The World Trade Organisation is hurtling towards crisis. Set up more than two decades ago to break down protectionist barriers and to ensure countries play by the rules of international commerce, the WTO is firmly in Donald Trump’s isolationist sights.
Up to now, the White House has been waging war by stealth. Trump has garnered the big headlines for his broadsides against China, the European Union, and Canada, while at the same time conducting a quiet war against the WTO.
But now the president has aired his discontent publicly, warning that the US will pull out of the WTO unless it treats America better. “If they don’t shape up, I would withdraw from the WTO,” Trump said in an interview with Bloomberg.
This matters to every one of the WTO’s 164 members, but it matters especially to Britain, which has said it would be prepared to trade with other EU countries on WTO rules if it proves impossible to negotiate a bespoke Brexit deal. In fact, in little more than a year’s time, the WTO could become ineffective, opening the way for a trade free-for-all in which countries can engage in unfair trade without any legal restraints.
This comes at a time when relations between Washington and Beijing are worsening. China has, rightly, come to the conclusion that Trump sees trade as a modern way of prosecuting the containment strategy used by the US against the Soviet Union during the cold war. But it is the existential threat to the WTO that poses the real of a full-scale global trade war.
The root cause of the problem is something arcane – the WTO’s system for settling disputes between member states, which up until now has been considered one of the achievements of the last successfully complete global trade negotiations – the Uruguay Round, signed in 1994.
The new procedure – which was strongly supported by the US during more than seven years of talks – has two stages. If a country brings a complaint against another member that cannot be resolved by bilateral agreement it is initially dealt with by a disputes panel. The panel makes a ruling, but states can appeal against the decision. The WTO’s appellate body then adjudicates and its decisions are final and binding.
Trump has claimed that the US has been badly treated by the appellate body but this is not true. As a nation of lawyers, the US has been good at fighting its corner at the WTO and wins more times than it loses. It is also in the privileged position of knowing that one of the appellate body’s seven members is always an American.
The real gripe of Washington is that over the years the appellate body has increasingly been making trade laws rather than enforcing the ones that already exist, thus encroaching on national sovereignty. Interpreting trade rules is a complex and contentious business. The Americans, and some other countries, think member states rather than unelected appeal judges should decide ambiguous or contentious issues and that it is wrong for the appellate body to establish precedents for future cases.
Trump’s reluctance to accept that foreign rulings are binding on the US has also been evident in his decision to pull the US out of the Trans Pacific Partnership (TPP) and in the negotiations over the future of Nafta, but it is the WTO row that has the most serious implications.
Under WTO rules, the appellate body has seven members, each elected for four-year terms, which can be renewed once. When an appeal is lodged, the case must be heard by at least three judges. But as judges have ended their terms, the US has blocked fresh appointments. The list of judges is already down to four and will be down to the minimum of three when the Mauritian member, Shree Baboo Chekitan Servansing, retires at the end of September. Two more members will go by the end of next year, at which point the appeals process will come to a halt.
The Petersen Institute, a Washington-based think tank, explained the implications in a recent paper. “Should that happen, the WTO would lose its system of final appellate review, and its panel rulings would seldom become binding. Aggrieved countries would then lose their legal rights under WTO rules. Failure to resolve this crisis thus runs the risk of returning the world trading system to a power-based free-for-all, allowing big players to act unilaterally and use retaliation to get their way.”
Trump might think America would do better under the law of the jungle but he is wrong about that. He would pave the way for the global economy’s other big beasts – China, the EU, and Japan – to use unfair trade practices against the US without any legal constraint.
US unhappiness with the mission creep of the WTO appellate body predates Trump and, as the tacit support for its stance from other member states shows, is not without merit.
There are ways out of the current impasse. The Petersen Institute paper says one way forward would be for the the appellate body to submit matters of legal uncertainty to WTO committees for further discussion and negotiation by member states. This, though, presupposes that the US is actually interested in remaining a WTO member and that the other 163 members want the US to stay. At present, many would say good riddance if Trump walked.
But the stakes are high. The WTO would stagger on without the US but would become a zombie organisation. It would be rendered as ineffective by the lack of American presence as was another Geneva-based body – the League of Nations – between the two world wars. Historically, that’s not a great precedent.