Free comment, Latest news, WTO dispute settlement

Comment: Hong Kong vs US – small is beautiful in the WTO

A World Trade Organization panel recently ruled in favour of Hong Kong in a dispute with the US regarding a requirement that imported goods should be marked as being of ‘China’ origin rather than ‘Hong Kong’ as hitherto.

The panel upheld the rights of a small economy against the most powerful state on earth in a world where, for the US and some of its allies, trade policy is now entirely subservient to foreign policy.

Origin of the dispute

The basis for the US action was a determination by the president that Hong Kong was no longer sufficiently autonomous to justify differential treatment in relation to China.

The value of goods produced in Hong Kong and exported to the US is in fact very small – but Hong Kong felt that this was a slippery slope.

Failure to challenge the US might lead to the gradual erosion of its status as a separate customs territory.

In addition, any goods produced in Hong Kong might in future be subjected to Trump-style tariffs on Chinese goods.

An obvious compromise would have been to agree that products be marked as having ‘Hong Kong, China’ origin but the US turned this down. Hong Kong was left with no option but to go to dispute settlement.

No ‘emergency in international relations’

The panel found that the US’s new origin marking requirement was inconsistent with article IX.1 of the GATT related to ‘marks of origin’ in that it accorded Hong Kong products less favourable treatment than like products of third countries.

In addition, the panel found that the US’s invocation of GATT article XXI(b), in relation to ‘security exceptions’, was not justified.

According to the panel, WTO members did not have a completely free hand to take whatever action they wanted and justify it on grounds of national security. Some elements of the article could be objectively assessed by a panel.

The panel went on to find that the US had not demonstrated that the ‘situation at issue’ – described by the US as an erosion of freedoms and degradation of democracy in Hong Kong – constituted an “emergency in international relations”, which was the relevant standard to justify a defence under article XXI(b)(iii).

Why Hong Kong trade is treated separately from China’s

Hong Kong became a GATT contracting party in 1986, when the United Kingdom declared that it possessed full autonomy in the conduct of its external commercial relations.

At that juncture, the People’s Republic of China also affirmed that Hong Kong, as a Special Administrative Region of China with effect from 1 July 1997, would continue to be a separate customs territory and decide its trade policies on its own.

The WTO, the successor to and like the GATT, makes no distinction between the legal rights of states and those of separate customs territories.

There is no doubt that Hong Kong’s trade policies are distinct, if not unique. It is widely regarded as a model of free trade in goods.

Hong Kong’s “mini-constitution”, the Basic Law, enshrines Hong Kong’s status as a separate customs territory and guarantees its ability to take part in international trade agreements, using the name ‘Hong Kong, China’.

It even stipulates that Hong Kong “shall pursue the policy of free trade and safeguard the free movement of goods, intangible assets and capital.”

Undermining Hong Kong autonomy?

In the WTO case, the US did not argue that Hong Kong had lost its autonomy in the trade sphere.  Indeed the panel noted quite the opposite.

In a March 2021 report to Congress, the US State Department somewhat begrudgingly included a short paragraph on “areas of remaining autonomy” in which it admitted that “Hong Kong continued to exercise authority in the implementation of commercial agreements and practiced free and open trade, with negligible tariff or non-tariff barriers.”

It therefore appears that, in order to address a perceived insufficiency of autonomy in freedoms and democracy, the US decided rather perversely that it should undermine the autonomy which it admitted Hong Kong retained in trade.

The impression was thereby created that the US was not genuinely concerned about Hong Kong’s autonomy at all but was simply using its distinct trade status as a pawn in a larger geopolitical game.

Threshold for an ‘emergency in international relations’

In addressing whether there was a case for the existence of an “emergency in international relations” under Article XXI(b)(iii) of the GATT – which would justify a departure from the principle of non-discrimination – the panel gave extensive consideration to the evidence submitted by the U.S.

In its assessment, the panel considered that there were “tensions and expressions of concern at the international level”.

However these did not meet the requisite level of gravity to constitute an emergency in international relations.  Relations between Hong Kong and the US continued to be cooperative in a number of policy areas.  Trade continued to flow largely as before.

There were some interesting contributions from third parties to the dispute.  Canada and the EU felt that the elements advanced by the US – such as democracy and human rights – could justify the existence of an emergency in international relations. However they did not agree with the US that security interests were entirely self-judging.

China stated that its National Security Law and other measures taken to safeguard the security and stability of Hong Kong had not changed Hong Kong’s status as a separate customs territory, nor had they anything to do with the so-called national security of other WTO members.

United Kingdom – missing in action

Altogether, thirteen WTO members joined the dispute as third parties  – Brazil, Canada, China, the European Union, India, Japan, Korea, Norway, Russia, Singapore, Switzerland, Turkey and Ukraine. Third parties can follow the proceedings and, if they wish, make submissions to the panel.

The UK might have been expected to have a closer interest than any.  It sponsored Hong Kong’s membership of the GATT – which led to its becoming an original member of the WTO. And it negotiated the Sino-British Declaration on the Question of Hong Kong, ratified in 1985.

The joint declaration states explicitly that Hong Kong will retain the status of a free port and separate customs territory.

It might be thought that the UK, strongly attached as it always claims to be to the declaration and the rule of law, would have had something to say about US efforts to undermine it.

To the contrary, the UK did not even register as a third party.  We do not know why – sheer negligence or unwillingness to stand up to the US in public suggest themselves as possible explanations.  Perhaps the UK expressed reservations in private to the US but, if so, they were completely ineffective.

Since July 1997, the foreign secretary has reported to parliament at 6-monthly intervals on the implementation of the Sino-British joint declaration on the question of Hong Kong.

The reports make no mention of the US change of origin marking requirements, or of Hong Kong’s defence of its rights, as enshrined in the joint declaration and the GATT.

Was it worth the effort?

Questions could legitimately be asked as to whether the panel’s findings mean anything in practice.  After all, the actual trade involved is minimal and, in the absence of a functioning appellate body in the WTO, the US can simply appeal the case into the void.

In the aftermath of the panel report it immediately said that it does not intend to alter its view that GATT Article XXI(b) is self-judging, or to change the origin marking requirement.

It is often said that “the strong do what they will and the weak suffer what they must”.

I doubt that Hong Kong was under any illusions as to the practical effects of the case even in the event of victory.  In this instance however the weak did have one recourse – to the WTO – and Hong Kong decided to take that up.

The US is impervious to consequences and can insouciantly ignore the panel findings.  But that does not alter the fact that there will be some reputational damage elsewhere.

And Hong Kong has accomplished what it set out to do by demonstrating that it will defend its rights.

Trade policy’s place in the modern world

A wider question is how the panel report fits into an era in which international trade has become anathema to the western world, which blames it unjustly for so many ills.

We are de-coupling, friend-shoring and super-subsidising but, as this case illustrates, we no longer value open trade.

One of the lessons we can draw is that, for the US and some of its allies, trade policy is now entirely subservient to foreign policy.  The former is seen merely as a weapon to advance the latter.

In years gone by, Hong Kong might have received some credit in the US and the west for maintaining its completely open door for trade in goods.  That now counts for nothing.

Yet, as Martin Wolf wrote recently in the Financial Times: “It would be a profound mistake to end economic openness: trade remains an essential contributor to prosperity for all countries, especially smaller and poorer ones, but also larger ones.”

The case also illustrated one of the strengths of WTO dispute settlement – the ability to take a delicate political issue and deal with it as a purely legal-technical matter.

The panel explicitly declined to focus on the underlying events in Hong Kong, rather considering simply how those events were reflected in international relations and whether the GATT standard of an emergency in international relations was met.

It did not shy away from making its objective assessment that the standard had not been met.  It thus upheld the rights of a small economy against the most powerful state on earth.

Contrary to popular misconception and despite the criticism it inevitably suffers as a result, the WTO is still capable of speaking truth to power.

Stuart Harbinson

Stuart Harbinson is former permanent representative of Hong Kong, China to the WTO, and former senior WTO official

Leave a Comment

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.