Ways Out of the WTO’s December Crisis

From GATT to the WTO

In the 1990s, members of the General Agree­ment on Tariffs and Trade (GATT, 1947) concluded the Uruguay round of trade talks (1986–1994). This was the eighth successful round of talks on the liberalization of inter­national trade in a row. Driven by the US under President Bill Clinton, the Uruguay round was eventually concluded and im­plemented, bringing about substantial changes and reform in the overall archi­tecture and scope of the multilateral trade regime. The EU, Japan and South Korea backed the Uruguay round agenda, although many developing countries did not. One major US objective was to curtail intellectual property theft by private and state-owned Chinese companies, but also securing patent rights for US firms active abroad (e.g. in pharmaceuticals and agriculture). This led to the TRIPS Agreement (Trade-Related aspects of Intellectual Property Rights) that was added to the GATT in 1994. Another breakthrough at the time was the General Agreement on Trade in Services (GATS) which facilitated liberalization of services. The round was eventually concluded in 1993 and signed by 123 governments in April 1994 in Marrakesh, Morocco. The delay was largely caused by the US and the EU disagreeing on agricultural trade, mar­ket access, services and anti-dumping rules, and also over the creation of a full-blown organization dedicated to world trade. In the end, the WTO replaced the GATT as an organization in 1995, and functions as um­brella for the reformed GATT (1994) and all other agreements that have existed as part of the negotiations since 1947.

The dispute settlement system had already been streamlined as a result of the early phase of negotiations in 1988, when it was decided to undertake a new systematic and regular review of national policies and practices under the Trade Policy Review Mecha­nism.

Legacy of the Uruguay Round

The Uruguay Round produced what is now known as a “built-in agenda” with further negotiations to follow after its conclusion. It also led to a change in the overall rela­tions between developed and developing member states. The latter increased their activities in particular policy fields and became partners in a rising number of pref­erential trade agreements. India, a GATT founding member, has been the leading developing country throughout the trade rounds. After the Tokyo Round (1979) it led, together with Brazil, a group of developing countries who voiced strong objections against a new round in the early 1980s, while the G7 countries were pushing strong­ly in that direction. Developing coun­tries had two demands, a rollback on GATT-inconsistent measures and a standstill on new measures, which were mostly driven by the US. The speed and scope of the G7 measures driving this process clashed with the limited capacities of the developing countries, but they also helped form com­mon areas of interest. With the Uruguay Round this changed. Brazil and India started lagging behind global integration processes, which other countries had opened up to – including China, which was an observer from 1984 onwards and applied to join the GATT in 1986.

The built-in agenda and the broadening of trade issues as backed by the US placed huge demands on most developing coun­tries. The Doha Round, launched in Novem­ber 2001, took up their calls for a new round combining the Marrakesh Agreement’s com­mitments to reopen talks on agricul­ture and services. Due to the criti­cism voiced by developing countries during the earlier Uruguay Round, ministers decided to put development issues at the centre of negotiations (Doha Development Round).

During these talks, a group of 20 (WTO G20) larger developing country WTO mem­bers, including India, China, Indonesia and Mexico, openly challenged the dominance of the US and the EU in 2003 at the WTO Ministerial Conference in Cancún. While the EU pushed for the Singapore issues (amongst them government procurement, trade facilitation, trade and investment and trade and competition), the US called for in­dustrial tariff reductions by developing coun­tries in return for lowering agricultural tariffs.

In summer 2006, the talks collapsed, large­ly because the US, the EU, India, Brazil, Japan and Australia could not agree on agriculture (e.g. reduction of US sub­sidies) and on a reduction of industrial tariffs according to the Swiss Formula, a tool used to calculate the tariff reduction rate. It marked yet another example of the changed geo-political realities.

For years, the US has expressed numer­ous concerns it has with the multilateral trade system, including the claiming of development country status by emerging economic champions like China and India. The US has also criticized the WTO’s gen­eral inability to constrain market-distorting practices, such as subsidies and dumping, intellectual property theft and forced tech­nology transfer, notably by China. WTO negotiations over these issues have been impeded by consensus requirements and, as the Trump administration argues, by “judicial activism” from the Appellate Body which encourages WTO members to seek privileges through litigation rather than negotiation.

Changing US views on trade with China

When China became a member of the WTO on 11 December 2001, its accession was initially applauded by free traders in both political parties in the United States. The Bill Clinton administration that had pre­sided over the accession negotiations and much of the business community both expected huge benefits from declining im­port prices and hence production costs. Fur­thermore, the US was expecting large gains from entering Chinese services mar­kets (telecommunications, finance, insur­ance).

Washington’s decision to finally approve China’s accession to the WTO was by no means rushed. The US government has granted the Chinese conditional normal trade relations (the equivalent of WTO’s most favoured nation status) since 1979, subject to annual review and approval by Congress.

A decade later, criticism of China’s acces­sion to the WTO resurfaced in the US. What was mostly an academic debate about the size and significance of the “China shock” on local economic labour markets and growth, turned into a highly politicized debate on China’s aggressive economic policy and its harmful economic effects on the US, and necessary countermeasures the government should take.

A turning point in US policy towards China had clearly been reached in September 2009, when President Barack Obama introduced tariffs to stop what he described as a “harmful surge” of Chinese tyre im­ports into the United States. The 2010 Trade Agenda noted several other Chinese trade practices that were hurting US companies, including unjustified restrictions on US exports of agricultural products, restrictions on winning distribution rights for Ameri­can content companies in China, as well as Chinese export restrictions on raw ma­terials needed by core US industrial sectors from steel and aluminium to chemicals.

Between 2009 and 2016, the United States Trade Representative (USTR) filed 13 WTO complaints against China – all successfully settled or ruled in favour of the US. Moreover, the Obama administration placed numerous anti-dumping and coun­tervailing duties on Chinese goods starting in 2009. By September 2017, before Donald Trump came into office and placed uni­la­te­ral tariffs of 25 percent on steel and 10 per­cent on aluminium in the spring of 2018, the measures taken earlier by the Obama administration were already shutting off Chinese steel imports from the US market almost entirely.

What angered Washington during the Obama years as much as now was the fact that since 2002, the Appellate Body had ruled against Washington’s use of trade remedies in several landmark decisions. Beijing successfully challenged Washing­ton’s use of “zeroing”, a technique used to calculate dumping margins for imports that are taken as a basis for remedies. Also, the Appellate Body ruled against the US’s use of “double remedy”, i.e. the simulta­neous placement of anti-dumping and countervailing measures on Chinese im­ports. The Obama administration took this as proof that the body was “overreaching”. Beyond its dissatisfaction with remedy decisions, the USTR has repeatedly argued that existing WTO rules are insufficient to take China to court for violations of intel­lectual property rights.

Donald Trump is the first US President to challenge China outside of the WTO frame­work. Not only has he repeatedly question­ed the global organization’s ability to deal with China’s trade practices. The path of unilateral trade measures applied against Beijing is evidence that Washington prefers to “go it alone on China” rather than to cooperate with other countries. The US ap­proach clearly undermines the WTO by im­plementing unilateral US tariffs on Chinese imports and taking other non-trade meas­ures and also by dealing with China almost entirely in bilateral rather than multilateral negotiations.

Option 1: wait and support reform of the Appellate Body, on US terms

The EU and its like-minded trade partners could accept the impasse at the Appellate Body for the time being and try to engage the Trump administration in negotiations over how to reform the Appellate Body. Proposals put forward by the EU and its partners tried to address US critique of the Appellate Body, including a last minute draft General Council decision with com­prehensive changes in the rules governing dispute settlement understanding tabled by New Zealand Ambassador to the WTO, David Walker. In this draft, member states declare that the Appellate Body has not been functioning as intended under the Understanding on Rules and Procedures Governing the Settlement of Disputes (the DSU) and agree to a list of amendments addressing long-stated US demands. It in­cludes stricter transitional rules for out­going Appellate Body Members, application of 90-day rule for completing reports and limitations on the scope of appeals. The proposed reform, however, may not yet sufficiently address US concerns about judicial overreach. To address this issue, some experts have suggested that WTO members could decide to aim for a closer link between the dispute settlement func­tion and the role of the WTO as a negotiat­ing forum. If a particular interpretation of WTO rules by the Appellate Body fails to reach a consensus, it would be referred to a specialized committee. In the end, the General Council could take a final decision based on a three-quarters majority vote of all member states (so called legislative remand).

Alternatively, WTO member states could agree to put the most controversial type of Appellate Body decisions – those related to trade remedy actions like anti-dumping and countervailing actions – on hold for a lim­ited amount of time, until a more permanent compromise can be reached with the US. Since many of the US complaints vis-à-vis the Appellate Body relate to decisions on trade remedy actions, one proposal sug­gested permanently separating trade remedy from other cases in the dispute settlement system, either by creating a special Appel­late Body for trade remedies or by placing a moratorium on appeals from panel deci­sions on such cases. Such a special body could mirror the working procedures of the Appellate Body. Its members could have backgrounds in trade remedy law, ensuring sound rulings. It would split the current workload of the Appellate Body (trade rem­edies disputes are 45 percent of all its cases). Such a restructuring of the Appellate Body would require an amendment to the Dis­pute Settlement Understanding (DSU).

Both of the proposals above would require a consensus among WTO members on a fundamental restructuring of the exist­ing appeals process. However, it is unclear whether the US would be less con­cerned about judicial overreach by the suggested solutions and end its blockage, or whether China would agree to any of these proposals given that they mostly aim to accom­modate US concerns.

Option 2: work towards a different system for appeals inside the WTO

A more proactive approach would be for the EU to form a coalition with other WTO members to preserve the current two-stage dispute settlement process and to temporarily abandon consensus decisions. Member states, with the exception of the US, could move forward with selecting new Appellate Body members by qualified majority vote in the General Council. This way, members would depart from the regular process that requires a consensus vote in the WTO’s Dis­pute Settlement Body. However, mem­bers could claim to be meeting their obligations (Art. 17.2 DSU “Vacancies shall be filled as they arise”).

Another way to overcome the impasse would be for member states to draw on Article 25 of the DSU which allows WTO members to resort to arbitration as an alter­native means of dispute settlement, the exact procedures of which would be deter­mined by the dispute parties. Parties in a dispute could agree to arbitrate appeals before the panel issues its ruling and let the arbitration process mirror the process of appeals before the Appellate Body, e.g. by having arbitrators adopt the Working Pro­cedures. The Appellate Body Secretariat could assist in the arbitration process and WTO rules on implementation of rulings (Art. 21 DSU) and compensation (Art. 22 DSU) would apply to any arbitration awards.

In recent bilateral agreements, the EU, Canada and Norway have pledged to accept Article 25 arbitration as binding. Since Article 25 DSU is an existing provision, no consensus vote is needed to use it, at least as interim solution. Nevertheless, this ap­proach has several drawbacks. One risk attached to the flexibility under Article 25 for smaller dispute parties to agree on pro­ceedings is that powerful WTO members like China or the EU could push for rules that put them at an advantage. Less power­ful members also have ways of blocking dispute settlement when they anticipate an unfavourable panel ruling. They could still refuse arbitration and block the adoption of the panel report by filing for appeal with the incapacitated Appellate Body. Those cases would remain in limbo for years to come. For all of the above reasons, there is uncertainty about how viable this solution would be in practice.

Therefore, a plurilateral arbitration agreement, binding participating countries to a specified arbitration process ahead of new disputes might be a better option. It would take more time and political capital to achieve. With the stalemate of the Appel­late Body approaching, the Trump adminis­tration has been increasing political pres­sure on member states. In a meeting in Geneva on 13 November, the US government representative named steps by other member states away from consensus voting as a reason for current US plans to cut or even fully withdraw financial contributions to the 2020–2021 budget. Others have warned that a move to Art. 25 arbitration could even be taken as justification for President Trump to follow up on his threats to leave the WTO.

The benefits of a plurilateral agreement on Article 25 arbitration would crucially depend on China’s participation. For an agree­ment to gain traction without US par­ticipation, it would need to include China. According to the ChinaPower Proj­ect, China was involved in 63 disputes with 9 econo­mies from the time it acceded to the WTO in 2001 through 2018. Bejing has been the complainant 20 times and the respondent 43 times. So far, the EU has brought 35 cases against the US and nine cases against China at the WTO, including recent com­plaints over US tariffs on European steel and aluminium, and forced technology transfer in China.

Option 3: aim for dispute settlement outside of the WTO

If no consensus on a way forward on dispute settlement can be reached within the WTO, the EU might draw on its bi­lateral and regional free trade agreements, like the EU-Canada agreement (CETA). How­ever, the EU’s existing bilateral and pluri­lateral agreements provide little, if any, legal protection in state-to-state-litigation cases beyond what is granted under WTO rules. What some of these agreements en­tail are rules on how to proceed in cases where private parties want to take legal steps against a government, known as Investor-State-Dispute-Settlement (ISDS)-procedures.

Due to recent agreements with Singapore and Vietnam and a preliminary agreement with the MERCOSUR countries, the share of EU external trade covered by these agree­ments is expected to increase beyond the 2017 status of around 30 percent to around 40 percent. Nevertheless, trade with major partners, including the US and China, which together account for roughly a third of the EU’s external trade, still takes place under WTO rules. EU agreements with both countries in the near future are far from certain.

Another yet more ambitious and politi­cally costly option for the EU would be to sound out if other countries would choose to be part of a parallel state-to-state dispute settlement system, outside of the WTO. As in the case of Art. 25 arbitration, such a move could be taken as justification for President Trump to leave the WTO. More­over, it might alienate even those actors in the US who have criticized the Trump administration’s policy towards the WTO and argued in favour of the multilateral trade order. It would make past pledges by the EU and others to do everything in their might to preserve WTO dispute settlement system look less credible.