Info Service on WTO and Trade Issues (Apr18/19)
Geneva, 25 Apr (Chakravarthi Raghavan*) - The World Trade Organisation and its multilateral trading system is now faced with a three-pronged assault from the administration of US President Donald Trump that appears intent on wielding a wrecking ball against the post-war world order that the US had conceptualised, fashioned and shaped all these years.
The US is assaulting the WTO-MTS by trade measures in violation of the rules in three ways:
(a) preventing the filling up of vacancies on the 7-member Appellate Body and make it non-functional, so as to end the current dispute settlement processes. As the US Trade Representative (USTR) Robert Lighthizer has made clear, it wants to revert to the old GATT process where the powerful could just refuse to implement rulings and prevent their adoption;
(b) bypassing WTO rules to raise import tariffs to protect its domestic steel and aluminum industries, and claiming it was doing so for "national security"; and
(c) reneging on US undertakings on S.301 of US trade law provided to a dispute panel (DS152 - dispute raised by the EU against the US: SUNS #4580, #4594 and #4595), and formally recorded by the panel as such in its report adopted by the Dispute Settlement Body (thus making it a US international commitment/obligation to other WTO Members), and invoking Section 301 of its trade laws to unilaterally judge trade measures and practices of other members and raise tariffs against imports from them (in violation of its own bound tariff schedules).
The future of the WTO system depends on the way the rest of the WTO members respond to this triple assault: either they act collectively to resist this onslaught, or keep quiet and allow the US to attack the rights of other members selectively, playing the old imperial game of divide and rule.
While focussing on China, the words and actions of the Trump administration can leave little doubt that it is intent on unleashing protective trade measures against trade partners with whom it has a bilateral trade deficit - Germany, South Korea, Japan, and India among others.
In blocking decisions at the Dispute Settlement Body (DSB) to set in motion processes for filling these vacancies on the 7-member Appellate Body (AB), the US has argued that it was doing so since the AB was acting beyond its powers in enabling retiring AB members to continue and complete work on disputes they have been hearing.
There are currently three vacancies on the 7-member Appellate Body.
Interestingly, when the AB initially notified the DSB of its Working Procedures to enable retiring AB members to continue hearing an appeal until the division bench decides the matter and issues its ruling, it was only India that had voiced some systemic concerns.
The US itself does not seem to have objected, nor expressed any support or understanding at that time over India's concerns, but rather acquiesced in the working procedures until now.
The government of any state may change its views and policies domestically, though in most domestic jurisdictions the doctrine of estoppel may come into play.
In terms of international treaty obligations, there are stipulated procedures (to change one's view and secure changes in international treaty commitments) that the US has not bothered to follow.
It has rather sought to prevent the functioning of the WTO's integrated dispute settlement process - the one feature of the multilateral trading system (MTS) that was part of the Marrakesh Treaty of 1994, making a departure both from the 1947 GATT system as well as other mechanisms of international treaties, a feature that both developed and developing countries at that time pointed to as a major gain in adopting the WTO treaty.
All viewed the Dispute Settlement Understanding (DSU) as a system that ensured the protection and implementation of the rights and obligations of the weakest as well as the strongest trade partners through disciplines of relatively impartial judgements of panels and the Appellate Body on clarifications of WTO trade law.
In the wake of the various trade measures unleashed or contemplated and unveiled by the Trump administration, there has been increasing talk (and news media headlines) about "trade wars".
"Trade" and "War" are two words antithetical to each other. Trade, by its nature, is a voluntary act between two or more individuals or enterprises.
War, on the other hand, is a coercive instrument by which one nation or country prevails over another, and forces it to yield and act according to what the winning side wants.
Yet, over the ages, and more so since feudalism gave way to mercantilism, war or threat of war has been used to force countries to trade or open up to trade.
Britain and its two "Opium wars" against China (the first between 1839-42, and the second in 1860), to enable Britain to sell opium to China to buy Chinese silk, is the most egregious example.
Similarly, the US, with its dubious claims to anti-colonialism, used China's defeat in the first Opium war, to get Beijing to conclude the Treaty of Wangxia in 1844 to establish consular (and trade) relations.
Similarly, there was some gunboat diplomacy and show of naval force by the US in 1853, when US Commodore Matthew Perry led a small squadron of naval vessels into the harbour at Tokyo Bay, to deliver a letter to the Emperor of Japan, asking for facilities and shelter for US ships and sailors in distress on Japanese shores, coming back a year later with a bigger squadron to receive Japan's reluctant agreement for a treaty with the US, opening two ports for US ships to refuelling and provisioning, right to appoint US consuls to live in these port cities, and a most-favoured-nation clause, so that all future concessions Japan granted to other foreign powers would also be granted to the United States. (https://nb.sinocism.com/p/understanding-chinas-rise-under-xi-jinping-by-the-honourable-kevin-rudd?utm_medium=web&utm_campaign=share-web) and (https://history.state.gov/milestones/1830-1860/opening-to-japan)
The Chinese were able to bring all these colonial legacies to an end on the mainland only in 1949 after the Mao-led People's Republic of China was established.
Much later, in 1997, the reversion of Hong Kong to Chinese sovereignty (but administered as a separate customs territory) took place, while the Portuguese colony of Macau reverted to China only in 1999.
These are but some of the extreme, disagreeable examples that have had long-term repercussions in relations between the countries (and even now is reflected in Chinese dealings, and suspicions, of Americans and Europeans, and many other foreigners).
TRUMP AND TRADE WARS
In talking of "trade wars", President Donald Trump has tweeted: "trade wars are good and easy to win"; and there is loose talk, nay saber rattling, in US government circles about the "trade wars".
After having announced and put in place increased tariffs on imports of steel and aluminum (claiming "national security" needs), the Trump administration unveiled plans for a slew of tariffs up to $50 billion on a range of imports from China.
In a tit-for-tat trade spat, China retaliated, with $3 billion of tariffs on imports from the US (already in effect, to counter US tariffs on steel and aluminum imports), and unveiled plans for counter-tariffs (to take effect when the $50 billion tariffs become effective) for up to $50 billion on a range of imports of other US goods (soybeans, aircraft and other such politically sensitive items, hitting Trump supporters).
Amidst stumbling stock markets and media headlines of "trade wars", Trump and his economic advisors all began announcing that there is no trade war, negotiations are under way, and that the economic effects would be minimal.
However, the mercurial Trump has also been changing his stance, and asked the USTR to levy additional duties of up to $100 billion on imports from China.
Beijing, for its part, made clear it would impose "comprehensive countermeasures... to the end and at any cost", if President Trump goes ahead with his threats.
At the moment, both sides are engaged in some shadow boxing; it will be about 60 days before the US announced $50 billion tariffs take effect, and then the Chinese $50 billion counter-tariffs on soybeans, aircraft and other US imports.
However, even before these tariffs and counter-tariffs come into effect, the mere announcement is having negative effects on US farmers and on markets for the products China has unveiled as well as on US enterprises (producing or trading these products).
As for the Trump threat of additional tariffs on $100 billion of imports from China, Beijing has made clear it will respond with equivalence. The US bought more than $500 billion in goods from China in 2017, and sold about $130 billion to China.
The US is planning or considering tariff increases on some $150 billion of those imports, but faces a potentially devastating hit to its market there if China responds in kind as it has promised. With the US, in 2017, selling no more than $130 billion in goods to China, the latter's retaliation will involve US services, where the US has a trade surplus with China (of perhaps about $30 billion).
While President Trump has said he will act to help the US farmers affected (by Chinese counter-tariffs), any additional farm support would provoke a trade fight with other trading nations, who would resist the threat to their own farmers through the subsidised US agri-exports.
In what is proving to be as much an actual tit-for-tat tariffs and counter-tariffs, China is also applying some pressure tactics: it has appealed to US businessmen to stop President Trump's trade war between the world's top two economic superpowers.
Chinese state media published on 8 April, an article calling on industrial and commercial leaders in the US to stand up to the White House's plans to bring an additional $100 billion in tariffs against China's exports, warning that China will mount a fierce counter-attack if Trump moves forward, as he has indicated.
US businesses too seem inclined to back China's position, with many complaining that the tariffs will make other countries more attractive to Chinese buyers.
"Growing trade disputes have placed farmers and ranchers in a precarious position," Zippy Duvall, Georgia farmer and president of the American Farm Bureau Federation, is reported as saying in US media on 6 April.
Patrick Delaney, a spokesman for the American Soybean Association, was cited by The New York Times as saying that his group was working to stop the tariffs from taking effect.
"It's a whole lot easier not to wreck the car in the first place than it is to think about what a repair might look like," he said.
China's Xinhua news agency reported that US top aircraft manufacturer Boeing Company has expressed deep concern about the US-China trade dispute, which is likely to escalate into a major trade war that will negatively impact the aerospace industry.
The tariff battle between the US and China "could do harm to the global aerospace industry," Boeing said in a short statement released on 4 April, and announcing its own efforts to proactively engage both governments (to head off the trade war).
NO WINNERS IN TRADE WARS, ALL LOSE
Any cursory study of the history of political economy and trade shows that there are no winners in trade wars: all are losers.
When two countries engage in trade spats or "trade wars" with tit-for-tat tariffs or other trade measures against each other, the trade surplus country tends to lose more than the one with the trade deficit. But this is not the case in today's world of global value chains and production spread across countries.
In any event, while the US is having trade deficits in goods with China, and many others, it has no deficit when trade in goods and services are taken together.
Also, the trade deficit is a necessary counterpart of the US dollar as an international reserve currency, with countries accumulating US dollar balances in their central banks as a reserve.
If there be no US deficit, the US dollar will become a scarce currency, and it will result in countries not buying US goods and services.
However, the problems in dealing with Trump and his "trade wars" and threats thereof, are different, since he is qualitatively different from a long line of his post-war predecessors.
He is trying to bring down the entire edifice of the post-war world order (political, security, money and finance, and trade) that the US, the sole hegemonic power at the end of that war, had conceived (even during the war), and post-war had built and fostered.
With his knowledge and experience of the construction industry, and how to become rich by resort to bankruptcies, Trump is willing to use a wrecking ball against the present world order.
He himself has offered so far no alternative, but his dislike of the United Nations and its system, the World Trade Organisation (WTO), multilateral trade, and multilateralism are palpable and clear. Pronouncements of his advisors, verging on economic illiteracy, are often as contradictory as Trump's own tweets.
And with his most recent appointment of John Bolton as national security advisor in the White House, the dangers of US misadventures in the Middle East (against Iran), and in the Far East have increased.
There are some contrary signals too, as in terms of moves under way for a summit meeting between the US and North Korea. Given the decades of hostility between the two, any peace will need patient, medium-to-long-term negotiations, and it is extremely doubtful whether the mercurial Trump will engage in it.
TRUMP ASSAULT ON WTO
As set out earlier, on the trade front the Trump administration has mounted a three-pronged assault on the WTO:
(a) blocking consensus in setting in motion a process for filling three vacancies (and two more soon to occur) on the Appellate Body (AB), thus threatening to make the AB and the dispute settlement system non-functional. Trump's USTR has proposed going back to the old GATT system of parties negotiating settlement after dispute panel reports and recommendations (and blocking adoption of panel reports with which they disagree).
This, in spite of the fact that it was the US, frustrated with the EU (it was then the European Economic Community) blocking consensus and preventing adoption of rulings favouring the US in the French wheat flour and the Italian pasta disputes, that at the time of the conclusion of the Marrakesh Treaty, sought both the DSU provision for "negative consensus" in dispute settlement and the right to have recourse to "cross-retaliation".
(b) Invoking powers under Section 232 of the US trade law and citing "national security", it has slapped 25% tariffs on imports of steel and 10% on imports of aluminium. Soon after, the Trump administration has exempted some of its trading partners from these enhanced tariffs, and has exempted some others like the EU for a short period, pending some negotiated accord. As a result, it has hit China, Russia, Japan, India and several others.
China, the European Union, India, Russia and Turkey have requested consultations with the US under Article 12.3 of the Safeguards Agreement. (See SUNS #8668 dated 24 April 2018). China has also initiated a dispute on the US tariffs on steel and aluminium - DS544. On 23 April, Hong Kong-China, the European Union, Russia, Thailand and India all have requested to join the consultations between the United States and China in DS544.
In domestic jurisdictions of most nations, following the Rule of Law (whether of the Anglo-Saxon jurisprudence or the European continental system under the Napoleonic code), it is a well-settled principle that it is the "pith and substance" of a measure, not how it is called, that matter in litigations.
In terms of US domestic law, the Trump administration's imposition of tariffs on steel imports have been challenged at the US Court of International Trade, New York (case no 18-00057).
The complaint by Severstal Export GmbH ("SSE") and Severstal Export Miami Corporation (in case No 18-00057) have cited various pronouncements of President Trump to argue that the action is not a genuine "security" measure (under S.232 of the US trade law) but one aimed at securing a positive trade balance with individual trading nations. The complainants have averred that the President's proclamation citing national security, "is a pretext to the actual intent for the imposition of tariffs on steel articles".
They point to President Trump's regularly stated intent, both prior to entering the Office of the President, and after assuming the Presidency, to obtain a "positive trade balance" with other countries, to "bring jobs home", and win trade wars. The issue is such that the domestic challenge can go all the way to the US Supreme Court before a final decision is reached. And US trading partners at the WTO cannot either await its outcome or be too influenced by it.
At the WTO, in judging whether the US tariffs on steel and aluminum are "national security" measures, "safeguard measures" or merely efforts at altering bound tariff schedules (without negotiating "compensation" with concerned trade partners), arguably the same "pith and substance" argument will apply. And in this matter, the various pronouncements of President Trump and his advisors, as well as Trump's own statements and comments on Twitter would be cited in disputes as evidence.
Article XXVIII of GATT 1994 enables a member to modify its bound duties, and if a member wants to raise them to follow the procedure laid out in that article: of giving notice, and negotiating with member with whom the original duty reduction was negotiated, as also with principal suppliers, to reach an agreement for compensation; and failing any agreement, the member seeking modification nevertheless can modify its schedule, while others can withdraw equivalent concessions.
As US trade law academic, Prof Steve Charnovitz, has pointed out, instead of adopting this route, the Trump administration has invoked the "security" exception to selectively modify the steel and aluminum import duties. (http://worldtradelaw.typepad.com/ielpblog/2018/04/the-us-china-national-securitysafeguardstariff-fight.html#comments)
At the WTO, the Appellate Body has not so far heard any appeal and decided the point of law on the scope of the security exception; and by blocking the filling up of AB vacancies, the US is preventing any such decision, if a dispute is raised.
However, an analogous issue has figured before the International Court of Justice (ICJ) in a dispute between Djibouti and France on interpretation of Article 2 (c) of the 1986 Convention on Mutual Assistance in Criminal Matters (which provides that the requested State may refuse a request for mutual assistance "if it considers that execution of the request is likely to prejudice [the] sovereignty, ... security, ... ordre public or other ... essential interests" of the State).
In that dispute the ICJ said in its ruling that "while it is correct, as France claims, that the terms of Article 2 provide a State to which a request for assistance has been made with a very considerable discretion, this exercise of discretion is still subject to the obligation of good faith codified in Article 26 of the 1969 Vienna Convention on the Law of Treaties (...)". [cited by Prof Regis Bismuth, Professor at Sciences PO Law School, France, in a comment posted at the IELP blog run by Prof. Simon Lester. (http://worldtradelaw.typepad.com/ielpblog/2018/03/litigating-gatt-article-xxi-the-us-view-of-the-scope-of-the-exception.html#comments)
The Vienna Convention on Law of Treaties, and its stipulation about "good faith" obligation of parties at all stages (negotiating particular provisions, concluding an accord and their implementation) is fully applicable at the WTO, as affirmed by the AB in disputes.
Thus, in the steel and aluminum import duties dispute, and the US invocation of "national security", it is for the US, as the member invoking the exception, to provide sufficient evidence of its "good faith" in its own consideration of the facts, and its conclusion that its essential security interests were affected. And it will be for the panel to weigh this and accept or reject it.
(c) Making clear that his principal trade target is China, President Trump has also now announced (after a S.301 investigation and "report" by the US Commerce Department of alleged "unfair" trade practices by China - denying or restricting and imposing "unfair" conditions for market access to US exports and investments) a list of various imports from China that will be subject to increased tariffs (to take effect after 30 days, and in the interregnum for US public to file comments and/or objections), and pending negotiations with China to resolve US complaints.
The proposed new slew of tariffs and trade restrictions (including on Chinese investments and acquisitions of US enterprises) are for alleged Chinese theft of Intellectual Property (by forcing US enterprises to transfer technology in return for market access or setting up joint ventures), and other restrictions on US investments.
This use of S.301 is contrary to express commitments by the US before a WTO dispute panel (DS152), which has been recorded by that panel as an international commitment; the panel report (adopted by the DSB) makes clear and that if the commitment is disregarded (by the US in future) it may attract liability of a State under international law.
These assaults, and attempts to dismantle the WTO and its MTS, bear every sign of the US effort to resort to a 21st century version of the 19th century mercantilist gunboat diplomacy to open up a foreign market. It calls for a collective response from the entire membership, other than the USA.
Unfortunately, the major industrialised nations are silent or acquiescing in the attacks against China. Thus, President Emmanuel Macron of France, in an interview on Fox News broadcast on 22 April (on the eve of his state visit to the US), is reported (in Washington Trade Daily) as hoping that the US will make permanent the current US exemption till 1 May on steel and aluminum tariffs on imports from Europe.
Macron is quoted as saying: "You don't make trade war with your ally. You make trade war against China. Trade war against Europe? War in Syria. Come on, it doesn't work. You need an ally. We are the ally."
This is a short-sighted expediency. In any event, irrespective of the stance of key developed countries, it is in the larger interest of all developing nations to unite and support China.
For its part, China too needs to reassess and revise its own stands and agenda at the WTO, abandoning its "Middle Kingdom" mindset in pushing for discussions at the WTO on such matters as E-Commerce, Investment Facilitation etc (issues opposed by most developing nations).
Irrespective of the views on the US measures citing "national security" or the S.301 actions against China over "unfair trade practices", the US, in blocking the processes for filling vacancies on the AB (thus attempting effectively to render nugatory the ability of the AB to function, hear appeals on law and dispose them off), is threatening the credibility and viability of the WTO's dispute settlement system, its one feature protecting the rights of its weaker members against the strong.
If the US continues to block the processes for filling vacancies on the AB, perhaps it is time for the rest of the WTO membership to take the necessary steps and ask the US to withdraw from the WTO. (See Chakravarthi Raghavan, SUNS #8590 dated 6 Dec 2017, "Contemplating the unthinkable, a WTO without the US").
If the rest of the WTO membership are unable to unite even on this basic systemic issue, they may as well wind-up the WTO and its multilateral trading system.
According to President Trump's latest announcement (after talks with President Macron of France, now on a state visit to the US), a US delegation, led by the US Treasury Secretary and the USTR, is going to China to negotiate with the Chinese to head off a trade war.
However, Chinese officials have made clear that any negotiations can only be in terms of WTO trade law, and not US laws and determinations.
Whatever the final outcome of these efforts, it is clear that beyond increasing the profits for Big PHARMA and benefit the richest Americans via better Wall Street access to Chinese markets, none of the contemplated or imposed US tariffs will bring additional jobs to the US; and in some cases (as on steel and aluminium), it will raise costs for a whole range of other US industries where these are used as inputs.
So far, the responses of various protagonists and trade partners of the US have been restrained, with most of the developed-country trade partners of the US mute.
Perhaps they are hoping that pressure from affected US industries, importers and consumers may yet force President Trump and his administration to modify his initial announcements of intention.
Or they might be hoping that other US domestic developments (the Mueller enquiry, various lawsuits against Trump that courts have allowed to move forward, mid-term elections in 2018) might intervene, and Trump and his mercurial policy changes and announcements, may end.
However, such a wait-and-see stance may end up even in the interim in inflicting serious injury to the WTO- MTS, making future reversals more difficult.
And those who might be thinking of appeasing Trump through minor concessions, might remember what Winston Churchill once remarked, defining an "appeaser" as one who keeps feeding a crocodile, hoping it will come for him last. (Dictionary of Humorous Political Quotations, edited by Fred Metcalf, publisher Biteback, 2012).
(* Chakravarthi Raghavan, Editor Emeritus of the SUNS, in contributing this comment, acknowledges that he has benefited from comments on a draft by Mr. B. K. Zutshi, who as Indian Ambassador to GATT 1947 (1989-1994), negotiated and concluded the Marrakesh Treaty, and Mr. Rammanohar Reddy, former Editor of the Economic and Political Weekly and currently Reader's Editor at Scroll.in. Any remaining deficiencies are that of the author. An earlier version is in Resurgence No. 328)