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Do Trump’s metal tariffs signal the end for the WTO? Or have we been here before?

Commentators have been proclaiming the World Trade Organisation’s multilateral trading system as either dead or on its deathbed since before the WTO even came into existence. So why does the Trump administration’s decision to implement import tariffs on steel and aluminium have the trade hornets so agitated again?

Earlier this month, the day after the import duties were announced, US journalist and author Edward Alden declared in a Council on Foreign Relations blog: “March 8, 2018: The day the World Trade Organization died. Twenty-three years and sixty-seven days after its launch on January 1 of 1995. RIP.”

He is far from the first person to have written off the WTO. Searching the internet for “WTO is dead” shows that this happens much more frequently than people imagine, sometimes annually.

Back in 2010, journalist Paul Blustein, one of the most knowledgeable about the WTO, also wrote its obituary, although he left open the possibility that it had “contracted a terminal illness”. If so, it’s taken an awfully long time to die.

20 years before Blustein, Lester Thurow wrote an article titled: “GATT Is Dead; the World Economy as We Know It Is Coming to an End, Taking the General Agreements on Tariffs and Trade with It.”

It included this: “The spirit of GATT would call for […] a level playing field. But no one wants a level playing field; everyone wants an edge.”

At that time, GATT negotiations were deadlocked. Four years later a huge deal was struck. The GATT era did indeed come to an end, but it was replaced by the WTO, and the level playing field was spread into new territory.

The problem with these death notices is that they judge the organisation’s health on only part of the WTO’s much wider role. They also ignore countries’ faith in a system based on rules, and longer term prospects: nothing ever happens fast in the WTO.

Yes, dispute settlement and negotiations — the two functions at the heart of the diagnosis — are important, but they don’t tell the whole story by any means, and even for them, their condition is not (yet) terminal.

Nevertheless, the hornets were well and truly stirred. Social media and the blogosphere were abuzz. Some commentators warned of the dangers of wrecking the WTO. Others called for more realism.

“This is not to say that the WTO is not at present in danger,” wrote Stuart Harbinson, former head of the WTO Director-General’s Office and before that Hong Kong’s chief diplomat at the WTO.

“However, it should not be judged against standards it was never designed to meet. Indeed, if there is a silver lining at all in the current situation, it may be that a more realistic view may in future be taken of its capabilities and limitations,” he said.

The WTO itself left it to a deputy director-general, Alan Wolff (perhaps deliberately because he’s an American), to counter that the organisation’s latest problems were not insoluble, and that its negotiating function was “hardly dead” since “three major WTO agreements were reached just two years ago.”

Then news broke in an Indian newspaper that a significant number of WTO members had got together to find a way round the crisis in dispute settlement. The new buzzphrase became: ‘it’s too soon to write off the WTO’.

Well, yes, but life or death at the WTO has always depended on its members collectively.

Steel and national security

The Trump administration’s announcement on March 8 that it was going to raise import duties on steel and aluminium was the WTO’s supposed death blow.

Wolff countered the commentators by saying that problems with steel were nothing new and the organisation had managed it before. True, but this time there was a difference.

Technically the proposed duties looked like “safeguard” tariffs, 10-25% added to normal rates as if charged to offset an import surge or price collapse. But the reason given was nothing of the kind. The US claimed its national security was at risk because the survival of its steel and aluminium industries were threatened by cheap imports.

The US cited a blanket carve-out for national security under Article 21 of GATT (now part of the WTO), instead of the WTO’s Safeguards Agreement. This avoided the US having to calculate the “serious injury” to domestic industry, which is required for safeguard tariffs. 

But normally national security is cited to block imports completely, not for a partial tariff increase. In the past countries avoided using this justification if they could, because it is ill-defined legally, and they wanted to avoid opening the door to a flood of similar undisciplined actions by other countries.

Recently, however, it has been cited in trade friction between Ukraine and Russia (with this submission from the EU on burden of proof), and potentially between Qatar and a group of middle-eastern states.

The US announcement led to an ingenious response from the European Union. It proposed a list of products for retaliation, explaining at the same time that it aimed to keep the retaliation legal under WTO rules by treating the US tariffs as if they were safeguard tariffs. This would presumably be under consultation and compensation provisions of Article 8 of the Safeguards Agreement.

Some lawyers, meanwhile, dug out evidence from the 1940s, when the US originally proposed the national security provision in GATT, and its officials described a more conventional interpretation of national security (see also this follow-up).

The US’s present claim might never pass a legal challenge in the WTO, some claimed, although no one knows how those snippets of negotiating history might be interpreted in a WTO dispute panel and appeal ruling.

Dispute settlement deadlock

That is where the second US-created problem came in: whether WTO dispute settlement would be in any shape to deal with the case at all.

The US has blocked the appointment of WTO Appellate Body judges to replace those whose terms have expired or are about to expire, or the reappointment of those eligible for a second term.

By the time a case against the US’s use or misuse of national security passed the first stage of WTO dispute settlement, the Appellate Body could have too few members left to hear an appeal (see infographic at the foot of this article) — and whatever the outcome, one side or the other (or both) would probably appeal. The case would therefore be stuck in limbo.

Hence the report in Hindu Business Line that key WTO members were getting together to consider a temporary fix in the form of arbitration under a separate provision of WTO rules (Article 25 of the Dispute Settlement Understanding). Participation in this is voluntary, unlike normal dispute settlement, but once both sides have agreed to arbitration, the ruling is binding.

Rumours and speculation grew on social media. Was it true? Some said Geneva sources were denying the report. Others said that despite the denials they believed it, not least since the idea had already been floated by a group of well-known trade lawyers affiliated with the Geneva office of Sidley Austin LLP. This and two alternatives from a former head of the WTO’s Legal Affairs Division (majority voting, or a similar arbitration mechanism outside the WTO) were presented at a panel discussion in Geneva last November.

The problem was the US would be unlikely to accept voluntary arbitration at least in a case about the steel and aluminium tariffs. So even if the move worked it would only rescue dispute settlement for cases that did not involve the US and other reluctant countries. The system would not be dead or even paralysed, but severely constrained.

In the end, WTO members may have to get down to tackling the US’s grievance. This seems to be an objection to how dispute panels and the Appellate Body draw on external criteria, such as broader international law, to interpret unclear provisions in WTO agreements.

The complaint is that the practice effectively creates new rules that were not negotiated when WTO agreements were created. Some other WTO members are said to share the concern.

It’s “seems to be,” because the US has made the complaint, but for the time being has not spelt out what it would need to unblock new appointments or reappointments.

To tackle the grievance would mean renegotiating the rules of the Dispute Settlement Understanding, a major task with no guarantee of success — certainly not quickly — since it is about the fundamental basis of how WTO law should be interpreted.

Trading without dispute settlement

Unless this is resolved, the WTO will be severely handicapped. But that will not necessarily kill it, not for some time to come at least.

The WTO’s trading system does not depend on legal rulings to keep it going. Litigation helps to clarify the boundaries where they are unclear, but by and large the $20 trillion of annual global trade in goods and services flows smoothly within those boundaries almost unnoticed and mainly without law suits.

Besides, the WTO system has other built-in ways of ironing out problems without going to court, particularly through transparency and peer review in regular committees.

For example, thousands of questions are asked in committees dealing with product standards and safety, regulation, labelling, agricultural subsidies, and trade remedies such as safeguards. Only a tiny minority end up in the dispute settlement court. 

Take one contentious area: sanitary and phytosanitary (SPS) measures — food safety and animal and plant health. Since 1995, over 15,150 SPS measures have been notified to the WTO, with 434 concerns raised in the SPS Committee, and only 48 becoming legal disputes.

By and large the incentive for countries to comply with WTO agreements comes from their desire for fellow-members to do the same. They consider a system based on workable rules to have its own commercial value, rather like traffic regulations helping to keep all vehicles moving on the highways.

The change that the Trump administration has brought to the WTO is that for now the US doesn’t see it that way, or at least its actions suggest that. The priority seems to be for the US truck to drive fast and not for traffic as a whole to flow smoothly. Again, “seems to be”.

It is possible that what the US is doing in steel and aluminium is ad hoc rather than systematic. After all these are important constituencies for Trump himself, and US Trade Representative Robert Lighthizer’s career includes years spent representing the steel industry.

If so, Wolff’s comment about steel being nothing new to the WTO is a credible argument.

The danger is if other countries feel that US actions and others’ reactions leave the WTO system unable to protect their interests, even in dealings with each other and not just the US. A collapse of confidence of that scale would indeed kill the WTO. But it would also take a long time to happen.

It’s noticeable that in the steel and aluminium issue, both the US and EU have sought to justify their actions under WTO law, the US citing GATT Article 21, the EU proposing retaliation under the Safeguards Agreement. They still feel the need to be seen as law-abiding.

For now, the signs are that the rest of the WTO’s membership, including major players such as the EU, China and Japan, will continue to work to keep the system going, even if they have frictions among themselves as well.

And the US is continuing to meet the EU and Japan in a series of talks that began at the WTO’s Buenos Aires ministerial conference last December, and which Lighthizer hailed as one of the meeting’s successes. The talks may have aimed to keep countries like China honest but they now include discussions about the US’s steel and aluminium tariffs.

That’s fully in line with how the WTO works. Everything that happens in the WTO begins and ends with talking, and not always inside the WTO itself.

 

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