Holding the WTO Hostage: A Risky Gamble

The World Trade Organization (WTO), with its 164 members, is the largest trade agreement in the world. The function of the WTO is to create predictability; it ensures that all members play by the rules of international trade and imposes sanctions when they don’t. Its dispute settlement mechanism is key to this mandate. Cooperation is enforced by the belief that any wrongdoing will be sanctioned multilaterally. Today, however, the WTO’s ability to coerce its members into cooperating is threatened by the US.

For members to accept sanctions delivered by the Dispute Settlement Body (DSB), they must first be deemed fair and impartial. The Appellate Body (AB) of the WTO serves as a check on the decisions of the DSB. The United States is currently using its veto power to block the appointment of 2 judges to the AB, thus creating delays sufficient to undermine the integrity of the entire dispute settlement mechanism the very foundation upon which the WTO rests. “The dispute settlement system is . . . one of the most important pillars of the organisation” states Roberto Azevêdo, the Director-General of the WTO.

Despite the more recent concerns expressed by the Trump administration towards the WTO, the decision to block the appointment of new judges was originally initiated by the Obama administration over procedural issues in May of 2016. It has since become clear that, apropos the WTO, the US is not simply directed by Trumpian whims—as so often seems to be the case now—but rather that it is driven by a much larger agenda, as it hasn’t put forth any solutions either.

The topmost decision-making body of the WTO –the Ministerial Conference– will meet this Fall. It would be the perfect occasion to address these irregularities, yet Robert Lighthizer, current US trade representative, has made it clear not to count on that, stating that “it’s unlikely that the ministerial in Buenos Aires is going to lead to negotiated outcomes.”

While it is highly unlikely that the US will do away with the WTO altogether, Lighthizer has hinted at concerns that suggest much more serious implications Speaking at the Centre for Strategic and International Studies (CSIS) late last month, he announced that “The United States sees numerous examples where the dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to.” The WTO has repeatedly sanctioned the US over a practice called zeroing, a disputed method used by the US to justify higher-than-usual anti-dumping duties. While this homemade formula only applies to a small percentage of American trade, it seems to be of utmost importance to the US, as it has kept using it, even after the WTO judged it illegal in 2007. In his discontent, Lighthizer implies that the US helped to create the WTO in efforts to protect its national interests, not to be bound by multilateral sanctions.

As the EU Trade Commissioner, Cecilia Malmström, put it, the US is “generally not happy with the system.” The WTO’s inability to handle China’s mercantilism and international trade in services poses fundamental problems to the US government and its large export surplus in services.

It remains unclear what strategy the US is pursuing, but Robert Lighthizer seems to be seeking more control over appellate decisions rendered against the US. Last April, the US initiated a Section 301 investigation against China, bypassing the WTO altogether. This contentious section of the Trade Act of 1974 grants the US president discretionary power to entirely disregard trade agreements and unilaterally implement sanctions as a result of a national investigation. In 1996, when he was advising presidential candidate Bob Dole, Lighthizer envisioned a national process that could review WTO appellate decisions. Under such a provision, Congress would have been able to vote out of the WTO if too many appellate decisions were rendered against national interests. This would effectively harness the appeals court (the AB) and politicize the judiciary, making its decisions illegitimate and prone to influence from bigger countries. When deliberating, judges would be charged with the burden of adjudicating in favor of the US or causing its withdrawal from the WTO.

Prior to the creation of the WTO, the General Agreement on Tariffs and Trade (GATT) was the only framework in place to settle trade disputes. It was based on bilateral agreements and was clearly ineffective as Robert Lighthizer pointed out in his speech at CSIS in September. Yet, from an American perspective, there is still something to be envied about GATT. It allowed larger countries with more influence to pressure smaller ones and further their interests. In his speech, Lighthizer made several references to GATT, seeming nostalgic about the way it handled bilateral disputes.

If the US stands by its decision and continues to block the appointment of judges, the appeals process of the WTO could be rendered ineffective as early as December when the Belgian member’s term comes to an end and the court no longer meets its quorum. Inevitably, the entire dispute settlement mechanism may be discredited and even collapse if countries decide to take matters into their own hands and start unilaterally implementing correctional measures on alleged claims that could not be settled by the WTO Appellate Body.

The Appellate Body is currently reviewing two cases filed by the European Union against the United States. By blocking the appointment of judges, the US hopes to bully the WTO into deliberating in its favour. Cecilia Malmström fears that the United States could effectively be “killing the WTO from the inside”.

Cecilia Malmström, European Commissioner for Trade in September 2016 at a press conference. http://bit.ly/2l8v8RS

The WTO and other international institutions have largely contributed to the perpetuation of liberalism and American hegemony. In the past, the US saw participation in international institutions as an opportunity to lock-in its influence over time, rather than as restrictions on its power. By impairing the WTO, however, the US makes way —inadvertently— for another hegemon. As a fierce supporter of free-trade, the EU could very well seize this opportunity to outplay the US when it is most vulnerable. As Roberto Azevêdo, the Director-General of the WTO pointed out, “it matters a great deal that the U.S. is not one of the driving forces […]. But the system itself did not stop.” This suggests that rather than collapsing, the WTO could instead be supported by the rise of new prominent actors — perhaps leaving the US to flounder in a limbo of its own creation.

This article has been edited by Shirley Wang