The basic rule book for international trade consists of the legal texts agreed to by the countries that set up the World Trade Organization (WTO) along with specific provisions of its predecessor, the General Agreement on Tariffs and Trade (GATT). At the heart of that rules-based system has been a dispute settlement process by which countries resolve any disputes they have about whether another country has violated those rules or otherwise negated the benefit of the bargain between countries.
Now the very existence of that dispute settlement system is threatened by a decision of the Trump Administration to block the appointment of any new members to the dispute settlement system’s highest court, its Appellate Body.
Under the WTO rules, the Appellate Body is supposed to be comprised of seven people who serve a four-year term and who may be reappointed once to a second four-year term. However, the Appellate Body is now down to just three members due to the United States’ blockage of any process to replace those whose terms have expired—and three is the bare minimum number of members necessary to rule on an appeal. Moreover, the terms of two of those three remaining members will expire in December, 2019, leaving the Appellate Body unable to complete any appeals.
In the absence of a functioning Appellate Body, the WTO’s highly regarded dispute settlement system could grind to a halt. Under the rules of the Dispute Settlement Understanding (DSU), countries that win a case at the panel stage are not entitled to seek the rewards of that victory while an appeal is pending. As such, any country that loses a case could forestall any outcome by appealing the decision, knowing that the Appellate Body lacks the requisite quorum of three members to hear their appeal.
It is hard to see why countries would be willing to wait in an endless queue for their appeal to be completed; instead most are likely to take matters into their own hands by engaging in unilateral retaliation, which will only invite further retaliation by the country that filed the appeal in the first place. As the Deputy Director General of the WTO, Alan Wolff put it, the United States’ blockage of any process to appoint new members to the Appellate Body risks turning every individual trade dispute into a “mini-trade war.”
In considering what needs to be done to fix the Appellate Body and when, the context in which this crisis is occurring is important.
First, it must be remembered that the United States’ decision to join—and indeed to lead the effort to create—a binding dispute settlement system for the trading system occurred at a unique moment in history. The negotiations establishing the WTO and its dispute settlement system occurred in the late 1980s and early 1990s—arguably the high-water mark for multilateralism and multilateral rules.
It was created in the wake of the collapse of Communism and the building of a united Europe, at a time of much work in the academic community, led by John Jackson and his critical 1990 book Restructuring the GATT, to provide the intellectual underpinnings for a trade organization with a binding set of rules and a system for adjudicating them at its central core.
Second, it was a time in the United States of considerable frustration among the trade insiders at the lack of an ability to hold countries—particularly those in the EU—to their commitments under the then existing General Agreement on Tariffs and Trade (GATT). Under the rules of GATT, if a country did not want a particular dispute to be discussed at all, it could block the creation of a panel to consider it.
If a country allowed the dispute to be heard but did not like the outcome, it could block the adoption of the panel report, thereby preventing the report from creating an obligation to comply. As a result, there was a clamoring among the trade cognoscenti for a more binding trade-rules system.
Third, the WTO’s Dispute Settlement Understanding (DSU) was, in the end, rolled up into a much broader package of new texts (“Results of the Uruguay Round of Multilateral Trade Negotiations”) providing market access and rules on everything from trade in services, to agriculture to intellectual property that had never before been included, such that even those members of Congress who might otherwise be reluctant to agree to effectively submit the United States to the jurisdiction of an international “court” found their qualms about dispute settlement outweighed by the gains in market access and new disciplines elsewhere.
It is hard to imagine such a confluence of events and incentives coming together again for decades, if ever. Therefore, if the Appellate Body and with it the WTO’s binding, two-stage dispute settlement system, cannot be restored soon, it is not likely to come back.
While there may be little support among many in Congress for the Trump Administration’s “national security” tariffs on steel and aluminum—and there will be downright opposition if tariffs are imposed on cars or car parts—there are very few champions in the US Congress for the Appellate Body. If the Appellate Body crisis is to be solved, it is not likely to be at the behest of members of Congress or other political forces in Washington coming to the rescue.
The United States’ concerns over the functioning of the Appellate Body did not begin with election of Donald Trump and they will not end with Donald Trump. Many of the current concerns have been raised for more than a decade with virtually no response in Geneva. Any solution that is worked out is going to have to demonstrate that the rest of the world is hearing what the US is saying—even if they don’t always agree with the US’ claims.
What can be done to break the impasse? I suggest three options— borrowing the title from Sergio Leone’s classic western movie, The Good, the Bad and the Ugly—but recognize at the outset that beauty is in the eyes of the beholder—so what I may call ugly may appear to be good to others. What is critical is not sorting out the best approach; rather, the imperative is to break the log-jam before it is too late.
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