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[Research Reports] Potential Conflict between the WTO System and the Security Trade Control System in the Japan-South Korea Dispute

Tsuyoshi Kawase (Professor, Faculty of Law, Sophia University / RIETI Faculty Fellow)
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Research Group on Economy-Security Linkages #9

"Research Reports" are compiled by participants in research groups set up at the Japan Institute of International Affairs, and are designed to disseminate, in a timely fashion, the content of presentations made at research group meetings or analyses of current affairs. The "Research Reports" represent their authors' views. In addition to these "Research Reports", individual research groups will publish "Research Bulletins" covering the full range of the group's research themes.

Trade and Security Approaches/Frictions, and the Japan-South Korea Dispute

Traditionally, trade and security co-existed with a relatively moderate distance of each other. Countries invoked trade measures cautiously in accordance with the agreements and practices prevailing among the participants in the international export control regimes, and UN sanctions resolutions. In addition, the security exceptions provided for in Article XXI of the GATT were "the ace in the hole"; indeed, countries seldom had recourse to them to justify trade restrictions without good security reasons.

However, following the inauguration of the Trump administration, the situation changed completely. The administration successively declared the imposition of additional duties on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962 for security concerns, and tariff increases against a broad range of Chinese products under Section 301 of the Trade Act of 1974 for reasons of forced technology transfer in several dual-use industries and theft of intellectual properties. Furthermore, over the past few years, the United States has eliminated Chinese telecomunication/IT giants--including ZTE, Huawei, Hike Vision and Byte Dance--from trade with and investment in the United States based on the Export Administration Regulations (EAR), the National Defense Authorization Act of 2019 (NDAA) and the International Emergency Economic Authorization Act (IEEPA). In the WTO, a couple of panels circulated their final reports regarding security exceptions respectively in Russian-Traffic in Transit (DS 512) in April 2019 concerning the Ukraine crisis, and in Saudi Arabia-Intellectual Property (DS 567) in June 2020 concerning the Qatar diplomatic crisis.

As these events were transpiring, Japan was prompted in July 2019 by vulnerabilities in South Korea's export control administration and undisclosed cases of "improper management" (possibly indicating diversion of goods subject to export control to third countries or military use) to review and reinforce export controls vis-à-vis South Korea by: (1) switching from bulk to individual licenses requirement for the export of hydrogen fluoride, polyimides fluoride and resists to South Korea (hereinafter, "licensing operational review"), and (2) making South Korea subject to the catch-all regulation (hereinafter, "'White Country' exclusion"). In the context of the deterioration of bilateral relations between Japan and South Korea, these measures ended up as a WTO dispute (DS590).

As all three chemical substances in question are listed in the Wassenaar Arrangement (WA) or the Australian Group (AG), and that the catch-all regulation is also part of WA, the measures are related to the implementation of international export control regimes to prevent the proliferation of WMD and related materials. Therefore, unlike outright abuse of the security exceptions as with the US steel and aluminum tariffs, or the two WTO disputes with serious international emergencies comparable to war in their backgrounds, this Japan-South Korea case is about seeking to establish the boundary of discretion in implementing trade measures for security purposes that are permitted under the WTO legal system in normal times.

On the other hand, these measures against South Korea were introduced against the backdrop of political discord between the two countries, which was mainly caused by the "wartime forced labor" issue. In particular, given South Korea's high degree of dependence on Japan for the three chemical substances, the measures against South Korea are the embodiment of "weaponized interdependence", which targets exports of specific products or technologies that serve as "chokepoints" in the global supply chain for South Korean-made semiconductors and, therefore, seem to constitute the strategic use of export controls as economic statecraft.

Export Control Regime and the WTO Agreement

Essentially, the export control regimes, as represented by WA and AG, are by nature discriminatory and restrictive, as exports of like products are subject to license, different procedures and sometimes prohibition, depending on their destination. It is clear that such a system does not comply with GATT Article I:1 (most-favoured-nation treatment on export procedures), Article XI:1 (prohibition of quantitative restrictions), and Article XIII:1 (non-discriminatory application of quantitative restrictions).

Therefore, not only export control measures but any trade-restrictive or discriminatory measures for security reasons must be justified by invoking exceptions. For this purpose, the WTO Agreements provide security exceptions consisting of almost the same wording in GATT Article XXI, GATS Article XIV:2 and TRIPs Agreement Article 73. Similar exceptions exist in regional economic agreements such as CPTPP Article 29.2 and RCEP Article 17.13.

GATT Article XXI is given below as an example.

Article XXI Security Exceptions

Nothing in this Agreement shall be construed

  1. to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or

  2. to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

    1. relating to fissionable materials or the materials from which they are derived;

    2. 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;

    3. taken in time of war or other emergency in international relations; or

  1. to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

As a result of each Member's careful and self-restrained invocation of security exceptions under the WTO Agreements, including Article XXI of the GATT, panels have so far reached conclusions in only a couple of cases, i.e., the aforementioned Russian and Saudi Arabian cases. These were related to subparagraph (b)(iii) (measures taken in time of war or other emergency in international relations) of Article XXI of the GATT and Article 73 of the TRIPS Agreement, respectively.

To a certain extent, both panels attempted to exercise ex-post reviews to prevent abuse of the exceptions. First, the respondent parties in both cases claimed that the panel's jurisdiction must be denied on the grounds of the very fact that a security exception was invoked or due to the political nature of the case, but the panel in Russia-Traffic in Transit rejected such an approach, proclaiming that national security could not be an "incantation" to exempt the measure in question from the panel's review.

The chapeaux of both Article XXI (b) of the GATT and Article 73 (b) of the TRIPS Agreement contain self-judging language - "which it considers necessary for the protection of its essential security interests" (emphasis added) - but, according to the panels' interpretation, a Member's judgment of applicability regarding each subparagraph under (b) falls outside of the self-judging language and is subject to objective ex-post review by a panel. Furthermore, with respect to the self-judging language, the panels decided to conduct reviews to determine whether the respondents invoking the security exception interpreted and applied the chapeaux in good faith.

With respect to these good faith reviews of compliance with the chapeaux, while investing the Members with broad discretion to define "essential security interests" in their own circumstances, the panels required the Members to (1) articulate their essential security interests, and (2) fulfill a minimum requirement of plausibility in explaning that the measures in question were taken to protect such interests. However, because the required level of articulation was extremely low, it is doubtful whether these requirements can effectively prevent the exceptions from being abused.

Both of these WTO panels applied subparagraph (b)(iii) in the context of actual international emergencies. Therefore, the panels' good faith review may also have been reserved in these cases and, where the other subparagraphs under (b) apply, a panel may conduct a more thorough review.

Issues in the Ongoing Japan-South Korea Dispute

In this case, South Korea is challenging only the licensing operational review. Therefore, Japan will be required to eatablish the applicability of Article XXI of the GATT to the measure. Since the "improper event" cases have not been disclosed, it is difficult at present to precisely assess the consistency of the measures with this exception. However, details of the measures and the political background of Japan-South Korea relations reveal that, at least, subparagraphs (a), (b)(i) and (iii) of the article will not apply in this case, leading to the prospect that the applicability of (b)(ii) will be the main issue.

As there is no precedent for (b)(ii), it is difficult to foresee the consistency of the license operational review with the subparagraph, but its scope is broad enough in that its product coverage is extensively defined ("other goods and materials"), and indirect transactions (i.e., those of inputs used in final products or those via third parties) are also included within the scope. It should be noted, however, that "a military establishment" may be interpreted narrowly, and that an invoking Member must demonstrate that transactions are "for the purpose of" supplying the military establishment.

Assuming that the licensing operational review falls under (b)(ii), the measure must be subject to good faith review under the chapeau of (b). The substantive standards of the good faith review have never been articlated in detail except for the above, but precedents from the International Court of Justice (Certain Questions of Mutual Assistance in Criminal Matters (Djibouti vs. France)) and the Permanent Court of Arbitration (CC/Devas v. India) imply that consideration of matters irrelevant to security or use of security exceptions for non-security purposes would constitute a violation of the duty to interpret and apply self-judging security exceptions in good faith.

In this case, immediately after the announcement of the licensing operational review and the "White Country" exclusion, Prime Minister Shinzo Abe, Chief Cabinet Secretary Yoshihide Suga, and Minister of Economy, Trade and Industry Hiroshige Seko (all titles at the time of the decision) referred to the "wartime forced labor" issue as underlying the damage to the trust between Japan and South Korea. These statements could imply that the measures may have been partly used as economic statecraft and constitute politically motivated abuse of the security exception. Essentially, Article 23 of the Dispute Settlement Understanding prohibits unilateral measures aimed at changing a policy of any other WTO Member and, in this context, trade measures as economic statecraft would not be considered to be in conformity with the good faith obligation under the chapeau of Article XXI(b) of the GATT.

However, in WTO disputes, the regulatory purposes of a measure in question are normally not only specified based on its subjective purposes, but also understood objectively from the structure and operation of the measure. With regard to the licensing operational review, its objective regulatory purpose can be demonstrated by its conformity with internationally established export control practices based mainly on WA and AG, and its rationality in light of Japan's security concerns, in this case including "improper management" cases and the vulnerabilities in South Korea's export control administration. In particular, it is crucial that Japan present good cause for selecting the three listed substances among others and for refusing a request for bilateral consultations from South Korea after the implementation of the review in order to show that the objective regulatory purpose of the measure lies in the protection of Japan's essential security interests.

Japan-Souuth Korea Dispute as a "Wrong Case"

That said, it is not desirable that consistency of export control measures with the WTO Agreements be formally contested in the panel process. Since Article XXI of the GATT was drafted immediately after World War II and that its compatibility with the export control regimes reflecting modern security concerns has never been ensured, a panel's and the Appellate Body's interpretations could reveal contradictions between these sets of rules. In addition, if a panel and the Appellate Body find that trade measures allegedly taken for security purposes do not conform to any obligation under the WTO Agreements, they will be criticized for interference in the sovereignty of WTO Members. Conversely, if a panel and the Appellate Body continue to conduct only modest reviews of such measures, protectionist abuse could be overlooked. In any case, the legitimacy of the WTO would be undermined.

It is also necessary to pay attention to the implications of this case in the context of the recent US-China conflict. Since last summer, China has been swiftly establishing a legal framework regarding export control: it introduced the "Unreliable Entity List", put into force the 2020 Export Control Law, and enacted regulations for claiming damages against parties complying with the extraterritorial application of foreign economic sanctions against China. Under the "Comprehensive Security" concept that underpins the above Chinese rules, the boundaries of "national security" have been extended from traditional military issues to those regarding economy, culture, social issues, science and technology, information, ecology and natural resources. It is a matter for concern that China may exploit export controls strategically in a manner different from the traditional US- and Europe-led export control regimes, for example, by imposing trade restrictions on foreign companies for their political stances on the Uighur or Hong Kong issues or export bans on rare earths as strategic materials. If an interpretation of Article XXI of the GATT by the panel in the Japan-South Korea case gives considerable deference to a Member's regulatory discretion regarding export control, it could result in supporting the aforementioned attempts by China. Such a deferential decision might be favorable to Japan in this specific case, but in view of the changes in the current security environment, it could become a burden on Japan's security strategy over the longer term.

While no institutional interface between the export control regimes and the WTO has been established, it is somewhat doubtful that the WTO dispute settlement procedures can successfully reconcile the two regimes only through Article XXI of the GATT. About forty years ago, right after the GATT Tokyo Round was concluded, Robert E. Hudec pointed out existence of a "wrong case" i.e., a case where a panel inevitably applies inoperative GATT articles or is forced to discuss matters beyond the panel's decision-making capacity, and warned that judicial settlement of such a case could be sometimes unreasonable and undermine the legitimacy of the GATT regime. The current dispute between Japan and South Korea no doubt qualifies as a "wrong case". I do not intend to urge Japan to make concessions to South Korea on the forced labor or comfort women issues, but both Japan and South Korea should be fully aware of Hudec's caution, and continue intensive bilateral talks to resolve the dispute between them. Otherwise, I am afraid that Japan and South Korea may end up exhausted, the United States left with a bitter taste, and only China will walk away grinning.


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