Red Viburnum, Cartridges and Trade – World Trade Organisation in the time of war in Ukraine. Interview with Professor Iveta Alexovicova

Red Viburnum, Cartridges and Trade – World Trade Organisation in the time of war in Ukraine. Interview with Professor Iveta Alexovicova

Summary of theses included in the text

 In the long term, the West does not want to abandon Russia in terms of trade relations and investments.

– World Trade Organisation was established so as to create interconnectedness and interdependence between countries, which were meant to prevent wars from happening. When the war occurs, WTO is not equipped with relevant tools to influence the conflict.

 Russia received a lot of benefits from membership in WTO. Despite the fact that there is no direct way to forcibly exclude a member from the organisation, there are multiple ways to cut down its benefits. 

– There are many sanctions imposed on Russia, which constitute a breach of WTO obligations, but they are very likely to be justified by relevant exceptions.

Introduction

The war in Ukraine broke out more than a month ago. Russia has gone brutal and slowly advances inside Ukraine territories. The invaded country, lacking sufficient military power and overwhelmed by Russian forces, has to find other ways to cause damage to Russia non-militarily. Ukrainian President Zelensky hopes that the West will impose as many sanctions as possible. His desire is to totally exclude Russia from international trade, reduce its economic power and transform it into second Iran. World Trade Organisation has been established to prevent such situations from happening and to resolve disputes between states in a judicial way. 

 

Professor Alexovicova, what is, in general, the relation between the WTO and the current conflict. Is the role of the WTO significant?

In my view, the role of the World Trade Organisation is rather limited. It is true that the WTO was established with a view of preventing wars. It was brought to life at the end of World War II with an assumption that one of the serious causes of the war, among other things, was the economic protectionism in the late 1930s. So the idea was that if there is economic interconnectedness between countries, a mutual dependency, it will prevent countries from engaging in wars with each other as such conflict would damage their own economies too much. In addition, it was believed that trade enhances wealth, thereby increasing stability, which was not the case in the interwar period. As the result of creation of wealth and stability there would be less incentives to engage in wars. These ideas, and peaceful resolution of trade disputes, belong to core elements underlying the WTO system. But Ukraine-Russia war is not a trade dispute, it is a purely political dispute and the WTO does not have much space to act as the conflict is outside its mandate. You may have noticed that the WTO has not even made any public statement for a week after the outbreak of war. Eventually a short statement of Director-General was issued, expressing sadness about human suffering and hope for peaceful resolution of the conflict, and correctly predicting trade implications of the conflict, in particular in trade on agricultural and food products and energy prices. The statement was just a paragraph long and careful not to include any judgment about the situation, which the Director-General would not be permitted to do given the independent and impartial nature of the function. Moreover, once again, the war in Ukraine is not a trade dispute and thus beyond the WTO competence.

 

That is for sure, but if we talk about the sanctions put on Russia by the West, then it arises a trade dispute.

In that sense a trade dispute may indeed arise in result. Reactions of many countries were in the sphere of economics or trade relations, so that is the place where WTO agreements steps in. Many of the sanctions imposed on Russia would breach WTO obligations set upon every WTO member, but there are ways that they could be legally justified and if a dispute were to arise, it would be about the applicability of the invoked justifications, which we will also discuss. 

 

What were the benefits that Russia had from WTO membership? What was the rationale of admitting Russia to WTO? 

Russia acceded to WTO in 2012, almost a decade ago. The WTO’s intention is to connect as many countries as possible with its multilateral rules under which they are to conduct their trade relations. This is in order to ensure that international trade is conducted fairly and that it brings economic benefits that are believed to be a result of such fair trade. In addition, Russia is a large country, possessing a lot of resources. Although its economy is not as big as its territory, in terms of exports and imports it still is  an important trading partner for, as an example, the European Union. More the reason for  having Russia in the WTO. Russia’s own incentive for the accession was liberalized market access to all markets of WTO members, just as it is for all countries. Russia’s economy is heavily dependent on exporting raw materials, such as gas and oil. Being able to export all these commodities on as low tariff rates as possible is simply more beneficial, for both Russia and the buyer, which is mostly Europe. So the predominant benefit of Russia’s WTO membership is market access and the ability to sell its export products under more favourable conditions than it would be without being a WTO member.

Another benefit lays a bit beyond trade. Russia is also quite an important destination for European investments. Therefore, Russia has signed a great number of investment treaties, also with EU member states. WTO membership makes Russia even more reliable as a trading partner. The trust, predictability and security of the legal system that Russia must follow help to attract foreign investors, traders and other economical operators, encouraging their economic exchange with Russian operators.  

How the Russian benefits have changed in the last month? While it is not possible to exclude a country from WTO membership and deprive it of all its benefits, what are the alternative measures, in scope of WTO, that could be taken to impose pressure on Russia?

The benefits changed dramatically. One of the measures to suppress Russia is removing it from the Most-Favoured-Nation (MFN) beneficiary list by many countries in the world. It means that Russia’s exports to those countries will face higher trade barriers when entering these countries. To explain briefly what suspension of MFN is all about, I will stick to the Art I:1 of General Agreement on Tariffs and Trade (GATT), but let’s keep it mind that the same principle applies to other WTO agreements as well. The so-called Most-Favoured-Nation treatment is a prohibition of discrimination between products imported to your territory from different countries. An example of such discrimination would be if the EU imposed higher customs duties on steel imported to the European Union from Russia than on steel coming from, say, China. By revoking the MFN status, this is what the EU will do, should it allow imports at all. The MFN obligation applies not only to tariffs, but also to many other regulations and requirements a country may have, including even internal taxes. It also applies to import bans – in principle, one cannot impose an import ban on Russian products and abstain from imposing such a ban on products of other origin, because than Russian products would be treated less favourably. Formally speaking, one must give the same trade advantage to competing products from all countries that are a WTO member. The suspension of the MFN status is contrary to Art I GATT, Art II GATS (General Agreement on Trade in Services), Art 4 TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) and other relevant WTO agreements and thus prohibited. MFN is a general obligation of every WTO member and is not dependent on any further commitments (though very limited exemptions exist). 

In terms of other measures to suppress Russia, it is not just customs duties and MFN suspension, but also bans and other export and import restrictions, limiting or excluding imports from Russia and exports to Russia. They concern mainly goods and services of importance to Russia, for example export of technologies important in the energy sector. That is a severe way to hit a country. Without a functioning economy a state will sooner or later collapse. Formally speaking, these measures are a breach of WTO obligations. We have already discussed the MFN obligation, but export bans to and import bans from Russia are also a breach of Art. XI GATT containing a prohibition of quantitative restrictions on goods. In terms of services, a ban is subject to Art XVI of the GATS, though its legality depends on the specific commitments made by the relevant WTO member vis a vis other countries, in specific services sector and mode of supply. 

Will sanctions exist long enough to stop war in Ukraine and prevent Russia from further expansion?

It is difficult to say whether the sanctions will be effective, it has only been one month after the outbreak of the war. There is literature which says that economic sanctions have some effect but not enough. Certainly not if you deal with someone like President Putin. In my view, he has crossed all lines. Yet, there is a shared view that he was surprised by the Western reaction and did not count on the reaction being that decisive and far-reaching. Perhaps he expected something similar to sanctions after the occupation of Crimea. The problem is that he cannot easily back down because he would lose his face and this is just not the character of Mr. Putin. Of course, these all are speculations we hear from people with relevant expertise. But we can see that Russia has been hit by sanctions very severely already. Whether they will be effective enough to make Putin stop, I do not know. It seems he crossed the line of any rationality and will bring the country to the complete economic collapse rather than stop. At the same time, there is not much more other countries can do apart from engaging in military war with Russia, which nobody wants. The sanctions that have been taken are very far reaching but there are limits to them. For example, the EU is still very hesitant in cutting off the Russian gas, because of its significant dependency on it. This is exactly the point of having this economic interconnectedness, to prevent conflicts from happening, because they are too expensive for everybody, yet Putin crossed that line and so the rationale behind the interconnectedness no longer applies in this case. 

 

What about other sanctions, for instance the Magnitsky style sanctions, that are aiming for specific oligarchs and people conducting serious crimes against human rights?

Some sanctions go beyond WTO law, like freezing assets and things like that. These rather come under the scope of BITs, bilateral investment treaties, as they provide protection for foreign investments and capital. It means that Russian investors could, possibly even successfully, defend its blocked assets in the West. Investment treaties’ typical standard of protection is freedom of capital movement and it would be applicable here. But it applies only to assets that can be defined as an investment under an applicable BIT. A private money of an individual put as a deposit in a bank does not normally qualify as an investment, so oligarchs’ private savings are not always protected. 

Coming back to your statement about the lack of possibility to expel a country from the WTO, that is formally speaking true indeed, there is no provision in the WTO Agreement for that. But there is an indirect way how this could happen, through Art. X:3 of the WTO Agreement  which concerns amendments of the Agreement. That is the only place where withdrawal from the WTO is mentioned and it would be of relevance in a situation of an important amendment to the WTO Agreement which the member at issue would not be willing to accept. In such a case the Ministerial Conference would ask the member to withdraw from the WTO or to remain a member with the consent of the Ministerial Conference. For an amendment like this, a 3/4 majority of WTO members is needed, although it must be stressed that countries do not really vote in the WTO, they always go for consensus. However, in times of a full-fletched war like the one initiated by Russia against a sovereign state of Ukraine, which we haven’t seen before, we do not know what will happen with the non-willingness to vote. This may just as well be the extreme example of a situation in which WTO members would be willing to take a vote. The 3/4 majority would perhaps be reached, despite the objections of Russian allies, such as China and India, although there is no procedure for  the subsequent withdrawal. It would be very interesting to see how that would operate, because you are ‘free to withdraw’ but what if you don’t? That said, I don’t think there would be a political will to do it anyways. Everyone hopes that the war will not continue for too long and  I don’t think there is any incentive for Russia to be kicked out of the WTO. Hopefully, the conflict will be resolved and for the time being everyone tries to fight with the tools they have, relying on the security exception available under the main WTO agreements – the GATT,  GATS and TRIPS. Rather than having Russia outside of the WTO with all the long-term consequences, not only for Russia losing the market in WTO members but also vice versa, the West would like to keep the long-term prospect of its trade engagement with this important country. 

By the way, it has been suggested that Russia could be effectively temporarily cut off from the WTO through the so-called waiver that the WTO may adopt under Art. IX:3 of the WTO Agreement, waiving countries’ (even all) WTO obligations vis-à-vis Russia. Such a waiver would also require ¾ majority, just like the situation described above. But it would result in an intermediate solution of depriving Russia of benefits of WTO membership and be easily reversible, thus not as definitive as an expulsion.

This move would also cancel the possibility of conducting the Reversed Nixon maneuver, like getting Russia out of the Chinese sphere of influence. 

Yes of course. That is another political consideration. One thing I still wanted to stress about the fact that there is no provision to expel a country from the WTO. In my personal view, in the early 1990s, the WTO Agreement was not written with a situation like this in mind. It didn’t assume that a country would seriously start a full fletched war against another sovereign country. The 1990s were the golden times of international law and international relations, everybody was happy as the cold war had just ended, and there was only a bright future ahead of us. 

The end of history, as Francis Fukuyama wrote.

Exactly, so if they had assumed otherwise, perhaps they would have included such a clause in the agreement. 

There is also an issue of the non-application clause which Ukraine actually invoked after its invasion by Russia. Referring to this clause, Ukraine suspended its entire WTO relations with Russia. In response, Russia argued that this was not possible and from a legal point of view Russia is indeed correct. This is because in Art. XIII of the WTO Agreement allows such  exclusion between two members at the point of accession of one of the two. This is a hard condition, there is no way around it. Hence, if it was at the point of Russia’s or Ukraine’s accession to the WTO, this could be done, but it is no longer possible as both countries are WTO members already. Perhaps if the drafters of the WTO Agreement had a war like this one in mind, they would have drafted the non-application clause in a broader way. But perhaps this is what the already mentioned waiver is meant to cover, a temporary suspension of WTO obligations in exceptional circumstances.

We can see that still a number of countries are neutral or positive towards Russian aggression, such as India or China. Would it not nullify the efforts, made by the West, to subdue Russia?

I think they actually can. Once again, the idea of sanctions is that it will, sooner or later, force people around President Putin to get rid off him. China is crucial in this puzzle, as it is economically strong enough to be able to help Russia properly. If China decides to actively support Russia, then the sanctions can be circumvented to some extent. If Russia cannot export to Europe directly, it can sell products to Chinese operator who will sell it further to Europe and the other way around.

The same as it worked with Belarus previously.

It is indeed very important to have as many countries as possible on board, certainly countries that are economically strong enough to be able to engage with Russia. Obviously, China and India are the most crucial ones. However, the truth is that for Russia it is not an easy task to find an alternative market for its oil and gas. It does not have a necessary infrastructure to redirect its gas and oil exports to, for example, India. But in the long term, and that is what Mr. Putin has already noted, they will reorientate Russian economy to the less democratic world. 

As you said, there is a vast list of sanctions which are prohibited by WTO law. How the EU and US justify their sanctions, so as to make them legal? Is any justification of art XX or art XXI GATT (GATS mutatis mutandis) potentially applicable in this situation?

In terms of invoking the general exceptions under Art. XX of the GATT, it would not make much sense in my view. Yes,  Art. XX includes an exception  that allows justification of otherwise prohibited conducts if it aims to protect human life. But with all the conditions included in Art. XX , justification is unnecessarily complicated. I do not say it would be impossible, but it is absolutely unnecessary to argue justifications on that basis. Instead, Art XXI of the GATT, the security exception, is indeed the provision envisaged  for situations like the current war in Ukraine. 

It was drafted in the 1940s for the purpose of the first GATT, so it was designed for real wars, like those which were likely to happen in 20th century. The world now is experiencing such a war between two countries. Art XXI used to work in practice in a way, it was not fully justiciable, what was of course contested by many. It means that whenever a country invoked art XXI to justify its sanctions, no one could efficiently oppose it with legal tools. It does not mean, it was fully non-justiciable, as the matter was discussed without being settled by a ruling. In the meantime the WTO Panel in “Russia – Traffic in Transit” case, made a breakthrough in art XXI interpretation and settled that it can be a subject to judicial review, as well as tailored a special test. Can the sanctions imposed by the West be justified and meet the requirements of the test?

First of all, I would like to underline that the decision in Russia – Traffic in Transit was a decision by the Panel, not the Appellate Body which is the ‘supreme’ adjudicating body of the WTO, though currently not operational. Yet, there seems to be a strong support among the WTO community for this judgement. The relevant part in Art XXI(b)(iii) states: “Nothing in this Agreement shall be construed to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests taken in time of war or other emergency in international relations”. Hence, there is even no need for an ongoing war between countries at issue for this exception to be applicable, an emergency in international relations would suffice. The panel in Russia – Traffic in Transit emphasized that the mere economic or political disputes will not be enough though, there must be some kind of defence or military issue or an issue with maintenance of law and order at stake. 

European Union seems to be meeting those requirements, as from geographical point of view, it lays near to the conflict. Yet, US and Canada are far away and it feels like they do not have a direct serious security interest.

I guess there is an argument to be made there, but I do not think it would be given a too favourable consideration in case a dispute arises.  The entire world is shocked by this war and considers it to be a threat to international security, to every country. For example, Russia could consider countries that are helping Ukraine to be a next target. Basically, even though there is no direct conflict between the US or Canada and Russia, there arguably is a situation of heightened tensions in international relations with Russia. I have little doubt that a challenge of the invocation of the security exception would not be successful and believe sanctions would be justified. The WTO panels do not operate in isolation but in the real world and it would take really a lot, in my view, to dare to say that, in a situation of an outright invasion by Russia, a nuclear power led by unpredictable President Putin, conditions for the security exception are not met. There is a fear, that while Putin is getting cornered, there are absolutely no limits for Russia taking military steps reaching even beyond Europe. Maybe from a legal point of view you  would have an argument that the US is too remote, but I really think it would be unsustainable for any Panel to actually struck down sanctions in the current tense situation. Actually, I also doubt they will be challenged in the WTO. 

Let’s also remember that the law is one thing, but the judges are quite another. They are humans too.

They operate in the given reality, of course, and so they should, in my view. They do not look only at the legal provisions and do care about the surrounding world. There are likely to consider the resolution of the General Assembly of United Nations that condemned the invasion and described it as a threat to international peace and security, making the perception of the security threat even stronger. If we do not want to see the beginning of a 3rd world war, we must act together as an international community. If not now, when would the security exception be applicable then?

There is another issue that Russia has actually brought up in this respect and fairly so. The security exception can be found in the GATT, GATS and TRIPS, but it is absent in some other multilateral agreements on trade in goods, such as Agreement on Technical Barriers to Trade (TBT), Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) or Agreement on Subsidies and Countervailing Measures (SCM). Of course, the question is whether any of these other agreements would actually be at issue here as they may not apply to the imposed sanctions. Still, even if they were, there may be ways to use the security exception in the GATT. This is what we saw in some TBT cases when Appellate Body used the preamble in the TBT Agreement to interpret what essentially is the GATT general exception into the relevant obligations in the TBT Agreement. These legal acrobatics were amazing and, as you can see, much  is possible. 

Even if sanctions happen to be illegal, does it matter since the Appellate Body is not functional? Since the cases can be sent into the void and never reach legally binding status, do we even have to discuss legality of the undertaken measures? Let’s remind, that it was the Donald Trump who obstructed the nomination of Appellate Body members and as a result stopped its functioning. Joe Biden did not took any measures to change it so far.

No, it does not matter indeed. As long as we do not have a possibility to conclude dispute settlement proceeding, if they were initiated by Russia challenging the sanctions, it would not matter. Whatever the result, even if the Panel was to find that these measures could not be justified by the security exception, as soon as the country which imposed sanctions were to appeal to the non-existent Appellate Body, the proceedings could not legally close and there would also be no implementation or enforcement. Even if Appellate Body was functional and the award was in favour of Russia, the only thing that Russia could do to enforce if against the will of the sanctioning countries is to impose retaliatory sanctions in turn. Well, come on, it is already collapsing economically; economic retaliation would make the economic situation of Russia even worse. 

The core of the WTO, raison d’être, is to enhance economic interconnectedness, wealth, stability so these conflicts do not happen. When they do, the WTO is not a proper organisation to resolve them. Let’s keep in mind that the WTO is a member-driven organisation – it is the members that take action, not the organization itself. If a number of strong economically members decide to act against Russia, there is nothing to stop them really. Even though you have legal proceedings, and they have been extremally efficient in resolving trade disputes, the real issue is the initial military conflict, which cannot be resolved by WTO dispute resolution. 

Taking into consideration all that we have already said, are there any prospects for reforms of the WTO or the current agony state is a demanded status?

The WTO is in crisis, also because of the different perceptions of the US on how the dispute settlement should look like. I do not think there would be any shift in the US attitude as a result of the war in Ukraine. More so, the US does not really need the dispute settlement right now, rather the opposite. It is to an advantage of the US (or the EU) in this situation because no one can proclaim the sanctions to be unjustified. The WTO has no tools, other than what I have mentioned, meaning increasing economic interconnectedness and stability. There are no tools to act directly against the war and a reform of the WTO dispute settlement system would make no real difference. Of course, the dispute settlement system must be fixed because, as we have seen in the last 25 years, a functional settlement system for trade disputes is extremely helpful and much valued by WTO members. Apart from the dispute settlement, there are other areas in the WTO that need to be reformed, such as the actual rulebook, but most of WTO problems are not connected to the current conflict. In that respect, the only thing that could perhaps be reformed, using the political current, is the security exception itself.  Arguably, the exception could be further clarified, for example by better outlining in which circumstances it should or should not be used, perhaps updating the traditional perception of state security. That being said, military conflicts are outside of the WTO mandate. In that sense it is rather an issue of reforming the United Nations, which was created for preventing, and banning, military conflicts like the one we witness.

Biographical note

Iveta Alexovicova is Assistant Professor of International Economic Law at Maastricht University, Department of International and European Law, focusing predominantly on international trade and investment law. She is a fellow of the Institute for Globalisation and International Regulation (IGIR), member of the Ius Commune Research School and a non-resident fellow of the World Trade Institute (WTI).

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