Bullets have been flying in the world of international trade lately but, as of today, there’s no longer a sheriff in town. A crisis brewing for years comes to a head at the World Trade Organization as its final appeals forum for global disputes — the Appellate Body — closes its doors.
A U.S. policy of blocking new candidates for the seven-man body, likened to a supreme court for global trade, has left it with just three judges. But the terms of two are set to expire, leaving just one, China’s Hong Zhao, and a body unable to make rulings.
At a time when U.S. president Donald Trump is in a damaging fight with China and only days ago threatened France with 100 per cent wine tariffs in retaliation for president Macron’s digital tax, the 164-member body is losing its ultimate referee on trade at the worst possible time.
The 164-member body is losing its ultimate referee on trade at the worst possible time
Countries taking disputes to the WTO for breaches of obligations – such as unfair subsidies or dumping goods, for example – initially have complaints heard by three-member panels. If one country disagrees with the verdict, it can appeal to the appellate. Last year, two thirds of the panel’s decisions were appealed against, but as of this week there is nothing to appeal to.
This means work on most of the 14 appeals currently being considered involving billions of dollars’ worth of trade disputes will just stop, with the exception of four “advanced” cases. A likely European Union appeal against a WTO verdict that it failed to end illegal subsidies for aerospace firm Airbus – the latest round in a 15-year dispute that triggered U.S. tariffs on $7.5 billion of EU goods in October – will also have nowhere to go.
As well as effectively shutting the appellate, the U.S. has even threatened to close down the WTO altogether by blocking its budget, although it rowed back from that nuclear threat. The U.S. ambassador to the WTO, Dennis Shea, has still taken pot shots at the body’s 231,000-pound compensation for part-time judges in November, saying the appellate’s structure did not create the “correct incentive” for the speedy resolution of disputes.
According to Marianne Petsinger, an international trade expert and fellow at Chatham House, it is “too simplistic” to blame an aggressive Trump for the current issues as the disputes predate him. Barack Obama was the first to block the replacement of an appellate judge and its complaints with the WTO are legion. “The U.S.’s concerns didn’t start with Trump and they won’t end with him,” she says. Disputes are supposed to be settled in 90 days, but the average time taken is almost 400, due to the heavy caseload generated by the volume of panel decisions appealed against. Countries found against can kick the case upstairs and continue with bad behaviour knowing that a lengthy process will ensue before retaliations are sanctioned.
The U.S. does not recognize the body as a court, and is deeply opposed to its rulings setting legal precedents
Aside from the difficulty of achieving consensus among 164 members, the U.S. is also unhappy at the likes of China and India self-declaring themselves entitled to “special and preferential treatment” under WTO rules. “Until recently you had 10 of the G20 nations declaring themselves as developing countries,” Petsinger says.
But the U.S.’s main beef is one of overreach, with the appellate offering verdicts and opinions beyond its purview. It does not recognize the body as a court, and is deeply opposed to its rulings setting legal precedents.
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Holger Hestermeyer, an international dispute resolution expert at King’s College London, says: “The Americans don’t want it to be a court. They want to use trade defence duties, anti-dumping duties and other safeguards somewhat more liberally, particularly against China. They are convinced that the appellate body unduly constrains that.”
The U.S. isn’t alone in its mistrust of the appellate; Japan was stung by a ruling in April that overturned an initial panel decision and allowed South Korea to keep import restrictions on Japanese fish in place in the wake of the 2011 Fukushima nuclear accident. The demise of the body does not mean the complete end of international dispute resolution. Some countries have agreed to abide by WTO panel decisions without appealing, while other blocs such as the EU, Norway and Canada have set up mechanisms to fill the vacuum. But it certainly weakens it, as the system inevitably becomes more fragmented. “We’re certainly seeing a shift from a rules-based international system to a power-based international system,” says Petsinger.
The U.S. is no longer the benevolent hegemon of the rules-based system
Sam Lowe, Centre for European Reform
Sam Lowe, a trade expert at the Centre for European Reform, adds: “The U.S. is no longer the benevolent hegemon of the rules-based system, it is now actively trying to disrupt it and return to a period when all that mattered was size.”
Moreover, this could have uncomfortable implications for the UK, particularly if it leaves the EU without a trade deal at the end of 2020, as promised by the Conservative Party’s election manifesto. If the UK were to take a dispute with the EU to the WTO it has no recourse to appeal against an unfavourable panel decision.
Lowe adds: “The UK is choosing a difficult time to extricate itself from its regional trading bloc and try to seek out its own path in this global trading system, which is fraying at the edges.”
Petsinger is more blunt: “In an environment where the WTO dispute settlement system isn’t fully functioning, it is going to be much more difficult to enforce the UK’s rights. Is it really wise for the UK to use the WTO as its key platform in a world where the WTO is under threat?”
This week the trading body’s general council will consider compromise proposals to appease the US, but hopes for an immediate resolution of the row are slim. Hestermeyer says: “The global trading system lives from crisis to crisis, but this is the gravest crisis the WTO has faced so far.”