Trade wars: Does WTO require a redesign?

Published: April 9, 2018 1:30:09 AM

The recent spat and open trade war between the US and China, with several other heavyweights stepping into the fray, has indeed been ‘interesting’.

Trade wars, WTO, US, chinaThe recent spat and open trade war between the US and China, with several other heavyweights stepping into the fray, has indeed been ‘interesting’.

The recent spat and open trade war between the US and China, with several other heavyweights stepping into the fray, has indeed been ‘interesting’. Rather than judging whether either or both players are right or wrong, or assessing whether the tariff increases are in breach of international commitments at the World Trade Organisation (WTO), this trade war raises a serious question about the relevance of the WTO. This is not a new topic and much has been written on various aspects of this issue. The one specific aspect of the topic I focus on here is the inherent design flaw in enforcing global trade rules within the WTO. As trade law experts may be aware, the ability of the WTO system to enforce trade rules is a big deal—the WTO prides itself on this. Many believe this to be the most significant factor that makes the WTO more successful than any other existing or historic international trade arrangement. The Dispute Settlement Body (DSB) is where one WTO member can initiate a case against another if the latter breaches any obligation under the various WTO agreements, say, by imposing import duties beyond what is permissible as per that member’s WTO commitments. Where the parties cannot resolve the dispute amicably, the complaining member can request for the establishment of a panel to give a ruling on the issue. While there are a number of fixed deadlines built into the system, there are also a number of ‘ifs’ and ‘buts’ and, on average, published evidence suggests that the time it takes for a panel to circulate its rule findings is about 21 months. An appeal before the appellate body forms the panel’s findings, and adds at least another three months.

That’s an average of two years for the litigation phase to complete. The findings of the panel or the appellate body, as the case may be, are adopted in a sitting of the DSB. Once adopted, the losing member is required to bring its measure into conformity within a ‘reasonable period of time’. Without getting into too many details or the procedural aspects, it suffices to say that while this period varies from case-to-case, on an average it lasts about 10 months. The important thing to bear in mind is that, in the hypothetical being discussed, even if the increased import tariffs are held to be WTO-inconsistent, the offending member does not have any obligation to roll back on the increased tariffs during this two-year and 10-month period. The need to comply with the ruling only arises after the conclusion of this ‘reasonable period of time’. Moving one step further, let’s say that the import tariffs are reduced after this two-year and 10-month period, but not to the original prevailing rates. There is some controversy surrounding the exact sequence and procedure to be followed at this point. Taking the more popular practice and approach, the complaining member can now ask what is called the ‘compliance panel’ to decide whether the offending member has complied with the earlier findings. This is also subject to an appeal before the appellate body. On an average, this compliance process takes about 11 months. Assuming the complaining member is successful in this compliance phase as well, the offending member may offer compensation, or the complaining member may request authorisation to retaliate with its own measures, by selectively suspending their obligations under the WTO towards the offending member. The compensation need not necessarily be monetary in nature (for example, the offending member can compensate by a tariff reduction in the future) and must be mutually agreed upon. The mutual consent requirement makes it practically impossible for this compensation option to ever work.

As for the retaliation option, as one would imagine, there are a number of rules and a specific procedure to be followed. There are several issues with this option, which cannot be pursued in this small piece. Irrespective, the important point to appreciate is that the successful complaining member can only take such retaliatory measures prospectively—having effect only from the date from which the DSB authorises such retaliation. At no point in time is the offending member held accountable for the two-year and 10-month period when the offending import tariffs were originally in place; at no point in time is the offending member held accountable for the 11-month period where the amended (but still offending) tariffs were in place. The damage that can be caused to the concerned traders during this period can be devastating and, on many occasions, irreversible. It is a realistic assessment for imports to stand substituted by domestic supply during this period, making it all the more difficult or even impossible for imports to regain the lost market share. Worse still, human ingenuity implies that members can develop and apply several other means of restricting imports than just tariff barriers and, yet again, the above cycle will start. It is realistic for the market to take cognisance of the uncertainties and vagaries associated with imports and, thus, move towards to a more sustainable domestic supply. The point I emphasise upon is that even if the recent tariff trade war were to be debated at the WTO’s DSB, it may have very little real-world consequence in alleviating the situation because the damage may have already been done by the time the WTO rules on the matter with any finality. The inherent design of the system would permit such damage to be wreaked ad infinitum, exploiting the temporal application of the relief granted at the WTO. If pursuing legal remedies to enforce rules prescribed within the WTO is not really worth it, does it make sense to have those rules in the first place? Even if such rules are indeed required, is it again the time to reassess whether the WTO requires a redesign?

Adarsh Ramanujan

An independent advocate. Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.