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The Crisis of the WTO Apellate Body and the trade war behind

Joel Diaz-Rodriguez , 9 septembre 2019

WTO & Trump..jpg


The Crisis of the WTO Appellate Body and the trade war behind.

Is the Appellate Body about to die next December? That is the main question to be resolved. If nothing changes, this institution, important part of the World Trade Organization Dispute Settlement System will die by thwarting because of a deadlock since Member States cannot agree on the appointment of the new judges that composed this body. However, alongside the diplomatic and technical negotiations and given the current context, would there not be another political reason behind? The crisis of the Appellate Body could only be the face of a dark and deep battle.

 International trade moves the world and multilateralism has governed the commercial relations through a system of norms between many countries that guarantee the rules of the game. The WTO, since its creation by the Marrakech agreement in 1994, safeguards these rules and punishes the actors who do not comply whit them. But in the last year, the trade war between the United States and China has unveiled a latent crisis that has deeply affected WTO and has put the system in check. Since the end of WWII, the United States have dominated the international trade and have had the western European countries and Japan as its main known rivals, both respecting the rules of the game. But since the last two decades, China became a great trade player and has grown economically in an illegitimate way according to the US government, by infringing WTO rules: subsiding its companies and devaluating its currency. As a result, the new U.S. administration has declared a trade war and turned to the protectionism.

Sir Thomas Smith, an English diplomat had written already in 1549 “we must always take heed that we buy no more of strangers than we sell them, far so we should impoverish ourselves and enrich them”. This expression considered one of the earliest definitions of Mercantilism translated to nowadays language could be easily understood when President Trump says that the United States lose when it runs trade deficits with other countries. This reflects the today trend and the danger for the international liberal trade system. “It is a delicate moment for the multilateralism” said the WTO Director General in the last General Assembly of the organization, because “the trend is that big trade actors are looking for unilateral actions”. The role that Member States have given to the WTO is not substantial because the organization cannot act as an arbiter that can intervene and resolve conflicts between its Member States. It is necessary that Member States activate the mechanisms within the organization to enable WTO to act. The main international organisms are already warning about the consequences of this trade war that has repercussion in the employment, the economic growth and the consumers. Unilateral measures produce uncertainty.

Thus, the protectionism and unilateralism shoot directly in the heart of the WTO. This trend and the trade war has been reflected in the crisis of the Appellate Body. The United States has declared that they do not like how things are resolved within WTO system and has blocked the appointment of the new judges by the Dispute Settlement Body (DSB), where Member States are represented. The Appellate Body is a permanent international tribunal, composed of seven judges. Today, only 3 of its 7 members are in office ─the minimum to be operative─, but two of them are going to have their mandate expired at the end of this year, without expectation that any solution can be reached. Some of the proposals to unlock the issue have stemmed from excluding the United States from the system to look for a legal trick such as modifying the rules of procedures of the Appellate Body.

The first would require wide political consensus from other WTO members and entails to re-create an appeal system through a separate treaty outside the organization. This option would need a one-off emergency majority vote in the DSB, which takes decisions by consensus that is today difficult to reach. However, the main question is, what kind of international trade system would we have without the United States? An organ that the U.S. are not part of, would not be attractive for trade actors and can at the end relegate the new system to the irrelevance. The second option: modifying the Appellate Body rules could be an ingenious alternative because it can amend its working procedures in order to deny new appeals in the event that the terms of three or more Appellate Body members have expired. This would allow panel decisions to be considered final for automatic adoption by the DSB. This option would allow the system to move on, but at the cost that WTO members would have to forego the right of appeal, at least temporarily.

It appears that the Appellate Body issue is only the tip of the iceberg. The problem is that WTO needs a structural reform. In first place, everything in the organization has to be adopted by consensus and it is very difficult to find a common ground between 164 members. Some countries are negotiating to make changes to make possible the adoption of some measures by majority vote that do not necessarily imply unanimity. The EU is leading these negotiations but in spite of being one of the world main trading blocs, it is not enough by itself to produce the desired changes. Other powers such as the United States and China are indispensable and need to be on board of this initiative. On the other hand, the WTO rules as the organization itself are already more than 20 years-old and since the 1990s the international trade has drastically changed. Today the 15% of the total trade is digital, the world economy is more integrated, and the trade wars can be started by two, but their effects can be felt by many others. WTO has thus, the challenge to reinvent itself and reach a compromise between its Members to unlock this stalemate. If it does not, there is a risk that WTO become irrelevant and probably we will get back to the times of the law of the jungle where protectionism and unilateral solutions will be the rule.

 Joel Diaz Rodriguez, researcher. Actualité du 9 septembre 2019. Disponible en www.ceje.ch