(Bloomberg) -- The World Trade Organization is facing the greatest crisis of its 23-year existence.
President Donald Trump doesn’t believe the WTO can handle the problems created by China’s rapid economic ascent and is fundamentally challenging the rules that govern international trade. “The WTO is unfair to U.S.,” Trump said on Twitter.
The U.S. has attacked both allies and adversaries in an effort to redraw trade relationships and Trump has threatened levies on $150 billion of Chinese goods in an escalating tit-for-tat with Beijing. China has warned of $50 billion of its own tariffs on American imports.
The escalating trade skirmish is threatening to sideline the global trading order that the U.S. has helped to build. So as world leaders rush to the White House to defend their countries’ interests, the biggest casualty may be the global system of trade itself.
Here are the five biggest challenges facing the WTO:
The unilateral tariffs threatened by the U.S. and China don’t adhere to the WTO’s established procedures, and if triggered, will inflame trade tensions that can’t be constrained by the trade body.
The latest round of tariffs are “obviously not good for the WTO,” said Patrick Low, a former chief economist at the institution. “If the measures are implemented, the two biggest traders will have thumbed their noses at the WTO. Politics will have trumped the rule of law.”
Reasons to go Rogue
The WTO is facing an influx of disputes from countries using national security as a justification for tariffs. This exploits a loophole in WTO law that permits its 164 members to take any action they consider necessary to defend “essential security interests.”
Trade officials are concerned that the WTO could be sidelined if countries increasingly abuse the national-security exemption to justify their trade restrictions. WTO Director General Roberto Azevedo said it would be better for countries to address their national security concerns at a political level, rather than testing the limits of the WTO system.
“National security is something that is not technical,” Azevedo said. “It is not something that will be solved by a dispute in the WTO. That requires conversation at the highest political level.”
Hearings May Be Paralyzed
Since August 2017 the U.S. has blocked nominees to the WTO’s appellate body -- a key forum for mediating disputes -- saying it has overstepped its mandate.
“The WTO has not always worked as expected,” the U.S. Trade Representative said in its annual report. “Instead of serving as a negotiating forum where countries can develop new and better rules, it has sometimes been dominated by a dispute settlement system where activist ‘judges’ try to impose their own policy preferences on member states.”
If the U.S. continues its hold, the appellate body will be paralyzed in late 2019 because it won’t have the three panelists required to sign off on rulings. Azevedo said the U.S. block could eliminate the WTO’s role as a trade dispute forum and lead to a “domino effect” of trade retaliation.
Market Economy Dispute
China says the U.S. and the EU are violating WTO rules by continuing to treat it as a non-market economy in anti-dumping investigations.
The dispute has already compelled the EU to modify its basic anti-dumping regulations and could ultimately force the U.S. to modify the way it penalizes Chinese producers that ship cheap products to the U.S. market.
The U.S. said it has no plans to treat China equally in international anti-dumping investigations because Beijing has not adopted market-economy principles. U.S. Trade Representative Robert Lighthizer previously called it the “most serious litigation that we have at the WTO.”
It took two decades for the WTO to complete its first significant trade accord and prospects for new deals among its 164 members are slim.
As a result, countries are pushing piecemeal accords centered on sectoral issues like e-commerce or investment. While that may be positive for groups of like-minded countries, it underlines the sense that the WTO’s broader negotiating agenda is mired in disagreement.
©2018 Bloomberg L.P.