WTO reform

WTO reform — distortions to market access and the need for better information

Terence P. Stewart · October 30, 2021 · Subsidy disciplines, WTO reform · agriculture subsidies, Canada, China, European Union, industrial subsidies, service sector subsidies, The 28th Global Trade Alert report, United States · No Comments

The WTO’s role in international trade requires timely, accurate and complete information on a wide range of matters covered by existing agreements and the willingness of Members to permit the gathering of information on topics which affect or may affect international competition. While information in some Committees is relatively timely, accurate and complete, many Members have failed to provide information required under existing agreements and have prevented the gathering by the Secretariat of information on topics of potential importance to the functioning of the global trading system and whether certain actions or modes of economic activity operate to create market distortions and distortions in trade patterns. Areas where information has been particularly deficient have been the areas of subsidy notifications both under the Agreement on Subsidies and Countervailing Meausres (“ASCM”) and under the Agreement on Agriculture.

A number of countries have proposed improved transparency requirements as part of the identification of needed WTO reforms. See, e.g., PROCEDURES TO ENHANCE TRANSPARENCY AND IMPROVE COMPLIANCE WITH NOTIFICATION REQUIREMENTS UNDER WTO AGREEMENTS COMMUNICATION FROM ARGENTINA; AUSTRALIA; CANADA; CHILE; COSTA RICA; THE EUROPEAN UNION; ISRAEL; JAPAN; REPUBLIC OF KOREA; MEXICO; NEW ZEALAND;
NORWAY; THE PHILIPPINES; SINGAPORE; SWITZERLAND; THE SEPARATE CUSTOMS TERRITORY OF TAIWAN, PENGHU, KINMEN AND MATSU; UNITED KINGDOM; AND THE UNITED STATES, 14 September 2021, JOB/GC/204/Rev.7, JOB/CTG/14/Rev.7.

Some countries have attempted to address the perceived inadequacies of subsidy notifications through counternotifications. See USTR, United States Details China and India Subsidy Programs in Submission to WTO, October 2011, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2011/october/united-states-details-china-and-india-subsidy-prog (“U.S. Trade Representative Ron Kirk announced today that the United States has submitted information to the World Trade Organization (WTO) identifying nearly 200 subsidy programs that China has failed to notify as required under WTO rules. Information was also submitted on 50 subsidy programs in India not previously notified. Through these actions at the WTO, the United States is seeking the prompt provision of detailed information and data from China and India regarding the operation of these subsidy programs. ‘The situation was simply intolerable,’ said Ambassador Kirk. ‘Every member of the WTO is required to come clean on its subsidy programs on a regular basis. China has not notified its subsidy programs in over five years. India only recently filed its first notification in almost ten years, and even then notified only three of the many subsidy programs we know to exist. Because China and India have failed to meet their respective obligations, we had to act – as we are entitled to under the WTO rules – and provide the voluminous information we have developed regarding subsidy programs in these two countries.’)(emphasis added); WTO news release, Concerns grow about slippage in subsidy notifications, 25 April 2017, https://www.wto.org/english/news_e/news17_e/scm_25apr17_e.htm (“The United States and the European Union questioned China about what they alleged were some 160 government subsidies or grants listed in the annual reports of six of the largest Chinese steel producers (G/SCM/Q2/CHN/70) which were not included in China’s WTO subsidy notifications. The United States also quizzed China about the non-notification of other alleged subsides in sectors such as steel, aluminium and fisheries, as well as the non-notification of subsidies under China’s ‘Internationally Well-Known Brand’ programme. On fisheries, the United States said China had failed to notify 44 subsidy measures, including tax exemptions for certain operations such as deep water fishing ‘ identifying over 470 Chinese subsidy measures that were not notified to the WTO.”); WTO News, Members express concerns on lack of transparency at WTO subsidies committee meeting, 27 April 2021, https://www.wto.org/english/news_e/news21_e/scm_27apr21_e.htm.

Organizations like the OECD have historically developed trade policy reports that look at subsidies and distortions in agriculture, fossil fuels and fisheries. In recent years, the OECD has done some sector specific reports based on public data on distortions in international markets from subsidies in the aluminum and semiconductor value chains. See OECD (2019-01-07), “Measuring distortions in international markets: the aluminium value chain”, OECD Trade Policy Papers, No. 218, OECD Publishing, Paris.
http://dx.doi.org/10.1787/c82911ab-en; OECD (2019-12-12), “Measuring distortions in international markets: The semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, http://dx.doi.org/10.1787/8fe4491d-en. The OECD press releases on the two trade policy reports contain information on the reports and historical activity of the OECD.

“Measuring distortions in international markets: the aluminium value chain

“This report builds on the OECD’s longstanding work measuring government support in agriculture, fossil fuels, and fisheries in order to estimate support and related market distortions in the aluminium value chain. Results show that non-market forces, and government support in particular, appear to explain some of the recent increases in aluminium-smelting capacity. While government support is commonly found throughout the aluminium value chain, it is especially heavy in the People’s Republic of China and countries of the Gulf Cooperation Council. Looking across the whole value chain also shows subsidies upstream to confer significant support to downstream activities, such as the production of semi-fabricated products of aluminium. Overall, market distortions appear to be a genuine concern in the aluminium industry, and one that has implications for global competition and the design of trade rules disciplining government support.” ttps://www.oecd-ilibrary.org/trade/measuring-distortions-in-international-markets-the-aluminium-value-chain_c82911ab-en.

“Measuring distortions in international markets: The semiconductor value chain

“This report builds on the OECD’s longstanding work measuring government support in agriculture, fossil fuels, fisheries, and more recently in the aluminium value chain in order to estimate producer support and related market distortions in the semiconductor value chain. Results for 21 large firms operating across the semiconductor value chain indicate that total government support has exceeded USD 50 billion over the period 2014-18. Government support provided in the form of below-market debt and equity appears to be particularly large in the context of the semiconductor industry and concentrated in one jurisdiction. Other types of support identified include support for R&D and investment incentives, which benefitted all firms studied in this report. The report also discusses the implications that these findings have for trade rules, and in particular for subsidy disciplines in a context of growing government involvement in semiconductor production and poor transparency of support measures.” https://www.oecd-ilibrary.org/trade/measuring-distortions-in-international-markets_8fe4491d-en.

The 28th Global Trade Alert Report, Subsidies and Market Access

Earlier this week, Simon Evenett and Johannes Fritz released the 28th Global Trade Alert Report entitled “Subsidies and Market Access, Towards an Inventory of Corporate Subsidies by China, the European Union, and the United States.” https://www.globaltradealert.org/reports/gta-28-report. It is an important contribution to the development of a data base of possible government subsidies by the three largest trading nations or blocs. The report has used information from government sources but not the subsidy notifications filed with the WTO. The report claims to have inventoried “18,387 corporate subsidies awarded by China, the EU, and the USA since November 2008.” (page 5)

“Our study should not be read as implying that China, the European Union, and the United States are the only jurisdictions that award subsidies to organisations engaged in business; the Global Trade Alert database currently contains a total of 5,977 subsidy policy changes and awards implemented by other nations.” (Page 5) Many countries provide domestic subsidies on industrial goods and such subsidies are not presently limited by the WTO ASCM although where such subsidies cause distortions or injury to a trading partner, there are potential remedies. Many countries also provide subsidies on agriculture whether reported to the WTO or not, and there is no tracking of what, if any, subsidies are provided by WTO Members to the service industries.

At present, there are no WTO disciplines on service industries receiving subsidies whether domestic or export. Yet, the report released on Monday indicates that “a total of 4,564” of the subsidy actions catalogued “involved the transfer of state resources to service sector firms” with 12.66% to financial service sector firms (578). The service subsidy findings in the report suggest that service subsidies (in number) are more than twice the number of agricultural subsidy items catalogued (2,171) and 42% of the number found for manufacturing companies (10,814). Page 6. Agricultural subsidies are the most actively controlled in the WTO (by the WTO Agreement on Agriculture). There are limited restrictions on manufacturing subsidies under the ASCM and some disciplines on subsidies to the civilian aircraft sector for signatories to the separate plurilateral agreement. And none on subsidies to services providers. I have written in the past on the irrationality of the different subsidy disciplines under the WTO on agriculture, manufactured goods and services. See, e.g., November 23, 2020: WTO subsidy disciplines – an update and coordination across areas is long overdue, https://currentthoughtsontrade.com/2020/11/23/wto-subsidy-disciplines-an-update-and-coordination-across-areas-is-long-overdue/. The report released yesterday provides a potential measure of why a comprehensive review of subsidy disciplines is needed by the WTO Members for all trade (goods and services).

Observations

breadth of data

There have been many studies of subsidies in particular sectors or by particular governments over the years. Depending on the level of transparency in a country, publications on subsidy sources by a particular government are not unheard of. For example, in Canada there used to be annual reports on government subsidy programs put out by Statistics Canada. See Fraser Institute, Governments go subsidy-wild with $684 billion spent on subsidies since 1981, https://www.fraserinstitute.org/article/governments-go-subsidy-wild-684-billion-spent-subsidies-1981 (“Ever wonder how Canada’s net federal debt reached $671 billion by 2013? Or how net provincial debt among the provinces ended up at $509 billion that same year? Wonder no more. It’s partially due to massive subsidies to corporations, government businesses and even consumers that over three decades amounted to $684 billion. Statistics Canada once collected useful information about such taxpayer-funded government subsidies. The subsidies include funding for corporations (think selected automotive and aerospace companies), or Crown corporations like VIA Rail, or a government-owned ferry system to subsidize consumers’ ferry rides. Statistics Canada stopped tallying up the numbers in 2009 but by looking at what is available from 1981 (and adjusting for inflation to 2013 dollars to get apple-to-apple comparisons), some useful statistics pop out.”).

The usefulness of the 28th Global Trade Alert report is its focus on the three largest trading nations or blocks and a compilation of data points for a lengthy period of time (since 2008). The data base is also available for evaluation. There is partial data for other countries in the data base as well.

Missing is an evaluation of how many of the inventoried items are covered by notified subsidy programs by Members to the WTO. While there are concerns about completeness of notifications and timeliness of notifications, it would have been helpful to flag how many of the items would be covered by the notifications.

Similarly, while the report lays out what it treats as a subsidy, there are likely areas where clarification would be helpful. For example, on export financing, the U.S. has long been a participant in the OECD undertaking on export credits. Yet, of the 5,962 “subsidies” identified by the report, more than 1500 were from U.S. Eximbank. These are not likely prohibited export subsidies. So presumably, any loan from U.S. Exim was treated as a domestic subsidy. Whether that would be factually accurate is an open question. Similarly, more than 1,000 of the subsidy items are actions by the U.S. Department of Agriculture. Since the U.S. has reported every year operating within the limits of its obligations under the WTO, the relevance of the notices would presumably be simply in cataloging subsidies provided. It is not clear how the information would be an improvement on what is reported by the U.S. to the WTO Committee on Agriculture.

2. Rise in trade remedy cases –a reaction to global excess capacity and a source of information on distortions to trade

Countervailing duty investigations by national authorities on imports from a particular country can reveal information on the type and level of subsidies. Much of the information developed in an investigation may not be otherwise publicly available. And GATT Contracting Parties and, now, WTO Members have been able to challenge perceived subsidy practices at the WTO under various agreements.

The 28th Global Trade Alert report notes the increase in CVD investigations and in WTO disputes on subsidies and CVD cases. While the observation is correct that there are more cases in the last decade or so, it is unclear that the authors explored the information from the CVD investigations to determine the extent of subsidy practices in particular industries which may vary considerably from the sources they used. Having been a trade practitioner for 40 years, it is clear particularly for countries like China that there are many programs that are not flagged in corporate documents as having been used and many other state interventions which distorted competition that are not available from public sources in China. Indeed, in at least one CVD case in the U.S., documentation was submitted by a petitioner indicating that the Chinese government was ordering companies not to cooperate — hence minimizing the understanding of subsidy practices in particular sectors in China. Moreover, many of the cases brought involve sectors where China’s (and other countries’) policies resulted in massive global excess capacity.

China has been the subject of 176 of 431 CVD investigations brought by WTO Members since 2008. 285 OF 632 CVD investigations since 1995 involved base metals products of base metals (e.g., steel and aluminum), with higher numbers in recent years. Chemicals, plastics, rubber products were the subject of 127 additional cases since 1995, with more cases in recent years. All of these sectors reflect problems of global excess capacity.

Historically, GATT Contracting Parties were all market economies. Thus, there has never been any question that market economy countries or territories often use domestic or export subsidies. This was true under the GATT and now under the WTO. What is different in 2021 and since 2001 is that with non-market economies like China now in the WTO and with their combination of massive government intervention in the domestic market, industry plans, government funding, tolerance of IP theft, limitations on operations of foreign companies, export restrictions on raw materials and other identified distortions of competition, distortions in global markets have gotten much worse.

Many sectors have found themselves characterized by massive global excess production capacity, often largely driven by China, including in sectors where China has no inherent competitive advantages such as aluminum or steel. Indeed, China has identified sectors where it acknowledges massive excess Chinese capacity since at least 2007. With limited transparency, China will note closed capacity in these sectors but will seldom acknowledge additions to capacity being made at the same time. I testified before the U.S.-China Commission in February 2016 on the problems flowing from the massive global excess capacity created by China’s economic system and multitude of distortions to market forces. See HEARING ON CHINA’S SHIFTING ECONOMIC REALITIES AND IMPLICATIONS FOR THE UNITED STATES, HEARING BEFORE THE
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION, ONE HUNDRED FOURTEENTH CONGRESS, SECOND SESSION, WEDNESDAY, FEBRUARY 24, 2016 at 92-100 (statement of Terence P. Stewart), https://www.uscc.gov/sites/default/files/transcripts/February%2024,%202016_Hearing%20Transcript.pdf; see also Rui Fan, ‘‘China’s Excess Capacity: Drivers and Implications,’’ Stewart and Stewart, June 2015 (cited in USCC 2016 annual report at 104, 116, 134). Excerpts from my prepared statement to the USCC are copied below.

“Generally, an economy that follows state planning has the ability to pour resources into industries on a scale that doesn’t reflect underlying demand patterns or that overshoots actual demand trends. In the past several decades, a massive amount of industrial capacity has been added in China in a large number of manufacturing sectors to enhance the competitive position of the country and to provide employment to large numbers of people, many in state-owned enterprises. These actions have created massive disequilibrium in China and globally in various important manufacturing sectors. This imbalance was exacerbated by the 2007-2008 global financial crisis and recession and has again surfaced as a destabilizing force amidst slowing global demand. In fact, the US and many other countries are suffering the consequences of China’s actions as seen in the closure of aluminum smelters and steel mills and the layoff of thousands of workers.

“Indeed, the scope of the excess capacity in certain major industries is extraordinary by any measure and flows from state planning, funding and subsidization on a massive scale. The central government of China has recognized that the problem is a serious one and has been trying to deal with it, often with little actual effect as planned capacity closures are undermined by local
governments focused on creating or maintaining employment and by central government efforts to add capacity in the western part of the country. So mandated closures have in many sectors been more than offset by other capacity additions in the country.1

“However, with the recent and increasingly slowing internal growth in China, the increasing capacity overhang in China is
creating very real problems for Chinese companies and their international competitors. These capacity increases in a time of declining global demand are destabilizing global markets as exports have increased in some cases by 100% in short periods. The result is depressed global prices for products and waves of dislocations around the world as producers in other markets shift product to export2 as they lose market share at home. Ultimately, China must play a leadership role in the global economy to help find a way to rebalance supply and demand in each of these sectors. While it is doing so, the sectors will be depressed around the world with companies, workers and their local communities paying the price for the massive excess capacity created and maintained by the Chinese economic system.

“Because there are no multilaterally agreed rules to address situations of massive global excess capacity in a rapid or comprehensive manner, Chinese action now to get rid of excess capacity is critical to preventing the serious global dislocations caused by overcapacity in many critical industrial sectors. Otherwise market economy producers will respond to the market signals
flowing from the excess capacity that prices are unsustainable by closing plants, writing off assets and laying off workers even if the plants being closed are in fact internationally competitive.3

“For example, in the aluminum sector, western aluminum producers have been closing aluminum smelters in many parts of the world because of the depressed prices caused in large part by China’s massive excess capacity and inventories of product overhanging the market. In the US, six aluminum smelters have closed or been announced as closing in the last six months, leaving the US with a capacity back at 1950s levels. Yet China has no natural competitive advantage in the production of aluminum and environmentally its production is not desirable being largely coalpowered for energy. Nonetheless, China has expanded its aluminum capacity from 1.75 million tons in 1996 to an estimated 36 million tons in 2015.4 And in 2014 alone, Chinese excess capacity was estimated at more than 10 million tons.5 China now accounts for more than half of the world’s aluminum smelting capacity (52.3% vs. 7.9% in 1996).6

“Meanwhile, US capacity has declined by 52 percent from 4.2 million tons in 1996 to 2 million tons in 2015 and will be much
smaller in 2016 following the announced closures or planned closures of six smelters since September 2015 (one million tons).7
Thousands of aluminum workers in the US have lost or are losing their jobs. America now has less than 3 percent of the world’s primary aluminum production capacity and will have less than 2 percent in 2016.8

“The global steel sector is also in crisis.9 China’s steel capacity has skyrocketed from 145 million tons in 2000 to more than 1 billion tons today (some estimates are as high as 1.4 billion tons) with excess capacity of as much as 40% – equal to the total capacity in the US, EU and Japan.10

“The problem of excess capacity in the steel sector has been studied for a number of years within the OECD,11 has been the subject of bilateral discussion between the US and China12 as well as the EU and China. Over the past few years, the Chinese have announced a series of production cuts with little or no actual net reductions in steel capacity to date. The government of China has announced in recent weeks a program to close 100-150 million tons of capacity in the steel sector over the next five years13 – a huge sum of capacity if actually achieved but as little as one fourth of what is needed in fact.

“Companies harmed by globally depressed prices and rising import levels can seek relief through trade remedies.14 However, for products like aluminum or steel, problems often reflect loss of export markets (China or third country) as well as loss of one’s home market. Trade remedies are generally available for import problems. WTO cases can be brought for loss of third country
markets or loss of the market by the subsidizing country but require the willingness of the home government to bring such a case. However, existing WTO rules do not provide members with quick and effective means to address excess capacity.

“1. See, e.g., Biman Mukherji, Rising Chinese Production Keeps Lid on Aluminum Prices, Wall Street Journal, Nov. 10, 2015 (noting that, since 2010, Chinese producers have closed 3 million tons of annual aluminum production capacity but have added an additional 17 million tons of capacity), http://www.wsj.com/articles/rising-chinese-production-keeps-lid-on-aluminum-prices1447186082 (requires subscription). See also Aluminum producers staggering as factories lack orders, http://china.org.cn/business/2013-08/27/content_29835483.htm; China’s aluminum glut set to continue, http://asia.nikkei.com/Markets/Commodities/China-s-aluminum-glut-set-to-continue.

“2 Will China Finally Tackle Overcapacity?, http://blogs.piie.com/china/?p=3857; OECD China Economic Survey (March 2015),
http://www.oecd.org/eco/surveys/China-2015-overview.pdf.

” 3 The US Trade Representative’s Office, in its December 2015 Report on China, summarized the problem of excess capacity:

“Excess Capacity

“Chinese government actions and financial support in manufacturing industries like steel and aluminum have contributed to massive excess capacity in China, with the resulting over-production distorting global markets and hurting U.S. producers and workers in both the United States and third country markets such as Canada and Mexico. While China recognizes the severe excess capacity problem in the steel and aluminum industries, among others, and has taken steps to try to address this problem, there have been mixed results.

“From 2000 to 2014, China accounted for more than 75 percent of global steelmaking capacity growth. Currently, China’s capacity alone exceeds the combined steelmaking capacity of the European Union (EU), Japan, the United States, and Russia. China has no comparative advantage with regard to the energy and raw material inputs that make up the majority of costs for steelmaking, yet China’s capacity has continued to grow exponentially and is estimated to have exceeded 1.4 billion metric tons (MT) in 2014, despite weakening demand domestically and abroad. While China’s steel production is slowing and China may
produce approximately 2 to 3 percent less steel in 2015 than in 2014, steel demand in China is projected to decrease 5 percent this year. As a result, China’s steel exports grew to be the largest in the world, at 93 million MT in 2014, a 50-percent increase over 2013 levels, despite sluggish steel demand abroad. In 2015, there is rising concern that China’s steel exports are still growing and may have increased 25 percent in the first ten months of 2015, as compared to the same period in 2014.

“Similarly, monthly production of aluminum in China doubled between January 2011 and July 2015 and continues to grow. Large new facilities are being built with government support, including through energy subsidies. China’s aluminum excess capacity is contributing to a severe decline in global aluminum prices, harming U.S. plants and workers.

“Excess capacity in China – whether in the steel industry or other industries like aluminum – hurts U.S. industries and workers not only because of direct exports from China to the United States, but because lower global prices and a glut of supply make it difficult for even the most competitive producers to remain viable. Domestic industries in many of China’s trading partners have continued to respond to the effects of the trade distortive effects of China’s excess capacity by petitioning their governments to impose trade remedies such as antidumping and countervailing duties.

“2015 USTR Report to Congress on China’s WTO Compliance (December 2015) at 12-13, https://ustr.gov/sites/default/files/2015-
Report-to-Congress-China-WTO-Compliance.pdf.

“4 U.S. Geological Survey, Mineral Commodity Summaries, 1998 and 2016, http://minerals.er.usgs.gov/minerals/pubs/commodity/aluminum/050398.pdf;
http://minerals.usgs.gov/minerals/pubs/commodity/aluminum/mcs-2016-alumi.pdf. See also Attachment 2 (chart and table
showing China’s aluminum capacity).

“5 U.S. Geological Survey, Mineral Commodity Summaries, 2016, http://minerals.usgs.gov/minerals/pubs/commodity/aluminum/mcs-2016-alumi.pdf.

“6 U.S. Geological Survey, Mineral Commodity Summaries, 1998 and 2016, http://minerals.er.usgs.gov/minerals/pubs/commodity/aluminum/050398.pdf;
http://minerals.usgs.gov/minerals/pubs/commodity/aluminum/mcs-2016-alumi.pdf.

“7 Id.

“8 U.S. Geological Survey, Mineral Commodity Summaries, 2016, http://minerals.usgs.gov/minerals/pubs/commodity/aluminum/mcs-2016-alumi.pdf.

“9 See generally, Surging Steel Imports Put Up To Half A Million U.S. Jobs At Risk, Terence P. Stewart, Elizabeth J. Drake,
Stephanie M. Bell, and Jessica Wang (Stewart and Stewart), and Robert E. Scott (The Economic Policy Institute),
http://www.epi.org/publication/surging-steel-imports/#iv.-the-future-of-the-domestic-steel-industry-depends-on-effective-traderemedy-enforcement.

“10 See Attachment 2 (chart and table showing China’s steel capacity). See also .Developments in Steelmaking Capacity of NonOECD Economies, http://www.oecd-ilibrary.org/industry-and-services/developments-in-steelmaking-capacity-of-non-oecdcountries_19991606; China’s excess crude steel still a problem, http://asia.nikkei.com/Politics-Economy/Economy/China-sexcess-crude-steel-still-a-problem.

“11 See, e.g., OECD, Steelmaking Capacity, http://www.oecd.org/sti/ind/steelcapacity.htm.

“12 The United States and China engaged in discussions regarding excess capacity in the steel sector at the SE&D meeting in July
2014 and regarding the steel and aluminum sectors at the JCCT meeting in November 2015. See USTR December 2015 Report
on China, at 104-105, https://ustr.gov/sites/default/files/2015-Report-to-Congress-China-WTO-Compliance.pdf.

“13 China to cut steel capacity by 100-150 mln tonnes in 5 years, http://news.xinhuanet.com/english/2016-
02/04/c_135075575.htm.

“14 Pain Spreads From China’s Excess Production, http://blogs.wsj.com/chinarealtime/2014/07/16/pain-spreads-from-chinasexcess-production/ (noting that “China’s vast excess capacity makes it the biggest target of [trade] sanctions”).”

Conclusion

For the WTO to regain full relevance, its rule book needs to be updated to reflect both the current developments in world trade but also to ensure that all trade distortions are addressable in a meaningful and timely way by Members. A review of subsidy disciplines is certainly an important topic (including finalizing the GATS to address how subsidies will be handled for services). But there are many other distortions that are not currently fully or even partially addressable within the WTO in a meaningful way. State owned and invested enterprises are a growing factor in a number of countries and can seriously distort trade flows and competition. Government policies that restrict exports of inputs have had dramatic skewing effects on where downstream producers invest. State supported or sanctioned industrial espionage skews competition and drastically reduces the cost of production in countries that permit the theft. Economies that don’t function on market principles fundamentally distort market outcomes and invite use of non-WTO tools to address resulting distorted outcomes. And the WTO has no rules for addressing quickly any sector with massive global excess capacity.

Efforts to get greater transparency, completeness and timeliness in notifications are obviously a necessary and important element of WTO reform. Reports like that put out as the 28th Global Trade Alert report can be an important source of additional information to help WTO Members understand the extent of practices that may be of concern to themselves or others. However, in 2021, the array of market distortions pursued by governments like China (and others) are far broader than simply government subsidies. A road forward must include an analysis and update or creation of rules for all such distortions.

“Blowing up the trading system” — Clyde Prestowitz’s suggested way for the world to move forward in light of China’s economic system

Terence P. Stewart · March 31, 2021 · WTO reform · Canada, China, Clyde Prestowitz, European Union, France, Germany, Global Business Dialogue TTALK, Italy, Japan, United Kingdom, United States · No Comments

The Global Business Dialogue (GBD) publishes periodically “THE TTALK QUOTES”. On March 30, 2021, GBD posted a TTALK Quotes on “CHINA, THE TRADING SYSTEM, AND THE ALTERNATIVES” with a quote from Clyde Prestowitz, ‘[There is] only one alternative – “blowing up the system” or, more politely, creating a new or alternative system.”

The quote is from a Washington Monthly article by Mr. Prestowitz from March 24, 2021 entitled, “Blow Up the Global Trading System, Yes, really. U.S. and international efforts to stop Beijing’s economic onslaught haven’t worked. It’s time for President Biden to go big,” https://washingtonmonthly.com/2021/03/24/blow-up-the-global-trading-system/. Mr. Prestowitz has a new book out, The World Turned Upside Down (Yale University Press, 2021) and some of the recommendations in the Washington Monthly article reflect his thinking from his new book.

While the title is provocative, the concerns expressed are similar to the ones reviewed in Amb. Dennis Shea’s remarks to the Coalition for a Prosperous America and those expressed last year by Mogens Peter Carl that China’s economic system isn’t consistent with the WTO rules and China has no intention of modifying its approach to global trade. See March 29, 2021: China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America, https://currentthoughtsontrade.com/2021/03/29/china-and-the-wto-remarks-by-dennis-c-shea-to-the-coalition-for-a-prosperous-america/.

Unlike Mr. Carl’s call for market economy countries to withdraw from the WTO and start a new organization, Mr. Prestowitz proposes in the Washington Monthly article “Reinventing the Globalization System” which involves seven action steps.

The first is for the United States “to impose a Market Adjustment Charge (MAC) on all non-direct investment (not in new means of production) into the United States.” The MAC is explained in his new book (pages 276-277) but is a charge that would vary based on the size and trend of the U.S. trade deficit.

The second step “would be for the International Monetary Fund (IMF) to adopt Keynes’ Bretton Woods proposal that all countries should have balanced trade in the medium to long term.” To achieve this result, a duty would be applied on imports from countries that run persistent trade surpluses.

The third step would be for the United States to seek strong enforcement within the IMF and by the U.S. Department of the Treasury.

The fourth step would be forming a supersized FTA including USMCA, CPTPP and the EU, and open to other market economies. Prestowitz calls this grouping the “Free World Free Trade Agreement”.

The firth step addresses the need for market economies to improve their competitiveness against the state directed and massively subsidized world of China. The step calls for the creation of “a free world high technology leadership project”

The sixth step calls on the U.S. to reorganize government and concentrate resources to support the technology leadership initiative.

The final step involves actions the U.S. can take to spur domestic manufacturing (use of Defense Production Act, curbing corporate lobbying, and review corporate overseas investment plans.

In his book, Mr. Prestowitz has a chapter on actions the U.S. should take to regain its leadership position. It starts with a Market Access Charge, calls for the imposition of a value added tax and a host of actions to ensure the U.S. is “the world’s most competitive economy.” Page 278.

U.S. actions are aimed at improving U.S. competitiveness

A number of the actions Mr. Prestowitz calls for on U.S. competitiveness are similar to actions being introduced today in part 1 of President Biden’s American Jobs Plan (est. cost of $2.5 trillion). See White House Briefing Room, FACT SHEET: The American Jobs Plan, March 31, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/. Excerpts are copied below. The full fact sheet is then embedded.

“While the American Rescue Plan is changing the course of the pandemic and delivering relief for working families, this is no time to build back to the way things were. This is the moment to reimagine and rebuild a new economy. The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild our country’s infrastructure, and position the United States to out-compete China. Public domestic investment as a share of the economy has fallen by more than 40 percent since the 1960s. The American Jobs Plan will invest in America in a way we have not invested since we built the interstate highways and won the Space Race.

“The United States of America is the wealthiest country in the world, yet we rank 13^th when it comes to the overall quality of our infrastructure. After decades of disinvestment, our roads, bridges, and water systems are crumbling. Our electric grid is vulnerable to catastrophic outages. Too many lack access to affordable, high-speed Internet and to quality housing. The past year has led to job losses and threatened economic security, eroding more than 30 years of progress in women’s labor force participation. It has unmasked the fragility of our caregiving infrastructure. And, our nation is falling behind its biggest competitors on research and development (R&D), manufacturing, and training. It has never been more important for us to invest in strengthening our infrastructure and competitiveness, and in creating the good-paying, union jobs of the future.

“Like great projects of the past, the President’s plan will unify and mobilize the country to meet the great challenges of our time: the climate crisis and the ambitions of an autocratic China. It will invest in Americans and deliver the jobs and opportunities they deserve. But unlike past major investments, the plan prioritizes addressing long-standing and persistent racial injustice. The plan targets 40 percent of the benefits of climate and clean infrastructure investments to disadvantaged communities. And, the plan invests in rural communities and communities impacted by the market-based transition to clean energy.”

FACT-SHEET_-The-American-Jobs-Plan-_-The-White-House

Reform of the WTO or a different approach?

The U.S. is looking to push WTO reform and work with trading partners to address challenges posed by China’s economic model. The EU and Japan are similarly looking at WTO reform as a way forward. See, e.g., February 18, 2021, The European Commission’s 18 February 2021 Trade Policy Review paper and Annex — WTO reform and much more proposed, https://currentthoughtsontrade.com/2021/02/18/the-european-commissions-18-february-2021-trade-policy-review-paper-wto-reform-and-much-more-proposed/.

The G7 trade ministers are meeting today. See Reuters, UK trade minister tells G7: We must stop fragmentation of global trade, March 31, 2021, https://www.reuters.com/article/britain-trade-truss-idUSS8N2L708T. The seven G7 countries are Canada, France, Germany, Italy, Japan, the UK and the US (EU participates as a guest). WTO reform is one of the topics being discussed today. The U.S., EU and Japan have been working on potential reforms to the Subsidies Agreement to address the massive industrial subsidies provided by China as well as looking at potential disciplines on state-owned/invested enterprises and forced technology transfer. However, in a consensus system like the WTO, it is hard to imagine meaningful reforms that will address Chinese distortions achieving results within the WTO.

The U.S. is not presently considering a “Free World Free Trade Agreement” as proposed by Mr. Prestowitz. The U.S. is also not proposing pulling out of the WTO as suggested last year by Mogens Peter Carl and entering into a new organization that is limited to market economies. Each of the U.S. and the EU have the ability to act unilaterally if necessary but obviously that is a less desirable approach to global governance.

So it is likely that the U.S., EU, Japan and other leading market economies will continue to seek reform within the WTO but with likely limited results putting pressure on free trade agreements or on plurilateral arrangements to achieve a trade regime acceptable to the major market economies.

Mr. Prestowitz’s article and recent book are well done and raise some interesting ideas for addressing U.S. trade concerns with China. Some of his ideas have been advocated for by others before and have significant potential whether they have much political possibility for adoption. But in a changing global trade environment, his writings are a useful contribution and worth reading by those in trade policy positions.

For the Biden Administration, new trade agreements do not appear to be a short-term objective. Getting control of the pandemic through vaccinations and building back better through the jobs bill are the two major priorities. Trade can contribute to both, but a push for Free World Free Trade Agreement is not likely in the Biden years.

Still China’s economic system and incompatibility with the WTO are major concerns for many countries including the United States. Reform of the WTO would obviously be the best outcome for addressing China’s distortions. While hope spring eternal, the Ministerial Conference in late November 2021 in Geneva will give an idea of whether meaningful WTO reform is likely in the cards in the coming years. Such reform is highly unlikely to happen during the 2020s, if ever.

Mr. Carl’s suggestion of mass withdrawal from the WTO and creation of a new entity of market economies is interesting in addressing the blocking capacity of China but seems improbable because of China’s size and importance. With no major economy having suggested any interest in the idea, it seems implausible in the 2020s, if ever.

Mr. Prestowitz’s idea for a super-FTA of market economies is doable within the WTO and simply depends on majors like the U.S., EU, Japan and others being willing to put in the effort. But the U.S. and EU have not been able to make meaningful progress on an FTA or even harmonization of regulations over recent decades. If past is prologue, it is unlikely that such an undertaking will occur in the 2020s either, if ever.

As British trade minister Liz Truss is reported to have said to her G7 fellow trade ministers, “We need to reverse the fragmentation of global trade and get the global system and WTO working again, otherwise we risk big countries going their own way and operating outside an agreed set of rules, which always spells trouble.” Reuters, UK trade minister tells G7: We must stop fragmentation of global trade, March 31, 2021, https://www.reuters.com/article/britain-trade-truss-idUSS8N2L708T. China has effectively been going its own way even after joining the WTO at the end of 2001. Actions by the U.S., EU and others in recent years have occasionally been outside of the agreed set of rules as well. So a fourth option is that of the collapse of the global trading system (actually or practically) with a law of the jungle reasserting itself.

Time will tell which direction global trade will take.

China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America

Terence P. Stewart · March 29, 2021 · WTO reform, WTO without China · Amb. Dennis Shea, China, Coalition for a Prosperous America, European Union, Mogens Peter Carl, United States, World Trade Organization · No Comments

On March 26, 2021, the former Deputy USTR in Geneva during the Trump Administration, Amb. Dennis C. Shea, spoke to the Coalition for a Prosperous America. While the remarks were made in his individual capacity, the remarks reviewed the challenges for the World Trade Organization remaining relevant with the current activities of the People’s Republic of China. His remarks, entitled “Three hard truths” can be found on his linkedin page. See Remarks to CPA, 3.26.2021, https://www.linkedin.com/feed/update/urn:li:activity:6781608096750956544/?updateEntityUrn=urn%3Ali%3Afs_feedUpdate%3A%28V2%2Curn%3Ali%3Aactivity%3A6781608096750956544%29.

The three hard truths from his remarks are copied below.

“The first of these hard truths is that China’s economic system – with its unique melding of public, private, and Chinese Communist Party resources, all harnessed to advance industrial policy objectives – is incompatible with the WTO norms of market orientation, transparency, non-discrimination, and reciprocity.”

“The second hard truth is that the WTO has proven itself incapable of restraining the trade disruptive activities of the Chinese non-market economic system.”

“The third hard truth is that China does not want change at the WTO.”

Amb. Shea reviews in some detail the actions of China post-accession to move away from market reforms that trading partners expected from China’s accession to the WTO and why such actions frustrate the proper functioning of the WTO. He also reviews China’s willingness to retaliate against trading partners for their legitimate use of WTO rights and to punish trading partners for comments China views as against their interests. The import bans against Australian products when Australia urged an independent investigation into the source of the COVID-19 virus is one example mentioned. Finally, on the issue of not wanting change at the WTO, Amb. Shea reviews China’s opposition to every reform issue raised by the United States.

Amb. Shea’s remarks are worth a close read. While he doesn’t address a road forward, his well founded concerns about China’s role in the trading system and its incompatible economic system with WTO rules bring to mind a piece by a former EC Director General for Trade, Mogens Peter Carl which I reviewed in an earlier post. See July 25, 2020, A new WTO without China? The July 20, 2020 Les Echos opinion piece by Mogens Peter Carl, a former EC Director General for Trade and then Environment, https://currentthoughtsontrade.com/2020/07/25/a-new-wto-without-china-the-july-20-2020-les-echos-opinion-piece-by-mogens-peter-carl-a-former-ec-director-general-for-trade-and-then-environment/ . I reproduce much of that post below.

“Earlier this week (July 20), a former EC Director General for Trade, Peter Carl, penned an opinion piece in Les Echos with the provocative title, “A new WTO is needed without China” (literally A new WTO must see the day without China). https://www.lesechos.fr/idees-debats/cercle/opinion-une-nouvelle-omc-doit-voir-le-jour-sans-la-chine-1224748.

“Mr. Carl indicates in the opinion piece that ‘Europe’s trade policy has stagnated for twenty years. It no longer meets the demands of today’s world and the European public attributes the loss of millions of jobs to China.’ (all quotes from the opinion piece are informal translations by Google Translate ). The opinion is remarkable as it comes from a former senior EC trade official.

“‘Our policy is outdated and based on an outdated ideology that is identical to what it was before the arrival of China on the world state, after its accession to the WTO in 2001. Its centralized economy, its powerful industrial policy in all the key sectors, its enormous state subsidies, combined with a government apparatus and a political repression as powerful as those of the ex-USSR, swept large swathes of European and American industry. However, we act as if we were in the heyday of the 1990s, when our main competitors were other market economies, Japan, Korea, the United States. Our inaction resembles the ostrich policy and unilateral pacifism of the 1930s. We know the results. We must therefore protect our liberal economies and our open societies against adversaries. This requires a fundamental review of the trade policy of the European Union and the WTO.’

“Mr. Carl calls for a complete reform of the WTO with the EU teaming up with the U.S. and other like-minded Members but recognizes that meaningful reform will be blocked by China. ‘The solution: withdraw from the WTO and create a new international trade organization without China. Most countries would follow our example. We would return to an open world economic order between market economy countries sharing the same ideas, on the basis of clear and reinforced principles in favor of the free market.’ Mr. Carl advocates for the adoption of rules that would deal with ‘abuses’ of the China model including improved subsidy disciplines and ‘rules against social, environmental dumping and inaction on climate change.’ Such new rules are needed to permit the EU to green its economy.

“Mr. Carl, addressing concerns that his proposal represents a turn to managed trade, says simply that ‘This is what we already have, although only China manages it, and we are suffering the consequences.’

“That Mr. Carl felt the need to publish such a strongly worded opinion shows the underlying and growing tensions felt by major trading partners from a major economic power with a fundamentally different economic system than that pursued by the historic major players in world trade.

“For WTO Members and their businesses and workers, the rising discontent by many with the functioning of the WTO and its ability to achieve meaningful reform should be a wake-up call. The WTO to be relevant must have rules that address the world in the 21st century. The WTO must also be able to have Members assume increased responsibilities as their stage of economic development evolves. Similarly, the WTO must confront whether existing rules can be modified to generate greater coverage of practices by different types of economic systems. If not, the WTO must consider whether it can survive where all Members don’t follow similar economic systems.

“Unfortunately, there appears little likelihood that many of these critical reforms will be addressed in the coming years. China has objected to WTO Members trying to modify existing agreements to address distortions caused by China’s economic system. China has also objected to the U.S. effort to have Members consider whether WTO rules require Members to operate market-economy based systems. China and others have objected to U.S. efforts to define ‘developing country’ and effectively have Members take on obligations commensurate to their stage of economic development. Stated differently, China is working hard to defend the status quo and prevent consideration of reforms that would achieve greater balance among all WTO Members.

“While USTR Lighthizer and others have said that if the WTO didn’t exist, it would have to be created, Mr. Carl’s opinion suggests that one option that may take on greater appeal is the withdrawal from the WTO and the creation of a new international trade regime among countries with similar economic systems. Such a move away from the WTO would certainly involve enormous economic upheaval and political tensions. The more desirable course of action is to achieve timely reform of the WTO so that all Members feel the system achieves reasonable reciprocity.

“Time will tell whether WTO Members find a path forward or whether the WTO becomes less and less relevant and even ceases to function. In a Member driven organization, the answer lies with the membership.”

The WTO now has a new Director-General who is working to see if Members can achieve breakthroughs on the existing fisheries subsidies, make significant progress on Joint Statement Initiatives, while encouraging Members to limit export restraints on medical goods needed to address the COVID-19 pandemic, promote rapid return to trade growth post pandemic, and work on WTO reform.

The Biden Administration has a desire to work with trading partners in multilateral organizations like the WTO and has articulated the need of allies to work together to address problems caused by non-market economies like China. While the Biden Administration will certainly pursue WTO reform, Amb. Shea’s final paragraph of his remarks is on point.

“The Biden Administration has made working with friends and allies a hallmark of its diplomatic approach, particularly when it comes to China. When the Administration brings this approach to the WTO, I sincerely hope our friends and allies will appreciate the gravity of the moment and what’s at stake.”

Today’s webinar hosted by Georgetown Law’s Institute for International Economic Law “Rethinking the WTO: Opportunity for Transatlantic Cooperation” — many areas for likely cooperation; some important challenges

Terence P. Stewart · March 10, 2021 · WTO reform · China, David Kleimann, European Union, Henry Gao, Jennifer Hillman, Joost Pauwelyn, Sabine Weyand, Thomas Graham, U.S-EU cooperation, United States · No Comments

On March 10, 2021 Georgetown Law’s Institute for International Economic Law (IIEL) held the second in a series of events on “Rethinking the WTO”, this time on “Opportunity for Transatlantic Cooperation”. See Georgetown Law, Rethinking the WTO: Opportunity for Transatlantic Cooperation, March 8, 2021, https://www.law.georgetown.edu/news/rethinking-the-wto-opportunities-for-transatlantic-cooperation/. The program was introduced by David Kleimann, Senior Visiting Research Fellow, IIEL. The program was moderated by Joost Pauwelyn, Murase Visiting Professor of Law, Georgetown Law and also a professor at the Graduate Institute of Geneva. The four panelists included Sabine Weyand, Director General, Directorate General for External Trade, European Commission; Jennifer Hillman, Professor from Practice, Georgetown Law, Senior Fellow, Council on Foreign Relations and a former member of the WTO Appellate Body; Thomas Graham, partner at Cassidy Levy Kent and former member and Chair of the WTO Appellate Body; and Henry Gao, Associate Professor of Law, Singapore Management University, Dongfang Scholar Chair Professor, Shanghai Institute of Foreign Trade and Advisory Board Member of the WTO Chairs Program.

Ms. Weyand provided an overview of the European Commission’s revised trade policy paper, focusing on the Annex dealing with WTO reform. I had reviewed the revised policy paper in a prior post. See February 18, 2021, The European Commission’s 18 February 2021 Trade Policy Review paper and Annex — WTO reform and much more proposed, https://currentthoughtsontrade.com/2021/02/18/the-european-commissions-18-february-2021-trade-policy-review-paper-wto-reform-and-much-more-proposed/. Ms. Weyand’s comments expressed hope that early statements by the Biden Administration meant that there were many areas for possible cooperation, although she started with reviving the Appellate Body — an area where cooperation is more challenging. She articulated that the EU was looking for an early commitment by the Biden team that the U.S. supported a two-tiered, binding, independent dispute settlement system — that which was promised in the Dispute Settlement Understanding. She acknowledged that the U.S. had valid concerns including on overreach on some cases.

Ms. Weyand reviewed areas where collaboration had occurred during the Trump Administration — the joint consultations on subsidies, SOEs, forced technology transfer — and opined that the process should be taken back up. She also mentioned new areas where rules were needed, including Joint Statement Initiatives (electronic commerce where the U.S. is active and others where the U.S. is not) where there should be opportunities for collaboration. She viewed that open plurilaterals were the likely necessary option for reform with benefits limited to those participating. She acknowledged that WTO Members need to address how to make folding plurilaterals into the WTO easier to do. The EU supports the U.S. view that the Special and Differential Treatment provisions and approach don’t make sense in 2021 though the revised policy.

Jennifer Hillman, after the disclaimer that she is not part of the Biden Administration and hence doesn’t speak for them, agreed that the early pronouncements by the Biden team showed significant areas of likely cooperation on WTO reform between the U.S. and the EU based on its revised trade policy paper. She believed that the period of time for getting collaboration started and showing early results was short and that many of the topics for collaboration would require time, hence raising concerns about the ability to actually see forward movement. During her direct comments, Ms. Hillman focused on areas other than dispute settlement. She noted that the concept of sustainable development appeared to have different meanings depending on whom one was talking to. For Europe, it seemed to focus on environment whereas for the Biden Administration there is a heavier focus on labor rights whereas for many WTO Members (developing and least developed countries), the focus would be development. She viewed it as important for the EU to realize focus on labor by U.S. in seeking and obtaining collaboration on sustainable development. She agreed on areas of cooperation on gender equality and empowerment of women and girls, on having the WTO contribute to addressing climate change, including on border taxes that are WTO consistent, on plurilaterals and the need for change to how Special and Differential Treatment is addressed, and on the need for new (e-commerce) or revised rules (industrial subsidies).

Thomas Graham, as a former Appelate Body who had left after eight years at the end of 2019 (his and a colleague’s departure reduced the number of Appellate Body Member below the number needed to hear an appeal), believed that the problems with the dispute settlement system could not be easily addressed and would take significant time to resolve in a way that would address the underlying problems. He urged greater accountability by Appellate Body members. He noted in particular the tension between the second and third sentences of DSU 3.2 (as referenced as well in 19.2) where the bar to creating rights and obligations (important to the U.S.) was neutered by actions of the Appellate Body in clarifying existing provisions (historically the focus of the EU). Mr. Graham did not see an easy resolution to this problem without changing the language itself. He also reviewed the Appellate Body’s elimination in effect of Art. 17.6(ii) of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Antidumping Agreement or ADA), a provision intended to grant discretion to administering authorities in interpreting provisions of the Agreement which were capable of more than one interpretation. Mr. Graham noted that members of the Appellate Body viewed there being either no or very few situations where the Antidumping Agreement provisions would be capable of more than one interpretation. He also raised the question of how Members would deal with past decisions made by and principles adopted by the Appellate Body. He referenced a commentary by Amb. Dennis Shea (the Trump Administration Deputy U.S. Trade Representative in Geneva) posted on the CSIS website on March 9, 2021, “No Quick Fixes for WTO Dispute Settlement Reform” and indicated the questions raised in the paper needed to be addressed. See Center for Strategic & International Studies, No Quick Fixes for WTO Dispute Settlement Reform, March 9, 2021, https://www.csis.org/analysis/no-quick-fixes-wto-dispute-settlement-reform (article includes eight questions Amb. Shea believes the EU needs to answer as it thinks about WTO Dispute Settlement reform).

Mr. Gao provided his perspective on how the types of reform issues identified in the EC revised trade policy paper would be viewed by China, among others. Mr. Gao indicated that China has been unwilling to consider reforms which it views as discriminating against China. Thus, initiatives like the EU’s to start a plurilateral on competitive neutrality (SOEs, heavy subsidization, etc.) is viewed by China as aimed at them and hence will never be supported by China. China’s response has been to assert that there should be ownership neutrality (no special rules for SOEs or for differences in economic systems). China has participated in Joint Statement Initiatives where it does not view itself as targeted including e-commerce, domestic services regulation, investment for development, SMSEs, etc. China is supportive of restoration of the Appellate Body. On S&DT, China does not agree to a change in classification of Members but has agreed to take on responsibilities that it views as consistent with its level of development.

Observations

The above review is undoubtedly incomplete and doesn’t include the discussion during the question and answer portion., but hopefully provides enough of a summary to show large areas of agreement and some of caution between the U.S. and the EU. Both the EU and the US (under the Biden Administration) are putting a lot of focus on recovery from the COVID-19 pandemic and both are interested in supporting global distribution of vaccines, therapeutics and diagnostics through COVAX, though there are short term issues in terms of supplies for national needs for both the U.S. and EU.

In general, the two U.S. panelists agreed with Ms. Weyand that there are areas where cooperation between the U.S. and the EU is possible and viewed the revised EC trade policy paper as helpful, particularly in terms of perceived movement by the EU on dispute settlement. Mr. Gao’s comments show that any reform will not likely be easy or quick because of the large differences in views of existing Members and the challenges posed by China’s economic system to global commerce since consensus decision making permits China to effectively derail multilateral solutions and it can opt not to participate in plurilaterals that it views as not in its interests.

While the U.S. and EU have each articulated the need to have unilateral response capabilities if solutions can’t be found through the WTO or bilaterally, the EU position (and likely Biden Administration position) is that cooperation should be sought between the U.S., EU and possibly others before unilateral actions are taken to permit coordination.

Much of the forward movement at the WTO on new rules is likely to be through plurilateral deals. The JSIs are generating most of the energy at the moment. India and South Africa have submitted a paper arguing that such plurilaterals area not proper under the WTO or require consensus (which doesn’t exist) to be included within the WTO. See February 20, 2021, Will India and South Africa (and others) prevent future relevance of the WTO?, https://currentthoughtsontrade.com/2021/02/20/will-india-and-south-africa-and-others-prevent-future-relevance-of-the-wto/. Ms. Weyand’s position was that the WTO will need to find ways to incorporate the plurilaterals into the WTO or action will happen outside of the WTO which cannot be beneficial to the WTO. In a post in recent days, I have argued that the U.S. should joint the JSIs that it is not a party to. See March 9, 2021, The Biden Administration should join the Joint Statement Initiatives that it is not presently party to, https://currentthoughtsontrade.com/2021/03/09/biden-administration-should-join-the-joint-statement-initiatives-that-it-is-not-presently-part-to/. The new Director-General has also put significant emphasis for obtaining forward movement in the JSIs. So despite the current importance of the JSIs, there are challenges to how much the U.S. and EU can achieve through plurilaterals within the WTO without changes to the Marrakesh Agreement Establishing the WTO, and Members will be divided on having WTO plurilaterals where benefits are limited to the parties vs. all Members (i.e., non-MFN, but open for later membership of non-participants).

On Dispute Settlement, the EU has stated that it understands the long-standing U.S. concerns that are bipartisan and reflected both in the Biden Administration and in Congress. While Ms. Weyand’s view is that the U.S. must signal that it accepts a two-tier, binding, independent dispute settlement system early for negotiations to move forward, the comments of Thomas Graham and the paper by Amb. Shea suggest that such an early commitment may be inappropriate. This would be true if the underlying problems laid out over the last years by the U.S. cannot be rectified satisfactorily under such a system — currently unknown as negotiations haven’t taken place.

Since the problems for the U.S. and others with the Appellate Body flow in part from an ineffective mechanism for Members to correct Appellate Body errors (i.e., the negotiating a clarification and/or Ministerial Conference/General Council adoption of an interpretation (Marrakesh Agreement Establishing the WTO Art. IX:2)), reform of the dispute settlement will likely exceed review of the Dispute Settlement Understanding and procedures.

Ms. Hillman has suggested and Mr. Graham has supported Ms. Hillman’s proposal for a separate process for trade remedy or trade defense cases in light of the large number of cases in the area where there has been longstanding disagreement on Appellate Body decisions and because of the failure of the Appellate Body to respect Art. 17.6(ii) of the Antidumping Agreement.

In earlier posts, I had suggested some modifications to Amb. Walker’s 2019 draft General Council Decision that (1) would interpret both DSU Art. 3.2 and 19.2 and possibly deal with the tension Mr. Graham reviewed in his comment and that have led to much of the overreach problem; (2) would address ADA Art. 17.6(ii); and (3) would deal with past erroneous decisions. See July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/ (relevant section copied below; modifications are in bold and underlined).

‘Overreach’

As provided in Articles 3.2 and 19.2 of the DSU, findings and recommendations of Panels and the Appellate Body and recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements. In a large number of Panel and Appellate Body reports, one or more parties and/or third parties have raised concerns about the Panel or Appellate Body adding to or diminishing the rights and obligations contrary to Articles 3.2 or 19.2 of the DSU.

To clarify situations where rights and obligations are being added to or diminished, Panels and the Appellate Body will not fill gaps in agreements, construe silence to indicate obligations or construe ambiguities in language of existing agreements to require a particular construction. Any such actions by a Panel or by the Appellate Body is inconsistent with Articles 3.2 and 19.2 of the DSU.

Any party to an Appellate Body report that raised at the DSB meeting considering adoption of the Appellate Body report concerns about the creation of rights or obligations inconsistent with Articles 3.2 or 19.2, will have 90 days from the adoption of this General Council decision to request a review of the Appellate Body decision. Such request will be for the limited purpose of having the Appellate Body determine whether on the specific issues raised where the party complained of creating rights or obligations the clarification of meaning provided in this General Council decision would result in a changed decision on the particular issue. The Appellate Body will render decisions on all such requests within 90 days and will accept no additional briefing or argument from parties. Where the report would have been different on one or more particular issues, it is sufficient for the Appellate Body to so indicate. Where the same decision on an issue would have been made, the Appellate Body shall provide a detailed explanation.

Panels and the Appellate Body shall interpret provisions of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“antidumping agreement”) in accordance with Article 17.6(ii) of that Agreement. Any party to an Appellate Body report that raised at the DSB meeting considering adoption of the Appellate Body report that Article 17.6(ii) was not applied in interpreting the antidumping agreement, will have 90 days from the adoption of this General Council decision to request a review of the Appellate Body decision. Such a request will be for the limited purpose of having the Appellate Body determine whether a different outcome on one or more issues would have resulted had the Appellate Body applied Article 17.6(ii) of the antidumping agreement. The Appellate Body will render decisions on all such requests within 90 days and will accept no additional briefing or argument from parties. Where the report would have been different on one or more particular issues, it is sufficient for the Appellate Body to so indicate. Where the same decision on an issue would have been made, the Appellate Body shall provide a detailed explanation.

There presumably are many other ways (and perhaps better ways) to deal with these issues, but the above suggests that solutions could be found that would support a two-tiered system. Perhaps, the EU proposal for what it needs from the U.S. early should be supplemented by an understanding that any such commitment assumes ability to address U.S. concerns meaningfully with a two-tier, binding, independent dispute settlement system.

Conclusion

Ms. Weyand’s statement was that cooperation between the U.S. and the EU was a necessary but not sufficient condition to a successful effort at WTO reform. The European Commission in its revised trade policy paper demonstrated some movement from prior positions that had made resolution of matters such as the impasse on the Appellate Body unlikely. Similarly, the Biden Administration has been indicating on a range of issues including environmental sustainability movement that makes a united front between the U.S. and EU more likely. Actions reported in the press in recent weeks show movement by both the U.S. and the EU to improve bilateral relations in the trade sphere. All are very promising signals.

But the path forward is complicated by a lack of common objectives with many third countries, including China. Hence, the correctness of the observation that U.S.-EU cooperation is necessary but not sufficient.

Programs like today’s IIEL program provide a useful opportunity for large numbers of members of the public to gain a better understanding of the possible road forward and challenges to be faced. All of the panelists (and moderator) did an excellent job. It will be interesting to see how the WTO responds in the coming months if the U.S. and EU can in fact mount a united front on reform.

The European Commission’s 18 February 2021 Trade Policy Review paper — WTO reform and much more proposed

Terence P. Stewart · February 18, 2021 · European Commission Trade Policy Review, WTO reform · European Union · No Comments

In a 23 page communication from the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions dated 18 February 2021 [COM(2021)66 final] with an accompanying 19 page Annex that looks at WTO reform, the European Commission lays out its vision for EU trade policy moving forward. The communication, at pages 1-3 lays out the background and global trends leading to the trade policy proposals presented. The discussion is copied below (any emphasis in quotes is from the original text unless otherwise noted).

“Trade is one of the EU’s most powerful tools. It is at the centre of Europe’s economic prosperity and competitiveness, supporting a vibrant internal market and assertive external action. As a result of the openness of our trade regime, the EU is the world’s largest trader of agricultural and manufactured goods and services and ranks first in both inbound and outbound international investments. Thanks to the common commercial policy, the EU speaks with one voice on the global scene. This is a unique lever.

“With new internal and external challenges and more particularly a new, more sustainable growth model as defined by the European Green Deal and the European Digital Strategy, the EU needs a new trade policy strategy – one that will support achieving its domestic and external policy objectives and promote greater sustainability in line with its commitment of fully implementing the UN Sustainable Development Goals. Trade policy must play its full role in the recovery from the COVID-19 pandemic and in the green and digital transformations of the economy and towards building a more resilient Europe in the world.
Making the right policy choices in designing a trade policy for the world of 2030 means taking into account recent political, economic technological, environmental and social shifts and the global trends emerging from them1.

“Global uncertainty is on the rise fuelled by political and geo-economic tensions. Instead of international cooperation and multilateral governance, there is growing unilateralism, with the consequent disruption or bypassing of multilateral institutions. These trends have their roots in several developments.

“First, globalisation, technological evolutions and the build-up of global value chains have had a dichotomous impact on economies and societies. On the one hand, they have created massive efficiency gains, fuelling sustained, trade-led economic growth in many parts of the world. This has helped to lift millions of people out of poverty. On the other hand, these developments sometimes have had a strong disruptive effect leading to growing inequalities and leaving some individuals and communities behind. What were expected to be transitory adjustment costs have sometimes turned into permanent losses in living standards, employment opportunities or wages and other working conditions. In many cases, governments are perceived to have been insufficiently responsive to economic adjustments and mitigating their negative impacts2. This has led to calls for de-globalisation and to the rise of inward-looking and isolationist reactions.

“Second, the rapid rise of China, demonstrating global ambitions and pursuing a distinct state-capitalist model, has fundamentally changed the global economic and political order. This poses increasing challenges for the established global economic governance system and affects a level playing field for European companies competing globally and at home.3

“Third, the acceleration of climate change, together with biodiversity loss and environmental degradation, paired with tangible examples of their devastating effects have led to the recognition of the green transition as the defining objective of our time.

“The European Green Deal is the EU’s new growth strategy which facilitates resetting our economic policy to better correspond to the challenges of the 21st century. Its overarching objective is the transition towards a climate neutral, environmentally sustainable, resource efficient and resilient economy by 2050, with the ambition to reduce GHG emissions by at least 55% by 2030 as well as the protection, conservation and enhancement of the EU’s natural capital. As such, it will be the driving force behind our competitiveness and will lead to a progressive but profound transformation of our economies, which in turn will have a strong bearing on trade patterns.

“The green transition needs to go together with social equity. A serious decent work deficit persists in global supply chains in many parts of the world4, from serious violations of freedom of association to poor working conditions5. Depriving workers of their fundamental rights puts downward pressure on social conditions globally and fuels people’s disenchantment with globalisation and open trade.

“Fourth, the digital transformation is another key enabler of sustainable development, but also a space of competition and inadequate multilateral governance. As it embarks on its Digital Decade, supporting Europe’s digital transformation is a priority both in internal and external policies including trade policy and instruments. At the same time, the nature of trade will continue to evolve. It will become more innovation-driven, supported by intellectual property (IP) protection, with an increasing role of services trade compared to goods.6 Services not only contribute directly to the value chain (financial services, telecommunication, IT, transport and logistics) but – often even more importantly – they contribute by being incorporated in manufacturing products. The servicification of the economy and the rise of digital technologies have created well-paid and high quality jobs and have fuelled economic growth.

“The COVID-19 pandemic has accelerated and focused attention on these shifts, while creating challenges of its own. It has highlighted the interconnected nature of economies, which rely on stable and predictable international rules and resilient transportation channels. It has exposed the risk of a breakdown of global cooperation and trust. It has also raised questions regarding the right policy mix in terms of diversification of domestic and external sources of supply and the build-up of strategic production capacities and reserves. It has also shown the importance of expanding production of health products in a crisis situation and the need for cooperation to ensure equitable access for the more vulnerable populations. Moreover, it has led to a significant increase in government support and involvement in the economy, which is necessary to rescue healthy companies and protect jobs, but may not be sustainable in the long-run and may generate tensions.

“Finally, the economic outlook across the globe needs to be factored in. The EU will remain a global economic power and a leader on sustainable growth. The latest OECD long-term forecasts indicate that real GDP in the euro area will increase by 1.4% annually (compounded annual growth rate) over the next 10 years7. Nevertheless, these growth prospects will be eclipsed by developments in other regions, and Europe’s relative position in the international economy will change. Already in 2024, 85% of the world’s GDP growth is expected to come from outside the EU. The continued rise of China will impact heavily on global economic developments over the next 10 years – the OECD predicts Chinese GDP will grow by 4.7% annually.

“EU trade policy has to take into account these global trends and challenges to reflect the political ambition of ‘a stronger Europe in the world’8. It should also respond to the expectations of stakeholders as signalled in discussion with Member States, the resolution adopted by the European Parliament9 and the views expressed in the public consultation10.

“1 The Commission’s 2020 Strategic Foresight report analyses the impact of the COVID-19 pandemic on the dynamics of some relevant megatrends, COM(2020) 493 final. The Commission’s 2021 Strategic Foresight Report will focus on open strategic autonomy.

“2 At the EU level, the European Globalisation Fund aims at making a contribution to deal with such adjustment costs; cf Regulation (EU) No 1309/2013 of the European Parliament and of the Council of 17 December 2013 on the European Globalisation Adjustment Fund (2014-2020) and repealing Regulation (EC) No 1927/2006. A new regulation is being adopted, allowing the Fund to continue supporting workers and self-employed persons whose activity has been lost.

“3 This challenge is particularly visible in the area of energy intensive industries and notably the steel sector, where global solutions are needed to address the immense imbalances on the world market negatively affecting European companies and undermining the successful green transition of this ecosystem.

“4 According to the International Labour Organization (ILO), an estimated 25 million people remain in forced labour, 152 million are victims of child labour and 2.78 million workers around the world die from work-related accidents or diseases every year; Sources: Global estimates of modern slavery: forced labour and forced marriage, ILO (2017); Global Estimates of Child Labour, ILO (2017) and ILO website.

“5 Commission Staff Working Document: Promote decent work worldwide, SWD(2020) 235 final.

“6 In 2016, taking both goods and services into account, 80% of EU imports and 82% of EU exports were generated by the IP-intensive industries. IPR-intensive Industries and Economic Performance in the European Union, Industry-Level Analysis Report, joint EPO/EUIPO study, 3nd edition, September 2019.

“7 OECD (2020), Real GDP long-term forecast (indicator).

“8 Political guidelines for the next European Commission 2019-2024.

“9 European Parliament resolution on the EU Trade Policy Review (2020/2761(RSP).

“10 https://trade.ec.europa.eu/consultations/index.cfm?consul_id=266&utm_source=dlvr.it&utm_”

The European Commission then lays out its vision of how the proposed trade policy supports the EU’s open strategic autonomy, identifies “[t]hree core objectives for trade policy for the medium term” which are (1) “supporting the recovery and fundamental transformation of the EU economy in line with its green and digital objectives,” “shaping global rules for a more sustainable and fairer globalisation,” and “increasing the EU’s capacity to pursue its interests and enforce its rights, including autonomously where needed”. Communication at 9-10. The communication then lays out “six areas that are critical to achieving the EU’s objectives in the medium term”, Id. at 10. The six areas are listed on page 11 and then described in significant detail in the remainder of the communication:

“Reform the WTO
“Support the green transition and promote responsible and sustainable value chains
“Support the digital transition and trade in services
“Strengthen the EU’s regulatory impact
“Strengthen the EU’s partnerships with neighbouring, enlargement countries and Africa
“Strengthen the EU’s focus on implementation and enforcement of trade agreements, and ensure a level playing field”.

The communication is embedded below.

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The Annex provides a detailed explanation of what the European Commission intends to pursue as part of the WTO reform area but lists two “Headline actions” in the communication (id at 11).

“The Commission will:

“1. Seek the adoption of a first set of reforms of the WTO focusing on enhancing the WTO’s contribution to sustainable development, and launch negotiations on reinforced rules to avoid distortions of competition due to state intervention. It will
give priority to enhancing transatlantic cooperation on WTO reform.

“2. Work to restore a fully-functioning WTO dispute settlement with a reformed Appellate Body.”

For the other five actions listed above, the European Commission outlines areas for focus. Several include actions to be pursued at the WTO — including environment, sustainable development and digital trade (actions 2, 3 above).

On the action of strengthening the EU’s focus on implementation and enforcement, The European Commission reviews a range of action steps dealing with enforcing existing agreements, also reviews the FDI screening regulation, a modernized export control regulation and then identifies some new tools that need to be developed “to confront new challenges” and lists four such potential new tools (id. at 20-21):

“Nevertheless, the EU needs to develop its tools to confront new challenges and protect European companies and citizens from unfair trading practices, both internally and externally.

“ The Commission will propose a new legal instrument in the area of trade policy, to protect the EU from potential coercive actions of third countries.

“ The Commission will propose a legal instrument to address distortions caused by foreign subsidies on the EU’s internal market.

“ To enhance reciprocal access for EU operators in public procurement the Commission will seek to advance the International Procurement Instrument and calls on the Council to finalise its work as a matter of urgency.

“ Finally, to ensure a better level playing field for EU businesses on third country markets, in which they increasingly have to compete with the financial support foreign competitors receive from their governments, the Commission will explore options for an EU strategy for export credits. This will include an EU export credit facility and enhanced coordination of EU financial tools. In line with the Green Deal objective to phase out fossil fuel subsidies, it will also incentivise climate friendly technology projects and propose to immediately end support for the coal-fired power sector, and to discourage all further investments into fossil fuel-based energy infrastructure projects in third countries, unless they are fully consistent with an ambitious, clearly defined pathway towards climate neutrality in line with the long-term objectives of the Paris Agreement and best available science.”

These issues will generate significant interest among trading partners (either supportive, such as the U.S. for tools to deal with coercive actions and possibly ability to address distortions on the domestic market by foreign subsidies to U.S. businesses, or in opposition, such as China on the same two items).

Annex

The Annex is entitled “Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System” and reviews the challenges in all three pillars of the WTO (negotiations, dispute settlement and monitoring of trade policies) as well as the U.S.-China trade conflict. The European Commission reviews the lack of a common purpose among the WTO Members and the multiple challenges posed by multiple crises including the pandemic, climate change, increased unilateralism and more. The EC’s view on how to restore trust and a sense of common purpose is presented in part 2 of the Annex (portion copied below from pages 3-4).

“2. Restoring trust and a sense of common purpose: the WTO’s contribution to sustainable development

“The collapse of the Doha Development Agenda in 2008 exemplified the lack of common purpose of the WTO membership. Despite the success in concluding the Trade Facilitation Agreement at the 9th WTO Ministerial Conference in Bali and the Decision on agricultural export competition at the 10th WTO Ministerial Conference in Nairobi, the WTO membership has become increasingly divided as to what it expects from the WTO. While part of the membership has argued that the ‘centrality of development’ in the WTO means that there should be a focus on exceptions and flexibilities from agreed and future commitments, another part has grown increasingly frustrated at the failure of progress in WTO negotiations and shifted its attention to bilateral trade agreements. Without a sense of common purpose, it has been extremely difficult to find a way forward for any initiative and to ensure that the WTO evolves in line with the changes in global trade.

“However, the vast majority of the membership remains committed to the idea of multilateralism, fully cognizant of the benefits of a rules-based system for global trade and development. The instability of the last few years, the climate and environmental crisis, the increased use of unilateral measures and now the COVID-19 pandemic have led to a clear realisation that the WTO is a vital component of healthy global economic governance but that reform is necessary. The G20 Leaders’ statement4 in Riyadh contains the strongest commitment to reform yet, at the highest political level.

“As global challenges proliferate, WTO members should be able to coalesce around the objective of addressing the most pressing problems they face: economic recovery and development, free from competitive distortions, as well as environmental and social sustainability as part of the green transition of economies. Addressing these problems would be in line with the objectives of the UN Sustainable Development Goals (the ‘SDGs’), to which all WTO members have committed. Such a focus could offer the sense of common purpose that the WTO has lacked in recent decades and rebuild trust among the membership. It could generate the confidence needed to modernise the WTO rulebook in a manner that isresponsive to the challenges of digitalisation and greening, as well as preventing and defusing conflicts caused by trade-distorting state intervention in the economy.

“4 Leaders’ Declaration G20 Riyadh Summit November 21 – 22, 2020.”

The EC mentions completing the fisheries subsidies negotiations, taking action on the trade and health initiative put forward by the Ottawa Group and developing a trade and environment work program. The EC also addresses issues of importance to many countries including the United States, such as revising how special and differential treatment (S&DT) is handled, and developing new rules to address distortions to competition from state intervention. However, the EC’s approach calls for a case by case approach on S&DT though recognizes that various countries should not be eligible for S&DT including many of the groups identified by the Untied States and doesn’t seek a convergence approach for non-market economic systems but rather seeks an approach to address distortions flowing from the different systems.

Not surprisingly, the EC places a high priority on restoring the full functioning of the WTO dispute settlement system. Throughout the communication and Annex, the EC calls for increased outreach to the United States and finding common approaches. On dispute settlement, the EC is waiting for a signal from the U.S. that it will address its concerns and seek solutions. In other communications, the EC has seemed to acknowledge that U.S. concerns on overreach and a need to limit the Appellate Body to the parameters of the Dispute Settlement Understanding could be addressed by the EU. I have previously posted my belief that with the extensive record compiled by the prior Administration, it would be appropriate for the U.S. to pursue modifications to the WTO dispute settlement system under the Biden Administration. See, e.g., December 12, 2020, The Incoming Biden Administration and International Trade – Katherine Tai, nominee for U.S. Trade Representative, https://currentthoughtsontrade.com/2020/12/12/the-incoming-biden-administration-and-international-trade-katherine-tai-nominee-for-u-s-trade-representative/ (“The U.S. has been correct in my view in insisting that the problems flagged with the WTO Appellate Body’s operation need to be fixed before the U.S. releases its blockage of appointment of new members. What has been lacking to date has been a specific set of proposals from the U.S. that would address their concerns and rebalance rights and obligations. While it will likely take the Biden Administration time to determine how to proceed on the Appellate Body issue, the U.S. can and should indicate that it will be providing its proposals for reform of the Appellate Body hopefully during the first half of 2021.”). Hopefully the U.S. will engage on reform needs later this year after the full trade team is in place for the new U.S. Administration.

The EC also identifies modernizing WTO rules to cover digital trade, services and investment, “addressing imbalances between members’ market access commitments,” and moving forward at least selected agricultural issues (domestic support reform).

The EC also makes a push for “integrating open plurilateral agreements in the WTO” by making it easier to add such agreements without needing consensus and avoiding free-ridership. In previous posts, I have argued for permitting plurilaterals that are open to all but where benefits are limited to the signatories. See, e.g., January 18, 2021, Revisiting the need for MFN treatment for sectoral agreements among the willing, https://currentthoughtsontrade.com/2021/01/18/revisiting-the-need-for-mfn-treatment-for-sectoral-agreements-among-the-willing/ Section 4.2 of the Annex (pages 11-12) is copied below.

“Although the WTO cannot regain its credibility and effectiveness without modernising its rules, it is abundantly clear after 25 years that such modernisation cannot be achieved through multilateral agreements based on a single undertaking. In parallel, a great number of bilateral or regional trade agreements are being negotiated, including on issues for which the WTO has so far failed to produce multilateral outcomes, for example on digital trade or on state-owned enterprises. The most positive development in recent years has been the interest of a growing number of countries to develop such rules in the WTO framework through open, plurilateral negotiations. If no effective formula is found to integrate plurilateral agreements in the WTO, there would be no other option than developing such rules outside the WTO framework.

“The WTO Agreement provides for plurilateral agreements to be incorporated into the legal architecture of the WTO in Article X:9, whereby the Ministerial Conference may decide by consensus to add trade agreements concluded by a group of WTO members to the list of WTO plurilateral agreements in Annex 4. However, Article X:9 has not been used since the WTO’s establishment. Reaching consensus on adding a plurilateral initiative to Annex 4 has been perceived to be an insurmountable difficulty, even if the rights of non-participants were not diminished by the plurilateral commitments taken by a group of WTO members. The methodology used to integrate plurilateral agreements in the WTO architecture so far has been for every participant to incorporate the additional commitments unilaterally into their schedule of commitments, as was done for the Understanding in Financial Services Commitments and the Reference Paper on Telecommunications. However, this has its drawbacks. Not every additional commitment fits neatly into a schedule of commitments. In addition, non-participants could bring dispute settlement proceedings against a participant for breach of these additional commitments, even if they, as non-participants, are not bound by such commitments.

“Meaningful WTO reform will have to recognise this reality and the Commission will call for a reflection on how to create an easier path for plurilateral agreements to be integrated in the multilateral architecture. The EU would favour an inclusive approach to open, plurilateral agreements that facilitates participation by developing countries and allows them to decide whether they wish to join the agreement, leaving the door open for them to join in the future. That is not to say that the WTO should accommodate all plurilaterals. Discussions could identify certain principles that plurilaterals should comply with in order to be incorporated into the WTO framework. These principles could relate to openness to participation and future accession by any WTO member, facilitation of the participation of developing countries, transparency of the negotiating process, as well as means of protecting the existing rights of non-participants while avoiding free-riding.”

The EC makes various proposals for the improvement of the functioning of the WTO system including “Reinforcing the monitoring and deliberative functions of the WTO” (an issue with strong support from the U.S. and others), “The role of the Director-General and the WTO Secretariat,” and “More effective stakeholder engagement: Business and civil society.”

The EC recognizes that reform at the WTO requires alliance building and that objectives for the next Ministerial Conference (likely in December 2021) have to be realistic. Section 6.2 of the Annex lays out the EC’s views on what can be achieved by the next Ministerial (MC12)(pages 17-18). The section is copied below (emphasis is in original).

“6.2 What can be achieved by MC12 – the next steps

“The agenda for WTO reform must be ambitious, but it must also be realistic. The different work strands of WTO reform need to be properly sequenced. Not all elements can or should be deployed simultaneously, but rather different components will follow different processes and be brought forward in different configurations – be it multilateral or plurilateral – and with different groups of members. The next WTO Ministerial Conference will be key for the WTO reform process, both in terms of delivering a potential package of outcomes and in launching new processes and areas of work that can serve as a springboard for the reform agenda.

“Three areas where work should intensify prior to MC12 are trade and health, fisheries subsidies and the reform of the dispute settlement system.

“In addition, the following outcomes could be achieved by MC12:

“1. An agreement should be reached to reinvigorate WTO work on trade and environment in view of mainstreaming sustainability issues in the WTO’s work. Ideally, this should be done multilaterally, although certain elements may only be pursued by subgroups of interested WTO members, such as the liberalisation of selected climate-mitigating goods and environmental services.

“2. Work should be launched amongst interested countries on the development of rules on competitive neutrality, including modernised rules on industrial subsidies.

“3. Substantial progress should be recorded on the plurilateral initiatives on e-commerce and investment facilitation. The Joint Statement Initiative on services domestic regulation could be concluded at MC12.

“4. The renewal of the multilateral e-commerce and TRIPS moratoria should be ensured at MC12.

“5. Improvements to the WTO’s regular work function, through agreements on the horizontal transparency in notifications and trade concerns proposals.

“6. On agriculture, a package of transparency improvements across the board and on export restrictions could be agreed at MC12. The initiative on the exemption of the World Food Programme humanitarian purchases from export restrictions could also be part of such an outcome. The EU is open to discuss how to progress after MC12 on the main aspects of the negotiations, in particular on trade distorting domestic support.

“Beyond these outcomes, a Ministerial Declaration articulating a political commitment to reform would be a significant additional element to support future work. This Declaration could focus on issues such as improvements of the negotiating, monitoring and deliberating functions of the WTO; and look into institutional improvements in the functioning of the Organization. The Ministerial Declaration could establish a Working Group on WTO Reform to consider these issues and guide the membership towards delivering outcomes. MC12 should thus set the agenda for further work on the medium to long-term areas of reform, some of which should be completed before the subsequent Ministerial Conference (MC13).”

The text of the Annex is embedded below.

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Conclusion

The European Commission’s communication and Annex lay out a thoughtful and interrelated set of objectives and action steps to try to achieve EU objectives. The Annex is an excellent document in laying out EC’s objectives for WTO reform and articulating priorities for the rest of 2021.

The Biden Administration in its first month in office has indicated support for many of the areas of interest contained in the European Commission’s trade policy, including addressing climate change, working to help the world come through the pandemic and restore economic growth. Many of the WTO reforms identified by the European Commission are consistent with where the U.S. and many other countries would like to see reform occur, although some take a more practical (and more limited) approach than the approach teed up by the Trump Administration (S&DT, need for convergence by state capitalist economies). While dispute settlement reform will be complicated, hopefully the WTO membership can coalesce around modifications that address the full array of U.S. concerns including the failure of the Appellate Body in fact to respect its limited role, the creation of rights and obligations through disputes contrary to the express limitations which of necessity upset the balance of rights and obligations agreed to during the Uruguay Round, and will address correcting major overreach situations from the first 25 years. While one would expect much greater cooperation between the U.S., the EU and other countries in the coming months ahead of MC12, meaningful progress at the WTO is far from certain. A number of the issues raised by the EU (and supported by others) are controversial and actively opposed by some Members. However, the proposals reflect the reality of a changed global economy from 1995 when the WTO commenced operations.

The incoming Director-General should find the EC’s Annex a useful document for understanding EU priorities and objectives. It should also help many other Members decide to compile their own lists to help move the WTO reform process forward.

WTO December 14th Heads of Delegation Meeting — Parting comments of U.S. Ambassador Dennis Shea

Terence P. Stewart · December 14, 2020 · H.E. Dennis Shea, WTO reform · convergence vs. coexistence, Dispute Settlement, Heads of Delegation meeting, Special and Differential Treatment, United States · No Comments

At today’s Heads of Delegation meeting, the U.S. Ambassador, Dennis Shea, indicated it was his last Heads of Delegation meeting. After expressing his thanks to his fellow Ambassadors, WTO Secretariat and U.S. Mission personnel, Ambassador Shea provided a concise summary of the reasons that the United States has viewed the WTO as unable to make progress in its first 25 years of existence. He flagged that the problem at the WTO in his view is not lack of trust but rather lack of like-mindedness. His statement then reviews three areas where this lack of like-mindedness is most acute — whether the WTO is premised on “free and fair trade based on market competition,” the proper role of special and differential treatment as a bridge versus a permanent “right”, and the role of dispute settlement. While all three areas/issues have caused significant opposition by some WTO Members, the Trump Administration through the efforts of USTR has done an excellent job of laying out the U.S. concerns. Whether WTO reform will be meaningful going forward will be based in large part on whether there is a greater agreement on the basic purpose of the WTO.

While the incoming Biden Administration may very well take a different approach to addressing these areas at the WTO, there is little doubt that addressing these three areas either directly or indirectly will be critical to forward movement of the WTO and a renewed sense of relevance.

Ambassador Shea’s comments can be found here. U.S. Statement by Ambassador Dennis Shea at the WTO Heads of Delegation Meeting, December 14, 2020, https://geneva.usmission.gov/2020/12/14/us-statement-by-ambassador-dennis-shea-at-the-wto-heads-of-delegation-meeting/. Because of the importance of Amb. Shea’s message, the bulk of his statement is copied below.

“As I reflect on my nearly three years at the WTO, one of the roles I think I have played is to expose problems that pre-existed my arrival in Geneva, but were largely ignored despite requiring more forthright attention.

“So, in that spirit, please allow me now to offer some final thoughts and observations.

“I have been hearing recently that what ails the WTO is a ‘lack of trust’ among its members. I respectfully disagree with this diagnosis.

“Colleagues, when each of you takes the floor here at the WTO, I trust that you are faithfully representing the views of your governments. And I believe you trust that I, too, have been conveying the views of the United States government, hopefully with some clarity and persuasiveness.

“As I see it, the core problem at the WTO is not a lack of trust but a lack of like-mindedness. We simply disagree on some fundamental issues. These divides make progress here at the WTO exceedingly difficult and threaten the institution itself.

“Let me point out three areas where I believe the lack of like-mindedness is most pronounced and problematic.

“First, the WTO is designed to support free and fair trade based on market competition. As one of the main architects of the multilateral trading system, the United States has always believed that adherence to market-based policies among trading parties was essential if this system is to work effectively and fairly. We held this belief when we joined the GATT, agreeing to rules dedicated to openness, transparency, and fair, market-oriented competition grounded in the rule of law. We held this belief when we signed the Marrakesh Declaration with its commitment to ‘open, market-based policies.’ And we held this belief when we have insisted in literally dozens of WTO accessions that the acceding party undertake domestic reforms to reduce the role of the state in the economy and increase market orientation.

“Unfortunately, some WTO members apparently do not believe that market orientation is part of the WTO’s DNA. In their view, the WTO is agnostic between market and non-market economies – both belong here on an equal footing. This is not just a philosophical difference; it also has a practical impact.

“In 2001, when China acceded to the WTO, there was much hope that its economy would further open up, liberalize, and embrace market principles. Regrettably, this future has not fully materialized. In fact, we have witnessed significant retrenchment, a process that has been ongoing for well over a decade.

“Today, we see an economic system in China in which state-owned and -influenced ‘national champions’ are lavishly funded by state-owned banks, charged with meeting state-determined industrial policy goals, assisted in this effort by state-sanctioned intellectual property theft and cyber espionage, and supported by a panoply of policies that discriminate against foreign competition. Add to this mix the absence of an independent judiciary where business disputes can be decided fairly, highly restrictive information controls, increasing Party involvement in state-owned and private enterprises alike, and an overall lack of transparency, and the playing field becomes even more unlevel.

‘Such a state-led, non-market economic system is incompatible with the WTO and its norms. To believe the WTO can manage this system’s trade-disruptive impact under current rules and through the dispute settle- ment process is fantasy.

“Second, the United States has long believed that greater integration into the international trading system through compliance with WTO rules is good – a net positive – for a nation’s economic development. While the U.S. has always supported special and differential treatment for LDCs and less developed nations, we believe the ultimate goal of everyone should be full compliance with the rules as laid out in the various WTO agreements.

“Unfortunately, it seems today that the overriding preoccupation of far too many WTO members is to be exempt from the rules. This situation is made worse when some of the world’s largest trading nations and advanced economies claim entitlement to SD&T as of right. So the question becomes: If you don’t want to abide by the rules of this organization, why be a member?

“I’ll answer that question: Clearly, participation in the global trading system results in benefits. That’s why WTO membership is valuable. But the system cannot be sustained if members continue to extract benefits without making commensurate contributions.

“The third area where the lack of like-mindedness is pronounced is, of course, dispute settlement. As expressed in the Dispute Settlement Understanding, the WTO membership never charged the Appellate Body with creating a corpus of international trade jurisprudence – its role was to promptly make recommendations that would assist the DSB in resolving individual disputes. The role of issuing authoritative interpretations of the WTO agreements that are binding on all Members has always been reserved to the Members themselves, acting in the Ministerial Conference or the General Council.

“The intended mandate of the Appellate Body was therefore always a limited one – to correct legal errors by panels and to do so expeditiously.

“The debate over the past three years demonstrates that some WTO Members have a fundamentally different vision for appellate review than the limited role set out in the DSU. They see the appellate reviewer as an independent international court charged with establishing binding precedent, enforcing ‘coherence,’ filling gaps in the agreements, and creating a global common law of trade.

“”This clash of visions simply can’t be papered over with a few word tweaks here or there. It requires a much deeper conversation, one that the U.S. has repeatedly sought.

“And let me add that concerns about Appellate Body overreach and rule-breaking are longstanding and shared across the political spectrum in the United States.

“With these wide divergences among the membership, it’s no wonder that the WTO has underperformed over the past 25 years – just one multilateral agreement, the Trade Facilitation Agreement, and no multilateral outcome that reduces tariffs and improves market access.

“On fish, it is true we have made some progress thanks to the efforts of Santiago Wills with help from Didier Chambovey and despite this year’s unique challenges. But let’s be serious: this negotiation has been ongoing for nearly twenty years, and by that measure, progress is very modest. This is certainly not the timeline of an organization aspiring to be effective and relevant.

“Where the WTO goes from here, I do not know. But, in my view, building greater like-mindedness and a sense of shared purpose around a common set of values will be essential if the system is to survive and live up to its significant potential. To those who wish to engage in this enterprise, I will be rooting for you.”

As noted in other posts earlier this year, the issue of whether the WTO requires convergence of economic systems over time or can survive in a mode of coexistence is a critical one. Convergence has been flagged as a core principle of the WTO by Deputy Director-General in several speeches to groups in 2020. While it may be “easier” to get movement of WTO Members in reform talks by simply focusing on changes desired to agreements (or to new agreements), whether such alternative approaches are sufficient will depend in large part on how extensive they are in addressing the myriad types of distortions that other economic systems can generate.

Similarly, there are huge gaps between the views of developed countries and large and advanced countries who have self-selected “developing” as their category in terms of the adequacy of contributions of Members based on changing economic strengths of individual Members. While some countries have agreed to not seek special and differential treatment in future agreements, many major countries have to date refused to view the issue as appropriate for discussion.

Finally, on the dispute settlement system, I have written often on the problems that have been identified by the U.S. over the years. There is no question that the U.S. has laid out in great detail the problems with the system and the lack of agreement on the limited purpose of the system. While it may be possible for the U.S. to put forward a set of proposals that will correct the problems identified and limit the ability of panels or the Appellate Body to deviate, Amb. Shea’s comment that there are major differences among majors on the purpose of dispute settlement is clearly correct. As such it is not clear that meaningful corrections will be acceptable to others who seek the reinstatement of the Appellate Body. While I believe that the U.S. under the Biden Administration should put forward its proposals to correct the challenges, including how to rebalance rights and obligations when overreach is addressed, it remains to be seen if other WTO Members will actually be willing to correct the system if they are not willing to embrace what the U.S. has viewed as the clear and limited purpose of the dispute settlement system.

Conclusion

Amb. Shea has a General Council meeting on December 16-17 and the year’s final Dispute Settlement Body on December 18. Presumably those will be his last meetings at the WTO. The United States during the last four years has attempted to map out the major problems with the existing WTO. The actions taken to gain focus or attention have sometimes been controversial, and the underlying message has often been unwelcome by some or many WTO Members. That doesn’t mean that the concerns raised aren’t the fundamental challenges for the WTO generally and for the U.S. and many others in particular with the existing system’s operation. It is often difficult to be the messenger of unwanted news. Amb. Shea and his USTR colleagues deserve a lot of credit for their willingness to be the bearer of unwanted news and to provide the factual and legal background to support the U.S. concerns.

A new chapter will begin in 2021. On trade issues at the WTO, the Biden Administration has a complex set of issues to address in the coming years. They will benefit from the efforts of USTR Lighthizer and Deputy USTR Shea and the entire USTR team to lay out in detail over the last four years the challenges to the fairness of the system at the present time. Whether their efforts will make a difference for the incoming Administration will depend on the ability to generate coalitions and like-mindedness of purpose in fact with our trading partners.

Responding to a comment received on yesterday’s post, WTO subsidy disciplines — an update and coordination across areas is long overdue

Terence P. Stewart · November 24, 2020 · Subsidy disciplines, WTO reform · Agreement on Agriculture, Agreement on Subsidies and Countervailing Measures, Agreement on Trade in Civil Aircraft, European Union, GATS, Japan, United States · No Comments

Earlier today I received a comment from a well respected trade attorney in Washington, D.C., on my post of yesterday calling for an update of subsidy disciplines including exploring the logic of how subsidies are treated in different areas and whether distortions caused by subsidies from actors not presently covered should be covered in the update. As I haven’t sought permission to identify the commenter, I simply provide the comment below as it is one that may be shared by other readers of the post.

“A review of the big picture of WTO subsidy control efforts ought to at least mention the damage done, through DSB-adopted decisions, to the fairly decent set of disciplines the ASCM appeared to have when it was first brought live in 1995. Today’s need for better ASCM rules is in substantial part the result of 25 years of bad interpretations of ASCM Art. 1, most of them rendered in pursuit of gutting the United States’ CVD remedy.

“To the extent Azevedo was suggesting that merely the passage of time is to blame for the current inadequate state of WTO subsidy rules, he is wrong. Purposeful shredding has played a role too.”

Here is my response to the thoughtful comment provided. First, there is no doubt that some dispute settlement decisions have undermined the disciplines that exist in the Agreement on Subsidies and Countervailing Measures (“ASCM”). The U.S. Trade Representative’s Office paper on concerns with the WTO’s Appellate Body present various examples of egregious overreach by the Appellate Body, including a number of cases involving interpretations of the ASCM. See USTR, Report on the Appellate Body of the World Trade Organization, February 2020, pages 81-89 (public body), 105-109 (use of out of country benchmarks), https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf; February 14, 2020, USTR’s Report on the WTO Appellate Body – An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role, https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/.

I have written extensively over the years on the problem of overreach by the Appellate Body, and the damage caused to the balance of rights and obligations that the United States and others negotiated in the Uruguay Round. The problem has been most obvious in the trade defense agreements (antidumping, subsidies and safeguards), but exist in decisions involving other agreements as well as is reviewed in the USTR report. I have also suggested ways for the WTO, in addressing the impasse on the Appellate Body, to clarify DSU language and address specific instances of claimed overreach. See, e.g., July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/; November 12, 2019, Background Materials on WTO Appellate Body Reform Challenges – The Critical Issue of “Overreach”, https://currentthoughtsontrade.com/2019/11/12/background-materials-on-wto-appellate-body-reform-challenges-the-critical-issue-of-overreach/; November 4, 2019, WTO’s Appellate Body Reform – The Draft General Council Decision on Functioning of the Appellate Body, https://currentthoughtsontrade.com/2019/11/04/wtos-appellate-body-reform-the-draft-general-council-decision-on-functioning-of-the-appellate-body/.

So while I agree with the comment that the ASCM is less robust because of erroneous WTO Appellate Body reports, that fact does not change the intended message of the post. There is significantly different treatment of subsidies between industrial goods, agricultural goods and services that are not logical or justifiable. There have been major changes in the world economy and who the major trading nations are in the last twenty-five years which raise questions about a range of topics that are not specifically covered by the ASCM, the Agreement on Agriculture, GATS (where there are no subsidy disciplines at present) or other agreements. While the U.S., EU and Japan are concerned (rightly so) about the extreme damage being caused by massive industrial subsidies from economies with non-market economic systems and hence the need for enhanced rules, lack of coverage of services, more restrictive subsidy rules on agriculture than on industrial goods are issues that can and should be examined as well as the areas not covered by the existing ASCM.

My second point would be that if I suggested in my earlier note that former Director-General Roberto Azevedo was suggesting the problems with the ASCM were due to the passage of time, that was not the intention. Mr. Azevedo’s interview for the 25th anniversary program and the comment quoted was focused on a much broader question — where had the WTO not accomplished what was originally envisioned. Mr. Azevedo’s comment reflected his understanding that a properly functioning WTO would have Members engaged in negotiations on issues on an ongoing basis to ensure the WTO was maintaining its relevance to Members in the light of evolving global commerce and technology. The fact that there are no rules on ecommerce decades after the rise of ecommerce is an obvious case in point where the WTO has not been able to update the rulebook in a timely manner. I was using Mr. Azevedo’s general statement to undergird the propriety of examining the important topic of where distortions are caused by the subsidy actions of governments (and possibly private parties). Such an examination is needed as part of the WTO reform efforts that should be occurring going forward. But examining subsidy disciplines in the reform effort is not intended to excuse the problem of overreach by the Appellate Body that has resulted in the temporary shut down of the Appellate Body at the WTO. The WTO Members need to find a way in resolving the Appellate Body impasse to restore the rights of Members that had been agreed as part of the Uruguay Round but undermined by panel or Appellate Body reports.

For ease of reference for readers, yesterday’s post is copied below. I hope the above eliminates any confusion that my post yesterday may have caused.

Yesterday’s post

When the WTO came into being at the beginning of 1995, subsidy disciplines were fragmented. Agricultural subsidies were largely addressed under the Agreement on Agriculture although also subject to the ASCM. Industrial subsidies were covered by the Agreement on Subsidies and Countervailing Measures (ASCM). The General Agreement on Trade in Services has no disciplines on subsidies although negotiations on a possible article dealing with subsidies was one of the open issues where negotiations were supposed to continue after the WTO started up. And there was the separate plurilateral agreement on civil aircraft which had rules on subsidies as well.

While export subsidies were prohibited on industrial goods from the beginning, there are only loose controls on domestic subsidies. As the U.S., EU and Japan have articulated at the WTO, the changing make up of WTO Members and the rise in trade importance of Members with a state-directed economy have created increased challenges from state subsidies where existing disciplines are not viewed as adequate.

In agriculture, export subsidies were originally capped and being reduced but have now been eliminated by developed countries. Agriculture faces many more vagaries of nature that directly affect growing conditions (climate change, increased severe storms, increased flooding, increased draughts, etc.) than do industrial goods. Despite this reality, domestic supports in agriculture are capped and are facing increased calls for reductions by some Members.

While the GATS was originally driven by developed country service providers who were unconcerned with the need for trade remedies, the changing make-up of the WTO Membership, the changing technologies used by many service providers, and the growth of state-owned or state-invested service providers competing internationally have all raised the specter of significant government supports being provided to service providers that distort economic outcomes between competing service providers but which are not presently addressable under WTO rules.

In addition, the ongoing COVID-19 pandemic has created enormous economic dislocations for many WTO Members and has led many countries to provide unprecedented stimulus packages to minimize the economic fallout within their countries or territories. The WTO hasn’t explored how, if at all, such stimulus efforts can or should be evaluated under WTO rules.

Similarly, subsidy disciplines basically apply simply to subsidies provided by a government or a private party at government direction within the economy of the government in question. There are issues of whether subsidized loans from intergovernmental entities should be addressable if causing distortion with other entities. There are similarly questions about whether subsidies into inputs in one country which are then exported and used in a second country for export to other countries can or should be addressable when a country is investigating the second country’s product. Similarly, while the WTO ASCM deals with subsidies from governments or private parties at the direction of governments, the distortions to international competition are not necessarily more distortive than private sector subsidies between or within companies may be. Just as the Agreement on Antidumping deals with private market distortions, it isn’t clear why subsidy disciplines should root out distortions whether coming from governments or private parties. And, of course, when the GATT came into existence in the late 1940s, there were concerns about dual exchange rates causing distortions and permission to handle those distortions under either the antidumping or countervailing duty provisions of Article VI of the GATT. When currencies become significantly undervalued there can be significant distortions in economic outcomes. While at least the United States is addressing such distortions under its countervailing duty law at the moment, there is no agreed updated rules in the WTO.

Last week, the WTO on November 19 celebrated its first 25 years with both various panels and with a video of the last three Directors-General being interviewed about the first 25 years. Former Director-General Roberto Azevedo who stepped down at the end of August this year was asked a question of where the WTO had fallen short in his view in the first 25 years. His answer was as follows (according to my notes): “The WTO has to be constantly updating itself. For example, tariff negotiations or disciplines or rules we negotiated thirty years ago are completely out of date.” WTO at 25: Conversations with former Directors-General of the WTO, 19 November 2020 (video). He added that when the WTO came into existence in 1995, it was clear that the WTO would need to update itself continuously without requiring big rounds, but that has not occurred.

There is no area where a review of the existing rules and disciplines is needed more urgently than the area of subsidies. But unlike in the past, there should be greater evaluation of all subsidy areas to be sure that distortions in any area of economic activity internationally can be addressed while actions which simply address emergency situations flowing from pandemics or weather events are not addressable if not adding to capacity. Such a review obviously needn’t slow down the important efforts to reach agreement on Fisheries Subsidies which has dragged on for roughly 19 years and is tied now to the UN Sustainable Development Goal 14.6.

Past Directors-General, the candidates for the position in 2020 and most Members readily agree that for negotiations to advance there has to be items of interest to all Members. A broad subsidy review should provide exactly that broad potential interest while at the same time permitting the rules and disciplines on subsidies to be updated to address the commercial realities of today.

China’s trade restrictive actions against Australia — what they say about China’s compliance with notification requirements and the importance of market-economy conditions in global trade

Terence P. Stewart · October 23, 2020 · China, industrial subsidies, non-market economy, State Ownership and State Investment, transparency, WTO reform · Australia, barley, beef, Brazil, China, coal, cotton, European Union, Global Business Dialogue TTALK, Japan, wine · No Comments

One of the challenges companies and trading partners of China have faced in having the global rules of trade actually honored by China has been the informal actions of China’s government at the central, provincial and local level which result in clear violations of WTO obligations as well as the fear of retaliation companies trading with China may face if specific examples of non-compliant actions are raised bilaterally or through dispute settlement.

In yesterday’s Global Business Dialogue TTALK entitled “China and Aussie Cotton,” the challenges that Australia’s cotton producers are facing in China are reviewed including apparent verbally communicated requirements to Chinese cotton purchasers not to buy Australian cotton. See Global Business Dialogue TTALK of October 22, 2020, “China and Aussie Cotton,” https://myemail.constantcontact.com/CHINA-AND-AUSTRALIAN-COTTON—-TTALK-FOR-OCTOBER-22.html?soid=1101547782913&aid=L4XRKbnPF_A. The post has links to various sources for the concerns raised in the post.

A good summary paragraph from the TTALK piece follows:

“All of that said, this has been a tense year for China-Australia trade, as China has taken aim at one Australian export after another to signal its displeasure with Australian policies. Australian barley, beef, and wine were hit with import restrictions earlier. Last week it was coal and cotton – what might be called Australia’s black and white exports to China. This time, though, China’s restricted policies were not in black and white. They were instead oral instruction to Chinese buyers of those products not to buy from Australia.”

As the WTO Members consider reforms needed to improve the functioning of the global trading system, the challenges Australian producers are facing in having access to the Chinese market should help inform some of the critical challenges and needs.

Obviously, there are transparency requirements on all WTO Members on actions taken that affect access to a Member’s market. It is unlikely that any of the non-written actions, policies or practices taken by the Chinese government at the central, provincial or local level that affect foreign goods or services or foreign investors are notified to the WTO. If so, this is a major problem in the third leg of the WTO structure – notifications and oversight. While similar problems may exist for other WTO Members, the Australia example is a clear instance where China has discriminated against products of a trading partner without formal notification or justification.

Similarly, the Australian example raises concerns about China using the influence of the state to distort trade outcomes. This is, of course, the core concern of the United States, Japan, Brazil and others that the global trading system is premised on market-economy conditions within WTO Members and that systems like that of China don’t fit well under existing global rules. The state directing companies not to purchase commodities like cotton from foreign suppliers is inconsistent with such market-economy conditions.

For any reform initiative to permit the WTO to ensure conditions of fair trade in the global market, state actors need to sit out the vast majority of trade actions involved in the production, sale, import and export of goods and services. There have been proposals to date to address some of the notification deficiencies that exist, but nothing really focused on informal actions of states. Similarly, the U.S., Japan and the EU have also identified a series of issues (industrial subsidies, forced technology transfer) where the existing rules of the WTO are inadequate to address some of the distortions caused by economic systems like that employed by China. It is unclear that the areas being considered deal with some of the distortions flagged in the Australian case or the issue of threats or acts of retaliation by a WTO Member against companies engaged in trading with the Member or who have invested in the Member. While China is certainly a Member where companies often complain privately about retaliation or threats, China is not alone in that regard.

Without serious reform to address these and other existing problems as well as update the rules to reflect 21st century trading realities, countries will need to increasingly look outside the WTO for tools to address the distortions created.

Reform at the WTO — fundamental divisions continue on key issues for U.S.

Terence P. Stewart · October 18, 2020 · WTO reform · Brazil, China, European Union, G90, India, Japan, South Africa, United States · No Comments

At the recent Informal Trade Negotiations Committee and Informal Heads of Delegation meeting on October 12 and the General Council meeting on October 13, WTO Members continued to line up on opposite sides of major reform proposals from the United States and others.

While the U.S. and other supporters of change in developing country status for special and differential treatment (“S&DT”) have not included least developed countries (where there is no dispute on the need for assistance), China, India, and South Africa hide behind a Doha Development Agenda item on S&DT on existing agreements and proposals put forward by the G90 in an effort to avoid their need to justify any special and differential treatment in new agreements or ongoing negotiations. The concept that Members who have advanced economically rapidly over the last twenty-five years are going to get additional S&DT benefits on existing agreements while not permitting a better differentiation of which WTO Members have actual needs is not one likely to move forward and will exacerbate the negotiating impasse at the WTO. There is a good summary of the S&DT debate at the General Council meeting on October 13 in the October 14 issues of Washington Trade Daily. https://files.constantcontact.com/ef5f8ffe501/7ce1179a-5882-4f55-96ce-84eea151fa27.pdf.

The U.S., EU and China statements at the General Council meeting and the U.S. and EU statements at the informal TNC and Heads of Delegation meeting the day before are available on each country’s WTO website.

Developing Counry criteria; Special and Differential Treatment

Below are excerpts from the October 13 General Council meeting on agenda item 6, “Procedures to strengthen the negotiating function of the WTO — Statement by the United States (WT/GC/W/757/Rev.10 and WT/GC/W/764/Rev.1).”

Statement by U.S. Amb. Dennis Shea:

“At the HODs meeting yesterday, I spoke about the paralysis of the WTO’s negotiating function.

“In our view, the root causes are complex and varied. They include:

“- Appellate Body overreach, which enticed many Members to disfavor negotiation and instead pursue litigation to achieve desired outcomes;

“- A chronic lack of transparency by many Members, especially some major players, which is distorting our grasp of key issues and undermining the foundation for negotiations; and

“- Certain Members’ unjustifed claim of automatic entitlement to blanket special and differential treatment (S&D), which ensures that ambition levels remain far too weak to produce negotiated outcomes. Members cannot find trade-offs or build coalitions when significant players use S&D to avoid making meaningful offers.

“As we’ve discussed our S&D reform proposal with Members, we have heard three criticisms.

“First, certain advanced, wealthy, or influential Members claim they have an automatic, permanent, and sacrosanct entitlement to blanket S&D. We disagree. Our approach to S&D eligibility can and must evolve to reflect the trade and development reality of today.

“Second, some Members argue for a different solution – the “case-by-case” approach, where each Member is asked to contribute to the full extent of its capabilities to a set of disciplines. But we know from experience—it’s called the Doha Round—that this approach does not work when some Members are not willing to take on obligations commensurate with their role in the global economy.

“- Some Members point to the Trade Facilitation Agreement (TFA) as a successful case-by-case approach to S&D, but the TFA is not a readily or generally applicable model moving forward. Recall that under the TFA, a Member may lose competitiveness if other Members fully implement the agreement and it does not. Most trade agreements operate differently, in that a Member is likely to believe it will be better off if other Members fully implement the obligations and it does not.

“Third, some Members say it is folly to try to create categories of Members. This is an odd criticism, given that categories already exist. Today, there are three categories – first, those Members to which all obligations apply; second, the LDCs that enjoy enhanced flexibilities; and third, the majority of Members – around 90 – that claim entitlement to blanket S&D as self-declared developing countries.

“So the starting point is not categorization, but what to do with this last category of Members that represent significantly divergent economies. These Members simply do not fit the same mold or have the same needs. The more economically advanced of these countries are clearly capable of negotiating the flexibilities they need, rather than availing themselves of blanket S&D.

“As just one example, China’s global merchandise exports are 14 times greater than the combined exports of all 49 countries that the UN categorizes as LDCs. Its economy is more than 11 times the economies of all 49 LDCs combined. China’s per capita income is more than five times higher than that of the LDC average – a remarkable development since 1995, when China’s per capita income was within $900 of the LDC’s average.

“China even admitted at the General Council meeting in July that China is not in the same position as Benin or Liberia. It is helpful that China recognizes that it should not receive the same flexibilities as LDCs. But does that mean that China believes it is in the same position as Pakistan or Kenya? Because today, China claims the right to seek the same blanket S&D as these and other lower-income countries.

“In 1995, China’s per capita income was nearly 20 percent smaller than that of Kenya and more than 25 percent smaller than that of Pakistan. Today, China’s per capita income is nearly four times that of Kenya, and more than triple that of Pakistan.

“The failure to differentiate some of this organization’s most advanced, wealthy, or influential Members from LDCs and others diminishes the value of special and differential treatment to those who need it most. It also imperils our ability to reach new agreements that could provide greater opportunities for the WTO’s poorest Members who are least integrated into the global trading system.

“This issue, and the need for reform, is not going away. We look forward to continuing our engagement with Members.”

U.S. Mission to International Organizations in Geneva, WTO General Council Meeting, October 13, 2020, item 6, https://geneva.usmission.gov/2020/10/13/statement-by-ambassador-shea-at-the-wto-item-6/.

Statement by EU Ambassador Joao Aguiar Machado:

“PROCEDURES TO STRENGTHEN THE NEGOTIATING FUNCTION OF THE WTO – STATEMENT BY THEUNITED STATES

“The EU reconfirms that development is a central pillar of this organisation.

“The current distinction between developed and developing countries no longer reflects the reality of the rapid economic growth in some developing countries. We should therefore continue to work on special and differential treatment with a view to ensuring that flexibilities are made available to those members who actually need them to enable them to fully benefit from their membership to this Organisation.

“The European Union firmly believes that if this organisation is to prosper, special and differential treatment must become much more granular, in function of an individual Member’s demonstrated needs and capacities. Future differentiation should be designed in terms of specific individual country needs at the sectoral or activity level rather than calling for a block exemption of a large category of Members. Furthermore, the EU considers that each developing country’s need for SDT should be assessed on a case-by-case and evidence-based basis. The notable exception should be the LDCs who deserve particular treatment and who in any case have graduation mechanism.

“We are open to looking into special and differential treatment (SDT) provisions in future agreements, such as the ongoing negotiations on fisheries subsidies. We expect to have a discussion with Members as to what development concern is raised by the provisions under discussion and what flexibility is necessary in order to eventually allow the affected Members to fully implement the agreement. It is only where special and differential treatment responds to a specific need that it can be truly effective. In this context, we call on advanced WTO Members claiming developing country status to undertake full commitments in ongoing and future WTO negotiations. As mentioned previously, this should particularly be the case for members of the G20, which represent the world’s most important economies.

EU Statements by Ambassador Joao Aguiar Machado at the General Council meeting, 13 October 2020, https://eeas.europa.eu/delegations/world-trade-organization-wto/86935/eu-statements-ambassador-jo%C3%A3o-aguiar-machado-general-council-meeting-13-october-2020_en

Statement of China Amb. Zhang Xiangchen on item 6:

“Thank you, Mr. Chairman.

“I have repeated many times that, the debate on criteria to differentiate developing members is totally meaningless, as it is a systematic and directional mistake. Development is one of the key objectives of the WTO, which is also an important attraction for many countries choosing to join in this Organization. As WTO members, our focus on development should be on how to translate the concept of development into practice rather than anything else.

“To be specific, our collective efforts should be focused on how to effectively enforce the existing special and differential treatment (S&DT) provisions, and negotiate meaningful S&DT for the developing members, for example in the fisheries subsidy negotiations. For the existing S&DT provisions, there should be assurance that developing members in need could truly benefit from and fully integrate into the multilateral trading system.

“Mr. Chairman, we did a preliminary review on the current 155 S&DT provisions contained in the 16 WTO agreements, finding that at least 105 provisions are too vague to operate, accounting for 67.7%; for the remaining 50 provisions, at least half of them are related to transitional period or technical assistance. So, there are only 25 S&DT provisions in existing WTO agreements that are directly linked to individual Members’ rights and obligations, accounting for 16.1% of the total. It is therefore fair to say, the overwhelming majority of current S&DT provisions are only pie in the sky. There has never been an almighty blank check.

“It is a long-standing consensus to make S&DT provisions more “precise, effective, and operational”, which is also a commitment across WTO Agreements. That is the very reason why developing members requested to discuss more than 200 ‘Implementation Issues’ aiming at rebalancing the imbalanced rules from the Uruguay Round, and G90 put forward their written proposals. I fully endorse the statement made by the Ambassador of South Africa. Actually, recalling the past 20 years, G90 has been compromising by reducing their 88 original requests, to 25 in Nairobi, and to 10 in Buenos Aires, demonstrating their utmost sincerity and restraint. Such reduction is not because their request was wrong, rather it is because they do hope all Members could be engaged and thus show flexibility.
For the current 10 proposals, some are to fill the loopholes of existing provisions, such as proposing procedural arrangement to invoke Article 18 of GATT; some are to restore good practices in multilateral rules, such as treating subsidies granted by LDCs and developing members facing certain constraints as non-actionable subsidies according to Article 8 of ASCM; some are to allow developing members to have longer time-frames for transitions or comments, such as granting 180 days for members facing capacity constraints to make comments on SPS measures notified by developed members, whereas the current practice is 90 days; some are to urge developed members to honor their already-committed obligations, including technology transfer. G90 has made comprehensive responses both orally and in writing to all questions from members on their proposals. However, no progress has been made due to certain Members’ reluctance to engage.

“Mr. Chairman, the WTO is a rule-based organization. If we want to win back people’s confidence in this organization, the most fundamental thing is to treat existing rules and implement promised commitments, with respect and awe. To make existing S&DT provisions “more precise, effective and operational” is the clear commitment and unfinished mission of all members, which is also the most urgent task in the area of development. I call upon all members to show our sincerity by meaningfully engaging in the discussion of the G90 proposal and carefully responding to practical concerns of developing members, rather than wasting time and resources on no outcome debates.

“Mr. Chairman, since China was mentioned specifically, I would like to make a comment to respond. China standing against to the differentiation of developing members does not mean we want to enjoy the same favorable treatment as small economies and LDCs. What we want is only to safeguard our institutional right of S&DT.

“In practice, according to our accession agreement, China has 14 specific S&DT provisions among all 155 articles, accounting only for 9%. Among the 14, 6 provisions are traditionally “obligations” of the developed members, such as providing translations of documents in WTO official languages upon request, only 8 provisions are so called meaningful “rights”, such as relatively higher tariffs for certain goods.

“Even in such circumstances, China always shows restraint in invoking S&DT provisions. Obviously, China did not request to have the same S&DT as Benin, Liberia, Kenya or Pakistan, which was proclaimed by the United States. On the contrary, as a large trading nation, we recognize the responsibility China should bear. Our approach is to address different issues according to their specific situations and make contributions within our capability. As we did in the ITA expansion negotiations, China is the largest contributor among all the participants. We will continue to do that in the future.

“Thank you, Mr. Chairman.”

Source: Ministry of Commerce website, Permanent Mission of the People’s Republic of China to the World Trade Organization, Statement by H.E. Ambassador Zhang Xiangchen of China at the General Council Meeting (Item 6 and 7) October 13, 2020, http://wto2.mofcom.gov.cn/article/chinaviewpoins/202010/20201003007644.shtml.

The two documents that are the basis of agenda item 6 are embedded below.

W757R1

W764R1

Market-Oriented Conditions

The U.S. with support from Japan and Brazil and with concurrence of the EU put forward again the importance for market-oriented conditions to the global trading system. Not surprisingly, China led the opposition. Below are the formal statements of the U.S., EU and China on agenda item 7, “Importance of Market-Oriented Conditions to the World Trading System, Joint Statement by Brazil, Japan, and the United States (WT/GC/W/803/Rev.1)

Statement of U.S. Amb. Dennis Shea:

“The United States, Brazil, and Japan have requested this agenda item to continue addressing the importance of market-oriented conditions to the global trading system.

“As a result of our work together, Brazil, Japan, and the United States have released a joint statement (WT/GC/W/803/REV.1). The statement reflects the importance we attach to market-oriented conditions for the world trading system and further elaborates the draft General Council decision circulated earlier this year.

“The joint Brazil-Japan-U.S. statement reflects our shared belief in the core principles of the WTO, to include that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system.

“We affirm a number of criteria that reflect the market-oriented conditions and disciplines to which our own enterprises are subject.

“And, we affirm that all Members’ enterprises should operate under these conditions to ensure a level playing field for our citizens, workers, and businesses.

“When Brazil and the United States first introduced the joint statement in July, we invited the support and engagement of Members who wish to become co-sponsors.

“We are pleased to report that, since that time, we have been able to hold consultations with a number of supportive Members. We were also pleased to welcome Japan’s decision to become a co-sponsor of the joint statement, and we are thankful for their efforts to engage with other Members on this important matter. The views that we have heard in small group discussions confirm that the joint statement reflects our shared values as WTO Members.

“We will continue to invite supportive Members to participate in one of our small groups as the discussions intensify.

“We see this discussion as necessary in the context of achieving meaningful WTO reform. To achieve such reform, WTO Members must continue moving toward – and not away from – more open, market-oriented policies and conditions.

“But as was made clear in recent G20 discussions, and reflected in the Riyadh Initiative Annex to the Trade Ministers’ Communique, not all WTO Members agree that “market-oriented policies” is a principle of the WTO.

“One Member in particular could not reaffirm the principles of the Marrakesh Declaration or even bring itself to reference the Declaration, and went on to dispute that its accession commitments tied it to any market-oriented policies.

“The usefulness of the recent G20 exercise was to clearly articulate this division in the Membership, and that some do not agree with the core values of the institution. This crystalizes for us the importance of reaffirming those core values.

“The Brazil-Japan-U.S. joint statement recalls that the WTO was established to promote Member economies’ participation in a world trading system ‘based on open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions’.1

“The market-based reforms that GATT parties and acceding Members undertook during that process helped to ensure that their participation was indeed based on open, market-oriented conditions. These Members’ reform efforts demonstrated their commitment to an international trading system that depends on the operation of market-oriented conditions in each of our economies.

“Ensuring that market-oriented conditions exist for market participants is critical to realizing the benefits of the international trading system that come from our mutual commitment to these rules. This common foundation is necessary to ensure a level playing field for all Members.

“Some Members have argued that our efforts to affirm the importance of market-oriented conditions are a pretext for questioning Members’ choice of different economic models. They argue that the WTO provides no basis for discussing those choices.

“However, that is not the discussion we are proposing to have, and these Members may have misunderstood our purpose. What we have argued is that market-oriented conditions provide a level playing field and therefore are necessary conditions for fair trade. And, we have not heard any Member argue for a different position. Do any Members really believe that fair trade can result when special advantages are given to domestic entities under these conditions?

“Take, for example, the joint statement elements on financing and investment. Where a Member’s economic conditions generally ensure market-determined financing and investment decisions, it would mean that receipt of state-directed or politically-directed financing confers an
unfair advantage. This is not a question of debating different economic models, but rather reflects a shared understanding of fair play.

“To this end, the Brazil-Japan-U.S. joint statement affirms that Members’ enterprises should operate under market-oriented conditions and notes the elements that indicate and ensure those conditions for market participants. We encourage Members to review these elements in detail as our discussions advance.

“As we see it, the continued relevance of the WTO will depend on whether it can deliver on the promises of a world trading system based on open, market-oriented policies. The success of our reform efforts will depend on our ability to ensure the fundamental premise of free, fair, and mutually advantageous trade remains intact.

“1.Marrakesh Declaration of 15 April 1994, fifth preambular paragraph.”

U.S. Mission to International Organizations in Geneva, WTO General Council Meeting, October 13, 2020, item 7, https://geneva.usmission.gov/2020/10/13/statement-by-ambassador-shea-at-the-wto-item-7/.

Statement of EU Amb. Joao Aguiar Machado:

“IMPORTANCE OF MARKET-ORIENTED CONDITIONS TO THE WORLD TRADING SYSTEM – JOINTSTATEMENT BY BRAZIL, JAPAN, AND THE UNITED STATES

“The EU has repeatedly stated that market-oriented conditions are central to allowing a level-playing field. EU has also repeatedly expressed its concerns with non-market-oriented policies and practices that have resulted in distortions to the world trading system.

“The role of the WTO – and therefore the role of all of us, as Members – is to ensure that there are effective rules in place to eliminate these distortions and to ensure a level-playing field. There are clearly gaps in the WTO rulebook that do not enable us to do so. These gaps must be addressed through the negotiation of new or updated rules to address the issues raised in the statement of the United States and its co-sponsors.”

Statement of China Amb. Zhang Xiangchen on item 7:

“Thank you, Mr. Chairman,

“It is true that the multilateral trading system is built on the basis of market economy, and all the WTO rules reflect the prevailing practices of market economy and are binding on all Members. There is also no doubt that in the past 40years, China persistently deepens its reform and opening up to the world in the direction of market economy, which is exactly the basis of our accession to the WTO and the reason for our firm support for the multilateral trading system.

“However, the challenge we are facing is not what Marrakesh Declaration says, but what some Members are doing. By the way, with regard to Marrakesh Declaration, when we talk about open and market-oriented policies, we should not forget Article 5, which I quote “Ministers recall that the results of the negotiations embody provisions conferring differential and more favorable treatment for developing economies, including special attention to the particular situation of least-developed countries”. Those words are equally important. Unfortunately, now some Members have selective amnesia.

“I have no intention to repeat what I have said at the previous meeting that ‘common sense issues like market orientation do not need to be discussed at the General Council’, and simply dismiss the whole discussion. Albert Einstein, a scientist who had worked in Bern, once said, ‘Success is equal to hard work plus correct method plus less empty talk’. Chinese people have also believed in ’empty talks harm the country’ since ancient times. So, my questions are: what is the purpose of this proposal? what are the follow-up measures to be taken in the next step? What puzzles me even more is that, at this moment, if we cannot prevent a Member’s government from forcing foreign companies to sell their equities and technology to its national companies in any way, how can we sit here comfortably and discuss and tell the world what the market orientated conditions are?

“Mr. Chairman, we need to bear in mind that for more than three years, we have failed to take effective actions to stop unilateralist and protectionist measures that undermine the market rules from raging around the world, and this organization we work for has been widely criticized for falling short of such actions. We should feel ashamed. However, at least, we could still argue that it is not because we do not want to, but because we are not capable enough. But now, why should we talk empty about the market-oriented conditions to give more reasons for the international community to laugh at us, for being not only incapable, but also naive?

“When a principle or a system is broken, what we should do is to take concrete actions to try to fix it rather than verbally repeating the importance and correctness of the rules to show the innocence of someone who broke the rules.

“Ambassador Shea once said that ‘when the state puts its thumb – or even its fist – on the scale to distort competition and drive preferred outcomes to benefit certain domestic actors, that is unfair.’ I couldn’t agree with him more about that. But it is a common sense that if you ask others to do something, you should do it first.

“Let me give you some specific examples. When a country, on the grounds of national security, arbitrarily and frequently imposes tariffs on foreign goods or deprives foreign services of market access, that is unfair. When a country uses tariffs as a leverage to force its trading partners to concede in trade negotiations, the market is distorted. When a country blatantly violates fundamental trade rules and at the same time blocks the independent and neutral adjudications, the level playing field is gone. Instead of chanting the empty slogan of ‘market-oriented conditions’, it’s better for us to take concrete actions to address the above wrongful practices which undermine the fair competition and market-oriented conditions.

“Thank you, Mr. Chairman.”

The joint document discussed is embedded below.

W803R1

Conclusion

The WTO is in crisis. None of its three core functions are operating as intended. The negotiating function is barely operational for various reasons including the move by many Members to try to achieve through litigation what they haven’t pursued or achieved through negotiations. The excesses of the Appellate Body has led to its temporary inoperability.

Moreover, the changing reality of competition internationally is that many WTO Members who have claimed developing country status have rapidly developed yet have not generally denounced special and differential treatment nor have they taken up greater liberalization commitments commensurate with their level of economic development. S&DT is treated as a perpetual right versus a temporary assist for Members with demonstrable needs. Self-selection is not the norm in other international organizations and makes no sense where not rooted in factual criteria which are reviewed over time with countries which advance accepting full obligations as appropriate.

The rise of countries like China which have many aspects of their economies which create distortions not covered by existing WTO rules calls out for leadership by those countries to work within the system to adopt new rules so that all trade distorting practices are addressable within the system. China appears intent of ensuring that the WTO is not able to address its acts, policies and practices which distort trade but which are not presently addressable by WTO agreements.

Similarly, the functioning of the WTO Committees in terms of notifications and review is problematic in at least many of the Committees. Without timely, complete and accurate information, trading partners are unable to understand how other Members are conducting themselves and where potential problems may exist. Subsidies notifications have been an area of particular concern but it is not the only area.

The recent General Council meeting showed the continuing deep divide of core reform concerns of the United States and others. A WTO incapable of reform will drift into irrelevance.

With the selection process of the next Director-General starting the last round of consultations on Monday, October 19, WTO Members not only need to decide who will lead the Secretariat but whether the WTO is important enough to have Members come together on the common vision of the organization and develop a willingness to find a road forward. The odds of success seem small at the moment.

G20 Trade and Investment Ministerial Meeting Communique, 22 September 2020

Terence P. Stewart · September 22, 2020 · G20, WTO reform · G20 Trade and Investment Ministers · No Comments

In an earlier post today, I reviewed, inter alia, a statement made by Deputy Director-General Alan Wm Wolff to the G20 trade and investment ministers virtual meeting on the topic of WTO reform and the need for G20 engagement.

The G20 Trade and Investment Ministerial Meeting Communique is now available and is embedded below.

G20SS_Communique_TIMM_EN

One of five agreed areas of cooperation and coordination by the G20 ministers was on supporting “the necessary reform of the World Trade Orgaization (WTO) t which the Riyadh Initiative on the Future of the WTO provides political support”. Other areas of cooperation and coordination include supporting recovery of international trade and investment from the fallout from COVID-19; encouraging “greater international competitiveness of Micro-, Small and Medium-Sized Enterprises (MSMEs); fostering “economic diversification”; and strengthening “international investment”. Page 1, para. 3.

This post focuses on the second area of cooperation and coordination, reform of the WTO. The Communique contains an articulation of G20 agreement in paragraphs 13-22 and provides in Annex 1 the Chair of the Trade and Investment Working Group’s (TIWG) “Summary of the Exchange of Views under the Riyadh Initiative on the Future of the WTO”. The Annex was prepared under the Chair’s “own responsibility and is without prejudice to the positions of individual members.” Page 3, para 14.

“15. We reaffirm our commitment to the objectives and principles enshrined in the Marrakesh Agreement Establishing the WTO.

“16. We recognize that the effectiveness of the multilateral trading system depends on the implementation of WTO rules by all Members, as well as their respective enforcement, in order to maintain the balance of Members’ rights and obligations.

“17. We remain committed to working actively and constructively with other WTO Members to undertake the necessary reform of the WTO. We recognize that this reform should improve the functions of the WTO and we encourage a constructive discussion of all proposals in this regard.

“18. We recognize transparency as an important condition for enhancing trade predictability and fostering trust between WTO members with regards to the compliance with their WTO obligations. In this regard, we reaffirm our commitment to fulfill our WTO transparency obligations and to lead by example and we call on all other WTO Members to do so. We recognize the need for assistance to WTO Members that face capacity constraints in meeting their notification obligations. We acknowledge ongoing discussions to enhance transparency and bolster compliance with notification obligations at the WTO.

“19. We underscore the significance of ongoing WTO negotiations and reiterate our support to achieve an agreement by 2020 on comprehensive and effective disciplines on fisheries subsidies, as WTO Ministers decided at the 11th Ministerial Conference. Many members affirm the need to strengthen international rules on industrial subsidies and welcome ongoing international efforts to improve trade rules affecting agriculture. Many of us highlighted agricultural subsidies and agricultural market access. We also stress that urgent action is necessary regarding the functioning of the dispute settlement system in order to contribute to predictability and security in the multilateral trading system.

“20. We note the ongoing discussions under the Joint Statement Initiatives (JSI) at the WTO, including the JSI on E-Commerce, Investment Facilitation for Development, MSMEs, and Services Domestic Regulation. G20 participants in these initiatives call for significant progress in the lead up to the 12th WTO Ministerial Conference. We note that concerns have been expressed on rule-making by some G20 members who are not part of the JSIs.

“21. We note the process under-way to select the next Director General of the WTO. We look forward to working with all WTO Members towards concluding the selection process by the 7th of November 2020.

“22. The 12th WTO Ministerial Conference represents an important milestone in an inclusive and ambitious process of WTO reform. We will use the additional time available until then to bolster our efforts to work constructively with other WTO Members to achieve meaningful progress in advancing our shared interests, including emerging stronger from theCOVID-19 pandemic and progressing with the necessary reform of the WTO to improve its functioning.” [Emphasis added]

While the G20 Communique lays out a number of areas of potential cooperation on WTO reform — fisheries subsidies, joint statement initiatives, transparency — there are other issues where language is qualified (e.g., industrial subsidies, rules on agriculture, agricultural subsidies, and concern re new rules established through plurilaterals). Thus, the known tensions between major G20 members are reflected in the joint Communique.

Similarly, the Annex 1 on the Riyadh Initiative on the Future of the WTO, TIWG Chair’s Summary, pages 8-13 contains sections on “Common Objectives,” “Foundational Principles,” “Collective Vision to Advance the Necessary WTO Reform,” and “Conclusion”. The Annex demonstrates the continued division within the G20 on many aspects of WTO reform. Consider the section on Foundational Principles:

“FOUNDATIONAL PRINCIPLES

“With respect to the principles that underpin the WTO, the Chair notes that G20 members’ responses referred to the foundational principles embodied in the Marrakesh Agreement and included in the covered agreements, with most members noting that some of these foundational principles are also reflected in the Marrakesh Declaration.

“The Chair notes the following outcomes of the exchange of views on foundational principles:

“• All members agreed to list the following as part of the principles of the WTO:

“o Rule of law

“o Transparency

“o Non-discrimination

“o Inclusiveness

“o Fair competition

“o Market openness

“o Resistance to protectionism

“o Reciprocal and mutually advantageous arrangements, acknowledging that agreements provide for differential and more favorable treatment for developing economies, including special attention to the particular situation of least developed countries

“• Most members stressed that ‘sustainability’ is a principle of the WTO

“• Most members stressed that ‘market-oriented policies’ is a principle of the WTO.

“• Some members stressed that ‘special and differential treatment’ is a principle that is integral to and underpins the WTO and that should be preserved. Many members, highlighting that WTO rules contribute to economic growth and development, expressed the view that S&DT is a tool to facilitate the achievement of WTO objectives and should be applied on the basis of demonstrable needs.

“• Members noted the practice of consensus-based decision making in the WTO, expressly carried over from the GATT in the Marrakesh Agreement. Some members consider this practice to be a principle of the WTO.” Pages 11-12 [Emphasis added].

The qualifications included reflect deep divisions on some issues. For example on whether “market-oriented policies” is a principle of the WTO, China strongly opposes the concept and views discussion of the matter as outside of the WTO’s mandate.

The same presence of divergent views is seen in the Conclusion:

“CONCLUSION

“The Saudi G20 Presidency extends its appreciation to all TIWG representatives for their feedback and engagement in the Riyadh Initiative. The Presidency notes the following outcomes of the Riyadh Initiative:

“• G20 support for the objectives enshrined in the Marrakesh Agreement Establishing the WTO, with most members noting that some of these objectives are also reflected in the Marrakesh Declaration.

“• Affirmation of foundational principles of the multilateral trading system with different views being expressed on various issues.

“• Determination to tackle the necessary reform of the functions of the WTO and to discuss all proposals in this regard.

“• The need for Members to fulfill their notification obligations as a necessary condition for Members to effectively monitor compliance with existing rules.

“• Recognition by most members of the value of pursuing plurilateral negotiations on issues where progress can be achieved and emphasis by some members that new rules be adopted by consensus.

“• Shared sense that the dispute settlement system needs urgent reform, with divergent views on the nature of such reforms.

“The Saudi G20 Presidency sincerely hopes that the Riyadh Initiative will help advance the shared interest of WTO Members in bringing about the necessary reform of the WTO, so it can fulfill its objectives of improving the lives of the world’s citizens and ensuring peaceful, inclusive and sustainable economic development through multilateral cooperation.” Page 13 [Emphasis added].

It is obviously a positive development that the G20 trade and investment ministers have been meeting during the COVID-19 pandemic and working together on various issues including keeping markets open, supporting investment (and more) and that the G20 countries are supportive of WTO reform. So today’s Communique is an important positive for many reasons including for the effort to get some focus on WTO reform at the WTO. However, the deep divisions among even the G20 countries show that the road for reform at the WTO will be long and complicated.

WTO reform — a push by the Secretariat for engagement by the Members; articulation of EU priorities

Terence P. Stewart · September 22, 2020 · WTO reform · China, Deputy Director-General Alan Wm. Wolff, EC Executive Vice-President Valdis Dombrovskis, European Union, G20 trade ministers, United States · No Comments

Background

The WTO has been struggling to restore its relevance in a rapidly changing global market but with limited success due to the challenges facing its negotiating arm. Those challenges are accentuated by the major tensions between three of the largest Members (U.S., EU and China) with the U.S. and EU having fundamental differences on the role of dispute settlement and with the US and EU and Japan having deep concerns about the trade distorting policies of China that are not adequately addressed by current WTO rules. The need for broad reform seems to be recognized by many WTO Members, though priorities for reform vary widely by Member or groups of Members. The WTO is working through its selection process for a new Director-General following the early departure of the last Director-General, Roberto Azevedo. The candidates vying for the Director-General slot have faced many questions on how they would help promote reform and deal with long festering issues. The distrust within the WTO membership generally and between the largest Members in particular resulted in the Members being unable to agree on an acting Director-General, so the WTO is operating without a Director-General at the present time though in a statement today to the G20 Trade Ministers, Deputy Director-General Alan Wm. Wolff, is listed as “Joint Acting Director-General”.

A push by the Secretariat for greater engagement by Members in the reform process

Because the WTO is a member-driven organization, the key to reform is for Members to come forward with proposals, for the membership to discuss proposed reforms, and for Members to look for areas where there are common interests or shared expectations.

The Secretariat can encourage Members to engage. At the present time, Deputy Director-General Wolff (DDG Wolff) has been making numerous statements to different groups encouraging engagement to move the reform process forward and highlighting the role the WTO can play in environmental and development of circular economies.

Specifically, between September 17 and today, September 22, DDG Wolff has given virtual statements to five groups. The first three were on September 17 and were to Business Europe on trade and climate change, to the Economic Times Packaging Virtual Summit (India) on packaging issues in trade including plastics pollution and moving to circular economies, and to the World Knowledge Forum in Korea on trade disputes between major trading powers and calling on all countries to work to improve WTO rules and recognizing that even where there are major differences between Members, there are common interests as well. See DDG Wolff: “Trade policies have a huge potential to support climate action,” https://www.wto.org/english/news_e/news20_e/ddgaw_18sep20_e.htm; DDG Wolff: WTO members addressing implications of plastics pollution, https://www.wto.org/english/news_e/news20_e/ddgaw2_17sep20_e.htm; DDG Wolff: Time for all countries to work to improve the rules of multilateral trade, https://www.wto.org/english/news_e/news20_e/ddgaw_17sep20_e.htm. The conclusion from the statement to the World Knowledge Forum gives a good summary: “As for the WTO, the demands are clear. It is time to consider needed reforms, to bring to life the negotiating forum that the founders of the WTO envisaged, to find a way forward to a single agreed binding dispute settlement system that all can support, and to strengthen the institution more generally. The support of the largest Members along with their trading partners will be necessary to succeed. Crises have in the past opened up new opportunities for making progress in building the world trading system and can do so now again.”

On September 21, DDG Wolff made comments to the Trade Law Center for Southern Africa. DDG Wolff: WTO reform crucial to restoring confidence in the trading system, https://www.wto.org/english/news_e/news20_e/ddgaw_21sep20_e.htm. His statement was entitled, “A WTO fit for the 21st century trade governance”. The following excerpt goes through some of the reform issues that are already being teed up:

“The last major update of the WTO rule book took place during the Uruguay Round. These negotiations were concluded in Marrakesh in April 1994, just as the world was beginning to hear of the internet. The world has changed over these last 25 years in ways that could scarcely have been imagined. Not only has technology revolutionized how we trade but even the main actors in the global economy have changed with new groundbreaking economic and business models.

“Ongoing WTO reform efforts will be crucial to restoring confidence in
the system’s ability to meet the needs of its users and adapt to changing
economic realities. However, the full range of challenges as well as
opportunities that the WTO’s membership faces cannot, and will not, be addressed overnight. More proposals need to be tabled and discussed, on how to update the WTO to enhance its effectiveness and assure that it evolves alongside changes in world trade.

“Trade rules will have to adapt to economic transformations such as the
fourth industrial revolution, characterized as the advent of ‘cyberphysical
systems’ involving entirely new capabilities for people and machines. If they do not, the likely outcome is unilateral action and fragmentation, which means unpredictability and higher costs for business, especially micro, small and medium enterprises (MSMEs). International cooperation can offer a path forward to a global economy where everyone can participate and benefit.

“Currently, WTO members are progressing on multiple fronts. At the multilateral level, they are working to reach an agreement that would limit fisheries subsidies and contribute to the health of our oceans. They are looking at how to liberalize and reduce distortions in agriculture trade.

“At the same time, groups of WTO members are considering potential
future rules on investment facilitation, e-commerce and on domestic
regulations that can unnecessarily obstruct services trade. These ‘joint
statement’ initiatives, as they are called, address issues at the heart of the
21st century world trade. They also represent a quiet revolution in the
way governments negotiate at the WTO. Like-minded members are free
to pursue issues of interest; the initiatives are open to all Members, but
no Member is required to join. As one example, the e-commerce talks,
bring together 82 members, accounting for around 90% of global trade.
Establishing joint rules of the game would facilitate electronic transactions and digital trade and could help manage wider tensions over technology.

“WTO Members must deliver on both the multilateral front and the joint
initiatives as these are vital for the future of the system. For the road
ahead, the WTO’s Twelfth Ministerial Conference, next year in Kazakhstan, will be a key landmark. It must deliver credible agreements and map the way for further reforms.” [Emphasis added]

And then today, September 22, DDG Wolff spoke to the G20 trade ministers urging them to step up engagement on WTO reform. https://www.wto.org/english/news_e/news20_e/igo_22sep20_e.htm. DDG Wolff’s statement is reproduced below:

“Thank you, Chair.

“This is a time of great challenges for the world trading system as well as of great opportunities.

“World trade has fallen by 18% compared to last year.

“Shortfalls in key medical supplies persist, despite icreased production – and increased trade. Preliminary figures indicate that global trade in products such as personal protective equipment, hand sanitizer and ventilators grew by close to 30% in the first half of the year.

“While some trade restrictions have already been rolled back, particularly with respect to foodstuffs, the pandemic is far from over and economic challenges will persist.

“The roll-back of trade restrictions may already be losing momentum.

“Government support needed to fight the economic downturn could end up distorting competitive conditions and fueling future trade tensions.

“However, fresh opportunities also exist.

“The WTO’s Members are well-advanced in the process of selecting a new WTO Director-General.

“Renewed engagement of the WTO’s Members can ensure that the WTO is fully ready to meet the challenges of a changing global economy.

“As the pandemic continues, emergency trade-restrictive measures should be reviewed through the lens of the G20’s criteria that existing measures are, in fact, targeted, proportionate, transparent, and temporary; members should begin to unwind those that are no longer absolutely necessary.

“Existing negotiations to modernize the WTO’s rules to meet the challenges of the global digital economy and to provide for sustainable development should be brought to a successful conclusion.

“The process of systemic reform, called for by the G20 leaders and trade ministers, should begin in earnest with WTO Members deliberating concrete proposals, restoring the WTO to its intended place

“where negotiations are successfully concluded;

“where disputes are settled within a universally accepted structure;

“actively served by a strong, dedicated, professional Secretariat.

“In an era of political and economic stress, the WTO must be made fit for purpose. It must be seen to deliver fairness to all who participate in or are affected by global commerce.

“A robust, sustained and inclusive economic recovery requires open and predictable international trade, supported by a well-functioning world trading system.

“Spurred by the determination expressed by you as trade ministers, informed by the Riyadh Initiative, under a new leader, the WTO can fulfill its promise.”

Will Members Come Forward With Proposals and Work for Reform?

As reviewed in prior posts, there have been many proposals for reform floated by individual Members and there are important initiatives underway either multilaterally (fisheries subsidies) or plurilaterally (Joint Statement Initiatives). The U.S., EU and Japan have been working for several years on proposals dealing with industrial subsidies, state owned enterprises and forced technology transfer. No proposals on these topics have yet been submitted by these Members.

The U.S. and others have presented proposals for improved transparency on notifications. The U.S. has pushed for changes to which Members are entitled to special and differential treatment and has pushed for addressing whether economies that are not market economies can be disciplined within the WTO under the existing rules. The U.S. has also shut down the Appellate Body based on longstanding concerns with deviations by the Appellate Body (AB) from the limited mandate provided the AB by the Dispute Settlement Understanding. The U.S. has also raised concerns about the structure of bound tariffs noting the high rates of many Members with rapid rates of economic development, but the U.S. has not made a specific proposal to address its concerns on this matter as of yet.

Other proposals from other Members have also been made.

In remarks made by the European Commission’s Executive Vice-President Valdis Dombrovskis on September 21 at the informal meeting of EU trade ministers, Mr. Dombrovskis outlined the EC’s objectives for the WTO including reform. The link to Mr. Dombrovskis’ speech is here, https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_20_1720:

“Let me start with the WTO, which is currently selecting its new Director General.

“The discussions today have shown strong agreement amongst ministers that the EU needs a Director General, who is capable of managing a profound reform of the organisation.

“This reform should focus on three main things:

“1. Fixing the dispute settlement system,

“2. Reinitiating global trade negotiations,

“3. Addressing the current challenges of international trade, in particular sustainability and the need for a level-playing field.

“To be credible, the new leader of the WTO:

“1. must enjoy the trust of WTO members and

“2. be able to present balanced views that reflect the diverse nature of the WTO Membership.

“The EU will view the remaining five candidates in this light.”

The three broad categories of reform that the EU supports were discussed at some greater length in EC President von der Leyen’s State of the Union speech earlier this month. The trade elements of the speech were reviewed in an earlier post. See September 18, 2020: Trade elements of EC President von der Leyen’s State of the Union address at the European Parliament plenary on 16 September 2020, https://currentthoughtsontrade.com/2020/09/18/trade-elements-of-ec-president-von-der-leyens-state-of-the-union-address-at-the-european-parliament-plenary-on-16-september-2020/.

There should be a joint statement from the G20 trade ministers later today which presumably will similarly reemphasize the need for moving WTO reform forward.

What isn’t clear is whether the collective understanding of the need for reform will actually result in serious reform efforts in the coming years. The large differences in views of Members, the serious lack of trust among Members, and the apparent lack of an ongoing common vision of the purpose of the WTO are major impediments to forward movement, just as they have been in the last two decades.

Conclusion

All of the candidates to become the next Director-General of the WTO understand the need for major reform to maintain or restore the WTO’s relevance. The WTO Secretariat continues to do its support part to articulate the value and need for reform and to encourage Members to conclude negotiations that are underway and to come forward with concrete proposals for the membership to discuss and consider.

While there are many proposals for reform that have been presented, Members have put proposals forward on a somewhat ad hoc basis and without a more formal process for compiling and considering the proposals. The major economies are at very different positions on many reform agenda items that have been identified, though there is some commonality among at least several of the majors on a few reforms. Other than fisheries subsidies and some of the Joint Statement Initiatives, other reforms seem unlikely to occur in the next several years. If that proves to be correct, the WTO will likely suffer a continued drift towards irrelevance.

Trade elements of EC President von der Leyen’s State of the Union address at the European Parliament Plenary on 16 September 2020

Terence P. Stewart · September 18, 2020 · EC's State of the Union 2020 address, WTO reform · Carbon Border Adjustment Mechanism, China, climate change, digital services taxation, EC President von der Leyen, European Union, Green Deal · No Comments

State of the union speeches in countries are typically a time for optimism with a review of the challenges that are presently being addressed and a host of policy initiatives to take the country in the direction the Executive believes is important. The European Commission’s President von der Leyen presented her State of the Union 2020 Address earlier this week before the European Parliament. The Address lays out the vision the Commission has for the road forward to “building the world we want to live in”.

The starting part of the address deals with COVID-19 and the EU response and actions needed to prevent the same type of challenges in the future. When the address turns to moving Europe forward, the first topic is the efforts to address climate change, focusing on the European Green Deal and various initiatives to make the Green Deal operative and effective. Other areas of focus include digital with attetion to data, technology and infrastructure.

President von der Leyen then turns to the need for collaboration to address global issues such as the pandemic citing both sharing of protective equipment to countries in need and the EU effort to set up fund “research on vaccines, tests and treatments for the whole world.” “Vaccine nationalism puts lives at risk. Vaccine cooperation saves them.”

The EU supports cooperating in international bodies whether the UN, the WTO or the WTO. The EC President recognizes the pressing need to “revitalize and reform the multilateral system” and wants the EU to lead reforms in both the WTO and WHO.

On China, EC President von der Leyen notes the complicated relationship and the need for China to live up to its commitments in areas like climate change. “There is still hard work to do on fair market access for European companies, reciprocity, and overcapacity. We continue to have an unbalanced trade and investment partnership.”

On the topic of trade generally, the EC President had this to say:

“We will continue to believe in open and fair trade across the world. Not as an end in itself – but as a way to deliver prosperity at home and promote our values and standards. More than 600,000 jobs in Europe are tied to trade with Japan. And our recent agreement with Vietnam alone helped secure historic labour rights for millions of workers in the country.

“We will use our diplomatic strength and economic clout to broker agreements that make a difference – such as designating maritime protected areas in the Antarctica. This would be one of the biggest acts of environmental protection in history.

“We will form high ambition coalitions on issues such as digital ethics or fighting deforestation – and develop partnerships with all like-minded partners – from Asian democracies to Australia, Africa, the Americas and anyone else who wants to join.

“We will work for just globalisation. But we cannot take this for granted. We must insist on fairness and a level playing field. And Europe will move forward – alone or with partners that want to join.

“We are for example working on a Carbon Border Adjustment Mechanism.

“Carbon must have its price – because nature cannot pay the price anymore.

“This Carbon Border Adjustment Mechanism should motivate foreign producers and EU importers to reduce their carbon emissions, while ensuring that we level the playing field in a WTO-compatible way.

“The same principle applies to digital taxation. We will spare no effort to reach agreement in the framework of OECD and G20. But let there be no doubt: should an agreement fall short of a fair tax system that provides long-term sustainable revenues, Europe will come forward with a proposal early next year.

“I want Europe to be a global advocate for fairness.” [Emphasis in original]

The full text of President von der Leyen’s Address is embedded below.

State_of_the_Union_Address_by_President_von_der_Leyen_at_the_European_Parliament_Plenary

The State of the Union — WTO Reform Priorities for the EU and Potentially Problematic Priorities

While EC President von der Leyden indicates she wants the EU to lead reform in both the WTO and the WHO, there is no set of agenda items identified as such in the State of the Union. That said, there are many areas addressed within the State of the Union where WTO reforms could be helpful. One can start with keeping markets open for the movement of goods and services during pandemics. Other pandemic response issues are more relevant to possible reforms at the World Health Organization.

The EU has been an active participant in the plurilateral negotiations on digital trade at the WTO and the Address’s focus on digital issues supports the need for completing those negotiations.

Similarly, the central place of addressing climate change and implementing the European Green Deal suggest that the EU would support greater activity in the Trade and Environment Committee as well as its work on the Paris Agreement on emissions reductions. Moreover, the carbon tax issue mentioned in the Address may require WTO negotiations to ensure WTO consistency or result in serious WTO disputes and possible unilateral responses by trading partners.

EC President von der Leyen’s discussion of the EU’s bilateral relationship with China raises issues on “fair market access, reciprocity and overcapacity”. This presumably includes the EU’s efforts with the US and Japan to address industrial subsidies, state-owned enterprises, forced technology transfer and more.

Finally, the digital services tax issue, while potentially being addressed within the OECD and G20 has the potential to result in serious trade consequences with the United States if not resolved to the U.S.’s satisfaction.

Conclusion

The European Union is a critical global player in trade and many other areas. The State of the Union Address by EC President von der Leyen at the European Parliament Plenary given on Wednesday this week lays out a comprehensive set of objectives for Europe, many of which have trade implications.

While the EU has an important role in the WTO, time will tell whether its desire to lead the reform process plays out. While it views itself as having been a constructive player in the Appellate Body impasse, as viewed from the U.S., the EU is one of the largest reasons for the departure of the Appellate Body from its agreed-to mandate. While the EU led a number of Members to create an interim arbitration system, from the U.S. perspective, the interim system attempts to shift arbitration to being a pseudo Appellate Body and is more objectionable in some respects than the now dysfunctional Appellate Body.

With the need for comprehensive reform of the WTO understood by most delegations, constructive leadership by any of the Members is certainly welcome. Hopefully, the EU will be such a leader in 2021.

WTO panel decision in United States – Tariff Measures on Certain Goods from China increases the need for comprehensive WTO reform

Terence P. Stewart · September 16, 2020 · WTO Dispute Settlement, WTO reform · China, Section 301 tariffs, United States · No Comments

On September 15, 2020, the WTO panel considering China’s challenge to certain additional duties on its products imposed by the United States flowing from an investigation under Section 301 of the Trade Act of 1974, as amended, released its report and concluded that the U.S. action was inconsistent with most favored nation (MFN) obligations under GATT 1994 Art. I and U.S. tariff bindings under GATT 1994 Art. II(a) and (b) and was not justified under GATT 1994 Art. XX(a) as action to protect public morals.

The U.S. Trade Representative issued a press release which is copied below.

“WTO Report on US Action Against China Shows Necessity for Reform

“09/15/2020

“Washington, DC – U.S. Trade Representative (USTR) Robert Lighthizer today criticized a World Trade Organization (WTO) panel report that stated that actions taken by the U.S. to combat China’s widespread and damaging theft of American technology and intellectual property were inconsistent with WTO rules.

“’This panel report confirms what the Trump Administration has been saying for four years: The WTO is completely inadequate to stop China’s harmful technology practices,’ said Ambassador Lighthizer. ‘Although the panel did not dispute the extensive evidence submitted by the United States of intellectual property theft by China, its decision shows that the WTO provides no remedy for such misconduct. The United States must be allowed to defend itself against unfair trade practices, and the Trump Administration will not let China use the WTO to take advantage of American workers, businesses, farmers, and ranchers. It is important to note that this report has no effect on the historic Phase One Agreement between the United States and China, which includes new, enforceable commitments by China to prevent the theft of American technology.’

“USTR issued a Section 301 report in 2018 documenting how China had engaged in unfair forced technology transfer practices, such as exploiting its foreign ownership and administrative requirements to extort U.S. intellectual property rights or supporting commercial cyber theft from U.S. entities. The report cited hundreds of sources and thousands of pieces of evidence, including reports from governments, firms, business associations, think tanks and researchers, and others. These unfair trade practices and other actions by China have cost U.S. innovators, workers, and businesses
billions of dollars every year.

“The actions USTR took in response to these practices led earlier this year to the historic Economic and Trade Agreement Between the United States of America and the People’s Republic of China (the ‘Phase One’ Agreement).

“Background: China initiated this WTO dispute – United States-Tariff Measures on Certain Goods from China (DS543) – in April 2018, and subsequently amended its request for consultations. In January 2019, the WTO established a panel at China’s request. The dispute covers two of the trade actions in the Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: the $34 billion trade action announced in June 2018, and the $200 billion trade action announced in September 2018.”

The Panel Report, WT/DS543/R

The panel report is relatively short (56 pages plus table of contents and list of disputes cited). The panel rejected two preliminary U.S. arguments and then addressed the core issues.

The U.S. had argued that the U.S. and China were engaged in negotiations and were handling the matter outside of the WTO and had reached a Phase I Agreement all of which meant the panel should not issue a report. That argument was rejected as China’s position was that no mutually satisfactory solution had been reached. Similarly, the U.S. effort to restrict the Chinese claim on the second action by the U.S. to 10% on $200 billion of trade and not the later increase to 25% was rejected.

On the two main challenges by China, that the tariffs imposed were inconsistent with most favored nation treatment under GATT Art. I and that the additional tariffs violated U.S. tariff bindings, the United States did not present argument. Thus, the panel reviewed whether China presented a prima facie case of violation and, when it so concluded then found U.S. actions to be inconsistent with those provisions.

The United States argument was limited to its right to deviate from other WTO obligations because of GATT 1994 Art. XX(a), actions taken necessary to protect public morals.

As reviewed in the panel report (para. 7.100), “The United States asserts that any inconsistency of the measures at issue with provisions of the GATT 1994 is justified as necessary to protect US public morals pursuant to Article XX(a) of the GATT 1994. This is because, according to the United States, China’s acts, policies, and practices addressed in the relevant Section 301 Report amount to ‘state-sanctioned theft and misappropriation of U.S. technology, intellectual property, and commercial secrets’182 which violates
the public morals prevailing in the United States.183″ [footnotes omitted]

“7.113. The United States asserts that the measures at issue protect public morals within the meaning of Article XX(a) because they have been adopted to ‘”‘obtain the elimination” of conduct that violates U.S. standards of rights and wrong, namely China’s unfair trade acts, policies, and practices’.201 In support of its argument, the United States has submitted evidence of several
domestic instruments that reflect prevailing US ‘standards of right and wrong’ and outlaw some (although not all) of the Chinese practices documented in the Section 301 Report.202 The United States contends that acts, policies, and practices of China referred to in the Section 301 Report violate US ‘standards of right and wrong’, in particular the prohibition of theft, extortion, cyber-enabled theft and cyber-hacking, economic espionage and the misappropriation of trade secrets, anti-competitive behaviour, as well as the regulation of governmental takings of property (hereafter referred to as ‘the public morals as invoked by the United States’).” [footnotes omitted]

The panel generally agreed with the United States that public morals objectives could include those identified by the United States and were not negated because there were economic effects as well. The U.S. argument was as follows:

“7.3.2.2.3 The public morals objective invoked by the United States

“7.127. The United States asserts that China’s actions documented in the Section 301 Report violate prevailing US ‘standards of right and wrong’ as reflected in US domestic legislation.226 The United States has submitted as evidence several domestic instruments that reflect prevailing US ‘standards of right and wrong’ and that outlaw some (although not all) of the Chinese practices documented in the Section 301 Report.227 Specifically, the United States refers to:

“• state and federal laws, under which the act of “theft” is universally deemed a criminal offence228;

“• US laws that generally prohibit extortion229;

“• US laws that criminalize cyber-enabled theft and cyber-hacking230;

“• US laws that criminalize economic espionage and the misappropriation of trade secrets (including though acts of ‘bribery’ or ‘extortion’)231;

“• US laws against anti-competitive behaviour (in particular the prohibition and criminalization of monopolization)232, which reflect ‘fundamental concepts of fair competition and fair play’233, and the breach of which the United States views as ‘a threat to the ‘preservation of our democratic political and social institutions”234;

“• US laws on contracts and torts235;

“• US laws on patents236; and

“• civil and criminal laws on, and governmental takings, of property.237

“7.128. The United States explains that the economic concerns underlying some of these legal instruments are related to notions of fair competition and fair play238, and that the United States does not view unfair competitive practices merely as a detriment to business and innovation, but
also as a threat to the preservation of its democratic political and social institutions.239 The United States also explains that it ‘imposes constraints on behavior based on national concepts of right and wrong to ensure market-oriented outcomes’.240 According to the United States, China
‘uses coercion and subterfuge to steal or otherwise improperly acquire intellectual property, trade secrets, technology, and confidential business information from U.S companies with the aim of advantaging Chinese companies and achieving China’s industrial policy goals.’241 The United States, considers that these acts, policies, and practices relating to intellectual property and technology transfer violate these US standards of right and wrong and thus implicate US public morals within the meaning of Article XX(a).242″ [footnotes omitted]

In the end the panel faulted the United States for not being able to demonstrate that the actions taken were necessary to achieve its public morals objective, looking at the number of products where there hadn’t been a showing that the products benefited from the Chinese government actions or where exclusions could be made for products where such actions were present but where there were economic reasons to exclude the product. The panel looked at List 1 and List 2 separately. The panel’s characterization of the U.S. position on each list is useful in understanding U.S. concerns.

“7.163. The United States argues that the additional duties at issue are “necessary” to protect public morals because they ‘play a necessary role toward the goal of eliminating China’s unfair trade acts, policies, and practices by raising the cost of such practices and reducing China’s incentive to continue engaging in such conduct going forward’.316 According to the United States, ‘it is reasonable to conclude that China will continue to pursue its unfair trade acts, policies, and practices while it is advantageous to China to do so, for example, until the economic costs of doing so begin to approach or outweigh the economic benefits’317, and for that reason, ‘to protect U.S. interests in moral (right or wrong) economic behaviour, it is necessary for the United States to adopt measures that are capable of changing China’s economic cost-benefit analysis’.318 The United States also asserts that the measures are necessary to achieve the public morals objective as invoked by the United States because it was only after their adoption that China agreed to enter into negotiations with the United States to address the concerns documented in the Section 301 Report.319 Finally, the United States asserts that so long as a WTO Member can establish that a measure that aims to influence the policies or practices of another Member is necessary to protect public morals, that measure can be justified under Article XX(a).320″ [footnotes omitted]

“7.216. The United States adopted and implemented the additional duties on List 2 products through the Notice of 21 September 2018. This Notice explains the rationale of the imposition of additional duties on List 2 products as follows:

“China’s unfair acts, policies, and practices include not just its specific technology transfer and IP polices referenced in the notice of initiation in the investigation, but also China’s subsequent defensive actions taken to maintain those policies. China has decided to impose approximately $50 billion in tariffs on U.S. goods, with the goal of encouraging the United States to drop its efforts to obtain the elimination of China’s unfair policies. Thus, instead of addressing the underlying problems, China has increased tariffs to further protect the unreasonable acts, policies, and practices identified in the investigation, resulting in increased harm to the U.S. economy.

“[…]

“The judgment during the period of investigation, based on then-available information, was that a $50 billion action would be effective in obtaining the elimination of China’s policies.

“China’s response, however, has shown that the current action no longer is appropriate. China has made clear – both in public statements and in government-to-government communications – that it will not change its policies in response to the current Section 301 action. Indeed, China denies that it has any problems with respect to its policies involving technology transfer and intellectual property.445” [footnotes omitted]

“7.218. The United States explains that ‘List 2 measures apply to a broader class of products than those found to directly benefit from the unfair trade acts, policies, and practices documented in the Section 301 Report’.446 The United States asserts that it imposed additional duties on List 2 products ‘after China “made clear – both in public statements and in government-to-government communications – that it [would] not change its policies’ and instead ‘responded … by increasing duties on U.S. exports to China”‘.447 According to the United States, the imposition of additional duties on List 2 products is ‘derivative’ of the imposition of additional duties on List 1 products.448 For that reason, the United States argues that the imposition of additional duties on List 2 products is ‘also necessary to protect public morals in part because to fail to respond to China’s economic retaliation would demonstrate that the United States Government is willing to acquiesce in theft and forced transfer of U.S. technology by one of its largest trading partners’.449” [footnotes omitted]

Reaction to the Panel Report

Much of the panel report is straight forward and unobjectionable. However, on the question of the GATT 1994 Art. XX(a) public morals provision, the analysis of core issues is too wooden and ignores the realities of government operations. The United States has worked for years to get China to address the myriad issues laid out in the 301 investigation which the panel accepts as important public morals issues for the United States. The effect of the many practices has been of major concern to the Untied States, to its businesses and workers for more than a decade. Duties were imposed exactly because prior efforts to get China to address the serious problems were never fruitful, and following the 301 investigation, China opted not to negotiate with the United States. The List One products were largely items known to benefit from one or more of the programs and the intent was to apply the tariffs until China would negotiate and resolve the matters. Thus, on the list one necessity issue, one can only conclude that the panel’s construction was too narrow. Similarly, finding fault with U.S. action because some products were excluded that may have benefited from the programs of concern ignores the political realities of applying pressure without imposing unintended consequences.

Conclusion

The U.S.-China trade dispute is obviously important bilaterally and multilaterally. While the China challenge to the U.S. action is understandable from their perspective, what is clear is that the panel report will make reform at the WTO more difficult and will likely result in the U.S. filing an appeal so that the dispute is not concluded in the foreseeable future.

On reform, China has taken the position on the question of the definition of “public body” that the issue is not subject to negotiations because of an Appellate Body report favorable to China. Similarly, despite the array of problematic practices of China that are not presently subject to WTO rules, the panel report will likely result in China refusing to negotiate on the underlying issues in an effort to kick the can down the road before the myriad Chinese policies that are inconsistent with market principles are ever brought under WTO rules.

At the same time, the panel report supports the views of the current U.S. Administration that the WTO doesn’t address many of China’s practices and rather restricts market-economy countries from addressing distortions not covered by existing rules to get conditions of fair trade established or restored. Thus, one should expect continued reluctance on the part of the U.S. to permit restoration of the Appellate Body with an expanded list of reform needs to cover the expanded list of inadequacies of the existing WTO rule book.

On appeal of the panel report, there is no reason for the U.S. not to file an appeal and there are likely interesting issues for an eventual appeal on the interpretation of GATT 1994 Art. XX(a). The U.S. did not pursue a case on the various retaliations undertaken by China — none of which would presumably pass WTO muster as they were taken without WTO authorization. As China has already taken and is maintaining retaliation, the two countries are presumably in the posture they intend to maintain until there is a broader resolution of their trade differences. While the U.S. may change its posture on the dispute if there is a different Administration, I would not expect a change in direction under the current Administration.

The race to become the next WTO Director-General – where the candidates stand on important issues: convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 2, comments by the candidates

Terence P. Stewart · August 19, 2020 · industrial subsidies, non-market economy, State Ownership and State Investment, WTO reform · Amb. Tudor Ulianovschi, China, Dr. Jesus Seade Kuri, Dr. Ngozi Okonjo-Iweala, Egypt, European Union, H.E. Amina C. Mohamed, H.E. Mohammad Moziad Al-Tuwaijri, H.E. Yoo Myung-hee, Kenya, Mexico, Moldova, Mr. Adbed-Hamid Mamdouh, Nigeria, Republic of Korea, Saudi Arabia, The Rt Hon Dr. Liam Fox MP, United Kingdom, United States · No Comments

[Updated on August 27 to incorporate comments by Amb. Tudor Ulianovschi of Moldova at a WITA webinar held on August 26.]

In a post on August 17, I provided background on a group of issues that are important to various Members though opposed by some that for shorthand will simply be referred to issues surrounding WTO rules’ applicability to economies operating differently than market economies. See August 17, 2020, The race to become the next WTO Director-General – where the candidates stand on important issues: convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, background on issues, https://currentthoughtsontrade.com/2020/08/17/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-address-dist/.

What follows is a review by candidate of his/her prepared statement to the General Council (Juy 15-17, 2020), my notes from the press conference for each candidate which followed immediately after his or her meeting with the General Council and my notes on each candidate’s webinar organized by the Washington International Trade Association (WITA) and generally also by the Asia Society Policy Institute (ASPI).

Dr. Jesus Seade Kuri (Mexico)

Dr. Seade did not in his prepared comments address directly any of the issues surrounding the question of compatibility of different economic systems with the WTO rules, or whether changes in rules to address some of the distortions perceived to be caused by economic systems which vary widely from market-economy structures are needed. Dr. Seade did include at the end of his prepared statement an indication of neutrality to all Members.

“All along my career I have worked with Ministers and legislators, often Heads of State. I present myself to you with my fullest energy, passion and experience, at a difficult time for the WTO. My commitment is to achieve with you the reform and restoration of a WTO back at the center of global governance for the benefit of world economic growth. My solemn commitment to you is to be an effective DG and interlocutor, close to all members north and south, east and west, and indeed fully equidistant from you all.”

During the press conference held after his meeting on July 15 with the General Counsel, Dr. Seade was not asked a question dealing with any of the issues surrounding different economic systems.

WITA had a webinar with Dr. Seade on July 7. https://www.wita.org/event-videos/conversation-with-wto-dg-candidate-seade/. During the webinar, Dr. Seade was asked several questions that dealt with U.S.-China tensions. My notes on Dr. Seade’s responses (and on at least one of the questions) follow.

The animosity between the United States and China in a way is understandable. The hardest part of negotiations during the Uruguay Round for GATT Contracting Parties to conclude was not the agriculture negotiations or the negotiations on intellectual property but rather the negotiations on antidumping. To simplify, the antidumping negotiations pitted the U.S. and EU against the Asian tigers who were excessively competitive and creating problems in world markets. But the Asian tigers were much smaller in size than China is today and were much more market oriented than China is today. So the chasm in the system was much smaller than what exists today So it is not surprising that there is a big challenge today. But challenges are there to be met and solutions found. Dr. Seade is convinced that China will want to respond to avoid chaos in the system. Once they view the U.S. as serious about engaging, China will want to know what they need to do to get the WTO functioning again. The same question should apply to the U.S. and the EU. So we should be able to save the system.

Question on the U.S.-China dynamic: USTR Lighthizer has indicated he has three criteria for next DG – he or she must support a robust reform agenda; he or she must acknowledge that the current system doesn’t adequately deal with China’s economy and state trading practices; he or she can’t have a “wiff” of anti-Americanism. China may have a different set of priorities. How do you get US and China to do business in the WTO?

Dr. Seade response: on the US-China conflict, how do you handle China? One way is through dispute settlement. To date there have been 44 cases brought by WTO Members against China. This is a good way to address problems a Member has with another Member, and it has worked. We have to resolve the problems with the dispute settlement system and make it work better. At the same time, there are initiatives that have been begun by the US (e.g., EU, Japan and US) on industrial subsidies. Dr. Seade believes that it is really for US to work out with China how to incorporate more disciplines on industrial subsidies or other issues. This will likely require the U.S. and others to add items of interest to China to make negotiations more acceptable to China. While China is a tough negotiator, China will not risk bringing down the WTO. In Dr. Seade’s view, the most important thing China has done in last fifty years other than the start of the reform process back in 1978 was joining the WTO. So we need to amend the dispute settlement system which would be a good starting point to helping address existing problems. Dr. Seade agrees with the U.S. that there have not been real negotiations on most agreement areas in the last 25 years. As China was not part of WTO in the 1990s, there can be little question that rules need to be updated both to reflect changing trade realities and to incorporate China in the process and resulting rules.

Dr. Ngozi Okonjo-Iweala (Nigeria)

Dr. Okonjo-Iweala in her prepared statement reflected that Members have differenting views on “new or enhanced rules” identifying state-owned enterprises (SOEs) but by implication including industrial subsidies.

“Members’ views differ on a number of fundamental issues, such as special and differential treatment or the need for the WTO to tackle new issues and develop new or enhanced rules to deal with SOEs and agricultural subsidies, for example. Trade tensions among the membership have flared up, threatening the fundamental architecture of the MTS. With all these, the WTO, unfortunately, is now perceived by some as an inefficient organization that has failed to keep abreast of developments in the global economy.”

Her prepared statement goes through a range of issues that need to be addressed by the WTO but does not include in that list any of the issues flowing from different economic systems. Dr. Okonjo-Iweala does link being able to renew the WTO to getting Members to recall core objectives and principles. The objectives and principles to many would be understood to require updating rules so that different economic systems are subject to effective rules to eliminate or minimize distortions.

“Renewing and improving the organization will require recalling the core objectives and principles on which the MTS was built – the value of open trade, competition and non-discrimination, security and predictability of market access, and transparency. These principles have contributed to economic growth and development and will continue to do so if Members renew their commitment to them.”

During the press conference on July 15th after Dr. Okonjo-Iweala had met with the General Council, she was asked one question about what she would say to the U.S. about staying in the WTO. The question doesn’t directly address different economic systems, but concerns about U.S. staying in the WTO are generally understood to reflect U.S. problems with many aspects of the WTO including rules which do not effectively address distortions created by non-market economies. My notes on Dr. Okonjo-Iweala’s answer to the question are provided below.

On the question of why the U.S. should stay in the WTO, Dr. Okonjo-Iweala indicated she would communicate to the U.S. that the WTO delivers for all Members. The GATT and WTO have provided shared prosperity which has lifted millions of people out of poverty. Where the trading system is not working, Members need to fix the problems. Peace, security and stability are needed now just as they have been over the last decades. These are what the WTO rules-based system provides. If we didn’t have the WTO, we would need to invent it.

WITA had a webinar with Dr. Ngozi Okonjo-Iweala on July 21. https://www.wita.org/event-videos/conversation-with-wto-dg-candidate-dr-ngozi-okonjo-iweala/. During the webinar, Dr. Okonjo-Iweala was asked a number of questions that resulted in answers that touched on tension between the U.S. and China, industrial subsidies and more. My notes on Dr. Okonjo-Iweala’s responses and to some of the questions follows:

Q: On the important issue of building trust between Members, there are major differences between the U.S. and China, including (for the U.S.) whether existing WTO rules adequately discipline Chinese policies and (for China) whether US is abiding by the rules. What do you see to be the main challenges to building trust among Members to permit a reform agenda to move forward?

A: Dr. Okonjo-Iweala noted that building trust between the Members is critical. When developed countries bring an agenda item to the WTO, developing countries may view the issue as not in their interest (and vice versa) because of a lack of trust. On the conflicts between the U.S. and China, we need to find areas of common interest for the two Members. We are used to looking at what are the differences between the Members, but we should be looking for common interests among Members. If we can use those common interests to accomplish incremental progress, that will help build trust.. You build trust negotiation by negotiation (using the issue of special and differential treatment as example). If we can solve any problem, it helps build trust. Another way to build trust between developed and developing Members is to conclude the fisheries subsidies negotiations taking into account the needs of individual Members. If the WTO Members can wrap up those negotiations, the success will start to build trust.

Q: On resetting of tariff commitments (comment from USTR Lighthizer as a problem within the WTO based on changing economic development of many countries), would this be in the best interest of the system?

A: This is a critical question and issue. Renegotiating any agreement would require consensus building that would be very difficult to achieve. That would certainly be true on bound tariffs. The balance of rights and obligations raised by the United States flows from the concerns about state-led economies and state-owned enterprises and whether such economies belong in the system. Dr. Okonjo-Iweala stated that the WTO is not there to comment on the economy of any Member. In her view, the key question is what disciplines does the WTO have around any issue that arises. Are the disciplines sufficient to address the imbalances in rights and obligations that may arise? We need to start there. What are the fundamental issues — state-owned enterprises (SOEs), public body. Can we come to agreement on the meaning of the term public body? Can we tighten subsidy disciplines that already exist or can we negotiate new subsidy or other disciplines to address the concerns that arise from these types of economies? That is the approach all Members should be pursuing.

Q: On industrial subsidies, China has signaled that they will oppose tightening disciplines. The U.S., EU and Japan have been working on a proposal and discussing with some Members. How can the Director-General help the membership navigate these issues?

A: If Dr. Okonjo-Iweala becomes the next Director-General, she would encourage that proposals from the U.S., EU and Japan be tabled so all Members can see what they are and how acceptable they are to other Members (including China). Let’s start to work with an actual proposal. Sometimes countries are not as far away as one might think. Members need to work on a specific proposal and see what happens.

Mr. Abdel-Hamid Mamdouh (Egypt)

Mr. Mamdouh in his prepared statement to the General Council on July 15 made only one reference to the issues pertaining to differences in economic systems when he acknowledged that addressing industrial subsidies should be a priority.

“Reviving the built-in agenda of agriculture and services must be a priority because WTO Members agreed on this, and it has not happened. Trade distorting subsidies, both agricultural and industrial, will also be a priority.”

During Mr. Mamdouh’s press conference on July 15 after his meeting with the General Council, Mr. Mamdouh was asked one question about the U.S.-China conflicts. My notes on his response to the question are provided below.

A question was asked on what should be the role of the US and China in the new WTO. Mr. Mamdouh responded that the role of these two Members is to engage in the WTO. Start from the point that bilateral disputes should be resolved in the WTO. Since we all believe in the multilateral process, Members must keep in mind that bilateral disputes and solutions have effects on other Members. Moreover, bilateral solutions are less likely to be effective and are likely to be short lived.

WITA had a webinar with Mr. Mamdouh on June 23. https://www.wita.org/event-videos/conversation-candidate-hamid-mamdouh/. During the webinar, Mr. Mamdouh was asked various questions that dealt with the U.S.-China conflicts, need for better rules on industrial subsidies, state-owned enterprises and more. My notes on Mr. Mamdouh’s response and to some of the questions follows.

Q: Why are you well suited to deal with the deep and potentially ruinous conflicts between US, China, EU? How would you get these big powers to do business with each other?

A: Mr. Mamdouh responded that this issue is the first frontier for a new Director-General. The key is to have the right attitude toward the conversation (less political). The types of problems that Members face deal with noncompliance and with inadequacy of rules. Both need to be handled. The issues must be addressed in an intellectually honest and politically courageous way if there is to be progress. In the past, reform occurred at the GATT when there was a perceived threat to the survival of the system. Mr. Mamdouh believes that the WTO is facing such a threat now. Do WTO Members have a common purpose? Do Members need a WTO? If the answer to the latter question is no, the conversation among Members has nowhere to go. It is in everybody’s interest to have the answer to the question be “yes”. For progress, the Director-General needs to bring the players to the table to identify problems with the current system. The system needs more transparency. For progress, it is important to keep the conversation at the level of looking at the contract and whether the contract adequately addresses the problems identified. If the contract is not adequate to the current needs, then WTO Members must modify the contract.

Q: is the near death experience the WTO is experiencing now an opportunity to move to a meaningful reform agenda?

A: Mr. Mamdouh responded that yes the current crisis can lead to a meaningful reform agenda, if there is the political will of the Members. But political will can only be generated if there is a common purpose.

The WTO needs to address issues of interest to Members, including those raised by the US (e.g., e-commerce, SOEs, forced technology transfer). Increasingly, the WTO is facing complex issues that go beyond simple trade liberalization but also deal with regulatory objectives. In these complex areas, such as e-commerce, the WTO Members need to find ways to accomplish differing regulatory objectives in a least trade restrictive manner. That can only be accomplished if there is a thorough discussion of the regulatory needs and development of factual information on possible trade options that can be taken back to capitals for review and for negotiation. Unfortunately, the deliberative function has nearly died at the WTO. To address the increasingly complex issues of importance to Members, the WTO needs to restore the deliberative function.

Amb. Tudor Ulianovschi (Moldova)

Amb. Ulianovschi’s prepared statement that he provided to the General Council on July 16 doesn’t contain direct reference to any of the issues dealing with different economic systems. Amb. Ulianovschi does indirectly reference the need to address other important issues through negotiations.

“In terms of immediate priorities for the future Director General of the WTO, the following should be considered (including in the preparation process for MC12): * * *

“3. Facilitating dialogue with Members regarding on-going negotiations on the remaining and other important issues.”

During the July 16th press conference following Amb. Ulianovschi’s General Council meeting, Amb. Ulianovschi was asked a question about U.S.-China conflict and how he, as Director-General, would be able to reduce tensions. My notes on his response to the question are provided below.

On the question of how he would use the role of Director-General to ease tensions between U.S. and China, Mr. Ulianovschi responded that this topic had been discussed with Members during his meeting with the General Council. In his view, the role of the Director-General is to be an honest broker between WTO Members. The Director-General must be able to listen to concerns with a view to using his offices to engage Members involved in a dialogue process. At the same time, the Director-General is not there to impose a solution but to listen and raise awareness of the impact of actions on the larger organization and to mitigate harm to others. The next Director-General needs to engage in talks both in Geneva and in capitals and see that any outreach is transparent and inclusive.

WITA held a webinar with Amb. Tudor Ulianovschi on August 26, 2020, https://www.wita.org/event-videos/conversation-with-tudor-ulianovschi/. During the webinar, Amb. Ulianovschi was asked several questions where answers dealt with some aspect of the U.S.-China conflict, differences in economic system, need for improved rules, etc. My notes on the questions and responses from Amb. Ulianovschi follow.

Q: How important is it to have a reform agenda, and how can you convince the major Members to agree on a common agenda?

A: Amb. Ulianovschi stated that reform is absolutely necessary. In his view, cosmetic reform is not sufficient, a fact made clear by major Members. Amb. Ulianovschi believes that political experience and dialogue by the Director-General will be key to get those who have put forward proposals to get into a discussion that is inclusive and transparent. There are a large number of issues that are affecting the environment at the WTO. For example, the current situation between the U.S. and China is affecting the system.

Q: US-China relations and how it affects the WTO. Amb. Lighthizer says he is looking for a Director-General who recognizes that the current system doesn’t address Chinese trade practices and that changes need to be made. Do you agree? There has been some work done by the U.S., EU and Japan on industrial subsidies and other topics. Would you support improving industrial subsidies?

A: Amb. Ulianovschi believes that the topic has to be of priority for the next Director-General. The Director-General can provide his/her good offices to the U.S. and China to take up any issue, but such discussions must be consensual. Based on Amb. Ulianovschi’s conversations with the broader membership, he knows that there is interest by many on the spillover effects on other economies from the US-China conflict. Having said that, Amb. Ulianovschi reiterated the need for the organization to have a Director-General with political experience not to politicize the organization but to reach out to the decision makers and raise awareness of the concerns of the larger membership and encourage the two Members to sit down and discuss issues they consider appropriate. On industrial subsidies and other issues, we need to have more indepth discussions at the WTO to have a better understanding of the issues, coverage of the current rules and the existing situation. As a member driven organization, the incoming Director-General will have to see whether the membership is willing to move to more discipline on industrial subsidies. Amb. Ulianovschi also believes that a review of transparency and notifications could be useful. An open, sincere dialogue based on timely and full information would lead to a better understanding of the issues of concern and then lead to a better decision making process to address the issues.

H.E. Yoo Myung-hee (Republic of Korea)

Minister Yoo included a general reference in her July 16 prepared statement to the General Council to “sensitive” proposals for reform which presumably include the U.S. proposal on non-market economies and the efforts by the European Union, Japan and United States to tighten disciplines on industrial subsidies.

“I am well aware of the proposals that Members have put forward on WTO reform. I also know how sensitive these issues can be to individual Members. A high degree of trust among Members must be the starting point in exploring cooperative solutions.”

Minister Yoo was not asked a question during her press conference that dealt with different economic systems or distortions flowing therefrom.

WITA had a webinar with Minister Yoo on August 11. https://www.wita.org/event-videos/candidate-h-e-yoo-myung-hee/. Minister Yoo was asked some questions on how she would address the U.S.-China conflicts and the U.S. view that the current WTO rules don’t adequately address the market distortions caused by the Chinese economic model. Below I provide my notes on the questions and Minister Yoo’s responses.

Q: In prepared statement you mention you can serve as a bridge between US and China. Please elaborate. Second, Amb. Lighthizer is looking for a Director-General who recognizes that current rules don’t adequately discipline China. Do you agree there is a problem in terms of adequacy of WTO rules for China’s policies?

A: On the first issue of serving as a bridge, Minister Yoo believes that the WTO can provide a good place for US-China issues to be addressed if the negotiating function is working. In her view, part of the problem which has led to actions outside of the WTO has been the lack of progress on negotiations. Thus, Minister Yoo believes WTO Members need to revitalize the negotiating function, so Members will use the WTO to ensure adequacy of rules in an evolving world. Minister Yoo believes the next Director-General needs to engage in dialogue with the U.S. and China to find and understand the real issues between them. Minister Yoo reviewed that she has done negotiations with both the United States and China. She believes that she can use that experience to engage in dialogue with each country and find commonalities between them among the real issues. By focusing on commonalities, Minister Yoo believes that one can find a path forward to achieve a negotiated success, even if small, and build trust. After finding small successes, the Members then move forward to address the more challenging issues.

On the second question relating to Amb. Lighthizer’s concern that current rules are not sufficient to discipline China’s practices, Minister Yoo believes one needs to look at the rule book. In her view, all policies adopted by governments can have spillover effects on trade. If policies do have such spillover effects and are not covered by existing WTO rules, one needs to evaluate whether the policies are consistent with WTO principles (fair competition, nondiscrimination, etc.). If a policy is not consistent with WTO principles and has spillover effects on trade, one must determine if current rules can be used to address the policy. If not, then the WTO needs to look at whether modifications to existing rules or the addition of new rules are needed. Minister Yoo believes Members will need to be willing to engage in this type of process.

H.E. Amina C. Mohamed (Kenya)

Like other candidates, Minister Mohamed didn’t directly address the issue of different economic models reflecting the conflicting positions of some major Members. Rather, Minister Mohamed acknowledged that there were different reform priorities for different Members and that Members needed to get past the challenges in current negotiating approaches. The following four paragraphs from Minister Mohamed’s prepared statement to the General Council on July 16 provides some general comments on the road forward which can be viewed as applicable to differing economic models and many other contentious issues.

“12. You do not all share the same reform priorities. This makes it essential to work together for convergence around elements that all can support. We need to break the cycle of despair and enter into a new phase of hope and realism.

“13. Renewal has to start with facing up to the defects that have weakened the system in recent years: the inability to update rules to reflect the changing realities of how trade is conducted; the sterility of ideological standoffs; the retreat into defensiveness; and the sense of the benefits of trade not being equitably shared.

“14. The WTO has to engage again in good faith negotiations, and this means openness to change and to new ideas, within a culture of inclusiveness and transparency.

’15. Renewal should also build upon the WTO’s core values and achievements. Trade has been transformational. It has helped to lift close to 1 billion people out of poverty and facilitated the attainment of higher living standards in countries at all levels of development. These successes were possible because Members did not see trade as a zero-sum game. They understood that trade-offs were needed to produce outcomes. All Members should contribute to trade opening and facilitation efforts, especially those most in a position to do so.”

During Minister Mohamed’s press conference on July 16 after her meeting with the General Council, she received two general questions about how she would work with major players to resolve trade tensions. Below is my summary of the questions asked and her response.

Q: If selected as the next Director-Generaly, will you be more engaged in resolving trade tensions between major players? If yes, what tactics would you use?

A: Minister Mohamed reviewed the types of powers that a Director-General has to work with Members. For example, the Director-General has engagement powers and can encourage members to consult, to use the good offices of the Director-General. So while the Director-General has only limited powers, those powers ca be used effectively by a Director-General to help Members to use the WTO system to resolve differences.

When asked what her approach would be to deal with trade tensions between US and China, Minister Mohamed stated that she would encourage all members to resolve their trade differences within the WTO rules.

WITA had a webinar with H.E. Mohamed on August 6. https://www.wita.org/event-videos/ambassador-amina-mohamed/. During the webinar, Minister Mohamed addressed briefly the rise of China as a major trading nation and was asked about whether current WTO rules adequately address distortions that flow from China’s policies. My notes from Minister Mohamed’s comments follow.

Minister Mohamed stated that since the WTO was set up in 1995, new and powerful players have emerged onto the trade scene, in particular China. The resulting tensions with the United States have fed the dysfunction within the WTO. Minister Mohamed believes that to address the tensions, the WTO needs to pursue reform. However, governments don’t share the same reform priorities. The WTO needs to identify issues all can support if reform is to move forward.

Q: Amb. Lighthizer has raised his concern that the current WTO rules are not capable of disciplining conduct of non-market economies, particularly China. Do you agree? How would you go about finding common ground?

A: Minister Mohamed’s response was that one needs to start by looking at the existing rule book. The rule book is outdated in some cases. Moreover, some rules are weak and are being circumvented. If you have candid discussions with WTO Members, you will find the problems are with the adequacy of the rules. If the rules are inadequate, WTO Members need to address them to achieve modifications or new rules. For example, the U.S.-EU-Japan effort on industrial subsidies is potentially important. If Minister Mohamed becomes the next Director-General she would urge the U.S., EU and Japan to table their proposal, so all WTO Members can discuss what are being raised as the real issues. It is important to understand what conduct is driving up the tension between Members.

H.E. Mohammad Al-Tuwaijri (Saudi Arabia)

Minister Al-Tuwaijri was the first candidate the General Council met with on July 17. In his prepared statement, Minister Al-Tuwaijri did not directly address the issue of different economic systems and the potential distortions created by non-market economies. Rather he indicated that any negotiating agenda would work only where all Members view the agenda as including items of interest to them. Applied to different economic systems, this would suggest that for negotiations to occur on the topic it would have to be part of a larger package of issues of interest to those Members (like China) who would potentially perceive themselves the target of the industrial subsidies issue or the differing economic systems issue.

“Concerning working together through negotiations, I believe that Members will participate in negotiations when they are convinced that the agenda includes an incentive for them to participate. Therefore, in order to have a successful multilateral negotiation, the agenda needs to be balanced – it needs to include something for everyone.”

At the press conference after his meeting with the General Council, Minister Al-Tuwaijri was not asked any questions dealing with the issue of differing economic systems or on industrial subsidies.

WITA had a webinar with H.E. Al-Tuwaijri on August 5. https://www.wita.org/event-videos/director-general-candidate-he-mohammed-al-tuwaijri/. During the webinar, Minister Al-Tuwaijri was asked several questions dealing with the relationship between some of the major trading Members (U.S., China, EU) and specifically whether he supported negotiations on industrial subsidies to address U.S. concerns that existing rules don’t discipline the policies of China. Below are my notes on the questions asked and answers provided.

Q: Can you have a successful launch of a reform agenda if the leaders in key Members (China, US, EU) aren’t committed to help you make it work? In the first six months as the new Director-General if selected, how would you get these Members to buy into a reform ageanda?

A: Minister Al-Tuwaijri started his response by noting his involvement in working with G20 countries where the major WTO Members are involved. He noted that one of the issues G20 countries have supported is engaging in reform at the WTO. Individual countries may have different views on reform — how, when, and what — but all agree reform is needed. Minister Al-Tuwaijri believes that six-months is too long a period to determine if there is support among the major Members for a reform initiative. He believes that within the first two – three months of becoming the next Director-General he should know if the intent of the major Members is to support reform or not. He would reach out with a specific set of questions (e.g., here are top five issues for reform discussions) and seek input on where Members are on a willingness to address the issues. Minister Al-Tuwaijri has the ability to reach out to the major Members and be viewed as an honest broker. Saudi Arabia has always been a neutral country and has been serving as President this year in the G20.

Q: On China, Amb. Lighthizer is looking for a candidate to be the next Director-General who understands that the current WTO rules don’t discipline China. Do you agree that the current rules don’t adequately discipline China? Would you support efforts to improve disciplines on industrial subsidies?

A: Minister Al-Tuwaijri supports all efforts of WTO Members to engage in negotiations. China is a major country and major trading nation. He believes that the more that is done to promote negotiations and promote timely resolution of issues, the better it is for restoring the negotiation function. He believes that the U.S. and China should bring all of their issues with each other to the table. He knows that there are many. But WTO Members need to move the negotiating process forward to ensure rules are adequate.

The Rt Hon Dr. Liam Fox MP (United Kingdom)

Dr. Fox was the last of the candidates to meet with the General Council and the second candidate who met on July 17. His prepared statement talks about the array of issues likely to be addressed heading into the twelfth Ministerial Conference in 2021 and the agreed need for broader reform. However, he does not mention in his prepared statement the issues surrounding different economic systems or the need for revised rules on industrial subsidies.

During Dr. Fox’s press conference on July 17, he was asked one question that was broad but fairly did include the U.S. effort to address non-market economies (how would you deal with the broad U.S. concerns with the WTO). Dr. Fox viewed the main U.S. concerns as being with the Appellate Body and limited his remarks to that issue.

He was asked a different question on why the multilateral trading system is important to large parties. My notes on his response are provided below.

Q: Why is the multilateral trading system important to the large parties?

A: Dr. Fox indicated that he viewed the Director-General position to not be one of taking sides in bilateral disputes but to maintain the international trading system. If Members don’t enforce what currently exists, what is the credibility of new rules signed onto later? He stated that all Members have benefited from the multilateral trading system. The alternative to a rules- based system is not acceptable. That is true for most countries, not just smaller countries. He used the examples of the 4th and 5th largest economies, Germany and UK, for whom global trade is a major component of their economies.

WITA had a webinar with Dr. Fox on July 30, 2020. https://www.wita.org/event-videos/conversation-with-dr-liam-fox/. During the webinar, Dr. Fox was asked several questions about China, including whether existing rules adequately discipline China’s policies and whether new negotiations on industrial subsidies are needed. My notes on the questions asked and Dr. Fox’s responses are provided below.

Q: USTR Lighthizer has indicated there are three factors he is looking for in considering candidates for the Director-General post: (1) no anti-Americanism; (2) a belief that there is a need for broad reform at the WTO; and (3) someone who understands that the current WTO rules don’t adequately discipline China’s policies. Do you agree with Amb. Lighthizer’s last point on the need for new rules to address Chinese policies?

A: Dr. Fox’s answer dealt with all three factors including that he is not anti-America. He also believes there is a need broad-based reform. In Dr. Fox’s view, the reform needed is both internal at the Secretariat as well as in changing the rule book. For example, Dr. Fox had had dozens of meetings by the time of the webinar with WTO Members. Many countries felt that if you weren’t a large Member or a squeeky wheel, your voices were not heard. In Dr. Fox’s view, the next Director-General needs to review the operation of WTO Secretariat to be sure all Members can be heard and improve the outreach to all Members and listening to their views and concerns. Dr. Fox believes that there is also a need to reform how the WTO operates during negotiations. He used the example of the fisheries subsidies negotiations. He opined that better outreach to NGOs and other groups about the negotiations and encouraging their engagement with Members would help constituencies better understand that the WTO is engaged in issues that are importance to them. The failure to have such engagement can undermine the concept of shared endeavor which is important to forward movement at the WTO. So different forms of reform are needed at the WTO.

On the question about whether rules adequately discipline the policies of China, Dr. Fox stated that reform is not about focusing on any one country. He stated that, of course, all Members must comply with the existing rules. In his view, Members need an effective dispute resolution system to ensure such compliance. Beyond that, the question is how do WTO Members take forward and address common challenges (e.g., e-commerce). The key for the WTO is to bring the rule book up to date with the changing commercial realities. Up-to-date rules and getting all Members to comply are the main objectives of reform.

Q: what about industrial subsidies. Is this an area that needs to be updated.

A: Dr. Fox indicated that WTO Members have a lack of trust in each other. One way to improve trust is to improve transparency. Dr. Fox used as an example, efforts by the OECD to quantify subsidies to aluminum producers around the world. He had visited the OECD recently and heard from them about the extraordinary efforts they went to to make up for a lack of available data on items like production capacity and production. The efforts undertaken were both expensive and time consuming. The example of aluminum indicates that it is important to improve objective data that are provided by Members to the WTO. If WTO Members want improved transparency and improved accuracy of information provided, the WTO also will need to find better ways to verify data submitted.

Conclusion

The question of whether non-market economies or state-directed economies or state-capitalist economies properly fit within the WTO Agreements was not addressed by any candidate, though Dr. Okonjo-Iweala took the position that the nature of the economic system of any Member was not an issue for the WTO to consider.

On whether the current rules of the WTO adequately discipline the policies of China (and more broadly other non-market economies), candidates generally were of the view that the reform process should permit an evaluation of the changing global landscape and developments and where issues were not addressed or inadequately addressed by current rules, Members should consider what changes would be appropriate. Dr. Seade noted that since China was not part of the GATT in the 1990s during the Uruguay Round negotiations, with all the change that has occurred in the first 25 years of the WTO and limited update of rules, there is little doubt that rules need to be updated both to address practices of new Members and to incorporate their views on needed updates. Minister Yoo suggested a somewhat similar approach.

On the question of the need for an update to the rules on industrial subsidies, Minister Mohamed and Dr. Okonjo-Iweala were of the view that the proposal being worked on by the U.S., EU and Japan should be tabled in Geneva so all Members could start the process of understanding the concerns and appropriateness of the approaches recommended to address. Mr. Mamdouh included updating industrial subsidies rules as one of the priority issues to be addressed by the WTO.

U.S. Senate Finance Committee Hearing on WTO Reform: Making Global Rules Work for Global Challenges

Terence P. Stewart · August 4, 2020 · WTO Dispute Settlement, WTO reform · Appellate Body, Country of Origin Labeling, Overreach, Senate Finance Committee, trade remedies · No Comments

On July 29, 2020, the United States Senate Finance Committee held a hearing on WTO Reform: Making Global Rules Work for Global Challenges. The hearing had four witnesses, including two prior Appellate Body Members (Jennifer Hillman and Thomas Graham) and two others.

Senators generally agreed that the dispute settlement system was in need of reform to address long standing U.S. concerns about overreach and other matters. At the same time, Senators view the WTO as an important organization where U.S. leadership is important to address problems and changing needs.

While most U.S. agricultural interests were perceived to have been generally upheld well through dispute settlement, concern was expressed with the Country of Origin Labeling (“COOL”) decision affecting the labeling of meat from animals imported into the United States.

There was broad concern about the problems created by Appellate Body overreach in the areas of trade remedies. For some, there is a belief, confirmed by at least one of the former Appellate Body members, that there has been a bias against trade remedy use by the U.S.

The hearing lasted about two hours and can be seen here. https://www.finance.senate.gov/hearings/wto-reform-making-global-rules-work-for-global-challenges. The prepared statements of the Senate Finance Committee Chairman and Ranking Member and of the witnesses are available for download from the same link.

Written comments to the Committee are accepted for two weeks (til August 12). I am submitting written comments today and provide them in the embedded document below.

August-4-2020-statement-to-Senate-Finance-Committee

As I note in my comments, U.S. concerns center around overreach – the creation of rights and obligations not contained in the agreements themselves. Such concerns can be addressed through clarifying that DSU Art. 3.2 and 19.2 prevent panels and the Appellate Body from filling gaps, construing silence and construing ambiguous provisions. Any clarification of those articles must be accompanied by an ability to correct prior decisions. My prior blogs have provided one suggestion which would address not just U.S. but other Member concerns about overreach.

On the other issues of concern to the U.S., any resolution must provide a means for the DSU terms to be enforced by Members where panels or the Appellate Body wander afield.

U.S. approach to trade – USTR Lighthizer’s Foreign Affairs article and Congressional testimony on June 17

Terence P. Stewart · June 18, 2020 · U.S.-China Phase I Agreement, United States, USMCA, WTO Dispute Settlement, WTO reform · Canada, China, Digital Services Tax, European Union, Kenya, Mexico, United Kingdom, United States · No Comments

Every year, the U.S. House of Representative’s Committee on Ways and Means and the U.S. Senate Finance Committee hold hearings to understand the Administration’s trade agenda for the year. This year both Committees held hearings on June 17 where the sole Administration witness was U.S. Trade Representative Robert Lighthizer.

Ambassador Lighthizer had separately prepared an article for Foreign Affairs entitled “How to Make Trade Work for Workers, Charting a Path Between Protectionism and Globalism” which had been reviewed by many of the Committee members prior to the hearings. The article is available here and presents the Trump Administration’s approach to trade policy. https://www.foreignaffairs.com/articles/united-states/2020-06-09/how-make-trade-work-workers.

The Foreign Affairs article

Ambassador Lighthizer uses the challenges of the COVID-19 pandemic to state that it is time for discussions to reach a new consensus on “the future of U.S. trade policy.” Amb. Lighthizer’s summary of the approach of the current Administration are repeated below:

“That debate should start with a fundamental question: What should the objective of trade policy be? Some view trade through the lens of foreign policy, arguing that tariffs should be lowered or raised in order to achieve geopolitical goals. Others view trade strictly through the lens of economic efficiency, contending that the sole objective of trade policy should be to maximize overall output. But what most Americans want is something else: a trade policy that supports the kind of society they want to live in. To that end, the right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, wellpaying jobs.

“That is precisely the approach the Trump administration is taking. It has broken with the orthodoxies of free-trade religion at times, but contrary to what critics have charged, it has not embraced protectionism and autarky. Instead, it has sought to balance the benefits of trade liberalization
with policies that prioritize the dignity of work.”

The paper reviews the history of trade liberalization, what the Administration views as its limits, their perception that many trade advocates have extolled the benefits of liberalization while discounting or ignoring the economic costs of liberalization. Unlike other areas of government policy, trade liberalization was viewed as an absolute good and not weighed against the costs of the policy in fact.

The section of the article entitled “The dark side of free trade” reviews the steep economic and human costs for the United States over the period 2000-2016 noting the loss of manufacturing jobs, stagnation of median household incomes, and the devastation to the populations left behind in manufacturing locations. While outsourcing reduces costs, it increases vulnerabilities and reduces the nation’s ability to respond to certain situations, such as the pandemic.

Amb. Lighthizer opines that “A sensible trade policy strikes a balance among economic security, economic efficiency, and the needs of working people.” He reviews how he believes the United States-Mexico-Canada Agreement (“USMCA”) achieves that balance looking at specific improvements from NAFTA.

The article then goes on to look at “two of the most significant trade challenges [the U.S.] will face in the coming years: market-distorting state capitalism in China and a dysfunctional WTO.”

The Trump Administration changed the approach of trying to deal with China’s trade policy issues pursued by prior Administration (e.g., through bilateral talks and through the WTO dispute settlement system) by going after some of the larger issues through the section 301 investigation with resulting tariffs on imports from China which led to the creation of the Phase 1 Agreement and, depending on success of Phase 1, a potential Phase 2.

On the WTO, the article focuses on the WTO’s Appellate Body and its deviation from its original purpose.

“The challenges in the WTO are also vexing. Like many international organizations, the WTO has strayed from its original mission. Designed as a forum for negotiating trade rules, it has become chiefly a litigation society. Until recently, the organization’s dispute-resolution process was led by its seven-member Appellate Body, which had come to see itself as the promulgator of a new common law of free trade, one that was largely untethered from the actual rules agreed to by the WTO’s members. The Appellate Body routinely issued rulings that made it harder for states to combat unfair trade practices and safeguard jobs. This was one of the reasons why the Trump administration refused to consent to new appointments to it, and on December 11, 2019, the Appellate Body ceased functioning when its membership dipped below the number needed to hear a case.

“The United States should not agree to any mechanism that would revive or replace the Appellate Body until it is clear that the WTO’s dispute-resolution process can ensure members’ flexibility to pursue a balanced, worker-focused trade policy. Until then, the United States is better off resolving disputes with trading partners through negotiations—as it did from 1947, when the General Agreement on Tarifs and Trade was signed, until 1994, when the WTO was created—rather than under a made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.”

Congressional Hearings

The Congressional hearings provide the opportunity for the Administration to present its record of accomplishments as well as identifying pressing issues being pursued and for members of Congress to inquire about specific issues of importance to their constituents, to challenge the narrative of the Administration (typically by the opposition party), to press for commitments on actions deemed of importance and otherwise to gain clarification of matters of interest to Congressional members.

Yesterday’s hearings had all of the above. Amb. Lighthizer’s opening statement to both Committees stressed what the Administration viewed itself as having achieved and the benefits to working Americans with a focus on China (and the US-China Phase 1 Agreement), USMCA, the US-Japan Phase 1, disputes at the WTO and WTO reform proposals as well as the Administration’s game plan for the WTO, for pending negotiations with the U.K. and Kenya and for WTO reform, and enforcement of existing agreements. His opening statement to the U.S. Senate Finance Committee is embedded below but mirrors his prepared statement to the U.S. House Ways and Means Committee.

17JUN2020LIGHTHIZERSTMNT1

Senate Finance Committee Ranking Member Wyden (D-OR) in his opening statement painted a different picture of the first three years of the Trump Administration’s trade agenda and whether successes had been achieved. His statement is embedded below.

061720-Wyden-Trade-Agenda-Hearing-Opener1

There were many questions in both chambers on the USMCA agreement, with particular focus on enforcement of labor, environment and other issues. With the final revised USMCA receiving strong bipartisan support in both houses of Congress and with the agreement taking effect on July 1st, many of the questions flagged areas where one of the countries was viewed as not in compliance with obligations in the Agreement (e.g., energy practices in Mexico) and commitments by Amb. Lighthizer to pursue matters where compliance wasn’t in place.

On the issue of Section 232 tariffs on steel and aluminum products from Canada and Mexico, some members inquired whether examining imposition of such tariffs would be consistent with U.S. agreement with the two countries which had excluded them from the additional tariffs. Amb. Lighthizer reviewed that the agreement excluded Canada and Mexico where volumes remained at historic levels. If the U.S. found surges and decided to impose the tariffs, any retaliation by Canada or Mexico would be limited to the same sectors (i.e., could not retaliate against agricultural products). Amb. Lighthizer indicated that the U.S. was considering whether tariffs should be imposed in light of surges that had been occurring.

There were also many questions about the U.S.-China Agreement with a focus on whether China was likely to meet its obligations on the purchase of goods (with most questions focused on agricultural purchases). Ranking Member Wyden (D-OR) cited a Peterson Institute paper claiming poor compliance with purchase commitments. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods Amb. Lighthizer on a number of occasions reviewed what were described as inadequacies in the Peterson data and reviewed strong growth in orders from China on agricultural goods to the present time (vs. exports through April shown in the Peterson graphs which look at January-April, even though the agreement didn’t take effect until February 14, 2020).

There were many questions about reshoring manufacturing of medical goods, particularly personal protective equipment (“PPE”), challenges to such reshoring because of the failure of the Administration to enter into long-term contracts to permit manufacturing to start up, whether broader tariff exclusions should be provided to imports of such products while there were inadequate supplies, concerns about existing supplies of PPEs amidst the ongoing pandemic. The issue featured prominently in Senate Finance Committee Chairman Grassley’s (R-IA) opening statement and in the questions of a number of Senators and House Representatives in the two sessions. Amb. Lighthizer discussed use of tariffs as a longer term issue to support reshoring and contested arguments that the Administration had not done enough to secure supplies during the pandemic. Chairman Grassley’s opening statement is embedded below.

Grassley-at-Hearing-on-the-President

There was also interest in both Houses of the ongoing or soon to be initiated FTA negotiations with the United Kingdom (ongoing, two rounds completed) and with Kenya (to start after July 4). There were questions or statements of support for the U.S.-Japan Phase 1 Agreement particularly by members with agricultural export interests to Japan.

On U.S.-EU trade relations, there were a few questions raised dealing either with the perceived abuse of geographical indications on food products by the EU and its push to get other countries to accept EU indications or with changing EU SPS provisions that appear to members of Congress and USTR as not science based. Amb. Lighthizer characterized both as protectionist trends from our friends in the EU. He also indicated that USTR is considering whether the U.S. should initiate a 301 investigation on the non-science based SPS measures.

On digital services taxes, questions arose about yesterday’s announced U.S. withdrawal from the OECD negotiations. Amb. Lighthizer reviewed USTR’s role in conducting 301 investigations first on France and now on a host of other countries where taxes are being imposed or considered on digital services on a discriminatory basis and on companies with no physical presence in countries imposing the taxes. The OECD effort was started to achieve a global agreement that could be accepted by all. The U.S. withdrew from the talks based on its view that the talks were building in discrimination against U.S. companies. If there is not a solution in the OECD, Amb. Lighthizer made it clear that results from the 301 investigations would permit the U.S. to take appropriate action against countries who proceed without a global agreement.

While Amb. Lighthizer’s opening statement had reviewed various WTO issues relevant to reform efforts — addressing Appellate Body; putting teeth into WTO notification requirements; clarifying which Members are eligible for special and differential treatment, and the concern about bound tariffs which have proven not to reflect current economic realities between countries, there were few questions about WTO reform during the two hearings. Amb. Lighthizer did go through the challenge of a WTO system where tariffs are bound, where the U.S. over 70 years has removed the vast majority of its tariffs and many other countries have maintained very high bound and even applied tariffs with little likelihood that those tariffs would be reduced regardless of the economic advances made by countries with high bindings. India and Indonesia were two of the countries used as examples of where bound tariffs today of such countries were not reflective of their economic advances and hence were unfair to the U.S.

There were also questions that arose from press reports about statements President Trump allegedly made to President Xi in Japan seeking China’s help in his reelection effort and to reports about two USTR professional staff members who had set up a webpage and been contacting automotive companies about helping them with USMCA compliance at a time when they were still USTR employees. Amb. Lighthizer was in a meeting with the U.S. and Chinese Presidents in Osaka, Japan in 2019 and denied that any request for assistance was made by President Trump at that meeting. On the latter issue, Amb. Lighthizer indicated that political appointees clearly could not do what was done by professional staff and that the professional staff had reportedly sought and obtained clearance from the USTR ethics office.

Conclusion

It has long been obvious that the Trump Administration was adopting a significantly different approach to trade policy than had been pursued by prior Administrations over recent decades. Ambassador Lighthizer’s Foreign Affairs article provides an articulation of the underlying concerns that have driven the Administration to the current policy approach. While there are many who remain skeptical about the benefits vs. costs flowing from the modified approach being pursued by the Trump Administration, there is little question that the change in approach has gotten attention of trading partners and at least some important modifications in agreements.

The USMCA has many novel elements, many of which are interconnected in terms of achieving stated objectives. Changes in rules of origin coupled with a high level of labor needing to make a minimum level of hourly wages and labor enforcement provisions are intended to address longstanding concerns of labor and is consistent with Amb. Lighthizer’s articulated objective of making trade work for workers. The willingness to work with the Democrats to achieve the labor and environment provisions contained in the revised agreement objectives permitted broad bipartisan support when implementing legislation was considered in the United States. Similarly, the USMCA provision of a sixteen year sunset of the agreement, extendable every six years should permit Canada, Mexico and the United States to update the agreement on a regular basis preventing the loss of relevance or coverage that normal FTAs have experienced with the passage of time.

On the importance of the U.S. relationship with China, the current Administration has come to the conclusion that China is not interested in converting to a market economy in fact. Reciprocity is unlikely under WTO Agreements since the WTO is premised on market economy Members, and the WTO agreements do not address many of the distortions flowing from the Chinese-style economy. Thus, the Administration has pursued a different approach to achieve a different outcome and greater reciprocity. The importance of the U.S.-China Phase 1 is best understood in that context. While the jury is out on how successful the Phase 1 Agreement will be, Amb. Lighthizer’s review of USTR information on growing orders from China in agriculture and China’s implementation of many of the specific commitments in the SPS area and other areas is encouraging.

On the WTO, the U.S. is looking for fundamental reform to achieve an organization that has rules for all and that reflects the changing capabilities of Members. With the differences in views of the purpose of the Appellate Body between the U.S. and the EU (and others), there is no likelihood of rapid restoration of the Appellate Body. With the EU moving towards taking unilateral action against Members who don’t engage in a second stage review of disputes with them, we are likely facing a period of heightened trade tensions between the U.S. and the EU.

Other U.S. proposals that have already been made at the WTO (notification requirements; eligibility for special and differential treatment; WTO being an organization for market economies ) or are working on jointly with others (e.g., EU and Japan on industrial subsidies and state-owned enterprises), have different challenges in terms of reaching consensus to adopt. The issue not yet formally raised on revisiting tariff bindings and/or how the system addresses changes in economic might over time with existing bindings would seem to require a further major shock to the operation of the WTO to have any chance of being considered.

As trading partners struggle to find new sources of revenue, particularly following the economic challenges flowing from the COVID-19 pandemic, many have looked to tax foreign companies in the digital services space. As the U.S. has many of the major players, there are looming major confrontations over EU and other country efforts to impose discriminatory taxes. The U.S. will defend its interests if an OECD agreed approach cannot be found. Based on yesterday’s withdrawal of the U.S. from the OECD process, major disputes are likely by the end of 2020.

The Trump Administration will continue to utilize all legal tools available to it under U.S. law and pursuant to various Agreements to achieve a rebalancing of the U.S. trade relationship with our major trading partners and with all nations. The Foreign Affairs article provides the Administration’s logic for the approach being pursued.