Huawei and the Egg: Supply Chain Risk Management and International Law

Benjamin Schwartz

Vol. 41 Associate Editor

State Legislatures Always Know Best In 1955, the wise legislators of pre-state Hawaii took a valiant stand against a growing threat…eggs.  For not all eggs came from the land of the free and home of the brave; many hailed from distant, alien shores.  Who knew what sinister plots they would hatch upon hatching? It may just have been pressure from the domestic egg industry, but regardless, Hawaii passed a law requiring sellers of imported eggs to prominently feature a sign saying “WE SELL FOREIGN EGGS.” However, the law did not stand.  The Supreme Court of Hawaii struck it down for breaching a treaty, the General Agreement on Tariffs and Trade (GATT).[1]  Specifically, the Court noted that it violated the “national treatment” provisions of the GATT, which require foreign and domestic goods to be treated equally after entering a country’s market.[2]  Nor could the law be saved by falling into one of the GATT’s exceptions. This case serves as an introduction to the international trade regime under the GATT, which continues to exist under the World Trade Organization (WTO) framework accepted by 164 countries.[3]  The influence of the GATT and related WTO treaties is most apparent in the economic realm but can be seen even in the real topic of this blog post: supply chain risk management. Supply Chain Risk Management Supply chain risk management (SCRM) is the process of ensuring that the products and systems one uses are not unnecessarily vulnerable to attack or interference.[4]  Although the defense and intelligence sectors are long accustomed to SCRM, the civilian side of government has only recently started paying much attention.  For example, the prominent Russian cybersecurity firm Kaspersky was blacklisted in 2017 and its products ordered removed from federal government computers.[5] Even more momentous have been the government’s assorted actions against Chinese telecommunications titan Huawei, including a similar ban on federal use of its products and a ban (albeit one that has not come into effect yet) on American companies supplying components to Huawei.[6]  The anti-Huawei measures have further increased U.S.-China trade tensions.[7] The Kaspersky and Huawei bans stem from national security concerns, specifically the fear that America’s geostrategic rivals could force the companies they oversee to spy on the United States or sabotage its infrastructure.  Could the government take wider action against all Russian or Chinese tech companies on national security grounds? The GATT’s Security Exception At first glance, such a decision looks like it could fall within one of the GATT’s exceptions to its general ban on treating products of member nations differently.  GATT Article XXI says: “Nothing in this Agreement shall be construed…to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…taken in time of war or other emergency in international relations.”[8]  In particular, the phrase “which it considers necessary” seems to imply that each nation can decide whatever steps are needed to protect it. However, the WTO declared otherwise in a landmark April 2019 decision that ruled on Article XXI for the first time.[9]  In a dispute between Ukraine and Russia which the U.S. intervened in, the WTO said that it could review a decision to invoke the security exception, rejecting Russian and American arguments to the contrary.  Moreover, it defined “emergency in international relations” as “a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.”[10]  Noting the UN General Assembly’s resolutions on the Ukraine-Russia crisis and corresponding sanctions against Russia, the WTO agreed with Russia that the situation made its invocation of Article XXI proper.[11] Given that there is no similar situation between America and Russia or China, any action now against all Chinese or Russian companies would highly likely be judged illegal by the WTO.  At best, the phrase “situation…of heightened tension” could offer some support for such action. The General Agreement on Trade in Services Although the original GATT applies only to goods, the follow-up General Agreement on Trade in Services (GATS) extends its basic policies and exceptions (including the security exception) to services.[12] It includes computer-related services such as “consultancy services related to the installation of computer hardware, software implementation services, data processing services,” and database services.[13]  While there is contention over what counts as a good versus a service,[14] the U.S. has included essentially no reservations for computer-related services.[15]  This makes the analysis for whether the government could restrict something’s importation and use largely the same regardless of which treaty applies. The Agreement on Government Procurement Still, the discussion does not end there.  The GATT and GATS do not cover government procurement, but another treaty does.  The Agreement on Government Procurement (GPA) has been signed by 48 WTO member states and applies the GATT’s non-discrimination principles to a list of government entities specified by each nation with certain exceptions.[16]  For example, the Department of Defense is included in the GPA, but it has a long list of exceptions for military equipment.[17] This means that in terms of procurement, the government can legally discriminate against foreign countries’ goods and services in many situations.  If it desired, the government could put a total procurement ban on Russian goods and services, since Russia is not a signatory to the GPA and therefore has no right under international law for its goods or services to be considered for procurement. In conclusion, the GATT, GATS, and GPA have essentially divided SCRM into government and non-government spheres.  The government can discriminate on the basis of national origin for many things it buys.  At the same time, it cannot enact discrimination that would affect the private sector.  This bifurcated situation has existed for many years and seems likely to continue barring a dramatic event.

[1] Territory of Hawaii v. Ho, 41 Haw. 565 (1957). [2] Id. at 570-71; see also Principles of the trading system, World Trade Organization, https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm (last visited Oct. 6, 2019). [3] Members and Observers, World Trade Organization, https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm (last visited Oct. 6, 2019). [4] Supply Chain Risk Management (SCRM) – Overview, Defense Acquisition U.,  https://www.dau.edu/acquipedia/pages/articledetails.aspx#!240 (last visited Oct. 6, 2019). [5] Dustin Volz, Trump signs into law U.S. government ban on Kaspersky Lab software, Reuters (Dec. 12, 2017), https://www.reuters.com/article/us-usa-cyber-kaspersky/trump-signs-into-law-u-s-government-ban-on-kaspersky-lab-software-idUSKBN1E62V4. [6] Carrie Mihalcik, Huawei ban kicks in next week for US government agencies, CNET (Aug. 7, 2019), https://www.cnet.com/news/huawei-ban-kicks-in-next-week-for-us-government-agencies/; see also Li Tao, Caught in trade war, Huawei may seize 90-day US trade reprieve to plan next moves https://www.scmp.com/tech/big-tech/article/3023503/caught-middle-trade-war-huawei-may-seize-90-day-us-trade-reprieve. [7] Id. [8] General Agreement on Tariffs and Trade art. XX1, Oct. 30, 1947, Stat. (5) and (6), 55 U.N.T.S. 187. [9] Panel Report, Russia — Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019). [10] Id. at ¶ 7.111. [11] Id. at ¶ 7.123. [12] The General Agreement on Trade in Services (GATS): objectives, coverage and disciplines, World Trade Organization, https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm (last visited Oct. 7, 2019). [13] Computer and related services, World Trade Organization, https://www.wto.org/english/tratop_e/serv_e/computer_e/computer_e.htm (last visited Oct. 7, 2019). [14] Sam Fleuter, Comment, The Role of Digital Products Under the WTO: A New Framework for GATT and GATS Classification, 17 Chi. J. of Int’l L.153 (2016). [15] GATS Schedule – United States 1.B Computer and Related Services Commitment, World Trade Organization, http://i-tip.wto.org/services/DetailView.aspx/?cid=C840&sector_path=0000100014&rta_path=&IsRta=0&IsGats=1&rgm_id= (last visited Oct. 7, 2019). [16] Parties, observers and accessions, World Trade organization, https://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm (last visited Oct. 7, 2019); see also Agreement on Government Procurement, World Trade Organization,  https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm (last visited Oct. 7, 2019). [17] Agreement on Government Procurement, United States Annex 1, Apr. 15, 1994, 1915 U.N.T.S. 103. The views expressed in this post represent the views of the post’s author only.