Addressing WTO gridlock and future trade issues

By Alvin Lee

SMU Office of Research & Tech Transfer – On 10th December 2019, the Appellate Body of the World Trade Organization (WTO) could be reduced to an unprecedented single member. While generally consisting of seven judges, there are currently only three, which is the minimum required for it to hear and decide on appeals. With the terms of two members due to expire on that day, the WTO’s Dispute Settlement Understanding (DSU) system could be paralysed.

Much of the impasse can be attributed to the United States blocking appointments to the Appellate Body. Since Donald Trump became President, four judges have left the Appellate Body – Hyun Chong Kim, Peter Van den Bossche, Ricardo Ramirez-Hernandez, and Shree Baboo Chekitan Servansing – without being replaced. The Trump administration has consistently railed against the WTO, accusing it of judicial overreach and reversing factual findings by trade arbitration panels. U.S. Ambassador to the WTO, Dennis Shea, panned the Appellate Body last year: “The invention of an authority to review panel fact-finding… has added complexity, duplication and delay to every WTO dispute”.

“I think it's something that needs to be resolved, unless the WTO members can live without an Appellate Body and look to some alternative arrangement,” offers Locknie Hsu, Professor of Law at Singapore Management University. She gave an example of the EU, which is resorting to a little-used WTO arbitration mechanism to sort out appeals with some of its trade partners in the WTO. Professor Hsu, who specialises in international trade and dispute settlement, gave the Office of Research and Tech Transfer some examples of DSU-related issues the U.S. is unhappy with:

• Appellate members continuing to work on cases they had been assigned after their terms expire (Rule 15, Working Procedures for Appellate Review); and
• The Appellate Body consistently exceeding the 90-day rule for appeals.

While negotiators work on resolving these longstanding issues, Professor Hsu singled out a WTO panel ruling “RUSSIA - MEASURES CONCERNING TRAFFIC IN TRANSIT” on 5th April 2019 which highlights a topic that is likely to influence a number of ongoing disputes, and how the Americans will proceed in future dealings with the WTO: national security.

“Found in Article XXI of the General Agreement on Tariffs and Trade (GATT), this is, in layman’s terms, a national security exception,” Professor Hsu explains, referring to the WTO’s ruling on the Russian ban and restrictions on road and rail traffic from Ukraine across Russia into Kazakhstan and the Kyrgyz Republic; the WTO Dispute Settlement Body (DSB) reaffirmed the decision on 26th April 2019.

She adds: “The dispute panel gave what was seen to be a balanced ruling, saying, ‘Yes, there's an exception clause allowing for countries in the WTO to decide they can depart from the rules in the case of an essential security situation, but we, the panel, have the jurisdiction to review its use.’ In that particular case, the panel decided that Russia was able to rely on the exception.

“The U.S. started the so-called trade war with the tariffs on steel and aluminium. In imposing those tariffs, the United States has argued that it's a matter of its national security because of the use of these materials in military and domestic facilities and so on. Now, a number of WTO disputes are pending about these U.S. tariffs on steel and aluminium, so the national security issue is likely to come up before the new panels hear these cases.

“They're arguing that this is not something for a WTO panel to decide because national security is something that the country itself considers – using the words of Article XXI – to be ‘necessary for the protection of its essential security’.”

Reimagining global trade through e-commerce

There are other longstanding bones of contention in international trade, not least the practice of self-classification as a “developed country” or a “developing country”. With two-thirds of WTO members, including China, choosing the latter to gain benefits and exemptions not afforded to developed counterparts, tension is perhaps inevitable. The U.S.-China trade war has diminished prospects of resolving core issues, as has America’s tit-for-tat tariff-swapping with the EU.

Additionally, there is the U.S.-Japan FTA (Free Trade Agreement) ‘mini-deal’ that granted American access to Japanese agricultural markets on terms similar to those provided in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Does the agreement not undercut multilateralism, or in essence violate WTO’s founding principle of Most Favoured Nation (MFN) treatment?

“The WTO rules allow you to have these departures from MFN because there is a provision [that allows this provided that it] liberalises your trade and substantially brings down barriers,” explains Professor Hsu. “It's seen to be permissible because it could be a catalyst to eventual greater liberalisation to the whole group. So there are provisions already in the rules. It's not necessarily a violation.”

Professor Hsu believes some of the logjam could be cleared if the WTO’s January 2019 Joint Statement on Electronic Commerce delivers on its potential.

“The existing WTO rules are not necessarily sufficient because of developments in technology since 1995,” Professor Hsu emphasises while pointing out that 76 WTO members representing some 90 percent of world trade had signed the statement, which she hopes could iron out issues which could promote “e-commerce, and facilitate trade in digital services and goods”. She further elaborates:

“My point in raising this is that the U.S. is in this negotiation, which is significant. So is China. Perhaps this is one place where some of the negotiations can start to unblock and have some creative pathways. If this moves, perhaps there's interest in unblocking some other areas.”

It is helpful that the world’s third largest economy, Japan, and the European Union, are also signatories in the joint statement. Despite global macroeconomic forces that have fanned nationalistic and protectionist sentiments, the participation of the U.S. in a plurilateral group signifies that e-commerce is “an area important enough for it to participate in rulemaking in”, observes Professor Hsu.

Looking ahead, Professor Hsu singled out FTAs and how they are structured as something that are due for an update.

“FTA e-commerce chapters are beginning to look like a certain template, and there are other issues which are not being covered in that template,” she elaborates. “For example, if you look at how the countries who sign FTAs may not have a baseline with regard to certain legal infrastructure for dealing with e-commerce, can we at least say, ‘You must make sure that electronic communications and contracts are clearly recognised in your laws, and clarify what kinds of electronic evidence will be recognised by your courts’?”

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