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Without an Appellate Body, what’s next for the WTO?

For the first time in its nearly 25-year history, the World Trade Organization opened for business on Wednesday without a properly functioning mechanism to settle disputes among its membership, leaving WTO members, lawmakers and business groups wondering what’s next.

The WTO’s Appellate Body is down to just one member after the terms of two others expired on Tuesday. While WTO dispute settlement panels can rule on cases brought by members, if members choose to appeal a ruling, the WTO cannot adopt a decision. For the past two-and-a-half years the U.S. has been blocking appointments to the seven-member panel over philosophical and procedural issues with how the body operates. The issue has been the focal point of discussion in Geneva since the U.S. began its blockade.

Business groups and some U.S. lawmakers who have previously been silent on the issue are now vocalizing their support for the Appellate Body, saying the U.S. should work with other members to revive it.

“The Chamber urges all parties to redouble their efforts to address the important issues the U.S. has raised regarding the functioning of the Appellate Body,” U.S. Chamber of Commerce Executive Vice President and Head of International Affairs Myron Brilliant said in a statement on Tuesday. “The goal must be to revive it in a more responsive and focused form in keeping with the objectives established by the U.S. and other members when the WTO was created nearly three decades ago.”

“If the WTO didn’t exist, we’d have to create it,” Brilliant continued, citing a well-worn trade mantra. “Its rules protect U.S. firms from unfair treatment and hidden protectionism every day. Safeguarding this institution and its dispute settlement system should be an urgent national and international priority.”

A group of House Ways & Means trade subcommittee members, meanwhile, last week introduced a resolution calling on the U.S. to “work with other WTO members to achieve reforms at the WTO that improve the speed and predictability of dispute settlement [and] address longstanding concerns with the WTO’s Appellate Body.”

But Senate Finance Committee Chairman Chuck Grassley endorsed the U.S. actions in a statement on Tuesday. “I wish U.S. concerns would have been resolved before today, but that didn’t happen,” he said. “I hope this provides the impetus for WTO members to seriously address the issues raised by the United States. I have said before that the WTO’s success depends on members acknowledging its shortcomings and working together to address our goals to strengthen the institution. The work to restore the Appellate Body should continue in earnest with the shared goal among all members of getting WTO dispute settlement back on track in 2020.”

Grassley has been asked about the U.S.’ dismantling of the Appellate Body repeatedly during weekly press calls and has consistently supported the U.S. actions.

Without an Appellate Body, there is no guarantee WTO disputes will be completed. Some members have set up alternative agreements to ensure disputes among a small subset of the WTO membership can be resolved, but the U.S. — one of the most frequent users of the system — has been critical of those efforts.

What now?

The handicapping of the Appellate Body could mean several things for the United States: The proliferation of tariff tit-for-tats could continue; countries could lose their incentives to avoid WTO-inconsistent measures; the already struggling negotiating arm of the WTO might face more obstacles; and China could step into what some say is a leadership void left by the U.S.

Rep. Stephanie Murphy (D-FL), a member of the Ways & Means trade subcommittee, warned on Tuesday that U.S. consumers could bear the brunt of “mini-trade wars” by having to pay higher tariffs on goods. “We would essentially be back to the wild, wild west as it relates to global trading,” without the Appellate Body, Murphy said at a congressional briefing she hosted on the WTO crisis on Tuesday.

“The absence of a binding, independent dispute settlement system could turn every trade dispute between nations into a mini trade war with countries unilaterally imposing tariffs and counter tariffs on each other,” she said. “That would mean new and damaging taxes on American consumers because — let’s be very clear — tariffs are taxes on American businesses and American consumers.”

Jennifer Hillman, a fellow at the Council on Foreign Relations and a former WTO Appellate Body member, said at the briefing that a functioning WTO dispute settlement system provides a “chilling effect” on those who break WTO rules. That chilling effect will be thawed in the absence of an Appellate Body and countries could feel emboldened to implement trade restrictions without fear of losing a case at the WTO, she said.

Linda Dempsey, the vice president of international economic affairs policy at the National Association of Manufacturers, suggested some countries could decide to just “stop trade” in specific sectors. She cited a case the U.S. won over China when the latter imposed export restrictions on rare-earth elements. Binding dispute settlement prevents the proliferation of those types of restrictions, she said.

With no multilateral dispute settlement, the U.S. would not have recourse to challenge other countries’ trade restrictions, which could lead to tariff battles that dampen economic growth, Hillman said. A major benefit of the WTO is the certainty offered by its most-favored nation principle and binding tariff commitments, she said. If new tariffs become the norm rather than dispute settlement, then exporters will lose that certainty. That loss will particularly hit small and medium-sized businesses that don’t already have lawyers, bonding agents and customs brokers on retainer to sort through tariffs and customs issues, she said.

Members could also lose the incentive to negotiate new rules if the current ones cannot be enforced, according to Simon Lester, a fellow at the Cato Institute, and Jeffrey Schott, a fellow at the Peterson Institute for International Economics. Lester spoke on Tuesday at an event sponsored by Women in International Trade and Schott participated in the congressional briefing. The U.S. has been pushing a group of WTO members for new rules on e-commerce. WTO members also hope to reach a deal to curb harmful fisheries subsidies by June 2020, a negotiation that has been characterized as a bellwether for the future of WTO talks.

By isolating itself via its Appellate Body block, the U.S. has also ceded the high ground to China, which is seeking to fill a leadership vacuum left by the U.S. at the WTO, analysts said. According to one Geneva source, China is positioning itself as “the savior” of the multilateral trading system through its opposition to U.S. actions. Attempts by the U.S. to lead in WTO negotiations is also undermined by its Appellate Body position because of the ire it is facing from other WTO members, Hillman said.

The U.S. used to be comfortable that when it leads, others follow, Stephen Kho, a lawyer with Akin Gump, said at the congressional briefing. But with its entrenched position on the Appellate Body, that is “less and less the case,” he said. Instead, the knee-jerk reaction of members is to dismiss the U.S.’ comments or contest them.

What’s next?

For now, WTO members likely will continue to use the dispute settlement process — at least up to the panel stage, according to Stephan Becker, a partner at Pillsbury’s international trade practice. Panel decisions, even if not adopted by the WTO’s Dispute Settlement Body, could prove useful in bilateral negotiations, Becker said at the WIIT event, as members could use the decisions as leverage in that context. But the longer the Appellate Body remains paralyzed, the greater the chance that members could choose to forgo the cost of WTO litigation and take matters into their own hands.

WTO dispute settlement is not dead, according to WTO Director-General Roberto Azevêdo. “The fact that we are where we are now, it doesn’t mean simply — because some people may understand it this way — ‘Oh, no more dispute settlement in the WTO, it’s all over,’” he told reporters in Geneva on Tuesday. “It’s not true. This is not necessarily true. A lot will depend on how members want to address this situation. But there are many questions out there.”

The U.S. has not made clear what it wants, according to Geneva sources, a point the U.S. would contest. One source said the U.S. does not know what it wants. Schott said the U.S. could have used the Appellate Body blockade to accelerate reforms for the body, but fears the U.S. is satisfied with where the Appellate Body stands today — with a single member, unable to rule against the U.S. — Brett Fortnam (bfortnam@iwpnews.com)

Source: Inside Trade

 

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