International Economic Law and Policy Blog

Misunderstandings on the Nature of Today's Globalization

I'm always up for a good debate about trade and globalization, so when the folks at American Compass asked me to comment on some of their recent work, I agreed to do so. American Compass is run by Oren Cass, a former Mitt Romney adviser who has moved in a protectionist and interventionist direction on economic issues. Robert Lighthizer is on their board of directors, which help makes their perspective clear.

The problem I had with engaging in this particular debate, besides a word limit which constrained me like a tariff quota, was that I feel as though some critics of the system are not completely clear about how the system works. I'm a critic of some parts of the system myself (get rid of the TRIPS Agreement!), but it seems to me that many critics are putting forward arguments that don't really match the system as it exists today. So, in this case, I focused all my comments on the larger issue of properly understanding the trade regime. We all need to have a similar understanding in order to have a productive debate.

My three main points were: 

• I know there's lots of talk about "free trade agreements," but actual trade agreements result in mutually agreed constraints on protectionism rather than the "unfettered" free trade that Cass is concerned about.
• Some people worry about power being shifted from governments to international bureaucrats, but having been one of those myself, I feel confident in saying there's not much power over at the WTO headquarters in Geneva (smart people, but they are hardly running the world!).
• People complain about various aspects of China's behavior, but there are tough China-specific WTO rules that are designed to address just about all the things people complain about, and I wish governments would make better use of them.

I concluded my comment this way:

In practical terms, the globalization debate is not an all-or-nothing proposition between pure free trade and total autarky. Rather, it is about achieving a sustainable political balance that trades off the protectionist demands of corporations and other interest groups against the broader economic interests of the American people. The current global trading system reins in those protectionist demands to some extent, but it also accommodates many of them, leaving us with a particular balance of free trade and protectionism.

Whether we should shift towards the free trade side or towards the protectionist side is an important debate, but in order to have that debate, it is necessary to understand the carefully constructed balance that currently exists and where exactly we lie on the free trade-protectionist continuum.

 

 

The WTO must deliver on PM Mottley’s message … and on the next-generation version of itself! Post by Jan Yves Remy

This post is by Jan Yves Remy, Director of the Shridath Ramphal Centre

At a time when all is not well with international economic relations, a message of inclusiveness, equity and morality in trade appears to have resonated strongly in a room at the World Trade Organization (WTO) packed to capacity with trade negotiators, dignitaries, WTO staff, students and academics.  Assembled to hear the thoughts of Barbadian Prime Minister Mia Amor Mottley at the WTO’s Inaugural Presidential Lecture on the theme “Re-inventing the Global Order” – the audience showed their appreciation for her hard-hitting speech with their rapt attention and a thunderous applause of appreciation when it came to an end after an hour and a half.  It was an especially defining and prideful moment for those of us who work in the field of Trade to hear an erudite, charismatic and clear message about the problems of the WTO from the perspective of one of its smallest and most vulnerable Members.

While the PM made many eyebrow-raising points and posed as many questions as she did answers about the morality and equity of the trading system – befitting of a Presidential Lecture series that seeks to generate new and even controversial ideas – what lingers on for me were her ideas of how this multilateral body, characterized by inertia and lack of progress in the past 20 years, might rise to the occasion … and the times.

PM Mottley’s substantive contributions focused on two areas where trade might play a more meaningful role:  the digital economy and climate change.  Starting with the digital economy, she noted the complete concentration of the ten biggest digital platforms in the US and China.  Highlighting that trade intersects with digital commerce since it affects the ability of consumers and producers to access these platforms and consent to their rules, she noted that the current global landscape is distortionary and discriminatory and beyond WTO scrutiny.  In the case of climate change, the Prime Minister used this new pulpit to repeat calls she has made at Glasgow and the United Nations General Assembly for greater action on climate change – especially on behalf of countries with high debt. Her message was that the WTO should complement action taking place in other fora and should provide almost a global assembly line for investment, production and ultimately trade of renewable products.  Noting that the global energy transition costs around $ 3 trillion dollars per year, she repeated her idea that the IMF should serve as a trustee for a new Climate Mitigation Fund valued at $500 billion and backed by new issues and used Special Drawing Rights.  That Fund could then lend to skilled and experienced green investors in one country, who could then use those low-cost funds to raise further capital in another country, buy technology somewhere else and then invest where there is greatest need for the technology and climate mitigation. 

The speech highlighted these and other issues that ultimately affect the competitiveness of certain economies and sectors.  For her then, the biggest challenge for the current trade system is not high tariffs so much as other rules and practices that stifle the growth and increase the debt of some.  That unfairness is being perpetuated by the uneven application of global money-laundering rules on developing countries; prohibition of tax incentives for research and development; prohibitions on subsidies for developing green technologies, unfair accreditation and standards processes, to name a few.

These are not new criticisms levelled at the WTO but they certainly have not been so directly and eloquently made in the bosom of an institution that seems less concerned about morality and justice as it is with detailed technical trade rules for negotiating access to markets; less about the relative circumstances of those sitting at the negotiating table and more about the overall negotiated outcomes being applied on a Most Favoured Nation or “MFN” basis.  Her thoughts might serve as a basis for negotiators to take their heads out of the minutiae of legal provisions and imagine what might be possible if equity and moral justice were the main metrics of success. 

This brought me to wonder:  how would the WTO even conceive of implementing solutions to these problems within its existing structure? Could we imagine a WTO that would gravitate more from the periphery to the centre of the universe on these core issues?   Could the WTO really curb the growing tendency towards unilateral approaches to achieving equitable solutions to problems – whether on carbon adjustment, health equity, workers’ and labour rights – and instead forge a multilateral approach?  The current negotiations on the environment, e-commerce, and MSMEs touch on some of the points raised by the PM, but as currently constituted, they seem a long way away from her market-based equitable solutions. 

In what might be her most tangible proposal, I heard the PM call for a WTO that is a representative, countervailing, and strong voice that monitors and values the impact of international trade and speaks up in defence of an international trade system.  She proposed the creation of a High-Level Committee that could consider for instance whether the war on money laundering, on tax evasion, on climate or any of these campaigns might not have inadvertently become a war on developing country exporters or small exporters. To that list of issues, I would add what is the (economic and legal) cost of the absence of a two-tiered dispute settlement system; how does the absence of revised rules on subsidies and investment affect competitiveness; and how does debt affect the ability of many countries to trade. 

I would endorse the creation of such a Committee to advise the Director-General (DG) – and ultimately WTO Members – on what a next-generation WTO could look like.  The Committee would help in defining exactly which areas for attention and priority would fall within its scope.  It would have a mandate much like the Caribbean Commission on the Economy on which the current DG served before she became the DG, together with other internationally recognized experts including former DG – Pascal Lamy – to advise Heads of Government of the Caribbean Community (CARICOM) about how they should assist with structural and economic reform of that regional bloc.  The next generation Committee would have to be representative and act as a reforming force against the tendency of WTO Members to look internally for answers.  Serious thought should be given to how the Committee is constituted with a healthy mixture of insiders and outsiders to avoid insiders’ bias.  Diversity would be achieved through the inclusion of policy makers and academics from all over the globe drawn from the WTO’s Chairs Programmes as well as other cohorts of academics dedicated to trade that do not get enough opportunities to actually contribute, but are among its most enduring and committed proponents of the WTO. These associations like SIEL, ASIL, AfIELN and others are teeming with ideas and ripe for picking.  The WTO next generation committee would not only breathe some new life into the WTO, but might also dislodge some of the reticence of countries – including those in the Caribbean – to actively engage on the plurilateral issues being debated at the WTO today.

Waiving Russia Adieu in the WTO? Post by Tomer Broude

This post is by law professor Tomer Broude of the Hebrew University of Jerusalem

With the Russian Federation’s invasion of Ukraine now about to enter its second month, concerns not only for the fate of civilians are rising, but also for democracy and the international rule of law. There is a severe disruption of international law across the board – multilateralism, collective security, human rights law, humanitarian law, refugee law, international criminal law, sanctions, even civil aviation law – are all involved. In the eyes of many, this is not a passing event but a systemic challenge, to international law and the international order. If not treated accordingly, it may not remain unprecedented.

The global response has been remarkable, but not sufficient, and its effectiveness is (and will remain) unclear. In this blogpost there is no need to survey the extent of condemnation, as by the UNGA’s sweeping Resolution from March 2, 2022 - in emergency session and invoking the almost forgotten “Uniting for Peace” practice - for which 141 states out of 193 UN Members voted in favor. Reasons for the abstaining votes are geopolitically complex; nevertheless this is an impressive critical mass. Likewise, the state of play regarding unilateral state-imposed as well as private divestment and sanctions is relatively clear and broad.

Turning to the WTO, additional responses have arisen, such as condemnations of Russia, and a joint statement by 40 WTO Members that Belarus, complicit in the invasion, cannot expect to continue with accession procedures.

Other steps have included withdrawal of MFN treatment in trade with Russia (that should ideally cover not only tariff treatment but all market access issues, non-tariff barriers and services). Economic sanctions and withdrawal of MFN clearly implicates domestic legal measures, as in the US, EU and other states; and relies, quite justifiably, on WTO security exceptions. Indeed, this has been the path pursued so far, since early March.

Some (e.g., former WTO Appellate Body Member James Bacchus)  have advocated taking the severe and indeed unprecedented step of expelling Russia from the WTO or suspending its Membership, on the (somewhat acrobatic) basis of the institutional voting procedures under Article X of the Agreement establishing the WTO. But as Peter Ungphakorn and others have explained, this is not really possible, legally, under the Agreement. It is also highly improbable, given the WTO’s adherence to consensus decision-making, and Members extremely low appetite for voting. Amendments would also require acceptance and ratification, which could take years (as in the case of the TRIPS amendment on public health, which took 14 years until adoption). Indeed, in the long run, it is also not desirable. The expulsion/suspension option, which would directly address not only trade relations, but Russia’s participation in the WTO, is essentially off the table.

Russia, in its response to Ukraine in the WTO, was quick to note that the “non-application” clauses in Article XXXIII GATT and Article XIII of the Agreement establishing the WTO apply only at the time of accession. This is of course true, and enabling non-application would require, similarly to expulsion, a super-majority vote. Given that amendments to multilateral treaties should be of general application to all Members, this path is highly problematic, as it is a large stone that would expose many Members to be living in glass houses, in the sense that there would be grounds for non-application towards them as well. This would potentially severely fragment the system, if post-accession non-application became a matter of ‘free-for-all’ practice.

Hence the suggestion here to take another path: adopting a waiver for withdrawal of concessions, including MFN, export/import bans etc. – in essence a waiver from obligations vis-à-vis Russia, adopted under Article IX:3 of the WTO Agreement. To be sure, the waiver authority is originally granted to the Ministerial Conference (as are amendments under Article X); and yes, voting and a three-quarters majority would still be necessary, on the reasonable assumption that consensus is unreachable. However, this approach has distinct advantages over what has been done and proposed so far. First, although based on the exceptional circumstances of the Russian invasion, it would bypass the messy questions of legal interpretation and application with respect to security exceptions. Although it is more than plausible that most, if not all, sanctions are covered by security exceptions (not least because of the UNGA Resolution mentioned above), a waiver would grant a watertight defense. Second, a waiver would leave Russia’s status as a WTO Member intact, including its obligations, subject to the terms of the waiver. Third, a waiver would not impose any obligations on Members, but give them a right to act and grant them the flexibility to take their measures of choice, taking into account such measures’ effectiveness and the Members’ bilateral concerns vis-à-vis Russia. Fourth, a waiver, in contrast to an amendment, need not be of general application, but can be Russia-specific. Fifth, waivers are in principle limited in time (e.g., one-year) subject to renewal and review. Thus, contingent on developments in the conflict over time, the waiver could expire or be rescinded, returning Russia to the fold. Indeed, a waiver should be adopted with retroactive effect, covering sanctions and measures taken since the invasion commenced. Sixth, a waiver could be adopted much more quickly than an amendment. Seventh, a waiver would have not only symbolic value, but provide a broad base for excommunicating Russia in the WTO, short of formal expulsion.   

Perhaps most importantly, the accumulation of the above should make it easier to garner the necessary three-fourths majority for the adoption of a waiver. This would be unprecedented in its scope (although there are conflict-related waivers, such as the waiver relating to the Kimberley process regarding trade in conflict diamonds, and Cuba’s waiver regarding article XV:6 GATT).

Surely in this proposal I am underestimating the procedural technicalities and political sensitivities in a Waiver approach, but it is a path worth closer – and urgent – examination. Moreover, these truly exceptional circumstances may be an opportunity. As Isabel Feichtner wrote more than a decade ago, WTO waivers may contribute to the adaptability, legitimacy and effectiveness of the WTO. Voting, paradoxically, may be what is needed to save multilateralism from itself.

Prospects for the Green Steel Deal

The Roosevelt Institute held a webinar on Tuesday entitled "Green Steel Deal: A Transformative Trade Policy for Our Economy & Environment." I remain skeptical about this approach to reducing carbon emissions, but nevertheless I am following it with interest.

U.S. Trade Rep. Katherine Tai offered remarks at the outset. She referred to the Green Steel Deal as the "global arrangement" and said it is intended to be "the world's first carbon based sectoral agreement on steel and aluminum trade." She later stated:

... the Biden administration has transformed a deep rift in transatlantic trade relationships into a collaborative and innovative partnership between the US and EU to craft what will be the world's first carbon based arrangement on steel and aluminum trade.

Trade agreements have traditionally been driven by a sole focus on lowering costs, often with little attention paid to the resulting impact on greenhouse gas emissions. Without a way to account for those emissions. environmental harm is neither captured nor paid. Our current trade frameworks incentivize and reward cheap and dirty production, the definition of the race to the bottom.

The agreement that we are negotiating will be powerful because it will drive demand to reduce these costs and create a race to the top. By increasing demand for less carbon intensive steel and aluminum produced by American and European companies, we can account for the cost of high carbon steel and help clean industries succeed. To create positive and durable environmental change, our vision requires that other leading countries and economies participate too. Critically, this advances President Biden's climate agenda and demonstrates that trade can and must be both a tool in tackling the climate crisis and a tool for promoting fair competition.

This deal will enable us to work with the EU to address a common challenge and global overcapacity issues, while also pushing back the costs of dirty non-market steel and aluminum onto China.

During the Q & A, I submitted the following question about incentives for China, India and others to participate:

Under the Green Steel Deal, if China or India were to switch to electric arc furnaces and reduce their carbon emissions from steel production to US levels, could they sell their steel in the US duty-free (i.e., no ordinary tariffs, no Section 232 tariffs, no AD/CVD/Safeguards tariffs)? If not, what incentive will these and other countries have to participate?

Todd Tucker of Roosevelt took this question and merged it with another as follows:

Tim, we've gotten a few questions in the chat about how other countries will react to this ... new global arrangement. And in particular, we've heard from Simon Lester from WorldTradeLaw.net, asking ... if China and other sort of major producers of steel and aluminum adopt clean production techniques, how can they expect to be treated? And then we've also gotten a question from Stephen Huddart from the Transition Accelerator, which is a Canadian nonprofit, asking what provisions can Canada expect, and how will Canadian steel be treated ... wondering if you could address some of those questions.

Panelist Tim Meyer offered the following response:

So the administration has indicated that ... it's open to countries that are going to pursue high ambition, decarbonization policies, to participate in this global arrangement. That was part of the discussion with Japan that ultimately led to a replacement to the 232 measures with Japan, but Japan is taking a slightly more wait and see approach, I think than some of these negotiations. But I think with respect to the question about Canada, I think ... Canada has obviously been one of the US's closest allies, and ... I imagine that there is a role for Canada to participate within this system, if ... Canada's willing to engage in these kinds of negotiations.

Simon's question is a little bit trickier. So in principle, I think the answer should be yes, that if China were to pursue decarbonization methods, if it were to pursue the same kinds of high ambition policies that we see in the US, in Europe, and hopefully accelerating in the US and Europe, then in principle, yes.

Now there's a couple of things that are going to have to be worked out in the development of a global arrangement. One of those things, the US-EU are going to convene a technical working group on this, it's just basically, how you account for emissions in the sector, in order to sort of figure out, how are we doing, how do we measure progress within the global arrangement. And so there would be a question, of course, about how that intersects with the Chinese model of production.

The second issue is what you do with state subsidies and the market-oriented nature, because quite an important part of the global arrangement is that, not only that you pursue decarbonization policies, but also that you pursue market oriented reforms. And in particular, again, we saw in the agreement with Japan, that there was some indication that Japan was going to pursue reforms that were designed to essentially protect the market oriented structure of its steel industry.

And so, ... I think that that's a pretty significant challenge for China. It's also a challenge, as Saule and Erin were just talking about, it's also a challenge, I think, for the US and the EU to figure out what kinds of subsidies are going to be permitted under the global arrangement, and what kind of subsidies are going to lead to, or what kind of state support are going to lead to, the concerns about an excessively state interventionist model in the steel sector. And I think that's a problem the US, the EU and any countries that choose to join them are going to have to think through carefully, and clearly would have application to countries like China.

Jane Flegal (Senior Director for Industrial Emissions, White House Office of Domestic Climate Policy) then offered comments on the broader issues here, including the following:

... I think as others have said, we see a really important role for trade regimes to help align real material incentives to cultivate a race to the top, domestically and globally. And that includes ... expanding market access for clean products in aluminum and steel and restricting market access for those dirty products, and that's, I think, a really important way to think about international climate cooperation actually.

... the third thing I'll say, which we haven't talked about that much yet, but given the conversation about WTO, I just want to raise here. I think one of the things that we see as central to the global arrangement is that it helps to establish a kind of new norm and climate and trade, of measuring what matters, which is the emissions embedded in these goods. Much of the conversation about climate and trade to date has focused on the sort of requirement of explicit carbon pricing. And in our view, that's not and really cannot be the case. The climate issue is just far too urgent to require uniform global policy instruments to make progress, and I think that's consistent with the Paris agreement, but I just want to flag that here as something we haven't discussed very much, but I think it's worth highlighting.

And then in response to another question, Tim offered the following thoughts on how to address the needs of developing countries:

I think the question of how this affects developing countries is an incredibly important one, both for the long term success of the decarbonization enterprise. I mean, one of the things we know is that ... we in the United States need to decarbonize, the Europeans need to decarbonize, it's critical that you see decarbonization in places like China, if we're going to successfully tackle the climate change problem. But the developing world more generally has an interest in developing its economies. And so it really is both in our own interest, as well as sort of a moral imperative, I think, to help them do so in a way that is going to respect the environmental imperative, which is to do so on the sort of decarbonize path. And so, ... I think the possibility of asking developing countries to basically adopt ... as part of the common external trade policy, these sort of trade policies, say look, keep out carbon intensive steel and aluminum products, and in exchange, we will help you decarbonize, and develop in a decarbonized way. That kind of approach makes a ton of sense to me. It's a way to build the club. It's a way to basically, sort of spread, I think, US values with respect to both trade and the environment.

And I guess just by way of closing, ... Felicia and Ambassador Tai both started off by talking about Russia's invasion of Ukraine, and I think ...this has really, I think, changed the conversation here in ways that we're going to see a much greater emphasis on a trading system in which countries are thinking about what kind of shared values do we have with the countries that we are are trading with, and what are the threats beyond the trading system that countries with whom we do business pose to peace and security and the environment. And in that vein, ... the idea that we would basically reach out to developing countries and help them decarbonize or help them develop on a decarbonized path really makes a lot of sense in a world in which those shared values are becoming increasingly important to how we define economic relationships.

I appreciate the additional clarifications from the government officials and Green Steel Deal advocates who were part of the webinar. But I still see the same problems with this exercise that I've seen from the outset.

First, as dirty as the steel and aluminum industries might be, I'm not sure it makes sense to look at emissions from these industries separately from other emissions. The Indians in particular have pointed out that in terms of per capita carbon emissions, the United States is worse than most other countries. Cherry-picking the steel and aluminum sectors as the sectors to emphasize in the fight against carbon emissions doesn't change that fact.

Now, it's not surprising that a particular country would focus on the area of carbon emissions where it is good and others are bad, but I'm not sure that's a recipe for negotiating success. While it's fair for the United States to put forward steel and aluminum as a place to start, it's going to have to talk about other areas as well, including those many areas where it is worse than others. As of this moment, I'm not sure it is ready to do so.

Second, the problem with trying to tackle "dirty" and "non-market" products together is that under current AD/CVD law, most steel and aluminum is considered to be "unfairly" traded and in that sense would be considered by some people to be "non-market." Thus, no matter how cleanly these products are produced, they can be subject to high U.S. duties, and as a result I'm not sure what incentive foreign governments will have to push for cleaner production. They could shift their production to electric arc furnaces and make them squeaky clean, but that won't give them better access to a U.S. market in a sector that is one of the main users of AD/CVD laws.

Along the same lines, Tim talked about helping developing countries decarbonize. That's great to hear, but how exactly would the U.S. government do that as part of the Green Steel Deal? It's hard to imagine the Biden administration accepting greater market access for developing country steel and aluminum products in the U.S. market, so what help would the Biden administration offer to these countries? One option is to provide U.S. government financing for a shift to cleaner production, and I can imagine that some people in the Biden administration would support this. But I can also see that approach getting lots of pushback from Congress, so I'm not sure it's politically viable.

Ultimately, I see the "non-market" component of this effort as a poison pill that will doom the enterprise. I think it would be possible to pursue a Green Steel Deal that provides incentives for cleaner production as part of a broader effort to lower carbon emissions. But once you bring in "unfair trade" issues, the progress is going to quickly grind to a halt.

USMCA Panel Composition in Autos ROO Dispute Announced

A third USMCA Chapter 31 state-state dispute is underway, with the panel having been composed in the Autos Rules of Origin dispute on March 22. There are five panelists on this one (which differs from the three panelists on the previous two cases):

• Mr. Elbio Rosselli – Chairperson;
• Ms. Kathleen Claussen – appointed by Canada;
• Ms. Ann Ryan Robertson – appointed by Mexico;
• Mr. Jorge Miranda – appointed by the United States;
• Mr. Donald McRae – appointed by the United States.

As I explained here, USMCA carries over from NAFTA an approach under which parties select citizens of the other party(ies) as panelists.

This case differs from the earlier ones because it involves two complainants, with Mexico having filed the initial panel request and Canada joining as a complaining party soon after. That took the panel composition process into Article 31.9, para. 2 for the first time.

With regard to the people selected as panelists in the Autos ROO dispute, we know for sure who the U.S. put on the roster because the U.S. provided a list. The only panelist selection from that list is Ann Ryan Robertson.

As for the other panelists appointed by the parties from the roster, Elbio Rosselli has a lot of experience with WTO panels and was the chair of the USMCA Dairy TRQ panel. Kathleen Claussen is a first-timer as a panelist (congrats to her!). There is no public information I have come across as to whether it was Canada or Mexico who put these two on the roster.

Finally, as for Jorge Miranda and Donald McRae, they are not on the roster. Recall that Article 31.9, para. 3 says:

3. A panelist shall normally be selected from the roster. A disputing Party may exercise a peremptory challenge against an individual not on the roster who is proposed as a panelist by a disputing Party within 15 days after the individual has been proposed, unless no qualified and available individual on the roster possesses necessary specialized expertise, including as required by Article 31.8.3 (Roster and Qualifications of Panelists), in which case a disputing Party may not exercise a peremptory challenge but may raise concerns that the panelist does not meet the requirements of Article 31.8.2 (Roster and Qualifications of Panelists).

McRae is a Canadian law professor who was a panelist in the USMCA U.S. - Solar Safeguard dispute, a NAFTA Chapter 20 dispute, and on five WTO panels. Jorge Miranda is from Mexico, and has worked at the WTO Secretariat and served on a number of NAFTA Chapter 19 binational panels (most recently this one).

Katherine Tai on Beating Regulatory Systems Into Submission

During a press conference at the conclusion of the Dialogue on the Future of Atlantic Trade today, U.S. Trade Rep. Katherine Tai said this:

Let us talk through and ask ourselves new sets of questions, not how do I beat your regulatory system into submission, or ... fend off your attempts to beat mine into submission, but how can we align and how can we actually harness the energy of our people, of our economies to address these very real challenges that we're facing?

I think this is a good point, and I would very much like to see the sentiment take hold. In my view, there has been too much effort spent by the U.S. government and other governments on attacking non-protectionist domestic regulations that are inefficient, or ineffective, or too burdensome in some way. Regulations usually reflect sensitive domestic policies, and as much as I think many of them harm more than they help, I don't think trade agreements should constrain non-protectionist ones (other than transparency obligations).

At the same time, I should note that it is possible I am interpreting the point a little differently than Tai meant it. She may be thinking about protectionist regulations as well, although I hope that's not the case. For me, when thinking about how much we want to interfere with domestic regulations, drawing the line between protectionist and non-protectionist regulations is the key.

Guest Post: Transforming World Trade and Investment Law for Sustainable Development?

This is a guest post from Prof. Ernst-Ulrich Petersmann, European University Institute Florence

The geopolitical conflicts and related trade wars (eg against China and Russia), climate change and other environmental disasters, global health and food crises, Russia’s military invasions and war crimes in Ukraine confront the UN and WTO legal systems with trade, investment, environmental, security, human rights and international criminal law conflicts of existential importance for humanity. Why do most UN and WTO diplomats and their international legal advisors fail to protect international rule-of-law in UN and WTO governance? How should reasonable citizens and democratic institutions respond to human disasters like the UN prediction of more than 140 million climate change refugees by 2050? The new monograph by Prof E.U.Petersmann on TRANSFORMING WORLD TRADE AND INVESTMENT LAW FOR SUSTAINABLE DEVELOPMENT (OUP March 2022, 360 pages) explores answers to these and related economic, political and legal questions (the book and its summary are available on the OUP website). As Russia’s wars against the liberal order further undermine UN and WTO governance, reasonable citizens, democratic institutions and also lawyers must no longer neglect the ‘constitutional challenges’ facing humankind as discussed in the 9 chapters of this book.

UN law and the UN Sustainable Development Agenda (SDA) prescribe human rights, democratic governance, rule of law and other constitutional principles for multilevel governance of the universally agreed sustainable development goals (SDGs). Yet, in legal practices, these constitutional principles remain ignored by many authoritarian governments, as illustrated by Putin’s imperial wars. This lack of legislative, administrative and judicial implementation of UN and WTO treaty rules on human rights, rule of law and the SDGs explains the ubiquity of ‘market failures’, ‘governance failures’ and ‘constitutional failures’ undermining the SDGs. It also illustrates the ’constitutional nature’ of the regulatory challenges. The necessary changes in the output-legitimacy of UN/WTO governance require corresponding changes in the input-legitimacy by more inclusive, participatory and deliberative democracy, as it has emerged in citizen-driven economic, environmental and multilevel democratic and judicial European governance of public goods.

The overview and summary of the book in Chapter 1 explain why the UN and WTO rules on protecting human rights, rule-of-law and sustainable development cannot be realized without strengthening democratic and republican constitutionalism in multilevel governance of public goods. Chapter 2 on ‘governance failures’ documents how UN and WTO law and governance fail to protect sustainable development effectively. Chapter 3 relates the destruction of the WTO dispute settlement system by the US Trump administration, and the geopolitical conflicts and trade wars caused by authoritarian abuses of powers, to the decline of democratic constitutionalism, the increasing authoritarianism (eg in China and Russia) and regulatory competition between state-capitalism, business-driven neo-liberalism, Europe’s ordo-liberal constitutionalism and third world conceptions of regulation. Chapters 4 and 5 explain the ‘constitutional economics’ and multilevel, ordo-liberal constitutionalism underlying Europe’s common market constitution, monetary constitution and ‘foreign policy constitution’, which have enabled EU leadership for multi-party interim appellate arbitration in the WTO and for the European climate legislation providing for the decarbonization of economies and carbon border adjustment mechanisms. Chapter 6 demonstrates why the more than 380 WTO panel, appellate and arbitration findings – by complying with the customary rules of treaty interpretation and with judicial administration of justice – successfully avoided violations of UN human rights obligations of WTO member states. Chapters 7 and 8 discuss investor biases in investor-state arbitration and the multilevel judicial comity among national and European courts in avoiding ‘judicial overreach’ through ‘proportionality balancing’, judicial deference and ‘administration of justice’. Chapter 9 describes the European Green Deal and rights-based, multilevel climate litigation as examples for how the input- and output legitimacy of UN climate governance should be improved by strengthening democratic and republican constitutionalism.

In a globally integrated world, path-dependent national ‘constitutionalism 1.0’ and functionally limited ‘treaty constitutions 2.0’ constituting multilevel governance institutions for protecting public goods (like the UN and its 15 Specialized Agencies, the WTO) can no longer effectively protect human rights and the SDGs without multilevel legal and institutional safeguards protecting human rights inside and beyond state borders. Constitutionalism – as a reasonable self-limitation of ‘bounded rationality’ of human beings and of their domination by passions, rational egoism and animal instincts – offers the most effective ‘political invention’ against abuses of power at home and abroad. But constitutional democracies cannot survive unless citizens and their democratic and judicial institutions assume democratic and cosmopolitan responsibilities beyond constitutional nationalism  (based on constitutional contracts, national Constitutions, democratic legislation, administrative and judicial protection of rule-of-law). Citizens must defend their constitutional and democratic rights also through multilevel constitutionalism constituting, limiting, regulating and justifying multilevel governance of the SDGs, for instance by holding governments legally and democratically accountable for legislative, administrative and judicial (non)implementation of UN/WTO guarantees of equal freedoms, non-discriminatory competition, rule of law, human rights and related SDG commitments. Democratic constitutionalism is about protecting reasonable disagreements by means of a limited ‘overlapping consensus’ among citizens with diverse worldviews and moral convictions. Hence, constitutional pluralism and regulatory competition among diverse neo-liberal, state-capitalist and European ordo-liberal regional economic systems remain the inevitable future. Yet, authoritarian wars on the liberal order require democratic alliances defending human rights at home and abroad. Even if the myth of Sisyphus rolling stones uphill may appear absurd, we know from Albert Camus’ interpretation of this myth - and from the history of democracies - that ‘struggles for justice’ remain a necessary part of defending liberty against tyranny at home and abroad. Citizens must overcome their ‘rational ignorance’ vis-à-vis multilevel governance of public goods and learn why reforming trade and investment law must become part of their democratic struggles for sustainable development.

House Passes Bill Suspending Normal Trade Relations Treatment for Russia and Belarus

After a brief floor discussion, today the House of Representatives passed the "Suspending Normal Trade Relations with Russia and Belarus Act" (H.R. 7108) with a vote of 424-8. The full text is here. A summary is here.

In terms of comparisons to previous legislation in this area, this bill seems pretty similar to the Senate legislation described here. That may indicate the bill could become law soon as the House and Senate are coordinating their efforts.

The key parts of the text are as follows.

First, this is the suspending normal trade relations part:

SEC. 3. SUSPENSION OF NORMAL TRADE RELATIONS WITH THE RUSSIAN FEDERATION AND THE REPUBLIC OF BELARUS.

(a) NONDISCRIMINATORY TARIFF TREATMENT.—

 Notwithstanding any other provision of law, beginning on the day after the date of the enactment of this Act, the rates of duty set forth in column 2 of the Harmonized Tariff Schedule of the United States shall apply to all products of the Russian Federation and of the Republic of Belarus.

(b) AUTHORITY TO PROCLAIM INCREASED COLUMN 2 RATES.—

(1) IN GENERAL.—The President may proclaim increases in the rates of duty applicable to products of the Russian Federation or the Republic of Belarus, above the rates set forth in column 2 of the Harmonized Tariff Schedule of the United States.

(2) PRIOR CONSULTATION.—The President shall, not later than 5 calendar days before issuing any proclamation under paragraph (1), consult with the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate regarding the basis for and anticipated impact of the proposed increases to rates of duty described in paragraph (1).

(3) TERMINATION.—The authority to issue proclamations under this subsection shall terminate on January 1, 2024.

Section 4 has a long and detailed set of provisions on resuming application of Column 1 rates and restoring normal trade relations if Russia/Belarus withdraws forces/ceases hostilities, poses no immediate threat to NATO allies/partners, and "recognizes the right of the people of Ukraine to independently and freely choose their own government." A lot of the power is with the president, but the legislation gives Congress a say in the process as well.

Section 5 then addresses WTO issues:

SEC. 5. COOPERATION AND ACCOUNTABILITY AT THE WORLD TRADE ORGANIZATION.

The United States Trade Representative shall use the voice and influence of the United States at the WTO to—

(1) condemn the recent aggression in Ukraine;
(2) encourage other WTO members to suspend trade concessions to the Russian Federation and the Republic of Belarus;
(3) consider further steps with the view to suspend the Russian Federation’s participation in the WTO; and
(4) seek to halt the accession process of the Republic of Belarus at the WTO and cease accession related work.

Lastly, Section 6 has some updates to the Magnitsky human rights sanctions.

Guest Post: The Imitation Game: Recent Developments on Transnational Subsidies and Anticircumvention in Europe and the United States

This is a guest post by Victor Crochet* (trade lawyer and PhD candidate at Cambridge University) & Vineet Hegde (Doctoral Researcher at the Leuven Centre for Global Governance Studies, KU Leuven)

Over the past few years, Western countries, and in particular, the European Union (“EU”), have been trying to rein in the foreign expansion of Chinese manufacturing entities under the Belt and Road Initiative (“BRI”) through the use of trade defence instruments. In this regard, several interesting developments have taken place since we last reported on the issue.

Today, the European Commission (“Commission”) adopted a regulation countervailing, yet again, cross-border subsidies granted by Chinese public bodies to producing entities located in another country. This time targeting stainless steel cold-rolled flat products from Indonesia. The Commission followed a similar reasoning as it did in two prior investigations (Regulations 2020/776 and 2020/870) where it decided that financial contributions granted by Chinese public bodies to the subsidiaries of Chinese State-owned enterprises in Egypt could be attributed to the Government of Egypt. While these two regulations are currently being challenged before the EU Courts, in Regulation 2022/433, the Commission similarly decided to interpret the terms a financial contribution by the “government in the country of origin or export,” found in the EU Basic Anti-Subsidy Regulation, in light of Article 1.1 of the SCM Agreement, with the latter interpreted in accordance with Article 11 of the ILC Articles on State Responsibility. Based on this reasoning, the Commission concluded that the terms “government in the country of origin or export” should also cover situations where the government of the country of origin or export “acknowledges and adopts” financial contributions granted by governments or public bodies of third countries.

The Commission’s reasoning seems to have inspired the United States (“US”) to follow suit. Since the 1980s, the US excludes transnational subsidies from the ambit of its countervailing duty law. However, in April 2021, a bill was introduced in the US Senate to, among other things, countervail transnational subsidies. The bill aims to extend the scope of countervailable financial contributions to also include contributions by a third country’s government. The bill provides that, if the government of the subsidized country “allows, implicitly or otherwise, another authority provide a financial contribution”, the US authorities can countervail the financial contribution provided by the third country. A companion bill was introduced in the House of Representatives in December 2021, which uses a similar language. The bill aims to treat a financial contribution by a third country government as the subsidized country’s own subsidy if the latter “facilitates the provision of such subsidy”. Although similar in spirit, these standards may be looser than that of “adoption and acknowledgment” used by the Commission.

Another interesting development is the increasing use of the anti-circumvention instrument by the Commission to target foreign subsidiaries of Chinese producers using inputs from China when the final products originating in China are covered by trade defence duties. The Commission’s use of the anti-circumvention instrument to target companies attempting to dodge trade defence duties through slight modifications of a product or assembly of parts in a third country is not new. However, the Commission has recently used the instrument to go a step further. It now targets entirely new production plants established by Chinese companies abroad when such plants use inputs originating from China even when these inputs are not only mere parts or intermediate products. For example, the Commission extended the duties on imports of aluminium foil from China to imports from Thailand after a Chinese producer built a rolling plant there using imported aluminium foil stock from China. Similarly, it extended the trade defence duties on imports of glass fibre fabrics from China to imports from Morocco, after a Chinese producer set up a new plant in Morocco but imported the necessary glass fibre rovings (which have been targeted by separate trade defence investigations by the Commission in the past as a distinct product from the fabrics) from China. In this regard, two years ago, we warned that Egyptian workers might be the ones paying the price for the countervailing duties imposed on Egyptian subsidiaries of Chinese fabrics producers as the producers in Egypt might simply decide to move shop somewhere else along the BRI. This prediction seems to have become a reality as these producers appear to have now built plants in Turkey. Indeed, in a recently initiated anti-circumvention investigation, the Commission now targets a new glass fibre fabric production line established in Turkey owned by the same group as that targeted by the Commission in Egypt.

The US may be following a similar path to that of the Commission. In 2021, the US extended trade defence duties on import of oil country tubular goods (“OCTG”) from China to imports from the Philippines and Brunei. The US authorities found out that the main input, hot-rolled steel sheet and strip, is manufactured in, and exported from, China to these countries to be processed into OCTG. As a result, the US concluded that the exports from the Philippines and Brunei were circumventing the US duties on exports of OCTG from China and, thus, extended the duties to exports from these countries. A similar pattern can be seen in the case of corrosion-resistant steel products from BRI countries, like Malaysia. Furthermore, in February 2022, a US producer requested the US authorities to investigate solar cells and modules manufactured in Malaysia, Thailand, Vietnam and Cambodia using inputs from China. The petition states that the production process was shifted to these countries with all the inputs, including research & development as well capital investment, coming from China. The US authorities now have until 25 March 2022 to decide whether to initiate an investigation or not.

Using the anti-circumvention instrument to target production subsidiaries of Chinese companies abroad using inputs originating in China is tempting for investigating authorities. The investigation is shorter and less complex than conducting a fully-fledged anti-dumping or anti-subsidy investigation. Furthermore, it may lead to the extension of the typically higher duties imposed on Chinese products as compared to the duties that could be  imposed in an initial anti-dumping or anti-subsidy investigation against the new plant in a “market economy” country.

As Western governments grapple with how to address the going out of Chinese manufacturing entities, it seems that the practices of the US and the EU are converging to a certain degree. While the US seems to be walking in the footsteps of the EU with respect to transnational subsidies, the EU and the US may be moving in parallel when it comes to using the anti-circumvention instrument.

* Victor regularly works for governments, exporting producers, importers and users in investigations initiated by the Commission, including in some of the proceedings mentioned in this post. All opinions expressed are personal.

U.S. Legislation on MFN Withdrawal for Russia (and Belarus) May Finally Be Moving Forward

After lots of fits and starts, it looks like the U.S. (and others) will join Canada and withdraw MFN treatment for Russian and Belarusian imports. President Biden discussed this at a press conference today. Here are some of the key points he made:

As Putin continues his merciless assault, the United States and our allies and partners continue to work in lockstep to ramp up the economic pressures on Putin and to further isolate Russia on a global stage. Later today, together with other NATO allies and the G7, Canada, France, Germany, Italy, Japan, United Kingdom as well as the European Union, we're going to jointly announce several new steps to squeeze Putin and hold him even more accountable for his aggression against Ukraine. I want to speak to a few of those points today.

First, each of our nations is going to take steps to deny most favored nation status to Russia. A most favored nation status designation means two countries have agreed to trade with each other under the best possible terms, low tariffs, few barriers to trade, and the highest possible imports allowed. In the United States, we call this permanent normal trade relations, PNTR, but it's the same thing. Revoking PNTR for Russia is going to make it harder for Russia to do business with the United States, and doing it in unison with other nations that make up half of the global economy will be another crushing blow to the Russian economy. It's already suffering very badly from our sanctions.

I want to thank Speaker Pelosi, Leader McCarthy, Leaders Schumer and McConnell, and Senators Wyden and Crapo, Representatives Neal and Brady, for their bipartisan leadership on this in the Congress. I would like to offer a special thanks to Speaker Pelosi who's been a strong advocate for revoking PNTR and who agreed to hold off on that in the House until I could line up all of our key allies to keep us in complete unison. Unity among our allies is critically important as you all know, from my perspective at least.

... The free world is coming together to confront Putin. Our two parties here at home are leading the way. With that bipartisan cooperation, I'm looking forward to signing into law the bill revoking PNTR, which is again, most people think of it as most favored nation status.

We're also taking the further step of banning imports of goods from several signature sectors of the Russian economy, including seafood, vodka and diamonds.

A White House fact sheet on this issue is here. On MFN withdrawal and the import ban, it says:

Revoking Russia’s Most-Favored Nation Status. President Biden will work closely with Congress to deny Russia the benefits of its WTO membership and ensure that Russian imports do not receive most favored nation treatment in our economy. The United States Congress has demonstrated bipartisan leadership to revoke Permanent Normal Trade Relations for Russia, and President Biden looks forward to signing a bill into law. Together with similar actions by the G7, following our respective national processes, this collective action by more than half of the global economy will deliver another serious economic blow to Russia.

...

Ban U.S. Import of Goods from Several Signature Sectors of Russia’s Economy. President Biden’s E.O. will also prohibit the import of goods from several signature sectors of Russia’s economy – including seafood, spirits/vodka, and non-industrial diamonds. This will deny Russia more than $1 billion in export revenues and ensure U.S. citizens are not underwriting Putin’s war. The United States retains the authority to impose additional import bans as appropriate.

The basis for the U.S. legislation going forward could be the Wyden/Crapo bill described here. The full text is here (and eventually will be posted here). I'm going to go through some of the key provisions.

Let's start with the provision on the suspension of normal trade relations:

SEC. 3. SUSPENSION OF NORMAL TRADE RELATIONS WITH THE RUSSIAN FEDERATION AND THE REPUBLIC OF BELARUS.

(a) NONDISCRIMINATORY TARIFF TREATMENT.—

Notwithstanding any other provision of law, beginning on the day after the date of the enactment of this Act, the rates of duty set forth in column 2 of the Harmonized Tariff Schedule of the United States shall apply to all products of the Russian Federation and of the Republic of Belarus.

(b) AUTHORITY TO PROCLAIM INCREASED COLUMN 2 RATES.—

(1) IN GENERAL.—The President may proclaim increases in the rates of duty applicable to products of the Russian Federation or the Republic of Belarus, above the rates set forth in column 2 of the Harmonized Tariff Schedule of the United States.

(2) PRIOR CONSULTATION.—The President shall, not later than 5 calendar days before issuing any proclamation under paragraph (1), consult with the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate regarding the basis for and anticipated impact of the proposed increases to rates of duty described in paragraph (1).

(3) TERMINATION.—The authority to issue proclamations under this subsection shall terminate on January 1, 2024.

I think it's useful that instead of just saying normal trade relations are withdrawn, as some previous versions of this legislation did, they spell out that Column 2 rates apply. That offers some added clarity as to what the impact of the legislation is.

At the same time, as explained here, based on the actual mix of products we import from Russia, it's not clear how much impact applying Column 2 rates would have on U.S. tariff levels for Russian imports. As a result, there might need to be additional measures taken to raise those tariffs, and Section 3(b) of this legislation provides for that.

Also, as a general matter, I've been concerned with Congress delegating power to the president over the years to raise tariffs. The delegation here has a termination provision, though, which seems like a good approach.

Section 4 then deals with a prohibition on Russian energy imports. 

And Section 5 has a long and detailed set of provisions on resuming application of Column 1 rates and normal trade relations if Russia/Belarus withdraws forces/ceases aggression, poses no immediate threat to NATO allies/partners, and "recognizes a free and independent Ukraine." A lot of the power is with the president, but the legislation gives Congress a say in the process as well.

Finally, as with previous versions of this legislation, there is something on actions at the WTO itself:

SEC. 6. COOPERATION AND ACCOUNTABILITY AT THE WORLD TRADE ORGANIZATION.

The United States Trade Representative shall use the voice and influence of the United States at the WTO to—

(1) condemn the recent aggression in Ukraine;
(2) encourage other WTO members to suspend trade concessions to the Russian Federation and the Republic of Belarus;
(3) consider further steps with the view to suspend the Russian Federation’s participation in the WTO; and
(4) seek to halt the accession process of the Republic of Belarus at the WTO and cease accession related work.

The "consider further steps" part of (3) seems weaker than previous legislation on this point, but regardless, I'm not sure they will get very far with suspending Russia from the WTO because of the heaving political lifting required. But maybe they will give it a shot and we'll see how it goes.

Questions about the 1982 Decision and Article XXI of the GATT

In 1982, the contracting parties adopted a Ministerial Declaration to take seriously the consideration of 'non-economic' trade measures. On 30 November 1982, the contracting parties adopted the Decision Concerning Article XXI of the General Agreement (the 1982 Decision) which set out some basic procedural guidelines for the application of Article XXI of the GATT.

The relevant text is, as follows:

The CONTRACTING PARTIES decide that:

1. Subject to the exception in Article XXI:a, contracting parties should be informed to the fullest extent possible of trade measures taken under Article XXI.

2. When action is taken under Article XXI, all contracting parties affected by such action retain their full rights under the General Agreement.

3. The Council may be requested to give further consideration to this matter in due course.

The Russia-Traffic in Transit dispute did not explicitly interpret the 1982 Decision. Ukraine raised Russia’s compliance with the first paragraph (DS512 report, note 210 on Ukraine’s second written submission). Inevitably, the panel declined Russia’s request to further examine the arguments pertaining to Article XXI(a) of the GATT 1994.[1]

I have a few questions regarding the second paragraph. The simplest interpretation is that Article XXI only refers to the rights under the GATT 1994. What does this mean in the context of the Russian invasion of Ukraine, and Ukraine’s invocation of the security exceptions in the GATS and the TRIPS Agreement?  In other words, if WTO Members are invoking essential security more broadly, or at a minimum every security exception provision in the relevant trade agreements, is it assumed Members should construe this second paragraph more broadly? This question did not arise in the Saudi Arabia – Measures Concerning the Protection of Intellectual Property Rights panel report.

What is the scope of 'all contracting parties'? Does 'affected' only refer to those invoking Article XXI to take necessary actions to protect their essential security interests? 

Curious to know people's thoughts, thanks.

 

[1] WT/DS512/R/Add.1, para. 2.70, p. 123.

House Approves Russian Energy Ban and Push for Russian WTO Suspension, But No U.S. MFN Withdrawal for Russia Yet

Late last night, the House passed a bill that would suspend Russian energy imports, but the bill had a proposed MFN withdrawal provision taken out (at the request of the White House apparently, although the reasons for this are not completely clear to me, as I've heard competing explanations). However, the bill does have this provision relating to possible actions at the WTO:

SEC. 3. COOPERATION AND ACCOUNTABILITY AT THE WORLD TRADE ORGANIZATION.

The United States Trade Representative shall use the voice and influence of the United States at the WTO to—

(1) condemn the recent aggression in Ukraine;

(2) encourage other WTO members to suspend trade concessions to the Russian Federation; and

(3) consider further steps with the view to suspend the Russian Federation’s participation in the WTO.

Compare this language to that of the first bill on this issue, introduced by Representatives Blumenauer and Doggett:

SEC. 3. COOPERATION WITH UNITED STATES ALLIES AND PARTNERS.

(a) IN GENERAL.—The President shall encourage allies and partners of the United States—

(1) to consider taking similar actions such as the withdrawal of permanent normal trade relations treatment for products of the Russian Federation; and

(2) to condemn the Russian Federation’s recent aggression in Ukraine at the World Trade Organization (WTO).

(b) ACCOUNTABILITY AT THE WTO.—The President shall direct the U.S. Permanent Mission to the World Trade Organization to use the voice, vote, and influence of the United States at the WTO to seek the suspension of the Russian Federation’s membership in the WTO.

The earlier proposal seems a little more forceful on the issue of suspending Russia's WTO membership.

On the issue of MFN withdrawal, how big a deal would it be? Ed Gresser of the Progressive Policy Institute looked at the data and concluded that it might not have that much of an impact here:

As the averages and the umbrella example both suggest, non-MFN tariffs are generally seen as quite punitive, and often are so in reality. However, they are much less punitive in the specific Russian case.  This is because Russia is mainly a natural-resource exporter, and Column 2 tariffs on natural resources are actually rarely high and often zero. 

Note that the Wyden bill introduced last week gives the president the authority to raise tariffs on Russia to levels above the Column 2 rates. If MFN withdrawal is going to be effective, there will probably have to be a provision along these lines.

Ukraine and Russia at the WTO

Thanks to Bryce Baschuk of Bloomberg, who posted the documents on Twitter, we have a letter written by Ukraine to the Chair of the WTO General Council regarding cutting of trade with Russia, and a letter Russia wrote in response. It's the trade response of other countries to the Russian invasion that will be the most economically important here, but nevertheless it is interesting to see the political/legal arguments from Ukraine and Russia.

Here's the main part of the Ukraine letter:

On 24 February 2022 the Russian Federation committed a blatant act of aggression against Ukraine through its unprovoked and unjustified military invasion, an attack on the sovereignty and territorial integrity of Ukraine in a brutal violation of the UN Charter and basic norms and principles of International law.

The ongoing military attacks by the Russian Federation on the Ukrainian territory have already resulted in the immense losses of human lives, including children, with more than a thousand people injured and inflicted severe damages on Ukraine's infrastructure and economy. The international community has categorically condemned the Russian aggression as a grave breach of international law.

Following Russia's invasion, the Government of Ukraine severed its diplomatic relations with the aggressor state, decided to impose a complete economic embargo and no longer apply the WTO agreements in its relations with the Russian Federation. Ukraine considers that these steps are consistent with its national security rights under, inter alia, Article XXI of the GATT 1994, Article XIVbis of the GATS, and Article 73 of the TRIPS Agreement.

We strongly believe that other WTO Members will stand along with Ukraine in countering Russian military invasion by taking similar measures against the aggresor state. We urge all WTO Members to consider further steps with the view to suspending the Russian Federation's participation in the WTO for its violation of the purpose and principles of this Organization.

Pursuant to the GATT Decision concerning Article XXI of the General Agreement of 30 November 1982, Article XIVbis, paragraph 2, of the GATS, and Article 73 of the TRIPS Agreement, I kindly request that you communicate Ukraine's decision to the Council for Trade In Goods, the Council for Trade in Service, the TRIPS Council, as well as to all WTO Members.

And here is the main part of Russia's response:

The Russian Federation notes that Article XIII of the WTO Agree1nent provides for non-application of the Multilateral Trade Agreements between particular Members. However, conditions set out in the said Article only refer to the non-application as between a Member and any other Member if either of the Members, at the time either becomes a Member, does not consent to such application. Therefore, the conditions set out in this Article do not apply to Russia or Ukraine.

We also note that Ukraine relies on Article XXI of the GATT, Article XIVbis of the GATS and Article 73bis of the TRIPS Agreement as a legal basis of its decision not to apply the WTO Agreements in its relations with the Russian Federation.

The so-called Security Exceptions relied upon are relevant in the context of a limited number of the WTO Agreements, namely Article XXI of the GATT is relevant to the matters covered by the GAIT, Article XIVbis of the GATS only applies to the matters covered by the GATS, while Article 73bis of the TRIPS Agreement can only be applied in the context of matters covered by the TRIPS Agreement. Therefore, none of the Security Exceptions relied upon by Ukraine justify non-application of such Multilateral Trade Agreements as ones contained, inter alia, in Annex 2 to the Marrakesh Agreement (namely, Understanding on Rules and Procedures Governing the Settlement of Disputes), Annex 3 to the Marrakesh Agreement (namely, Trade Policy Review Mechanism), or Marrakesh Agreement itself. As the Appellate Body in China - Rare Earths¹ noted "neither obligations nor rights may be automatically transposed from one part of the legal fra1nework into another". Moreover, non-application of an international treaty presumes that all of its provisions are not applied, that would presumably include Security Exceptions referred to in Ukraine's communication as a legal basis of its decision, as well.

The WTO is a rules-based trade organization and shall remain such.

The suggestion of Ukraine to suspend the Russian Federation's participation in the WTO equally has no legal ground. Such action is not provided in the WTO Agreement.

The Russian Federation would like to stress that we should refrain from discussing in the WTO, which is a trade related organization, and its bodies issues and events, which are out of the scope of the WTO and are under the focus of other international organizations and diplomatic agencies.

In numerous international fora, the WTO Members repeatedly expressed their commitment to strengthen multilateralism and support rules-based, nondiscriminatory and transparent multilateral trading system (MTS) with the WTO at its core. Russia notes with regret the efforts of certain Members towards politicization of the WTO and fragmentation of the multilateral trading system instead of engaging constructively in a substantive dialogue on the key issues of the global trade agenda. On the contrary, all Members need to combine their efforts to improve the WTO's functioning, demonstrate its continued relevance for the international trade and ensure the successful MC-12 with the tangible negotiating results to be delivered.

I don't expect any of these issues to be litigated before a WTO panel, but nevertheless it's interesting to see how governments argue about legal issues as part of a political exchange. Many other governments are preparing their domestic trade responses to the Russian invasion right now. I wonder if they will weigh in on the legal issues noted above.

Fixing the WTO Dispute Settlement Crisis Requires U.S. Reform Proposals

Here's an excerpt from a short piece I wrote for IISD Trade and Sustainability Review about the WTO dispute settlement crisis:

... the key here, regardless of whether it is the Appellate Body specifically or dispute settlement more generally [that the U.S. is concerned with], is to make actual proposals for reform. It is fine for the United States to have objections to the functioning of the Appellate Body or the broader system. But if it has specific concerns, it needs to propose solutions. This applies whether we are talking about the narrow “Appellate Body crisis” or the broader “WTO dispute settlement reform.”

Whichever the issue, the first step to a solution is for the United States, as the government imposing the appointments block, to offer concrete suggestions for the changes it would like to see. If it does not offer any ideas for new language to address the points it has raised, the system is in danger of decaying further, and the United States itself is at risk of being left out as others move forward.

Senators Brown and Cassidy Introduce No Most Favored Nation Trading with Russia Act

U.S. Senators Sherrod Brown (D-OH) and Bill Cassidy (R-LA) have introduced the No Most Favored Nation Trading with Russia Act "to revoke Russia’s most-favored-nation status." The full text is here (and here). It is mostly identical to the Blumenauer/Doggett bill discussed here, so no need for new analysis, but I'm doing this post for the sake of completeness in covering these issues.

Canada Revokes MFN Status of Russia and Belarus

Legislating and regulating seems much easier in parliamentary systems. As the U.S. starts considering the competing Russia MFN withdrawal bills I've been discussing the past couple of days, Canada just went ahead and withdrew the MFN status of Russia and Belarus. This is what Deputy Prime Minister Chrystia Freeland had to say:

Today, I'm announcing that Canada will be the first country to revoke Russia's and Belarus's most favored nation status as a trading partner under Canadian law. We are working closely with our partners and allies to encourage them to take the same step. Simply put, this means that Russia and Belarus will no longer receive the benefits, particularly low tariffs that Canada offers to other countries that are fellow members of the WTO. Instead, Russia and Belarus will be subject to a tariff of 35% on their exports to Canada. The only other country that does not enjoy MFN status with Canada is North Korea.

And this is from the official announcement:

Russia’s invasion of Ukraine, supported by Belarus, is a violation of international law and threat to the rules-based international order. Canada is taking further action to ensure those who do not support the rules-based international order cannot benefit from it.

Today, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, and The Honourable Mary Ng, Minister of International Trade, Export Promotion, Small Business and Economic Development, announced that the Government of Canada has issued the Most-Favoured-Nation Tariff Withdrawal Order (2022-1), removing these countries’ entitlement to the Most-Favoured-Nation Tariff (MFN) treatment under the Customs Tariff.  

This Order results in the application of the General Tariff for goods imported into Canada that originate from Russia or Belarus. Under the General Tariff, a tariff rate of 35 per cent will now be applicable on virtually all of these imports. Russia and Belarus will join North Korea as the only countries whose imports are subject to the General Tariff.

...

• This measure has been taken under section 31 of the Customs Tariff, and applies for 180 days, unless extended by a resolution adopted by both Houses of Parliament.

• A tariff rate of 35 per cent will apply to virtually all imports. Where MFN rates are higher, the higher rates will continue to apply.

Section 31 of the Customs Tariff says:

Extension or withdrawal of entitlement

31 (1) The Governor in Council may, on the recommendation of the Minister, by order, amend the schedule to

• • (a) extend entitlement to the Most-Favoured-Nation Tariff to any goods that originate in a country to which the General Tariff applies;

  • (b) withdraw entitlement to the Most-Favoured-Nation Tariff from any goods that originate in a country that is entitled to that Tariff and make those goods subject to the General Tariff; and

  • (c) indicate, to the extent required, the tariff treatment of the country to which the order applies.

Contents of order

(2) An order made under subsection (1) must

• • (a) specify the date on which the order becomes effective;

  • (b) if the order partially extends entitlement to the Most-Favoured-Nation Tariff, indicate the goods to which entitlement to that Tariff is extended; and

  • (c) if the order partially withdraws entitlement to the Most-Favoured-Nation Tariff, indicate the goods that are made subject to the General Tariff.

Ukraine Invokes National Security Exceptions at WTO: Complete Embargo and WTO Agreements No Longer Applied to Russia

Ukraine has sent a letter to the Chairman of the WTO's General Council, in which it says it will "impose a complete economic embargo and no longer apply the WTO agreements in its relations with the Russian Federation":

On 24 February 2022 the Russian Federation committed a blatant act of aggression against Ukraine through its unprovoked and unjustified military invasion, an attack on the sovereignty and territorial integrity of Ukraine in a brutal violation of the UN Charter and basic norms and principles of International law.

The ongoing military attacks by the Russian Federation on the Ukrainian territory have already resulted m the immense losses of human lives, including children, with more than a thousand people injured and inflicted severe damages on Ukraine's infrastructure and economy. The international community has categorically condemned the Russian aggression as a grave breach of international law.

Following Russia's invasion, the Government of Ukraine severed its diplomatic relations with the aggressor state, decided to impose a complete economic embargo and no longer apply the WTO agreements in its relations with the Russian Federation. Ukraine considers that these steps are consistent with its national security rights under, inter alia, Article XXI of the GAIT 1994, Article XIVbis of the GATS, and Article 73 of the TRIPS Agreement.

We strongly believe that other WTO Members will stand along with Ukraine in countering Russian military invasion by taking similar measures against the aggressor state. We urge all WTO Members to consider further steps with the view to suspending the Russian Federation's participation in the WTO for its violation of the purpose and principles of this Organization.

Pursuant to the GATT decision concerning Article XXI of the General Agreement of 30 November 1982, Article XIVbis, paragraph 2, of the GATS, and Article 73 of the TRIPS Agreement, I kindly request that you communicate Ukraine's decision to the Council for Trade In Goods, the Council for Trade in Service, the TRIPS Council, as well as to all WTO Members.

How many other WTO Members will pursue similar measures, and what are all the different approaches they will take? As noted in several of the last blog posts, several members of U.S. Congress are offering up proposed legislation. In addition, the Canadian government has announced action to withdraw MFN and impose tariffs on Russian imports, but some of the technical details are unclear at the moment. And the EU is considering action as well.

Two Views on What To Do about Russia at the WTO

Jim Bacchus, writing in the WSJ, is pushing for expulsion:

No specific WTO provision relates to expelling a member. Expulsion would be possible under Article X of the WTO agreement, however, if two-thirds of the WTO’s current 164 members vote to alter the agreement. If Russia were to refuse to accept the changes, then a three-fourths vote could expel the Russian federation.

...

President Biden and his administration should be leading a charge at the trade organization’s headquarters in Geneva to kick Mr. Putin and his crony government out of the WTO by seeking broad support for an amendment that would deny the Russian Federation its rights and relieve it of its obligations as a member of the WTO

Inu Manak, writing at CFR, focuses instead on suspending MFN under the national security exception:

WTO members agree not to discriminate against trading partners or among trading partners, and also to limit using border measures such as tariffs and quotas. ... However, like all rules, there are exceptions.

The exceptions that have garnered the most attention in recent years are those surrounding issues of national security. ... as law professor Mona Pinchis-Paulsen explains, the United States had an “overwhelming influence… in designing and constructing the exceptions,” particularly Article XXI. This, along with security exceptions found in the General Agreement on Trade in Services (GATS) and the agreement on Trade Related Aspects of Intellecutal Property Rights (TRIPS), could be used to justify suspending most-favored nation treatment for Russia.

The process by which to do this legislatively is fairly straightforward in the United States, as the three-page bill submitted by Rep. Doggett and Rep. Blumenauer attests to. If this bill were to become law, any future consideration of reinstating normal trade relations for Russia would revert back to the previous practice of having the president reconfirm this determination as part of a reporting requirement established with Congress. ...

For such actions to be most effective, the United States cannot be the only country that denies trade preferences to Russia. ... President Biden could therefore coordinate efforts with allies to increase the consequences of these trade sanctions. If other WTO members followed suit, the hit on the Russian economy could be severe.

Notably, these actions do not require removing Russia from the WTO altogether, but could instead serve as a practical way to suspend the benefits of WTO membership. This is crucial. For a member to be removed from the WTO, the treaties would need to be altered with the support of two-thirds of the membership. This would be a challenge. Furthermore, it would be irreversible and require Russia to reapply for WTO membership—a process that can take years to complete.  By using the national security exception to deny Russia its WTO privileges, the United States and its allies could attain the same results with a far less cumbersome policy option.

Senator Wyden's “No Most Favored Nation Trading With Russia Act”

Senate Finance Committee Chair Ron Wyden (D-OR) has introduced the No Most Favored Nation Trading with Russia Act. According to the press release, the bill "revokes Russia’s Permanent Normal Trade Relations (PNTR) status and provides the president the power to raise tariffs on a host of Russian products."

The full text of the legislation is here. The press release says "[t]he bill is similar to legislation introduced by Reps. Earl Blumenauer, D-Ore., and Lloyd Doggett, D-Texas in the House." The only big change I see from the Blumenauer/Doggett legislation is the addition of this provision:

SEC. 3. PROCLAMATION OF TARIFFS.

With regard to products of the Russian Federation, the President may proclaim modifications to the rates set forth in the column 2 rate of duty column of the Harmonized Tariff Schedule of the United States if the President determines that the modifications are necessary for the protection of the essential security of the United States. 

This provision appears to give the president the authority to raise tariffs on Russian imports above the current column 2 "bad boy" rates if these rates are considered not to be high enough to protect U.S. security.

The Portman/Cardin Russia (and Others) NTR Withdrawal Trade Bill

Following up on Senator Portman's speech discussed here, Senators Portman and Cardin have introduced bipartisan legislation "to revoke free trade privileges from Russia and other countries that invade sovereign nations." They explain that "[t]he No Trading with Invaders Act would automatically revoke Permanent Normal Trading Relations (PNTR) for any Communist, or formerly Communist, country that commits an act of aggression against another member of the World Trade Organization (WTO)." (There is also a Global Magnitsky Human Rights Accountability Act component to the legislation, but I'm going to focus here on the trade part).

The legislation itself is here. The key trade provision is as follows:

SEC. 2. WITHDRAWAL OF NORMAL TRADE RELATIONS TREATMENT FOR COUNTRIES OR TERRITORIES THAT COMMIT ACTS OF AGGRESSION.

(a) WITHDRAWAL OF NORMAL TRADE RELATIONS TREATMENT.—

(1) IN GENERAL.—Notwithstanding any other provision of law, effective on the date of the enactment of this Act, if the President determines that the government of a subject country or territory has committed an act of aggression in violation of international law, that the President does not consider to be a legitimate act of self-defense, against a WTO member, the President shall deny nondiscriminatory treatment (normal trade relations) in accordance with paragraph (2) to products of that country or territory.

(2) DUTY RATES APPLICABLE.—If the President makes a determination of aggression under paragraph (1) with respect to a subject country or territory, not later than 15 days after that determination, the President shall, by proclamation, cause all products of that country or territory to be dutiable at the rates set forth in the column 2 rate of duty column of the Harmonized Tariff Schedule of the United States.

(3) REQUEST BY CONGRESS FOR DETERMINATION.—If the President receives from a relevant congressional committee a request to make a determination under paragraph (1) as to whether the government of a subject country or territory committed an act of aggression in violation of international law against a WTO member, the President shall make such a determination not later than 15 days after receiving the request.

(4) DETERMINATION OF NON-AGGRESSION.—If the President determines that the government of a subject country or territory has not committed an act of aggression in violation of international law against a WTO member, whether pursuant to a request by a relevant congressional committee under paragraph (3) or otherwise, the President shall brief each relevant congressional committee on the justification for such a determination.

(b) RESTORATION OF NORMAL TRADE RELATIONS TREATMENT.—

(1) IN GENERAL.—The President may restore nondiscriminatory treatment to products of a subject country or territory with respect to which such treatment has been withdrawn under subsection (a) on and after the date that is 30 days after the date on which the President certifies to Congress that—

(A) the subject country or territory has ceased committing acts of aggression in violation of international law towards the WTO member that led to the withdrawal of such treatment and has fully removed its armed forces or proxy forces from the WTO member; and

(B) the WTO member has fully regained its sovereignty and territorial integrity as in existence in that country before the commencement of the acts of aggression in violation of international law.

(2) CONSULTATION WITH CONGRESS.—Before making a decision to restore nondiscriminatory treatment under paragraph (1), the President shall consult with each relevant congressional committee to determine whether the conditions of that paragraph have been satisfied.

(c) DETERMINATION OF ACTS OF AGGRESSION.—For purposes of this section, the President shall consider an act of aggression in violation of international law by a subject country or territory against a WTO member to include—

(1) an invasion of the territory of the WTO member by the armed forces or proxy forces of the subject country or territory;

(2) the occupation of the territory of the WTO member by the armed forces or proxy forces of the subject country or territory; or

(3) any other armed attack by the armed forces or proxy forces of the subject country or territory on the WTO member.

(d) DEFINITIONS.—In this section:

(1) RELEVANT CONGRESSIONAL COMMITTEE.—

The term ‘‘relevant congressional committee’’ means any of the following committees:

(A) The Committee on Finance, the Committee on Foreign Relations, or the Committee on Armed Services of the Senate.

(B) The Committee on Ways and Means, the Committee on Foreign Affairs, or the Committee on Armed Services of the House of Representatives.

(2) SOVEREIGNTY.—The term ‘‘sovereignty’’ means the international independence of a state, including its right to regulate its own internal and external affairs without foreign dictation, such as by conducting free and fair elections.

(3) SUBJECT COUNTRY OR TERRITORY.—The term ‘‘subject country or territory’’ means a country or territory that is or was at any time subject to the provisions of chapter 1 of title IV of the Trade Act of 1974 (19 U.S.C. 2431 et seq.).

(4) WTO MEMBER.—The term ‘‘WTO member’’ has the meaning given that term in section 2 of the Uruguay Round Agreements Act (19 U.S.C. 9 3501)).

So you would start with a presidential determination (which Congressional committees can request) that a government "has committed an act of aggression in violation of international law, that the President does not consider to be a legitimate act of self-defense, against a WTO member." After this determination is made, the President "shall deny nondiscriminatory treatment (normal trade relations)," in particular, the President "shall, by proclamation, cause all products of that country or territory to be dutiable at the rates set forth in the column 2 rate of duty column of the Harmonized Tariff Schedule of the United States." As one law firm puts it, Column 2 is the “bad boy” duty rate "that the US charges on imports from countries which we do not have normal trade relations with" (e.g. Cuba and North Korea).

Normal trade relations can be restored if acts of aggression stop and sovereignty and territorial integrity have been restored.

One part of this I'm not sure I understand is that the press release says this applies to "any Communist, or formerly Communist, country." But the legislation seems broader than that. If Canada were to invade Mexico, to take a ridiculous example, could this legislation be applied to withdraw NTR from Canada? (I'm going to ignore any suggestions that Canada, with its universal, government-run health care system is actually socialist!). That makes me wonder how this legislation would be applied to the various other military conflicts going on around the world.

Finally, unlike the earlier Blumenauer/Doggett bill, there is nothing in this legislation about trying to kick countries out of the WTO, which seems like it would be a political challenge.

UPDATE:

I missed this from the definition provisions: "The term ‘‘subject country or territory’’ means a country or territory that is or was at any time subject to the provisions of chapter 1 of title IV of the Trade Act of 1974." So, that means the statute is limited to the countries covered by the Jackson-Vanik amendment, and my hypothetical concerns about a situation in which Canada invaded Mexico were misplaced.

Senator Rob Portman on Russia and the WTO

This is from a speech by Senator (and former U.S. Trade Rep.) Rob Portman:

I believe we should also target Russia's trade sector by revoking our Permanent Normal Trade Relationship, or PNTR, with Russia. In other words, the United States should no longer give Russia unrestricted access in trade to our country. This would have the effect of raising tariffs on goods from Russia to the rates at which they were before Russia joined the World Trade Organization and received this special status, PNTR, from the U.S. Congress. When I was U.S. Trade Representative, I helped negotiate this agreement, and it does give them certain privileges with regard to our economy.  

Free trade with the United States is a privilege, not a right. After Russia joined the WTO in 2012, Congress passed legislation to expand trade between our countries by eliminating tariffs on some of these imports. But as easily as we granted PNTR, Congress can take it away. Invading a sovereign nation, a democracy no less, is certainly grounds for us to take away that privilege, and we have the right to undo it under the WTO rules for national security reasons. It would not be unprecedented. In 1992, Congress revoked market access for Serbia and Montenegro as a result of their aggression in the wake of the breakup of Yugoslavia. Today, I will be introducing bipartisan legislation to revoke unrestricted market access for countries who invade their neighbors. Period. I call upon our trading partners to invoke their own national security rights at the WTO and similarly take away market access Russia, until this point, has enjoyed in their economies. 

This should be ended, this market access, unless and until Ukraine's territorial integrity and sovereignty are as they were prior to the Russian invasion. ...

This part sounds a bit off to me: "This would have the effect of raising tariffs on goods from Russia to the rates at which they were before Russia joined the World Trade Organization and received this special status, PNTR, from the U.S. Congress." But weren't the tariffs on Russian imports at the same rate as those on imports from other countries prior to PNTR being granted, because NTR was being granted to Russia each year?

As to the WTO, the legislation he mentions is not publicly available yet, but it's interesting that instead of focusing on a push to suspend Russia's WTO membership, as Congressmen Blumenauer and Doggett did, he seems to want everyone to "invoke their own national security rights at the WTO and similarly take away market access Russia." That's probably a simpler approach to using the WTO to induce Russia to change course.

Guest Post: Russia’s Invasion of Ukraine and Global Trade: It’s More Than Just Oil and Natural Gas

This is a guest post from Chaturbhuj (a law student at National Law University, Jodhpur, India) and Hridyanand Ojha (a law student at Institute of Law, Nirma University, Ahmedabad, India)

Introduction

The Russian invasion of Ukraine has triggered Europe’s largest land conflict since 1945. This conflict presents a severe danger to global trade. The developed world’s response to Russia’s invasion, including sanctions on Russian banks and trade, is expected to produce significant disruptions in global trade and financial links with far-reaching consequences. It is more than simply a negative influence on oil and natural gas.

It is noted that Russia is a large producer of basic and precious metals in addition to being an energy powerhouse, on the other hand, Ukraine is a major agricultural exporter in the globe. The authors seek to sketch out the potential consequences of Russia’s invasion of Ukraine on global trade flows. The authors attempt to lay down the possibilities of global trade disruptions and raise a question on the effectiveness of economic sanctions.

Decoupling continues and sanctions prove to be an imperfect tool

Sanctions have been seen as a key weapon of public policy that sparked much debate in recent years due to their increasing usage by the West. These enormous economic and social costs imposed on targets are designed to bring about a change in policy or activity by the target country, entities, or individuals. The question arises whether these sanctions have been effective.

Concerning the Ukraine problem, western economic sanctions aimed at punishing Russia date back to 2014. There have been various sets of sanctions and export controls enacted by the United States (US), the European Union (EU), and the United Kingdom (UK) in response to actions taken by the Russian Federation in Ukraine and surrounding areas. In March 2014, the US imposed the first wide-ranging set of sanctions blacklisting banks and certain wealthy individuals. The list also included unspecified individuals whose actions have been found to undermine Ukraine’s democratic institutions and process and established government authority in the Crimean region without the authorization of the Ukrainian government. In addition, on March 17, 2014, the US, the EU, and Canada joined the first wave of sanctions the day after the Crimean pseudo-referendum. The sanctions imposed on Russia on March 17 were the broadest imposed on the country since the Soviet Union’s demise in 1991. As a result, Australia, Albania, Iceland, Montenegro, and Ukraine joined the US and EU in sanctioning Russia following its takeover of Crimea.

The second wave of sanctions on Russia came in 2014 when the Council of Europe froze Russia’s delegation’s voting privileges. In the prolongation of the second wave, the US barred several Russian officials from conducting business within its borders, and on the same day, on April 28, 2014, the EU announced further travel restrictions against 15 people.

In reaction to the intensifying conflict in Donbas, the third round of sanctions was imposed to paralyze Russia. The US and the EU joined the third wave, imposing transaction bans and sanctioning further persons. The third wave is still ongoing, with a huge list of sanction measures. Following Russia’s invasion of Ukraine on February 24, 2022, two nations that had not previously participated in sanctions, South Korea and Taiwan, imposed sanctions on Russia.

Economic sanctions imposed by the West to punish Russia for its invasion of Ukraine did not seem to bring intended change in Russian policies. As a result, these sanctions added a new layer of uncertainty to a global economy already warped by the coronavirus outbreak and a decade of ultra-low interest rates. We agree with Professor Susan Aaronson that economic and financial penalties have been used by countries for decades, but they prove to be imperfect weapons. Denying Russia from having normal trade relations is not the optimal solution to the ongoing violence. We need to remind Russia’s leader that when you undermine the rule of international law, you cannot expect the rule of law in international trade. As with sanctions, the price of Russian goods will increase in these markets and the world will be affected. Therefore, the attempt to decouple Russia, the world’s 11th biggest economy and source of one-sixth of all commodities from the trading system fails and has no precedence in the trade liberalization age.

Analyzing the implications of the Russian Invasion on Global Trade: Who will suffer?

Following the pandemic, a recovery could be seen occurring in global supply chains and economic growth, however, the new sanctions have put all that in question. Meanwhile, the Russian invasion of Ukraine has already knocked financial markets and the worldwide economy hard.

Both Russia and Ukraine are major exporters not only of natural gas and oil but also of a wide variety of commodities. Russia is the 16th-largest goods exporter in the world, with petroleum, coal, gas, gems and precious metals, and iron and steel as the top five products. Ukraine is 48th with steel, coal, fuel, petroleum products, grain, and iron ore making up the top five products.

 

 

Russia Export – Import Balance                                

 

 

Ukraine Export – Import Balance

Source: World Integrated Trade Solution (2019)

Among the countries that Russia exports to, there are the US, Turkey, Netherlands, Italy, Germany, China, Belarus, and more than 187 others. More than 90% of Finland’s nickel imports come from Russia, and the country supplies nearly half of Turkey’s aluminum imports. Statistics do not leave behind the US and the UK and make them one of the largest buyers of Russian pig iron and gold in 2020. That accounted for three-quarters of its overall imports of the metal that year and represented 19% of its domestic production.

On the other hand, Ukraine exports to the US, Turkey, Russian Federation, Poland, Netherlands, Italy, India, Hungary, France, Egypt, Germany, China, Switzerland, Belarus, and 169 other countries. In addition, Turkey and Egypt import more than 50% of their wheat from Russia and Ukraine, while India and China import sunflower and cotton-seed oils from Ukraine. As of 2019, Russia and Belarus provided Brazil and China with at least 30% of their fertilizer imports for the year, worth a total of $4.3 billion. The US and India were also major buyers.

A closer look at what the world gets from Russia and Ukraine indicates that trade is likely to be disrupted given Russia’s invasion of Ukraine and its longstanding relationship with stricter sanctions by western states. Consequently, the prices of many commodities beyond oil will be on the rise, and most developing and least-developing countries will be the sufferers.

Will Russia be able to run away safely from the consequences resulting from sanctions? Will Russia survive without nearly half of the world’s trade? The answer comes in the negative. Russia is a major buyer of chemical products, equipment and transport, foodstuffs, and agricultural products and has significant imports from Asia and countries from other regions such as China, Germany, the US, Belarus, and Italy. In any case, disruption of trade could leave a dent in Russia’s economy, regardless of China’s stance.

In reverse, for a few countries and products, Russia and Ukraine are major customers. Russia imported more than $5 billion worth of fur coats, clothing, and accessories from China in 2019 and 2020. In the same line, Ecuador sells almost 20% of its bananas, worth more than $600 million annually to Russia. This poses a risk of demand that could be hurt by future sanctions and other economic fallout. The country is also a key market for Finnish nuclear-reactor parts.

Russian Federation Country Growth vs World Growth vs GDP Growth

Source: World Integrated Trade Solution (2019)

 

Ukraine Country Growth vs World Growth vs GDP Growth

Source: World Integrated Trade Solution (2018)

In the above graphs, Russia and Ukraine are compared with global growth, indicating a dent. A two-way road exists: first, the world suffered, not Russia and Ukraine, between 2006-08; and second, possibly when Russia and Ukraine suffered, so did the world at large. COVID-19 approached, and countries’ growth slowed along with the global economy. Russia’s invasion of Ukraine leaves the world in doubt and with unknown outcomes. Considering sanctions announced so far, the sanctions will harm Russian businesses. More specifically, export curbs due to economic sanctions will limit the access of Russia to foreign markets.

And it is not just natural gas or oil that is imported to other countries. In total, over 130 economies have at least one good or commodity that is largely imported from Russia or Ukraine. Sanctions imposed so far are focused on Russia’s financial sector, individuals, and certain trades while giving a pass to the country’s two commodities, oil, and natural gas. Bypassing the energy sector is unlikely to stop the snarl of global trade while sending stock prices soaring and gas prices inching up.

This invasion disrupts global trade beyond oil and natural gas. The invasion of Ukraine may upset the supply chains of wheat, barley, corn, rye, precious metals etc. In all likelihood, countries that primarily supply commodities to Russia and Ukraine will also suffer. A rise in oil and natural gas prices in Europe will disrupt the exports of other countries, as consumers will not spend as much on other goods and services. There are more factors affecting global trade than simply oil and natural gas. The Russia-Ukraine conflict is shattering a leg of global trade which was previously broken by the COVID-19.

Conclusion

Following the pandemic, global supply chains and growth had been in recovery mode, but now all of that is under threat due to the conflict and harsher sanctions. The impact of the Russia-Ukraine conflict will be felt badly across the world in terms of currency volatility, commodities, security, sanctions, and trade disruption. As Jacob Kirkegaard said, “We are now entering an era of geopolitical risk at an entirely new level. Many of the supply chain issues that are still with us from the pandemic are going to be exacerbated by this.”

With a rapid turn of events in Ukraine, additional sanctions are highly probably in the future. Global supply will always be at the mercy of everything, as the Butterfly Effect describes. The longer the conflict drags on, the worse this will impact global trade. Now the question arises, whether countries are prepared to confront the implications of labor shortages, global supply disruption, and inflation. Lastly, let us not forget that we are still learning how to live with Covid-19’s effects.