Recalibrating international trade in the COVID-19 age

COVID-19 has caused global trade to plummet, leading some governments to make use of exception provisions in WTO treaties to balance public policy needs with trade goals. Image: Avigator Fortuner/Shutterstock
Senior Lecturer, ANU College of Law
Wednesday 29 April 2020

International trade law consists of a series of multilateral treaties administered through the framework of the World Trade Organisation (WTO), which has 164 members. WTO members include the world’s biggest economies, all of which are bound by the treaties. The underlying aim of the WTO system is to promote international trade by removing barriers to trade – such as tariffs, quotas and other import or export restrictions – and to promote equal treatment of members by prohibiting discrimination between and against other countries.

Many of the initial national responses to COVID-19 including restrictions on travel and export prohibitions on essential medical items are prima facie breaches of WTO agreements, such as the General Agreement on Trade and Tariffs (GATT) and the General Agreement on Trade in Services (GATS). However, these treaties also contain exception provisions allowing governments to balance legitimate public policy needs with trade goals. Actions taken during this time that are aimed at preventing the spread of the disease would qualify as those taken to “protect human health or life” as set out in GATT Article XX(b) and GATS Article XIV(b). As long as countries do not unjustifiably or arbitrarily discriminate in how they apply these measures, no GATT or GATS breach would actually occur. 

Discrimination in this context includes treating countries with the same conditions differently; or with different conditions the same. Thus, if responses to COVID-19 properly differentiate based on the status of the pandemic in each country, no discrimination takes place even if the measure applies differently to different countries. If, for example, Australia and New Zealand are successful in not just flattening but squashing the curve and chose to lift restrictions vis-à-vis each other – essentially extending the national bubble to a bubble for two countries – the fact such restrictions are not lifted for other countries less successful in containing the pandemic would not be considered discrimination.

However, as global production plummets, countries are now starting to discuss changes to trade policy that will have effects lasting long after the COVID-19 pandemic is over, seeking to bring manufacturing of products back onshore. International trade law rests on the economic assumption that countries should specialise in the industry they are most efficient at and the treaties disincentivise countries from artificially propping up inefficient domestic industries through the use of subsidies, tariffs or other measures. This, combined with the proliferation of free trade agreements, has seen vast shifts in certain industries. For example Australia no longer has a domestic car manufacturing industry, while the now-abandoned North American Free Trade Agreement is often blamed for the shifting of car manufacturing jobs from the US to Mexico. Of those industries that do manufacture onshore, most have deep vertical global supply chains, sourcing composite parts internationally.  

The current situation may well cause countries to reassess their domestic manufacturing capabilities in a post-pandemic world. Preparation for future events that disrupt international trade and supply may be seen as vital.

In the face of decreased global trade, countries may wish to reverse some of these trends, ensuring domestic companies can manufacture critical goods and supplies without reliance on international trade. Prime Minister Scott Morrison has suggested that part of Australia’s post-COVID recovery could be a turn back to domestic manufacturing, citing the need “to look carefully at our domestic economic sovereignty” as well as open trade. 

However, the policy tools used to encourage onshore manufacturing risk breaching WTO treaties. Any subsidy that is contingent on export performance or the use of domestic products in manufacturing breaches the Agreement on Subsidies and Countervailing Measures. Tariffs that go above an agreed bound rate on imported goods to allow a domestic price advantage will breach GATT Article II, any internal sales restrictions that preference domestically produced goods will breach GATT Article III, and any kind of quota or licencing system to restrict numbers of imports will breach GATT Article XI. 

If these measures continue after the COVID-19 pandemic has passed, it may be hard to justify them under the same human health or life exception. This is especially if they are not restricted to medical goods and supplies but rather aimed at revitalising a domestic industry more generally. Instead, countries may turn to the security exception contained in GATT Article XXI, which allows countries to take “any action which it considers necessary for the protection of its essential security interests” provided it is “taken in time of war or other emergency in international relations”.  

Historically, this provision has seldom been relied upon and even less seldom challenged. However recently Article XXI has been more popular. In 2019, the US used it as justification for its steel and aluminium tariffs, and in the same year Russia relied on it as a substantive defence when challenged by the Ukraine over restriction of the flow of goods in the Russia – Traffic in Transit case. Although Russia argued that the provision was non-justiciable, the WTO panel did not agree. The panel deferred to national subjective judgment over what constitutes an “essential security interest”; essentially allowing countries to claim anything and everything as an essential security interest.  

However, the panel held that the context that the measure must be taken in – in time of war or other emergency in international relations – could be determined objectively. In that case, the ongoing conflict between Russia and the Ukraine, demonstrated by international sanctions and censure by the UN General Assembly, was enough to meet objective standards. The pandemic is certainly a time of emergency, but is it an emergency in international relations? And even if it is, that will surely only be the case for its duration. 

The current situation may well cause countries to reassess their domestic manufacturing capabilities in a post-pandemic world. Preparation for future events that disrupt international trade and supply may be seen as vital. However, the strictures of the WTO treaty system mean that countries must be careful how they support their domestic industries.  Once this current crisis is over, it may be difficult to argue that the GATT Article XXI security exception still applies.

Updated:  10 August 2015/Responsible Officer:  College General Manager, ANU College of Law/Page Contact:  Law Marketing Team