Trump’s Threat to Leave the WTO Could Be a Saving Grace
(Bloomberg Businessweek) -- It’s easy to think of President Trump’s trade assault on China as a one-on-one battle fought almost wholly with tariffs between two nations that, for very different reasons, depend heavily on goods and services that cross their borders. The world’s two largest economies have this year alone imposed import taxes on more than $360 billion in annual trade with each other.
That’s left much of the rest of the world looking like bystanders as the accusations about unfair trade practices fly. Yet the biggest long-term impact of the U.S.-China cage match may be felt not in Washington or Beijing, but in Geneva, home to the World Trade Organization.
Trump has long argued that the WTO, the traffic cop for the world’s trading nations, has favored China unfairly ever since the Asian giant joined the body in 2001. And his bombastic rhetoric that global trade’s rules of the road have allowed policymakers in Beijing to run roughshod over U.S. businesses is as much a gripe with the WTO as it is with China’s government.
If the WTO doesn’t “shape up,” Trump told Bloomberg in an Aug. 30 interview, the U.S. will pull out. His administration has also provoked a more immediate crisis by blocking the appointment of judges to the institution’s appellate body, slowly strangling world trade’s supreme court.
Despite all the criticism that Trump misunderstands trade’s role in global prosperity, the U.S. assault on the WTO has also prompted the first earnest efforts to address what the European Union, Japan, and other major members concede is a need for change. In other words, by threatening to kill the WTO, Trump might force it to save itself. “This guy comes along, and he begins to shake the tree pretty hard. So let’s make sure that some fruits fall. Let’s make sure also that you don’t kill the tree by shaking it too hard,” is how Roberto Azevêdo, the WTO’s director-general, describes the conundrum.
That the efforts to save the WTO are taking place in the shadow of an escalating trade war between China and the U.S. is lost on no one. Neither are the possible consequences, nor the reality that the WTO’s 164 members have over the past two decades amassed a reputation for failing to tackle anything difficult. “There is a risk that this organization slowly or rapidly slides into marginalization,” says Marc Vanheukelen, the EU’s ambassador to the WTO. “We are not in good shape.”
But efforts to save it are under way. In September, Canada and the EU published separate blueprints for reforming the three pillars of the WTO’s work—negotiation, dispute settlement, and monitoring—and embarking on an update of global trading rules. Canada in late October will host a meeting of like-minded WTO members in Ottawa that will exclude the U.S. and China. EU officials are fanning out to Beijing, Washington, and other capitals to build support for reform.
The discussions are about more than arcane procedures. In their papers, the EU and Canada argue for an update to global trading rules that have gone largely untouched since the organization was founded in the 1990s. Both also propose a growing use of “plurilateral,” sector-specific negotiations. Those allow smaller groups of members to circumvent the usual requirement for unanimity, thus eliminating the practical veto power that even a small WTO member can wield.
Much of the conversation is aimed directly at China, which the Trump administration complains the WTO has failed to keep in check. “China’s economic model is inconsistent with the norms of the WTO, and this is something that this institution really needs to grapple with if we are going to move forward,” says Dennis Shea, Trump’s ambassador to the organization.
The U.S. is joining Japan and the EU to draw up rules to address common complaints aimed at China over its industrial subsidies, state-owned enterprises, and theft of intellectual property. Also building is a push to tackle WTO rules that allow China to label itself a “developing” economy and gain extra time and flexibility to comply with some regulations.
Chinese officials have made it clear they will resist any U.S.-led attack. “For China, holding our feet to the fire never worked,” Ambassador Zhang Xiangchen told fellow WTO members in July. “Extortion, distortion, or demonization does no good to resolve the issues.”
One problem with Trump’s assault on the WTO is that it’s left the U.S. looking increasingly isolated. As China invests more in the institution, other countries complain of an absent U.S. leadership. They also question Washington’s motives.
Disdain toward the Trump administration at the WTO largely stems from its assault on the trade group’s appellate body. Washington’s block on new appointments has thinned the ranks of serving judges from seven to three, the minimum needed for an appeal. The terms of two more judges expire by the end of 2019, meaning total paralysis could be approaching.
Since the administration of George W. Bush, the U.S. has complained about the appellate body’s “overreach” and the plodding pace of its work, occasionally vetoing individual appointments. But Trump’s bare-knuckle tactics have caused many in Geneva to suspect the administration is trying to cripple the referee that might rule against its controversial China tariffs or its invocation of national security as justification for duties on steel, aluminum, and potentially auto imports.
In Trump and his trade czar Robert Lighthizer, a veteran of the Reagan administration’s Japan trade battles, many in Geneva also see two protectionists fighting to rewind the global trade order to the pre-WTO 1980s. As a lawyer for the U.S. steel industry for much of his career, Lighthizer was on the losing end of a series of WTO cases related to antidumping duties and the U.S.’s method of calculating punitive tariffs. He and his supporters argue that those decisions amounted to violations of U.S. sovereignty.
James Bacchus, a former Democratic congressman and onetime head of the WTO’s appellate body, says Lighthizer and his team are “a bunch of steel lawyers on the protectionist side” targeting the WTO out of spite. “They lost a number of cases they should have lost in the WTO, and now they are seeking revenge,” he says.
While the EU and some countries are suggesting changes to the appellate body’s rules to satisfy U.S. concerns, they’re also contemplating stopgap measures to keep the WTO’s dispute function from coming to a Trump-induced halt. One idea: invoking an article that allows members to resolve disputes via arbitration. Such a move might temporarily stand in for the appeals process.
That might suggest that some nations may simply hope to hunker down for a drawn-out battle to protect the WTO status quo until Trump is no longer in power, but other trade officials see hope for a near-term resolution of the WTO debate in the recent rewrite of the North American Free Trade Agreement. After years of threatening to withdraw from a pact he labeled “a disaster,” Trump in October settled for only modest changes.
To Azevêdo, the WTO director-general, the new Nafta offers another reason for the institution’s defenders to get to work on proposals and to engage with the Trump camp. “If you have enough things on the table that are appetizing enough, I’m pretty sure that the conversation in Washington is going to change pretty significantly,” he says. “If you do nothing, just cross your fingers and hope things will get better somehow, I think you risk many things, including the system.”
To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net
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