Toothless WTO Raises The Risk Of Trade Wars

As of today, the Appellate Body of the World Trade Organization is no longer operational. Without an arbiter, non-compliance with the WTO could become the rule rather than the exception.

The Appellate Body is the WTO’s Supreme Court. If member countries disagree over international trade, the Appellate Body has the final say, and can even authorize retaliatory countermeasures. Now the appellate body has ceased to function, what can we expect? 

1. Why the US is blocking the appointment of new judges

Current and previous American governments have been concerned that the WTO's dispute settlement process takes too much power away from WTO member states (and their governments). In particular, they claim that the Appellate Body changes the rules of the game with its reinterpretation of WTO agreements and national laws. The US also complains that the Body doesn't stick to its 90-day deadline for handling disputes. A further source of concern is that the Appellate Body’s rulings don’t always go the US’s way (though they don’t always go against the US).

Other countries have proposed reforms to address the US’s concerns, aiming to clarify and narrow the Appellate Body’s mandate and increase the number of judges from seven part-time members to nine full-time members to increase its capacity to settle disputes quickly. However, various proposals have been rejected, and the WTO is still searching for a way forward. While the appointment of judges has received the most attention, the US’s imposition of a 95% cut in the Appellate Body’s budget is a major obstacle to progress.

2. What a dysfunctional Appellate Body means for international trade

While dispute settlement can continue at the WTO, matters which are not resolved at the consultations and panel stages will no longer be able to progress to appeal. This includes all of the disputes raised in 2018 and 2019 associated with the trade war.

Number of appeals handled by the appellate body

Source: WTO *Provisional data for 2019

Without an arbiter, countries that don’t agree with rulings by the WTO’s panels can simply ignore them and carry on as before. This increases the risk of bilateral trade wars and could contribute to a new norm, where non-compliance with the WTO becomes the rule rather than the exception. In this way, the lack of an Appellate Body increases the risks and uncertainty for firms and economies surrounding international value chains.

3. The interim solution of Canada, the EU and Norway.

The EU, Norway and Canada are working on an interim arbitration system to work around the problems at the WTO. This would be an international court that replicates the function of the WTO Appellate Body. Instead of filing an appeal with the WTO, countries would file their appeals with this proxy court. Reportedly, China, Japan, Brazil, Turkey and Russia have shown interest in such a solution. However, with the US unlikely to participate in or recognise the court’s authority, one of the world's major trading nations is missing.

4. The US against the appellate body is not the only challenge for the WTO

While the crisis surrounding the Appellate Body is currently the most pressing issue, the WTO still faces other significant challenges. It has been unable to progress the Doha round of negotiations aimed at further liberalising trade. This is mostly the result of its structure, where every one of the 164 members has a right to veto.

There are tensions between the groups of countries classed by the WTO as ‘developed’ and ‘developing’. Developed countries question the status of larger emerging economies such as Brazil, India, and China as ‘developing economies’, with associated benefits (such as being allowed longer implementation periods for reforms) There is also tension over whether China should be granted 'market economy' status (For more on this read our earlier piece on the WTO).

President Trump has threatened to withdraw the United States from the WTO if it doesn’t change the way it settles disputes and fails to address its other concerns.

Still, WTO rules are embedded in US regulation and the President would need a majority in Congress to repeal this. If the US were to withdraw, the remaining WTO members would no longer be obliged to grant the US the benefits of a WTO member. This is a strong disincentive for the US to follow through on its threat to withdraw. If the US ends up remaining in the WTO but not participating in the dispute settlement mechanism which evolves to resolve the current crisis, this still suggests a further deterioration of the world trading system.