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In Search of Lost Transit

Date of publication: 16 April 2019

Olena Omelchenko, Partner, Head of International Trade Practice

Source: ZN.ua

On April 5, 2019, the World Trade Organization Dispute Settlement Body circulated Panel Report on the DS512: Russia — Measures Concerning Traffic in Transit initiated by Ukraine.

Ukraine has challenged a number of restrictive measures on the transit of goods by road and rail, imposed by the Russian Federation in the period between 2014-2016. Ukraine pointed out that the restrictions did not comply with the principle of freedom of transit, as well as other obligations assumed by the Russian Federation under the WTO. Russia referred to the GATT article, which allows exceptional actions in order to protect essential security interests.

Unfortunately, Ukraine failed to achieve a positive result in its own favor, but managed to become a pioneer in searching for balance between national security interests and goals of international trade.

For the first time in WTO history the dispute over national security issues was not settled by states during the consultations and was fully considered by the DSB Panel. The result is the interpretation of Art. XXI (b) (iii) of GATT 1994 provides the criteria that “constrains” parties.

In the future, in order to refer to national security interests in trade disputes, WTO member states will need to prove an objectivity of emergency situation and good faith. Namely – the focus of measures on the protection of the population and territory from external threats or on the maintenance of law and order.

Prospects of the case in the Appellate Body

The Report in issue contains points that provide Ukraine with chances for appeal in the WTO’s Appellate Body. In particular, it was established that “had the measures been taken in normal times, i.e. had they not been taken in time of an “emergency in international relations”, Ukraine would have made a prima facie case that the actions of the invoking party were inconsistent with the freedom of transit and with the obligations assumed by Russia. This point may be significant if the case will be reviewed in appeal.

However, there are a number of reasons that may deter the Government from appeal.

Firstly, the prospects of review of the case remain vague. The Appellate Body relatively infrequently reverses the ruling of the Panel.

Secondly, it is difficult to predict when the appeal will be considered on the merits. Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the DSB. The fact is nowadays there are only three members and for two of them the term of office expires before the year-end. Due to the lack of members, the Body cannot promptly operate and has already accumulated a number of cases that are in the “queue for review”.

The shortfall of the Appellate is explained by the United States approach to reject all nominees. The fact is in the near future progress is not expected. The reason is that the United States, as a country involved in several so-called “trade wars”, benefits from an opportunity to block the DSB activity at the right time.

Moreover, the Panel Report creates new incentives for the US to sabotage the work of the WTO. It will be difficult for the US authorities to prove the compliance of measures restricting imports of steel and aluminum (nine cases in the DSB, that are likely to be combined into one proceeding) with the criteria described above. It is worth being able to start an appeal that cannot be finished in case of an unsuccessful outcome. Throughout the review period, restrictions can be maintained. And the situation can be maintained until a compromise can be reached, which is most likely to be achieved on the terms of a stronger player. And it is not difficult to guess who it will be.

Thirdly, undoubtably deciding whether to appeal Ukraine will consult with the EU as a third party in a dispute. It is highly unlikely that the EU will support the idea of revising the decision, since Brussels is satisfied with the fact that the Panel has limited the application of measures according to certain criteria, thereby strengthening the EU’s position in the case against the US regarding aluminum and steel.

Fourthly, in the case of a positive case review for Ukraine there is no obvious mechanism by which Russia can be forced to fulfill the recommendations of the DSB. Since Russia refuses to comply with the recommendations, Ukraine will only legitimize the possibility of applying counter measures, which it already implements without the permission of the WTO in the form of sanctions and a ban on the import of Russian goods.

According to the domestic procedure established by the Ukrainian legislation, the Ministry of Economic Development of Ukraine will convene an interdepartmental working group on this problem and decide whether to appeal.

It is possible to review the Report until it is approved at the meeting of the WTO DSB. It is unlikely that Russia will appeal the decision of the Panel, so it is to be expected that the Russian Federation will initiate the approval of the Report in the near future and thereby limits the time for filing an appeal.

If not an appeal, then what?

Now the Ukrainian government faces a difficult choice: try to change the decision or, leave everything as it is, using the findings of the Panel to strengthen its own position in the “mirror dispute” DS525: Ukraine — Measures relating to Trade in Goods and Services, in which Ukraine acts as the Respondent. The Russian Federation tries to challenge the sanctions approved by the National Security Council of Ukraine, as well as a ban on the import of goods from Russia, applied by the Cabinet of Ministers of Ukraine.

In this case, the Respondent now has a strong position in view of the Report. Ukraine will also be able to resort to reference to the same Art. XXI (b) (iii) of the GATT 1994 and meet the same requirements Russia has already met, namely: 1) the objective nature of the state of emergency (relationship to the interests of defense or maintaining order); 2) compliance with the timeframe of emergency measures; 3) adherence to the principle of good faith (the inadmissibility of protectionism); 4) compliance with the minimum criterion for a causal relationship between measures and a goal. The first has already been established by the Panel, the second is confirmed by the dates of the adoption of acts, the third and fourth can be easily proved by analogy with the Russian position in DS512.

Thus, the Russian Federation, realizing the futility of further proceedings, is likely to end up on consultations stage in DS525 will not develop, and the parties will continue to apply restrictive measures.

Certainly, it would be economically advantageous to mutually remove all trade restrictions, but, unfortunately, this is possible only after an emergency situation in international relations between Ukraine and the Russian Federation will be resolved.