Struggling Cub Reporter Blog

Original reporting by Jutta Hennig

Washington, DC | November 2, 2018: Key U.S. trading partners who met last week in Ottawa to discuss reforms to the World Trade Organization faced a stark reality: for the first time since the WTO’s creation more than 20 years ago, there is a real danger that the binding dispute settlement system is on the verge of unraveling.

The crisis stems from the Trump administration’s decision to continue blocking new appointments and reappointments to the WTO Appellate Body until members address the complaints it has raised about its functioning and approach.

Starting under President Obama, the US has refused to fill the open slots until other countries address its complaints that the Appellate Body has overreached in its interpretation of the WTO agreements, particularly in rulings adverse to US interests.

The overreach issue is one of several the U.S. has insisted must be resolved before it will lift its hold on the Appellate Body appointments.

In light of that link, the collapse could come no later than December 10, 2019, which is the date by which the terms for two out of the three remaining Appellate Body members expire. Under the WTO Dispute Settlement Understanding, the Appellate Body is supposed to consist of seven members but needs a minimum of three members to function.

If the Appellate Body can no longer function, that would lead to panel decisions being nonbinding. If WTO members cannot exercise their right to appeal panel decisions as envisioned in the Dispute Settlement Understanding, they would not be considered final and therefore would not be able to be adopted.

The US complaints about the Appellate Body were one of three topics discussed at the Oct. 24-25 ministerial on WTO reform in Ottawa. The meeting was attended by 13 WTO members but not the U.S., China, South Africa or India. Ministers discussed concept papers by the European Union and Canada outlining potential solutions to the U.S. complaints about the Appellate Body.

The papers also covered the issue of how to make more effective the monitoring of members’ implementation of their commitments and how to make their policies more transparent. They also sought to address perhaps the largest challenge of reviving the all but defunct negotiating function of the WTO, including to update the rules to effectively addresses practices by state directed economies like China.

Most WTO watchers say it’s hard to imagine that members could reach consensus on how to address US complaints about the functioning of the Appellate Body before the end of 2019, although others are more optimistic. The skeptics cite the degree of controversy surrounding the issues the US has raised and the preliminary state of the current reform discussions.

In addition, the US has not shown much interest in the dispute settlement discussions to clearly indicate how its complaints could be addressed substantively or procedurally. In addition to the overreach complaint, the US has raised a number of others. They include Rule 15 of the AB’s Working Procedures that members whose term has expired can serve on appeals.

The US also complains about the AB’s failure to meet the 90-day deadline for issuing its reports as laid out in Article 17.5 of the DSU. Technically, a failure to meet that deadline means the adoption of the AB report is not subject to the reverse consensus.

Moreover, the US argues that the AB oversteps its mandate by reviewing panel findings regarding countries’ domestic laws, which [is] are technically [an] issues of “fact” the DSU says is off limits for the AB. Under the DSU, the AB is to review issues of law covered in the panel report and legal interpretations of the panel.

The EU concept paper on dispute settlement divides the issues raised by the US into two groups: the first to be addressed in the near term are the ones related to the AB’s functioning. This includes the 90-day deadline, the use of AB members whose term has expired and the AB’s need to focus on issues of law, not fact.

In the second group, the EU lists “substantive issues” such as the overreach. According to the paper, this should be addressed once the AB appointment process has been unblocked. That stance is likely to be unacceptable to the U.S., sources said.

The Canadian paper also offers two groups of issues to be addressed, with the second one including the overreach complaint and the need to focus the appellate review on legal issues.

Georgetown Law Professor Jennifer Hillman, a former AB member, sees the 90-day deadline, the Rule 15 provision and the standard of review for the AB as “fixable” in the near term. She says they could be addressed without amending the DSU and having the members issue a ministerial or General Council or DSB declaration.

For addressing the US overreach complaint, Hillman noted that most of it relates to the AB decisions in trade remedy cases. According to Hillman, one way to approach it would be the creation of a different appeals process for trade remedy cases not applicable to other complaints. Another option, she said, would be to say panel decisions in trade remedy cases should not be subject to a review by the AB. This is based on the rationale that the panel process already constitutes a review of a national authority’s decision, according to Hillman.

The U.S. lack of direct engagement in the reform discussions amounts to a message that other countries need to make concessions and leads them to scramble for ways to address the U.S. demands, according to Simon Lester, the associate director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute.

“My best guess is by waiting the U.S. is strengthening its negotiating position,” he said in an interview. “The longer they wait, the more likely they are to get what they want.” But he cautioned that it is hard to know exactly what the administration wants.

He also said that he does not see anybody coming up with the kind of plan that would satisfy the US before the terms of the two Appellate Body judges expires.

But Terry Stewart, the managing partner of Stewart and Stewart law firm, said he believes that members will be able to agree to a package of modifications before Dec. 10, 2019 or quickly thereafter. He said he believes the like-minded countries that came together in Ottowa and anyone who joins them will make an effort for a broader package than just DSU reform. But he did not rule out that they may only be able to agree to DSU reforms, which are most directly linked to the AB crisis.

If the reform discussions have made progress by December but have not concluded, the Appellate Body would go into limbo. Some observers take the position that the WTO could function for some time without the Appellate Body and that it would ultimately be reconstituted. But Georgetown law professor Jennifer Hillman, questions that. “I am pessimistic [about that notion],” she said in an interview. “I don’t think [the Appellate Body] would come back [after a hiatus].”

U.S. Trade Representative Robert Lighthizer, who throughout his career in Washington has favored nonbinding dispute settlement, is the point man for the Trump administration on WTO dispute settlement. There are no other senior officials with the depth of his knowledge and understanding, sources said.

But Lighthizer has not expressly taken this position during his current tenure at USTR.

Lighthizer, who had previously served as a senior aide to then Sen. Bob Dole, was the force behind a 1994 proposal to create domestic US oversight over WTO dispute settlement decisions adverse to the US under the threat of the US leaving the WTO after three findings of egregious violations of the standard of review reflected in the adverse decisions.

Each of the findings, which were to be considered a strike against the WTO, would have had to be approved by the congressional trade committees in both houses, according to the proposal. It was based on the notion that under this threat, countries would address the faults in the dispute settlement rules the U.S. had identified.

In addition, Lighthizer faces no strong push back from the two congressional trade committees on either side of the aisle, sources said. Instead, committee aides have informally made clear that they share the administration’s complaints regarding the WTO, and that it is up to other trading partners to fix the problems identified.

Major business groups have also taken a low profile on this issue for a number of reasons, even though they previously have come out against unilateral retaliation. They still express support for an enforceable dispute settlement process in the WTO, but in general they have not put any political capital behind lobbying the administration or expressed great alarm over the Trump administration’s stance.

There is some indication that agriculture groups are a bit more nervous about the administration’s stance with regard to the WTO, but they also seem to want to hold off on expressing alarm at least until after the midterm elections.

This cautious stance seems to be due to several factors, including that business priorities lie elsewhere. But even in the trade arena, businesses may be focused more on what they see as more immediate high-value targets such as a U.S.-Japan trade agreement that the administration wants to negotiate quickly, they said.

It is also not hard to imagine that businesses and trade association leaders are cautious in criticizing the Trump administration because they fear the president’s retribution more than they feared the political fallout from previous administrations.

On a practical level, the absence of a binding dispute settlement system could lead the U.S. and other countries to impose more and more unilateral trade restrictions secure in the knowledge that there is no effective WTO remedy open to targeted trading partners.

The views expressed here are the author’s own, and do not reflect the opinions of WITA, its Board or its staff.