WTO reform

G20 Trade and Investment Ministerial Meeting Communique, 22 September 2020

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

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

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

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

[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

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

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.