More worrying are Washington’s actions before the WTO, which can affect the efficiency and capacity of its robust Dispute Settlement Mechanism. This could undermine the relevance of the WTO as an organisation, and diminish the stability of the entire multilateral trading system.
In early 2018, the US introduced tariffs on imports of steel, aluminum and various Chinese goods. The objective of this move was to protect America’s “national security” and to sanction China’s “unfair trade practices.” India and other countries, including long time US allies like Canada and the EU, were also not spared from the increased steel and aluminum tariffs. In response to these unjustifiable measures, affected countries quickly hit back with retaliatory tariffs against American goods. This tit-for-tat escalation in trade measures has now culminated into the well know “trade war.”
The cumulative impact of increased tariffs on global trade and economy is difficult to quantify. However, it can have a debilitating impact on national economies by increasing costs for domestic consumers, industries and companies, and by adversely affecting exporting entities. Aggrieved by these measures, complaints have been filed before the WTO stating that US’ actions are inconsistent with established trade rules and obligations. The US, in response, has filed complaints against retaliatory tariffs imposed against its own products. Presently, the WTO has as many as 17 pending cases in relation to these measures.
The legitimacy of US’ unilateral measures remain suspect at best and will be explored in brief, below. More worrying are Washington’s actions before the WTO, which can affect the efficiency and capacity of its robust Dispute Settlement Mechanism. This could undermine the relevance of the WTO as an organisation, and diminish the stability of the entire multilateral trading system.
The US has imposed tariffs on steel and aluminum imports (25% and 10%, respectively) from all countries except Brazil, Argentina, Australia and Korea. This action was based on the recommendation of a government report under Section 232 of the Trade Expansion Act (1962), which suggested the use of increased tariffs to protect America’s “national security.” The report argues that cheap and increased imports could weaken US industries and economy, and thereby, shrink its ability to meet national security production requirements in an emergency. <1>
Taking measures to protect “essential security interests” is a recognised exception to WTO obligations under the General Agreement on Tariffs and Trade (GATT). However the GATT does not define the term, thereby allowing each country to be the sole judge of the scope, meaning and extent of “national security” interests. While many argue that this helps grant flexibility to nations in emergency situations, others have flagged concerns stating that the exception is too wide and could permit measures that are purely commercial, and have no connection to national security whatsoever.
It is no secret that the present US administration is skeptical of the advantages of free trade, and has been keen on introducing protectionist measures to boost US jobs and industry. Such measures cannot be considered as “essential security interests.” Countries like the EU have rightly pointed out that national security measures cannot be introduced with the “objective of sustaining national industries.” <2> However, given the wide definition of national security and the self-judging nature of the provision, it remains to be seen whether the WTO will utilise this opportunity to suitably interpret this provision and prohibit the use of disguised protectionist measures.
The WTO’s Dispute Settlement Understanding mandates that redressal of trade related violations can only take place through the established Dispute Settlement Mechanism. This provision aims to secure the primacy of the multilateral trading system by prohibiting recourse to self-help, through the use unilateral measures.
The US tariffs against China are based on Section 301 of the Trade Act (1974), which enables the US Trade Representative to investigate and impose trade restrictions on countries engaging in unfair trade practices. In 1998, the EU challenged this provision before the WTO on the grounds that it authorised the use of unilateral measures, without seeking recourse to the WTO first. However, during the course of the proceedings, the US assured that it will not impose sanctions under Section 301 unless and until it had previously secured the approval of the WTO. On the faith of this assurance, the case ended without the US being asked to abolish this provision.
Presently, the US has completely sidestepped this requirement by imposing tariffs against China without filing a complaint before the WTO first. Concerns regarding China’s unfair trade practices, such as intellectual property theft and technology transfers, are shared among most countries. Nonetheless, they all agree that the appropriate means for enforcing any action against China should be through the WTO, and not otherwise. Circumventing the dispute settlement mechanism not only undermines the authority of the WTO, but may also embolden other countries to deviate from their trade obligations by employing similar, unilateral measures.
The WTO’s Dispute Settlement Mechanism is one the most successful adjudicatory mechanisms among other multilateral organisations. Since its inception in 1995, it has received more than 500 complaints, has issued nearly 400 reports, and has seen a 90% compliance rate with its decisions. <3>
However, the mechanism is currently facing a serious crisis. The seven-member Appellate Body (AB) which adjudicates appeals for the WTO, has had three vacancies since 2017. Unfortunately, these vacancies continue to remain unfulfilled because the U.S. is actively blocking the appointment of new members. It is no secret that the US has been unhappy with previous AB decisions. In 2016, the US blocked the re-appointment of Seung Wha Chang of South Korea, on grounds of judicial activism in rulings against the USA. The present US action appears to be fueled by the oblique motive to stall and incapacitate the WTO’s adjudicatory system.
Needless to say, with just four members the dispute settlement mechanism may face long and arduous delays. There is also a chance that the process may freeze in its entirety, if more vacancies arise in the future. This is because panels constituted to hear appeals need a minimum of three members. Appellate Body Chair, Ujal Singh Bhatia commented that in such a scenario it would be easy for a losing party to subvert WTO decisions, by appealing to a paralysed AB. Given that now there are 17 “trade war” related complaints before the WTO, the chances of their expeditious resolution look bleak.
The present global trading system — though not without its flaws — continues to stand as success story of countries coming together to establish a consensus-based trade mechanism with harmonised rules and regulations. Since 1994, it has helped promote free trade and open markets across the world, by driving down tariffs and non-tariff barriers to trade in goods and services. The American battle plan to pursue measures designed to undermine the WTO and incapacitate its dispute resolution mechanism may dismantle the multilateral trading system, as we know it.
A multilateral institution draws its strengths directly from the support, approval and legitimacy it enjoys from its members. As things stand, it is imperative for countries to come together and take concrete steps to tactfully dissuade the US from adopting any further errant measures to destabilise the WTO.
<1> https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/
<2> https://www.wto.org/english/news_e/news18_e/good_23mar18_e.htm
<3> https://www.wto.org/english/tratop_e/dispu_e/bashir_13_e.htm
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