In his first in what will hopefully become a long series of blogs for Borderlex Dmitry Grozoubinski takes a relentlessly pragmatic look at the World Trade Organization and the world trading system with one question in mind: “You’re busy, what do you need to know?”
Like a fire department catching on fire on an unseasonably hot day, the World Trade Organization’s Appellate Body has lost the quorum it needs to adjudicate trade disputes. For the first time since 1995, disputes about multilateral trade rules will lack a final, obligatory, and binding forum of arbitration.
While academics write papers and politicians compose stirring oratory about all this, I’d prefer to look at the questions plaguing businesses, policymakers, stakeholders, and the assorted minions thereof.
Question: Are governments still bound by international trade rules?
Yes. The Appellate Body crisis doesn’t void trade rules for the same reason your spouse being out of town doesn’t void vows of fidelity.
That doesn’t mean the Appellate Body crisis can’t impact your interests. However, if chains or business partners weren’t under threat from trade lawbreaking a week before the Appellate Body lost quorum, then they’re probably not under significantly greater threat today.
Question: My business is hurt by another country’s trade policies, does my government still have WTO dispute settlement options?
For an issue to get to where the Appellate Body crisis becomes problematic it must have already undertaken a long and arduous journey consisting other steps designed to try and solve the problem.
Your government can still raise at the relevant WTO Committee. This draws scrutiny and can apply international peer pressure. It can also demand consultations (a diplomatic name for head to head negotiations) to resolve the issue.
That may not sound promising, but negotiations can and do yield results. Most country pairs have a host of low-grade irritants with one another and can find ways to reach accommodations by trading them off.
It’s also possible your problem hasn’t come about because of a deliberate choice to make your life more difficult, but through bureaucratic inertia, outdated systems or just plain old incompetence. Making a fuss about it bilaterally or in a WTO committee could start a regulator to regulator conversation that fixes the issue.
If that doesn’t work, your government can still push forward with dispute settlement. Even with the Appellate Body lacking quorum, panels can still be convened and issue judgements, and governments don’t like having international tribunals declare they’re breaking the law even if they technically have a legal out to invalidate the outcome.
Some governments (the geeky ones, who love binding dispute settlement) may also find ways to fully resolve panel appeals without an Appellate Body. The European Union and Norway have already notified the WTO that if the Appellate Body lacks quorum, they will resolve any appeals through an alternative procedure. Others may sign up to this approach or come up with their own variations.
Question: What about other options?
WTO Members can use ‘Trade Defense Instruments’ to protect their markets against certain forms of unfair competition.
These allow a government to investigate if goods are entering at ‘unfairly low’ prices and if so, intervene through targeted tariffs.
These instruments won’t apply in all cases, but they can be surprisingly flexible. For example, the EU relied on them to impose tariffs on steel in retaliation to the US. It argued that by locking steel out of its own market with tariffs the US caused a flood of it to enter the EU at unfairly lowered prices.
If your government has a trade agreement in place with the country you have a problem with, that agreement likely includes its own dispute settlement mechanism independent of the World Trade Organization. If that’s the case, this might be used to pursue a resolution of your concern.
Question: Trade defense doesn’t apply to my situation and the rest all sound too fluffy, I want action NOW.
That’s not really a question, but your sentiment is a valid one.
The most drastic end-result of an Appellate Body process can only be the authorization of retaliation. The absence of a functioning Appellate Body cuts both ways. Not being able to definitively prove a country is breaking the rules also means it’s impossible to prove your government is breaking the rules if it chooses to retaliate.
If your government considered the matter serious enough, they could skip to the last page and ‘retaliate’ without such authorization, confident there’s no Appellate Body to judge this action illegal.
This wouldn’t be a great thing for the international trading system or global stability but if the damage being done to your interests is severe enough…
Question: I’m following an ongoing WTO dispute, what will this mean for it?
Probably nothing good (unless you’re on the respondent’s side!).
If the case you’re interested in hadn’t reached the appeal stage by the time the Appellate Body lost quorum, then there’s a chance it will be ‘appealed into the void,’ leaving it effectively unresolvable. At that point the parties involved can either wait, negotiate a resolution, agree an alternative method of arbitration, or take matters into their own hands.
As to pending appeals, only three out of 13 will be ruled on.
Question: What about the Airbus case and the US tariffs?
The Airbus case has already been decided, with the Appellate Body ruling EU subsidies to be in breach of the rules, and authorizing the US to retaliate with tariffs on EU products up to the value of $7.5 billion every year in perpetuity. The US will continue to have this right until the EU can demonstrate, effectively through another panel process, that it no longer has policies illegally supporting Airbus. That process is subject to appeal.
The EU recently failed in its attempt to do so, and indicated it would appeal… but it’s highly unlikely there will be an Appellate Body to appeal to. By paralyzing the Appellate Body, the US has effectively ‘vetoed’ any attempt by the EU to prove its compliance. From a strictly legal standpoint, it can keep tariffs on indefinitely.
Question: So, is the crisis going to be resolved?
Probably not in the short term. Much depends on how this and future US administrations are approaching the issue.
If the US fundamentally believes in the Appellate Body as an entity, but has significant problems with how it works, then the loss of quorum could sharpen global focus on the ‘reform’ conversation and a compromise may eventually emerge.
If the US, as its Trade Representative Robert Lighthizer indicated on several occasions, has fundamentally decided against binding legalistic arbitration, then the international system is in for a long period of uncertainty.
Even if other countries eventually accept the necessity of returning to model of largely optional dispute settlement reliant on negotiation, they won’t do so quickly.
Strap yourselves in.
Dmitry Grozoubinski is founder of ExplainTrade.com. Follow him on twitter @DmitryOpines
- Peter Ungphakorn – What the Appellate Body crisis means for the World Trade Organization
- VoxEU – WTO dispute settlement and the Appellate Body crisis: Insider perceptions and Members’ revealed preferences
- Trade Talks Podcast – Trade Policy Under Trump