Can India cut its trade ties with China? A closer look at Article XXI of the GATT Agreement

The recent standoff at Galwan has fuelled debates on how we should alter our trade ties with China. What should be the legally tenable response for claims ranging from cutting trade ties in toto to the citizen-initiated boycott of Chinese products and Chinese cuisine?

Given the fact that the India and China are parties to World Trade Organization (WTO) agreements, unilateral acts without invoking exceptions under the General Agreement on Tariffs and Trade (GATT) would be considered as violation of the non-discrimination principle in the GATT-WTO regime.

The basic principle of the world trading regime is based on the principle of non-discrimination, and this principle protects international trade between countries. There are two principles of non-discrimination in WTO law: the most-favoured-nation (MFN) treatment obligation and the national treatment obligation.

The MFN treatment obligation requires a WTO member that grants certain favourable treatment to another country to grant that same favourable treatment to all other WTO members. The national treatment obligation requires a WTO member to treat foreign products, services, and service suppliers not less favourably than it treats ‘like’ domestic products, services and service suppliers.

When it was argued that India should alter its trade relationship with China, many feared that other countries might also do the same against India, and this unilateral act may amount to a violation of non-discrimination principles.

Will altering trade relations with China amount to derogation of the non-discrimination principle?

Under Article I, GATT provides for Most Favoured Nation (MFN), and Article III provides for National Treatment (NT). These two principles are general principles and applied to all member countries subject to a few exceptions given under the GATT. One such exception is Article XXI of GATT, which provides for Security Exception. Under Article XXI, a state can do the following things if ‘they consider it necessary for the protection of its essential security interest’. First, the State can withhold any information which is required to furnish under the GATT obligation. Second, the State can take any decision, relating to – fissionable material; traffic in arms, ammunition, and implements of war which are directly or indirectly for the purpose of supplying a military establishment; any action taken in time of war or other emergency in International relations; any action in pursuance of its obligation under the UN charter for maintenance of international peace and security.

Can India unilaterally adopt protectionist trade policy?

Article XXI has characterised as a self-judging principle because of the Chapeau of Article XXI. It states that, inter alia, “Nothing in this agreement (GATT Agreement) shall be construed,” that means no limitation has been put forward by the GATT drafters. Whereas in the chapeau of Article XX, it has restricted the use of General exception subject to “arbitrary or unjustifiable discrimination or a disguised restriction on international trade”. In simple words, the State has the absolute right to trigger Article XXI. If the measure taken by State is ‘for the protection of essential security interest’.

Nonetheless, few argue that it has not been entirely self-judging as it can be objectively judged upon two principles: first, the procedural test set out in the provision itself, and second, the good-faith obligation. In the present case, to restrict or to regulate the trade relations with China, the Government of India can use Article XXI (b) (ii) and (iii). Presently, there exists a threat to the essential security interest of India.

This argument has moved from theoretical interpretations to a practical one, given the recent development that took place a few days ago in which Chinese troops killed 20 Indian military personnel. Moreover, there is still a threat looming, as the Chinese military has been continuously establishing bunkers along the LAC.

Article XXI (b) (ii) provides for action taken concerning 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 for the purpose of supplying a military establishment’. Presently, India has stationed its military establishment near the LAC of the India-China border, and in order to supply to the military establishment, India can take any ‘necessary’ measures that are otherwise limited by its GATT obligation.

Article XXI (b) (iii) provides that, inter alia, "any action taken in time of war or other emergency in international relations". In the contemporary situation, there is no declaration of war. Still, the current border situation with China shall definitely fall under “other emergency in “international relations,” and India can take as many restrictive decisions as necessary to protect its essential security interest. In fact, various public sector undertakings have already started to make such decisions, as seen in the cancellation of contracts given to Chinese firms by BSNL and the Railways.

Thus, the exception given under Article XXI is self-judging, as it provides that the state can take any action which it considers necessary for the protection of its essential security interests. If not entirely self-judging, then deference can always be given to the state adopting such measures, considering the territorial sovereignty of the state concerned. Hence, under Article XXI, any unilateral act taken by India cannot be considered as derogation from non-discrimination principles.

Can such action taken by the Indian government be questioned before Dispute Settlement Bodies (DSBs)?

The justiciability of the action taken under Article XXI can be understood from the case laws decided in the GATT regime and the WTO regime. Under the GATT regime (before WTO came into force, i.e., 1947 to 1994), there were many cases in which the state has raised an issue for the formation of the panel to decide on the justiciability of Article XXI. However, such a panel could not be established. It is important to note that even if the panel would have been established, it would not have changed the status quo or would not have contributed substantially in the GATT practice, as the decision making was based on the negative-consensus.

Under the WTO regime (after the establishment of WTO/DSBs), members managed to avoid invoking the security exception before WTO panels, leaving the tension between the self-judging element explicit in its text and the compulsory jurisdiction of WTO panels unresolved.

However, recently, panels were established after the respondent declared that it deemed the challenged measures necessary to protect its essential security interests. The first panel report to examine the issue, in Russia – Measures concerning Traffic in Transit, was adopted in April 2019 without appeal. Its interpretation of GATT Article XXI significantly limits the scope of the self-judging element in the provision and devises a three-step legal test to be met by members invoking the exception, with the declared objective of safeguarding "the object and purpose of the GATT 1994 and the WTO Agreement more generally".

The panel favoured the view that subparagraphs (i)-(iii) call for an objective review, while a determination of the “necessity” of the measure and what constitutes “essential security interests” was left for the WTO members to decide. But, the the reason for coming to such a decision was not elaborated upon. DSBs have the opportunity to bring in more clarity in pending cases regarding security exceptions concerning Qatar, Saudi Arabia and United Arab Emirates.

In conclusion, India can cut its trade ties with China or can take any other decision that may be in contravention of its GATT obligation, with the help of Article XXI (b) (ii) and (iii). The present situation with China qualifies the ‘objective test’ laid down for the justiciability of Article XXI. If the Government of India thinks it "necessary for the protection of its essential security interest", it can restrict trade or can take any other necessary measure, which without the application of Article XXI, would be in contravention of its GATT obligations.

The author is a 1st-year student of LL.M (International Law) at South Asian University.