US President Donald Trump is talking tougher to China's Xi Jinping over North Korea. Photo: Reuters

The reason Donald Trump is escalating the nuclear crisis with North Korea and Iran is to justify the application of the WTO-GATT security-exceptions clause and wage a rules-based trade war on China.

Early in the year, the US president’s 2017 trade agenda set as the two top priorities to “defend US national sovereignty over trade policy, and strictly enforce US trade laws”.

To this effect, on March 31 Trump signed an executive order directing the Secretary of Commerce and the United States Trade Representative (USTR) to prepare an “Omnibus Report on Significant Trade Deficits”.

The Omnibus Report was due within 90 days of the executive order (that is, by the end of June). In the past few months the US administration has been dwelling on two nuclear crises by pushing blanket sanctions on North Korea and the decertification of the Iran nuclear deal. It is hard to believe this is a coincidence, when these initiatives present the optimal breeding ground and geopolitical expedient to legally justify a trade war with China.

Indeed, should China continue to trade with North Korea and to invest in Iran, the US administration is poised to argue legitimately with the World Trade Organization for trade remedies against China and its economic partners on the basis of “essential security interests”. Here’s how.

First of all, the Omnibus Report is meant to investigate whether alleged unfair or discriminatory trade practices contribute to US trade deficits in goods, which in 2016 exceeded US$700 billion, and related implications on the US economy and national security. The clear target of this initiative is China, whose imported goods weigh on the US trade deficit for a staggering $347 billion.

In fact, the executive order explicitly aims at assessing “those foreign trading partners with which the United States had a significant trade deficit in goods in 2016”. Looking at the trade data from the US Census Bureau, besides China the other foreign trading partners under the radar include (in decreasing order of deficit) Japan, Germany, Mexico, Ireland, Vietnam, Italy, South Korea, Malaysia, India, Thailand, France, Switzerland, Taiwan and Indonesia. Basically, these are all countries that are significantly involved with China’s strategy of geo-economic expansion along the New Silk Roads.

The findings included in the Omnibus Report will thus pose as the legal evidence of future unilateral trade remedies against China and its economic partners by the Trump administration. At face value, these unilateral actions can be legally pursued under a number of obsolete US statutes, such as Section 232 of the Trade Expansion Act of 1962 (justifying trade remedies on national-security grounds), Section 301 of the Trade Act of 1974 (to counter unfair practices), and Section 338 of the Tariff Act of 1930 (against discriminatory treatment).

The third option has never been used, and its first application would be easily found to be in breach of the GATT (General Agreement on Tariffs and Trade) agreement acceded by the US in the WTO Uruguay Round in 1994, which requires member countries to settle trade disputes through the WTO judicial mechanisms and bodies.

Similarly, Section 301 of the Trade Act of 1974 also does not appear to stand up to an international legal test, as the Statement of Administrative Action (SAA) accompanying the Uruguay Round Agreements Act (URAA) has codified into US law that the USTR can only unilaterally challenge discriminatory practices that are not covered by the WTO agreements.

In practice, there is virtually no field open to US remedies in the area of trade in goods, which is the most comprehensively regulated at the multilateral level, and thus hardly leaves any unfilled gaps to domestic jurisdictions (whereas trade in services is much more ambiguous and porous, hence the Omnibus focuses only on trade in goods).

On the other hand, Section 232 of the Trade Expansion Act of 1962 casts a wider net of application, as it specifically enables tariffs or other restrictions in order to “adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security”. In other words, Section 232 subordinates trade policy to national security, which is an ambiguous category, by definition subject to unilateral and sovereign interpretation.

So this is where the US-China trade war would legally spark, since meeting the test of national security at the domestic level would set in motion the US claim at the WTO to apply GATT Article XXI (b) “Security Exceptions”, which allows “any action [considered] necessary for the protection of [any party’s] essential security interests (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment; (iii) taken in time of war or other emergency in international relations”.

Ultimately, if President Trump’s endgame is to wage a trade war with China that is legally justified and does not forgo the rules-based order, the only alternative to applying the GATT security-exception clause is nothing short of the US withdrawal from the WTO or a direct military conflict.

Giovanni Di Lieto

Dr Giovanni Di Lieto teaches international trade law in the International Business program at Monash University in Melbourne, Australia, and engages in expert analysis on the geopolitics of trade and investment for media, industry and government outlets. His professional career developed as a commercial law practitioner in Italy, and then as a global value chain specialist across the US, Europe and...

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