Recent developments in international trade have brought to the forefront the concept of “friend-shoring” in supply chains, as the U.S. and EU navigate evolving trade dynamics. This term refers to the deliberate strengthening of economic ties with trusted countries, highlighting the importance of building resilient and secure supply chains. We will delve into the implications and challenges of this approach in the context of international trade and the World Trade Organization (WTO).
Background
On August 28, 2023, the Minister of Commerce of the People’s Republic of China (PRC), Wang Wentao, and the U.S. Secretary of Commerce, Gina Raimondo, engaged in discussions in Beijing amid escalating measures restricting bilateral trade. This meeting followed China’s imposition of export licensing requirements for gallium and germanium, critical elements used in semiconductor production and prevalent in modern electronic devices. China justified these restrictions on national security grounds under its 2020 export control laws. While these controls had general applicability, they could be seen as a response to the U.S. Chips and Science Act of 2022 (CHIPS Act), which links research and development (R&D) subsidies for advanced semiconductors to restrictions on building production facilities in China. The CHIPS Act also serves national security goals and has expanded restrictions on Chinese and Russian entities related to semiconductor manufacturing items and chip design software.
This conflict could be interpreted as a classic trade dispute centered on the interpretation of WTO Agreements. Export controls on advanced semiconductors and fabrication tools by the U.S. and rare earths by China appear to conflict with the “most-favored-nation” principle outlined in Article I:1 of the GATT 1994. Both sides allege that the other does not accord the same treatment to their products as they do to other WTO members. Additionally, these measures contradict Article XI:1 of the GATT 1994, which aims to eliminate quantitative restrictions. The U.S. CHIPS Act, which includes subsidies, has also been questioned in the WTO’s Committee on Subsidies and Countervailing Measures (SCM) regarding its compliance with actionable subsidies under Part III of the SCM Agreement.
Despite these clear conflicts within WTO law, the dispute holds broader significance as it reflects a trade policy shift known as “friend-shoring.” This shift, embraced by both the U.S. and the EU, is a response to changing global dynamics post-COVID-19 and Russia’s actions in Ukraine. It marks a return to the concept of “state friendship” in international trade and raises fundamental questions about the scope of the “national security” exception in WTO law.
Friend-shoring of Supply Chains in the U.S. and the EU
The U.S. has emphasized the importance of deepening economic ties with trusted countries under the banner of “friend-shoring.” This approach aims to establish resilient supply chains with reliable partners. China and Russia are notably excluded from this circle of trusted countries. The COVID-19 pandemic exposed vulnerabilities in supply chains, particularly in the semiconductor production, which is critical to various sectors, including electronics, automotive, defense, and climate change mitigation. The PRC holds significant control over the production of crucial rare materials, such as gallium and germanium, vital for semiconductor manufacturing.
In response to these dependencies and the economic impact of Russia’s actions in Ukraine, many countries, including the EU, adopted strategies to reduce reliance on China for rare earths. The Minerals Security Partnership, comprising several nations, aims to diversify sources of rare earths. The EU has initiated negotiations to secure access to critical rare earths through free trade agreements. Simultaneously, countries are incentivizing domestic industrial manufacturing and research and development (R&D) of high-end semiconductors through subsidies. For example, the U.S. CHIPS Act allocates substantial funding to boost domestic semiconductor production and development while restricting companies from expanding manufacturing in China. The EU Chips Act pursues similar goals with public and private investments.
Export controls and the protection of intellectual property are also becoming integral to this strategy. Both the U.S. and the EU have included strategic export controls in their trade agendas for 2023.
State Friendship: A Forgotten International Law Concept
The revival of “friend-shoring” introduces a concept of state friendship that has largely faded from international trade since the end of the Cold War. This concept implies economic relationships based not just on utilitarian interests but on shared values, trust, or benevolence. Historically, friendship was a prerequisite for political relationships, and moral principles had constructive effects on legal agreements.
Inter-state cooperation and friendship played a substantial role in 20th-century treaties, such as the “Treaties of Friendship, Commerce, and Navigation.” While the “friendship clauses” in these treaties were primarily political in nature, they carried normative content that aimed to foster friendly relations across various activities covered by the treaties. This concept seemed to vanish with the rise of modern trade and investment agreements post-Cold War. The resurgence of friendship in trade matters raises questions about its meaning in contemporary international law and how it influences trade policies.
“Friend-shoring” as a Security Matter in WTO Law
From a WTO law perspective, “friend-shoring” measures need critical examination. The WTO’s primary goals include reducing discriminatory trade barriers and building a durable multilateral trading system. While extending free trade to new sources of rare earths aligns with the spirit of the WTO, “friend-shoring” tends to increase trade barriers, potentially conflicting with these objectives. The WTO aims to maintain reliable supply chains, but friend-shoring has been criticized for its inefficiency and potential economic costs, such as a reduction in global GDP.
The security exception, notably Article XXI of the GATT 1994, is invoked in many cases to justify these measures, asserting that they fall outside the scope of WTO dispute settlement. Security exceptions are not provided for in the SCM Agreement, raising questions about their application in this context. The increased use of these exceptions highlights a complex shift in trade dynamics, challenging the WTO’s effectiveness in addressing contemporary challenges while balancing national security and economic efficiency.
Crucially, “friend-shoring” measures conflict with the temporal limitations of Article XXI(b)(iii) of the GATT 1994, which allows actions for essential security interests “in time of war or other emergency in international relations.” This presents a fundamental problem as “friend-shoring” necessitates long-term commitments, while the WTO exception implies a temporary deviation from WTO obligations. Consequently, long-term friend-shoring inherently operates outside the WTO framework.
In conclusion, the concept of “friend-shoring” introduces a nuanced dimension to international trade and raises questions about the compatibility of this approach with existing WTO norms. The role of the WTO and its dispute settlement system in addressing these challenges remains uncertain, as the invocation of national security exceptions becomes more prevalent. As the world navigates these shifts in trade policy, the balance between national interests, economic resilience, and multilateral trade will continue to evolve.
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