Last year, I wrote about a U.S. argument in the U.S. - Rules of Origin (DS597) case that "the essential security exception of Article XXI of the GATT 1994 applies to the multilateral agreements on trade in goods, including the Agreement on Rules of Origin." One thing that interests me about this issue is the possibility of extending the argument from GATT Article XXI to Article XX, and from the Agreement on Rules of Origin to other Annex 1A agreements. Will the DS597 dispute tell us anything about, say, applying Article XX as a defense to claims of violations of the SCM Agreement? I'm curious about the U.S. view on this, given the recent subsidies it has announced in relation to clean energy vehicle production.
I haven't gone through on every word of the U.S. submissions in the DS597 dispute, but I did see a couple other comments from them on the issue of applying Article XXI outside the context of the GATT. First, as set out in the U.S. response to the panel's questions after the first substantive panel meeting, the panel had asked:
Should the Panel, in your view, in its analysis on the availability, or not, of Article XXI(b) to the claims at issue in this dispute follow the analytical approach applied by the Appellate Body, in for example China – Rare Earths (paragraphs 5.61-5.62 and 5.74), and by previous panels referred to by some third parties (European Union6, Singapore7 and Switzerland8)? If not, do you consider this approach legally incorrect? In your response, please indicate whether there are any relevant differences between Article XX and Article XXI of the GATT 1994 for applying such an analytical approach, in determining the applicability of Article XXI of the GATT 1994 to non-GATT provisions.
The U.S. replied as follows:
110. The United States understands the references to the report in China – Rare Earths (AB) and previous reports identified in third party submissions to include reports that have addressed applicability of Article XX to non-GATT instruments.54 The United States set forth the proper application of the customary rules of treaty interpretation with respect to the applicability of Article XXI(b) to the Agreement on Rules of Origin and the TBT Agreement in its First Written Submission. In particular, the text of the Agreement on Rules of Origin and the TBT Agreement (including their textual links to the GATT 1994), in their context – which includes the structure of the WTO Agreement – and in light of their object and purpose establishes that Article XXI(b) applies to each agreement.
111. In this regard, the United States considers that previous reports, in analyzing the applicability of GATT Article XX to a non-GATT agreement, correctly recognized that lack of explicit incorporation of an exception is not dispositive – notwithstanding that GATT Article XX begins with the clause “[n]othing in this Agreement”. Instead, those reports analyzed the question of applicability on a case-by-case basis.55 The China – Rare Earths (AB) report also specifically noted that this analysis must take account of the structure of the WTO Agreement: “The analysis must also take into account the overall architecture of the WTO system as a single package of rights and obligations and any other relevant interpretative elements, and must be applied to the circumstances of each dispute, including the measure at issue and the nature of the alleged violation.”56
112. That said, Article XX is different from Article XXI in key respects, and the Panel’s analysis should account for those differences. First, in Article XXI(b), the operative language regarding the relationship between the measure and the objective is in the chapeau – “any action which it considers necessary for the protection of its essential security interests”. As the United States has explained, the requirement for applicability of Article XXI(b) is that the Member taking the action must consider that action necessary for the protection of its essential security interests.
113. In Article XX, the subparagraphs themselves contain the operative language regarding the relationship between the measure taken and the Member’s objective (for example, “necessary to”, “relating to”, or “essential to” the relevant objective), and none of the Article XX subparagraphs use the phrase “which it considers” to introduce the word that establishes that relationship. That is, the subparagraphs of Article XX indicate on what basis a Member may avail itself of the exception – for example, when the measure at issue is “necessary to protect public morals”. In addition, the chapeau of Article XX includes an additional non-discrimination requirement. Under this structure, then, a Member: 1) may take a measure that is necessary to protect public morals, for example, but only if 2) that measure does not arbitrarily or unjustifiably discriminate or constitute a disguised restriction on trade. These two substantive obligations in the text led the Appellate Body to its statement that the “structure and logic of Article XX” suggests a two-step analysis. The “structure and logic” of Article XXI is fundamentally different. By its terms, Article XXI(b) does not permit a panel to substitute its judgment for that of a WTO Member as to whether an action is necessary for that Member to protect its essential security interests.
114. Moreover, with respect to the structure of the WTO Agreement, as explained in the U.S. First Written Submission, the essential security exception applies to each of Annexes 1A, 1B, and 1C to the WTO Agreement.57 The security exceptions in each of Annexes 1B (GATS) and 1C (TRIPS) mirror the security exception in Annex 1A (GATT).58 That is, when Uruguay Round negotiators included new areas or updated disciplines under the single undertaking, such as services or intellectual property rights – or rules of origin or technical barriers to trade – they extended the security exception to those commitments, and maintained the same self-judging approach.
115. In contrast, the “general exceptions” provision of Annex 1B (GATS Article XIV) includes a number of textual differences compared to the general exceptions of Annex 1A (that is, Article XX of the GATT 1994). For example, Article XIV of the GATS includes specific language on exceptions to the GATS provisions on MFN and national treatment,59 and does not include language similar to that found in Article XX(c), (e), (f), (g), (h), (i), or (j). Annex 1C (TRIPS) does not include a “general exceptions” provision.
116. As explained above, and in the U.S. First Written Submission, the textual differences between Articles XX and XXI themselves, as well as the differences in the structure of the WTO Agreement with respect to these exceptions, are relevant context for the Panel’s analysis of the applicability of Article XXI(b) to the claims at issue in this dispute.
Then in its second written submission, the U.S. said:
114. First, Hong Kong, China, attempts to dismiss the relevance of the structure of the WTO Agreement as context by mischaracterizing the U.S. explanation regarding applicability as simply an argument that the Agreement on Rules of Origin and TBT Agreement “relate in some way to trade in goods.”140 The U.S. explanation, however, does not rely solely on the fact that these agreements all relate to goods, but rather on the single undertaking structure established by the text of the WTO Agreement, and consideration of the structure of a treaty as context is provided for in the customary rules of treaty interpretation.
115. As the United States explained in its First Written Submission, the Marrakesh Agreement is an umbrella, establishing among other things that all of the agreements in its annexes are a single undertaking.141 The core multilateral substantive obligations are contained in Annex 1: Annex 1A consists of the Multilateral Agreements on Trade in Goods, including the GATT 1994, the Agreement on Rules of Origin, and the TBT Agreement; Annex 1B includes the GATS; and Annex 1C includes the TRIPS Agreement. The inclusion of the GATT 1994, the Agreement on Rules of Origin, and the TBT Agreement in a single annex is therefore a legal structure, not merely a function of those agreements each “relating in some way to trade in goods” as misstated by Hong Kong, China.
116. The customary rules of treaty interpretation provide for taking into account the structure of the treaty as context, as the United States explained in the first videoconference with the Panel.142 Some commentary has even noted that the “systemic structure of a treaty is . . . of equal importance to the ordinary linguistic meaning of the words used. . . .”143 The United States observes further that past panel and Appellate Body reports have taken the structure of the WTO Agreement into account as context.144 As cited by the Panel in Question 21, the report in China – Rare Earths (AB) noted that “due account [be] taken of the overall architecture of the WTO system as a single package of rights and obligations” when interpreting individual provisions of the multilateral trade agreements.145 Although Hong Kong, China, cites to the same phrase in its opening statement and response to the Panel’s questions as part of its arguments,146 it attempts to dismiss the relevance of the structure of the WTO Agreement as simply the equivalent of saying that the Annex 1A agreements “relate in some way to trade in goods”. As a result, Hong Kong, China, does not undertake any consideration of the structure (or “overall architecture of the WTO system”) as part of its interpretative approach.
117. In contrast, the United States has set forth an interpretation that accounts for the structure of the WTO Agreement. Treaty interpretation is a holistic examination;147 examining the structure of the WTO Agreement as a whole is a starting point for establishing that the essential security exception applies to the covered agreements at issue.148
118. As the United States has explained, the structure of the WTO Agreement in no way suggests that Members considered essential security a concern for the disciplines of the Annex 1B and 1C agreements with respect to services and intellectual property, respectively, but not a concern for the Annex 1A agreements with respect to goods. Nor does logic suggest any reason that essential security should be less of a concern for trade in goods than for trade in services or intellectual property. To the contrary, when the parties decided to extend disciplines to new areas – services, and intellectual property – the new agreements contain the essential security exception. The structure of the WTO Agreement – and logic – suggest that the GATT 1947/1994 essential security exception likewise applies to the new agreements on trade in goods contained in Article 1A.149
119. Therefore, the structure of the WTO Agreement does not support a finding that the essential security exception necessarily only applies to those Annex 1A agreements that expressly incorporate it, as Hong Kong, China, suggests. The United States illustrated the absurdity of such a finding in a hypothetical in its First Written Submission and in its opening statement at the first videoconference.150
120. In addition, Hong Kong, China, errs in suggesting that the analysis of applicability of the essential security exception under Article XXI must be identical to that of applicability of Article XX.151 Hong Kong, China, bases its assertion only on the inclusion of “Nothing in this Agreement” in both exceptions. However, this overlooks textual differences between Articles XX and XXI themselves, as well as differences in the structure of the WTO Agreement with respect to those exceptions. As the United States explained in its response to Question 21 and in the U.S. First Written Submission, those differences are relevant context for the Panel’s analysis of the applicability of Article XXI(b) to the claims at issue in this dispute.152
It may be unlikely that the panel will make any broad pronouncements on the issue of Article XXI vs. Article XX here. This dispute is contentious enough in relation to the core issues in dispute.
Nevertheless, the broader issue of GATT exceptions for non-GATT goods agreements seems of great importance for the likely upcoming debates about how subsidies for environmental purposes are considered under WTO rules. Ideally, governments would sit down and hash out clear rules in this area. Perhaps more realistically, though, the existing rules will have to be applied, and disputes will arise over whether particular measures are consistent with those rules. I can imagine that Article XX will be invoked as a defense in this context, based on the argument that it applies beyond the GATT, and then we will see the issue debated directly. (I can also imagine that Article XXI will be invoked, but that seems like a less constructive approach).
The latest update I see from the WTO panel is that it expects to issue its final report to the parties in the last quarter of 2022. We'll see if that happens or if there is a further delay (and if it does happen, there will be a bit more time before circulation).
