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The Legality of an Indo-China Trade Face-off
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The Legality of an Indo-China Trade Face-off

20 Indian soldiers sacrificed their lives in a military face-off with China, igniting tensions along the Indo-China Line of Actual Control (“LAC”) in the Galwan Valley on the evening of June 15th. The clangour for economic sanctions is growing as strategic experts try to discern China’s Achilles heel, which India can exploit to put a lease on the dragon. Questions have arisen concerning what can be considered a legally justifiable response for claims ranging from imposing an embargo on Chinese imports to the boycott of Chinese products and technology.

India is legally entitled to impose sanctions on Chinese imports by annulling China’s Most Favoured Nation (“MFN”) status in the World Trade Organisation (“WTO”) when perceived from an International point of view. India had rescinded Pakistan’s MFN status last year in the WTO for a temporary period, in the aftermath of the Pulwama attacks along the LOC which resulted in the martyrdom of 40 Central Reserve Police Personnel. Therefore, what is sauce for the goose should be sauce for the gender.

However, considering both India (signed and ratified 1st January 1995) and China (signed and ratified 11th December 2001) are parties to the WTO, a unilateral decision concerning trade ties without providing exceptions under the General Agreement on Trade and Tariffs, 1994 (“GATT”) is an infringement of the “non-discrimination” principle, a basic premise of the world trading regime safeguarding International Trade between countries. The non-discrimination principle in GATT, consisting “Most Favoured Nation Treatment“, “Market Access”, and “National Treatment“, facilitate competition and enhance cross-border trade in services by combating discriminatory practises in international trade.

The MFN principle obligates countries granting favorable treatment to one foreign nation to extend the same favor to other WTO members. The national treatment obligation on similar lines mandates the members of WTO to regard foreign products, service suppliers and services not less favorably than domestic services and products.

It was a general concern when an embargo on the import of Chinese products was suggested, that other countries might adopt a similar strategy against Indian products violating the “non-discrimination” principle under WTO in process.

The MFN and national treatment principles enumerated under Article I and Article III of the GATT are subjected to certain exceptions enumerated under Article XXI of the GATT agreement. The exceptions operate as an instrument which the parties to WTO use in pursuing policy objectives.

The Dispute Settlement Bodies of the WTO while interpreting Article XXI(b) in the landmark decision concerning Ukraine’s complaint against Russia’s transit restrictions have relied on a two-tier test. The first test is to determine if the measures in question are covered by the relevant subparagraph of Article XXI(b), GATT. This will require an objective determination as to whether the requirements under the relevant subparagraph are satisfied. The second test is to check if it is accepted that the measures are indeed covered by the relevant subparagraph of Article XXI(b), were they in reality taken for the protection of the Member’s essential security interest or for some other reason. Here, a lesser degree of scrutiny applies, with the Panel effectively limiting itself to ensuring that the Member interprets and applies the provision in good faith.

Article XXI(b) of the GATT permits a WTO member country to ensue actions or impose restrictions which it considers essential for the protection of the country’s security interest. Article XXI(a) allows the “contracting parties to conceal information which otherwise it is obligated to present under GATT”. The State, secondly, under clause (b) sub-clause (i) of Article XXI has the levy to take decisions, concerning – “fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and such traffic in other goods and materials as is carried on directly or indirectly to supply a military establishment” (iii) “in time of war or other emergencies in international relations.” Article XXI(c) “refrains contracting party from taking actions in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”

Therefore, the legal challenge before India to make a successful case under Article XXI is to establish a nexus between the trade-restrictive measures adopted against China during this emergency and how these measures are essential to address the “security interests”. Contrary to the popular opinion the phrase “which it considers” and “nothing in this agreement shall be construed” in Article XXI is not “self-judging” sans limitations. Despite the significant leeway that India might be benefitted by in discerning what amounts to “necessary measures”, the actions shall be reviewed through the lens of the “good faith” principle. The WTO Panel has affirmed this while adjudicating the national security and defence exception in two cases, namely, the Russia – Measures concerning Traffic in Transit case between the Russian Federation and Ukraine and the more recent broadcasting dispute between Saudi Arabia and Qatar.

For India to justify the actions are taken and restrictions imposed is “necessary” it has to prove that i) the country genuinely believes adopting the particular measure is imperative to ally the country’s security concerns ii) as determined from the Russian Transit case the measures administered has a plausible nexus with the essential security interest in question. The actions should be adopted in consonance to the emergency in concern as to make it practicable for safeguarding security interests.

Article XXI(b)(iii) provides that, inter alia, “any action taken in time of war or other emergencies in international relations”. In the contemporary situation, there is no declaration of war. As per latest developments along the LAC, the armies of both the countries are expected to finalise modalities for the next phase of de-escalation and disengagement of troops in eastern Ladakh. Additionally, both the countries shall finalise a roadmap for the restoration of tranquillity and peace in Galwan, after a standoff for eight weeks. The developments came after China’s People Liberation Army pulled back troops from Gogra, Hot Springs and the Galwan Valley. The formal dis-engagement process commenced on Monday, July 6th after a two-hour telephonic conversation between National Security Advisor Ajit Doval and Chinese Foreign Minister Wang Yi. After another round of diplomatic talks on Friday, July 10th, India and China resolved to execute the idea of “complete disengagement” of troops “on time” for peace. Therefore, in light of the current developments, the border situation with China cannot be considered an “emergency” in international relations. Considering the circumstances India cannot take many restrictive decisions against China on grounds of preserving national interest. In light of the “disengagement” of troops, the provisions of Article XXI(b)(ii) , ” relating to the traffic in arms, ammunition, and implement of war and to such traffic in other goods and materials as is carried on directly or indirectly to supply a military establishment”, cannot be applied as an exception.

India had repudiated the MFN status of Pakistan in the aftermath of the Pulwama attacks by increasing tariff rates on Pakistani imports by 200%. Oddly the decision which was driven by national security concerns failed to mention the term “national security” in its notification. This might have been because the decision was enacted under Article 8(A)(1) of the Indian Customs Tariff Act, 1975 which approbates “emergency power” on the Government of India to increase duties on import if the government deems necessary under the circumstances. However, Section 8(A)(1) of the Act does not explicitly refer to “national security” as a ground to adjust tariff rates but refers to economic emergencies only.

Therefore, it is implausible to accept under the WTO framework that India believes increasing tariff rates by 200% on Pakistani imports are essential to protect India’s security interests. Nonetheless, the decision was not challenged by Pakistan in front of a WTO Panel, despite the meagre bilateral trade between two countries. However, imposing trade restrictions on China by using Section 8(A)(1) will be difficult. India will find it tricky to defend its action if China challenges this decision. To restrict Chinese imports on national security grounds, India will have to furnish a justifiable explanation concerning how and why trade restrictions on Chinese imports are “essential” to safeguard India’s security interests.

The high quantum of bilateral trade between India and China is another pressing factor amounting to tentatively $80 billion a year, 45 times more than that with Pakistan. Additionally, a plethora of Chinese imports are utilised as intermediary products in the manufacturing sectors like pharmaceuticals, automobiles, electronics, etc. Consequently, restricting imports of Chinese products will harm the Indian economy as well. Therefore, when considering India’s dealing with Pakistan and China under WTO and GATT, what’s sauce for the goose is not sauce for the gander.

Conclusively, India cannot cut its trade ties with China or take any other decision that may be in contravention of its obligations under GATT, under Article XXI (b)(ii) and (iii), since the present situation with China does not qualify the “objective test” enumerated for the justifiability of Article XXI. The Government of India cannot restrict trade simply because it thinks the same is necessary for the protection of its essential security interestbut needs to justify its actions under the “good faith” principle and any action otherwise would be in contravention of its GATT obligations.

 

Indrasish Majumder is a Second Year student at National Law University, Odisha, India.

Suggested citation: Indrasish Majumder, The Legality of an Indo-China Trade Face-off, JURIST – Student Commentary, August 5, 2020, https://www.jurist.org/commentary/2020/06/indrasish-majumder-india-china-trade-faceoff/.


This article was prepared for publication by Khushali Mahajan, a JURIST staff editor. Please direct any questions or comments to her at commentary@jurist.org


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