In January 2024, the EU will offer more information about its strategy for economic security. After the pandemic and war, the focus is on an approach to risk management. While we await more details, this post probes past jurisprudence to assess how earlier WTO adjudicators handled the potential of an economic security risk – and what we still don’t understand well.
The WTO Secretariat has defined ‘economic security’ as ‘resilience’ and ‘the ability of a system, including households, firms, and governments, to prevent and prepare for, cope with, and recover from shocks.’ The emphasis on prevention and preparation collapses notions of wartime, peacetime, or the transition period. No longer compartmentalised by ‘exceptional’ times, economic security stretches how security interacts with trade policy. States that refer to economic security emphasise ongoing evaluation and management of economic action in the highly integrated global economy, whether it is firms’ market power, technology transfers through foreign investments, or even classic efficiency gains from trade. The legal consequences of sustained economic security trade actions for the multilateral trading system remain unknown. However, any member may challenge the legality of ongoing strategies based on benefits being ‘nullified or impaired’ under Article XXIII of the GATT.
In such challenges, sub-paragraph (j) of Article XX may be particularly relevant. Sub-paragraph (j) permits members to justify trade restrictions owing to short supply, provided the member demonstrates multilateral cooperation on the basis that all members are ‘entitled’ to an equitable share of international supply. According to the Appellate Body, Article XX(j) addresses short-supply situations that must eventually conclude. In other words, they are not indefinite (para. 5.70). Assessing a ‘short supply’ circumstance requires a ‘holistic consideration of trends in supply and demand as they evolve over time, as well as whether the conditions giving rise to short supply have ceased to exist’ (para 7.1333). In examining case-specific factors, the Appellate Body explained that considering whether the ‘international supply of a product is stable and accessible’ becomes relevant (para 5.74).
In India-Solar Cells, India invoked, inter alia, Article XX(j) to secure the domestic capacity of solar cells and modules to remedy its energy security concerns with import dependencies. The Appellate Body reasoned that a panel must examine the extent to which a product is ‘available’ in all markets to meet the requisite demand (para 5.71). On this basis, the Appellate Body rejected India’s appeal and found India should have given ‘due regard’ to imports to meet its demand and not narrowed its available supply to achieve ‘domestic resilience’ (paras. 5.83, 5.58, 5.60).
In a different dispute, the European Union and its Member States – Certain Measures relating to the Energy Sector (DS476 or EU-Energy Package) (under indefinite appeal), the question arose as to whether EU measures on Russian gas were ‘essential’ because natural gas was in ‘short supply’ due to the ‘genuine and serious risks of disruption of supply of gas.’ (See European Union’s second written submission, paras. 419 and 420-421; and opening statement at the second meeting of the Panel, paras. 117-119). The intention of the EU’s measures was to develop the EU infrastructure and improve its interconnectivity to enhance the 'competition and security' of natural gas supply to the EU market (European Union, Appellate Submission, 21 September, para. 159). The EU argued that events disrupting gas supply are common around the world. (European Union's second written submission, para. 414). According to the EU, it is ‘vulnerable’ to supply disruptions because it is ‘largely dependent on a relatively limited number of sources of supply’ and owing to the inadequacy of the infrastructure currently interconnecting EU Member States’ (European Union's second written submission, para. 417). In the event of a disruption, it would become too difficult to develop an alternative route of supply owing to the costs and time required to facilitate the transmission of gas (para 7.1337).
The EU’s defence of its trade measures meant the panel had to assess whether risks of supply instability satisfied the language of Article XX(j) of the GATT. Ultimately, the EU-Energy Package panel disagreed with the EU and reasoned that Article XX(j) only covered products ‘presently in short supply’ (paras. 7.1347-7.1348 [emphasis mine]). Citing India-Solar Cells, the panel concluded the defence does not cover products that ‘may become’ products of short supply. The India-Solar Cells panel reasoned that the language of Article XX(j) confirmed products must be in short supply rather than at risk of becoming in short supply (paras 7.244, 7.250). Furthermore, the panel found the history of Article XX(j) demonstrated the article did not cover prospective shortages (para 7.249).
Yet, ‘for the sake of argument’, the India-Solar Cells panel concluded that it must evaluate the scope of Article XX(j) by reading it against the standard of risk under Article XI:2(a), confirming Article XX(j) may only include products at ‘imminent risk’ of short supply (paras 7.255, 7.258). Using a textual assessment, the panel defined imminent as ‘impending, soon to happen’ (para 7.260). The panel evaluated the potential of ‘imminent risk’ based on whether India could identify ‘any actual disruptions […] to date’ (para. 7.262). As India failed to provide evidence of any past disruptions, there was no further evidence to establish an imminent risk of disruption of solar cells or module supply (para 7.263). The panel concluded evidence of a ‘volatile’ or ‘cyclical’ market failed to establish a likely shortage (para 7.263).
The Appellate Body in India-Solar Cells upheld the panel’s consideration of ‘potential risks of disruption in supply’ to assess whether a ‘short supply’ situation existed in that case. Furthermore, it upheld the panel’s conclusion that India failed to identify ‘any actual disruptions in imports of solar cells and modules’ (para 5.75, citing the panel report, para. 7.262). Correspondingly, the Appellate Body disagreed with India’s claims that risks arising from dependence on imports are ‘intolerable’ so long as domestic manufacturing capacity ‘has not been met’ (para. 5.77).
The EU-Energy Package panel report reaffirmed the reasoning of the Appellate Body in India-Solar Cells. It reasoned that ‘short supply’ products do not cover ‘products at risk of being in short supply and noted that there were no ‘cogent reasons’ to disagree with the India-Solar Cells reports (para. 7.1350). However, the EU-Energy Package panel report does not confirm whether the panel asked the EU to demonstrate past ‘actual disruption’ to prove ‘imminent risk’ to the supply of natural gas. Rather, the panel determined the EU had failed to show ‘that natural gas is currently “in short supply” in the European Union’ ( paras 7.1351-7.1352). In a footnote, the panel noted a failed attempt to request data on the demand for natural gas within the EU, but through the panel’s calculations, it found the supply of natural gas from 2011 to 2015 met the EU demand for the same period (note 2189). While making a point to follow past legal interpretations, the DS476 panel had reinterpreted the relevance of risk to determining essential products’ short supply.
Yet, what about the precise circumstances of the EU’s natural gas market and evidenced geopolitical tensions between the EU, Ukraine, and Russia at the time? The EU developed its trade measures in late 2013, as tensions mounted between Russia and the EU, with Russia invading Crimea and tensions with Ukraine mounting in the first quarter of 2014 (see para 7.122). Even before 2014, the EU cited the risks of cutting gas supplies to Ukraine in 2006 and 2009 (European Union's second written submission, para. 204). Future interrogation could conclude whether the EU already anticipated how its dependence on limited interconnectors left it vulnerable to Russia’s ability to choke off the gas supply to the EU to – as Sabine Weyand noted in 2022 – weaponise trade.
How a future panel may evaluate the risks involved in the supply of critical or ‘essential’ products remains to be seen. Taking stock of the very limited jurisprudence of Article XX(j) of the GATT, the text of these GATT obligations fails to structure how governments should address shocks before they happen – what we consider to be an assessment of the potential of economic security concerns or risks. In the face of these unknowns, a good starting place is history.
