This story is part of an ongoing series on US-China relations, jointly produced by the South China Morning Post and POLITICO, with reporting from Asia and the United States.
The world will not end on December 10, yet for many who have spent their careers within the global trading oversight system, the date has apocalyptic consequences.
That is when the World Trade Organisation’s (WTO) highest dispute-resolution body will cease to function after the administration of US President Donald Trump blocked reappointments to its panel. Without a working appeals system, international trade disputes may never see resolution and could quickly evolve into tit-for-tat tariff wars that spiral out of control.
I don’t think up to this point the [Trump] administration has been satisfied by the type of answers it has been getting from other members
The United States does not appear to be eager to avert a crisis until other countries admit that the WTO – part negotiating forum and part trade policeman – has failed in multiple ways.
“I don’t think up to this point the [Trump] administration has been satisfied by the type of answers it has been getting from other members,” said Stephen Vaughn, who stepped down as general counsel to US trade representative Robert Lighthizer in May.
The looming crisis exposes deeper cracks at the WTO. The consensus-based organisation, which includes 164 countries with wildly divergent stages of economic development, has largely failed to work out new rules for freer trade since it was formed in 1995. Negotiations launched in Doha in 2001 were finally declared dead by the US in 2015 after yielding few results.
The US could use its agenda to neuter the Geneva-based WTO even further after Bloomberg reported earlier this month that it had floated the possibility of blocking the organisation’s biennial budget approval. Without money, the global body would effectively shut down next year.
“This is the depressing bit: The Titanic has hit the iceberg. It's not sinking in 13 minutes, but it is sinking and how do we fix it?” said Deborah Elms, executive director of the Asian Trade Centre. “Everyone is setting up the deck chairs and the band has never sounded better. But in the meantime, the boat is going down and how do you solve this problem when people do not even want to admit the boat hit the iceberg?”
How did we get here?
The US has a long list of complaints with the WTO’s Appellate Body, the last stop in what some view as an overly deliberative and needlessly long dispute-settlement process. The body’s annual report for 2018 showed that the average trade spat spent 859 days at panel stage, then 395 days on appeal, meaning 1,267 days, or three and a half years, in total – a lifetime in the information age.
The top panel typically has seven people but needs a minimum of three judges to hear cases and issue rulings. The tenures of two of the three current members will expire on December 10, leaving only one judge, Chinese professor Hong Zhao, remaining.
This is the depressing bit: The Titanic has hit the iceberg. It's not sinking in 13 minutes, but it is sinking and how do we fix it?
Among the biggest objections of the US are how panel members have come up with their own rules in the absence of clear guidance from the numerous agreements that were reached when the WTO was founded 24 years ago.
“I think it’s been clear for a long time that the Appellate Body has taken it upon itself to do gap-filling and to do rule making in areas where the members haven’t spoken,” added Vaughn. “The United States has been very concerned for a very, very long time and other members, including the European Union, have been less concerned and that is something I think that the administration really is saying has to be taken more seriously.”
Indeed, US grievances with the Appellate Body did not start with Trump. In 2016, the administration of president Barack Obama blocked Seung Wha Chang of South Korea from serving a second term. He was accused of exceeding the scope of his legal mandate in a number of rulings.
The Obama administration also prevented the reappointment of Jennifer Hillman, an American and former US trade official, out of concern she was not being aggressive enough in issuing dissents in rulings that attacked American trade laws.
“The US has consciously forced a crisis within the WTO around the Appellate Body because we believed that it had strayed over the years from its mandate and that the crisis was necessary to try to get a role change,” said Robert Holleyman, deputy US trade representative under the Obama administration.
The US sees the Appellate Body's role as one which strictly enforces a “contract” agreed to by WTO members. The European Union and many other countries, however, view the body as more of a court that is able to create new laws for the organisation, WTO deputy director general Alan Wolff said recently.
Lighthizer made that same point in a rare public speech in 2017 when he said the European Union views the WTO and its dispute-settlement rules as “sort of evolving kinds of governance.”
“There’s a very different idea between these two things,” Lighthizer said. “And I think sorting that out is what we have to do.”
The gap between American and European perspectives widened further last year when the European Union sided with India and China on a proposal that Washington said would make the Appellate Body even less accountable to WTO member nations. A person close to Lighthizer said the trade chief was particularly incensed after the European Union doubled down on that position viewed as completely opposite to that of the US.
While China and India will inevitably oppose US complaints, support from the largest trading bloc in the world is seen as a requirement for long-term changes, said the unnamed source.
Trump’s envoy to the WTO, Dennis Shea, said during a high-level meeting in October that “it is difficult to see how we can find solutions to a ‘problem’ we do not agree exists.”
Even staunch defenders of the system say the European Union and others need to recognise the problem.
You’re going to need to hear from the European Union and others that have been viewed as sceptical – that they agree with the fundamental principles that the United States is espousing, that the Appellate Body has gone off track
“You’re going to need to hear from the European Union and others that have been viewed as sceptical – that they agree with the fundamental principles that the United States is espousing, that the Appellate Body has gone off track,” added Hillman, whose one term on the Appellate Body lasted from 2007 to 2011.
Supporters of Trump’s tactics say the negative consequences of the Appellate Body closing have been overly exaggerated. Even if nations cannot appeal, trade complaints can still be raised and potentially resolved formally or informally at lower levels.
Unease with the prospect of not having a final authority on disputes has prompted Canada and the European Union to begin work on a “shadow Appellate Body” that would mimic much of the WTO version. Judges would be made up of former Appellate Body members.
But even if the US manages to ram through its fixes to the dispute system, American officials have a litany of other changes they want to see at the WTO. They include making it harder for countries like China to self-proclaim “developing” status, which affords them certain preferential treatment on trade. The US also wants more transparency from all nations, especially from China, on subsidies given to domestic businesses that export overseas.
A weakened WTO could bring back an era that allowed economically strong countries to steamroller other nations. Before the WTO established a rigid dispute process, trade was governed by the General Agreement on Tariffs and Trade, which determined trade disputes through diplomatic muscle rather than a deliberative, legal manner.
That may not necessarily be seen as a bad thing for Trump and his group of trade officials, who have long viewed the WTO as a suspect institution aimed at undermining US economic sovereignty.
At that stage, the whole thing gets out of hand. I think that will be the doomsday scenario
“At that stage, the whole thing gets out of hand,” said Stuart Harbinson, Hong Kong’s former representative at the WTO, now an international trade consultant at communications firm Hume Brophy. “I think that will be the doomsday scenario.”
The China connection
Lighthizer’s discontent with the WTO’s appeals process only grew worse after China joined the global trade group in 2001.
“The WTO dispute settlement system is simply not designed to deal with a legal and political system so at odds with the basic premises on which the WTO was founded,” Lighthizer said of China in 2010 testimony to the US-China Economic and Security Review Commission.
The former trade lawyer had spent most of his career defending the interests of US steel companies by filing for duties to protect against unfair pricing and subsidies made possible by the juggernaut of China’s state-run economy. His frustrations with the Appellate Body increased after rulings continued to undermine US trade laws that were used to protect the economy against China and other bad actors.
“There have been a lot of cases in the dumping and countervailing-duty, the trade-remedies laws, where, in my opinion, the decisions are really indefensible,” Lighthizer said in 2017.
The Trump administration, labour unions and other constituents view China’s membership of the WTO as the death knell for US manufacturing. Membership of the WTO required the US to further open its market to Beijing’s industrial machine even as China was routinely accused of flouting the organisation’s rules.
The failure of the WTO to address issues such as intellectual property theft and forced technology transfer prompted the Trump administration to act alone and forcefully as part of its current trade war. US trade officials have defended the decision to launch a bruising trade war with China outside the formal WTO dispute process with the argument that global trade rules do not address Beijing’s transgressions.
In that regard, the WTO’s problems are unlikely to be resolved until the world’s two largest economies wrap up negotiations in their tariff disputes, a process that could take years.
The US is taking an irresponsible attitude in letting the organisation become ineffective
Long Yongtu, who was Beijing’s chief negotiator during bilateral talks over China’s accession to the WTO in 2001, described the Appellate Body as its “jewel in the crown.”
“The US is taking an irresponsible attitude in letting the organisation become ineffective,” Long said in an interview in Shenzhen in early November. “The US’ action to slap higher tariffs on tens of millions of dollars of Chinese products is a total breach of the WTO promises and rules. If the WTO’s rules are ignored, the entire game will be in a state of chaos. I think that’s the biggest damage to global trade.”
Yu Yongding, a noted Chinese economist and former member of the monetary policy committee of the People’s Bank of China, added that the US should be “resolutely condemned” for “blocking the appointment of judges to the WTO appellate body.”
“If there is no final ruling, no judges, the dispute mechanism cannot run properly. You have to solve these problems, therefore, China must resolutely condemn the United States,” he said.
If there is no final ruling, no judges, the dispute mechanism cannot run properly. You have to solve these problems, therefore, China must resolutely condemn the United States
That is a common refrain among China’s WTO watchers. China is open to reform, they say, but the US is intransigent in its behaviour. This sort of finger pointing makes it plain to see that neither side is willing to yield much. Furthermore, Chinese experts rarely say exactly what sort of modifications Beijing would back.
Huiyao Wang, founder of the Centre for China and Globalisation, a Beijing think tank, said China “strongly supports the reform of the WTO,” but has not outlined what changes it would accept.
One of the army of Chinese lawyers charged with readying the country for its WTO accession in 2001, who wished to remain anonymous, added: “China certainly wants to have an open global market and supports globalisation, but I don't think the Chinese leadership are ready to change themselves,” the lawyer said. “China says it supports globalisation, but what are the details?”
Finbarr Bermingham reports for the South China Morning Post from Hong Kong and Adam Behsudi reports for Politico from Washington.
Additional reporting Cissy Zhou and Liu Yujing
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