5 September 2019

Guest blog by Professor Yong-Shik Lee is Director and Professorial Fellow of the Law and Development Institute and Hiram H. Lesar Distinguished Visiting Professor in Law, Southern Illinois University School of Law.

In the last eighteen months, President Trump has re-introduced the use of national security arguments to restrict the USA’s international trade for commercial reasons. I recently warned[1] that the US use of security arguments to justify its additional tariffs on steel and aluminum imports would create a dangerous precedent, and shortly after that, another major trading nation has indeed followed this precedent.

On July 1, 2019, the Japanese Government announced the exclusion of Korea from a group of countries (“the white list”) that benefited from a simpler approval process for the exportation of materials and items that Japan considers “strategic,” because they can be converted into military use. Initially this exclusion covered three items that are essential to produce Korea’s key export item, semiconductors, namely, photo resists, hydrogen fluoride (HF) and fluorinated polyimides. Japan’s measure does not prohibit the exportation of the said items per se, but it requires a tighter approval process for each export request, which may take up to 90 days, at the end of which there is no guarantee of approval. This measure creates substantial uncertainty from the perspective of both exporters and importers. In the worst scenario, IT industries worldwide could be devastated if the supply of semiconductors from Korea, which supplies up 70 percent of the global market, is disrupted.

Despite these concerns, the Japanese government escalated the situation. On August 2, it decided to expand on its earlier measure and exclude Korea from the white list with respect to all the other strategic export items beyond the initial three. The Japanese government has justified its measure in terms of its security concern over the exportation of such items, but it is widely considered to be an act of retribution to the court decision in Korea that ordered the Japanese companies to provide compensation for the Koreans who were forced to work by the Japanese government during the Second World War. The Japanese government has protested against this decision claiming that it had already offered compensation in the treaty made between Korea and Japan in 1965. The Korean court found, however, that the treaty did not exclude the claim of a private person for the compensation.

It is also possible, however, that Japan’s measure has a commercial objective – as many suspect of President Trump’s use of tariffs on steel and aluminum and his threat to use them on autos. Japan’s measure may have been motivated by its desire to keep Korea in check; Korea has become a major competitor to Japan in important product categories that Japan once dominated, such as home electronics and semiconductors. Korean manufacturers, such as Samsung, plan to expand their production into new areas, such as the next generation of systems semiconductors which use new production technologies that require materials from Japan. The Korean semiconductor manufacturers rely on the supply of these items from Japan, and finding alternative suppliers might prove to be difficult, if not impossible.

Irrespective of its motives, Japan’s export measure marks a couple of ‘firsts’:

• It is Japan’s first use of the national security argument for a trade restriction, and
• it is the first trade measure since the establishment of the GATT/WTO system in which a high income country specifically targeted another such country and tightened exports over a security concern.

Prior to the U.S. steel and aluminum tariffs, WTO Members had rarely used national security as a justification for a trade measure, without there being a resolution by the United Nations. Thus it is highly plausible that Japan felt that those tariffs offered cover for its own measure. It is true that the U.S. measure is an import measure while Japan’s an export one, but this distinction is immaterial: both use the national security argument to restrict the trade of their trading partners to meet their own economic and political interests.

Even more concerning, Japan has gone beyond the US precedent. President Trump used national security as a cover for his tariffs, but he did not single out a particular country under this measure. Similarly, while the United States and many other countries also have export control regimes in place for products that could be used for military purposes, none has removed a country from a group that had simplified approval processes, other than for obviously security-related reasons.

Given the concerns, the compatibility of Japan’s measure with WTO rules requires an examination. Japan argues that its measure does not breach WTO rules, as it does not restrict exports to Korea but merely moves Korea from one administrative group of countries to another. However, this “reclassification” constitutes a discriminatory trade practice against Korea vis-à-vis the other exempted countries; thus, it is a prima facie violation of GATT Article I that requires Most Favored Nation treatment and prohibits discriminatory trade practice, unless there is a defense under other WTO provisions. Since Japan argues the national security justification, the relevant part of the GATT is Article XXI. Article XXI authorizes a WTO Member to take “any action which it considers necessary for the protection of its essential security interests,” [emphasis added] including measures that would otherwise be in breach of Article I.

The question is whether an exporting country may move one country from a favored group to another less-favored group in absence of a genuine security concern. Arguably, Article XXI does not cover this. Moreover, recent case law suggests that the determination of the legitimacy of using Article XXI is not at the sole discretion of the exporting country. The USA has claimed that measures taken under Article XXI are self-judging, rendering them unreviewable by the WTO, but no provision under the WTO Dispute Settlement Understanding (DSU) supports such an exclusion, and a recent WTO panel (paras. 7.53–7.58 ) has found that it has jurisdiction to review Article XXI matters. Previous panels and the Appellate Body have clarified the applicable standard of review; i.e., they will not conduct a de novo review of the national authorities’ investigations, but they will nevertheless require the Member to evaluate all relevant factors and provide a reasoned and adequate explanation of how the facts support their determinations. Japan does not seem to have offered such an explanation as to why trade with Korea poses a security concern that necessitates the country’s reclassification into the group requiring a tighter review.

The dispute is still on-going, and neither side has de-escalated it; as announced, the Japanese government excluded Korea from its white list on August 28, and Korea responded by excluding Japan from its own white list. Serious concerns have been raised by businesses, policy makers, scholars, and the general public in both countries and around the world, and Japan has reportedly declined U.S. mediation and a request to put the planned exclusion of Korea from the white list on hold. It is not clear how this Korea-Japan trade dispute will end, but it certainly illustrates the dangers of weaponising trade for political reasons.

Footnotes

[1] Yong-Shik Lee, Three Wrongs Do Not Make a Right: The Conundrum of the U.S. Steel and Aluminum Tariffs,” 18 World Trade Review, no. 3 (July 2019), 481–501

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