Leibowitz: The West Strips Russia of ‘Most Favored Nation’ Status, Enters Uncharted Waters

On Friday, President Biden announced that the United States would end “Most Favored Nation” status, termed “PNTR” in the United States, for Russia, a member of the World Trade Organization since 2012. Permanent normal trade relations means that a country will be treated to the same tariffs as all other countries (other than those with special trading relations, like free trade agreements). This is the first time a WTO member will have been stripped of “most favored nation” status since the 1995 birth of the World Trade Organization.

In addition, President Biden issued an Executive Order, which does not require congressional approval, prohibiting importation into the United States of certain products of the Russian Federation and authorizing the Departments of the Treasury and Commerce to embargo imports of other products from Russia.

These are big and unprecedented steps justified by a big and unprecedented situation.

I received questions about the legalities of all this, and their significance for U.S. and international law. Here goes.

First, Friday’s steps are the latest in a parade of sanctions against Russia since the Feb. 24 invasion of Ukraine by Russian troops. Beginning with sanctions on Vladimir Putin and those close to him (such as Russian oligarchs), the U.S. and its allies have added restrictions on Russia’s access to the SWIFT system to expedite financial transactions, frozen assets of Putin and some Russian oligarchs, seized superyachts, etc. Then, on March 8, President Biden announced that oil and gas imports from Russia would no longer be allowed by the U.S. Three days later, the U.S. added significantly to the import restrictions for Russia.

Second, NATO allies and other countries, including Japan, Australia and others, have also announced similar sanctions intended to isolate Russia and especially Russia’s elites from “polite” society. One superyacht, detained by Italy, is reported to be owned indirectly by Putin himself, although there is no evidence he ever boarded the Scheherazade since its completion in 2020. The UK has announced that it is phasing out imports of oil and gas from Russia. Like the U.S., however, the UK is not critically dependent on energy from Russia. The EU has not blocked imports of oil and gas from Russia, in large party because the EU is largely dependent on Russia for these products.

The announcements on Friday from the White House expanded the list of banned items. A few details: (1) the oil and gas embargo was not the subject of a separate Executive Order; (2) Friday’s order listed several products that are banned, effective immediately—fish, seafood, and preparations thereof; alcoholic beverages; and non-industrial diamonds (industrial diamonds are not embargoed); (3) Treasury may prohibit importation of any other products from Russia (the Office of Foreign Assets Control, or OFAC, is an arm of the Treasury Department).

The authorization of OFAC to embargo any other Russian products would appear to give that agency the power to implement rules on the oil and gas embargo. At a briefing on March 8, a “senior administration official” announced that the oil and gas embargo would apply to any new transactions effective immediately. Existing import contracts can continue for 45 days (until April 22).

The other major announcement was the stripping from Russia of “most favored nation” or “PNTR” status. Because PNTR (the “P” stands for “permanent”) was accorded to Russia by statute in 2012, legislation is required to strip Russia of that status. On Friday, Speaker Nancy Pelosi indicated that legislation drafted by the two leaders of the House Ways and Means Trade Subcommittee, Earl Blumenauer (D-Oregon) and Kevin Brady (R-Texas), would be the vehicle. Details are not yet available, but action is expected to be quick. Legislation could be on the president’s desk by the end of the week.

What does withdrawal of PNTR mean? It means basically that the Customs duties on imports would be different (almost always higher—much higher). The U.S. tariff schedules (HTSUS) list applicable duty rates for PNTR countries (Column 1) and all other countries (Column 2). Just to give an example, steel products classified in Chapter 72 of the HTSUS are essentially duty-free, not considering Section 232 tariffs or antidumping and countervailing duties or other trade remedies. Most steel products under Column 2 carry a 20% duty rate. The result: Imports from Russia could be subject not only to Section 232 duties (25%) but also to an additional 20% duty under the HTSUS. For “articles of steel” (such as steel pipe and tube), the Column 2 duty rate can be as high as 35%.

Before the action against Russia, only North Korea was subject to Column 2 duties. Russia would be the first country ever to lose PNTR status after having gained it. There being effectively no precedent for this, there are a lot of questions.

Without giving legal advice, any business importing from Russia could be expected to ask whether completing pending transactions for Russian goods would be prudent.

The WTO agreements in place since 1995 require all WTO members to accord all other WTO members “most favored nation” treatment from the moment of accession. Russia would mark the first time that countries have withdrawn MFN treatment. There is no explicit provision in the WTO agreements for suspension or withdrawal of MFN treatment. Russia would therefore have an argument that its suspension or expulsion would violate the agreements. However, Article XXI of the General Agreement on Tariffs and Trade does not prevent countries from taking any action which they consider necessary for the protection of their essential security interests in times of “war or other emergency in international relations.” This language should cover not only the withdrawal of MFN status for Russia but also any embargoes. Of course, the WTO dispute settlement system has been rendered ineffective by the collapse of the WTO Appellate Body, so any dispute would lead nowhere.

Russian ally Belarus is in a different posture, because Belarus has never joined the WTO. Its accession process began in 1993 and nothing much has happened recently (documents are not publicly available). While the United States and other countries accord Belarus MFN status, it could be withdrawn at any time. Canada and the EU have already taken action against Belarusian imports in the last few days, including iron and steel products. It is widely expected that the U.S. will follow suit.

Once the PNTR legislation has been signed into law, imports from Russia would be (1) embargoed (prevented from entry) if those products were listed in Friday’s Executive Order (fish and seafood, alcoholic beverages, non-industrial diamonds); (2) embargoed if added by OFAC at a later date; and (3) subject to higher duties based on the withdrawal of MFN status.

What else could happen? Plenty. The world trading system is still going through the most turbulent time since the GATT was established in 1948. The international consensus that expanding trade based on established rules was the best way to ensure peace and friendly competition has suffered a serious, possibly lethal blow. What will (or should) replace the expiring global trading system has barely crossed peoples’ minds.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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