Trade correspondent L.C.’s weekly trade report:
Over the past two weeks, the Trump administration has been playing hardball at the WTO, including the possibility of vetoing its budget for the next two years and opposing the compensation given Appellate Body (AB) judges. This week, it offered an alternative AB payment plan featuring drastic cuts.
Washington is proposing a compromise on judge’s pay in return for which it wouldn’t veto the WTO’s 2020 budget. The proposal does not include removing the US block on appointment of new AB judges. The WTO Secretariat – that is, Director-General Robert Azevedo – accepted the US plan, apparently as a way to put off the immediate crisis over the budget and allow at least some appeals to move ahead.
Washington justified its pay-cut demand by noting that it considers the current way judges’ pay is structured to be an incentive for them to drag out the time taken to conclude their appeals. Others, though, saw the drastic cut in resources to be a way to cripple the AB’s functioning – a clear US goal.
Washington’s proposal would have an AB judge receive no more than about $100,000 a year and would cut the AB operating budget. Apparently it would allow these payments for judges next year so that the two judges whose terms are expiring can continue hearing appeals that are currently pending. Only the Secretariat, rather than the AB, could provide funds for the substitute dispute settlement system proposed by the EU, Canada, and Norway as a way to have appeals heard in the absence of an AB quorum. But the Secretariat would only be allowed to spend about $100,000 for this purpose.
In return, the US would vote to approve the proposed 2020 WTO budget of $197.6 million (approval of the 2021 budget would be postponed).
Despite the Secretariat’s acquiescence, the proposal met stiff opposition from the EU, China, India, Turkey, and others. The proposal wasn’t adopted, and the path ahead for the WTO budget isn’t clear. Nor is it clear just what will happen after December 10th when two AB judges’ terms expire. The AB must have a quorum of three judges in order to hear trade disputes appealed to it.
Reportedly, Japan and Brazil were among those supporting the US/Secretariat plan. One of the issues was how this funding would impact ongoing appeals, of which there are about a dozen, and those supporting the plan argued – as did Azevedo at the meeting – that it is flexible enough to allow those disputes to be concluded, though others said it may only enable conclusion of just one appeal.
In the recent period, about 70% of dispute settlement panel rulings have been appealed, so the collapse of the appellate system would, unless most members agree on a substitute arrangement, kill the WTO’s dispute settlement function. Any country hit with an unfavorable panel ruling could simply file an appeal and in the absence of a way to bring an appeal to a conclusion, the ruling would never take effect. This would discourage countries from bringing cases to begin with since they would have to take into account that if they win, the respondent country would be likely to send the case into oblivion by appealing it.
Indeed the Indian press is quoting a “legal analyst” as saying New Delhi “need not have to worry about an adverse ruling anytime soon” in the three cases it lost and then appealed – since the “wrenching conditions sought by the US will make the highest court dysfunctional from December 11” on. So India won’t have to abide by the panel rulings it lost, including the US case against its export subsidies. Or as an EU official told reporters, not having binding dispute settlement “is almost a license to start misbehaving.”
Separately this week, a paper produced for the American Enterprise Institute by the Agriculture Department’s former chief economist Joseph Glauber warns that US payments to farmers, compounded this year by President Trump’s “trade aid,” may exceed the domestic farm support limits set by US WTO commitments. This may, he said, spur other countries to challenge the US and could also interfere with US efforts to win cooperation from others on WTO reform, given that Washington would be perceived as violating current subsidy rules.
The EU, Canada, and Norway are trying to convince other WTO members to join them in creating a temporary ad hoc system for appeals to be used until the AB is back in operation. Under it, parties to an agreement would agree to ask three retired AB judges to come back to rule on their case. The US last week indicated it would disrupt this effort by vetoing the use of WTO funds to pay for such appeals.
At a November 21st EU trade ministers meeting, three countries reportedly also raised objections, saying they don’t like the EU to put itself in a position of siding with countries like China and Russia against the US and would prefer to work for WTO reform rather than work for an alternative appeals system.
An opinion editorial in the December 1st Wall Street Journal defends the Trump administration’s disruption of the WTO, writing that
The WTO has three fundamental problems. First, it isn’t working efficiently to resolve disputes and modernize….The case against Airbus for receiving unfair subsidies dragged on for more than 15 years before being finalized this fall.
Second, WTO rules don’t cover digital trade, cross-border data flows and many services, including commercial aviation. They also fail to address subsidies of “national champions” in the developing world, including China, which claims to be a developing country so it can use state-controlled funds and banks to finance industry without violating WTO rules.
Third,… the WTO appellate body is acting beyond its mandate, which is to settle specific cases using rules negotiated by member states. It is even making new law “as Members push to achieve through litigation what they…cannot achieve at the negotiating table…” according to Dennis Shea, the U.S. ambassador to the WTO.
The op ed’s author, Thomas Duesterberg, is a senior fellow at the Hudson Institute who served as assistant secretary of commerce in President George H.W. Bush’s administration.
Bloomberg News thinks that the administration is following the take-no-prisoners technique that Peter Navarro successfully applied to stop the Universal Postal Union from compelling the US to subsidize China’s package shipments to the US. This initiative, together with the administration’s use of trade threats to force Mexico to take more responsibility in stemming the flow of migrants to the southern US border, are the only trade-related actions that the administration can credibly claim success for so far.
But there’s a high risk that the US approach of playing hardball at the WTO could seriously and permanently damage the world economy, most of whose trade is conducted under WTO rules and rulings.
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