The World Trade Organization no longer has a functioning Appellate Body. Two members retired in late 2019, and the United States has been blocking new appointments to it since 2017. The Appellate Body is the highest organ in the Organization’s Dispute Settlement System -- and it now has too few members to adjudicate disputes.
Trump’s frustrations with the WTO are real
Critics in the U.S. media have lambasted U.S. President Donald Trump over the blockage, but the White House has legitimate complaints about the WTO. First, the administration correctly says the Dispute Settlement System is too slow -- cases are supposed to take 18 months, yet the average dispute takes 34 months to adjudicate. For example, the U.S. complaint against the European Union over Europe’s state subsidies to Airbus, Boeing’s chief competitor, has taken over a decade to resolve.
But a more fundamental U.S. criticism concerns judicial overreach. The Appellate Body has been asked with increasing frequency to render decisions on “ambiguous or incomplete” WTO rules.
One such area of controversy is the Dispute Settlement System’s rulings on anti-dumping measures. The WTO has ruled against U.S. responses to dumping, called zeroing. “Dumping” is when a foreign country -- often China -- floods another country with excess product, often created by bloated state-run industries that are protected from market forces. Anti-dumping measures seek to counteract the excess capacity, which, while often temporary, can risk destroying U.S. industry and jobs that are not protected from market forces. America has won only two out of 29 anti-dumping cases.
Technically, WTO rules restrict state subsidies and allow trading partners to penalize the their use. But the Appellate Body has ruled in ways that make it hard to penalize Chinese firms that have clear state support. And many of China’s subsidies to state-owned or backed companies are opaque. Members are required to inform the Organization of these subsidies, but China consistently doesn’t do so.
Finally, China retains its status as a developing economy, despite being the world’s second-largest economy. That designation allows China to tax imports more than America. Indeed, before the trade war with China started, the average tariff the United States placed on imports was about 3%, while China’s average tariff sat at about 10%. There are also plenty of hidden barriers pushing the cost of exporting to China even higher.
Starving the WTO has risks
These disagreements go beyond Washington’s being upset about losing a handful of WTO rulings. Overall, the United States has won and lost about an equal amount of WTO cases, and several of the cases the White House cites as problematic don’t even involve the United States. Today’s complaints are being voiced by the Trump administration, but it was the Obama administration that first started blocking appointments of judges to the World Trade Organization.
True to form, the Trump administration has upped the ante. It has been more aggressive than previous administrations in the effort to do something about these longstanding complaints.
Some worry that the White House -- if no concessions are made by other WTO members -- is happy to shift back to the General Agreement on Tariffs and Trade regime, which is the predecessor of the World Trad Organization. The GATT regime, technically still in place today, predominated from 1947 to 1995, at which time the World Trade Organization superseded it.
But shifting back to the General Agreement would run many risks. The main difference between the two is that the General Agreement on Tariffs and Trade has no international judicial framework. It requires diplomacy and prizes power. In practice, smaller trading blocs would lose any equal footing with large trading blocs under GATT.
While this would allow the United States to take greater action against Chinese state capitalism, it could also cause a general fracture in trading relationships. And going back to the GATT regime could hurt smaller players who America does not have a dispute with, while leaving some of the abusive larger players -- such as China and Europe --relatively unscathed.
In an effort to rescue the World Trade Organization, the European Union is trying to build a copy of the Dispute Settlement System, but only Canada and Norway have signed up. That’s probably because a protectionist Europe has no credibility on these issues, despite pretending to be champions of free trade. In other words, if the United States doesn’t stand behind this institution, nobody else can.
Reform is the only way out
The risk now is that Europe and China are stalling on WTO reforms until after the 2020 election, waiting to see who wins. Though the White House is not scrapping the World Trade Organization, the administration should tread carefully. Blowing up the World Trade Organization would be a mistake, and it would not necessarily mean the reversion to the GATT framework. Plus, the World Trade Organization is redeemable. Once its members are ready to negotiate, there are plenty of solutions to improve it.
For example, some have proposed a “legislative remand” outlet that would move issues not subject to clear WTO rules out of the Dispute Settlement System and into committees populated by the various member-countries. Here, controversial issues would be subject to negotiation, not to the rulings of appellate members.
Even then, issues surrounding America’s chief complaint -- the rise of China -- will be hard to handle. These will require tough, hard-nosed negotiation and compromise. But the answer is neither the status quo at the World Trade Organization, nor is it scrapping the Organization entirely.
Willis L Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from the University of St. Thomas, and works in the financial services industry. The views expressed are the author's own.