America First vs the WTO

America First vs the WTO

The World Trade Organization (WTO) is the foremost intergovernmental organization for regulating international trade. Its purpose is to promote free-flowing trade by providing its membership with forums for three interrelated functions – negotiation, illumination, and litigation. As of 2018, 164 members or (contracted parties) representing 96.4% of world trade, 96.7% of world GDP, and 90.1% of world population have signed onto the WTO agreement. Members of the WTO regularly bring issues of tariffs, subsidies, dumping, or intellectual property rights infractions to WTO dispute panels so that these unfair trade practices can be discussed and resolved. In this way, the organization helps resolve international trade issues before they evolve into trade wars, which often have detrimental economic impacts.

This organization has traditionally been lauded for its role in promoting and expanding the benefits of free trade, especially for already developed countries. However, Increasing U.S. criticism of the WTO’s fairness and efficacy has set the stage for the Trump administration’s continued attack on key WTO dispute resolution bodies. Starting during the Obama administration, the US has been blocking judicial appointments to the WTO Appellate Body (AB), which rules on litigation appeals. As the few remaining judicial appointments expire in December 2019, the AB will no longer be able to reach a quorum, effectively forcing the WTO to dig its own grave. Considering this situation, it is important to determine the validity of common U.S. criticisms towards the WTO and whether the current prescription for a cure advances U.S. interests.

U.S. Criticisms of the WTO

In August of this year, President Trump threatened to pull the United States out of the WTO if it doesn’t “shape up.” He stated, “I don’t know why we’re in it. The WTO is designed by the rest of the world to screw the United States.” Trump himself has not specified what “shape up” entails, but his ambassador to the WTO, Dennis Shea, has articulated three U.S. priorities for WTO reform. Among the items he targeted are the transparency measures of the WTO, the process for obtaining and maintaining “developing country” status, and the WTO Appellate Body. He went on to say that if meaningful progress towards these reforms is not made, the U.S. will continue to block appointments to the AB and consider leaving the WTO.

Ambassador Shea’s concern about transparency measures refers to a WTO rule that requires members to report their subsidies, trading by state-backed firms, and changing product standards to Geneva. These reports are called, “notifications” and are necessary so that states can identify other members that commit trade infractions and begin negotiations accordingly. Unfortunately, his concern is well placed, for 90 out of the 164 members, including China, failed to submit any notifications in 2017. Most developed countries submit notifications in a timely manner, but the record for developing countries is far worse. Most small developing countries claim that they do not have the capabilities to collect the necessary data for these notifications; however, there are well-founded suspicions that countries such as China and India are using this explanation as a way to avoid the repercussions from illegal trade practices.

Ambassador Shea’s second area of reform is the WTO’s differentiation between developing and developed countries, which grants special and differential treatment for developing economies. This appears to be a sensible idea, for developing economies should not be expected to meet the same requirements as developed economies. However, according to WTO rules, the status is self-selected by the state, although other members can challenge the status. This has led to many countries taking advantage of the status by failing to transition out of developing status despite significant economic growth. As of now, there are 10 countries in the G20 that claim “developing” status including China, India, Brazil, Mexico, Saudi Arabia, and Turkey.

Lastly, both President Trump and Ambassador Shea have claimed that the WTO’s dispute resolution body (i.e. the Appellate Body) has overstepped its authority, does not exercise judicial fairness, and is not operating efficiently. President Trump, in reference to the Appellate Body, stated that “We lose the cases, we don’t have the judges.”  However, there are reasons to doubt the validity of some of these criticisms, for none of the other 163 members of the WTO have agreed that the AB is unfair, no judges native to the states in dispute are allowed to rule on the dispute, and the U.S. officially won 55 and lost 54 cases from 1995-2012, which is above the average for WTO members. WTO Ambassador Shea’s criticism focused more on the efficiency of the AB, “rules that we, as WTO Members, negotiated and approved domestically stipulate that the AB must render its decisions within 90 days – there are no exceptions given.  And yet the AB now almost never meets that deadline.” A recent study has proven this criticism more meritorious, as it showed that in 2015 the average AB proceeding lasted just under 5 months.

U.S. Solution

As has been shown, relevant facts support many of the most common U.S. complaints against the WTO; however, the aggressive prescription of bullying the WTO until it is no longer functional is more likely to compromise U.S. interests rather than fix the problem. The U.S. is one of the most frequent users of the dispute settlement process both as a complainant and respondent. Therefore, the confrontational strategy of destroying the AB leaves the U.S. with no legal channel with which to secure trade victories or appeal defeats. This comes at a time when the U.S. has multiple important cases pending against countries such as China, Russia, Mexico, and Canada. If this channel for dispute resolution is rendered dysfunctional, then it is likely that these trade disputes will escalate into fully-fledged trade wars, which would lead to further market instability and undermine our recent economic growth. Luckily, the U.S. is not the only major power in the WTO who is willing to pursue major reforms.

WTO members such as China, Canada, and the EU have put forward reform proposals that adequately address the majority of U.S. criticisms of the AB. Their proposed reform specifically addresses the supposed fairness, efficiency, and jurisdiction issues of the AB and has widespread support among WTO members. Moreover, the EU and Canada have released comprehensive WTO reform proposals that cover all of Ambassador Shea’s stated concerns. These proposals do not enjoy the sweeping support that the AB reform currently has, but they are a good starting point for negotiations. Thus, it is likely that the U.S. could successfully lead the reform effort from within the WTO structure, rather than reforming it through disruptive methods such as blocking AB judicial nominations and unilateral tariff increases. This would ensure that the benefits of the WTO such as constructive dispute settlement, providing market stability, and increased trade volume remain in place while also taking meaningful steps towards reform.