The World Trade Organization (WTO) is facing an unprecedented existential crisis. The challenges to WTO are coming from various quarters but the biggest threat is from one of its former proponents — the US.
The present US administration has taken a very tough stand on the WTO. The US President thinks that the WTO is the “single worst trade deal ever made”. He has often expressed his disdain for WTO in no uncertain terms and has repeatedly threatened to pull out of the organisation.
In the name of promoting nationalistic policies, the Trump administration is repeatedly flouting the WTO rules and unilaterally imposing tariffs on other countries. Actions by the US trade officials are basically pushing the world towards a trade war.
To justify their actions, the US trade officials are using a rather arcane rule of GATT — the Article XXI. This Article says, in part, that GATT/WTO rules cannot prevent a country “from taking any action which it considers necessary for the protection of its essential security interests,”. The Article XXI was written during the establishment of GATT more than 70 years ago when the world was coming out of a series of major conflicts including the second world war. It was also a period of the ‘Cold War’.
May be during that era there was certain usefulness of this Article. But in the present context, there is serious debate about what is meant by “national security” and “necessary” action. For example, the US has used the ‘national security’ clause to increase tariff rates on imports of steel and aluminum. Not surprisingly, not many countries have agreed that import of steel and aluminum can threaten national security.
However, a recent WTO ruling has made the matter more complex. In a dispute between Ukraine and Russia, the WTO has ruled that while every member can define its essential security interests, the WTO has the right to review whether a country’s claim was made in good faith. This ruling has opened a Pandora’s box and can potentially turn the WTO dispute settlement (DS) process into a forum to discuss international political problems. Against the backdrop of a potential trade war, this may lead to more conflict among the WTO member countries and put pressure on the WTO DS system.
Dispute settlement in crisis
The WTO dispute settlement process is anyway going through a crisis. In the recent past, several WTO rulings have gone against the US. These have led the US officials to claim that the US is being victimised and the WTO rules are violating its national sovereignty.
For example, a recent report of the Appellate body (AB) of WTO — dated July 16, 2019 — has ruled that the US broke WTO rules while imposing certain trade barriers against China. If the US does not remove these trade barriers, then China can impose sanctions against US exports.
In WTO, an AB report is final, and binding and it cannot be challenged. Therefore, the US will have to act unless it wants to give China an option to exercise trade sanctions against the US. No wonder such rulings have not gone down well with the US officials. They have accused the WTO system of encroaching on its national sovereignty. They have also accused the WTO dispute settlement system of judicial “overreach”. As a retaliation to its perceived victimisation, the US is blocking appointment of members in the WTO AB since the past few years. This has serious ramifications for the WTO dispute settlement system. In the WTO dispute settlement system, any trade dispute is initially tried to be settled through consultations among the disputing members.
If that does not work, then the case goes to a dispute panel. The decision of the dispute panel is final, but the decision can be appealed to the AB. The AB reviews the decisions of the panel. But once the AB gives a report, it becomes final and binding on the members.
According to the WTO system, the AB should have seven members who are appointed by consensus among WTO members. Any appeal from the WTO dispute panels must be heard by three out of seven members of the AB. These seven members are appointed for a four-year term. Once an AB member finishes his/her term, a new member is required to be appointed to keep the strength of the AB at seven.
US blocking appointments
However, since 2017, the US has been blocking appointment of new members in the AB. Four members of the AB have completed their terms, and no replacement members could be appointed. Presently there are only three members left in the AB and if no new members are appointed, then by December 2019 there will be only one member left. This will make the AB dysfunctional and will jeopardise the WTO dispute settlement mechanism.
This can have a serious impact on the rule based multilateral trading system. The US administration is regularly threatening countries with imposition of additional tariffs. They have also raised tariff rates on several products. Some countries like India have retaliated and imposed countermeasures against US exports. It almost appears that the US is using a two-pronged strategy to create disruptions in the global trading system.
It is violating the WTO rules and raising a large number of trade disputes while continuing to block appointment of AB members thereby disrupting the DS system. These trade frictions and uncertainties are hurting global trade quite significantly. WTO data released in April this year show that international merchandise trade growth is slowing down perceptibly.
After a healthy year-on-year growth rate of 4.6 per cent in volume terms recorded in 2017, the growth rate of global merchandise trade has slumped to 3 per cent in 2018 and is further expected to slow down to 2.6 per cent in 2020.
If major trading countries continue to undermine the role of WTO and global trade continues to decline, it may become a serious setback for an organisation which is struggling to remain relevant in a changed global trade scenario.
The writer is a professor at IIM Calcutta