Trump threats, demands spark 'existential crisis' at WTO

[October 24, 2018]  By Tom Miles

GENEVA (Reuters) - The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after U.S. President Donald Trump brought the world's top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization.

Trump's administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs.

Proposals to shore up the organization include increasing the number of judges and rewriting trade rules for industrial subsidies, state-owned firms and technology transfer. Those ideas and others will be discussed when Canada hosts a dozen trade ministers in Ottawa on Wednesday and Thursday.

At stake is the effectiveness - even the survival - of a key stabilizing force in the global economy. Since its founding in 1995, the WTO has stopped governments from arbitrarily raising trade barriers and disrupting the flow of goods.

Members can air grievances before clashes materialize, and the WTO's dispute settlement system allows them to seek binding rulings from judges.

Much of the U.S. displeasure stems from how the WTO has tied its hands in dealing with China, which it accuses of "dumping" cheap goods on the United States to take market share and unfairly using government subsidies to lower Chinese companies' costs.

U.S. officials have repeatedly complained that the WTO's seven-member Appellate Body has gone beyond its remit. In binding rulings, effectively acting as the supreme court of world trade, WTO judges have given Beijing the benefit of the doubt on subsidies and rejected Washington's treatment of dumping.

The WTO rules on dumping are ambiguous, the result of a political compromise at the WTO's creation in 1995. The U.S. reading is that, when in doubt, the judges should defer to the U.S. interpretation of the law - a view that judges often have not shared.

"The Trump administration has seized on what was a controversy in the WTO and turned it into an existential crisis," said James Bacchus, a one-time WTO chief judge and former Democratic congressman.

Dennis Shea - U.S. ambassador to the WTO and deputy United States Trade Representative - has said the judges have "strayed" and taken liberties with their own rules of procedure, ignoring deadlines and staying on cases after their official departure dates. Shea says such breaches may invalidate their work.

"We've been making these points for not just 15 months but for 15 years. Our proposal is that the Appellate Body needs to abide by the rules we agreed to in 1994," he said.

The White House did not respond to requests for comment. The United States Trade Representative declined to comment and referred to previous administration statements on trade.

APPOINTMENTS BLOCKED

When Trump first suggested withdrawing from the WTO during his presidential campaign, the organization's diplomats, convinced the United States could not afford to operate outside global rules, neglected the complaint as just the latest gripe about its operations from one of 164 member nations.

Now they appear to grasp the seriousness of the threat - that the WTO would have little sway over global commerce without the world's largest economy as a member.

The Trump administration has ramped up pressure by blocking any move to fill vacancies on the Appellate Body as judges left or finished their terms, taking the team down to three - the minimum required to make rulings.

The appeal system will cease to function altogether in December 2019 if Shea blocks the appointment of two more judges who need to be replaced by that time. The tactic amounts to "asphyxiation" of the organization, departing judge Ricardo Ramirez-Hernandez said in May, after his replacement was blocked.

The demise of the appeals system would paralyze dispute resolution and make negotiating new trade rules pointless, Appellate Body chief judge Ujal Singh Bhatia said in a speech in Geneva in May.

"The paralysis of the Appellate Body would cast a long and deep shadow on the continued operation of the multilateral trading system," he said.

The WTO has no executive power, but its members have a shared interest in following its rules. Under U.S. pressure, the WTO has begun discussing reform but found little agreement among members on the way forward.

A logo is pictured outside the World Trade Organization (WTO) headquarters next to a red traffic light in Geneva, Switzerland, October 2, 2018. REUTERS/Denis Balibouse/File Photo

CHALLENGING CHINA

In September, the European Union and Canada, which had separately drawn up reform proposals for the WTO, presented their ideas to a packed audience of diplomats from developing countries.

"The idea at this point is not to solve all the problems" but to open discussion about them, said a Latin American diplomat who attended the meeting at the WTO in Geneva.

The United States has also teamed up with the European Union and Japan to push for tighter rules on government subsidies of exports, state-owned firms and the forced transfer of technology from foreign partners, issues often raised in U.S. criticism of China's trade practices.

They also want to end the way two-thirds of WTO members, including China, declare themselves "developing" and thereby qualify for about 140 provisions in the rules that grant benefits and more lenient treatment to developing nations. Taiwan recently won U.S. praise for voluntarily renouncing such benefits.

The EU has translated some of those shared ideas into WTO reform proposals. Most of them have U.S. approval, but U.S. and EU officials disagree on the Appellate Body. In early October, Shea criticized EU proposals during a tense public debate with EU Ambassador Marc Vanheukelen at the WTO.

The EU advocated increasing the number of judges to nine and giving them more resources and longer, single terms to make them more independent on the grounds they would no longer need to curry favor to get appointed for a second term.

"That means less accountability for the Appellate Body," Shea said. "We cannot support something that makes the Appellate Body less accountable."

'CRUNCH POINT'

U.S. Trade Representative Robert Lighthizer has said the WTO does an enormous amount of good but that he wants more focus on negotiating new rules and enforcing existing ones with less litigation.

Lighthizer is widely seen as the brain behind Trump's trade strategy, drawing on his experience battling cheap Japanese imports as the deputy U.S. Trade Representative from 1983 to 1985 under the administration of President Ronald Reagan.

For more than 30 years after that, he was a partner at the law firm Skadden Arps, where he represented U.S. steelmakers against China. Shea also briefly worked at Skadden, later spending a decade investigating the national security implications of U.S.-China trade for the U.S. Congress.

"We have a slew of steel dumping lawyers on the protectionist side in charge of U.S. trade policy," said Bacchus, the former WTO judge and congressman. "They are bullying the world, and now they are bullying the members of the Appellate Body."

The goal, U.S. officials have said, is to get China's communist government, which still controls much of its economy, to institute sweeping free-market reforms to get into line with WTO rules. Lighthizer said the United States erred in letting China join the WTO in 2001 without such changes.

While many trade experts agree that Chinese trade has not been adequately policed since China joined the WTO in 2001, they say the solution is to improve the rules of the organization rather than to scrap it.

"If the rules today are not tight enough, you have two alternatives – you try to tighten the rules, or you try to fight this outside the WTO," a former senior official at the WTO said. "Little by little, we're getting to crunch point."

(Reporting by Tom Miles; Editing by David Clarke, Simon Webb and Brian Thevenot)

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