The World Trade Organization (WTO) currently faces the biggest crisis since its inception in 1995. Events that appear as bureaucratic chess games threaten to risk the business rules of major trading nations around the globe. On 11 December, the Appellate Body, the committee dealing with WTO members’ appeals became incapacitated after its membership dropped from three – the minimum to take decisions on cases – to only one remaining adjudicator. New appointments have been blocked by the United States since June 2017. This effectively shuts down the body, because the minimum requirement for any decision is three judges. In a recent move, the U.S. government has placed a veto on any funding for the Appellate Body’s secretariat in Geneva, meaning that it will have to stop operating at the beginning of 2020. What seemed to be a merely procedural issue for several years could culminate in major disruptions for international trade relations. But as an international organization with a diverse membership of 163 states other than the United States the World Trade Organization may be more resilient than President Trump expected. The EU and other trading nations still have options how to prevent the dispute settlement system from unravelling. To stabilize the open trade regime, however, the new European Commission and the member states need to make the WTO appellate body a policy priority now. If the EU remains passive, it will make it much harder to reach an agreement on dispute settlement later on.

A multitude of problems has been building up in the WTO over a period of 25 years. The Trump administration’s open rejection of the dispute settlement regime, culminating in a breakdown of Appellate Body in December 2019, can be traced back to these fundamentals. They include a long-stated frustration with reform inertia inside the WTO’s negotiation branch during years of dynamic globalization requiring an overhaul of multilateral trade and investment rules. In addition to that, the U.S. has grown increasingly dissatisfied with the Appellate Body as an independent supra-national judicial entity that it sees as over-stepping the role assigned to it by the WTO member states and instead is creating new WTO law.

While Donald Trump is the first President to openly question the usefulness of the WTO and, in particular, its judiciary branch, former U.S. presidents have been critical of rulings from Geneva for many years. In 2016, the Obama administration even blocked the reappointment of an adjudicator over a period of six months. What angered Washington at the time was the fact that since 2002, the Appellate Body had ruled against the US’s use of trade remedies – like anti-dumping tariffs – in several landmark decisions. For instance, China successfully challenged Washington’s use of “zeroing”, a technique used to calculate dumping margins for imports that are taken as a basis for remedies. The Obama administration took this as proof that the body was “overreaching”. Additionally, the United States Trade Representative’s Office has repeatedly argued that existing WTO rules are insufficient to deal with China’s increasing use of unfair trade practices and heavy government interference in the economy.

The Trump administration has justified its unilateral blockage of new appointments of adjudicators to the Appellate Body with a series of long-standing procedural concerns, such as disregard for the 90-day deadline for reports by the Appellate Body and the occasional continued service of its members on cases beyond the expiration of their terms without explicit approval from WTO members. But these more narrow technical matters are often tied to substantive ones. Disregard for the time limit, for example, is seen as problematic not only because it impedes the swift settlement of disputes, but also because it enables the Appellate Body to widen the scope of its reports instead of focusing solely on the issues on appeal. Hence, a breach of procedural rules is interpreted as a way of facilitating overreach on substance. In this sense, the Appellate Body’s activities are at conflict with one of the key aims of U.S. governments: to keep national authority and control over the dispute settlement process firmly with WTO member states in order to prevent infringements on national sovereignty.

How to preserve the open global trade order?

Now the EU and other WTO members need to decide quickly on their next steps to preserve the open global trade order. Otherwise they will no longer be able to grant legal protection against unjustified tariffs, unfair trade measures, and marked-distorting trade-related economic practices, hurting their businesses and eventually also consumers. Given that the EU has already ruled out a vote in the WTO’s General Council, which would allow the nomination of new Appellate Body members requiring a qualified majority, it is now left with essentially two options to cope with the situation. The EU and its partners could keep their protest quiet for now while continuing to negotiate with the U.S. government over a fix of the current dispute settlement system as well as about more general reforms of WTO rules that might satisfy Washington’s expectations. Or the EU could push for an alternative appeals mechanism within the WTO, as an interim solution.

The first option would require that the EU and its like-minded trade partners accept the impasse at the Appellate Body for the time being and try to continue their negotiations with the Trump administration over how to reform the Appellate Body and update the WTO rule book. Of course, the EU and several other WTO members have already put forward proposals that tried to address US critique of the Appellate Body and the WTO more broadly. Also, a last minute draft General Council decision with comprehensive changes in the rules governing dispute settlement understanding tabled by New Zealand Ambassador to the WTO David Walker, was rejected by the U.S. government. However, it should be noted that other, more far-reaching proposals for an Appellate Body reform have been proposed and discussed by experts on trade and trade law for a while.

One proposal suggested permanently separating trade remedy from other cases in the dispute settlement system, either by creating a special Appellate Body for trade remedies or by placing a moratorium on appeals from panel decisions on such cases. Such a special body could mirror the working procedures of the Appellate Body. Its members could have backgrounds in trade remedy law, ensuring sound rulings. It would split the current workload of the Appellate Body (trade remedies disputes are 45 percent of all its cases). Such a restructuring of the Appellate Body would require an amendment to the Dispute Settlement Understanding (DSU). Adopting such a proposal could clear the way for more substantial reform measure later on.  Nevertheless, it remains uncertain whether the Trump administration would be less concerned about judicial overreach by the suggested solutions and end its blockage, or whether China would agree to any of these proposals given that they mostly aim to accommodate US concerns.

The second option would mean that the EU, in cooperation with other WTO members, works towards a different system for appeals inside the WTO, as a stop-gap measure to resolve the current impasse. Member states could draw on Article 25 of the DSU which allows WTO members to resort to arbitration as an alternative means of dispute settlement. Parties in a dispute could agree to arbitrate appeals before the panel issues its ruling and let the arbitration process mirror the process of appeals before the Appellate Body, e.g. by having arbitrators adopt the Working Procedures. The Appellate Body Secretariat could assist in the arbitration process and WTO rules on implementation of rulings (Art. 21 DSU) and compensation (Art. 22 DSU) would apply to any arbitration awards.

In recent bilateral agreements, the EU, Canada and Norway have pledged to accept Article 25 arbitration as a binding interim measure. Since Article 25 DSU is an existing provision, no consensus vote is needed to use it. Nevertheless, this bilateral approach also has several drawbacks that might keep WTO members, in particular the smaller and less powerful ones, from signing a bilateral agreement with a powerful player like the EU. (More details on potential benefits and downsides can be found here.)

Therefore, a plurilateral arbitration agreement, binding participating countries to a specified arbitration process inside the WTO ahead of new disputes might be a better option. It would take time, negotiation skills and political capital to achieve. And there can be little doubt that the benefits of Article 25 arbitration would crucially depend on China’s participation. For a new dispute settlement arrangement to gain traction without US participation, it would need to include China because of its economic weight and importance in trade and also because the country is party in a large number of WTO cases, often with high significance.

The EU needs to choose wisely

Both options are not mutually exclusive, and the EU should – in principal – be free to pursue them in parallel to find out which one works best to satisfy its own interests. However, given the increasing geopolitical confrontation between the U.S. and China, the EU and other countries are not acting in political vacuum. In any diplomatic attempts to approach the U.S. and China, the EU Commission needs to consider which way forward is best to limit damage done to the European economy and its own citizen. Therefore, the EU needs to step up its efforts in working together with other trade partners like Japan, Canada, Mexico, and India – for instance by discussing long and short-term options and finding a common understanding of how to tactically approach both, the U.S. and China.

 

 

Picture: World Trade Organisation, WTO Public Forum 2010

 

Research Associate, Americas Division at Stiftung Wissenschaft und Politik (SWP)
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