Oil embargo, Iran, Security Exception and the WTO - Some reflections

I had blogged about the Security Exception under Article XXI GATT here. An anonymous blogger commenting yesterday on this blog also brought my attention to another article by William J Moon on the subject. To quote from this piece:

"This understanding of the essential security provision is grounded in the widely-shared concern over the abuse of GATT Article XXI. The Czechoslovakian delegation to a GATT Council Meeting, for example, warned that any state wanting to justify illegal trade measures could do so if Article XXI was to be construed broadly.Perhaps due to such anxiety, states have collectively refrained from invoking Article XXI as a defense to breaching trade agreements.79 The best evidence of this reservation is the fact that there is still no GATT or WTO case law construing the meaning of Article XXI.80 There is not even a consensus as to whether the invocation of Article XXI is reviewable by the WTO Dispute Settlement Body. Such reservation is notable since states have repeatedly invoked Article XX’s general exception clause in several important cases, including U.S.-Shrimp, Korea-Beef, and EC-Asbestos."

A sensitive question has arisen now about the WTO law consistency of the U.S.embargo on Iranian oil under the National Defense Authorization Act. Is the measure justifies under Article XXI of the GATT?


The U.S. has enacted a National Defense Authorization Act for Fiscal Year 2012 which deals, inter alia, with sanctions on Iran. Section 1245 (4) which deals with "Imposition of Sanctions with respect of the Financial Sector of Iran"  of the enactment states:

"... (4) APPLICABILITY OF SANCTIONS WITH RESPECT TO PETROLEUM TRANSACTIONS.— 

(A) REPORT REQUIRED.—Not later than 60 days after the date of the enactment of this Act, and every 60 days thereafter, the Administrator of the Energy Information Administration, in consultation with the Secretary of the Treasury, the Secretary of State, and the Director of 

National Intelligence, shall submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60 day period preceding the submission of the report. 

(B) DETERMINATION REQUIRED.—Not later than 90 days after the date of the enactment of this Act, and every 180 days thereafter, the President shall make a determination, based on the reports required by subparagraph (A), of whether the price and supply of petroleum and petroleum products produced in countries other than Iran is sufficient to permit purchasers of petroleum and petroleum products from Iran to reduce significantly in volume their purchases 

from Iran. 

(C) APPLICATION OF SANCTIONS.—Except as provided in subparagraph (D), sanctions imposed under paragraph (1)(A) shall apply with respect to a financial transaction conducted or facilitated by a foreign financial institution on or after the date that is 180 days after the date of the enactment of this Act for the purchase of petroleum or petroleum products from Iran if the President determines pursuant to subparagraph (B) that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.

          ..."

What has raised concern is the "extra-territoriality" of the measure in terms of impacting transactions of other countries with Iran. Hence, not only are entities in the U.S. impacted by the measure but other countries which purchase oil from Iran are also under the scanner and penalties can be imposed on them as per these provisions. This "secondary sanction" is what is being questioned. Ofcourse, there is a provision of waivers to exempt countries from the applicability of the provision that has already been used by the U.S. but this does not take away the fact of the existence of the measure as well as its international law compatibility. Though it is highly unlikely that the U.S. will subject other countries to sanctions for violations of transactions with Iran, the existence of the legislation ipso facto raises issues of international trade law violation. India and China have objected to the measure on the ground that it is a unilateral measure and imposition of U.S. law on third countries. The validity of the measure has been discussed here and here.

Some questions as usual:

1. Which WTO provisions, if any, are violated? Does the provision relating to imposition of sanctions with respect to the financial sector of Iran violate the provisions of the GATT? Does it violate the national treatment principle under GATT and TBT Agreements as the imposition of sanctions on Iranian oil on third party transactions is discriminatory and accords less favourable treatment to Iranian Oil? Does the waiver system violate the Most favoured nation treatment of Article II of GATT by according favour to a set of countries as compared to others? Is it a violation of Article 2.2 of the TBT Agreement as a regulation creating unnecessary obstacles to international trade? Is it more trade restrictive than necessary since it applies to third party countries? Is the "legitimate objective" of national security requirements applicable to transactions related to the country or can it be extended to third party transactions too? 

2. What provision of the WTO Agreements is violated by the "extra-territorial" applicability of laws? Can countries enact laws that impact trade between other independent sovereign countries?

3. Is the Security Exception of Article XXI GATT defence applicable in this case? Does this exception have extra-territorial impact in terms of covering transactions of third country parties?

4. In a more general context, what are the dangers of extraterritorial effect of national laws in terms of international trade?


Has the time come for a dispute covering the contours of the Security Exception under Article XXI GATT to reach the footsteps of the DSM of the WTO?