Analysis

US Sets Stage For WTO Brawl By Demoting Russian Trade

Law360 (April 15, 2022, 10:03 AM EDT) -- The U.S. revocation of Russia's preferential trade status following the invasion of Ukraine may have limited economic force, but it opens the door for Russia to pull the U.S. into a yearslong battle before the World Trade Organization.

Congress' passage of a bill this month severing normal trade relations with Russia ends Washington's legal obligation to trade with Moscow on the most favorable terms possible, triggering higher tariffs on Russian goods. But with sanctions already drastically curtailing Russian imports, a more concerning consequence for the U.S. could be possible retaliation from Russia's demanding to be treated the same as other WTO members, in line with the organization's bedrock principle that members don't openly discriminate against each other.

"The significance of no longer applying [most favored nation] is really, initially, a treaty issue," said Andrew Shoyer, the co-head of Sidley Austin LLP's global arbitration, trade and advocacy practice. Shoyer has also served as the legal adviser to the U.S. mission to the WTO.

Article I of the General Agreement on Tariffs and Trade states that WTO members must offer each other their best possible trade terms, by what is known within the WTO as "most favored nation" status, but referred to in the U.S. as "permanent normal trade relations."

Though the U.S. has faced more than 150 trade complaints in the WTO since the organization's inception in 1995, experts couldn't recall a single instance in which the U.S. revoked MFN status for another WTO member.

"To get to the point of granting PNTR, we're doing so in the context of reaching across to a trade partner," said Ashley Craig, the co-chair of Venable LLP's international trade group. "Pulling it back signifies a systemic alteration the likes of which we haven't seen."

If Russia lodges a complaint, the U.S. will have several avenues to defend its MFN revocation. Experts say that GATT's Article XXI offers the U.S. its most likely legal defense. Known as the WTO's national security exemption, Article XXI states the WTO cannot prevent "any contracting party from taking any action which it considers necessary" for national security purposes.

But according to Shoyer, the WTO has hinted in a handful of recent cases that the waiver has its limits, most notably — and ironically — in a trade dispute between Russia and Ukraine.

In the wake of Russia's 2014 annexation of Crimea, each country began hammering the other with sanctions and trade restrictions.

Russia's restriction on how Ukrainian goods could transit in its borders set off litigation in the WTO, and Russia invoked Article XXI in defense of the transit restrictions, citing tensions in Ukraine. It argued that the WTO couldn't review any trade measures arising from security concerns, and even though the U.S. denounced the annexation of Crimea, it sided with Russia on the trade dispute, agreeing that issues of national security were shrouded from WTO review.

A WTO panel ultimately upheld Russia's trade measures, but it also said that reviewing security exemptions was within its jurisdiction. The organization ruled that it couldn't just let a member declare trade measures as being connected to security concerns, as that would make WTO obligations subject to a member's "unilateral will."

In addition to the limits on the security exception, the U.S. legal position could be further complicated by the fact that Russia doesn't consider its ongoing invasion a war and the U.S. Congress hasn't formally declared a war either, Shoyer said.

Even if Russia launches a WTO dispute over its MFN status, the U.S. likely won't be bogged down by it significantly, according to Stephen Vaughn, former general counsel to the U.S. Trade Representative during the Trump administration.

"It's always been very, very clear under U.S. law that Congress retains sovereign power to address trade relations," Vaughn said. "We aren't obliged to follow any international rules — that's always a question of choice."

Countries regularly bring disputes before the WTO, but they can ultimately choose for themselves whether they'll comply with a panel ruling. The European Union, for example, snubbed the WTO's 1998 rebuke of its ban on U.S. beef. Faced with that brushoff, the WTO allowed the U.S. to impose retaliatory tariffs, but it took more than a decade of countermeasures before the EU lifted its ban, Vaughn said.

Moreover, the WTO Appellate Body is largely shuttered, after the Trump administration blocked new appointments, leaving members to appeal a panel loss into a legal void.

Experts largely painted the revocation as a political issue, saying that trade between the U.S. and Russia isn't that large. It is difficult for Congress to reconcile allowing Russia the same trade rights as the United Kingdom, Vaughn said.

The Kremlin may also choose to just let the revocation go. Facing trade restrictions as well from several U.S. allies within the Group of Seven leading industrial nations and the European Union, it may already have too many political battles to fight.

Russia is more likely bruised from the sheer scope of sanctions that prevent it from obtaining key technologies and cut it off from Western funding, including President Vladimir Putin's war chest of foreign currency reserves.

Withdrawing MFN "doesn't really matter" when Russia can't execute a trade, said Jeffrey Schott of the Peterson Institute for International Economics. "Can Russia file a WTO complaint against us? Yes, but there are a number of ways to justify it on national security grounds or whatever, and in effect the trade's already been blocked."

Still, Russia is no stranger to the WTO's dispute process and it might want to lodge a complaint to preserve that option, Shoyer said. Russia is still a member of the WTO, with all the rights that membership affords, including its right to open a dispute, he said.

"Unless and until it is not a WTO member, it is a WTO member," Shoyer said.

--Editing by Robert Rudinger.

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