jeffrey schott is a senior fellow at the Peterson Institute for International Economics. He is a member of the State Department’s Advisory Committee on International Economic Policy and was previously cochairman of the Trade and Environment Policy Advisory Committee for the U.S. Trade Representative.
Published May 4, 2020
When 123 nations signed the accord creating a truly global body to oversee international commerce in 1994, the new World Trade Organization was hailed as a major step toward a modern, rules-based regime that would advance the effort of global open trade. What a difference, alas, a quarter-century made.
Now the WTO is increasingly seen as sclerotic. Its rules badly need updating and the dispute-settlement process is breaking down. Multilateral trade talks have collapsed; efforts to conclude even modest deals at the upcom-ing June 2020 meeting of trade ministers seem unlikely. Indeed, it’s no exaggeration to say that the WTO faces an existential crisis. Here, I offer some perspective on what has gone wrong and how to make it right in the face of widespread skepticism that a global rules-based trade system remains viable.
There’s no getting around the fact that the WTO’s rules are widely abused or flat-out ignored. Even after the heralded U.S.-China trade deal was announced in January, the U.S. and China continue to violate WTO obligations on a grand scale, with about $425 billion of two-way merchandise trade still subject to duties that violate WTO obligations of both countries. Rules on subsidies, intellectual property and investment, last updated in the 1990s, are inadequate and in-complete, allowing countries to circumvent their market-access commitments with finan-cial support for domestic firms and farmers, and to encourage the misappropriation of foreign technology.
Equally alarming, the exemption to the WTO rules allowing trade restrictions for compelling reasons of national security protection has been grossly misapplied by U.S. officials to protect domestic steel, aluminum and possibly auto producers — and by Japan and Korea to justify high-tech trade restrictions. If countries continue to brazenly invoke national security rationales to justify plain and simple protectionism, commitments to open markets that are central to WTO obligations will become increasingly worthless.
At the same time, the WTO’s dispute-settlement process, which has helped to resolve almost 600 cases since 1995, has been seriously impaired by the idling of its Appellate Body (AB). All countries have the right to appeal dispute-panel decisions, which are then held in abeyance pending completion of the appeal. But since last December, the AB has been reduced to only one member out of the normal complement of seven. That’s because U.S. officials have blocked the appointments of AB members until other WTO countries approve changes in dispute procedures demanded by the United States.
Now, since three members are needed to form a panel to hear appeals, the whole appeals process has been placed in suspended animation. The situation has broad-ranging implications for the multilateral trading system. Preventing new appeals of panel rulings will, of course, allow disputing parties to block implementation of the rulings. This will encourage unilateral actions by countries strong enough to pressure partners and will discourage new rule-making negotiations because of uncertainty that rules will be enforced.
What Would It Take?
Can the WTO system be put back on track? Doing so would require the recognition that its rulebook, along with the process of resolving disputes about those rules, needs substantial renovation. It also requires the recognition that the world’s key problems require global solutions, in which the top traders — the U.S., the European Union, Japan and China — work together in common cause.
That’s a tough row to hoe, especially given current U.S.-China and U.S.-EU frictions. But it is doable, if WTO members reorder their priorities and focus on narrow, pragmatic solutions. To see a way forward, it makes sense to digress a moment to see how we got here.
Throughout the postwar era, the United States led the charge to strengthen the multilateral trading system and to lower barriers to trade and investment. U.S. negotiators led by example: U.S. tariff cuts accounted for a large share of the liberalization undertaken in the first four rounds of postwar negotiations under the General Agreement on Tariffs and Trade, when tariffs were high to protect industrial recovery in war-decimated economies. U.S. officials opened and led all eight GATT rounds of more or less successful reform — plus the Doha Round (named after the city in which it was started), the first multilateral trade negotiation of the WTO era.
Almost the entire WTO rulebook was crafted in the period 1947-1994, when trans- Atlantic nations dominated world trade and China’s footprint was barely noticeable. Since then, technological developments have transformed the way we produce, transport, market and finance goods and services. The Doha Round, begun in late 2001, was meant to make WTO rules more relevant for 21st-century economies. In the event, the giant package of trade reforms developed in the Doha Round, so close to completion in 2008, was felled by the slingshot blows of India and a few other countries seeking special protection for their farmers and industries. WTO rules have been virtually unchanged since then, with the Trade Facilitation Agreement (2013) and updates to the Government Procurement Agreement (2014) the only modest changes.
The WTO’s prospects are not bright. In particular, it’s unclear whether the United States is willing to invest in a multilateral effort.
As I am writing this, the WTO’s prospects are not bright. In particular, it’s unclear whether the United States is willing to invest in a multilateral effort. Under the Trump administration, the United States, the lead architect of the postwar trading system, has been quick to criticize flaws in WTO agreements but half-hearted in its commitment to reform. The president has made no secret of his preference to deal with trading partners and allies one on one, where they are more likely to accept U.S. demands in deference to broader strategic relations.
Why is the WTO so unpopular in Washington these days? Simply put, President Trump believes past U.S. administrations paid too much and got too little in return from U.S. trading partners in previous multilateral trade agreements.
His complaints target several interrelated problems. First, largely for historical reasons alluded to above, U.S. tariffs are frozen in the WTO at lower levels than for other major trading nations. Trump is particularly galled that European auto tariffs are four times higher than U.S. auto tariffs. But under existing WTO rules, if U.S. officials want to raise these “bound” tariffs, they have to offer other WTO members something in return.
Second, too many countries avoid WTO tariff obligations, most notably by invoking special exemptions for developing countries. Any WTO member can self-designate as a developing country — as Singapore and South Korea have done in the past. And third, WTO rules weren’t designed for big economies (think China) that feel free to intervene in markets to achieve government goals. Nor were they built to accommodate the big-data world of digital trade.
Accordingly, the White House wants past WTO deals redone, with an updated rulebook to address Chinese industrial policies (especially support for state-owned enterprises). It wants a freer hand for U.S. officials to raise tariffs under WTO antidumping, safeguards and national security exceptions (where Trump’s current tariffs against China, Europe and others plainly violate current WTO norms). And it wants the removal of most developing- country trade preferences in current and prospective trade deals.
U.S. trade officials don’t want U.S. policies to be subject to binding enforcement of WTO rules. Defanging the AB permanently would enable them to achieve that result.
All told, U.S. critiques have exposed legitimate problems. But U.S. negotiators have not put forward targeted, pragmatic solutions for purposes of negotiation. And they conveniently ignore unilateral changes in U.S. trade barriers, particularly farm subsidies where the Trump administration recently doled out $28 billion to soothe U.S. farmers hurt by the U.S.-China trade war. Not surprisingly, there aren’t many takers among the 164 WTO members for Trump’s trade offer.
The most important and intractable U.S. complaint is that the Appellate Body has abused its authority through expansive interpretations of WTO rights and obligations — what might be called judicial overreach. Indeed, U.S. authorities claim that other countries have pursued trade litigation in hopes of achieving changes in U.S. policies that they could not obtain in reciprocal trade negotiations. So, the Trump White House turned to hardball tactics, using its power to block the appointment of new AB members and thus render the body powerless until other WTO countries address U.S. grievances.
Left unspoken is another core grievance that is unique to the Trump administration’s views on international economic relations. Citing sovereignty concerns, U.S. trade officials want to regain the right that existed before the WTO to block rulings with which they disagree. In other words, they don’t want U.S. policies to be subject to binding enforcement of WTO rules. Defanging the AB permanently would enable them to achieve that result.
Note that, while the Appellate Body no longer has enough members to hear new appeals, disputes can still be heard and decided by WTO panels. But if either party exercises its WTO right to appeal the panel decision, the ruling is sent into legal limbo because cases cannot be finalized until the appeals process is concluded. Enforcement of WTO rights then becomes haphazard, which in turn will have a chilling effect on negotiations to update the WTO rulebook.
Developing countries have not been willing to pursue WTO reforms in areas where many already accept obligations in bilateral or multilateral deals.
U.S. officials seem content with the status quo. If a panel rules in favor of the United States, the decision is accepted; if the ruling is critical of U.S. policy, U.S. officials appeal and the judgment against the United States is blocked. Heads I win, tails you lose.
Most small countries won’t dare appeal a case that goes against the United States. But big WTO members, notably China and the EU, certainly will, preventing the United States from obtaining WTO authority to counter other countries’ practices that violate WTO norms. The result will be more tit-fortat trade retaliation like that we have seen in the last two years between the U.S. and China and the European Union, and less faith in the rules-based trading system that has supported economic development since World War II — and that was designed and led by the United States since its inception.
U.S. officials seem dismissive of the damage such a policy is having on the rules-based WTO trading system. What country would negotiate new rules if the enforcement of WTO obligations, old and new, is haphazard due to the possible blocking of WTO rulings and the lapse of AB reviews?
The consequences of putting the AB in limbo cut both ways. For one thing, the tactical move makes it harder for U.S. officials to achieve key objectives in updating the WTO rulebook. Moreover, the U.S. ability to use WTO dispute settlement to enforce U.S. rights would be compromised. U.S. cases against foreign malpractice could be sidetracked. China and others would be likely to defend themselves by appealing adverse WTO rulings and blocking enforcement of U.S. rights under the WTO. The result undoubtedly would be new rounds of protectionism.
The Doha Round approach to multilateral negotiations is not an option. Most Doha drafts are obsolete: market conditions have changed, and new trading rules have evolved in bilateral or regional pacts. Instead, WTO negotiators should look at trade pacts minted over the past decade for precedents in such areas as intellectual property, investment and digital trade. The USMCA (the successor to Nafta) and the Trans-Pacific Partnership, which share many common provisions, have been particularly fruitful negotiating laboratories. Recent European pacts with Canada and Japan also merit careful review.
But the new issue that should get top billing is not covered in any of those pacts: trade and climate change. The world, with the irresponsible exception of the Trump administration, is united in its commitment to action to mitigate greenhouse gases.
Can WTO Negotiations be Revived?
Near-term prospects for WTO negotiations are limited. WTO initiatives are rudderless; there is a lack of leadership by the major traders (the U.S., China, the EU and Japan) that together account for almost half of world merchandise trade and 54 percent of world exports of commercial services. For WTO talks to succeed, these “responsible stakeholders” need to be engaged and working together.
But today, all seem distracted. In the past, the United States was the demandeur of every multilateral trade negotiation. No longer. The Trump administration prefers bilateralism where it can leverage individual partners to accept managed trade deals that trample on the core obligations of the WTO system. In any case, it has imposed or threatened trade retaliation against China, Europe and Japan, which clearly complicates efforts to work together on new multilateral initiatives.
EU officials are focused on negotiations to recast their trade relations with Britain in a post-Brexit world as well as managing U.S.- EU trade frictions and dealing with spillovers from U.S.-China conflicts. Chinese officials are torn between their interest in a viable WTO process and their reluctance to accept more obligations or to press developing countries to do so. Japan helped develop WTOplus rule-making for the Trans-Pacific Partnership, the nascent regional pact that was jettisoned by the Trump administration. But Japan has always demurred from leadership roles in the WTO. Developing countries have not been willing to pursue WTO reforms in areas where many already accept obligations in bilateral or multilateral deals.
Over the past decade, WTO initiatives on services, environmental goods, fisheries subsidies and digital trade have failed to bear fruit because of:
- differing levels of ambition, with many countries willing to codify only their existing practices and some, like India, not even willing to go that far
- special treatment for developing countries alluded to earlier, which undermine all efforts to discipline farm and fish subsidies
- data privacy/access-to-data concerns that pose seemingly intractable problems with China, but also deep discord between the U.S. and the EU.
Add to that list the current impasse over dispute settlement reforms, and one can see why it is so hard to be optimistic about moving forward with multilateral negotiations.
Prospects for progress at the WTO Ministerial Conference, the organization’s alternate- year meeting of its primary decision makers, in June are dim. WTO members seem to be pinning hopes on the conclusion of fish subsidy talks to demonstrate that multilateral initiatives can produce results, even if the pact is a minnow rather than a marlin. The United States is pushing for other countries to pare back programs that cause overfishing, but that’s a hard sell when the top subsidizers — China, India and the European Union — are demanding the right to maintain subsidies for extensive periods. And if fish subsidies really were a high priority for U.S. officials, why didn’t they press China to make substantial subsidy cuts when they had leverage as part of the first phase of the U.S.-China trade deal?
Other issues promoted by U.S. officials include new rules on subsidies for state-owned enterprises, where a recent U.S.-EU-Japan proposal was tabled in January 2020. But it has no appeal for China, the country that is the obvious target of the proposed disciplines, and thus is likely to go nowhere. U.S. efforts also focus on new rules for digital trade, based on the accord included in the recent U.S.-Japan pact and the USMCA. In large measure, those countries agree with the U.S. regulatory approach to e-commerce; this is in sharp contrast to the major differences that divide U.S. positions on data privacy and data localization from those of Europe and China.
(Dim) Light, Long Tunnel
WTO revival over the next five years requires two fundamental changes in WTO rules and operations: the reconstitution of the Appellate Body with procedural reforms to ensure objective and timely AB decisions, and the development of new rights and obligations covering the intersection of trade and climate policies. The Trump administration is adamantly opposed to pragmatic reforms in both areas. Yet each class of reforms would require cooperative initiatives among the United States, Europe, Japan and China, and developing countries would need to recalibrate the benefits they accrue from a well-functioning system of multilateral trade rules against the additional contributions that will be required of them in each accord.
Fixing Dispute Settlement
Reforms of the Appellate Body need to cover both procedures for conducting appeals of WTO rulings and judicial overreach — rulings that broaden the scope of WTO obligations. U.S. officials put forward a lengthy legal brief earlier this year that detailed areas where AB members abused procedures or authority delegated to them by WTO members. Procedural issues represent the largest number of complaints, but also the easiest problems to resolve. Judicial overreach is a more fundamental problem because it often involves interpretations of ambiguous or incomplete rules that would have to be revisited in WTO negotiations.
What could be done to mitigate U.S. concerns, the stumbling block to revivifying the AB? U.S. concerns about judicial overreach arise primarily in cases involving how U.S. officials calculate antidumping (AD) and countervailing duty (CVD) measures — penalty tariffs on imports that are subsidized or sold at allegedly unfairly low prices (i.e., dumped). More than half the cases brought against the United States involve U.S. AD/CVD law, but only a small subset of them result in U.S. losses based on AB rulings that the U.S. methods for determining appropriate subsidies and dumping penalties are improper. Why ditch the whole appellate process when the problem lies in a narrow set of cases?
A better approach would be simply to exempt AD/CVD cases from appellate review (while still subjecting them to dispute panel decisions). This would amount to a major concession of the part of other WTO members to address the U.S. concern over judicial overreach. But at the same time, the changes would not provide the untethered right for the United States (and others) to block all WTO dispute rulings. All told, this approach would improve the functioning of WTO dispute settlement and help to reopen the door to negotiations of new WTO rules that otherwise would be dragged down by the AB zombie.
The WTO and Climate Change
To date, environmental issues have been almost an afterthought on the WTO agenda. Efforts have focused primarily on reducing tariffs on a small number of environmentally friendly goods (very loosely defined) and current talks to develop disciplines on fish subsidies and unregulated fishing to address overfishing that have depleted global stocks. Only recently have some WTO negotiators raised the world’s most existential environmental issue: climate change.
Why is this a WTO concern? National policies to counter greenhouse emissions involve a mix of direct regulation, subsidies and tax measures that affect production costs and distort international trade and investment. Calls for tax adjustments at borders to protect domestic firms subject to climate policies from foreign competition are now heard on both sides of the Atlantic and elsewhere.
Given its core competencies on trade and investment, WTO negotiations should counter climate change through five key efforts.
Encourage the diffusion of green technologies by lowering barriers to trade beyond what was covered in previous negotiations.
Revise subsidy rules to promote investment in clean energy and sustainable vehicles.
Develop cooperative regulatory policies that set higher standards for energy efficiency and support deployment of carbon abatement technologies.
Phase out fossil fuel subsidies in coordination with the World Bank to ensure that poor countries have the requisite assistance to offset the burden on low consumers.
Institute a moratorium on carbon-related border tax adjustments.
Climate change is the one area where all the top trading nations could agree on new WTO rules, but for the position of the Trump administration. When the White House changes residents, the U.S. position will probably rejoin the international consensus. But WTO initiatives must not depend on an aboutface from Washington to start work.
• • •
For all the downsides to open trade — in particular, industrial dislocation and rising income inequality within national economies — there is simply no doubt that trade has been a key driver in the spectacular growth of the global economy since World War II. No country, it is safe to say, would be better off today if the United States hadn’t doggedly pursued the goal of lower trade barriers.
Unfortunately, it’s also safe to say that the system buttressing international trade is in deep trouble and that the United States has ceased to be a leader in designing fixes that have any prospect of generating a consensus. That said, the only practical way forward is one that recognizes the legitimate concerns with a system built before the rise of China, the looming importance of trade in services and the widespread misappropriation of intellectual property — and get on with the job of saving global economic integration from its myopic enemies.