WTO Panel Again Spurns National Security Arguments, Rules Against Hong Kong Origin Rules

A World Trade Organization dispute settlement panel found the U.S. violated global trade rules by requiring goods made in Hong Kong to be marked as being made in China. Submitting its ruling Dec. 21, the three-arbitrator panel found the U.S. measures inconsistent with the General Agreement on Tariffs and Trade, saying the U.S. failed to show the moves were made in response to an "emergency in international relations." The U.S. argued the change in the origin requirement was needed to safeguard American national security.

The U.S. blasted the panel results, decrying what it described as the arbitrators' "flawed interpretation and conclusions." The panel ruling marks the second time the U.S. has faced an unfavorable ruling at the WTO in recent weeks, with a dispute panel earlier this month finding U.S. Section 232 national security tariffs cut against WTO obligations (see 2212090060). Adam Hodge, Office of the U.S. Trade Representative spokesperson, said the Hong Kong-origin measures are an extension of U.S. national security preroogatives, and the U.S. maintains that national security decisions are not subject to WTO review.

"The Hong Kong panel report suggests that the United States cannot act to address China’s undermining of democratic and human rights and democracy in Hong Kong," Hodge said. "To be clear, the United States does not intend to remove the marking requirement as a result of this report, and we will not cede our judgment or decision-making over essential security matters to the WTO. This report further underscores the need for fundamental WTO reform and the United States will continue to work constructively with Members to ensure that the WTO remains relevant to the lives of all people."

Hong Kong "welcomed the ruling," which it said clearly shows that the "politically motivated" origin measures violate the most-favored nation treatment requirement over origin marking under the GATT. "We welcome that the Panel has fully affirmed the status of Hong Kong, China, as a separate customs territory," Hong Kong Commerce and Economic Development Secretary Algernon Yau said. "The ruling has once again confirmed that the US has disregarded international trade rules, attempted to impose discriminatory and unfair requirements unilaterally, unreasonably suppressed Hong Kong products and enterprises, and politicised economic and trade issues."

The U.S. imposed the Hong Kong-origin measures following events in 2020 that caused Washington to no longer believe that Hong Kong was "sufficiently autonomous to justify differential treatment in relation to" China. Hong Kong challenged the measures at the WTO primarily in so far as they violate the MFN obligation. In response, the U.S. invoked the security exception in the GATT under Article XXI(b).

The panel first looked at whether Article XXI(b) is "self-judging such that it excludes any review of the challenged measures by a panel," with the phrase "self-judging" meaning that any measures taken under this provision are reviewed only by the country itself. The GATT says nothing in the agreement shall be understood to stop any member "from taking any action which it considers necessary for the protection of its essential security interests." The panel ruled the phrase "which it considers" does not extend to the subparagraphs in this chapter that lay out different security interests. As such, these subparagraphs are subject to panel review.

The panel also ruled that the origin marking is "inconsistent with Article IX:1 of the GATT 1994 because it accords to products of Hong Kong, China, treatment with regard to marking requirements that is less favourable than the treatment accorded to like products of any third country." The U.S. also violated the security exception to the GATT since it failed to show that the situation at issue amounts to an "emergency in international relations," as laid out in Article XXI, the ruling said.

In making the latter ruling, the panel first set out to define the term "emergency in international relations," ultimately declaring it means "a state of affairs that occurs in relations between states or participants in international relations that is of the utmost gravity, in effect, a situation representing a breakdown or near-breakdown in those relations." Looking at a host of evidence, the panel then found that the situation has not gotten to a point of breakdown in the relations between the states involved since the U.S. and Hong Kong continue to cooperate "in a number of policy areas" and trade has carried on between the two sides.

"In summary, we consider that although there is evidence of the United States and other Members being highly concerned about the human rights situation in Hong Kong, China, the situation has not escalated to a threshold of requisite gravity to constitute an emergency in international relations that would provide justification for taking actions that are inconsistent with obligations under the GATT 1994," the report said. As a result, the U.S. failed to show that its Hong Kong-origin measures qualify for the security exception in the GATT because they were not imposed due to an international relations emergency.