Changing trade order: Donald Trump’s WTO moves worse than its war

By stalling the dispute resolution mechanism at the WTO, the US is Pushing the multilateral trade regulator towards A slow Death

Changing trade order: Donald Trump’s WTO moves worse than its war
To restrict trade in steel and aluminium with trading partners, which are long-standing allies of the US in defence and military pacts, cannot be reasonably justified on grounds of national security. (Reuters)

Since its establishment in 1995, the World Trade Organization (WTO) has been the focal point of a stable rules-based system guiding the conduct of world trade in goods and services. True, progress in the negotiations for further liberalisation of trade has been mired in the lack of consensus on the way forward. But, it is widely acknowledged that the multilateral trading system embodied in the WTO Agreement has served the international community well. The WTO has therefore enjoyed the strong support of all its members.

But not anymore. Since about the beginning of 2018 the United States has been decrying the WTO. In his latest onslaught in an August 30 interview, US president Donald Trump denounced the institution as the “single-worst trade deal ever made”. He went on to warn that “if they don’t shape up, I would withdraw from the WTO”. On earlier occasions, he had deprecated the institution as a ‘disaster’ or a ‘catastrophe’. The irony is that the US is its main architect and builder. Not only on the edifice, but in the design of every part of it, the US made a substantial contribution. The name of the institution was suggested by the well-known US legislator, Senator Daniel Patrick Moynihan.

The object of Trump’s ire is the imbalance in bilateral trade between the US and a number of its trading partner—China, the EU, Canada, Mexico, South Korea and India—to name a few. In an attempt to redress this imbalance, Trump has cracked hard with aggressive trade measures. Some of the US measures, such as the safeguard tariffs on solar cells and washing machines, are prima facie within the four corners of the WTO framework. But others go well beyond. To restrict trade in steel and aluminium with trading partners, which are long-standing allies of the US in defence and military pacts, cannot be reasonably justified on grounds of national security. The same can be said of the threat to impose tariffs on automobiles and auto parts on the same grounds. Fearful of being found to be in breach of the WTO obligations in disputes, the US has taken the stand that, under the security exceptions in GATT 1994, a member has the right to take whatever action it considers necessary to protect its essential security interests, and such action cannot be subject to multilateral oversight.

In taking unilateral trade action against China under Section 301 of the US Trade Act of 1974, the US gives up even the pretence of acting within the WTO framework. The action is a retaliation against the Chinese practice of asking US investors in China to transfer technology to local enterprises. To be consistent with the WTO Agreement, the US should have first raised a dispute against China and, on getting a favourable verdict, it should have obtained an authorisation for retaliation. In avoiding these intermediate steps, the US has shown disdain for the WTO Agreement. These actions have imperilled the WTO more than Trump’s harsh condemnation of the institution.

Predictably, almost all the major trading partners of the US—most notably, the EU and China—have responded with retaliatory measures. Even without these retaliatory measures, domestic opposition has been growing against the tariffs. Consumers are unhappy because the price of imported goods has gone up. Manufacturers are upset because they have lost access to cheaper inputs, supply chains have been disrupted and their competitiveness lowered. The retaliatory countermeasures, which are designed to cause maximum economic and political pain, have generated additional pressures to discontinue the measures. It is not unlikely that the US will begin to unwind the offending measures eventually. It is a good sign that it is already engaged in trade talks with the EU and talks are ongoing with China as well. However, with the current presidency, the future course of action will always remain unpredictable.

The trade war unleashed by the US signals that international trade relations are not in good shape, but there is hope that the countermeasures and internal pressures from consumers will help the parties to work out solutions. Unfortunately, there are also another development in parallel, which might prove to be a greater threat to the multilateral trading system. There was news from Geneva last week was that the US blocked the re-appointment of a retiring member of the Appellate Body of the WTO once again. For more than two years, the US has been stalling these appointments. As the members appointed earlier have retired on the expiry of their fixed terms, their total number has dwindled. At the end of September 2018, there will be only three members left, just enough to fulfil the quorum requirements. If the present stand-off continues and no appointments are made in the coming months the Appellate Body will remain operational only until December 10, 2019, when two more members are due to retire. And then it will cease to function.

In GATT 1947, the precursor of the World Trade Organization, there was no provision of appeal from panel findings. In fact, the GATT procedures for the settlement of disputes had a substantial negotiating content and only the rudiments of a judicial approach. Decisions could be taken only by consensus, whether to establish a panel, adopt a panel report or to authorise retaliatory measures to enforce a right. The result was that the process could be blocked at any stage, although diplomatic pressures generated in the process of consideration of the issues in a dispute did play a role and limited progress was made sometimes. The idea behind the Dispute Settlement Understanding of the WTO Agreement was to infuse a judicial approach into the process and make it more predictable. With this end in view, time limits for each stage and automatic decision-making were introduced in the procedures, ruling out the possibility of obstruction of the process. As the final element in the design to judicialise the dispute settlement process, a provision was made for to set up the Appellate Body to hear appeals from panel recommendations.

What will be the effect on the dispute-settlement process if the Appellate Body is non-functional? The rules provide that a panel report shall be adopted by the Dispute Settlement Body (DSB) unless a party to the dispute notifies its decision to appeal. With the Appellate Body non-functional, the notification of the decision to appeal would mean that the process of dispute settlement will come to a standstill. If this happens, all the gains of the judicialisation of dispute settlement would be lost, and the WTO will revert to the GATT-era of resolving disputes essentially by means of negotiations. Since there has been a lack of progress in achieving liberalisation through negotiations, there is no reason to expect anything different in resolving disputes through negotiations. In the absence of a credible dispute settlement machinery, the rule of law will dissipate and the WTO will die a slow death. Such an eventuality should cause greater disquiet among the WTO members than the wave of trade actions initiated by the US in 2018.

The Author is Professor, ICRIER, and a former deputy director general of the WTO

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