Multilateral Trade System in Crisis
The disintegration of the WTO's Appellate Body
Posted June 7, 2021
Key Takeaways
- After hearing 600 cases in 25 years, dispute settlement in the WTO is facing an uncertain future as central provisions of its process are suspended and key Member States disagree over the future of the multilateral trade system.
- The Appellate Body, functioning as important review stage in the dispute settlement process, has not been able to take on new cases ever since its minimum required number of standing judges dropped below 3 in winter 2019.
- As the number of new cases drop significantly and more states fall back on unilateral trade restrictions, the future of free trade guided by the WTO will depend on a sweeping reform that accounts for today's challenges in export subsidies, support for state-owned enterprises and non-trade barriers.
The Covid-19 pandemic has had its impact on many areas of our daily life. One aspect that received a lot of attention early on was the availability of essential products and the reliability on global supply chains that suddenly presented a threat to supply and thus security. A significant number of renowned institutions has picked up on this debate and tried to predict how global value chains will continue to develop after the pandemic will end[1].
The initial reflex of many government officials and managers was to demand a reduction of dependences from international suppliers and set up domestic production capabilities, as essential goods were in short supply. However, with a recovering economy that is picking up in pace, the potential consequences of those demands become visible as supply chains are not able to follow fast enough and whole industries are suffering from low stock of parts and short supply.
The past year, however, has only been the tip of the iceberg when it comes to more underlying dynamics that have had an impact on international trade over recent years. In the centre of those dynamics are the trade war between the U.S. and China, the push towards regional integration and the creation of trade blocs (mega regional trade agreements) and as the consequence of these trends the increasing weakness of the multilateral organization that was once established to prevent exactly those dynamics, the World Trade Organization (WTO).
The WTO is an international trade regime that seeks the liberalization of global trade and has 164 member states. It is natural to expect some disagreement and the representation of different interests in such a large and diverse group of countries. However, for a long time it seemed like international trade is a continuous success story of deeper multilateral integration and liberalization. The outcome of the Doha Round, which was launched in 2001 to negotiate the next framework for trade liberalizations, was the first indication that this success story was coming to an end. After the WTO Member States were unable to agree on any progressive trade liberalizations the negotiations remain mostly in limbo[2]. One institution that has come under particular scrutiny in light of these developments is the WTO’s Dispute Settlement Process (DSP) that Member States address to file a complaint about trade restrictions of other Member States, which allegedly violate WTO policy.
Dispute Settlement in the WTO
The DSP is one of the central provisions to achieve the WTO’s objective of international trade liberalization. Chart 1 shows the distribution of 600 complaints that have been filed by WTO Member States over time, which presents a strong case for the dispute settlement mechanism as a respected institution by its members. The primary goal of the DSP is to protect and guarantee the rights and obligations of the WTO Member as well as the effective functioning of the WTO itself[3]. By doing so, the DSP is positioned to effectively prevent any unilateral action by one of the WTO Member States to address a possible inconsistent trade measure.
But exactly these provisions written down in Article 3 of the Dispute Settlement Understanding (DSU; Annex 2 of the WTO Agreement) have been the subject of fierce debate among WTO Member States. They argue about the role of the second stage of the process, the Appellate Body (AB), which reviews appeals or rulings made by the initial panel.
The AB is a standing panel that consists of seven judges with no government affiliation and that should be “broadly representative of membership in the WTO”[4]. A panel of three AB judges is assigned to perform a review of the first stage and decide whether to uphold or revise any decision made by the first stage. In December 2019, the DSP and the AB received a lot of attention in the media after the U.S. refused to confirm the nomination of new judges to the AB[5] . Chart 2 outlines the path of this blockade, which started in 2017 and led to a situation where the AB only consisted of three judges starting October 2018. As described before, three judges are required to form a panel and thus the minimal number of judges necessary to keep the appealing process running. After two of the three remaining seats became vacant in December 2019, the continued suspension of the selection process meant the effective suspension of the AB and the DSP as we got to know it over the past 25 years. With the last member leaving in November 2020, the AB is currently only existing in the treaty text of the WTO.
In his farewell speech, Prof. Dr. Hong Zhao, the last member of the AB who completed his term, addressed this disagreement between the WTO Member States regarding the provisions made in DSU Article 3. He summarized that the underlying question posed by critics is if the extent to which the AB interprets WTO policies in its rulings and that “overreaches” its competencies and creates precedent for future rulings. Proponents of the AB’s actions point to the failure of the DDR and the WTO Member States’ incapability to negotiate a new policy framework that regulates issues like state-owned enterprises, subsidies and intellectual property rights. Therefore, they argue, the AB is forced to apply existing policies to present disputes that go beyond what the current WTO Agreement covers. Prof. Zhao, as a departing member of the AB, did not outline his own opinion, but did defend the members of the AB as performing “their duties under the mandate of the treaty”[6].
In a setting where participating countries are looking for reasons to disagree rather than find a common ground, these conflicts are mutually reinforcing. Due to the inability of WTO member states to make considerable progress during the DDR, necessary amendments to WTO legislation as well as updates
to the DSP itself are missing. Thus, the members of the AB might find themselves increasingly often in situations where they have to make a ruling that some interpret as “overreaching” rule interpretation and complain about those verdicts. They consider certain verdicts as exceeding the AB’s authority by creating new rules that could also affect future cases than simply reviewing the recommendations made by the panel. The U.S. are among the most vocal sceptics of the work of the AB and consider it overdue for a reform that clearly defines the working rules and procedures of the AB[7].
The conflict over certain provisions of the DSP has left its marks on the functioning of the whole process. Figure 1 shows that since the beginning of 2020, only seven complaints have been filed. Now this should not solely be attributed to the conflict surrounding the AB, considering the increasing utilization of more unilateral and protectionist trade policies. But it is the unfortunate display of the current state of dispute settlement in the WTO. The trade war between the U.S. and China that is largely taking place outside of the realm of the WTO system is the most prominent example of this trend. The U.S. do not consider the rules of the current WTO Agreement insufficient to keep up with the different policies used by China to support its domestic industries[8]. This summarizes accurately the problem created by the inability of the WTO Member States to come to an agreement during the negotiations of the DDR. If the WTO Member States are looking for someone to blame for the current situation they should start among themselves before they turn to the institutions of the DSP.
Outlook
With the appointment of Ngozi Okonjo-Iweala as the new Director-General of the WTO, at least a first step is made to bring the WTO back into the spotlight of trade talks[9]. The former World Bank economist and Nigerian Finance Minister is facing the formerly mentioned challenges and has to act quickly if she wants to prevent to be side-lined by other trade agreements in the negotiation of globally leading trade rules and regulations. The dispute settlement process has been a central pillar to the functioning of the WTO. The Appellate Body is only one but an essential part of that process. Considering the previous use of the DSP by its Member States, it has to be in the interest of the WTO to guarantee the effective functioning of the DSP and re-establish the AB as soon as possible. Prof. Dr. Hong Zhao urged in his farewell speech all Member States to come to a solution quickly and revitalize the rules-based multilateral trade system and refrain from unilateralism and a potential fall-back “to the GATT era when panel reports could be easily blocked by any defendant”[10].
Notes
Because this issue is central to international trade, we will likely come back to the DSP very soon and take a closer look on the actual disputes and Member States that are most active in the DSP.
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Footnotes
[1] see for example:
UNCTAD. 2020. "How COVID-19 is changing global value chains." https://unctad.org/news/how-covid-19-changing-global-value-chains.
Brookings. 2020. "The future of global supply chains: What are the implications for international trade?"
https://www.brookings.edu/research/the-future-of-global-supply-chains-what-are-the-implications-for-international-trade/.
McKinsey. 2020. "COVID-19 and supply-chain recovery: Planning for the future."
https://www.mckinsey.com/business-functions/operations/our-insights/covid-19-and-supply-chain-recovery-planning-for-the-future
[2] Bown, Chad P. 2019. “The 2018 trade war and the end of dispute settlement as we knew it”. In: Crowley, Meredith A. (Ed). “Trade War: The
Clash of Economic Systems Endangering Global Prosperity” (pp. 21-32). London, UK: CEPR Press. pp. 21-32.
[3] DSU Art. 3
[4] DSU Art. 17.3
[5] See for example:
New York Times. 2019. “Trump Cripples W.T.O. as Trade War Rages.” https://www.nytimes.com/2019/12/08/business/trump-trade-war-
wto.html
Washington Post. 2019. “What’s Next for the WTO After Sabotage by the U.S.” https://www.washingtonpost.com/business/whats-next-
for-the-wto-after-sabotage-by-the-us/2019/12/11/db45de8e-1bd3-11ea-977a-15a6710ed6da_story.html
[6] WTO. 2020. "Farewell speech of Appellate Body member Prof. Dr. Hong Zhao."
https://www.wto.org/english/tratop_e/dispu_e/farwellspeechhzhao_e.htm
[7] Payosova, Tetyana, Gary C. Hufbauer, and Jeffrey J. Schott. 2018. “The Dispute Settlement Crisis in the World Trade Organization: Causes
and Cures.” PIIE Policy Brief 18-5.
[8] Bown, Chad P. 2019.
[9] WTO. 2021. "History is made: Ngozi Okonjo-Iweala chosen as Director-General."
https://www.wto.org/english/news_e/news21_e/dgno_15feb21_e.htm
[10] WTO. 2020.
