U.S. Wielding Budget Ax Sends Shudders Through World Trade Watchdog

(Bloomberg) --

While much of Wall Street was focused on President Donald Trump’s trade speech Tuesday in New York, something happened across the Atlantic that might add to the angst about the world economy.

In a closed-door meeting in Geneva, a Trump administration official floated the idea that the U.S. may block the adoption of the World Trade Organization’s biennial budget, according to people in attendance.

Because WTO decisions must be made by a consensus of all of the trade body’s 164 members, such a maneuver could shut the WTO’s doors as soon as Jan. 1, threatening the functioning of the organization responsible for enforcing the rules of global commerce.

In a brief statement, the people said, the U.S. highlighted two concerns:

• The WTO is paying exorbitant fees to members of the appellate body
• WTO funds may be diverted to a proxy dispute settlement system championed by the European Union, Canada and Norway 

Though some meeting participants said they weren’t entirely surprised by the U.S. move, they still described it as unprecedented and worrying.

Of course, it’s fair for the U.S. — which contributes more money than any other single country to the WTO’s budget — to question the institution’s spending habits.

But this fight is about more than money. The WTO is central to Trump’s overhaul of the global trading system because it settles disputes, and the U.S. is trying to push members to address the alleged pattern of judicial overreach.

The budget tactics reveal that the U.S. is willing to use any lever at its disposal to force the reform of the WTO appellate body and stop the EU, Canada and Norway from creating their own arbitration system.

It’s the kind of maximum leverage gambit that’s favored by Trump’s top trade official. U.S. Trade Representative Robert Lighthizer argues that WTO appellate body members have strayed from their original mandate and is slowly asphyxiating the dispute settlement system by blocking the appointment of new appellate members. The seven-person panel, already down to the minimum of three required to sign off on cases, will essentially become paralyzed after two more end their terms on Dec. 10.

So what happens next?

Ultimately, the U.S. may not follow through on this threat. Complete paralysis at the WTO would add a layer of uncertainty about a global economy that’s already slowing. It’s more likely to continue to block the budget process until the top delegates gather Dec. 9-11 for the final general council meeting of the year.

Still, the Rubicon may have been crossed. A founding member of rules-based multilateral trading is so set on forcing change that it’s sounding more willing to bring the whole system to its knees.

Charting the Trade War

The U.S. contributes more money than any other country to the WTO’s annual budget — 22.7 million Swiss francs ($22.8 million) in 2019. The total budget for 2019 was 197.2 million francs, the same as a year earlier.

Today’s Must Reads

• No truce yet | Trump, in a widely anticipated speech on trade, said the U.S. will increase tariffs on China if the first step of a broader agreement isn’t reached.
• Europe’s rebound | Euro-area industrial production unexpectedly rose for a second month in September, offering a sign the economy is beginning to emerge from a slump.
• Flower power | Japan’s prime minister canceled an annual cherry blossom viewing party, seeking to sweep away obstacles before a vote in parliament on a U.S. trade deal.
• Batteries included | Elon Musk picked a glitzy event, a few hours’ drive from the birthplace of the internal combustion engine, to announce Tesla’s plans to build an electric-car factory near Berlin.
• Technology wars | Chancellor Angela Merkel’s government is prepared to make a key concession to security hawks by tightening barriers aimed at Chinese equipment supplier Huawei.

Economic Analysis

• Bloomberg Economics primer | ‘Phase one’ trade deal with U.S. won't revive China’s growth.
• Brexit deadline | If U.K. Prime Minister Boris Johnson returns to power, he has given himself until the end of 2020 to negotiate a free trade agreement with the EU. 

Coming Up

• Nov. 15: Euro-area, India trade balance
• Nov. 20: Japan trade balance
• Nov. 21: South Korea exports and imports

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

©2019 Bloomberg L.P.