Posted by on Apr 17, 2015

In our recent note on the national security exception, we reviewed the text of GATT Article XXI, a controversial provision, and its implications in international trade.  The exception under Article XXI distinguishes itself from other traditional exception clauses in international agreements in that it is purely self-declaratory in nature. Based on the rationale of preserving state sovereignty, a country’s decision to invoke Article XXI is subjective and has not typically been reviewable by international regulatory bodies like GATT or WTO.

Canada has previously invoked the national security exception to defend government procurement complaints in Lotus Development Canada Limited, Novell Canada, Ltd. and Netscape Communications Canada Inc. [File Nos.: PR-98-005, PR-98-006 and PR-98-009]. The matter was decided by the Canadian International Trade Tribunal (CITT)   pursuant to the Government Procurement provisions of the NAFTA, the WTO Agreement on Government Procurement (AGP) and the Agreement on Internal Trade (AIT).  This 1998 complaint was filed by Lotus Development Canada Limited (Lotus) concerning the acquisition by the Department of Public Works and Government Services (PWGSC), on a sole source basis from Microsoft Corporation, of a Microsoft NT server, a back-office server and back-office client access licences for the Department of Foreign Affairs and International Trade (DFAIT). Lotus (joined later by Novell Canada, Ltd. and Netscape  Communications Canada Inc.)  took issue with the fact that the normal competitive procurement process had been  side-tracked when the Government  decided to  proceed on a sole source basis.  Canada responded that this action was justified  as the procurement was urgent and the urgency was a matter of national security. It cited NAFTA Article 1018(1), Article XXIII(1) of the WTO’s AGP and Article 1804(b) of the AIT, all being similar provisions. NAFTA  Article 1018(1) reads:

 Nothing in this Chapter shall be construed to prevent a Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defense purposes.

The CITT reviewed the matter and determined that seeing as the security exceptions of the various agreements had been invoked by the Government of Canada, it did not have jurisdiction to continue its inquiries and the complaints were subsequently dismissed.  The Tribunal indicated that the only matter it was able to review was whether the necessary procedures had been triggered to exercise the national security exception.

By its wording, Article 1018(1) of NAFTA  … indicates … the Government of Canada has a discretion to declare the subject matter of a particular procurement as relating to national security and, in so doing, may remove that matter from the obligations of the bid challenge process provided for in the relevant trade agreements.

The CITT noted that there have been commentaries on the issues raised by the national security exception:

Professors Jackson, Davey and Sykes, speaking about security exceptions generally, state that they represent “a classic exception to liberal trade policies and rules” and note that the problem that they present in international agreements is that it is virtually impossible to define their limits. This difficulty is reflected in the history of GATT’s general security exception ….  (which) suggests that there is no restriction on when such exceptions can be invoked, other than the recognition by each Party to a particular agreement that frequent resort to the exception will bring the effectiveness of the relevant agreement into question. As is reflected in the discussion of the GATT cases generally, once invoked, the GATT security exception appears to take the matter outside the scope of that agreement. Having said this, it is generally recognized that a broad application of security exceptions could threaten the effectiveness of trade agreements ….

This is not the first or only time that Canada has invoked the national security exception and likely not the last – see for example Mistral Security Inc. v. Department of Public Works and Government Services
[File No. PR-2012-035]
. In 1982, Canada relied upon on the cover of GATT Article XXI, along with several other countries,  to impose an import ban on Argentinian products during the Falkland Conflict. During the debate at the GATT with respect to the import ban against Argentina, the GATT’s Contracting Parties noted that recourse to Article XXI “ … could constitute, in certain circumstances,  an element of disruption and uncertainty for international trade and affect benefits accruing to contracting parties under the General Agreement.” The GATT contracting Parties subsequently agreed to require members invoking Article XXI to provide proper notice of measures taken under the exception.

The debate continues however as to how a proper balance can be achieved between maintaining a state’s sovereign right to protect itself in cases of national security and the need to avoid potential abuse through the imposition of trade-barriers for purely commercial or political reasons.  The concept of advanced notification as per the GATT process discussed above is a start, and underlines the wide recognition of the problem.  Some have argued that an Article XXI defence should, at least in part, be reviewable by a GATT Panel.  According to this movement, a WTO member would remain free to subjectively determine what national security related measures it may take. However, the matter of when the measure may be taken would be open for a Panel to review. For example, where GATT Article XXI indicates measures may be taken “ … in time of war or other emergency in international relations …” some have suggested that it should be open to a Panel to determine if these conditions precedent exist.  Perhaps more guidelines are needed and more debate, discussion, and dialogue in the WTO (and under other trade agreements) context is called for.  One thing is certain however, old fashioned international diplomacy in addressing the “gray areas” of international trade, such as GATT Article XXI, remain an important tool in helping maintain the balance.  Recall the case, cited in our earlier note, when Sweden invoked Article XXI with respect to measures prohibiting footwear imports in late 1975. Quiet but strong pressure came from other GATT members about whether Article XXI should be used in this instance and Sweden ultimately terminated the prohibition in early 1977.