Legal Aspect of USA Sanctions on Foreign Companies; Back to the Pre- Uruguay Round Era?

by A.A KADKHODAEE*

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Introduction

Economic and military sanctions have a long standing history in the international community. Every state always reserves its right to defend itself when it negotiates or signs an agreement should its vital interest be in danger. This old rule of international law has also been enshrined in the UN Charter when the peace and stability of a country is at stake1. In order to do so, the best known instruments to carry out such defence are military and economic sanctions which have been continuously used during the past decades and it will be so, as long as international disputes exist, provided that could be justified by the states concerned2.

As regards the motivations behind such embargoes, they have been classified into economic and political sanctions. However, with respect to economic and trade embargoes, the controversy remains over the justification of such actions for political reasons. Could any country impose trade sanctions on target state(s) in order to achieve some sorts of political aims and objectives? Particularly, when there is no direct confrontation between them. Or should economic and trade embargoes be employed only to reach economic and commercial destinies? In practice, the first assumption has been the most obvious motivation behind economic sanctions, since the international law has been born and continues to be so well into the future3.

Nonetheless, as far as theory is concerned, it has been asserted that economic sanctions should not be used in order to dictate political aims or cause economic changes in the target countries4.In this regard, it has also put forward that all sanctions could come under two heads; reprisal and retorsion. By the first, it means that any economic sanction may interfere with the socio-economic policy of the target countries, and its freedom to chose a political system. In contrast, the latter, seeks economic sanctions only for economic aims and nothing more5. As regards the second, we may refer to cases such as Chicken War between the USA and the EC, in the 1960s6, or Computer Literacy Program case between the USA and EC in 1985.

Economic Sanctions Within Trade and Economic Organisations

Whilst economic sanctions and embargoes may find their justification in a way or another in political dimensions, these instruments might be found difficult to be proved amongst parties of a multilateral trade organisation which are committed to improve liberalisation and freedom in trade flows. In such communities, if economic embargoes which are purely imposed for economic reasons could be legalised under the relevant trade agreements for certain reasons7, any political motivation behind such actions would jeopardise their obligations and would be regarded as the infringement of the rules of the trade agreement envisaged.

The only exception in this regard might be those actions which come under the general heading of national interests or security interests. Every bilateral or multilateral trade agreement usually reserves the right of parties to take action outside the framework of the relevant agreement, should an essential interest of the parties involved. In this regard, it is worthwhile to have a look at these exceptions in other multilateral agreements. The EU which is a more harmonised economic organisation and nowadays is paving the road towards political unification, has exempted its Member States from carrying out Treaty provisions provided that a vital interest of the relevant Member States is in danger8. However, the Treaty has limited such actions to cases of absolute necessity, and further provides that taking such action shall not adversely affect the conditions of competition in the Common Market. Moreover, Article 224 has asked the Member States to have close contacts during the occurrence of such disturbances9. Finally, Article 225 gives power to the Commission to take legal action before the ECJ in case of any distorting of the conditions of competition in the Common Market following the implementation of the two aforementioned Articles10. It seems, although the Treaty has left a discretion to its Member States when any vital national security interests is under threat, it has provided some measures which ensure that Member States could not distort competition within the Common Market. In other words, whatever, the national security is, those actions shall not distort and damage the competition within the EU markets11.

NAFTA, another trade related agreement among the USA, Canada and Mexico, has a similar rule to GATT in Article 2102(b), with identical words12. EEA has also exempted its members from the application of its rules if such interests are at stake13 Finally, the GATT has treated its Contracting Parties in a similar way by virtue of Article XXI, which has remained effective even after the new amendment aftermath the Uruguay Round Negotiations and the establishment of the WTO14.

The Legal Basis of Economic and Trade Sanctions

Article XXI in a wide and ambiguous section leaves a vague discretion to the Contracting Parties by which they could take any action when their essential security interests are involved15. What would be the limit of the term any action and what is the definition of essential security interest? There is no precise definition to these words. The only limitation to which this Article has referred is in section b(ii) as those goods which are carried on directly or indirectly for the purpose of supplying a military establishment.[sec, ii] Even this definition has its own ambiguity on which any state could rely in order to justify its embargo against another. One further point is whether all maters could come under the heading of essential security interests? For example in Nicaragua case when the USA restricted sugar imports from that country, could that be justified by the term essential security interests? By a close look at Article XXI and its sections, it will be revealed that restriction on sugar imports had no justification whatsoever and no essential security interests had depend on that sort of imports. If we are allowed to take into account any potential threat as a case of endangering security interests there would be no future for trade relations amongst countries in the world as all their activities are potential threat to others. Such ambiguity has been enough to lead some countries not to prove their actions by saying just that the relevant embargo was for other broader reasons than the GATT provisions and challenge the jurisdiction of the GATT institutions such as the Panel16. Furthermore, the Panel itself has refused to define such terms and left its interpretation to the countries involved17. Furthermore, in the second Nicaragua case the Panel ruled that it was preclude by its terms of reference from questioning USA Article XXI18. By comparison with the EC Treaty, in interpretation of such terms, it seems that the Panel or any other International forum should bear in mind the prime aims and aspirations of the relevant multilateral agreements, to which countries are parties. If any state according to its own judgement could take any action towards other countries in a way to violate those commitments and obligations enshrined in the relevant agreements, there would be no point to have such agreements and nothing would be left for the organisation concerned to play, as a result that process might be obsolete, particularly, when through economic instruments some non-economic issues have been sought. This point seems to have been in the mind of the Rome Treaty's authors when they were conceiving that Treaty. They certainly knew that national security objects are of significance and there should be some sorts of protection, but they were well aware of any likely consequences of its misuse which could jeopardise the main aims of the Treaty and the implementation of the competition in the Common Market. To this, they set another Article ( 225) in order to prevent Member States from any misjudgement and taking any unjustified action which is a threat to the Common Market. Here, by analogy we may be able to interpret the rule enshrined in GATT Article XXI (b). Thereupon, it could be said that if those actions taken under Article XXI, infringe the general rule of free trade and liberalisation principle the case should be considered by the GATT institutions such as the DSB.

Here, before turning to the next subject, it is worthwhile to mention that the EU is a far more political organisation with an ultimate aim of the achievement of political unity amongst its members, whereas, the GATT or the WTO has no such political targets, at least for the time being. Therefore our comparison could be limited and justified only in economic or trade aims and targets towards which both are paving way. Furthermore, the EU has a strong enforcement mechanism, namely the ECJ which could enhance the implementation of EU Treaties rules, but the WTO has no similar mechanism.

Economic And Trade Sanctions and the Role of WTO

According to Article, the DSB has jurisdiction to resolve any disputes which may arise amongst members countries in implementing the provisions of GATT agreements and understandings. However, arguments and disputes over the scope and the power of GATT institutions on such disputes has been a long story which yet to be clarified, though by the last Uruguay Round results, in a great degree has been improved. One of the main problem in this case has been the debate over political influence of some countries over GATT dispute system which should follow a legal procedure rather than political pathway. Such political influence has shaped and affected its ruling system in the past, while its future still is in doubt. If there is no clear legal system to resolve disputes arising from GATT provisions, there will be less hope for its efficiency as a legal forum to enhance the way toward the free trade in goods and services19.

As regards the jurisdiction of the DSB, it seems a bit odd if any country challenges the jurisdiction of the Panel or DSB in the WTO in considering whether or not the relevant state is in the right position or not? In other words, there should be some kinds of interpretation of the GATT terms by the GATT institutions in order to prevent any misinterpretation and misuse of these terms. Therefore, it sounds strange that the USA challenged the jurisdiction of the Panel. Of course, if any vital interest of the relevant country is involved, and the Panel or DSB could recognise that, there will be no more challenge as it would be out of the jurisdiction of WTO to take action, but before that, it seems that the DSB have jurisdiction for the preliminary investigation. Thus, if there is a feeling for interpretation, the case should be refereed to the General Council which is competent to give proper interpretation over GATT terms20. A new hope in this regard is that by the new provisions concerning the WTO and its DSB and the applicability of the customary rule of international law, perhaps in future the General Council could give some kinds of interpretation over imprecise terms enshrined in the GATT, in a way to prevent any mistreatment of these terms by any Contracting Party21.

Apart from the question of the jurisdiction of the WTO and despite not ruling over such cases by the Panel in the past, it has been held that such actions are not consistent with the spirit of the GATT and even they may damage the system on which the GATT (WTO) has been based. The Panel in Nicaragua case has concluded that economic embargoes for political justification are contrary to the basic aims of the GATT22 and they would harm the GATT system as a whole23. Moreover, using more economic and trade sanctions for foreign policy aims, may lead other countries to follow suit, as a result of which the efforts towards open markets and free trade will be weakened that countries24.

Nonetheless, if the bilateral economic and trade sanctions which come on the scene between two or more countries, possibly with a reasonable justification would be acceptable by the international community, the effects of such sanctions on third countries which are not involved in dilemma are in serious doubt. As far as indirect impact is concerned, it has been said that there will be no problem in behaving in this way since the terms in Article XXI are so wide to cover even these indirect effects on a third country25 Thus, if the first country could justify its sanctions according to this Article, it might be able to justify that indirect effects and apparently there would be no remedy for the affected third countries.

Direct Sanctions and Third Countries

However, a more recent controversy is whether or not a country which has imposed some sanctions on one or more countries for any political or economic reason, could extend that to third countries? In other words, could the first state impose some direct sanctions against those which are not involved directly in order to intensify its sanctions? Would the sender state be able to justify its action according to Article XXI and its terms? Particularly when the sender and third countries are members of a multilateral organisation such as the WTO? Furthermore, what remedies are available for third countries? Such strange case has recently happened between the USA and all other countries in the world over the political dilemma between the USA government on the one hand and Iran, Libya and Cuba on the other. This case which I think is the first and only case as such in the history of GATT (WTO) is going to be a major trade dilemma between the USA and other industrial countries, particularly, the EU, Japan and Canada.

The fact is that the USA, which has had a long standing political dispute with Cuba, Libya and Iran, after many failed attempts to resolve the dispute, in a new effort has imposed some sorts of economic sanctions on its allies in order to intensify its pressure on the above mentioned countries. Here, no matter what is the situation between the USA and these three countries, which could be resolved in some other ways through the international justice system, but the problem is with third countries which are dealing with these three countries, and have been brought to the heart of the matter. The USA Act which has been passed through the legislative bodies and has been signed by the USA President consider two sanctions out of six to impose on any foreign company that invests $40 million or any combination of investments of $10 million each worth $40 or more in any one year in Libya or Iran26. The list of the six sanctions from which the President must choose is as follows:

-

No US export-import Bank assistance.

No US export licenses to receive goods.

Not eligible for loans of more than $10 million in any one year from US financial institutions.

Not eligible to be a primary dealer in US government bonds.

Not eligible to bid on US government contracts.

Not allowed to export goods to the United States27.

Whatever status this Act has in the USA national law, it is a clear case of extra- territorial jurisdiction of the USA on foreign companies which I think is not even justifiable by the effective theory28. Generally speaking, it is not acceptable that economic sanctions directly imposed on a third country and its companies, which are a member of GATT and has had nothing wrong except trade with these three countries. Not only it is not compatible with the general rules of international law, they are inconsistent with the GATT provisions concerning the liberalisation of trade in goods and services. It is clear that the unilateral economic sanctions of the USA on these three countries are seeking nothing but some political targets, which could weaken its justification even in public international law. However, as it often occurs between countries all over the world, it could be challenged in any international forum and the UN.

The second point regarding the USA Act for the imposition of sanctions on foreign companies is that that Act is in obvious infringement of GATT provisions such as Articles I, II, V and XI. Under these Articles Contracting Parties should provide, in trade related areas, every opportunity for other countries and not prevent them from such connections, except in those areas provided by agreement itself, particularly, Article I which lays down the provisions of MFN principle. Therefore, any economic or trade embargo against members of the WTO in order to intensify pressure on a non-member country would not be rationalised. Accordingly, the Act could be challenged by third countries before the DSB, as was the case between the EC and Argentina in 1982. In that case the EC had imposed economic sanctions on Argentina over the so-called Falklands War, which was challenged by Argentina by observing that such sanctions were not justified under Article XXI29. The legal claim of Argentina further was that such actions had violated Articles I, II, XI:I and XIII of the GATT. Although there was no ruling as such over the using of Article XXI, the GATT Council admitted to have a further study over that Article on national security exceptions. However, in another case the GATT panel has accepted that such sanctions for the reason of national security would damage the GATT system30.

Possible Reaction by third countries

The next question over the Act signed by the USA President is whether or not a third country could challenge that Act in any legal forum, and if the answer is in affirmative what would be the legal basis for so doing? Further, will that likely challenge have any outcome, and if so, to what extent? As regards the first question, a simple answer is yes, that is to say, any country whose economic and trade interests would be in jeopardy, could take the case before the DSB of the WTO, which is a new case as such in the history of GATT. However, such case should go through the dispute settlement procedure of the WTO which in the first place requires the parties involved to consult each other. In the case of recent Act, the EU, Japan, Canada, or any other country should asks the USA government not to implement such Act31. However, as it is obvious and recent observations by the USA authorities show, that stage may have little effect32. According to the provisions concerning disputes settlement in the WTO, the next stage is Mediation, Conciliation and Good Office33 which in this case is unlikely to be employed. First of all, as the Act treats all countries in a same way, there will be no room for any possible mediator(s). Secondly, not only these stages are not compulsory to be taken, but also there would not be any further impact while the consultation has gained nothing. Therefore, in this case the next stage will be recourse to the Panel which is the legitimate forum for considering disputes amongst Contracting Parties.

In this stage, the most likely argument of the USA would be to challenge of the Panel and its jurisdiction over such case. As happened in the past, the USA might argue that passing such Act was for some broader reasons than GATT, to which the Panel will have no jurisdiction.

The second likely argument of the USA in order to justify its action, would be recourse to GATT Article XXI, by which any action could be taken should an essential security interests be involved.

As regards the jurisdiction of the Panel, it should be mentioned that it is for the relevant forum which in the first place must consider its jurisdiction and in this case at least for considering the case it has certainly jurisdiction because there is no political dispute between the USA and for example the EU, Japan and Canada as they seem to have many common aspirations. Thus, the imposition of any embargo on these countries in order to intensify its pressure on a third country, without doubt by no means is justifiable. Moreover, it is for the Panel to recognise that those broader reasons upon which the USA has decided to do so. If it recognises that such reasons exist, it would discharge itself from going further.

As regards the second likely argument of the USA, it seems that any interpretation of GATT provisions is the responsibility of the Council, according to Article IX of the WTO. Therefore, in order to consider whether or not such imposition on third countries would come from terms any action enshrined in Article XXI, the opinion of the Council should be asked and the USA could not interpret that Article in a self-satisfactory way. Even, if we accept such broad interpretation of the USA, it could only be justified so long as it is carried out towards the target country(ies) and not third countries which have nothing to do in this circulation. It is an obvious interference of the sovereignty of third country by the USA government.

As regards the second question, i.e., the outcomes of the case before the DSB, two possible results would be predictable. Either the DSB could reaffirm its jurisdiction over such cases through presenting a sort of interpretation from the General Council, in which two further steps would be possible. In case of having jurisdiction, the DSB might recognise the Act as justified action according to the GATT provisions in which case there will be no further reaction to be taken by third countries. Or the DSB may recognise that the Act is a true violation and infringement of GATT rules, in that case the complaint countries could go ahead through other dispute settlement procedures up to retaliation. A new chance for the complaint parties is that the procedure of adopting of Panel reports has been changed by the Final Act from a positive consensus to a negative consensus34, by which the USA would not be able to veto reports and decisions should they not be in favour of it. In between, there is another possibility of putting aside that Act by the USA government, which is a highly unlikely case. The second finding of the DSB would be that it has no jurisdiction over such case as it has been taken for other reasons other than GATT. In this case third countries would have the only possibility in retaliation through a collective manner which would intensify pressure on the USA government to step back.

Final words in this respect are that, taking such actions by which third countries members of the WTO and their vital interests come under serious threat certainly will damage the liberalisation of trade which has been recently intensified. In other words, the new Act is a step back from the Uruguay Round and its outcomes.

Notes

* The author would like to thank Professor Andrew McGee the Head of the Centre for the Study of Business Law and Practice of the Faculty of Law at the University of Leeds (UK), for his constructive comments on a draft of this article, the responsibility for the contents, however, rests with the author alone.

1 Article 51 of the UN Charter says: Nothing in the present Charter shall impair the inherent right of individual or collective self-defence if an armed attack occurs against a Member of the United Nations, until the Security Council has taken measures necessary to maintain international peace and security. Measures taken by Members in the exercise of this right of self-defence shall be immediately reported to the Security Council and shall not in any way affect the authority and responsibility of the Security Council under the present Charter to take at any time such action as it deems necessary in order to maintain or restore international peace and security.

2 See generally Bergeijk, P.A.G.v., Economic Diplomacy, Trade and Commercial Policy: Positive and Negative Sanctions in a New world Order. 1st ed. 1994, Aldershot, England: Edward Elgar Publishing Limited.

3 See for example economic sanctions follows: USA v. Former USSR, 1983, for the retaliation for downing of Korean airliner UK v. Argentina, 1982, Withdraw troops from the Falkland Islands USA v. Nicaragua, 1981, over the victory of Sandinista USA v. Iraq, 1980- 1984, allegation of supporting terrorists

4 Kuyper, P.J., International Legal Aspects of Economic Sanctions, in Legal Issues in International Trade, P. Sarcevic, Editor. 1990, Martinus Nijhoff: Dorderecht. pp 145 - 175. at page 151.

5 Ibid.

6 The so-called Chicken War arose from a proposed act of retaliation by the USA government against the EC which had withdrawn tariffs on poultry in order to protect price supported EC poultry. To protest the USA did not accept the compensation which according to the GATT rules had offered by the EC, instead it withdrew tariffs binding on an equivalent volume of EC product. See further Hudec, R.E., Enforcing International Trade Law: The Evolution of the Modern GATT Legal System. 3rd ed. 1993, New Hampshire: Butterworth Legal Publishers, at page 33.

7 See the general exceptions enshrined in Article XX of the GATT.

8 Article 223 says: The provisions of this Treaty shall not preclude the application of the following rules: (a)No Member State shall be obliged to supply information the disclosure of which it considers contrary to the essential interests of its security; (b)Any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not, however, adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes. 2. During the first year after the entry into force of this Treaty, the Council shall, acting unanimously, draw up a list of products to which the provisions of paragraph 1 (b) shall apply. 3. The Council may, acting unanimously on a proposal from the Commission, make changes in this list.

9 Article 224 reads: Member States shall consult each other with a view to taking together the steps needed to prevent the functioning of the common market being affected by measures which a Member State may be called upon to take in the event of serious internal disturbance affecting the maintenance of law and order, in the event of war or serious international tension constituting a threat of war, or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security.

10 Article 225 says: If measures taken in the circumstances referred to in Articles 223 and 224 have the effect of distorting the conditions of competition in the common market, the Commission shall, together with the State concerned, examine how these measures can be adjusted to the rules laid down in this Treaty. By way of derogation from the procedure laid down in Arts. 169 and 170, the Commission or any Member State may bring the matter directly before the Court of Justice if it considers that another Member State is making improper use of the powers provided for in Arts. 223 and 224. The Court of Justice shall give its ruling in camera. Also see Article 226 which sets the procedure for the implementation of such exceptions: 1. If, during the transitional period, difficulties arise which are serious and liable to persist in any sector of the economy or which could bring about serious deterioration in the economic situation of a given area, a Member State may apply for authorisation to take protective measures in order to rectify the situation and adjust the sector concerned to the economy of the common market. 2. On application by the State concerned, the Commission shall, by emergency procedure, determine without delay the protective measures which it considers necessary, specifying the circumstances and the manner in which they are to be put into effect. 3. The measures authorised under paragraph 2 may involve derogation's from the rules of this Treaty, to such an extent and for such periods as are strictly necessary in order to attain the objectives referred to in paragraph 1. Priority shall be given to such measures as will least disturb the functioning of the common market.

11 Article 226 of the EC Treaty.

12 Article 2102 of NAFTA reads: National Security 1. Subject to Articles 607 (Energy) and 1018 (Government Procurement), nothing in this Agreement shall be construed: (a) to require any Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; (b) to prevent any Party from taking any actions that it considers necessary for the protection of its essential security interests

13 Article 123 of the EEA reads in part: Nothing in this Agreement shall prevent a Contracting Party from taking any measures: a)... b)... c) which it considers essential to its own security in the event of serious internal disturbances affecting the maintenance of law and order, in time of war or serious international tension constituting threat of war or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security.

14 Article XXI of GATT says: Security Exceptions Nothing in this Agreement shall be construed (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements 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; (iii) taken in time of war or other emergency in international relations; or (c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

15 Ibid, section b.

16 Case Nicaragua v. USA, GATT DOC., C/M/178, 1984, at page 27.

17 Czechoslovakia v. USA,.......Nicaragua v. USA, Poland V. USA.

18 GATT DOC., L/5802, 1985.

19 For a general view see Hudec, Ibid, pages 33 onwards.

20 Article IX (2) of the Final Act.

21 Articles 3.2 and 3.9 of the Understanding on Dispute Settlement Body.

22 GATT DOC., L/5802, 1985

23 GATT DOC., L/6053, 13 October 1986.

24 Carter, B.E., International Economic Sanctions: Improving the Haphazard US Legal Regime. 1st ed. 1988, Canada: Cambridge University Press, at page 140.

25Kuyper, Ibid.

26 Ruter, 23 July, 1996

27 Ibid. That Act has been signed on Monday 5 August of 1996 by President Clinton.

28 Ibid., 5 August 1996.

29 Argentina v. EC, 30 April, 1982, GATT DOC., L/5317.

30 Nicaragua v. USA, 13 October 1986, GATT DOC., L/6053.

31 Article 4 of the Understanding on DSB.

32 State Department spokesman Nicholas Burns put the U.S. case in more stinging terms, saying there was a ``very clear difference of view'' with the European governments which, he charged, ``prefer to sit back and hope that Iran will be nice.'' Burns told a news briefing it would be ``unwise'' of the Europeans to retaliate, ``because they would be acting contrary to their own self-interest.'' ``If the Europeans don't want to go along with us, they at least should get out of the way,'' he said. ``There's nothing that the European governments can do to dissuade the Clinton administration from going forward'' with the Act. Ruter Monday 5 August 1996.

33 Article 5 of the Understanding.

34 Article 9 of the WTO Agreement, Articles 2(4) and 6 of the Understudying on Dispute Settlement Body.