Explained: Why has the U.S. crippled the functioning of the WTO?

Is the World Trade Organization dying? Why does America disregard the authority of the Appellate Body?

January 05, 2020 12:02 am | Updated 01:56 pm IST

The story so far: Even as the trade war between China and the United States shows no signs of ending, Washington has paralysed the World Trade Organization’s Appellate Body, which acts as a supreme court for international trade. In December 2019, the U.S. chose to spike the Appellate Body by starving funds for its functioning. It also stalled the selection process for filling six vacancies at the Appellate Body. Consequently, the Appellate Body is left with only one member, who will not be able to deliver any rulings on pending trade disputes — a minimum of three members is required to adjudicate any dispute.

What is the World Trade Organization’s Appellate Body and why is it in the news?

Global trade disputes are complex and difficult to resolve. For proper enforcement of trade rules, a binding, two-stage dispute settlement system was established at the World Trade Organization in the 1990s. The Appellate Body is the scaffolding of the dispute settlement system, with seven standing members.

In the first stage for adjudicating trade disputes, a panel would decide cases brought before it by the members. Rulings issued by the panels can be appealed at the Appellate Body. As part of the second-stage of adjudication, the Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel. Therefore, the Appellate Body’s decisions are final and adopted within 30 days by the dispute settlement body. Sanctions can be imposed on a member in case of its failure to comply with the Appellate Body’s rulings.

The panels and the Appellate Body have issued rulings in almost 200 disputes involving bananas, cotton, aircraft, beef, tuna, trade, ‘shrimp-turtles’, hot-rolled coils, subsidies for renewable energy, and gambling. Cases involving trade remedies such as countervailing and anti-dumping measures, and the use of a controversial practice called the zeroing methodology that inflated the anti-dumping duties, dominated the disputes among the WTO members.

The establishment of the Appellate Body has given teeth and credibility to the rules-based multilateral trading system. Moreover, it provided security and predictability in the multilateral trading system. But the U.S. chose to spike the highest appeals body for global trade disputes by alleging that it has gone astray.

Why did the U.S. choose to strangulate the Appellate Body?

The smooth and effective functioning of the Appellate Body, which is regarded as the jewel in the crown, has posed hurdles to the U.S. for adopting unilateral measures. Several U.S. provisions for imposing countervailing and anti-dumping measures were found to be inconsistent with core provisions of the WTO agreements.

Finally, the U.S. chose to spike the Appellate Body by resorting to starving funds for its functioning as well as blocking the selection process for filling six vacancies. Consequently, the Appellate Body is left with only one member, who will not be able to deliver any rulings on the pending trade disputes. A minimum of three members are required to adjudicate any dispute.

Why did the U.S. block the selection process for filling six vacancies?

The independent and impartial functioning of the Appellate Body in complex trade disputes has become a problem for Washington over the past many years. While the U.S. has accepted favourable rulings that served its interests in global trade, it raised intransigent concerns about adverse decisions that struck down the U.S.’s trade measures. Washington has repeatedly accused the Appellate Body of allegedly straying away from the dispute settlement understanding (DSU) in several disputes involving the U.S.’ measures that were challenged by other members. It has maintained that the Appellate Body failed to issue rulings within the 90-day deadline. The U.S. says the Appellate Body’s rulings failed to adhere to the provisions in the dispute settlement understanding in cases involving countervailing (anti-subsidy) and anti-dumping measures based on the zeroing methodology. It argues that the the Appellate Body’s decisions “assert a precedential value for its reports…”. It has suggested that “some Appellate Body members view themselves as ‘appellate judges’... serving on a ‘World Trade Court’ that is the ‘centerpiece’ of the WTO dispute settlement system ... rather than one component of it.” The U.S has argued: “Such an expansive vision of the Appellate Body is not reflected in the DSU and was not agreed to by the United States.” Finally, “there has been no discussion of why the Appellate Body has departed from its agreed role,” it has maintained.

How did other WTO members respond to the barrage of criticism levelled by the U.S. against the Appellate Body?

Many WTO members did not agree with the U.S. about the functioning of the Appellate Body. Early last year, a facilitator was appointed by WTO members at a general council meeting to address the specific concerns raised by the U.S. about the Appellate Body. The facilitator, who is also the chair for the WTO’s dispute settlement body, Ambassador David Walker of New Zealand, held several rounds of consultations with members to finalise a draft decision on unblocking the crisis at the Appellate Body. The draft decision included a package of reforms to improve the functioning of the Appellate Body as well as the immediate launching of the selection process for filling six vacancies to ensure that the Appellate Body remained functional after December 11, 2019.

There was an overwhelming acceptance for the facilitator’s package of reforms at the WTO General Council meeting last month. But the U.S. trade envoy, Ambassador Dennis Shea, rejected the facilitator’s draft decision on grounds that it failed to address the issues raised by Washington about the Appellate Body’s overall functioning. “Today’s failure makes it happen that the Appellate Body, an important component of effective WTO dispute settlement mechanism, will temporarily go lights out,” the Chinese trade envoy Ambassador Zhang Xiangchen said, after the U.S. spurned the facilitator’s report. China maintained: “This is no doubt the most severe blow to the multilateral trading system since its establishment.”

Said India’s trade envoy Ambassador J.S. Deepak: “At the core of a functioning multilateral trading system is an effective dispute resolution mechanism.” He added: “Although not perfect, the dispute settlement system has led to meaningful reductions in unfair trade practices and has helped to strengthen the rules-based international trading system.” The U.S. has been one of the bigger users of the dispute settlement system and also a beneficiary “of this public good,” India said, cautioning that “unless the Membership acts in concert … to lift the block on AB vacancies, we are going to lose this public good which has served all of us so well.”

How will the U.S.’s unilateral stand affect developing countries?

Undoubtedly, it is a tremendous loss for the majority of WTO members who are all developing and poor countries. Clearly, they “lack the political and economic clout to enforce their rights and protect their interests in a system governed by power and not rules,” said Mr. Deepak.

What is the future for an organisation that will not be able to enforce rules?

The strangulation of the Appellate Body is a reflection of unilateralism and protectionism that are on a sharp rise. China has said: “It is therefore not surprising that someone attempts to use its might rather than WTO adjudications to change trade polices of other Members.” The absence of the Appellate Body will create a jungle raj and paves the way for a steep descent into the General Agreement on Tariffs and Trade, 1947 rules.

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