9:56 AM Mar 7, 1996

US STRAINING THE TRADING SYSTEM

Geneva 6 Mar (Chakravarthi Raghavan) -- As US President, Bill Clinton, is readying himself to sign into law the bill to tighten the embargo against Cuba, and punish third countries who engage in trade and economic relations with Cuba, trade officials are bracing themselves for a legal challenge at the WTO that will further strain the system.

While trade officials do not want to comment until they see the fine print of the "Cuban Liberty and Solidarity Act", the legislation sponsored and pushed by Sen. Jesse Helms, analysts say there is little doubt the US law would grossly violate the WTO agreement and its rules in so far as it relates to trade and economic relations of third countries with Cuba.

While the United States may try to invoke Art. XXI of the GATT and cite its 'essential security interests' as justifying its actions against Cuba, this article could at best provide a cover to the US to maintain a trade embargo against Cuba -- though it would still be arguable even on this, since it would strain credibility to argue that the US action against Cuba is one "taken in time of war or other emergency in international relations".

But in any event, it cannot be avail when the US takes action against third parties -- enterprises of other countries doing business with Cuba -- trade diplomats agree.

The EU members are due to meet in Brussels Thursday to review the situation and decide on a course of action.

Canada has also sharply come out against the US and warned it would take recourse to the WTO.

But bringing a dispute to the WTO could be tricky. Generally, in the past, the GATT and its panels, have been invoked only on the basis of any trade measure or action, and not merely potential actions. There has been a reluctance to deal with issues when the law of a country is merely an enabling one, enabling the executive to take a particular course of action contrary to the GATT obligations. But where the law is mandatory, the potential trade damage could provoke a complaint.

The mandatory nature of the new law, unlike other US laws where the executive has some discretion on putting into place some measure, means that the US action could be challenged, whether or not any action is taken, some trade diplomats say.

In strict trade exchanges, the Canada-Cuba trade is put at an annual $500 million and more, and that between Caribbean countries and Cuba at about $30 million.

Even more, such a wide range of major enterprises of Europe and Canada are involved in investments and trade with Cuba, directly or through their subsidiaries, and the principals and officers of these enterprises, could find themselves hauled up in US domestic courts, that a challenge from Europe, Canada etc seems unavoidable.

Among foreign firms said to be affected are such high-profile TNCs like French Pernod Ricard (which distributes Havana Club rum), the tobacco TNC, BAT industries (whose Brazilian subsidiary is immediately involved, but which has many subsidiaries and partnerships around the world which would be affected), the Anglo-Dutch Unilever, Australian mining companies and British agro-chemicals group, Zeneca.

The legislation enabling Cuban-Americans and other US nationals to file cases for damages (for their property taken over in Cuba after the Castro revolution) in US courts against many of these foreign enterprises, and its provision barring entry into the US of officers or shareholders having a controlling interest in such companies would violate the basic provisions of the GATT, GATS and rules of other WTO agreements.

Under the Reagan administration, (and the old GATT which had no binding and enforceable dispute settlement mechanism, unlike the WTO now), when restrictions were applied against sugar imports from the Sandinista Nicaragua by taking away the sugar import quotas into the US market and giving it to others, the US lost the case when it sought to argue that its own agriculture waiver covered its action.

The Reagan administration then cooly told the GATT that it could not implement the ruling and Nicaragua could take trade retaliation - an option that even the powerful partners have to be chary about.

The Reagan administration then imposed new sanctions, but this time invoking its essential security interests under Art. XXI. Nicaragua could not do much, though it sought a panel and asked it to recommend to the CPs to take their own measures to help or compensate Nicaragua.

Art. XXI was also invoked by European Communities to impose trade sanctions against Argentina during the Falkland/Malvians war with Britain -- which provoked a move at that time for a clearer definition of the Art XXI 'security exception'. But this was not proceeded with.

Most countries, industrial and developing, not wanting to have their judgements of security interests to be subject to outside scrutiny.

But whatever the merits of applicability of Art XXI to US trade embargo against Cuba, under the WTO rules it would not be possible to argue that US "security" requires violation of trade rights of third countries through extra-territorial application of US laws.

But in terms of the system, even if a case is brought and the US loses, would it strengthen the system or prove an illusory victory?

At the end of the day, (as US Trade Representative Mickey Kantor has been repeatedly asserting, and had stipulated in letters to Senator Helms even before ratifying the WTO), unless the US and its Congress accept the ruling and change the law, complainants could only have recourse to retaliation. That stage too would take two years after a panel ruling, which too could take a year or more from complaint.

Perhaps the US is hoping that it is a long enough time, and things may change in Havana and a new regime come to enable the new law and actions to abate.

But whether the US action is challenged and ruled illegal or not, and whether others involved take some 'retaliatory' actions to assert their own rights, it will strain the credibility of the WTO system visavis the majors. If they do not obey the rules, it will lose all respect.

But these considerations do not weigh in the US in an election year, more so when the US, as the sole Super-power, believes it does not have to observe any international rules.