The Political Economy of WTO Exceptions

In a bid to save the planet from rising temperatures, the European Union is introducing a carbon border adjustment mechanism—essentially a levy on imports from countries with weak climate rules. The United States, Canada, and Japan are all openly mulling similar proposals. The Biden Administration is adopting new Buy American rules, while countries around the world debate new supply chain regulations to address public health issues arising from COVID-19 and shortages in critical components like computer chips. These public policy initiatives—addressing the central environmental, public health, and economic issues of the day—all likely violate World Trade Organization (WTO) rules governing international trade, as well as regional free trade agreements. This inconsistency poses a political problem domestically and a diplomatic problem internationally, to say nothing of potential consequences authorized by the WTO. To ward off these consequences, governments will seek to justify their measures under a series of exceptions to trade obligations first drafted in 1947. Although governments have invoked these exceptions with increasing frequency in recent years, they have never been tested in the manner that they will be in the coming years. Indeed, a provision in the 2021 Infrastructure and Investment Act—the first major legislative piece of the Biden Administration’s economic agenda—contains a provision directing the government to invoke these exceptions to justify measures to manufacture personal protective equipment (PPE) in the United States. This Article seeks to make sense of the exceptions and their role in the legal, political, and diplomatic proceedings that determine the fate of public policies that restrict trade. It distills three paradigms through which to view legal exceptions in international trade agreements. Under the Policy Space Paradigm, governments have the right to violate international obligations so long as the violation is necessary to pursue a public policy goal permitted by an exception. Under the Safety Valve Paradigm, exceptions excuse violations that are undeterrable, such as those motivated by overwhelming domestic political pressure. Both of these approaches, which are dominant in international legal practice, permit governments to invoke international legal exceptions only to the extent that the government acts with a single, permissible objective. In so doing, both paradigms rest on faulty assumptions about how domestic policymaking works. I therefore introduce the Channeling Paradigm, which rests on the observation that international trade policies are the result of bargaining between domestic interest groups. Exceptions in trade agreements influence that bargaining process and the resulting domestic coalitions. Industries seeking economic protection will often ally themselves with groups pursuing “non-trade” public policy goals, such as environmental protection or public health. Both groups benefit. The domestic industry obtains protection from foreign competition by lending its political support to a public policy goal. Public policy advocates obtain important political support for policies that provide public goods that governments often undersupply, such as measures to protect public health, fight climate change, and address economic inequality. Counterintuitively, then, the domestic political bargaining that legal exceptions encourage serves the public interest by channeling protectionist pressure into the promotion of public goods. The Channeling Paradigm has implications for dispute resolution under international trade agreements, as well as the drafting of new agreements. In short, existing tests for the application of trade agreements’ public policy exceptions unduly constrain domestic politics. This Article argues that trade tribunals and treaty negotiations should adopt a Predominant Motive test when interpreting and drafting exceptions clauses. Under this approach, a trade restrictive policy would benefit from an exception if the primary objective of the measure is a permitted goal under the exception. So long as it does not become the predominant purpose of the challenged policy, economic protection would not be fatal to invoking an exception. The WTO compatibility of a wide range of critical government policies that have mixed motives—including President Biden’s Buy American requirements that seek to address economic inequality within the United States; efforts to reshore critical U.S. supply chains with the goal of ensuring the United States has access to the components it needs to be a global leader in manufacturing; the European Union’s efforts to impose a carbon tariff in aid of its efforts to combat climate change; and public health restrictions on trade in medical supplies and the COVID-19 vaccine—all depend on a more flexible approach to international legal exceptions.

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