Canada

U.S. Additional Tariffs on Imports of Steel and Aluminum "Derivative" Products — Presidential Proclamation 9980

The United States conducted two investigations under Section 232 of the Trade Expansion Act of 1962, as modified, in 2017 with findings that imports of steel and aluminum products were a threat to U.S. national security. Import relief (25% on covered steel products and 10% on covered aluminum products) was imposed by mid-2018. Retaliation by many trading partners followed without resort to WTO dispute settlement. Dispute settlement cases were also filed by a number of countries. The U.S. also filed disputes against those countries who had retaliated without obtaining final reports or decisions from the WTO panels or Appellate Body and authorization if the U.S. did not comply with any loss that might have happened. All the disputes that are ongoing are at the panel stage at the WTO.

A number of countries agreed to other arrangements with the U.S. or were excluded from coverage. These included Argentina, Australia, Canada and Mexico for aluminum products and those countries plus Brazil and South Korea for steel products.

On January 24, 2020, President Trump issued a Presidential Proclamation “on Adjusting Imports of Derivative Aluminum Articles and Derivative Steel Articles into the United States”. https://www.whitehouse.gov/presidential-actions/proclamation-adjusting-imports-derivative-aluminum-articles-derivative-steel-articles-united-states/. The Proclamation (No. 9980) will be published in the Federal Register on January 29, 2020 and will apply to imports from subject countries beginning on February 8 (25% on steel derivative products and 10% on aluminum derivative products listed in Annexes II and I respectively). The inspection version of the Federal Register for January 29 is available today and the document is attached below. In the Proclamation, the President lays out the history of the 232 investigations and actions previously taken as well as the President’s intention to have Commerce monitor developments in case other actions were warranted. The action laid out in Proclamation 9980 is responsive to information reportedly provided by Commerce of possible evasion/circumvention of the duties. Countries who are excluded or who have arrangements with the U.S. on the original 232 actions are also excluded subject to certain conditions being present suggesting a need to address imports from those countries as well.

1-29-2020-FR-of-presidential-proclamation-on-steel-and-aluminum-derivatives

The purpose of this note is not to review the legal basis for the U.S. action (there have been a number of judicial actions in the United States challenging various aspects of the steel and aluminum national security case), but rather to examine the U.S. trade data to understand the breadth of the term “derivatives” and which countries appear to be the main targets of the additional duties.

Prior Proclamations Sought Review by Commerce and Others of Developments in Case Additional Action Was Deemed Necessary

The President in Proclamation 9980 references the fact that the Secretary of Commerce was directed to monitor imports of aluminum and steel and identify any circumstances which might warrant additional action. For example, paragraph 5(b) of the Steel Proclamation (No. 9705) of March 8, 2018 contained the following language:

“(b)  The Secretary shall continue to monitor imports of steel articles and shall, from time to time, in consultation with the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the USTR, the Assistant to the President for National Security Affairs, the Assistant to the President for Economic Policy, the Director of the Office of Management and Budget, and such other senior Executive Branch officials as the Secretary deems appropriate, review the status of such imports with respect to the national security.  The Secretary shall inform the President of any circumstances that in the Secretary’s opinion might indicate the need for further action by the President under section 232 of the Trade Expansion Act of 1962, as amended.  The Secretary shall also inform the President of any circumstance that in the Secretary’s opinion might indicate that the increase in duty rate provided for in this proclamation is no longer necessary.”

https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/.

Similar language was in the aluminum proclamation.

How Broad is the Term Derivative Aluminum or Derivative Steel Product?

The aim of the Proclamation is to deal with products that undermine the purpose of the earlier proclamations. Proclamation 9980 reviews (paragraph 6) how the term “derivative” is used for purposes of the proclamation:

“For purposes of this proclamation, the Secretary determined that an article is ‘derivative’ of an aluminum article or steel article if all of the following conditions are present: (a) the aluminum article or steel article represents,
on average, two-thirds or more of the total cost of materials of the derivative article; (b) import volumes of such derivative article increased year-to-year since June 1, 2018, following the imposition of the tariffs in Proclamation 9704 and Proclamation 9705, as amended by Proclamation 9739 and Proclamation 9740, respectively, in comparison to import volumes of such derivative article during the 2 preceding years; and (c) import volumes of such derivative article following the imposition of the tariffs
exceeded the 4 percent average increase in the total volume of goods imported into the United States during the same period since June 1, 2018.”

What is the Volume of Imports Covered and Which are the Major Exporting Countries?

When one looks at the products that are covered by the two Annexes, one will see relatively few tariff categories covered by the new Proclamation. There are two HS categories that contain products that may be either steel or aluminum – bumper stampings and body stampings. There are significant imports of bumper stampings (though the data are not broken between steel, aluminum and other material). Imports from all counttries of bumper stampings in the first eleven months of 2019 were $394.3 million (of which $199.6 million are from countries not excluded for aluminum; $198.4 million if steel). Body stamps were significantly smaller, $5.2 million from all countries in Jan.-Nov. 2019 ($2.4 million covered if all are aluminum; $2.3 million covered if all are steel). The 8708 categories may have met the Commerce criteria but show a decline in 2019 vs. 2018 of 8.63% for the covered products/countries.

The other aluminum products identified — stranded wire, cables, plaited bands and the like (HS 7614.10.50, 7614.90.20, 7614.90.40, 7614.90.50) are relatively small in value – $43 million for all countries in 2019 (11 months)($26.9 million for countries subject to the additional 10% duties). The products/countries covered increased over the first 11 months of 2018 by 41.45%.

The other steel products identified – nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples and similar articles (HTS 7317.00.30.00, 7317.00.5503, 7317.005505, 7317.00.5507, 7317.00.5560, 7317.00.5580, 7317.00.6560) were $331.8 million in the first eleven months of 2019 for all countries ($276.9 million for countries covered by the new 25% duty). However, the rate of increase for covered products/countries was only 7.03% in 2019 versus 2018 (but had large increases vs. 2016 and 2017).

Countries with large exports in 2019 of the aluminum products (other than bumpers and body stampings) include Turkey at $7.4 million, India at $7 million, China at $5.0 million, Indonesia at $1.6 million, Italy at $1.35 million.

Countries with large exports in 2019 of the steel derivative products (other than bumpers and body stampings) include Oman at $59.5 million, Taiwan at $31 million, Turkey at $28.4 million, Thailand at $26.0 million, India at $25.3 million, Sri Lanka at $22.2 million, China at $20.4 million, Liechtenstein at $13.0 million, Malaysia at $12.5 million, Austria at $9.9 million and Saudi Arabia at $9.4 million.

On bumpers and body stampings, a number of the excluded countries are major suppliers — imports from Canada were $151.9 million in the first eleven months of 2019. Imports from Mexico were $44.6 million. For countries facing higher tariffs of 10% or 25% depending on whether the exported bumper stamping or body stamping is steel or aluminum, some of the large suppliers in 2019 were Taiwan at $87.4 million, Japan at $41.4 million, China at $39.4 million, Germany at $12.1 million, South Africa at $4.5 million, Italy at $3.8 million and Thailand at $3.6 million.

Conclusion

While any import measure by the President should be periodically reviewed for effectiveness and the need to maintain, the current action by the President in essence is a minor tweak with only $504 million of imports covered by the modified coverage of the Section 232 Proclamations — likely less than 1% of imports of steel and aluminum covered by the original proclamations.

It is true that the domestic steel and aluminum industries are not operating at the levels viewed as optimal and the problem of massive excess capacity in China and other countries is little changed in fact. But if a revision were needed, the level of ambition reflected in the Proclamation seems inadequate to the task.

So perhaps the way to read the proclamation is a recognition by the Administration that the existing relief hasn’t achieved the full measure of relief intended and to give trading partners warning that more is possible if the underlying problems aren’t addressed.

The Proclamation will certainly engender more disputes and increased tension with many of our trading partners. It is hard to understand the calculus (divorced from 2020 election posturing) of taking such a modest step, but time will tell if this is simply a prelude to a larger action in the coming months.

WTO Dispute Settlement – January 24, 2020 Statement by Ministers at Davos, Switzerland on Interim Appeal Arrangement Amongst Certain Major Countries

The WTO’s Appellate Body has not been in a position to handle any appeals from panel reports where the appeal was filed after December 10, 2019 and is processing some but not all of the appeals that were pending on that date. This situation flows from the existence of just one of seven Appellate Body slots currently being filled and the Dispute Settlement Understanding (“DSU”)requirement that appeals be heard by three members of the Appellate Body. The slots are unfilled as the United States has blocked the start of the process over the last two years while pressing WTO Members to acknowledge longstanding problems in how disputes are handled and to come up with effective reforms. For the United States, this requires WTO Members to come to grips with why clear requirements of the DSU were being ignored or violated by the Appellate Body.

For most members of the WTO, achieving a resolution of the dispute settlement impasse is a high priority with many countries looking to see if some form of interim approach could be adopted by those with an interest in having an interim process for a second tier review of panel reports by participating members. The European Union had announced bilateral arrangements with Canada and with Norway in 2019 and discussions have occurred with and among other countries about whether arbitration-type arrangements based on Article 25 of the DSU should be agreed to during the period when a solution to the impasse is pursued.

Earlier this week on the sidelines of the annual World Economic Forum, ministers from a number of WTO Members issued a statement indicating that a large number of WTO Members would work towards contingency measures. The statement was on behalf of seventeen WTO Members (46 Members if the EU’s 28 member countries are counted instead of the EU). The list includes a number of large trading nations including the EU, China, Canada, Mexico, Brazil, Australia and Korea along with ten others (Chile, Colombia, Costa Rica, Guatemala, New Zealand, Norway, Panama, Singapore, Sitzerland and Uruguay. The joint statement follows:

Statement by Ministers, Davos, Switzerland, 24 January 2020
“’We, the Ministers of Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, European Union, Guatemala, Republic of Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland, Uruguay, remain committed to work with the whole WTO membership to find a lasting improvement to the situation relating to the WTO Appellate Body. We believe that a functioning dispute settlement system of the WTO is of the utmost importance for a rules-based trading system, and that an independent and impartial appeal stage must continue to be one of its essential features.

“Meanwhile, we will work towards putting in place contingency measures that would allow for appeals of WTO panel reports in disputes among ourselves, in the form of a multi-party interim appeal arrangement based on Article 25 of the WTO Dispute Settlement Understanding, and which would be in place only and until a reformed WTO Appellate Body becomes fully operational. This arrangement will be open to any WTO Member willing to join it.

“We have instructed our officials to expeditiously finalise work on such an arrangement.

We have also taken proper note of the recent engagement of President Trump on WTO reform.’”

https://trade.ec.europa.eu/doclib/docs/2020/january/tradoc_158596.pdf

Since Australia and Brazil had been looking at a different approach than that announced by the EU and Canada or the EU and Norway, it will be interesting to see what type of contingency measures the larger group agrees upon. The U.S. had significant problems with the EU approach when it was announced last year as it simply continued many of the problems that the U.S. has identified as needing correction. A similar approach by the larger group would likely add complications to finding a permanent solution and also likely discourage at least some other WTO Members from joining the group’s approach.

Likely Coverage of Disputes by the 17 WTO Members

There are 164 WTO Members at the present time and there have been a total of 593 requests for consultations filed by WTO Members since the WTO came into existence in January 1995. The WTO webpage lists all disputes where a Member has been the complainant, the respondent or acted as a third party. Not all requests for consultations result in panels being requested, and not all panel proceedings result in appeals being filed. But a review of number of requests for consultations filed by a Member and the number of such requests where a Member was the respondent helps understand the coverage likely from the seventeen Members (46 at individual country level) who released the joint statement.

However, the data from the WTO webpage needs to be modified to eliminate requests for consultations where one party was not one of the seventeen Members. The following table reviews the data and then corrects to eliminate cases where the complainant or respondent was not another of the seventeen Members.

WTO Member# of cases complainant # of cases respondentcomplainant among 17respondent among 17
Australia91644
Brazil3316117
Canada40231811
China2144519
Chile101346
Colombia5735
European Union10486*/1123323*/49
Guatemala10272
Korea211847
Mexico2515118
New Zealand9030
Norway5030
Panama7161
Singapore1010
Switzerland5020
Uruguay1111
Subtotal306242/26811694/120
All countries593593593593

NOTE: EU numbers as a respondent differ based on whether include cases where EU is listed or just one or more of the EU member states (26 individual member disputes).

While the seventeen Members are obviously important WTO trading nations and participants in the dispute settlement system, the percent of disputes where the seventeen members are engaged in disputes with each other is obviously much smaller than their total number of disputes. Thus, the seventeen members accounted for 51.6% of the requests for consultations filed in the first twenty-five years and were respondents in 45.2% of the requests for consultations. However, when disputes with any of the 118 WTO Members who are not part of the joint statement are removed, the seventeen Members accounted for 19.56% of the cases where one was a complainant and 20.2% of the cases where one was a respondent. This is not surprising as there are many important trading nations who are not part of the seventeen signatories who are active both as complainants and as respondents – United States, Japan, India, South Africa, Argentina to name just five.

Of course, WTO Members do not have to be part of a group interim arrangement to handle ongoing or new disputes. Members can agree not to take an appeal, can agree (as the U.S. and India have done in one case) to hold up appeal until the Appellate Body is back functioning, to name two approaches some are pursuing.

While an interim approach is obviously of interest to many, the core issue remains finding a road forward to address needed reforms to the dispute settlement system. There seems to be little progress on that front. Procedural issues appear easier to resolve if consequences are added for deviation from procedural requirements. However, there is little active consideration of how to address the problem of overreach both prospectively and retroactively to permit a restoration of rights and obligations where panel reports or Appellate Body decisions created obligations or rights not contained in the Agreements.

In a Member driven organization, the hard work of the Secretariat doesn’t overcome fundamentally different views of how the dispute settlement system is supposed to operate. Thus, while it is a positive development that Director-General Azevedo and his team will visit Washington in the near future to discuss U.S. reform ideas, the real challenge is getting agreement on what the system is supposed to be and how to restore the balance that existed when the WTO commenced in 1995.

Revisions to the US-Mexico-Canada Agreement Gains Support of Labor and House Democrats

The Trump Administration has sought to replace/update NAFTA as a priority since taking office. The Obama Administration also wanted to update NAFTA but viewed that as doable within the context of the Trans Pacific Partnership agreement talks. When the Trump Administration withdrew from the TPP in 2017, updating/revising NAFTA became the preferred approach.

In a post from November 16, 2019, I reviewed the possibility that USMCA, if revisions were made to address Democratic concerns, could be an example of bipartisan trade legislation. See https://currentthoughtsontrade.com/2019/11/16/usmca-a-return-to-bipartisan-trade-legislation/.

For roughly a year, the Trump Administration through USTR Lighthizer and the House Democrats have been pursuing negotiations on changes deemed necessary by the Democrats for the USMCA to be acceptable to them. Enforcement of labor and environment provisions and issues surrounding biologics have been at the core of the concerns being explored. Labor and environmental groups have pressed hard for changes that would address their concerns, and the problems they have experienced under other agreements.

In recent weeks, lead negotiators from Mexico and Canada were in Washington to review changes the Administration was seeking and providing further feedback/reactions to whether such changes were acceptable. A meeting in Mexico City today between the main negotiators is intended to permit agreement on revisions acceptable to the three countries.

Earlier today, the President of the AFL-CIO, Richard Trumka, expressed support for the modifications to the USMCA that had been negotiated by the Democratic team with the Trump Administration. Speaker of the House Nancy Pelosi and House Ways and Means Chairman Richard Neal indicated that the House Democrats believed the revised agreement (as reflected in the modifications negotiated with the Trump Administration) was far superior to both NAFTA and the USMCA that had previously been signed by the governments. Indeed, assuming agreement by the three countries to the revisions this afternoon, USMCA as revised, will be ready for Congressional consideration as early as next week.

While the text of the modifications is not yet public, the House Ways and Means Committee Chairman has released a fact sheet which reviews issues pursued by the Democrats that they perceive have been successfully resolved. The text of the fact sheet is included as a PDF below.

USMCA-win-factsheet-

If the USMCA is revised as expected, the timetable in the Congress will likely be expedited and will be supported by large parts of the business community whether agriculture, manufacturing, services and will include support from labor and other groups.

When the text of the agreed modifications is available, the revisions will be added to the comparison documents provided in the prior post that compare USMCA to NAFTA and the TPP agreement that the U.S. had signed (before withdrawing).

To the extent that the USMCA becomes a model for other agreements going forward, there should be greater likelihood of bipartisan support for future agreements just as has developed for USMCA.

With the WTO Appellate Body Becoming Dysfunctional on December 11, What Happens to Pending Appeals and Other Open Issues?

There was another WTO Dispute Settlement Body (“DSB”) meeting on November 22, 2019. In addition to the normal agenda item of receiving reports and comments by other members on the status of implementation of recommendations on disputes where reports had previously been adopted by the DSB, there were a number of other agenda items, one of which was not addressed.

First, the United States had put on the agenda making a statement on what it considers systemic concerns on the compensation for Appellate Body.

Second, annually each body within the WTO prepared a report on activity during the year. Adoption of the 2019 draft annual report of the DSB was an agenda item for consideration.

Third, the topic of Appellate Body appointments was an agenda item based on the September 2019 proposal from 117 WTO members.

Finally, there was an agenda item entitled “Pending Appeals” which was meant to permit an examination of how the 13 pending appeals would be handled after December 10 when the number of current Appellate Body members would decline to 1 from 3.

This note looks at several of the agenda items with a focus towards the end on the thirteen appeals which are proceeding at the present time.

I. Compensation for Appellate Body members

As reviewed in a post from November 16, the United States had raised a series of questions on the handling of funds for the Appellate Body and its Secretariat (among other issues) and held up adoption of the 2020/2021 WTO budget at a November 12 meeting of the Committee on the Budget, Finance and Administration. Another meeting of the Committee has been scheduled for November 27, with efforts to provide answers and resolve concerns ahead of that meeting.

At the same time, the U.S. added the agenda item to provide its thoughts on “systemic issues” flowing from the Appellate Body compensation system. The comments on this agenda item were made by Ambassador Dennis Shea and laid out the various elements of the compensation package, the part time nature of the work of Appellate Body members, and the fact that compensation has been paid to individuals whose terms have expired but who continue to handle appeals. See pages 9-12 of Statements b the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, November 22, 2019, https://geneva.usmission.gov/wp-content/uploads/sites/290/Nov22.DSB_.Stmt_.as-handed-out.fin_.public.pdf. U.S. concerns revolved around: (1) the total compensation (some 300,000 Swiss Francs tax free for part time work which is higher than compensation for Deputy Director Generals at the WTO whose work is full time; (2) whether the daily component of compensation contributed to delay in completing Appellate Body decisions, hence undermining prompt resolution of disputes; (3) lack of transparency on expenses; and (4) pay to former members who are continued after terms expire when working on appeals which they started prior to term expiration.

Press reports from the day of the DSB meeting indicated relatively little interest/sympathy by other trading partners on the U.S. concerns including on the size of the compensation. See, e.g., Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

From the earlier U.S. statement of concerns on how to remedy the Appellate Body disregard of clear requirements under the Dispute Settlement Understanding, the U.S. statement provides a potential “why” answer to part of the disregard. Failing to meet the required 60-90 day deadline for appeals results in longer work on any given appeal and hence higher compensation, potentially encouraging longer decisions, coverage of additional issues, etc. and making timely delivery of AB decisions more difficult.

Should the U.S. insist that the AB compensation system be reviewed and potentially modified before agreeing to opening the Appellate Body nomination process, obviously a protracted and difficult process will become more complicated and presumably more drawn out.

II. Appellate Body Proposal to Start the Appointment Process

Not surprisingly, the same proposal to start the process of finding new Appellate Body members that had been presented in October by Mexico and 116 other WTO members was resubmitted for consideration at the November 22 DSB meeting. Once again the U.S. found itself unable to agree to moving ahead with the process for finding six Appellate Body members to fill the existing vacancies and the two that will occur when existing terms expire on December 10. So there is actually nothing new on this agenda item or the outcome at the recent DSB meeting.

Ambassador David Walker’s draft General Council Decision which is an effort to present a possible road forward to addressing U.S. concerns was not taken up within the DSB (other than a review of the effort at resolution contained in the draft annual report of the DSB) but will be on the agenda for the December 9-11 General Council meeting. As reviewed in an earlier post, the U.S. has already rejected the draft General Council Decision as not meeting its concerns. Thus, the General Council meeting in December is not likely to provide a breakthrough on the current impasse. So an obvious question is what happens on December 11?

The panel process of dispute settlement will continue as before. Thus, for the many cases proceeding through panel deliberations, one can expect those panels to continue without interruption. WTO Members have the option of agreeing to arbitration under Article 25 of the DSU, as the EU has done with Canada and with Norway. Similarly, WTO Members can agree not to take an appeal in a given dispute such that the panel report would be what is adopted absent a negative consensus. It is understood that some WTO members are considering this or have agreed to this approach. Thus, December 11 marks not the collapse of the dispute settlement system in its entirety, but rather a need to evaluate options for WTO members as they look at pending or future disputes or face a process where there is no automatic adoption.

A large number of WTO Members have participated in at least one dispute in the first 25 years of the WTO. Other WTO members, who have not been a complainant or a respondent have participated as a third party in one or more cases. While that is true, the number of cases where a Member is either a complainant or a respondent is very small for nearly all countries. The attached table looks at information from the WTO Dispute Settlement listing (looked at on November 22, but not reflecting the EU request for consultations filed against Indonesia on November 22). Six Members (U.S. (11.16/yr), EU and member states (9.44/yr), China (3.61/yr), Canada (2.52/yr), Russian Federation (2.42/year), and India (2.24/yr)) have seen two or more disputes filed each year of membership. Eight others have between one and two disputes each year (Brazil, Argentina, Japan, Mexico, Korea, Ukraine, Australia, and Indonesia). Everyone else (121 members) have less than one dispute per year including 81 who have never either filed a dispute or been a respondent in a dispute in the first twenty-five years of the WTO and 46 of whom have also never been a third party in a dispute.

WTO-Member

The EU’s agreements with Canada and Norway are important for Canada and Norway but relatively minor for the EU itself, other than creating what they hope will be an approach that other trading partners of theirs will agree to. For Canada, 23.81% of the disputes where Canada has been a complainant or respondent have been where the EU was the other party. For Norway, 3 of 5 cases they have been involved in have been with the EU (60%). However, for the EU, Canada and Norway represent less than 6% of the disputes in which they have been a party.

So how disruptive the reduction in Appellate Body membership to one member as of December 11, 2019 will be is uncertain and will depend on actions by a number of major players in terms of ongoing disputes..

III. Pending Appeals Before the Appellate Body

Agenda item 7 on the November 22, 2019 DSB meeting was “Pending Appeals. A. Statement by the Chairman.” WTO/AIR/DSB/89.

In the Dispute Settlement Body’s draft Annual Report (2019), the following brief discussion appears on what the Chair of the DSB was doing on the issue of pending appeals. WT/DSB/W/651 (8 November 2019) at 4:

” Finally, he said that he would be consulting with delegations who had pending appeals before the Appellate Body ahead of 10 December 2019 to see how to deal with those appeals. He said that he would revert to this matter at the November DSB meeting (WT/DSB/M/436).”

While the WTO does not have a summary of the November 22nd DSB meeting up on its webcite as of 11/24 2:30 p.m. (ET), a press article from the 22nd indicated that the agenda item wasn’t pursued as the Chair had not found agreement on how to deal with the 13 pending appeals. The U.S. was apparently the holdout in reaching agreement on how to proceed. Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

In looking at the thirteen appeals that are understood to be underway and the relevant DSU articles on Appellate Body practice rules, there appear to be a number of potential issues that will need to be addressable if the issues are in fact present and the appeals are to proceed.

First, eight of the thirteen appeals were noticed by the appellant after 30 September 2018 the last day of Mr. Shree Baboo Chekitan Servansing’s four year term. See DS541, DS534, DS523, DS518, DS513, DS510, DS461, DS371. After that date, there have been only three Appellate Body members, all of whom would have to be hearing the appeal and no substitute would be possible if one of the two members whose terms end on December 10, 2019 decided not to continue on an appeal after that date. See DSU Art. 17.1; Working Procedures for Appellate Review, WT/AB/WP/6 16 August 2010, Rules 6.(3) and 12 and 13. It is understood that one of the two Appellate Body members whose second term expires on December 10 has indicated an unwillingness to continue to serve on the appeals after the expiration of his term. If correct, absent a decision by the DSB on how those appeals can proceed, the appeals will presumably terminate or be in a state of limbo pending restoration of the membership of the Appellate Body. The United States is a party in four of the eight cases.

Of the other five appeals, it is unclear if a similar situation exists in terms of the composition of the Division hearing the appeal (DSU Art. 17.1 has appeals heard on a rotation basis) and if so, if the remaining AB member would be available to maintain the appeal at three members (two former members and the remaining current member).

For all thirteen appeals, after December 10, 2019, the appeals could only be handled in two or all three of the people hearing the appeal were individuals whose terms expired, hence falling into the space that the U.S. has reviewed as to the lack of authority for the Appellate Body have non-AB members complete appeals that were started when they were members. The U.S. is a party in five of the thirteen pending appeals.

Expect that the DSB Chair David Walker will continue to search for an approach that is acceptable to all members. Don’t be surprised if no consensus is reached. Two known events in December are possible situations where better understanding of the issues will surface: the December 9-11 General Council and the December 18 DSB meeting.

Below is a reverse chronological listing of the thirteen pending appeals:

DS541, India-Export Related Measures (U.S. complainant); notice of appeal, Nov. 19, 2019.

DS534, United States – Anti-Dumping Measures Applying Differential Pricing Methodology to Softwood Lumber from Canada; notice of appeal, June 4, 2019.

DS523, United States – Countervailing Measures on Certain Pipe and Tube Products (Turkey complainant); notice of appeal, Jan. 25, 2019.

DS518, India – Certain Measures on Imports of Iron and Steel Products (Japan complainant); notice of appeal, Dec. 14, 2018.

DS513, Morocco – Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey; notice of appeal, November 20, 2018

DS510, United States – Certain Measures Relating to the Renewable Energy Sector (India complainant); notice of appeal, August 15, 2019.

DS505, United States – Countervailing Measures on Supercalendered Paper from Canada; notice of appeal, August 27, 2018.

DS499, Russian Federation – Measures Affecting the Importation of Railway Equipment and Parts Thereof (Ukraine complainant); notice of appeal, August 27, 2018.

DS476, European Union – Certain Measures Relating to the Energy Sector (Russian Federation complainant); notice of appeal, September 21, 2018 [The WTO webpage shows this dispute still being on appeal before the Appellate Body, but the case is not included in the list of 13 pending appeals on the WTO webpage] .

DS441, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Dominican Republic complainant); notice of appeal, August 23, 2018.

DS435, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Honduars complainant); notice of appeal, July 19, 2018.

DS461, Colombia – Measures Relating to the Importation of Textiles, Apparel and Footwear (21.5, Panama complainant); notice of appeal, November 20, 2018.

DS371, Thailand – Custom and Fiscal Measures on Cigarettes from the Philippines; notice of appeal (2nd recourse to 21.5), September 9, 2019; notice appeal (1st recourse to 21.5), 9 January, 2019).

IV. Conclusion

WTO Members are continuing to look for alternatives to the present appeal process as they await further developments both at the General Council and the Dispute Settlement Body. The U.S. has been looking for adherence to the original DSU commitments and is unwilling to accept simple reaffirmation of those principles in light of the longstanding problems flagged by the United States. The core disagreement on the purpose of the dispute settlement system between the U.S. and the EU (and like minded Members) has made meaningful progress difficult.

What is certain is that the brave new world of a more complicated dispute settlement system within the WTO arrives in less than three weeks. How long the changed status will continue is unclear. Current indications are the wait will be long in fact before the Appellate Body is back functioning with the concerns of the U.S. at last addressed in an enforceable manner. For the U.S. a major concern should be achieving a restoration of the rights and obligations that were agreed to through negotiation and that have been lost through overreach actions by the Appellate Body.

The WTO budget and the Appellate Body — Potential Fireworks at the end of 2019

On December 11, the WTO Appellate Body will be down to one member based on the current impasse created by the U.S. insistence that significant problems with the dispute settlement system be addressed before new Appellate Body members are added. Earlier posts have reviewed the impasse and underlying issues at some length.

On November 12, the U.S. reportedly blocked adoption of the 2020-2021 budget proposal from the WTO Director-General at the meeting of the Committee on Budget, Finance and Administration. There were a series of written questions about the budget received from Members ahead of the November 12 meeting, including a six page document entitled, “CBFA questions received from the United States relating to the coordination, governance and administrative responsibilities of the multi-donor voluntary contribution trust funds”. WT/BFA/INF/6, 7 November 2019. The written questions are not publicly available at the present time.

A version of the 2020-2021 Budget Proposal from the Director-General that is available publicly is from 10 September 2019 and is document WT/BFA/W/492 (38 pages). Pages 23-24 review the budget proposal for the Appellate Body and its Secretariat (Section 3.2). The proposal shows the budget for the Appellate Body Secretariat staff at 4.573 million Swiss Francs/year, Appellate Body Members Fees and other temporary assistance as 871,000 Swiss Francs/year, other resources as 136,000 Swiss Francs/year and contributions to special reserves as being 2.0 million Swiss Francs/year. In mid-November 2019, 1 Swiss Franc was worth $1.01.

Press reports on the WTO meeting indicate that the U.S. was opposed to the budget for various reasons, including the provision of funds for the Appellate Body (AB) and its Secretariat for 2020-21 because of the impasse which would render the AB dysfunctional (arguably meaning no funds would be required until the impasse is resolved).

The U.S. also raised questions as to where funds for arbitration under DSU Article 25 would come from, including whether funds would be diverted from the AB. The EU has concluded agreements entitled “Interim Appeal Arbitration Pursuant to Article 25 of the DSU” with Canada and separately with Norway. These agreements call for the use of former AB members to act as arbitrators (in groups of three the same as AB Divisions) and use of AB Secretariat staff for such arbitrations.

Concern was also expressed on what was done with AB funds from 2018 and presumably 2019 because of the reduced number of AB members. See, e.g., Washington Trade Daily, November 13, 2019, “US Blocks WTO Budget” at 1-2; Bloombergs, Bryce Baschuk, November 12, 2019, “U.S. Raises Prospect of Blocking Passage of WTO Budget”, https://www.bloomberg.com/news/articles/2019-11-12/u-2-is-said-to-raise-prospect-of-blocking-passage-of-wto-budget.

The U.S. intends to develop its concerns on budget matters in multiple fora within the WTO. For example, the U.S. has added an agenda item (no. 4) to the upcoming Dispute Settlement Body meeting on November 22, “4. Statement by the United States on systemic concerns regarding the compensation of Appellate Body members”. WTO/AIR/DSB/89, 12 November 2019.

One can envision a number of concerns that could be raised by the United States. For example, based on its concerns about former AB members continuing to handle disputes after their term has expired, the U.S. could raise concerns about any payments (fees and expenses, etc.) to such individuals. Similarly, the U.S. could raise concerns over the total compensation including expenses that go to AB members whose work is part time only, particularly if the overall level of expenditures per AB member exceeds what full time compensation is for judges at appeals courts or the Supreme Court.

It is not clear if the U.S. will use the agenda item at the DSB meeting to also question whether WTO Members can utilize Appellate Body resources and staff for DSU Article 25 arbitration work or whether that issue will be left for the budget discussion.

Based on the Budget Finance and Administration Committee meeting of this past week, the U.S. statement at the November 22 DSB meeting is likely to be a detailed review of its concerns on how AB and Secretariat funding has been handled. The U.S. statement will almost certainly see responses from many other Members defending the status quo. The conflict on the budget issue adds to the tension among the membership on the likely continued impasse on the AB vacancies and the imminent shut down of the AB for future appeals pending a resolution on the many concerns raised by the U.S. on the functioning of the dispute settlement system.

The current approved budget ends at the end of 2019. So achieving an approved budget in the remaining weeks of 2019 is critical to the continued functioning of the WTO. Whether the U.S. will block the budget, achieve some accommodation or simply approve the budget in the coming weeks creates the focus for WTO Members. There is a three day General Council meeting on December 9-11, and there is an assumption that the matter will be resolved by then, if it is to be resolved this year. What is certain is that the last weeks of 2019 will see increased tensions within the WTO and likely fireworks at formal meetings.

USMCA – A Return to Bipartisan Trade Legislation?

Trade legislation historically was an area of bipartisan agreement. For the last twenty years or so, it has been increasingly difficult to find bipartisan support for trade agreements and implementing legislation. If the consultation process between the Trump Administration and House Democrats results in a set of modifications to the USMCA that garner larger Democratic support, we may be seeing a roadmap for greater bipartisan efforts in the trade arena going forward.

The Democrats have highlighted concerns in four areas – enforcement, labor, environment and pharmaceuticals. Labor (as reflected in the position of the AFL-CIO and its member unions) has felt that prior trade agreements, including NAFTA, resulted in situations where workers have not benefited and have in fact seen economic opportunities shrink. The shrinkage was a result of jobs moving off-shore, with imports into the U.S. from such off-shored facilities ramping up and reducing U.S. employment. Indeed, the possibility of moving to Mexico has been viewed by labor as a constant threat applied by management in many companies to reduce income expectations of workers. NAFTA has not been viewed by labor as helping improve significantly working conditions in Mexico nor the problems of labor rights in Mexico. How to achieve meaningful improvements has been a major concern of labor and many Democrats. For labor, the result of past trade agreements has been a documented stagnation of wages and reduced employment in manufacturing. The concern with North American neighbors has been reinforced by the large and growing trade deficit with Mexico in particular. For labor, agreements that don’t result in actual improvements in the opportunities for workers as well as the companies are simply unacceptable. A race to the bottom on worker rights and environmental protections is not acceptable to labor or to environmental groups.

The Trump Administration introduced certain provisions into the USMCA that were intended to address certain Administration concerns over the trade deficit with our neighbors. The Administration also elevated labor and environment from side letters to integral chapters of the Agreement, an important improvement over NAFTA. While recognizing improvements over prior agreements, Democrats have signaled that some modifications are critical for their support.

USTR Lighthizer and his team have been involved in negotiations with Democratic House members over a number of months. While the specifics of the proposals and counter-proposals are not public, press accounts indicate that resolution of Democratic concerns/demands could be close. Moreover, the Mexican government has been visited by Congressional Democrats, and the President of Mexico has forwarded communications on his commitment to fulfilling Mexico’s obligations under the USMCA labor chapter.

Speaker Pelosi stated at her weekly press conference this past week that “I do believe that if we can get this to the place it needs to be which is imminent, that this can be a template for future trade agreements, a good template.” House members involved in the negotiations agree negotiations are progressing, but have indicated a deal is not yet imminent. https://thehill.com/policy/finance/trade/470580-usmca-deal-close-but-not-imminent-democrats-say. The next few weeks will likely indicate whether agreement can be reached on the four topics being negotiated.

Obviously, the vast majority of the USMCA will not be disturbed by any agreement between the Trump Administration and House Democrats. And any modifications to the agreement or acceptance of additional side agreements, etc., obviously need to be agreed to by Mexico and Canada and result in implementing legislation that is approved by Congress. But without agreement between the Administration and the House Democrats, USMCA implementing legislation will not be taken up by Congress. Thus, agreement between the Administration and House Democrats in the next few weeks is priority number one for the USMCA moving forward.

For those with an active interest in the USMCA and how the agreement, before modifications, compares to the NAFTA or to the Trans Pacific Partnership (as signed by the U.S., but before the U.S. withdrew), I include below side-by-side documents of several chapters (14 on investment, 20 on intellectual property, 23 on labor, 24 on environment, 31 on dispute settlement) and one side letter (on biologics). The side-by-side documents were generated by my firm prior to my retirement. Presumably modifications to the agreements or additional side letters, etc. that are agreed to by the Administration with the House Democrats will key off of the enclosed chapters and side letter.

USMCA-Side-by-Side-Chapter-14-Investment

USMCA-Side-by-Side-Chapter-20-Intellectual-Property-Rights

USMCA-Side-by-Side-Chapter-23-Labor-1

USMCA-Side-by-Side-Chapter-24-Environment

USMCA-Side-by-Side-Chapter-31-Dispute-Settlement

MX-US_Side_Letter_on_Biologics

The World Trade Organization in Crisis – the Last Two Months of the Appellate Body Absent Reform Is Just One Example

The World Trade Organization currently has 164 members (countries and customs territories), with an additional 22 countries in the process of pursuing accession.  While the WTO has attracted a lot of interest and greatly increased membership since its start in 1995, it is an organization in trouble and of diminishing relevance despite its important role and broad membership.  While the challenges facing the WTO dispute settlement system are an obvious example of an unresolved problem, dispute settlement is by no means the only area of concern.

Challenges with the Negotiations Function

Historically, the most important function of the WTO’s predecessor, the GATT, was negotiating reductions in tariffs and other trade barriers.  With a much broader membership under the WTO and with divergent economic systems for some major players from the historic market-based model,  the negotiating function has been seriously hampered and the rules-based system does not adequately address differences in economic systems.  While there have been some successes in expanding liberalization (e.g., information technology agreement, trade facilitation, agriculture export subsidy commitments), the consensus based approach and different interests of various major participants has largely prevented the WTO from maintaining a system reflecting current global issues and technologies and the differences in economic systems, with members relying on other vehicles to address pressing issues.

Members are attempting to reach agreement on limiting fisheries subsidies (now in the 18th year of negotiations) by the end of 2019 against a background of a continuing worsening of the overfishing problem globally.  Moreover, discussions on broader reform within the WTO have been being held over the last year or two, including efforts to restore vitality to the Committee process through improved notifications (see below) and addressing some of the practices of different economic systems that are destabilizing global markets in a wide range of products.  The likelihood of any significant breakthrough on fundamental reform seems implausible in light of the dramatically different interests of key members and the need for consensus.

Challenges to the Committee Oversight Function

A second function of the GATT and now the WTO has been a committee process that is supposed to permit Members to monitor the activities of other members through various notification requirements and an ability to identify current concerns and potentially identify solutions acceptable to the broader membership.  While the committee structure exists, notifications are spotty at best and the committee process has been reduced in importance for most of the first 25 years of the WTO through lack of focus by participating Members and other reasons.  There are committees which appear to have functioned reasonably well over periods of time, but this critical aspect of the WTO is not making the contributions that it could and should make.

Time is Running Out for the Appellate Body’s Continued Functioning

The third core area of the WTO is dispute settlement.  While there have been hundreds of disputes during the first 25 years of the WTO and while most Members are supportive of the system, there is a continuing crisis that flows from a core departure by the Appellate Body from the agreement that established the system, the Dispute Settlement Understanding (“DSU”).  While many/most of the Appellate Body decisions are accepted by most/all countries, fundamental concerns with a system at odds with the agreed purpose of dispute settlement have been raised by the United States for more than 17 years (and indeed flow from Appellate Body actions stretching back close to 20 years). A core problem is the lack of effective ability of Member states to correct erroneous decisions of the Appellate Body which has meant that a system intended to help Members resolve disputes between themselves has instead turned into a system where rights and obligations are not a reflection of agreements but rather the views of the Appellate Body members.

While there are important Members who are happy with a system where rights and obligations are identified by the Appellate Body whether or not trading partners agreed to such obligations or rights, the creation of rights and obligations through dispute settlement is a fundamental departure from the agreed terms of the Dispute Settlement Understanding and is unacceptable to the United States.  As no appeal can be heard where there are not at least three members of the Appellate Body, the Appellate Body will cease to operate (at least temporarily) after December 10, 2019, when the number of Appellate Body members declines from three to just one.

The United States has gone to extraordinary lengths over the last year or more to both identify its concerns and chronicle the history of the development of the issues.  Some Members have made proposals to address one or more U.S. concerns through modifications to the DSU or through other means. But the proposals to date have failed to address the question raised by the U.S. as to why the Appellate Body has been willing to depart from the requirements of the DSU in the first place.  Without understanding that question, why would modifications to the DSU result in a correction of action by the Appellate Body going forward?

The last Dispute Settlement Body meeting was held on September 30, and there was no resolution of the concerns of the U.S.  at that meeting.  There are future meetings (before December 10) presently scheduled for October 14 and November 22.  There does not appear to be any realistic scenario in which there is a resolution before December 10, which will result in the Appellate Body ceasing to operate until there is a resolution.

Some countries – the European Union and Canada – have agreed to create an “arbitration” substitute for disputes between themselves and can be expected to seek agreement with other Members.  See JOB/DSB/1/Add. 11.  Members have the right now to agree to arbitration in lieu of the panel or Appellate Body system.  DSU Art. 25.  The proposal by the EU and Canada has already resulted in questions from the U.S. not on whether arbitration among willing Members is permitted but whether, inter alia, the specific agreement between the EU and Canada exceeds the limits of the DSU by making arbitration decisions among willing Members somehow more than a resolution between the parties themselves.      

Conclusion

USTR Lighthizer has indicated that the world would need to create something like the WTO if it didn’t exist.  The U.S. under the Trump Administration just as under prior Administrations, has worked hard within the WTO to identify issues of concern and seek forward movement.  Therefore it is not a correct reading of the actions of the United States to suggest that the U.S. is not supportive of the WTO.

An organization that sovereign states subscribe to and adhere to and that can address a rapidly changing world environment for the benefit of all participants is what the WTO is supposed to be.  Without important reforms, unfortunately, the WTO will become less and less relevant to global commerce and to the lives of people around the world.   It is the responsibility of the WTO Members to identify and adopt the changes that are needed to achieve the reforms needed to keep the WTO relevant.  That takes leadership and an ability of the major players to understand what current economic realities prevent acceptable solutions.  

 Unfortunately, taking the dispute settlement situation as an exemplar, major players are failing to address the departures from the DSU that have caused such concerns for the United States for the last two decades.  That approach simply ensures a diminished relevance for the WTO and increased conflict between trading partners.