The Reviewability of the Security Exception in GATT Article XXI in Russia – Traffic in Transit: Implications for South China Sea Investment Disputes in GATT Article XXI-type Clauses in ASEAN Regional Investment Treaties

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The landmark WTO Panel Report on security exceptions in GATT Article XXI came out Friday last week in Russia – Traffic in Transit.  I have written extensively about necessity and national emergency clauses in the past – particularly to reject the position of the supposed wholesale unreviewability of these clauses in the Schmittian sense (on GATT Article XXI exceptions here and here, and on GATT Article XX exceptions, here and here).  The significant valence to this decision, in my view, does not just lie with the Panel’s reasoning (especially as to what they considered to be “objectively” determinable) and its broader implications for the current configuration of the world trading system in this era of increased Trump-driven trade wars.  The greater impact of this decision’s rejection of unreviewability, I submit, will be to enable arbitral tribunals to review security defenses of States anchored on international investment treaties that have purposely grafted GATT Article XXI language.

This phenomenon may be particularly acute for the regional investment treaties of the Association of Southeast Asian Nations (ASEAN). (For the detailed analysis of these clauses, see my previous published work here.)  Attempts by any ASEAN nations (such as the Philippines, Malaysia, Viet Nam, in particular) to impose, in the present or in the future, certain regulatory measures against China-funded development projects or activities of Chinese firms who are increasingly expanding their footprint (from either dredging activities and the creation of artificial islands from dredged and pulverized coral reefs; to tourism; logistics, construction, as well as energy operations in the South China Sea) could, ordinarily, be justified under the GATT Article XXI-type clause of Article 17 (Security Exceptions) in the 2010 ASEAN-China Investment Agreement.  With the declared reviewability of GATT Article XXI in Russia – Traffic in Transit, however, ASEAN Member States should expect that these measures could be challenged (and likely reviewed by arbitral tribunals) in investor-State dispute settlement proceedings permitted under Article 14 of the same 2010 ASEAN-China Investment Agreement.  This is just one illustration of the kind of deep ripple effects that the reviewability of GATT Article XXI-type security exceptions could have across many investment treaties that have kept replicating this clause (and particularly why I have generally, in my own expert work for ASEAN, cautioned against wholesale grafting of trade norms into the regional investment treaties, without setting an explicit treaty provision either rejecting or permitting the justiciability or reviewability of these provisions).  Transposing trade law so unstintingly into investment law creates its own set of unexpected consequences.  Notwithstanding regime differences with world trade law, investor-State arbitral tribunals may find it hard to ignore the authoritativeness of the Russia – Traffic in Transit Panel Report’s finding of reviewability of GATT Article XXI security exceptions.

This post will first give a brief summary of the Panel’s reasoning on reviewability of GATT Article XXI in Russia – Traffic in Transit, anticipating some of the consequences for ongoing trade wars of the United States, the EU, and Russia that depend on the unreviewability of the security exceptions clause in GATT Article XXI. (We expect extensive commentary on this landmark decision from several quarters, and this post certainly does not intend to be the last word on the full elaboration of reasons on all issues in this case.) The remaining part of this post focuses on GATT Article XXI-type security exceptions clauses in the ASEAN regional investment treaties, and how the reviewability of these clauses could potentially impact the investment and development dimension in the South China Sea disputes.

A Test of “Objective Facts” to GATT Article XXI in Russia – Traffic in Transit

To recall, Ukraine’s complaint challenged the legality of Russian measures with respect to rail transit and road routes across the Ukraine-Russia border for “all traffic in transit destined for Kazahkstan”, as well as other countries such as the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, Uzbekistan, and Belarus.  (Panel Report, paras. 7.1a to 7.1d).  Russia argued that the measures “are among those that Russia considers necessary for the protection of its essential security interests, which it took, “[i]n response to the emergency in international relations that occurred in 2014 that presented threats to the RussianFederation’s essential security interests” (Panel Report, para. 7.4), invoking Article XXI(b)(iii) of the GATT 1994, arguing that, as a result, the Panel lacks jurisdiction to further address the matter. Russia took the interpretive position that “the explicit wording of [GATT] Article XXI confers sole discretion on the Member invoking this Article to determine the necessity, form, design, and structure of the measures taken pursuant to Article XXI” (Panel Report, para. 7.28), cautioning that “involving the WTO in political and security matters will upset the very delicate balance of rights and obligations under the WTO Agreements and endanger the multilateral trading system.” (Panel Report, para. 7.22).  Russia did not present substantive evidence to meet Ukraine’s claims on the merits, but instead focused on its jurisdictional objection.  In contrast, with respect to the interpretation of GATT Article XXI (Panel Report, paras. 7.31-7.34), Ukraine argued that Members invoking this provision did not have “total discretion”, and thus, a panel’s “objective assessment must include an examination of whether a Member invoking Article XXI has done so in good faith” (Panel Report, para. 7.33).  Unilateral determinations of the applicability of GATT Article XXI, in Ukraine’s view, would also be contrary to Article 23.1 of the DSU.  (Panel Report, para. 7.31).  Third parties Australia, Brazil, Canada, the European Union, Moldova, favored the justiciability or reviewability of GATT Article XXI, albeit for different reasons.  (Panel Report, paras. 7.35-7.43, 7.46-7.47). Japan urged extreme caution and ultimately proposed a “deference” approach for panels with respect to Members’ invocation of GATT Article XXI (Panel Report, 7.43-7.44), similar to Singapore’s proposal for a “margin of appreciation” approach. (Panel Report, paras. 7.48-7.49).  Turkey put forward a two-tiered analytical approach requiring the complaining Member to first establish a prima facie case of inconsistency before the responding Member has to substantiate its GATT Article XXI justification.  (Panel Report, para. 7.50).  Only the United States sided with Russia’s position that GATT Article XXI is self-judging.  (Panel Report, paras. 7.51-7.52).

In its dispositive reasoning, the Panel found that Russia’s invocation of the security exception under GATT Article XXI [specifically item b(iii): “Nothing in this Agreement shall be construed…to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…taken in time of war or other emergency in international relations“] fell well within its terms of reference for purposes of the Article 1.1 of the Dispute Settlement Understanding (DSU). (Panel Report, 7.56).  The Panel broke down the interpretation of this sentence as follows:

  1. The phrase “which it considers” was not intended to make GATT Article XXI subject to a Member’s unilateral determination, otherwise the items under GATT Article XXI(b) would be considered effet utile (Panel Report, paras. 7.63-7.65);
  2. The phrase “taken in time of”, according to the Panel, “describes the connection between the action and the events of war or other emergency in international relations in that subparagraph. The Panel understands this phrase to require that the action be taken during the war or other emergency in international relations. This chronological concurrence is also an objective fact, amenable to objective determination.” (Panel Report, para. 7.70);
  3. The circumstances referred to in item (iii), namely, “war” or “other emergency in international relations”, was in the Panel’s view “clearly capable of objective determination”, elaborating further:

“…Although the confines of an “emergency in international relations” are less clear than those of the matters addressed in subparagraphs (i) and (ii), and of “war” under subparagraph (iii), it is clear that an “emergency in international relations” can only be understood, in the context of the other matters addressed in the subparagraphs, as belonging to the same category of objective facts that are amenable to objective determination.

7.72. The use of the conjunction “or” with the adjective “other” in “war or other emergency in international relations” in subparagraph (iii) indicates that war is one example of the larger category of “emergency in international relations”. War refers to armed conflict. Armed conflict may occur between states (international armed conflict), or between governmental forces and private armed groups, or between such groups within the same state (non-international armed conflict). The dictionary definition of “emergency” includes a “situation, esp. of danger or conflict, that arises unexpectedly and requires urgent action”, and a “pressing need … a condition or danger or disaster throughout a region”.

7.73. “International relations” is defined generally to mean “world politics”, or “global political interaction, primarily among sovereign states”.” (Panel Report, paras. 7.71-7.73).

 The Panel also stressed that “the enumerated subparagraphs of Article XXI(b) establish alternative requirements, the matters addressed by those subparagraphs give rise to similar or convergent concerns, which can be formulated in terms of the specific security interests that arise from the matters addressed in each of them. Those interests, like the interests that arise from a situation of war in subparagraph (iii) itself, are all defence and military interests, as well as maintenance of law and public order interests. An “emergency in international relations” must be understood as eliciting the same type of interests as those arising from the other matters addressed in the enumerated subparagraphs of Article XXI(b)…Moreover, the reference to “war” in conjunction with “or other emergency in international relations” in subparagraph (iii), and the interests that generally arise during war, and from the matters addressed in subparagraphs (i) and (ii), suggest that political or economic differences between Members are not sufficient, of themselves, to constitute an emergency in international relations for purposes of subparagraph (iii). Indeed, it is normal to expect that Members will, from time to time, encounter political or economic conflicts with other Members or states. While such conflicts could sometimes be considered urgent or serious in a political sense, they will not be “emergencies in international relations” within the meaning of subparagraph (iii) unless they give rise to defence and military interests, or maintenance of law and public order interests….An emergency in international relations would, therefore, appear to refer generally to a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.152 Such situations give rise to particular types of interests for the Member in question, i.e. defence or military interests, or maintenance of law and public order interests. Therefore, as the existence of an emergency in international relations is an objective state of affairs, the determination of whether the action was “taken in time of” an “emergency in international relations” under subparagraph (iii) of Article XXI(b) is that of an objective fact, subject to objective determination.”(Panel Report, paras. 7.74-7.77).  The Panel further confirmed this interpretation referring to the object and purpose of GATT 1994 (Panel Report, paras. 7.78-7.82), as well as the negotiating history of the provision (Panel Report, paras. 7.83 – 7.100).  On its examination of the facts before it, the Panel then upheld Russia’s invocation of GATT Article XXI (Panel Report, paras. 7.126 – 7.149).

The Investment and Development Dimensions to the South China Sea Disputes: GATT Article XXI as a Regulatory Defense?

Judging from Russia’s successful invocation of GATT Article XXI (and without having to adduce extensive evidence on the merits of the particular allegations of Ukraine) and the fairly broad conception of emergencies within the scope of GATT Article XXI(b)(iii), it might appear that GATT Article XXI-type clauses could still be reliable for current new(er) generations of investment treaties, such as the current corpus of ASEAN regional investment treaties that adopts these types of clauses, or even Article 29.2 (Security Exceptions) in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.  But it may be a time to take stock and pause on the continuous grafting of GATT Article XII-type clauses, especially when it comes to the question of the ultimate utility of these clauses in the 2010 ASEAN-China Investment Agreement, given the particularly fraught relations evolving between China (as primary lender) to Southeast Asian states (such as Chinese investment project cancellations in Malaysia; Chinese construction rushes in Cambodia that may be aggravating electricity shortages and the displacement of Cambodian workers by Chinese firms hiring Chinese workers; Viet Nam measures regulating Chinese investment; tensions and simmering conflict over Pagasa/Thitu swarmed by 275 Chinese vessels in the Philippines and the non-materialization thus far of the promised bulk of US$24 Billion development financing from China; US$60 Billion in proposed Belt and Road initiative projects Indonesia, among others).  Thus far, there has not been a dispute yet brought by Chinese firms or investors (or even China itself as a disputing Party under Article 13 of the 2010 ASEAN-China Investment Agreement) against any regulatory measures (or project modifications or cancellations) made by ASEAN Member States, especially in the tension-filled rapid infrastructure and island building developments of China in the South China Sea.  If any were to likely arise in the future in one of the world’s most rapid infrastructure and maritime investment hubs, however, ASEAN Member States would be hard put to rely on GATT Article XXI-type security exceptions clauses as possible non-justiciable regulatory defenses to any future claims by either Chinese firms or China itself.  Russia – Traffic in Transit drives home the point that the characterization of “emergencies in international relations” will no longer be outside the purview of a WTO Panel, much more an investor-State dispute settlement mechanism created under regional investment treaties with GATT Article XXI-type clauses.  Given the ongoing reform challenges to the investor-State dispute settlement system as we featured in our UNCITRAL series last week, one could also say this is not the time for investor-State arbitral tribunals to be seised of the investment and development dimensions to the South China Sea disputes.  For better or for worse, we are all on due notice now that security exceptions are indeed reviewable and justiciable.

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