Latest news, WTO dispute settlement

WTO panel report: US origin marking changes for Hong Kong products not legal

The World Trade Organization released a panel ruling today related to a dispute brought by Hong Kong authorities against Washington’s decision to mark the origin of products imported from Hong Kong as originating in China.

The conclusions are similar to those of a recent report on US Section 232 tariffs on steel and aluminium, namely that these are illegal and there was not enough of an emergency situation in international relations to justify the measure.

In this case, the European Union, which acted as a third party in the case, appeared supportive of the United States view.

Relationship deterioration not a severe enough international security situation

The US introduced these measures in 2020 following the promulgation of a new national security law in Hong Kong amidst wide-spread street protests, leading Washington to consider that the island-city state is no longer politically independent enough from Beijing to warrant the separate treatment it enjoys in trade matters.

Hong Kong, officially cohabiting under a one-country-two-systems regime with mainland China since the United Kingdom relinquished control over it in 1997, is also an independent customs territory. As such, it is also a full-fledged member of the World Trade Organization.

The US decision has major implications for Hong Kong’s exports to the United States, not least reputational, as every Hong Kong product needs to be labelled as originating in China.

In Geneva, the United States made the same argument as in the steel case. To Washington the matter concerns “its essential security interests under Article XXI(b) of the GATT 1994” and for this reason the issue is self-judging, which means no panel may judge on the issue.

Panellists disagreed they had no right to look into the matter. “Effectively, this would mean that we would not review the challenged measure at all, whether under the claims or under the security exception,” their report says.

The panellists found that the US had violated the basic ‘most-favoured nation’ requirement under article IX of the General Agreement on Tariffs and Trade related to origin marking on products.

The report states that “Hong Kong, China has (…) demonstrated, on the basis of the design, structure and expected operation of the measure, that the origin marking requirement modifies the conditions of competition to the detriment of products of Hong Kong, China.”

The panellists rejected the notion that there was enough of “an emergency in international relations” – as referred to in the relevant GATT security exception under article XXI – to justify the measure.

The 96-page panel report engages in a lengthy linguistic interpretative exercise about article XXI and also invokes the history of the GATT to come to its final conclusion on whether the situation warrants taking the measure at all.

The authors consider that as a result of their analysis “an emergency in international relations generally refers to a state of affairs that occurs in relations between states or participants in international relations that is of the utmost gravity, in effect, a situation that represents a breakdown in those relations.”

“A determination of whether a given situation constitutes an emergency in international relations is to be examined on a case-by-case basis,” the panellist say.

“In this context, we consider that the further removed that a situation is from war or comparable threat to international peace and security, the more explanation a respondent would usually need to provide as to why a given situation is close to the breakdown in relations between two or more countries,” which is something the United States did not do.

The panellists conclude that “the United States has not demonstrated that the situation at issue constitutes an emergency in international relations, and therefore the origin marking requirement is not justified under Article XXI(b)(iii)”.

United States wants to address democracy and human rights violations

The United States Trade Representative’s reaction came immediately after the report’s publication. “The United States has held the clear and unequivocal position, for over 70 years, that issues of national security cannot be reviewed in WTO dispute settlement,” it said in a statement.

“The United States does not intend to remove the marking requirement as a result of this report”

USTR accuses the report of suggesting “that the United States cannot act to address China’s undermining of democratic and human right and democracy in Hong Kong”.

Interestingly, the European Union, which did not take trade measures except restricting some sensitive technology exports against Hong Kong under its dual-use regime, but who acted as a third party in this WTO case, partly agrees with the United States.

“The European Union argues that there are significant elements to indicate that the situation to which the United States sought to respond by its measures is one of an emergency in international relations within the meaning of Article XXI(b)(iii) of the GATT 1994,” the report reveals.

The report also indicates that Brussels has argued that “the EU shares the concerns of the United States regarding the degree of autonomy of Hong Kong and regarding the respect for protected rights and freedoms in Hong Kong”.

Now that raises a new can of worms: can democratic backsliding justify big powers absolving themselves of basic WTO rules?

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