Global Trade Wars and Sanctions: The Legal Challenges of Multilateral Trade Agreements in a Fragmented World

Author: Humaira Imran, Ishan Law Institute

To the point

The increasing use of trade wars and economic sanctions has led to significant legal and economic challenges, particularly as global trade becomes more fragmented. As nations resort to unilateral measures, such as tariffs or embargoes, in pursuit of political and economic goals, the legal foundations of international trade agreements are being strained. Unilateral actions often conflict with the rules-based system of the World Trade Organization (WTO), which aims to facilitate free and fair trade among its members. Another legal issue arises from the use of economic sanctions as a foreign policy tool. Although often framed as measures to protect national security or influence foreign governments, sanctions can have severe unintended consequences, particularly on civilian populations. The legal ramifications of such measures are increasingly being scrutinized, especially when they impact humanitarian concerns or run counter to principles of free trade. Additionally, secondary sanctions, which penalize third-party countries or corporations doing business with sanctioned nations, add layers of complexity for companies navigating conflicting legal obligations from different jurisdictions.
As trade disputes move beyond tariffs and traditional goods, the digital economy and intellectual property (IP) are emerging as critical areas of contention. Trade wars are now increasingly focused on issues like data flows, cybersecurity, and IP protection, particularly between the U.S. and China. This shift has revealed the inadequacies of current international legal frameworks to address the complexities of cross-border data, technology transfer, and digital trade. New legal challenges are emerging around the governance of big data, AI, and digital platforms, as countries increasingly impose regulations to protect their economic and security interests.
Regionalism is also playing a significant role in the changing landscape of global trade law. While regional trade agreements (RTAs) provide nations with more control over their trade policies, they also create new legal obstacles, including rules of origin and market access barriers. These agreements can complicate the legal environment for multinational companies and disrupt global supply chains, leading to higher costs and legal risks. As countries increasingly turn to RTAs in response to the perceived inefficiencies of multilateral agreements, the risk of legal fragmentation grows, making it harder for businesses to comply with multiple, sometimes conflicting, regulatory systems.
Finally, the rise of Investor-State Dispute Settlement (ISDS) mechanisms within trade agreements allows foreign companies to sue governments over policies that they claim harm their investments. While these mechanisms are intended to protect investors, they have sparked significant legal debate, with critics arguing that they undermine national sovereignty and favor multinational corporations at the expense of public policy. As investment arbitration becomes more widespread, questions arise about the balance of power between corporate interests and the right of governments to enact laws that protect their citizens and promote the public good.

Use of legal jargon

The use of trade wars and economic sanctions has sparked significant legal challenges within the framework of international trade law, particularly in light of the World Trade Organization (WTO)’s diminishing efficacy. Sanctions, while justified under principles of national security or foreign policy, often conflict with the WTO’s foundational tenets of most-favored-nation (MFN) treatment and national treatment. Unilateral measures, such as tariffs or embargoes, imposed without multilateral consensus, may violate GATT Articles that prohibit arbitrary restrictions on trade. As disputes intensify, the WTO dispute settlement mechanism has been hampered by the Appellate Body’s paralysis, prompting countries to increasingly adopt regional trade agreements (RTAs) like RCEP and CPTPP. These agreements, while offering more flexibility, often operate under divergent rules of origin and trade facilitation measures, which can create legal fragmentation. The result is a patchwork of legal obligations that complicate cross-border trade for multinational corporations, requiring compliance with multiple regulatory frameworks that may not align with WTO norms.
Moreover, secondary sanctions, which impose penalties on third-party states or entities engaging in trade with sanctioned countries, create a legal quagmire. These extraterritorial measures often contravene principles of sovereignty and jurisdictional limitations under international law, particularly in relation to customary international law and non-intervention. Legal scholars have raised concerns about the conflict of laws created when companies are forced to choose between compliance with conflicting national regulations, undermining the principle of good faith in international relations.
In the digital age, the legal governance of data flows, cybersecurity, and intellectual property (IP) in trade wars has further exacerbated these challenges. Disputes over data localization and cross-border data transfers highlight the tension between privacy laws and trade liberalization commitments. For example, the General Data Protection Regulation (GDPR) in the European Union imposes stringent requirements on data processing, while countries like the U.S. and China assert greater control over digital infrastructure. These disputes raise questions about the compatibility of national security concerns with global trade principles, particularly as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) fails to address modern issues like patentability of software and AI-related inventions. The rise of technology-driven protectionism complicates the legal certainty of international trade, as states seek to balance trade liberalization with digital sovereignty.
The proliferation of Investor-State Dispute Settlement (ISDS) provisions in trade agreements adds another layer of complexity. Under ISDS, foreign investors can bring claims against host states for alleged violations of investment treaties, such as the Fair and Equitable Treatment (FET) standard. While these mechanisms are designed to provide a neutral forum for resolving disputes, critics argue that they undermine state sovereignty by enabling corporations to challenge domestic regulatory policies, including those related to environmental protections and public health. This has led to calls for reforming ISDS to address concerns about its lack of transparency, accountability, and the potential for abuse by powerful corporate actors. The balance of power between multinational corporations and sovereign states remains a contentious issue, especially as investment arbitration increasingly intersects with public international law in shaping the future of global economic governance.


The Proof
The growing use of trade wars and economic sanctions has created significant legal challenges within international trade law. Unilateral tariffs, such as those imposed by the U.S. on China during their trade war, often conflict with WTO rules like most-favored-nation treatment, as these actions bypass multilateral agreements. The WTO’s dispute resolution system has been weakened, prompting countries to increasingly turn to regional trade agreements (RTAs) like RCEP and CPTPP, which introduce legal fragmentation and complicate multinational compliance due to differing rules of origin and trade facilitation measures. Secondary sanctions, such as those imposed by the U.S. on countries engaging with sanctioned states like Iran, raise legal concerns over sovereignty and extraterritorial jurisdiction, challenging global businesses’ ability to navigate conflicting legal obligations.
The rise of digital trade and data protection laws has created additional legal tensions. For instance, the GDPR in the EU conflicts with global data flow commitments, while the U.S.-China dispute over 5G technology and intellectual property (IP) illustrates the difficulty in balancing national security with trade liberalization. Finally, the use of Investor-State Dispute Settlement (ISDS) in trade agreements has sparked concerns over state sovereignty. Cases like Philip Morris v. Uruguay demonstrate how ISDS can challenge domestic regulations, undermining a state’s right to regulatein the public interest. Overall, the intersection of trade wars, sanctions, regionalism, and digital economy issues highlights the need for reform in international trade law to maintain a consistent, rules-based global system.

Abstract

This paper examines the legal challenges posed by the increasing use of trade wars and economic sanctions in the context of a fragmented global trade system. As countries increasingly resort to unilateral measures such as tariffs and embargoes, these actions often conflict with core principles of international trade law, particularly those enshrined in the World Trade Organization (WTO). The weakening of the WTO’s dispute resolution system has led to a rise in regional trade agreements (RTAs), further fragmenting global trade and creating compliance complexities for multinational corporations. The imposition of secondary sanctions, especially by the United States, raises issues of sovereignty and jurisdictional overreach, complicating the legal environment for businesses operating across jurisdictions. The paper also explores the growing legal tensions in the digital economy, focusing on the conflict between data protection laws (e.g., GDPR) and global trade principles, as well as intellectual property disputes such as those between the U.S. and China. Finally, the rise of Investor-State Dispute Settlement (ISDS) provisions in trade agreements challenges state sovereignty and the right to regulate, as seen in the Philip Morris v. Uruguay case. The paper argues for the need to reform international trade law to address the evolving challenges posed by these complex, intersecting legal issues, ensuring a balance between national sovereignty and a consistent, rules-based global trading system.

Case laws

1. US – Shrimp/Turtle (1998)
Issue: This case involved the U.S.’s import restrictions on shrimp to protect sea turtles, challenging whether such unilateral trade measures violated WTO rules.
Significance: The case underscored the tension between trade liberalization and environmental protectionmeasures. It highlighted the legal challenges around unilateral sanctions and the use of trade restrictions to achieve non-trade objectives.


2. Philip Morris v. Uruguay (ICSID, 2016)
Issue: Philip Morris challenged Uruguay’s strict tobacco packaging regulations under a bilateral investment treaty, arguing that they violated the Fair and Equitable Treatment (FET) standard.
Significance: This case is critical for examining Investor-State Dispute Settlement (ISDS) mechanisms and their impact on sovereignty, especially when corporate interests challenge public health regulations.


3. China – Rare Earths (2014)
Issue: The EU and U.S. challenged China’s export restrictions on rare earth minerals, arguing that they violated WTO rules.
Significance: This case addressed export restrictions and resource nationalism, offering insight into how WTO law handles measures that disrupt global supply chains for strategically important materials.


4. EC – Hormones Case (EC v. U.S., 1998)
Issue: The European Union banned hormone-treated beef, and the U.S. challenged the ban under WTO rules.
Significance: This case highlighted the balancing act between public health regulations and trade law, and it remains one of the most prominent cases involving the sanitary and phytosanitary measures exception under GATT Article XX.


5. US – Countervailing Measures (2002)
Issue: The case concerned U.S. countervailing duties on imported goods from countries accused of subsidizingindustries.
Significance: It focused on anti-subsidy measures in the context of trade wars, illustrating how countries may legally defend their domestic industries against foreign subsidies that distort trade.

Conclusion

The legal landscape surrounding trade wars, sanctions, and investor-state disputes reveals a growing tension between national sovereignty, public policy objectives, and the principles of free trade that underpin international economic law. The cases discussed, such as US – Shrimp/Turtle, Philip Morris v. Uruguay, and China – Rare Earths, highlight the complexity of reconciling domestic regulatory measures—be it for environmental protection, public health, or national security—with the demands of a rules-based global trading system. The increasing reliance on unilateral trade measures and regional trade agreements signals a shift away from multilateralism, creating a fragmented legal environment that complicates compliance for businesses and policymakers alike.
Simultaneously, the expansion of Investor-State Dispute Settlement (ISDS) mechanisms has raised concerns about the balance of power between corporate interests and the right of governments to regulate in the public interest. As nations pursue protectionist policies under the guise of safeguarding national interests, the fundamental challenge lies in maintaining a balance between trade liberalization and state sovereignty.
The growing influence of digital economy issues, such as data localization and intellectual property, alongside traditional trade concerns, further complicates the legal challenges in the modern global economy. For international trade law to remain effective, there is a pressing need for reforms that address these emerging issues while preserving the core tenets of non-discrimination, transparency, and fair competition. Only through careful balancing of public interestswith global trade obligations can the evolving legal framework of international trade adapt to the complexities of a rapidly changing world.


FAQS


1. What is a trade war?

Answer: A trade war occurs when countries impose tariffs or other trade restrictions on each other in retaliation for perceived unfair trade practices.


2. Can a country impose sanctions legally?                                                                                Answer: Yes, countries can impose sanctions, especially for national security or foreign policy reasons, but unilateral sanctions must comply with international law to avoid legal challenges.

3. What is ISDS?                                                    Answer: Investor-State Dispute Settlement (ISDS) allows foreign investors to sue governments if they believe their investments have been harmed by government policies or actions.

4. How do tariffs affect trade?                          

Answer: Tariffs are taxes on imports designed to make foreign goods more expensive, which can protect domestic industries but also raise prices for consumers.


5. What role does intellectual property play in trade disputes?                                                            Answer: Intellectual property (IP) issues often drive trade disputes, particularly regarding allegations of IP theft, forced technology transfer, or patent violations, leading to trade barriers or sanctions.

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