The future of the world trading system is at stake thanks to an impasse in Geneva over the appointment of members of the Appellate Body (AB) of the World Trade Organization (WTO). The Trump administration has been waging a behind-the-scenes campaign against the WTO’s dispute settlement system. It is holding hostage the selection of new members to the AB, which functions as the WTO’s de facto court of appeals, unless unspecified U.S. demands are met.
This U.S.-made crisis threatens to undo the multilateral rules-based trading system that the U.S. created after the Cold War and replace it with a return to aggressive power politics unchecked by the rule of law. Here’s what you need to know.
The U.S. is waging a quiet war against WTO Dispute Settlement
As a candidate for President, Trump made no secret of his contempt for prior U.S. trade policies and trade agreements. People pay more attention to Trump’s frequent and intemperate outbursts against preferential trade agreements, such as NAFTA. Yet outside the public eye, the Trump administration has been mounting a high-stakes attack on the WTO’s judicial process. If it succeeds, the consequences for the world trade system will be grim.
In a little-noticed policy change issued in March, the administration announced that it might seek to deal with trade disputes outside the WTO system, and possibly defy WTO rulings that it does not like. More ominously, the U.S. recently has refused to approve the start of the selection process for new AB members. It is threatening to hollow out the AB unless the U.S. gets its way on changes to the WTO dispute settlement system that it has yet to specify. This is like what would happen if half the U.S. federal appellate judge positions were empty, and the senators from a single big state such as Texas blocked all new appointments until the Senate passed rule changes ensuring that Texas had an edge in future disputes.
The U.S. has been unhappy with WTO rulings in the past
Previous administrations have also been unhappy with WTO Appellate Body decisions, which repeatedly slapped down U.S. anti-dumping policies that it found unfairly protected import-competing sectors, such as steel. This has led to unhappiness with particular AB members because of decisions against U.S. measures. First, the U.S. decided not to reappoint two Americans after their first four-year terms. Then, after continued U.S. attacks on AB decisions regarding U.S. import relief laws, the U.S. for the first time blocked the reappointment of a non-U. S. member, Seung Wha Chang of South Korea, in 2016, on the grounds of judicial activism in rulings against the U.S.
This was a first in WTO history and raised howls of protest from other member states and from former AB members, who accused the U.S. of endangering the independence of the WTO judiciary. Chang’s seat sat empty for several months until late November 2016, when, after the U.S. election, the Obama administration agreed to the appointment of two new members, from South Korea and China, to fill the vacancies. Ironically, the U.S. actually has a higher win rate than any other major user of the WTO system, but winning some and losing some in judicial processes is apparently not sufficient.
The Trump administration is pushing things much further
The Trump administration appears to want to intimidate and even paralyze the WTO Appellate Body. It suggests that it wants to change the rules over whether former AB members can continue to serve after their term expires on cases to which they were appointed during their term. The current European member Peter van den Bossche, for example, recently was selected (by random draw) to be on a new appeals panel pitting the U.S. (defending Boeing) against the European Union (defending Airbus) regarding aircraft subsidies. The U.S. says it intends to hold up any new appointments pending a satisfactory agreement on this question. The U.S. demands go against the explicit AB working procedures, which allow this kind of continuity. What particularly troubles the WTO membership is that the U.S. refuses to approve the launching of the selection process of new AB members until this issue is resolved, without the U.S. proposing what should be done.
The U.S. is in a strong position to shut down the AB, because the AB is already down from its allotted number of seven members to five, and will be down to four soon, and to three in less than a year. The Latin American seat has been vacant since July, and the E.U. seat will become vacant in December. Now, the South Korean member suddenly resigned his seat effective Aug. 1, to return home as South Korea’s new trade minister. This means there will be only four out of seven AB members in December — and potentially three when the African seat opens next September.
Unless new AB members are appointed, the Appellate Body will face severe delays. If the AB dips down to two members, it could not formally operate, since each case requires at least three sitting judges. But even a court with fourth or five judges will find it hard to manage its caseload, and face legitimacy problems, because decisions will be taken by only a few judges from a few countries with particular legal traditions (such as the U.S. and China). This could lead — in an extreme scenario — to the crumbling of the WTO dispute settlement system.
This could threaten the entire system of rules-based trade.
The U.S. could use this crisis to effectively eliminate the AB, the “crown jewel” of the WTO dispute settlement system, and possibly the WTO itself. Given world history, it is remarkable that the U.S. and China, and the E.U. and Russia, today resolve their trade disputes through agreed rules applied by an independent body, minimizing the risk that disagreements would seriously undermine trade. That is now in jeopardy.
Robert E. Lighthizer, the current United States Trade Representative (USTR), recently reminisced about the days of the GATT — before the WTO’s formation — when a party could unilaterally block the adoption of a decision it did not like. He suggests that the Trump administration may wish to deploy the AB crisis to force a return to a more politicized dispute settlement system.
Indeed, the U.S. was able to use its economic power to exploit weaknesses in the GATT dispute settlement mechanism in the lead-up to the creation of the WTO. However, two critical things have changed. First, the U.S. is not as economically powerful as it once was, given the rise of China and other emerging economies. Second, unlike the GATT, the WTO contains rules on services liberalization, intellectual property protection and the use of health measures to block imports, which are important to U.S. businesses. If the U.S. defies the WTO and acts unilaterally, other countries will retaliate against it and U.S. stakeholders will suffer.
The edifice of the rules-based international trading system has stood for decades, but international courts and the rule of law are fragile, and there is no guarantee that they will stand up to a sustained assault.