International Law

Multinationals Beware: The U.N. Threat to Global Trade and International Economic Law

By Doron Hindin
Friday, June 10, 2016, 11:45 AM

As the UN dismantles the well-rooted legal architecture of free trade, with the broad support of its members, global industry is growing concerned. Recently, members of the UN Human Rights Council (“UNHRC”) discouraged commercial engagements with Israel and voted to establish a publicly-available database of businesses involved in Israeli-controlled territories located beyond the 1949 Armistice Agreement line, also known as the Green Line. The resolution was unanimously adopted 32-0, with 15 abstentions.

Whereas grassroots activism against business in politically-contentious regions is a familiar reality for companies with a global footprint, the recent UN resolution is different in that it represents a top-down, government-mandated disincentive against trade. With hundreds of conflicts worldwide, this development signals a policy that could create substantial challenges for global business operations.

Legally, leveraging a country’s private sector to intervene in long-standing political disputes is permitted only in narrow circumstances. Specifically, international economic law under the WTO provides limited exceptions for otherwise prohibited government-imposed restrictions on trade, the animating principle being that global trade should remain apolitical, other than in the face of exceptional circumstances. Thus, under the seminal post-WWII trade agreement, the General Agreement on Tariffs and Tariffs (“GATT”), WTO Members are prohibited from adopting any measure that leads to a restriction of exports to other WTO Members (a prohibition known as “Quantitative Restrictions” or “QRs”) or that accords less favorable treatment to any WTO Member than accorded to any other country (a principle referred to as “Most Favored Nation Treatment” or “MFN treatment”). Other WTO agreements, such as the “TBT” and “SPS” agreements, similarly prohibit governments from imposing trade restrictions, such as through limiting trade based on labeling or packaging requirements. These rules constitute the bedrock of today’s international trading system by preserving free trade and protecting against discriminatory practices. The UNHRC resolution violates these principles.

Admittedly, certain UN members supporting the UNHRC resolution are not WTO members and do not participate in its rules-based system of global trade. Others joined the organization with specific preconditions allowing them to sustain various prejudicial trade practices. However, the remaining supporters of the resolution are full-fledged members of the WTO and joined the organization without any country-specific reservations. Support of the resolution by these countries, therefore, must stem either from their unfamiliarity with their WTO obligations or from a false sense of security that their conduct is somehow permitted under laws of international trade. But arguments in their defense are unconvincing.

First, contending that “naming and shaming” businesses fails to amount to a government measure and that it does not in and of itself formally restrict trade is untenable. WTO dispute settlement jurisprudence is clear that for government restrictions on trade to be deemed unlawfully discriminatory, they need not take the form of binding legislation that formally constrains trade. For example, in the 1980s, Japan was deemed to be violating WTO law when it tacitly discouraged its semiconductor industry from selling products at below-market prices, in part because Japan had created a database of companies failing to heed the government’s hortatory request. In the matter known as Japan-Trade in Semi-Conductors, it was determined that government statements or actions, even if non-binding, that have an effect of discouraging certain forms of protected trade violate WTO obligations. Extending the rationale underlying the Japan-Semiconductors case, the U.S. and the EU would, for example, be subject to substantial WTO exposure if they began publicly listing food companies using GMOs or designating businesses whose carbon emissions are deemed disproportionate.  The UNHRC resolution is no different, and constitutes an illicit, government-imposed, trade-related measure. That the resolution does not in itself directly ban trade is immaterial, and support for the resolution nevertheless violates international trade law.

Support for the UNHRC resolution is similarly indefensible on grounds that the restrictive trade relates to territories that the resolution’s supporters mostly consider as outside of Israeli sovereign territory. As studies show, past WTO dispute settlement decisions have applied the organization’s free trade rules to administered territories beyond countries’ recognized sovereign state-lines. Moreover, in practical terms, it is mostly impossible to carve out trade in a country from trade implicating territories administered by that country. Indeed, contracts with governments embroiled in sovereignty disputes invariably entail providing goods and services utilized in disputed territories, as will the provision of goods and services to private residents who will often travel regularly in those areas.

Remaining, but unpersuasive, contentions could be that discouraging or placing conditions on trade with states such as Israel is permitted in the name of upholding “public morals” “national security,” or to preserve “international peace and security under the UN Charter.” Under WTO law, these justifications permit limited forms of restrictive trade practices.

The “public morals” exception, however, is very narrowly tailored. It allows only the least trade-restrictive measures necessary to protect the public morals at issue and further requires consistent, non-discriminatory application of the measure. Accordingly, a government may discourage trade with respect to a particular territorial dispute, such as the Palestinian-Israeli conflict, only if no less severe method is available to protect the public morals and provided the country equally discourages trade across all similar territorial disputes, a highly dangerous policy in light of extensive global trade relations in disputed territories throughout the world, such as in Northern Cyprus, Western Sahara, Nagorno-Karabakh, Abkhazia, Crimea and elsewhere. Artificial distinctions between similar scenarios are frequently rejected in WTO disputes, making it difficult for countries to attempt singling out a particular dispute or set of circumstances that would uniquely qualify to be the subject of prejudicial trade practices.

A national security justification for country-specific trade discrimination is common and serves as the basis for national trade sanctions programs worldwide. Furthermore, countries’ decisions to invoke national security exceptions generally go unchallenged, largely because such decisions represent a core expression of state autonomy and are considered as mostly immune from scrutiny by other states. However, the national security exception is unhelpful with respect to most political disputes, including the Palestinian-Israeli conflict, where states of actual or merely declared belligerency simply do not involve those third countries imposing trade restrictions. In the case of the UNHRC resolution, many of the resolution’s supporters have regular diplomatic and commercial relations with Israel, rendering the national security exception irrelevant.

Finally, the non-binding status of UNHRC resolutions, which are typically declaratory by nature and adopted by majority vote, preclude claims that limiting trade is required to maintain peace and security under the UN Charter. This is similarly the case for other UN resolutions and decisions, including opinions of the International Court of Justice, which cannot in and of themselves serve as the basis for imposing trade limitations under international economic law. Instead, state practice has reserved the WTO’s UN Charter exception for the narrow contexts in which the UN Security Council administers binding sanctions programs prohibiting trade with countries, entities and individuals. Such formalized sanctions programs are relatively few and certainly do not exist with respect to Israel or the vast majority other countries and regions embroiled in political or territorial disputes.

Rules preventing states from imposing prejudicial trade restrictions are not confined to the WTO framework. For example, following WWII, the US Federal Trade Commission ruled that US diamond dealer organizations, many members of which were Jewish refugees from the Holocaust, acted illegally when they sought to restrict purchasing diamonds that had been seized from Jews by the Nazis. In the 1990s, to take another example, the European Union, Japan and the Association of Southeastern Asian Nations (“ASEAN”) all filed vociferous objections to legislation enacted by the State of Massachusetts that imposed prejudicial trade conditions on companies doing business in what was then war-torn Burma. The discriminatory trade practices initiated by the diamond dealer organizations and by the State of Massachusetts were driven by moral considerations, and yet the US, the EU, Japan and the ASEAN states rejected these moral arguments, preferring instead a system of trade based on equality and opposed to mixing country-specific, political considerations into the broader dynamics of international commerce.

To conclude, through the current UNHRC resolution, the UN has fostered fragmentation and violations of international law, the very legal system the UN was founded to protect. Countries supporting the resolution have subjected themselves to substantial WTO-legal exposure and, most concerning, these countries’ private sectors have been struck with anxiety as they witness their governments systematically unravel foundational principles of free trade. As the UNHRC celebrates its 10th anniversary throughout 2016, its member states should take stock—and should be encouraged to do so by global industry—to ensure they cease abetting the UNHRC in its continued erosion of the international trading system.