[Ip-health] The Economist: It’s the end of the World Trade Organisation as we know it

Thiru Balasubramaniam thiru at keionline.org
Fri Nov 29 04:04:20 PST 2019


Who shot the sheriff?It’s the end of the World Trade Organisation as we
know it

And America feels fine
Print edition | Finance and economics
<https://www.economist.com/finance-and-economics/>Nov 28th 2019|

“Winter is coming,” warned a Norwegian representative on November 22nd, at
a meeting of the World Trade Organisation (WTO). The multilateral trading
system that the WTO has overseen since 1995 is about to freeze up. On
December 10th two of the judges on its appellate body, which hears appeals
in trade disputes and authorises sanctions against rule-breakers, will
retire—and an American block on new appointments means they will not be
replaced. With just one judge remaining, it will no longer be able to hear
new cases.

The WTO underpins 96% of global trade. By one recent estimate, membership
of the WTO or General Agreement on Tariffs and Trade (GATT), its
predecessor, has boosted trade among members by 171%. When iPhones move
from China to America, or bottles of Scotch whisky from the European Union
to India, it is the WTO’s rules that keep tariff and non-tariff barriers
low and give companies the certainty they need to plan and invest.The
system is supposed to be self-reinforcing. Mostly, countries follow the WTO’s
rules. But if one feels another has transgressed, then instead of starting
a one-on-one trade spat it can file a formal dispute. If the WTO’s ruling
displeases either party, it can appeal. The appellate body’s judgments pack
a punch. If the loser fails to bring its trade rules into compliance, the
winner can impose tariffs up to the amount the judges think the
rule-breaking cost it. It is that punishment that deters rule breaking in
the first place.

It is no surprise that President Donald Trump has axed these foreign
arbiters, given his general distaste for internationally agreed rules. On
November 12th he declared himself “very tentative” on the WTO. But the
problems run far deeper than dislike of multilateral institutions. They
stem from a breakdown in trust over the way international law should work,
and the more general failure of the WTO’s negotiating arm. Had the
Americans felt that they could negotiate away their grievances, resentment
towards the appellate body might not have built up. But with so many
members reluctant to liberalise, including smaller countries fearful of
opening up to China, that has been impossible.

America has had some wins at the WTO: against the European Union for
subsidies to Airbus, an aircraft-maker; and against China for its domestic
subsidies; theft of intellectual property; controls on the export of rare
earths, which are used to make mobile phones; and even its tariffs on
American chicken feet. But it has also been dragged before the appellate
body repeatedly, in particular by countries objecting to its heavy-handed
use of “trade remedies”: tariffs supposed to defend its producers from
unfair imports. Time after time, it has lost. In such cases, it has
generally sought to become compliant with the rules rather than buy the
complainant off.

Though previous administrations had grumbled, and occasionally intervened
in judges’ appointments, the Trump administration went further. Its
officials complained that disputes often dragged on much longer than the
supposed maximum of 90 days, and—more seriously—that the appellate body
made rulings that went beyond what WTO members had signed up to. They made
it clear that unless such concerns were dealt with, no new judges would be

Judicial overreach is in the eye of the beholder. Losers will always feel
hard done by, and America has been quick to celebrate the WTO’s rulings
when it wins. But plenty of others think that the appellate body had
overstepped its remit. A recent survey of individuals engaged with the WTO,
including national representatives, found that 58% agreed with that verdict.

Getting so many countries to sign up to the WTO was a remarkable
achievement. One way negotiators managed this was by leaving the rules
vague, and papering over their differences with ambiguous language. Take
“zeroing”, for example: using dubious mathematics to calculate defensive
tariffs on unfairly traded imports. The Americans claim that the rules do
not say they cannot do it. But others counter that the rules do not say
they can. It is such long-running differences that have set the scene for
the latest showdown.
Offer me solutions

The American trade lawyers happy to kill the appellate body see a
fundamental difference between their attitude to international law, and
that of Europeans. Their position is that only clear contractual terms can
be enforced, and they see Europeans as more comfortable with resolving
ambiguities by going beyond what is written. Essentially, they regard the
appellate body as too European. Moreover, in its eagerness to rule where
terms are unclear, and in the American government’s willingness to change
its laws in response, they feel an affront to America’s sovereignty.

Under the GATT, which lacked a proper enforcement system, ambiguities were
hashed out in smoke-filled rooms. But the WTO was supposed to make naked
power politics over trade obsolete. Had it worked as intended, there would
have been a balance between settling disputes and writing new rules. Policy
is best made with a vibrant judiciary interpreting the law, and a
functioning legislative arm to fix any mistakes. Whenever the appellate
body made decisions that annoyed members, they could have resolved their
differences at the negotiating table. Perhaps America could have got others
to agree to higher tariffs on imported steel, or been granted some
flexibility in its defensive duties.

But the WTO’s negotiating arm has been broken for years. With the current
count of members at 164, it has become more inclusive, but is unable to get
much agreed. Each member has a veto over any further multilateral trade
liberalisation. And without new negotiations, resentment towards the
appellate body has built up.

Had the multilateral system been more effective at dealing with the rise of
China, perhaps the single biggest issue of its times, then calls to save it
might be louder in Washington. Although various American administrations
pursued and won several cases, the process was slow and occasionally
frustrating. America can justly claim that, when it tried to hold China to
account for its breaches of trade rules, it got little support. America has
been responsible for more than half of all complaints against China. And
other wto members’ complaints were generally copycat, filed in America’s

Now that the Trump administration has bypassed the wto and taken the fight
straight to China, there is nothing remaining that it particularly wants
from the wto. And so the chances that it will relent and allow nominations
to the appellate body by December 10th are slim to none. In response to
proposals from other members to change the body’s rules, an American
representative said that they were not persuaded that the rules would be
stuck to.

On November 26th the Trump administration suggested slashing the pay of
members of the appellate body. In October Chuck Grassley and Ron Wyden, the
top Republican and Democrat politicians on the Senate Finance Committee,
published an editorial saying that while they saw the value of an appellate
body, it “needs to operate as the members agreed”.

Of the WTO’s 163 other members, 117 have signed a joint letter calling upon
America to end the impasse. Although America has been the heaviest user of
the dispute-settlement system, others will miss it too (see chart). Some
have already begun preparing, for example by agreeing at the start of any
disputes to forgo the right to appeal. The EU, Canada and Norway have
agreed on an interim arbitration mechanism that will use retired members of
the appellate body as judges. And the EU is considering beefing up its own
enforcement mechanism to fill the hole left by the appellate body, though
it would probably cleave more closely to the outcomes of first-stage
rulings in WTO disputes.

But some members are likely to shun such alternatives—especially those that
expect to be sued a lot. And it is unclear how robust they will be if
disputes turn nasty. Some WTO members may try to choose their
dispute-settlement mechanism case by case. An organisation as ambitious as
the WTO, for all its faults, will be easier to break than replace.

All this means that global trade is about to become a lot less predictable
and a lot more contentious. Without the appellate body to act as honest
broker, disputes between the biggest members may escalate. Under the
GATT America acted as global trade sheriff, launching investigations at
will and bullying disputatious countries into submission. It is not
impossible that it will resume this role. On November 27th the Trump
administration announced that it had nearly finished an investigation into
a French tax on digital services, which America reckons discriminates
against its tech giants. That could lead to tariffs.
You’ll miss it when it’s gone

In the 1980s American unilateralism was no fun for countries on the
receiving end. But at least back then Uncle Sam could point to the lack of
any other power even theoretically capable of doing the job. Now the
absence of independent referees is America’s own doing. And of all Mr
Trump’s trade policies, it may prove the hardest to reverse and have the
longest-lasting effects.

Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International
41 22 791 6727
thiru at keionline.org

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