Commodity Analysis

WTO’s Appellate Body killed. Clouded outlook for global trade

Rajalakshmi Nirmal | Updated on January 12, 2020 Published on January 12, 2020

Protectionism and trade conflicts will make things worse this year

The World Trade Organization’s (WTO) Appellate Body has been grounded to a halt from December 11, 2019, with the US blocking the appointment of new judges.

Appointment of judges in the Appellate Body requires approval of all member-countries. Since the US didn’t approve of the newly nominated judges as the term of the sitting judges expired, the Appellate Body is now left with just one active judge.

WTO rules require a quorum of three members in the Appellate Body to consider an appeal of a panel report.

The appeal process of the WTO has thus become dysfunctional.

Member-countries may now skirt the rules to get ahead, taking the world to the pre-WTO era, a period marked by a high degree of protectionism.

The absence of the Appellate Body at the WTO is set to deal a heavy blow to international trade, lowering growth and job creation. Here’s a look at the background of the issue and what is in store for the global trade and commerce in 2020.

Dispute settlement

Dispute settlement between members of WTO is a two-stage process. First, a panel would hear the case. Rulings issued by the panel can be appealed to the Appellate Body which can uphold, modify or reverse the judgement. The Appellate Body is a standing body made up of seven members appointed for a period of four years, with a maximum of two terms.

At least 60 per cent of cases in which a panel issues ruling get appealed. The judgement given by the Appellate Body is final. In case a member fails to comply with the Appellate Body’s rulings, the affected party may request the DSB (Dispute Settlement Body) to introduce retaliatory measures.

Now, with the Appellate Body being defunct, the WTO is handicapped.

Sachin Kumar Sharma, Associate Professor, Centre for WTO Studies, Indian Institute of Foreign Trade, New Delhi, says: “The dispute resolution mechanism ensured that any measures of members violating the agreements could be challenged. But now, with the Appellate Body becoming dysfunctional, the ‘right’ to appeal is hampered. Generally, if the panel report in any case is appealed, the member does not have to comply with the report. Now, this can be exploited by members to circumvent the compliance with the panel reports.”

Why the US did what it did

The US has been openly criticising the WTO for many years now, for allowing member-countries to self identify as ‘developing’ countries to receive special treatment. It has also been slamming the Appellate Body for delaying judgements beyond the 90-day deadline, and has found faults with the body’s approach to settling disputes.

Experts, however, indicate that while the US has accepted the WTO’s favourable rulings that served its interest, it has been objecting to adverse decisions. According to a Bloomberg analysis of 524 cases lodged at WTO between 1995 and 2017, the US won 87 per cent of the cases it brought to the WTO against other countries and lost 75 per cent of the cases other countries brought against it.

In 2018, a facilitator was appointed to help the WTO General Council resolve the issues raised by the US. After several rounds of consultations with member- countries, the facilitator presented a solution that included reforms to improve the functioning of the Appellate Body. This, though, was rejected by the US.

Members left in limbo

There were 13 appeals pending before the Appellate Body as on December 10 when the term of one of the last two judges got over.

Of the 13, three cases in which hearings are already over, will see the WTO judges give out their decisions. The fate of others, however, is uncertain. Australia has two key disputes to be resolved, say international media reports.

India has three pending cases before the Appellate Body. In two, India has challenged WTO panel rulings — one is a case where the US has sought termination of export subsidy schemes in India, and in the other Japan wants India to withdraw duties against Japanese steel products.

The third one is a case where the panel had given a verdict in favour of India, but the US appealed to the Appellate Body — this was with respect to the US offering billions of dollars of subsidises to local industries by violating WTO rules.

So, all these cases are not going to be completed now. The India-Australia sugar subsidy dispute is before a panel — it would be too premature to predict its fate now.

Growth in world merchandise trade has been weak ever since the economic slowdown in 2009. The increasing protectionism in the world and trade conflicts only make things worse.

Impact on global trade

In 2018, global trade volumes registered a growth of 3 per cent — down from 4.6 per cent in 2017 — due to increased trade tiffs and tighter monetary conditions across the globe.

In 2019, the situation turned worse with the US-China tariff war. In the first quarter of 2019, growth was flat (q-o-q). In the second quarter, it was negative 0.3 per cent and in the third quarter, 0.4 per cent (q-o-q).

India’s exports have also been facing challenges. In 2017, India’s total merchandise exports (by value) recorded a 13 per cent growth, but this was 8 per cent in 2018. In the first three quarters of 2019, growth was a mere 0.2 per cent over the same period the previous year.

Export-oriented economies will pay a big price due to the ongoing slowdown in global trade. Among this the Asia pack includes Hong Kong, Singapore, South Korea and Taiwan and also China. India, which is now producing excess grains, pulses and sugar, has also been eyeing the global market, and the current developments are not bringing any cheer.

From the developed world, Australia, Germany and the US will see problems of slowdown in global trade. In the US, exports over the last three quarters (of 2019) are down 1.1 per cent. In the same period last year, it had recorded a growth of 9 per cent.

A drop in global trade will impact economic development and jobs in countries across the world. This is not good news for anyone even remotely connected with the commodity or the equity markets.

Published on January 12, 2020
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