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What Aspects of the WTO is the Trump Administration Targeting for Reform?

By ·January 28, 2020
The Fletcher School of Law and Diplomacy, Tufts University

The Issue:

President Trump has long argued that the World Trade Organization (WTO), which administers a multilateral world trade system, is unfair to the United States. He recently said that his administration is discussing something “very dramatic” with WTO Director-General Roberto Azevêdo. President Trump has threatened on many occasions to withdraw the U.S. from the WTO. The two areas that the Trump administration has consistently targeted for reform at the WTO are its dispute settlement mechanism and its special treatment for developing countries. It is not clear, however, that addressing these issues will provide significant net economic benefits to the U.S.

There is room for some reasonable amendments to the WTO's dispute settlement and to rules relating to developing countries. Net benefits are unclear.

The Facts:

  • The dispute settlement system at the WTO provides an established process by which countries can resolve trade issues, and the WTO treaty prohibits countries from taking matters into their own hands. The system allows complainant countries to bring their case to the WTO for consultations, and if they are not successful, the complainant can proceed to mandatory litigation before an ad hoc dispute panel. Decisions by such panels could, up until recently, be appealed to the WTO Appellate Body, which consists of seven members appointed for limited terms. After a period to allow removal of the violation, final decisions of the dispute settlement system are the basis for authorization to the winner to suspend equivalent concessions — to retaliate. In order to be able to continue to function, the Appellate Body must have at least three members. As of December 10, 2019, it was down to a single member.  
  • The United States has not yet proposed specific reforms to the WTO dispute settlement mechanism, but has voiced a number of complaints. Beginning before the 2016 election, these complaints have been largely motivated by the Appellate Body's consistent determination that a particular method that the United States uses to calculate whether exporters to the U.S. are pricing their exports below home market prices, or "dumping", violate WTO law. The U.S. method is called “zeroing” because it calculates average prices by deeming low home market prices to be zero, thereby inflating the average home market price. These antidumping duties are important to some U.S. industries, such as the steel industry, and are very important to U.S. law firms that work in this area, but anti-dumping duties are generally considered a form of protectionism. Because the WTO Appellate Body has criticized the dispute panels for failing to follow precedent in dumping complaints and other areas, a related U.S. criticism has attacked the very idea of following precedents. But, of course, consistency is at the heart of the rule of law, and the Appellate Body would find it difficult to justify applying one principle in one case and another in a later case. So it will be especially difficult to find a way to "reform" this practice. The U.S. has also been concerned that the Appellate Body has failed to apply a special rule of deference required to be accorded to member states in connection with dumping—Article 17.6(ii) of the Anti-Dumping Agreement within the WTO. This rule of deference requires the Appellate Body to accept a national treaty interpretation if it is one of several possible interpretations, and was in fact designed to protect the U.S. zeroing practice from judicial scrutiny. The U.S. has also generally criticized the Appellate Body for what it considers to be "overreaching," meaning that the Appellate Body extends member countries’ obligations beyond those specifically stated in the treaty.      
  • The United States has been working to undermine the dispute settlement system. All 164 member-states have the right to veto new members of the Appellate Body, the WTO’s “supreme court.” The U.S. has been using this right to prevent new members from joining the Appellate Body as current members’ terms have expired. Effectively, this has meant that, as of December 2019, there are not enough members for the Appellate Body to operate. This precludes appeal of panel decisions, making it possible for states that violate WTO law to prevent adverse WTO rulings from attaining legal effect. The U.S. has also acted to limit further funding for the Appellate Body. 
  • In recognition of the benefits of the dispute settlement system, on January 24, 2020, the European Union and 16 other member states agreed to develop a substitute appeal mechanism that will allow those states to preserve an effective dispute settlement system at the WTO, but only for disputes among themselves. Those members, including the European Union, Australia, Brazil, Canada, China, Korea, Mexico, and New Zealand, among others, are important trade partners for the United States. Forgoing use of the WTO dispute settlement system will likely disadvantage U.S. companies in these countries, compared to companies from countries within this group, unless the more bilateral, power-based system of addressing foreign trade barriers espoused by the Trump Administration becomes successful in addressing trade barriers abroad.  
  • The Trump Administration has also attacked the use of Special and Differential Treatment (SDT) for developing countries. In a practice that dates back over five decades, developing countries have been granted certain exceptions to trade rules that allow them greater leeway to protect their domestic industries as well as preferential treatment for their exports to developed markets. The underlying justification for this has been the thought that temporary protection and preferential access to larger markets could foster infant industries and help diversify the industrial base of developing countries, ultimately leading to sustained, faster economic growth (see here). Under WTO practice, countries “self-designate” as developing countries; China, India, Brazil, and a number of other countries, as well as Singapore, South Korea, and Israel, are all counted as developing countries. The Trump Administration argues that: "while some developing-country designations are proper, many are patently unsupportable in light of current economic circumstances." 
  • In particular, the Administration has focused on China’s designation as a developing country. The Administration argues that China is the world’s leading trading nation and is as technologically advanced as any developed country. The Chinese government responds that its GDP per capita is still low compared to developed countries. A broader group of developing countries also has responded along similar lines. In other communications, the U.S. has rejected this "binary" system of developed and developing countries saying that: "There has been much discussion lately about staying committed to the "rules-based multilateral trading system." However, if you look behind the curtains, that system is hardly monolithic. All the rules apply to a few (the developed countries), and just some of the rules apply to most, the self-declared developing countries."
  • There is debate about whether Special and Differential Treatment for Developing Countries actually benefits them. A survey of the literature finds that there is not much evidence that SDT designation increases growth or reduces poverty, and, as the U.S. points out, there is a growing systemic cost. There is also an argument that the structure of SDT is biased against developing countries. One core issue is that SDT makes it harder for developing countries to negotiate for liberalization in wealthy countries with respect to products in which the developing countries have export capabilities. Although the actual economic benefits of developing country status are questionable, countries that believe, perhaps erroneously, that they currently benefit from Special and Differential Treatment will not easily accept a re-definition that excludes them.   
  • Though China has been the principal target of the critique against Special and Differential Treatment for developing countries, the special treatment accorded China when it joined the WTO was curtailed by its protocol of accession. There was resistance to China’s claim of developing country status when it joined the WTO in 2001. Its access to the special treatment available to developing countries was curtailed by its protocol of accession, a treaty instrument by which it joined the WTO. When China joined the WTO, it did not receive any of the most significant components of special treatment accorded to developing countries. For example, the tariff reductions required of China upon entry far exceeded those required of other developing countries under the Uruguay Round WTO negotiation guidelines. In areas such as export subsidies on agricultural products, and export taxes, China’s obligations significantly exceeded those of developing countries. China does not have access to the U.S. Generalized System of Preferences (GSP) system of reduced tariffs accorded to developing countries. In current negotiations, China has stated that it “is willing to take up commitments commensurate with its level of development and economic capability”.

What this Means:

After the U.S. renegotiations of the U.S.-Korea and NAFTA/USMCA free trade agreements, one might be forgiven for wondering whether the changes that the Administration is demanding of the WTO will be as dramatic as advertised, and whether they will have significant economic effects. But it will be politically important to address U.S. concerns. There is room for some reasonable amendments to WTO dispute settlement and WTO rules relating to developing countries. It is unclear what concessions Director-General Azevêdo can deliver. First, some U.S. demands would be difficult to implement. For example, it would be especially difficult to find a way to “reform” the use of precedent since consistency is at the heart of the rule of law, and the Appellate Body would find it difficult to justify applying one principle in one case and another in a later case. Second, WTO rules are set by treaty among all of the 164 member states, and the director-general has no authority or power to change WTO rules on his own. If the negotiations fail, it is unlikely that Congress would support U.S. withdrawal from the WTO, and it is unclear that President Trump holds the constitutional or statutory authority to effect withdrawal without Congressional approval. If the U.S. were to withdraw from the WTO it would need to quickly re-establish most of the WTO’s rules and institutions, and might do so in regional or bilateral free trade agreements. Withdrawal would increase uncertainty, in a way that may undermine investment and thus growth. Finally, while reforms of dispute settlement and developing country status would not have great economic significance, the WTO needs to make progress on digital commerce, global warming, fisheries subsidies, state-owned enterprises, and a host of other issues of much greater significance.

Topics:

China / International Trade / World Trade Organization
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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