What’s Next for the WTO After Sabotage by the U.S.

(Bloomberg) -- The World Trade Organization’s most critical function as the globe’s trade referee is now paralyzed, and governments are looking for ways to pick up the pieces. On Dec. 11, the WTO’s appellate body -- the preeminent forum for settling worldwide trade disagreements -- lost its ability to rule on new dispute cases. That’s good news for U.S. President Donald Trump, the self-proclaimed “tariff man,” because he can now retaliate against America’s trade partners without fear of WTO oversight. It also means that the global economy is entering a dangerous new era where economic might supersedes international law.

1. What is the appellate body?

It’s the second tier of a binding dispute-settlement system that determines whether the WTO’s 164 members are abiding by the rules of international trade. The seven-member panel of trade experts has the ultimate say in WTO rulings that can affect the world’s largest companies and billions of dollars in commerce.

2. How did the U.S. paralyze it?

Over two years, the U.S. refused to consider any nominees to fill vacancies on the panel, which was whittled down initially to just three members -- the minimum required to sign off on rulings. (Because all WTO decisions are made by consensus, the Trump administration’s refusal to consider nominations acted as an effective veto on filling seats.) Then the terms of two of those members ended at 11:59 p.m. on Dec. 10, which means no new appeals can be reviewed.

3. What happens now?

WTO members can still bring disputes to the trade body and receive an initial ruling, but any party to a dispute could appeal that ruling into legal limbo -- which effectively provides the loser with a veto. This removes an important set of guardrails within the global economy, increasing uncertainty for businesses and creating the potential for escalating trade wars. WTO Director-General Roberto Azevedo previously said that a world economy that lacks the ability to enforce international trade rules would mark a return to the “law of the jungle.” Under such a scenario, “investors will pull back, the economy will lose steam and jobs will be lost -- millions of jobs will be lost,” he said.

4. What happens to existing WTO cases?

The appellate body plans to complete its work on four disputes that have already received hearings -- two parallel cases brought by Honduras and the Dominican Republic over Australia’s tobacco plain packaging laws, plus ones brought by Canada over U.S. duties on glossy magazine paper and by Ukraine over Russian railway restrictions. (Under an existing WTO rule -- Rule 15 -- appellate members can “complete the disposition of appeals assigned to them prior to the end of their terms of office.” The U.S. rejects this approach, however.) All other WTO appeals will have to await the resumption of a fully functional appellate body. The WTO lists 9 pending appeals that fall into that category.

5. Is there a work-around?

The EU, Canada and Norway have adopted an alternate arbitration system that could fill in for the WTO appellate body in any disputes among those nations. The plan is to replicate the “essential principles and features” of the appellate body until the WTO impasse is resolved. Several major economies such as China, Japan and Brazil are discussing ways to broaden the EU’s plan to a larger group of nations. Other WTO members could agree on an ad hoc basis to avoid the appellate process entirely and accept the WTO’s initial rulings as final. It’s also possible that WTO members could trigger a majority vote to begin appointing new members to the appellate body.

6. What is the U.S. objection to the panel?

It says the appellate body, in rulings, has overstepped its mandate by “adding to or diminishing rights and obligations” of WTO members. The U.S. Trade Representative’s office, in a 2018 report, accused the WTO of routinely failing to meet a 90-day deadline to decide on appeals, permitting panel members to serve beyond their terms and issuing opinions on matters not necessary to resolve a dispute. The U.S. has also criticized the WTO’s compensation structure for creating an incentive for appellate members -- who can make more than 300,000 Swiss francs ($303,000) a year -- to string out cases to boost pay. It’s worth noting that U.S. objections didn’t begin with Trump. Under his predecessor, Barack Obama, the U.S. rejected the reappointment of two appellate body members due to concerns that they had exceeded the scope of their mandate. But the Obama administration agreed to approve replacement candidates to keep the appellate body’s roster full. The Trump administration refuses to consider nominees until its concerns are fully addressed and hasn’t issued any formal reform proposal.

7. Who’s leading the U.S. campaign against the WTO?

Robert Lighthizer, the U.S. trade representative, spent much of his career as a trade-remedy lawyer representing clients who were parties to WTO disputes. He was nominated in 2003 to serve as an appellate body member, but WTO members chose a different candidate. He has since sought to prevent an erosion of America’s sovereignty due to membership in the WTO and has criticized previous administrations for their “slavish” dedication to the organization. Lighthizer told U.S. lawmakers this year that his ultimate goal is to reform the WTO and sees the appellate body impasse as a form of leverage in pushing his agenda forward.

8. Is the U.S. the only country with a gripe?

No. Other countries acknowledge that the appellate body has its flaws, including the length of proceedings and its approach to legal interpretations. But most members disagree with the American tactic of linking new panel appointments to a demand for reforms. More than two-thirds of the WTO’s membership signed onto a request urging the U.S. to immediately start considering nominees to fill the vacant seats. Members have also made specific reform proposals aimed at overhauling the appellate body, all of which have been rejected by the U.S.

The Reference Shelf

• A primer about the WTO and what it does.
• A primer about the WTO dispute settlement system.
• The report explaining the U.S. concerns with the appellate body. (See pages 22-28.)
• The EU-Canada agreement to sidestep the WTO impasse.
• A look at how Trump’s threat to abandon the WTO could be its saving grace.

To contact the reporter on this story: Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Laurence Arnold, John O'Neil

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