Now is the winter of our discontent

The WTO Appellate Body is no longer functional. But 17 WTO Members have agreed to appeal trade disputes through an ad-hoc mechanism. The US is not part of this agreement. The crisis therefore continues. But for how long and at what price?

With great bravour, 17 WTO Members (Australia, Brazil, Canada, Chile, China, Colombia, Costa Rica, European Union, Guatemala, Republic of Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland and Uruguay) agreed to an ad-hoc appeal arrangement for WTO Panel reports. This arrangement ensures that disputes between the 17 parties can arrive at a final conclusion and avoid that Panel reports are appealed into a “void”, as the WTO Appellate Body is currently not functioning.

The EU was the instigator of this agreement, but it is particularly interesting to note that China also decided to join. China is currently involved in several WTO disputes with the other 16 parties to this arrangement. A major motivating factor for China might have been to show the world, and especially the US, that they are committed to the rules of the current system. The absence of the US on the list of signatories is palpable.

The US, first under Obama, then followed by Trump, is responsible for having sunk the WTO Appellate Body. Many countries agree with all or some of the reasons given by the US, but no other countries have supported the US’ drastic measure of shutting down the institution. During this escalating crisis, trade academics and professionals have had a field-day trying to figure out an elegant legal solution to the crisis. The ad-hoc arrangement is a clever way to circumvent the paralysis of the WTO Appellate Body crisis for the countries that signed up to the arrangement. However, unless more countries sign up to the arrangement, the crisis in the dispute settlement system will persist.

Few analysts have looked at how the US actions are aligned with today’s geopolitical, economic and security situation. This might be the key to understanding how long the crisis will last and how to find a possible solution. China is on a trajectory to surpass the US in terms of economic power, has vast natural resources and has successfully gained control of resources in many other countries, conducted a policy of regional integration in terms of infrastructure and trade (Belt and Road initiative), has institutionalized the appropriation of foreign know-how and is exercising its military might in the Asian region. These are just a few examples of China’s rise in global power.

In response to this, the Trump administration has taken several actions against China. The US has introduced additional duties on Chinese products, banned Huawei from developing 5G mobile networks and recently forced China to commit to buy more US products under a trade agreement. According to the US, these are necessary actions, as China cannot be reined in under the current rules and dispute settlement system.

However, China is not always breaking the WTO rules. According to the US, the rules are just not adapted to China’s behavior in international trade. Observing the deadlock (or: demise) of the current Doha round of negotiations, the US must have quickly concluded that the solution to fixing the problem would not be to bring additional concerns into the WTO negotiation mix. The negotiating climate is not ripe for any agreement to be struck on any issue. The US apparently also believes that the current WTO rules excessively limits US policy space as the world’s foremost superpower. The US response has therefore been to reboot the system, rather than trying to patch it up. Hence no more Appellate Body.

The OECD has dramatically cut its economic forecast for global growth. This is an indication that the problems in the international trading system are profound and serious. As the WTO judiciary is effectively stymied, one can expect more dubious government actions. International trade will gradually suffer as governments will try to bend the rules and revert to protectionism.

The current ad-hoc arrangement between the 17 countries is furthermore not a solution to fixing the problems at the WTO. But it takes away the immediate pain for the parties involved. A solution needs to involve the US. But the US has so far only voiced their concerns about the system, but not contributed to finding solutions or taken part in the discussions to resolve the crisis. And the US would be farfetched to sign up to any rules that they were not part of negotiating.

The US apparently does not seem overly concerned about finding a solution to these issues. With time, the pain of protectionism and decline in international trade and global growth will increase. The stakes are therefore high. How long this situation will last, remains to be seen. Some analysts are hoping that the end of the Trump administration, either in 2020 or 2024, will bring the US policy back to what it used to be. This might be optimistic, as the underlying factor of the rise of China and the US qualms about sovereignty in international dispute settlement will remain and likely continue under any new US administration.

The EU’s ad-hoc arrangement could therefore take two effects. Either it could grow significantly in signatories, so that it effectively will be an alternative to the WTO Appellate Body, and therefore force the US to the negotiating table. Or it will remain limited in signatories and protract the WTO crisis as the 17 parties don’t see the urgency in finding a solution to a crisis which doesn’t fully affect them, and especially not on the US terms. The depression in the international trading system could therefore stabilize as a permanent dark cloud.

If a full-blown economic crisis erupts from the slow-down in international trade, another question is for how long people around the world are willing to suffer the consequences of dire economic times: unemployment, insecurity, poverty, etc. This crisis will hit every country in the world, including the US. Hopefully, people’s reaction would be a new impetus for global cooperation to jointly overcome the problems. The recession, fueled by protectionism, in the 1930’s was the precursor to a much more dire scenario.

A political solution to the current problems must be found and the gravity of the situation cannot be underestimated.

Please get in touch if you have comments or would like to discuss the points raised above. Email: [email protected]