Global trade needs an independent referee

Global trade needs an independent referee

President Trump must decide if he wants to reform or break the WTO

The World Trade Organization looks set this week to suspend its arrangements to settle disputes between member states. This represents the biggest threat to the trade body in its 25-year history, and has been forced on the organisation by the US. Two of the judges who sit on the panel that oversees trade disputes, the appellate body, will retire on December 10. With the US blocking new appointees this means there are no successors and, with just one judge remaining, the body will not be able to hear new cases. The global trading system is about to lose its independent arbiter.

There is a lot at stake. The roots of the WTO were laid in the ruins of the second world war when the US and its allies recognised the need for an international trading system to help curb protectionism and break down trade barriers. Its forerunner, the General Agreement on Tariffs and Trade, was set up in 1948. Almost half a century later, the WTO ushered in binding dispute settlement, including the appellate body. Panels of arbiters rule on breaches of existing WTO law in cases brought by one member country against another and can authorise retaliation in the form of higher tariffs. Almost all world trade — 98 per cent — is covered by WTO rules.

Experts fear the looming paralysis will make it easier for countries to break WTO rules without the fear of penalties. It also creates uncertainty for the 14 appeals cases already filed at the WTO. Ten of these are expected to have to await any resolution of the blockage over new appointments. Among these is the EU’s appeal on compliance by Airbus over alleged subsidies, part of the world’s largest trade dispute between the aerospace group and its US rival Boeing.

One does not have to look far for the trigger for today’s crisis. The US has been blocking the appointment of new judges since July 2017. America may have been instrumental in the WTO’s creation but it has long been wary of what it has regarded as judicial over-reach, in particular in rulings by the appellate body. US officials say it has often sought to fill holes in the WTO rule book rather than interpret existing law.

The US intervened in 2011 when the Obama administration refused to support the routine reappointment of a US national. Under President Donald Trump, who, in the pursuit of his “America First” strategy, sees world trade as a zero-sum game, US dissatisfaction has hardened. Ironically, as in the Airbus case, Mr Trump is happy to accept rulings when they suit him.

There are some widely accepted faults in the settlement process. Its rule book has not been updated since 1994. It works reasonably well for countries with market economies where the boundaries of the state and market are fairly clear. But in the case of China, where state-owned enterprises dominate in many sectors, those lines are blurred, making it more difficult to apply the WTO’s rules on issues such as subsidies. There are also complaints about the panel’s working practices. Recent appeals have taken more than five months to conclude, far longer than the 90-day timeframe required under the rules.

Reform is necessary. The EU, Canada and Norway have recently proposed an interim mechanism, one that in effect creates a shadow appellate body to rule on future cases using retired judges from the WTO body. Such approaches will work in the short-term, but full-scale reform will require the support of the US administration. The question is, does Mr Trump want to reform the WTO or does he want, as part of his broader onslaught on multilateralism, to derail it.

  The Editorial Board

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