China

U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter

The retaliation that China has pursued against U.S. exports in response to the U.S. 301 investigation and resulting U.S. actions reduced total US domestic exports of goods by some $10 billion between 2017 and 2018 and a further $15 billion in the first eleven months of 2019.

While the U.S.-China Phase 1 Agreement does not include obligations for China to reduce retaliatory tariffs on U.S. exports, the Chapter 6 Expanding Trade obligations that China has assumed would not be plausible if China doesn’t unilaterally reduce retaliatory tariffs on many products. It has done that on some products in 2019 and it is assumed when the agreement takes effect in mid-February 2020 a significant number of retaliatory tariffs will be reduced at least temporarily to permit China to honor its purchase commitments.

The U.S. and China agreed to different levels of ambition in terms of increased U.S. exports depending on four broad categories of goods and services – manufactured goods, agriculture, energy and services. What isn’t immediately apparent is that the increases in goods exports does not cover all U.S. export categories but rather refers to levels of ambition for the categories shown in Annex I and detailed in the Attachment to Annex 6-1 of the Agreement (pages 6-4 to 6-23).

But in fact, manufactured goods (8 subcategories), agriculture (6 subcategories) and energy (4 subcategories) account for less than 60% of all U.S. domestic exports of goods to China in 2017 (59.17%). This suggests both larger percentage increases for the products that are covered to achieve the growth in goods exports and an unknown future for the 40.83% of export products not included in the Attachment, products which saw sharp declines in the first eleven months of 2019 of over $12 billion (a decline of 28.12% from the comparable period in 2018). While the service categories covered in the Attachment are also not inclusive of all service sectors, the select categories account for 98.97% of all service exports to China reflected in U.S. statistics for 2017.

Thus, the level of stretch in achieving the very ambitious figures in Annex 1 depends on a number of factors, including whether one compares increases to the products and services identified versus total goods and services and how one factors in U.S. exports of goods and service not covered by specific commitments.

For example, in 2017 total US domestic exports and U.S. service exports were $175.9 billion. From page 6-3 of the US-China Phase 1 Agreement, the total commitments for increased purchases by China over 2017 levels are $76.7 billion in the first year (Feb. 14, 2020-Feb. 13 2021) and $123.3 billion in the second year (Feb. 14, 2021 – Feb. 13, 2022). The level of increases versus 2017 total exports of goods and services would be 43.6% and 70.0%.

However, only $126.9 billion of goods and services are included in the Attachment to Annex 6-1. If the increases presented are against those smaller numbers, the level of increase needed is obviously greater — 60.4% and 97.2%.

And there doesn’t appear to be any level of trade projected for the $49 billion of goods exports and $600 million services exports not included in the Attachment to Annex 6-1. Since many of the goods exports are subject to retaliatory tariffs, there is not likely to be a rebound in exports from the U.S. to China of these non-specified goods in the near term suggesting that the experience in 2019 (data through November) is likely the best scenario for those products. If so, total U.S. goods exports would be $12 billion lower (services not covered are minor and unlikely to be negatively affected). Increases over 2017 actual (adjusted for the decline for non-covered goods in 2019) would represent an increase of 40.02% in the first year and 68.62% in year two.

Below is a review of the four categories to see the level of ambition being undertaken in each.

Manufactured goods

The manufactured goods listed in the Attachment to Annex 6-1 are broken into the following eight subcategories: industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft (orders and deliveries), vehicles, optical and medical equipment, iron ad steel, and other manufactured goods. The HS categories listed show total U.S. domestic exports to China in 2017 of $42.521 billion (and most non-covered US exports of goods would be in this grouping). The level of increase in exports of manufactured goods is $32.9 billion in year one and $44.8 billion in year two – increases over actual 2017 of 77.37% and 105.36% respectively.

Agriculture

The agriculture category in Annex 6-1 has six subcategories: oilseeds, meats, cereals, cotton, other agricultural commodities, and seafood. The 2017 U.S. domestic exports for the HS categories included under agriculture in the Attachment to Annex 6-1 were $20.851 billion. Annex 6-1 calls for increased U.S. exports of $12.5 billion in year one and $19.5 billion in year two, increases of 59.95% and 93.52% respectively.

Energy

The energy group products is broken into four subcategories: liquefied natural gas, crude oil, refined products and coal. The increased exports are the largest percentage wise for this category as 2017 exports are relatively modest, just $7.57 billion. With growth of $18.5 billion in year one and $33.9 billion in year two, the rate of increase needs to be 244.23% in year one and 447.53% in year two over actual 2017 levels. Presumably the aggressive increases reflect China’s energy needs and the developments in the U.S. energy sector in recent years.

Data on each of the goods categories is contained in the table below. For simplicity, year 1 is referred to as 2020 and year 2 as 2021.

Services

Data on U.S. trade in services with China show growing U.S. exports from 2016 to 2017 and continuing to grow in 2018. Data for 2017 show U.S. exports to China of $56.009 billion growing to $57.140 billion in 2018.

The service sectors covered in Annex 6-1 include charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services. These categories in 2017 accounted for $55.434 billion with one of the BEA categories not showing exports to China to preserve confidentiality. The growth objectives included in Annex 6-1 are for $12.8 billion additional US exports in year one and $25.1 billion in year two representing growth rates over 2017 action of 22.85% and 44.81% respectively. U.S. data are presented below.

As reviewed in the post on January 15, there are significant commitments by China in a number of the chapters which should make a significant expansion of exports from the U.S. doable in the short run. Such a result is envisioned in Chapter 6 of the Phase 1 Agreement with specific commitments on Chinese purchases broken down by categories and possibly by subcategories. Such commitments will require a reduction or elimination of retaliatory tariff on many products to permit results in the first two years of the agreement.

While a lot of attention understandably is focused on what remains to be done with China on a host of critical issues (industrial subsidies, SOEs, China 2025 policies, etc.), a strong growth in demand from China for U.S. products and services is important if achieved. Let’s hope that the Agreement surprises many by its early and complete implementation.

U.S.-China Phase 1 Trade Agreement Signed on January 15 — An Impressive Agreement if Enforced

There has been a lot of anticipation for what the Phase 1 agreement between the U.S. and China actually contains. Earlier today, following the signing ceremony at the White House, The Economic and Trade Agreement Between the United States of America and the People’s Republic of China, Phase 1 was released. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf

I’ve just finished reading through the agreement.  My first blush read is that the agreement has a lot of positive potential for the United States. While enforcability is always a critical consideration and particularly based on the U.S. experience with other commitments made by China in the past, there are some chapters which have both great specificity on obligations and specific timeline commitments that should make at least those chapters potential important improvements.

A quick overview of the agreement follows.

Intellectual Property

Chapter 1 on intellectual property is quite interesting as it lays out a large number of obligations China is taking on by individual IP issue and confirms that US system already has such obligations.  The chapter is broken into the following topics:

Trade secrets and confidential business information;

Pharmaceutical-related intellectual property;

Patents;

Geographical indications;

Manufacture and export of pirated and counterfeit goods;

Bad-faith trademarks;

Bilateral cooperation on intellectual property protection;

Implementation;

The specificity of commitments and timing for action are important in hopefully making this a really important chapter for companies with intellectual property needs and current concerns in China’s performance on such matters. USTR’s fact sheet on the IP chapter presents the Administration’s view of what was achieved. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-IP_Fact_Sheet.pdf. My own view is that Chapter 1 is an important plus for the U.S.

Forced Technology Transfer

The technology transfer chapter is limited and doesn’t appear to be more enforceable than the multiple laws, etc. China has had for years. While the chapter states the obligations, China has historically been of the view that technology transfer is not enforced in fact. The Administration understandably views the chapter as important, and the pressure of the 301 investigation and tariffs that remain may make the chapter more valuable than the general statements it consists of suggest. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Technology_Transfer_Fact_Sheet.pdf In my view, this is more of a placeholder chapter. Hopefully it will be honored in fact but the past doesn’t show that as a high probability.

Trade in Food and Agricultural Products

The third chapter on agriculture could be very important for changing the U.S. agricultural export scene as the chapter goes through a large number of products, establishes timelines and standards against which US products will be evaluated and or requires acceptance of various US products that have met US standards. The Administration gets straight A’s for the breadth and depth of this chapter in my view. There are seventeen annexes that take up the following topics or products:

Annex 1, agricultural cooperation

Annex 2, dairy and infant formula

Annex 3, poultry

Annex 4, beef

Annex 5, live breeding cattle

Annex 6, pork

Annex 7, meat, poultry and processed meat

Annex 8, electronic meat and poultry information system

Annex 9, aquatic products

Annex 10, rice

Annex 11, plant health

Annex 12, feed additives, premixes, compound feed, distillers’ dried grains, and distillers’ dried grains with solubles

Annex 13, pet food and non-ruminant derived animal feed

Annex 14, tariff rate quotas

Annex 15, domestic support

Annex 16, agricultural biotechnology

Annex 17, food safety

The chapter also includes an Appendix which lists beef, pork and poultry products considered not eligible for import into China which US producers will need to review. There are also side letters released with the agreement that address products and producers who will have immediate access to China consistent with the chapter. The Administration has a fact sheet on agriculture chapter in total and then on individual products. The chapter fact sheet’s link follows. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Ag_Summary_Long_Fact_Sheet.pdf

Financial Services

The fourth chapter on financial services is also quite interesting and is the one chapter where there are specific US obligations identified (typically considering expeditiously pending applications by Chinese financial service providers in specific areas).  US companies have had many problems for the last 20 years in terms of China’s permitting access.  Looks to me that the chapter, if implemented (and there are timelines, etc.) could be important for US companies. Subjects covered include banking services, credit rating services, electronic payment services, financial asset management (distressed debt) services, insurance services, and securities, fund management, futures services. The Administration’s fact sheet on financial services provides its views on the importance of the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Financial_Services_Fact_Sheet.pdf

Macroeconomic Policies and Exchange Rate Matters and Transparency

The fifth chapter on currency contains four articles. One is on general provisions. The second is on exchange rate practices. The third addresses transparency. And the fourth article covers the enforcement mechanism. While China was widely viewed as engaging in reducing the value of its currency for many years and was last year found by the Trump Administration to be a currency manipulator, most economists have viewed China as less problematic on its currency in recent years.  It is important to have a chapter focused on transparency and currency practices. Unclear how effective the enforcement provisions outlined will be in fact. But hopefully, China’s actions will not raise concerns under this chapter going forward. The Administration’s fact sheet presents its views of what was accomplished in the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Macroeconomic_Fact_Sheet.pdf

Expanding Trade

The sixth chapter is potentially commercially important as it addresses China’s commitments to increase purchases from the United States in both goods and services. The actual text clarifies that the $200 billion additional imports by China over 2017 levels are the combination of increases over 2017 in 2020 and 2021 versus being a requirement for each year.  Such growth is more achievable and less unrealistic in my view.

The targets for growth are presented in four groups – manufactured goods, agricultural goods, energy, services and then the categories that are considered within each of the four groups are shown on pages 6-4 – 6-23 of the Agreement.  The growth above 2017 levels for the four broad categories is shown below.

Products/Services20202021Total
manufactured goods$32.9 BN$44.8 BN$77.7 BN
agriculture$12.5 BN$19.5 BN$32.0 BN
energy$18.5 BN$33.9 BN$52.4 BN
services$12.8 BN$25.1 BN$37.9 BN
Total$76.7 BN$123.3 BN$200.0 BN

A lot of attention will be focused on whether the purchases actually happen.  Actions under Chapter 3 will directly improve US exports of agricultural goods and those of Chapter 4 will improve the financial services portion of the services target.  The IP chapter could be affect manufactured goods, etc. So much of the Phase 1 Agreement should result in a natural increase in imports from the U.S. as longstanding barriers are removed or otherwise overcome.

The Administration’s fact sheet on expanded trade can be found here. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Expanding_Trade_Fact_Sheet.pdf

Bilateral Evaluation and Dispute Resolution

A lot of focus will be given to Chapter 7 because of the importance of enforcement. However, as noted above, enforcement should be easier where there has been the level of detail/specificity as to obligations and timelines for implementing individual obligations that exists in many of the chapters.

On enforcement, Chapter 7, lays out the basic purpose of the bilateral evaluation and dispute resolution arrangement in Article 7.1. Paragraph 2 of that Article provides the objectives, reflecting both the U.S. desire for speed and the Chinese desire for mutual respect and avoidance of escalation.

“The purpose and madate of the Arrangaement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.”

There are various elements to the chapter including a high level Trade Framework Group (USTR and designated Vice Premier of the PRC).  Each country will have a Bilateral Evaluation and Dispute Resolution Office which will, inter alia, handle disputes and includes opportunities for appeals on short time lines, referral to USTR and the Vice Premier and the ability of the complaining party to take action if not resolved with either no retaliation (complained against party views action taken as in good faith) or the need to withdraw from the agreement for the party complained against if the belief is that the action was not taken in good faith.

I believe that the Chapter will effectively help the Parties resolve disputes particularly with regard to the commitments in Chapter 1, 3,  4 and 6. 

Conclusion

The Phase 1 Agreement is an important agreement that will achieve some significant market access opening for U.S. producers into the Chinese market, improved intellectual property protection in China, expanded market access for U.S. financial service providers and hopefully make some progress on reducing or eliminating forced technology transfer and limit concerns about currency misalignment. My hat’s off to the negotiators for an impressive result. There remain important issues not yet addressed bilaterally that will hopefully be taken up in Phase 2 talks, but Phase 1 is an important accomplishment.

WTO Reform – Joint Statement of January 14, 2020 of Japan, the U.S. and the EU

At the last WTO Ministerial Conference held in December 2017 in Buenos Aires, Argentina, the U.S., the EU and Japan announced efforts to cooperate to develop WTO reforms to address concerns in areas such as industrial excess capacity, massive government subsidies, state owned enterprises, forced technology transfers, local content requirements and other matters. The joint statement released on December 12, 2017 is included in a press release from USTR and is reproduced below:

“Joint Statement by the United States, European Union and Japan at MC11

“12/12/2017

“Mrs. Cecilia Malmström, European Commissioner for Trade, Mr. Hiroshige Seko, Minister of Economy, Trade and Industry of Japan and Ambassador Robert E. Lighthizer, United States Trade Representative met in Buenos Aires, Argentine Republic on the 12th of December 2017 and agreed to strengthen our commitment to ensure a global level playing field.

“They said:

“We shared the view that severe excess capacity in key sectors exacerbated by government-financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state owned enterprises, forced technology transfer, and local content requirements and preferences are serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.

“We, to address this critical concern, agreed to enhance trilateral cooperation in the WTO and in other forums, as appropriate, to eliminate these and other unfair market distorting and protectionist practices by third countries.”

Japan, the EU and the U.S. have had a series of meeting over the last two years to seek agreement amongst themselves on reforms to the WTO to address the areas covered by the joint statement. There have also been other areas of cooperation including on working towards a more robust set of notification requirements and on how advanced developing countries can better contribute to the WTO by taking on full commitments and by not participating in special and differential treatment under new agreements or new negotiations.

On January 14, 2020, officials from Japan, the EU and the U.S. issued a joint statement that lays out some of the reforms, most in the area of subsidy disciplines, that the three have been able to agree on. While they are still working on proposed text, it is expected that the three major WTO Members will start an outreach process to broaden the support for the proposals. The USTR Press Release which contains the joint statement is attached below.

Joint-Statement-of-the-Trilateral-Meeting-of-the-Trade-Ministers-of-Japan-the-United-States-and-the-European-Union-_-United-States-Trade-Representative

One can expect a busy 2020 in Geneva and in capitals around the world as proposals for WTO reform are vetted with various members and the topics get taken up in the WTO. While it is unlikely that any significant movement will occur by the 12th WTO Ministerial scheduled for early June 2020 in Kazakhstan, the topic of WTO reform has seen increased interest and activity throughout 2019.

What are the proposed increased disciplines on subsidies?

Prohibited Subsidies

Industrial subsidies have been the focus of the trilateral discussions. The Joint Statement recommends expanding the list of prohibited subsidies in Article 3.1 of the Agreement on Subsidies and Countervailing Duty Measures (“ASCM”) to include the following four categories (and have indicated that they are still exploring whether additional categories should be added):

  1. “unlimited guarantees”;
  2. “subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan”;
  3. “subsidies to enterprises unable to obtain long-term financing or investment from independent commercial sources operating in sectors or industries in overcapacity”;
  4. “certain direct forgiveness of debt”.

These types of subsidies have been major concerns in a number of industries and certainly would pertain to China, but would be applicable to all Members.

Reversal of burden on certain actionable subsidies

The Joint Statement also recommends reversing the burden of proof on certain actionable subsidies that are not prohibited but where the three Members believe the types of subsidies can cause significant harm to competing producers in other countries. The proposal would impose on the subsidizing Member the burden of demonstrating “that there are no serious negative trade or capacity effects and that there is effective transparency about the subsidy in question.” While the list of such subsidies is still being developed, the list currently includes four categories:

  1. “excessively large subsidies”;
  2. “subsidies that prop up uncompetitive firms and prevent their exit from the market”;
  3. “subsidies creating massive manufacturing capacity, without private commercial participation”; and
  4. “subsidies that lower input prices domestically in comparison to prices of the same goods when destined for export.”

China has been pouring vast subsidies into a range of manufacturing sectors, has created massive excess capacity in dozens of industries, has created “zombie” companies which are prevented from exiting the market, and engages in various practices which have the effect of lowering input prices domestically far below world prices. Similar problems have been experienced with other trading partners as well.

Additional example of serious prejudice

The joint statement also reviews the desire to expand the situations in which serious prejudice under Article 6.3 of the ASCM should be found. The joint statement proposes adding a provision that serious prejudice would exist where the subsidy under investigation distorts capacity. Again, while such a provision would be applicable to all WTO Members, it would obviously be important for economies with the large state role such as China.

Other subsidy proposals

There are three other important proposals contained in the joint statement.

First, the serious problem of inadequate notifications is addressed by proposing that any non-notified subsidies will be treated as prohibited subsidies where other WTO Members provide a counter-notification unless all required information is provided by the subsidizing Member within a certain period of time. The U.S. has provided counter-notifications of subsidies on China and on India in the past. There is still a belief that large numbers of subsidies are not reported by these two countries and others. Lack of complete notifications hampers the ability of trading partners to understand the competitive environment and whether particular Members are acting consistent with their ASCM obligations.

Second, the joint statement addresses one of the challenges flowing from the existing ASCM and dispute settlement decisions, namely the lack of clarity for determining benchmarks for evaluating whether benefits are provided when the home market is distorted. The U.S. and others have gone out of country in certain circumstances, and WTO disputes have limited options for investigating authorities. This has proven to be an important issue in countervailing duty cases looking at subsidies for a number of countries, though China is obviously a major concern. Clarification is very much needed.

Third, the joint statement proposed ensuring that subsidies provided by state owned enterprises can be captured by the term “public body” in ASCM Article 1.1(a)(1). Such clarification is needed in light of a WTO dispute settlement decision which limited the scope of public body. All WTO members with significant state-owned and state-invested enterprises would be affected. Again, China is a major focus of the concern.

Forced Technology Transfer

Forced technology transfer has been a matter of concern for all three of the trilateral Members issuing the joint statement. The joint statement reviews the harm such actions have on other trading partners but does not provide a proposal as yet on what steps need to be taken, including on enforcement. Obviously, as far as China is concerned, these concerns have been a central part of the Section 301 investigation and actions by the U.S. Administration and is reportedly being addressed in one of the chapters in the Phase 1 Agreement that will be signed on January 15. It is not clear if the EU, Japan and the U.S. will be looking to multilateralize whatever provisions the United States has negotiated with China into the WTO.

Other items mentioned in the joint statement

Japan, the EU and the United States have been active on a range of other reform issues and agreed to continue to cooperate on them going forward. There are four items flagged:

  1. “the importance of market oriented conditions for a free, fair, and mutually advantageous trading system”;
  2. “reform of the WTO, to include increasing WTO Member compliance with existing WTO notification obligations and pressing advanced WTO Members claiming developing country status to undertake full commitments in ongoing and future WTO negotiations”;
  3. “international rule-making on trade-related aspects of electronic commerce at the WTO”; and
  4. international forums such as the Global Forum on Steel Excess Capacity and the Governments/Authorities’ Meeting on Semiconductors.”

The WTO system was built by market economy countries and does not address many of the distortions that “state capitalism” such as that practiced by China creates. While proposals such as those on subsidies can address (potentially) some of the distortions that state capitalism systems create, pursuing greater coherence to market economy principles is undoubtedly to the benefit of global trade. If very different economic systems are to continue to coexist, major reform to the WTO will be needed to have any hope of reciprocal trade happening, and such trade may well need to be managed in part.

The second group of issues have been being pursued by the U.S. aggressively in Geneva and bilaterally with the support of various countries. Korea, Singapore and Brazil have all agreed not to seek special and differential treatment in future negotiations or agreements.

For the WTO to remain relevant going forward it needs to be able to address major changes in the global trade environment. The importance of e-commerce is one such example. The plurilateral negotiations that are underway by many WTO members need to be both ambitious and reach an early conclusion.

China has walked away from the Global Forum on Steel Excess Capacity without a resolution to the serious global excess capacity problem largely created by China. Separately, a recent OECD report on subsidies to the semiconductor industry globally shows the importance of addressing the challenges in that sector on a comprehensive basis to avoid massive distortions in outcomes. OECD (2019), “Measuring distortions in international markets: The semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, https://doi.org/10.1787/8fe4491d-en.

Conclusion

The joint statement released today has an importance beyond the specific proposals it contains. It demonstrates that Japan, the EU and the U.S. have a large set of issues on which there is a common vision and willingness to work together for the good of the global system. The proposals on additional subsidy disciplines address real shortfalls in the existing ASCM and reflect the emergence of subsidy practices by state-capital countries like China that need to be addressed. They also identify important corrections to WTO dispute settlement decisions that need to be made to permit the ASCM to function as intended.

Many countries have concerns with forced technology transfer practices of some countries. While hopefully the U.S.-China Phase 1 Agreement to be signed on January 15, 2020 will provide a roadmap for a successful approach to these issues, the trilateral efforts will be important to multilateralize an approach that will address all permutations of forced technology transfer that are identified by Members.

Finally, the WTO has gone through its first 25 years and is in need of significant reforms to remain relevant as global trade moves forward. The issues covered by the Joint Statement represent a good group of issue to breathe life back into the WTO.

Fisheries Subsidies – Will the WTO Members Reach Agreement Before June 2020?

When WTO Members launched the Doha Development Agenda in November 2001, one of the topics to be explored was fisheries subsidies as outlined as part of the Rules paragraph 28:

“In the context of these negotiations, participants shall also aim to clarify and improve WTO disciplines on fisheries subsidies, taking into account
the importance of this sector to developing countries.” Ministerial Declaration, para. 28, WT/MIN(01)/Dec/1.

Fisheries subsidies were also mentioned in paragraph 31 of the Declaration dealing with topics within trade and environment that would be explored.

More than 18 years later, WTO members are pushing to reach agreement on new disciplines on fisheries subsidies by the time of the 12th Ministerial Conference to be held in Nur-Sultan, Kazakhstan in early June 2020.

The push is related to the 2020 deadline included in the September 2015 UN Sustainable Development Goals (“SDG”) 14.6: “by 2020, prohibit certain forms of fisheries subsidies which contribute to overcapacity and overfishing, and eliminate subsidies that contribute to IUU fishing, and refrain from introducing new such subsidies, recognizing that appropriate and effective special and differential treatment for developing and least developed countries should be an integral part of the WTO fisheries subsidies negotiation.” The term “IUU” refers to “illegal, unreported, and unregulated” fishing.

At the 11th WTO Ministerial Conference, WTO members adopted a decision to complete fisheries subsidies negotiations by the next Ministerial Conference. See WT/MIN(17)/64; WT/L/1031:

“FISHERIES SUBSIDIES

“MINISTERIAL DECISION OF 13 DECEMBER 2017

“The Ministerial Conference

Decides as follows:

“1. Building on the progress made since the 10th Ministerial Conference as reflected in documents TN/RL/W/274/Rev.2, RD/TN/RL/29/Rev.3, Members agree to continue to engage constructively in the fisheries subsidies negotiations, with a view to adopting, by the Ministerial Conference in 2019, an agreement on comprehensive and effective disciplines that prohibit certain forms of fisheries subsidies that contribute to overcapacity and overfishing, and eliminate subsidies that contribute to IUU-fishing recognizing that appropriate and effective special and differential treatment for developing country Members and least developed country Members should be an integral part of these negotiations.

“2. Members re-commit to implementation of existing notification obligations under Article 25.3 of the Agreement on Subsidies and Countervailing Measures thus strengthening transparency with respect to fisheries subsidies.”

Why the interest in fisheries subsidies?

For decades, the world has been experiencing overfishing of various species of fish in different parts of the world. The U.N.Food and Agriculture Organization (FAO) reports that between 1974 and 2015 fish stocks that are not within biologically sustainable levels increased from 10% in 1974 to 33.1% in 2015. FAO, The State of World Fisheries and Aquaculture 2018 (“2018 Report) at 6. This decline has occurred despite efforts made by various countries to regulate capture/production.

“Despite the continuous increase in the percentage of stocks fished at biologically unsustainable levels, progress has been made in some regions. For example, the proportion of stocks fished within biologically sustainable levels increased from 53 percent in 2005 to 74 percent in 2016 in the United States of America, and from 27 percent in 2004 to 69 percent in 2015 in Australia.” 2018 Report at 6.

Because of, inter alia, the importance of the fishing industry to many countries and fish to the diets of many peoples, there has been concern for many years with actions needed by nations to ensure the sustainability of fish captures.

The FAO’s 2018 Report provides a great deal of information on the importance of fish to developing and least developed countries and the various actions being taken to address meeting the Sustainable Development Goals (“SDGs”) pertaining to fish and the oceans.

The WTO’s negotiations on fisheries subsidies are just one part of the much larger group of SDGs being pursued by countries as part of the UN targets and only deals with ocean/sea wild caught fish, not with aquaculture and not with inland caught fish. The FAO’s 2018 Report is attached below.

2018-FAO-the-state-of-world-fisheries-and-aquaculture

As Table 1 in the 2018 Report shows, there has been a rapid growth in aquaculture so that by 2016, there was greater volume from aquaculture than there was from “marine caught”. Specifically, in 2016 aquaculture accounted fro 80.0 million metric tons (46.8%) of the total production/ capture, marine capture was 79.3 million metric tons (46.4%) and inland capture was 11.6 million metric tons (6.8%) – for a total of 170.9 million metric tons. Data do not include information on aquatic mammals, crocodiles, alligators, caimans, seaweeds and other aquatic plants. 2018 Report, Table 1, page 4.

While aquaculture has grown, marine capture has declined or stagnated over time and with growing levels of overfishing, longer term decline will occur in this sector absent concerted steps to manage the volume pursued at sea. Overfishing is believed due to overbuilding of fishing fleets and the level of fishing that contravenes national laws, is unrecorded and/or unregulated. Thus, the efforts within the WTO to impose disciplines on subsidies benefiting IUU fishing and/or contributing to overfishing are an important element in achieving catch rates that are sustainable versus unsustainable and declining.

Importance of marine fishing to developed, developing and least developed countries

The FAO gathers information on the amount of marine capture (as well as inland capture and aquaculture) annually. The latest data available from FAO are for 2017. FAO, Fishery and Aquaculture Statistical Yearbook 2017, http://www.fao.org/fishery/static/Yearbook/YB2017_USBcard/index.htm. The average marine caught volumes for the years 2015-2017 from the FAO data base were summarized for WTO Members in a July 11, 2019 submission to the WTO rules negotiations addressing fisheries subsidies. The submission was made by Argentina, Australia, the United States and Uruguay. Top marine caught Members are presented below in millions of metric tons and percent of world production:

CountryProduction (mm tonnes)% of World Production
China13.8 17.30%
Indonesia 6.2 7.76%
European Union 5.3 6.68%
United States 5.0 6.25%
Russian Federation 4.4 5.53%
Peru 4.2 5.31%
India 4.6 4.57%
Japan 3.2 4.06%
Vietnam 3.0 3.71%
Norway 2.2 2.80%
Chile 1.7 2.18%
Malaysia 1.5 1.90%
Republic of Korea 1.4 1.82%
Morocco 1.4 1.73%
Mexico 1.4 1.73%
Thailand 1,3 1.65%
Myanmar 1.2 1.49%
Iceland 1.2 1.48%
Chinese Taipei 0.8 1.04%
Canada 0.8 1.03%
Argentina 0.8 0.98%
Ecuador 0.7 0.84%
Bangladesh 0.6 0.78%
Mauritania 0.6 0.74%
South Africa 0.6 0.71%
Subtotal 68.8 86.36%
All Other 10.9 13.64%
World Total 79.7 100.00%

TN/RL/GEN/197/Rev.2, pages 4-7, Annex I (11 July 2019). Data for the EU and the US contain data from various islands referenced on page 4 in fotnotes a and b. The Annex lists 136 of the 164 WTO members and their production/volumes although no data are available for 28 WTO members (some of which are landlocked and hence may have no marine caught fish). The full listing is attached below.

TNRLGEN197R2

As reviewed in the 2018 Report (page 2), fish make up an increasing share of animal protein for humans, with 100% of the increase being accounted for by expanding aquaculture:

“The expansion in consumption has been driven not only by increased production, but also by other factors, including reduced wastage. In 2015, fish accounted for about 17 percent of animal protein consumed by the
global population. Moreover, fish provided about 3.2 billion people with almost 20 percent of their average per capita intake of animal protein. Despite their relatively low levels of fish consumption, people in developing countries have a higher share of fish protein in their diets than those in developed countries. The highest per capita fish consumption, over 50 kg, is found in several small island developing States (SIDS), particularly in Oceania, while the lowest levels, just above 2 kg, are in Central Asia and some landlocked countries.”

Fishing/fisheries are an important source of employment for many countries, with the vast majority of such employment being in countries in Asia, Latin America and Africa. Specifically in 2016 worldwide fisheries employment was estimated at 40.338 million people (no breakout between marine and inland caught). Of this number, 31.990 million were in Asia ((79.3%), 5.367 million were in Africa (13.3%) and 2.085 million were in Latin America and the Caribbean (5.2%) , with just 896,000 jobs in North America, Europe and Oceania. Several important individual countries are shown in the 2018 Report — China with 14.5 million jobs in fisheries in 2016 (36% of global) and Indonesia with 2.7 million folks employed in fisheries (6.7% of global employment in the sector). 2018 Report at 32-33. Much of the employment in fisheries around the world is from family run operations, often subsistence in nature, and mainly using small boats (less than 12 meters in length and a large portion of which are not motorized).

The 2018 Report indicates that in 2016 the number of fishing vessels in the world were 4.6 million, 2.8 million of which were motorized. Of the 4.6 million vessels, 75.4% were in Asia, 14.0% in Africa, 6.4% in Latin America and the Caribbean, 2.1% in Europe, 1.8% in North America and 0.3% in Oceania. 100% of Europe’s vessels were motorized, more than 90% of those in North America, but only some 25% in Africa. See pages 36-38 of the 2018 Report.

WTO Efforts at Increasing Disciplines on Marine Fisheries Subsidies

Negotiations at the WTO have had periods of greater activity since 2001 than in other periods. 2005-2011 was a particularly active period according to the WTO webpage, with an uptick in efforts beginning in late 2016 and continuing to the present time. See https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_intro.htm.

The negotiations have been complicated by many issues that are not typical for trade negotiations. Here are a few of the perceived problem issues:

(a) problem being addressed relates to depletion of scarce global resources through overfishing flowing from subsidies that create excess capacity;

(b) production occurs not only in national waters but in the open seas and through contracts to capture fish in third countries’ waters;

(c) concerns about effect of negotiations on outstanding territorial disputes/claims;

(d) the challenge of disciplining subsidies provided by one country on fishing vessels which are flagged in a different country;

(e) the lack of meaningful data from many developing and least developed countries which complicates understanding the level of marine capture;

(f) for many developing and least developed countries, the large part of fishing fleets which are subsistence or artisanal in nature;

(g) the large portion of global capture which is developing and least developed country in origin vs. desire for special and differential treatment for such countries;

(h) challenge of whether traditional S&D provisions (exclusion from disciplines, lesser reductions, longer implementation periods) are actually harmful to developing and least developed countries where continued erosion of marine catch from overfishing will actually hurt the fishermen and fisherwomen of the countries receiving S&D consideration;

(i) whether dispute settlement as applicable to other WTO agreements (whether SCMA or other) will serve the underlying objectives of any negotiated agreement or needs to be modified to reflect the unique objectives of the agreement.

On the question of level of subsidization, there are the usual questions of what, if any, subsidies will be allowed as not causing concerns re growing capacity or overfishing and whether there is some level of acceptable subsidies even if adding to capacity.

While the set of public documents from the negotiations are reasonable through much of 2018, the resort to Room Documents (which are not made public) and other classification of documents, means that much of the current drafts of sections of a possible agreement are not publicly available. For example, there were ten documents identified as made available to WTO Members for the May 8, 2019 Informal Open-ended Negotiating Group on Rules (Fisheries Subsidies). Seven of the ten documents are not available to the public as “Room Documents” even if the documents were generated weeks or months before the meeting. See, e.g., RD/TN/RL/72 (17/12/2018); RD/TN/RL/81 (21/03/2019); RD/TN/RL/77/Rev.1 (21/03/2019); RD/TN/RL/82 (08/04/2019); RD/TN/RL/79/Rev.1 (18/04/2019); RD/TN/RL/83 (02/05/2019); RD/TN/RL/84 (06/05/2019).

Similarly, WTO Members have done a relatively poor job of notifying the subsidies provided to marine fisheries. Even with improvements in notifications in 2019, as late as November 2019, nine of the 26 largest providers of fisheries subsidies had not provided notifications and some who had done so in 2019 submitted the first notifications of such programs in 20 years. Members welcome progress in notification of fisheries subsidies, https://www.wto.org/english/news_e/news19_e/scm_19nov19_e.htm.

There is a draft document from the Chair of the negotiations from 14 November 2018, TN/RL/W/274/Rev.6 which lays out the Chair’s understanding of negotiations as of that date. The document is attached below and is heavily bracketed meaning that at the time of the draft there was not agreement on the bracketed text or options were shown.

TNRLW274R6

Some public submissions show that countries or groups of countries are still putting forward approaches on topics of importance. For example there are 2019 submissions on the following topics: fishing vessels not flying the member’s flag (e.g., TN/RL/GEN/201/Rev.1 (proposed prohibiting subsidies to such vessels)(Argentina, Australia, Indonesia, Japan, New Zealand, the United States, and Uruguay), on a cap-based approach to addressing certain fisheries subsidies [(TN/RL/GEN/197/Rev.2) and TN/RL/GEN/203)(Argentina, Australia, the United States, and Uruguay) vs. different approach put forward by China (TN/RL/199)], on whether different dispute settlement principles need to be considered (TN/RL/GEN/198, Canadian discussion paper), the breadth of special and differential treatment for developing and least developed countries (TN/RL/200, submission from India).

Interestingly, a submission from New Zealand and Iceland in 2018 warned other WTO members that a focus on fishing in international waters vs. marine catch in national waters would result in any agreement addressing very little of the marine catch volume as would other overly narrow scope approaches:

‘6.SDG Target 14.6 is clear that subsidies that contribute to both overcapacity and overfishing must be prohibited. An outcome which excluded the most harmful types of subsidies which contribute to overcapacity and overfishing would therefore not satisfy SDG Target 14.6. An outcome that addressed capacity or overfishing in just a hortatory way or in a manner that applied disciplines only to a small subset of subsidies or the world’s fishing fleet would similarly fail to meet the requirements of SDG Target 14.6.

“7. For example, the current emphasis on subsidies to fishing beyond national jurisdiction is warranted given the weaker governance and resource and development impacts of such fishing. This however must not be at the exclusion of waters under national jurisdiction where the vast majority of global catch – 88% – is taken.1 Similarly, the emphasis on overfished stocks should not equate to an exception for other stocks as doing so would exclude nearly 70% of the world’s fisheries.2 Taken together, these two approaches alone would result in barely 8% of the world’s fisheries being subject to subsidy prohibitions.3
“2 FAO. 2016. The State of World Fisheries and Aquaculture 2016.
“3 Two thirds of fish stocks managed by RFMOs are overfished or depleted: Cullis-Suzuki, S. & Pauly, D. (2010). Failing the high seas: a global evaluation of regional fisheries management organization. Marine Policy 34: 1036–1042.”

Advancing Fisheries Subsidies Prohibitions on Subsidies Contributing to Overcapacity and Overfishing, TN/RL/W/275 at 2 (8 May 2018)(New Zealand and Iceland).

Will WTO Members Deliver Meaningful Fisheries Subsidies Reform

The fact that the negotiations have taken more tan 18 years and that major countries appear to remain widely apart on many key issues suggests that the road to success will be challenging.

For example, India’s proposal for S&D would result in large amounts of fisheries subsidies not being addressed by the agreement (whatever the scope of subsidies addressed) rendering any agreement of minimal assistance in fact if adopted following that approach.

There are significant differences in approaches to limiting subsidies as can be seen in the different cap approaches presented by China and a group of other countries (Argentina, Australia, the United States and Uruguay).

Similarly, there is a disconnect between the problems being addressed (overcapacity and overfishing) and the traditional role of S&D to eliminate, reduce and/or delay obligations. For the fisheries subsidies negotiations to achieve a meaningful result, the WTO Members need to revisit what the role of special and differential needs to be to achieve better marine catch for developing and least developed countries. The focus needs to be on helping LDCs and developing countries develop accurate data on marine catch, developing the capacity to participate in regional management programs, finding assistance to fishermen and fisherwomen affected by depleted marine catches to survive/choose alternative work until such time as sustainable levels of wild caught fish are again available. But all countries need to contribute to limiting fisheries subsidies where excess capacity or overfishing are the likely result.

And there is the U.S. position that S&D will only be approved in any new agreement if it is limited to those countries with an actual need (i.e., certain countries would not take such benefits). Considering the role of major countries like China and India in marine catch, one can expect challenges in having those countries (and possibly others) agree to forego S&D provisions.

Net/net – as most Members seem to be focused on the wrong questions, there is a reasonable probability that the Kazakhstan Ministerial will not see a meaningful set of disciplines adopted on fisheries subsidies to address the challenges to marine catch from overcapacity and overfishing.

Let’s hope that the above forecast proves wrong.

WTO Reform – Will Limits on Who Enjoys Special and Differential Treatment Be Achieved?

The GATT had and now the WTO has a system of self-declared status as a developing country. The vast majority of WTO members have declared themselves to be developing countries. Some WTO members are categorized by the United Nations as Least Developed Countries (“LDCs”). Indeed the WTO webpage indicates that 36 of 47 LDCs are currently WTO members and that another eight countries who are listed as LDCs by the UN are in the process of negotiating accession to the WTO. “There are no WTO definitions of ‘developed’ or ‘developing’ countries. Developing countries in the WTO are designated on the basis of self-selection although this is not necessarily automatically accepted in all WTO bodies.” https://www.wto.org/english/thewto_e/whatis_e/tif_e/org7_e.htm.

The relevance of a WTO member declaring themselves to be a developing country has to do with access to special and differential treatment provisions in virtually every agreement and the likelihood of reduced trade liberalization obligations on the member and in any ongoing negotiations. Thus, in the Uruguay Round, developing countries typically faced lower percent reductions on tariffs and were given longer time periods to implement such reductions than were true for developed countries. A report by the WTO Secretariat reviews Special and Differential Treatment (“S&D”) by agreement and categorizes the S&D provisions under one of the following six groupings (WT/COMTD/W/239 at 4) which are quoted as presented:

  1. provisions aimed at increasing the trade opportunities of developing country Members;
  2. provisions under which WTO Members should safeguard the itnerests of developing country Members;
  3. flexibility of commitments, of action, and use of policy instruments;
  4. transitional time-periods;
  5. technical assistance;
  6. provisions relating to LDC members.

The listing of S&D provisions in the Secretariat document is provided as an attachment below along with a correction.

WTCOMTDW239

WTCOMTDW239C1

With the progress many countries or customs territories have made during their GATT and/or WTO membership, the self-selection designation process has raised concerns by other members about whether certain Members are carrying their weight in terms of market liberalization. Indeed, some have attributed the failure of the Doha Agenda to conclude in 2008 to what certain Members who have declared themselves to be developing countries were willing to do in terms of liberalization versus other major Members who are not “developing”. The issue of who should benefit from Special and Differential treatment takes as a given that all LDCs should receive such benefits. The issue is about whether those non-LDCs who have experienced strong growth and significant economic advancement since the start of the WTO should continue to enjoy those benefits in new agreements.

The United States at the beginning of 2019 made a major submission entitled “An Undifferentiated WTO: Self-Declared Development Status Risks Institutional Irrelevance”. WT/GC/W/757, 16 January 2019. A revision was submitted in February and was followed by a draft General Council Decision to limit who can claim S&D benefits in future negotiations and agreements. WT/GC/W/747/Rev.1; WT/GC/W/764. The U.S. proposal in February was as follows:

“The General Council,

Acknowledging that full implementation of WTO rules as negotiated by Members can contribute to economic growth and development and the need to take steps to facilitate full implementation;

Recognizing the great strides made by several WTO Members since the establishment of the WTO in accomplishing the goals set out in the Marrakesh Agreement Establishing the World Trade Organization, of ‘raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with
the objective of sustainable development…;’

Recognizing that not all WTO Members have enjoyed equal rates of economic growth and development since the establishment of the WTO;

Recognizing the plight of the least-developed countries and the need to ensure their effective participation in the world trading system, and to take further measures to improve their trading opportunities;

Recognizing that reserving flexibilities for those WTO Members with the greatest difficulty integrating into the multilateral trading system can open new export opportunities for such countries; and

Desiring to strengthen the negotiating function of the WTO to produce high-standard, reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations;

Agrees as follows:

“To facilitate the full implementation of future WTO agreements and to ensure that the maximum benefits of trade accrue to those Members with the greatest difficulty integrating into the multilateral trading system, the following categories of Members will not avail themselves of special and
differential treatment in current and future WTO negotiations:

“i. A WTO Member that is a Member of the Organization for Economic Cooperation and Development (OECD), or a WTO Member that has begun the accession process to the OECD;

“ii. A WTO Member that is a member of the Group of 20 (G20);

“iii. A WTO Member that is classified as a “high income” country by the World Bank; or

“iv. A WTO Member that accounts for no less than 0.5 per cent of global merchandise trade (imports and exports).

“Nothing in this Decision precludes reaching agreement that in sector-specific negotiations other Members are also ineligible for special and differential treatment.”

The self-designation of developing country within the GATT and the WTO has generally been seen by Members and outside observers as a “third rail” that could not be modified because of the certain opposition from those enjoying S&D benefits. Not surprisingly, the U.S. proposal has met with opposition from some important WTO Members who have declared themselves to be developing countries, including China, India, South Africa, Venezuela, Bolivia, Kenya and Cuba. See, e.g., WT/GC/W/765 and 765/Rev.1 (it does not appear that the U.S. proposal would affect the last four Members listed).

The U.S. has included the topic in each General Council meeting since its submissions, has engaged in discussions with many WTO members, and submitted a revised proposal in November 2019, WT/GC/W/764/Rev.1, which incorporated language reflecting its arguments throughout the year that

(1) the proposal would not require any country to declare itself not a developing country, just limit whether they received blanket S&D coverage in new agreements;

(2) the change would affect new agreements/negotiations and not affect S&D from existing arrangements;

(3) Members had the right to seek special accommodations on issues of particular importance to them.

There was also clarification of the third and fourth criteria for non-eligibility to reflect a three year period of meeting the criteria.

A few WTO Members who would be subject to the elimination of automatic entitlement to new S&D provisions if the U.S. proposal were adopted by the General Council have indicated that they will forego automatic S&D from future negotiations/agreements. These Members to date are Korea, Singapore and Brazil.

While the strong opposition from major WTO Members such as China, India and South Africa would indicate the U.S. proposal is not likely to be adopted in the foreseeable future, the U.S. has also indicate that it will oppose S&D provisions in future agreements if they are applicable to certain Members.

Indeed, President Trump on July 26, 2019 issued a Memorandum on Reforming Developing-Country Status in the World Trade Organization. https://www.whitehouse.gov/presidential-actions/memorandum-reforming-developing-country-status-world-trade-organization/. The Memo notes that many WTO members who have declared themselves developing countries are “patently unsupportable in light of current economic circumstances. For example, 7 out of the 10 wealthiest economies in the world as measured by Gross Domestic Product per capita on a purchasing-power parity basis – Brunei, Hong Kong, Kuwait, Macao, Qatar, Singapore, and the United Arab Emirates – currently claim developing country status. Mexico, South Korea, and Turkey – members of both the G20 and the Organization for Economic Cooperation and Development (OECD) – also claim that status.” “China most dramatically illustrates the point.”

The memo goes on to instruct USTR to use all available means to secure changes at the WTO to prevent unwarranted use of S&D provisions and authorizes USTR to take action after 90 days if substantial progress is not made to no longer treat certain WTO members as developing countries and to not support any such country’s efforts to join the OECD.

USTR Robert Lighthizer issued a statement the day of the President’s Memo that reflected the position of the Administration:

“For far too long, wealthy countries have abused the WTO by exempting themselves from its rules through the use of special and differential treatment. This unfairness disadvantages Americans who ply by the rules, undermines negotiations at the WTO, and creates an unlevel playing field. I applaud the President’s leadership in demanding fairness and accountability at the WTO, and I look forward to implementing the President’s directive.” https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/july/ustr-robert-lighthizer-statement

Obviously trading partners have had an ongoing interest in the President’s Memo and how it is being implemented by the USTR. At the December 9, 2019 General Council meeting, as part of the U.S. discussion of its proposal, Ambassador Dennis Shea (Deputy USTR) stated as follows:

“Finally, I’d like to provide an update on the memorandum to USTR from the President of the United States in July.

“The President instructed USTR to no longer treat as a developing country for the purposes of the WTO any self-declared developing country that, in the USTR’s judgment, can inappropriately seek S&D in current and
future WTO negotiations. Some Members have asked how the USTR will carry this out.

“USTR consulted with the interagency Trade Policy Staff Committee on this issue. The interagency agreed that if a S&D provision is introduced in a WTO negotiation, the United States will indicate that it will not agree to that provision unless certain Members forego use of that provision. The United States will also use the TPR process to continue to press countries that we believe should not be claiming blanket S&D in future agreements. In addition, USTR is continuing to review additional steps that can be taken.

“The President issued two other instructions to the USTR.

“The USTR will not support the application for OECD membership of any self-declared developing country that, in the USTR’s judgment, can inappropriately seek S&D in current and future WTO negotiations.

“Also, USTR shall publish on its website a list of all self-declared developing countries that the USTR believes can inappropriately seek S&D in WTO negotiations.

“Members have asked when USTR will publish the list. USTR is consulting on this issue. The memo did not require USTR to publish the list by a speci􀃌c date.

“I’d like to emphasize two important aspects about the memo and the U.S. proposal that we would like Members to keep in mind.

“First, the President’s memo did not instruct USTR to ask any Member to change its self-declared development status. The U.S. proposal does not ask this of any Member, either.

“Second, the President’s memo did not instruct USTR to ask any Member to forego S&D in existing WTO agreements. The U.S. proposal does not ask this of any Member, either.”

https://geneva.usmission.gov/2019/12/09/ambassador-shea-procedures-to-strengthen-the-negotiating-function-of-the-wto/

As S&D provisions are part of every negotiation, the U.S. position obviously creates challenges to completing ongoing negotiations in any area, such as negotiations on fish subsidies, agriculture, digital trade without more countries agreeing not to seek S&D privileges or at least foregoing such privileges in certain agreements where there is U.S. opposition.

A quick look at some of the countries whom the U.S. proposal would remove from automatic S&D eligibility for new negotiations include the following:

Member of the OECD or in the accession process:

Chile, South Korea, Mexico, Turkey, Colombia, Costa Rica.

Member of the G-20:

India, South Africa, Turkey, Argentina, Brazil, Mexico, China, Indonesia, South Korea.

Classified by World Banks as “high income” for 2016-2018 (includes):

Antigua and Barbuda, Bahrain, Brunei Darussalam, Chile, Hong Kong, South Korea, Kuwait, Macao, Panama, Qatar, Seychelles, Singapore, St. Kitts and Nevis, Trinidad and Tobago, United Arab Emirates, Uruguay.

0.5% of Merchandise Trade (includes):

China, South Korea, Hong Kong, Mexico, Singapore, United Arab Emirates, Thailand, Malaysia, Vietnam, Brazil, Indonesia, Turkey, South Africa.

In light of the experience of the last two years on the need to reform the WTO Appellate Body, there should be little doubt that the United States will continue to push hard to achieve a more rational approach to the assumption of obligations at the WTO in terms of who should be eligible for S&D benefits in new agreements. Without movement by some major countries who currently enjoy S&D benefits to forego automatic eligibility in new agreements, the challenging negotiating environment at the WTO that has prevailed for many years now will become more challenging in 2020.

The WTO Dispute Settlement System – Closing Out 2019 and Implications for 2020

The week of December 2, 2019 saw WTO Members engaged in a variety of year end activities including two added meetings – the resumption of the November 22 Dispute Settlement Body (“DSB”) meeting to explore how pending appeals would be handled post December 10 and another Committee on Budget, Finance and Administration meeting to see if Members could agree to a modified proposed budget to address U.S. concerns on funding for the Appellate Body (“AB”) in light of the imminent reduction of AB members from three to one.

December 3, 2019 DSB Meeting on Pending Appeals

The resumption of the DSB meeting did not result in agreement for how all pending appeals will be addressed with most pending appeals unlikely to be resolved by the current AB members, although it has been reported that the DSB Chair David Walker had indicated that appeals would proceed on four cases (of fourteen pending on December 3) – the two plain paper packaging appeals on Australia’s programs (Honduras (DS435) and the Dominican Republic (DS441), Ukraine’s challenge to various measures in the Russian Federation on the importation of raailway equipment (DS499) and the appeal in the case on U.S. countervailing duties on supercalendered paper from Canada (DS505).

The December 3 resumed DSB meeting did show the continued distance between at least certain WTO members in their view of one of the issues raised by the United States — whether the Dispute Settlement Understanding limits who may authorize individuals to serve as Appellate Body members to the WTO Membership through the DSB. For example, the EU statement confirmed that it viewed the Appellate Body, through Rule 15 of the Working Procedures, as qualified to permit members of the AB whose terms have expired to continue working on appeals that started while they were members. See EU statement at the regular DSB meeting on 3 December 2019, https://eeas.europa.eu/delegations/world-trade-organization-wto/71496/eu-statement-regular-dsb-meeting-3-december-2019_en.

The U.S. statement reviewed their year long effort to get an answer to the question “do Members agree that the Appellate Body does not have the authority to ‘deem’ a person who is no longer an Appellate Body member to nonetheless continue to be a member and decide appeals?” From statements by the EU and presumably others, the U.S. concluded that “members are not in agreement on this fundamental question.” As such the U.S. concluded that “there will be no consensus between Members on how to proceed on the Appellate Body by December 10” and that “[i]n the absence of any shared understanding of the underlying causes and of appropriate solutions, it will be for the parties to each dispute to engage with each other to determine an appropriate way forward.” Statement of the United States at the Meeting of the WTO Dispute Settlement Body (Dec. 3), https://geneva.usmission.gov/wp-content/uploads/sites/290/Nov22.DSB_.Reconvene.Item7_.as_.deliv_.fin_.public.pdf.

Since the DSB meeting on December 3, Morocco withdrew its appeal of a panel decision, Morocco – Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey, indicating that its antidumping measure had terminated in September. See WT/DS513/7 (5 December 2019). And on December 6, the European Union filed an appeal from the second compliance panel ruling in the Airbus case where the panel had found the EU had not brought its programs into compliance with WTO obligations (panel report was circulated on December 2, 2019). See https://www.wto.org/english/news_e/news19_e/ds316oth_06dec19_e.htm. Thus, as of December 7, there remain 14 appeals pending before the Appellate Body.

December 5, 2019 Committee on Budget, Finance and Administration Consideration of WTO 2020 Budget

Meanwhile, the Committee on Budget, Finance and Administration meeting of December 5 resulted in approval of the modified budget proposal for the WTO for 2020. The budget will now be before the General Council for approval in its final meeting of 2019 held on December 9-11. See Agenda item 20, WT/GC/W/793. The U.S. had worked with the Director-General to identify changes in the budget to reduce funds available for Appellate Body members in light of the current situation and only agreed to proceed with the budget for 2020, postponing the 2021 budget approval process until next year. A number of WTO Members, including the EU, China, India and Turkey had expressed concerns about the modifications to the budget, but approval at the Committee level was secured.

Reductions in two budget line items were reportedly made, reducing funding from $2.791 million to $200,000, presumably sufficient to handle appeals that do go forward through the Appellate Body. What such changes in funding will mean for the Appellate Body Secretariat is not yet clear but logically if there is no functioning Appellate Body, there is no need for an Appellate Body Secretariat until such time as the AB has sufficient members to once again hear appeals.

Other Issues Potentially Affecting the Operation of the Dispute Settlement System

Still unknown is whether current AB members whose term expires on December 10 will agree to continue on appeals after that date even on the four appeals where hearings have been had and that press reports indicated that Amb. Walker, the DSB Chair, had indicated would proceed post December 10. To the extent one of the current AB members opts not to continue on any appeal after the end of his term, that would presumably reduce the number of pending appeals that could be heard as it is likely there would be no continuing AB member who could be substituted (would depend on the composition of the AB Division presently hearing the appeal).

Moreover, as one of the four pending appeals identified in press articles as likely to be completed is a case where the U.S. is a party, it is also not clear what the U.S. position will be on that appeal post December 10. It may have agreed to have those appeals where hearings have been had completed if the current AB members are willing to continue to serve. Press accounts are unclear if that is the case.

There is also the question as to whether the Appellate Body Secretariat is disbanded pending the resumption of a functioning Appellate Body. Press reports have indicated that this is possible/likely with existing staff having the option to leave the WTO or accept positions in other WTO divisions. That would obviously make sense from a budget perspective as well as there is no institutional value in paying people who have no discernible workload.

December 6 Trade Negotiations Committee Heads of Delegation Meeting

There is always a flurry of activity ahead of the last General Council meeting of the year. December 6 saw a meeting of heads of delegation for the Trade Negotiations Committee (“TNC”). The TNC is the Committee that oversees ongoing negotiations within the WTO. While there are very important issues being pursued by various groups within the WTO under the jurisdiction of the TNC, for purposes of this post, the issue of interest will be the extent to which the dispute settlement system is a subject of debate.

As the minutes of the meeting are not publicly available, reference is made to three statements – one by Director-General Azevedo, one by EU Ambassador Joao Aguiar Machado and one by Ambassador Dennis Shea of the United States at the meeting. Other relevant statements were undoubtedly made as well.

The WTO put out a news release on Director-General’s statement to the TNC Heads of Delegation Meeting. The long excerpt below provides the Director-General’s views on the state of play on both the dispute settlement system and on the 2020 budget:

“In his remarks, the Director-General said that while the effective suspension of appellate review of WTO dispute rulings is a serious challenge to the global trade body’s adjudication function, it ‘does not mean the end of the multilateral trading system’.
“‘Existing WTO rules still apply. WTO disciplines and principles will continue to underpin world trade. And members will continue to use WTO rules to resolve trade conflicts – in regular WTO bodies, through consultations, via dispute settlement panels, and through any other means envisaged in the WTO agreements,’ he said.
“Members have important decisions to make, with implications for the WTO and for their respective economies, DG Azevêdo said.
“Where we go from here is in your hands. What we do – or just as significantly, what we fail to do – will define the trajectory of this organization.
“On rule-making, your choices could contribute to restoring certainty in the global economy, and help governments manage interdependence in a fast-changing world.
“On the implementation of existing commitments, you have scope to make regular committee work an even more effective vehicle for fostering compliance and addressing concerns about each other’s trade policies.
“And on dispute settlement, you could restore the impartial, effective, efficient two-step review that most members say they want.
“Alternatively, your choices could open the door to more uncertainty, unconstrained unilateral retaliation – and less investment, less growth, and less job creation.”
‘The DG welcomed a compromise reached in the Committee on Budget, Finance and Administration on the WTO’s budget for 2020. The committee’s favourable recommendation has been forwarded to the General Council for endorsement during its 9-11 December session.
“The proposed budget compromise is the result of flexibility and cooperation among members, both here in Geneva and in capitals. It represents a pragmatic response that preserves the WTO system amid turbulence in the wider international system – turbulence that we cannot wish away. I am counting on your help with approval in the General Council.”
DG Azevêdo urges WTO members to find ways forward on
the dispute settlement system, https://www.wto.org/english/news_e/news19_e/tnc_06dec19_e.htm.

Ambassador Machado of the EU’s statement at the meeting is a good representation of the EU position over time and shows the continued sharp difference in views the EU has with the U.S.

“Since our last meeting, the situation of the WTO has further deteriorated. Not only the discontinuation of the Appellate Body’s work has become an evident prospect, but attempts to obstruct the functioning of this Organization through the budget discussion have shattered Members’ confidence in teh WTO. This has diverted us from progressing our negotiation agenda or from finding ways to resume nominations of the Appellate Body Members, which should be the priority. While the European Union is alarmed about the current state of affairs at the WTO, we remain strongly determined to address the challenges in front of us.

“First, we remain resolute to find ways to restore a two-step dispute settlement system at the the WTO, and resume nomination of Appellate Body’s Members as soon as possible. Next week’s General Council will be crucial in this respect and we invite all Members to engage constructively in finding solutions.”

https://eeas.europa.eu/delegations/world-trade-organization-wto/71633/eu-statement-ambassador-jo%C3%A3o-aguiar-machado-trade-negotiations-committeeheads-delegation-6_en

Ambassador Shea’s statement, like that of other Ambassadors at the meeting, covered a range of issues deemed important for the TNC and its work going forward. On dispute settlement, Amb. Shea provided the following thoughts:

“Foruth, with respect to dispute settlement, the United States has engaged constructively over the past year, providing detailed statements in the DSB and the General Council outlining clear positions and articulating our longstanding concerns with the functioning of the Appellate Body. Unfortunately, we have yet to see the same level of engagement from other Members. We have asked repeatedly, if the words of the DSU are already clear, then why have the practices of the Appellate Body strayed so far? This is not an academic question; we will not be able to move forward until we are confident we have addressed the underlying problems and have found real solutions to prevent their recurrence.”

https://geneva.usmission.gov/2019/12/06/ambassador-sheas-statement-at-the-wto-trade-negotiating-committee-heads-of-delegation-meeting/

General Council Meeting, December 9-11, 2019

When the General Council meets starting on Monday, December 11th, among its twenty-four agenda items are two that deal with either dispute settlement (Agenda Item 5) or the 2020 budget (Agenda Item 20). Both agenda items will likely generate a great deal of discussion.

Presumably on December 9th, the General Council will get to agenda item 5, “Informal Process on Matters Related to the Functioning of the Appellate Body – Report by the Facilitator and Draft Decision on the Functioning of the Appellate Body.” The original draft Decision and the revised draft have been discussed in earlier posts and reflects efforts by Amb. Walker (serving as Facilitator to the General Council) to identify possible solutions to the concerns raised by the United States over the last several years on the functioning of the Appellate Body. There will be many WTO Members – undoubtedly including the EU, China, India and others – who will support the draft Decision and urge its adoption. In their view adoption of the Decision would clear the path for the Dispute Settlement Body to start the process for finding replacements for the six Appellate Body seats that either are currently or will be empty after December 10.

The United States has made it clear that the draft Decision does not resolve its concerns, most importantly because there is no understanding of why the Appellate Body has felt free to disregard the limits on its activities.

So expect Agenda item 5 to be contentious but result in no agreed decision being adopted.

On agenda item 20, “Committee on Budget, Finance and Administration – Reports on Meetings of April, June, September, October and November”, this item will likely be taken up on the 10th or 11th (assume the 11th). While again there will likely be a large number of statements and concerns raised about the process, it is expected that the 2020 budget for the WTO will be approved by the General Council.

Regular DSB Meeting of December 18, 2019

The agenda for the upcoming last regular DSB meeting of 2019 is contained in WTO/AIR/DSB/90 dated 6 December 2019. The relevant item for this post, is agenda item 6 which takes up the latest iteration of the proposal to have the DSB make a decision to launch a selection process to fill the six Appellate Body member slots that are or will be open. The proposal is essentially identical to earlier versions and is supported by 117 of the 164 WTO Members. See WT/DSB/W/609/Rev.15, 6 December 2019.

As it has in the past, the United States will not support the proposal, and the year 2019 will end with the Appellate Body unable to hear new appeals, unable to proceed with many of the pending appeals and with WTO Members exploring different options for how they will handle disputes going forward.

Implications for 2020

The 2020 budget reflects the contraction in activity by the Appellate Body even assuming the four pending appeals are completed in 2020. So 2020 will be a year of no or limited Appellate Body activity.

Major players such as the EU, China, India and others are far removed from acknowledging the deep concerns that have been expressed by the United States on the functioning of the Appellate Body, and in many cases disagree that there is even a problem. This impasse suggests that progress on reestablishing a two-step dispute settlement system will be slow if it occurs at all in 2020.

For some, there may be a hope that U.S. elections in late 2020 could lead to a different Administration in 2021 and a different posture on the WTO dispute settlement system. Change may or may not occur regardless of which Administration is in place in 2021. But there is little doubt that 2020 will be a year in which WTO members will need to consider other approaches to resolving disputes. One obvious alternative could be through arbitration under Article 25 of the Dispute Settlement Understanding (the EU has a model it has adopted with Canada and separately with Norway; other approaches could obviously be pursued). Members could also agree to not appeal from panel decisions. Negotiations can also provide ways to address matters of concern to trading partners, as can greater transparency and increased activity in WTO Committees permitting Members to understand and comment on practices of trading partners.

Change inevitably brings discomfort and uncertainty. December 10 and the inability to appeal new panel decisions after that date is the bookmark date for change. 2020 will undoubtedly be a year of discomfort and uncertainty. Let us hope that the WTO Members can find a path to addressing U.S. concerns in a meaningful manner and that an improved dispute settlement system is the result.

The WTO Budget — Will There Be a Resolution in December?

November 2019 proved to be a challenging time for the WTO in terms of getting agreement on the budget for the organization for 2020. Normally, the budget is approved for a two year time period. At the November 12 Budget, Finance and Administration Committee [“BFA Committee”] meeting, the United States had questions on a number of topics including funding for the Appellate Body and its Secretariat with the result that the Director-General’s draft budget was not approved at that meeting. The Committee added another meeting to the agenda for November 27 in the hope of achieving resolution and agreement at the Committee level on the budget for 2020-2021.

Virtually none of the documents that are submitted to or generated by the BFA Committee are made public, nor is there a summary of meetings that is made available to the public. Thus, relatively little is public about events following the November 12 BFA Committee meeting. The Director-General is reported to have revised the budget proposal after consultations with the United States which appeared to leave the total budget for the WTO in tact but to have modified what could be used for the Appellate Body based on the reality of the number of Appellate Body [“AB”} members being reduced to 1 after December 10 which prevents the AB from handling new appeals after that date.

Press accounts suggest that the U.S. agreed to having just a few of the 13 pending appeals concluded with AB funds — specifically the two plain packaging of cigarette cases against Australia brought by Costa Rica and Honduras (DS435 and DS 441). In an earlier note, I had reviewed the likely challenges for the 13 pending appeals in light of when notices of appeal were filed and the possibility of one of the two AB members whose term expires on December 10 apparently not having expressed a willingness to continue to hear appeals past the end of his second term.

Reportedly, the U.S. has also insisted on funding for any arbitration under DSU Article 25 to be handled from the WTO Secretariat and be at the level and amount for panelists vs. Appellate Body members.

Finally, the U.S. has only agreed to funding for 2020 with 2021 to be dealt with next year.

At the meeting on November 27, press reports indicate that objections to the modified budget were raised by the EU, China, India and Turkey. on various grounds (e.g., different treatment for different pending disputes; contractual commitments to the remaining AB member for the remainder of the member’s term; view that it is not the role of the BFA Committee to resolve how pending appeals are handled) with no consensus at the end of the November 27 meeting. See, e.g., Washington Trade Daily, November 28, 2019 at 1-2.

No additional BFA Committee meeting has been added to the WTO list of remaining meetings in 2019. There are two informal heads of delegation meetings ahead of the December 9-11 General Council meeting. One was held on November 29 (informal General Council – heads of deletation) but has no report of what was discussed or whether the budget was being handled in ongoing negotiations with those raising concerns. The next informal heads of delegation meeting is scheduled for Friday, December 6 (TNC – heads of delegation) followed by the three day General Council meeting.

The General Council’s agenda is likely lengthy and will include annual reports from various committees and other entities but has not been made public at this point. However, some documents for review at the General Council are available publicly including the draft General Council Decision prepared by Amb. Walker of New Zealand which is an attempt to find a solution to problems with the dispute settlement system raised by the United States. As the U.S. has already indicated that the draft General Council Decision does not adequately address its concerns, it is not expected that the draft Decision will be adopted by the General Council after it has been presented and discussed.

December 18 is the last regularly scheduled Dispute Settlement Body meeting of the year, and will occur eight days after the last day the Appellate Body has a minimum of three Appellate Body members (assuming no resolution with the United States). Thus, no new appeals filed after December 10 can be heard by the Appellate Body until new members are agreed to.

Amb. Walker, who in addition to being the facilitator for the General Council’s consideration of the issue is the current Chairman of the Dispute Settlement Body, is understood to be working with Members to see if there is an approach to the pending appeals that can be approved. For the reasons reviewed in the Nov. 24 post, it is unlikely that most of the current appeals will be in a position to proceed if all three of the existing Appellate Body members don’t agree to continue to serve under Rule 15 of the AB’s procedures despite the terms for two of the three expiring on December 10. Amb. Walker will be hoping to have an agreed solution ahead of the December 18 DSB meeting. But the resolution on how pending appeals will be handled, if found, is presumably relevant to what the Members agree to for the 2020 budget. The December 18 DSB meeting is the last listed meeting of any WTO group for 2019. Indeed, December 23 – 31 are shown as non-working days for the WTO.

While it is hard to imagine that WTO Members won’t approve a modified budget for 2020 in the coming few weeks, it is likely to be a tense end to 2019 at the WTO with formal or informal additional meetings possible and with some Members having to consider how to handle pending appeals and all ongoing and future disputes.

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 U.S. Trade Deficit – Data for First Thirty-Three Months of the Trump Administration (2017-Sept. 2019)

The U.S. trade deficit has been at extraordinarily high levels for many years, having ranged from $766.6 to 818.0.billion/year during 2005-2008 (2nd term of President George W. Bush).  After a sharp contraction in trade during the 2009-2010 period as the country dealt with the great recession flowing from the financial crisis that started in 2008 (with resulting significantly lower trade deficits), trade deficits ran from $689.5 to $745.5 billion/year during the 2011-2016 years of President Obama’s tenure (2016 trade deficit was $735.3 billion).

President Trump has had a significant focus on trade issues during his presidency.  His Administration has attempted to address the chronic trade deficit the country has developed over the last fifty years through improved trade deals, aggressive enforcement of various trade laws and some domestic actions (regulations and taxation).  Despite these actions, the first two years and nine months of the Trump Administration saw a significant expansion of the trade deficit in 2017 ($793.4 billion) and 2018 ($874.8 billion) – an increase by 2018 of 18.97% over 2016 levels) – with a stabilization in the first nine months of 2019 (up 1.43% from the first nine months of 2018 at $647.6 billion).

A growth in the trade deficit during 2017-2019 reflects various causes including:  (1) continued economic growth in the U.S. and slower growth rates in much of the rest of the world; (2) a delay in the trade balance effects flowing from the Administration’s trade actions against China under Section 301 of the Trade Act of 1974 and against many countries on steel and aluminum under Section 232 of the Trade Expansion Act of 1962; (3) retaliation by various trading partners for actions taken by the U.S.; and (4) shifts in currency values.

The huge trade deficit with China declined by $38.5 billion or by 12.77% in the first nine months of 2019 reflecting the large tariffs applied by the U.S. on huge parts of Chinese exports to the U.S. which exceeded the contraction in U.S. exports to China flowing from retaliation by the Chinese.  However, there was more than a $47.7 billion increase in the deficit from trade flows with other countries during the first nine months of 2019.  Below are some of the countries with whom the U.S. trade deficit has increased in the first three quarters of 2019 by more than $5.0 billion.  Data reflect the size of the increase in the U.S. trade deficit with the particular country: :

Country or Group of Countries Increase in U.S. Trade Deficit
9 months 2019
Mexico $17.0 billion
European Union (28) $12.0 billion
Vietnam $11.7 billion
Switzerland   $7.3 billion
Taiwan   $6.5 billion
Subtotal $54.5 billion

Vietnam and Taiwan could be in some significant part the result of shifting shipments from China to neighboring countries where Chinese or other producers have investments, where producers have found alternative sourcing or where there has been shipment of products from China which have been mislabeled as to origin.

Similarly, the large increase from Mexico may reflect in part a move back to Mexico or increased sourcing from Mexico for companies previously sourcing from China.    An UNCTAD Research Paper (No. 37) entitled “Trade and trade diversion effects of United States tariffs on China” released recently made similar findings for imports in the first half of 2019.  https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2569.  As noted in the Abstract to the paper (page 1):

“This paper finds that United States tariffs against China have resulted in a reduction in imports of the tariffed products by more than 25 percent. The analysis finds that China’s export losses in the United States have resulted in trade diversion effects to the advantage of Taiwan Province of China, Mexico, the European Union and Viet Nam among others. The analysis also finds that those effects have increased over time. The analysis finds some preliminary evidence that Chinese exporters may have started to bear part of the costs of the tariffs in the form of lower export prices. Overall, the results indicate that the United States tariffs on China are economically hurting both countries. United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses.”

The shift in trade balance for the mentioned countries and for the U.S. as a whole is explained in the following table which shows the change in U.S. total exports and in U.S. general imports during the first nine months of 2019 vs. the same period of 2018:

Country US Exports US Imports US Trade Balanace
China  -$15.2 BN  -$53.0 BN  +$47.7 BN
Mexico    -$4.3 BN +$12.8 BN   -$17.0 BN
European Union (28) +$14.0 BN +$26.0 BN   -$12.0 BN
Vietnam   +$1.0 BN +$12.7 BN   -$11.7 BN
Switzerland    -$4.5 BN   +$2.8 BN     -$7.3 BN
Taiwan   +$0.5 BN   +$7.0 BN     -$6.5 BN
Subtotal (Mex.-
Taiwan)
  +$6.7 BN +$61.3 BN   -$43.5 BN
From all countries =$15.2 BN    -$6.0 BN     -$9.2 BN

Thus, in the first nine months of 2019, US trade with China fell in both directions, with imports from China declining by $53.0 billion and U.S. total exports to China declining $15.2 billion.  Trade with Mexico and Switzerland saw declines in U.S. total exports to each country (-$4.3 billion and -$4.5 billion respectively) while imports from those countries into the U.S. increased (+$12.8 billion and +$2.8 billion).  For the European Union, Vietnam and Taiwan, the U.S. saw total exports increase, but at much slower amounts than the increase in U.S. imports from those countries.  

When looking at the 2-digit HS categories that saw the largest changes in the U.S. trade balance with China in 2019, the three largest improvements in the U.S. trade balance with China were in HS chapters 84, 85 and 94 dealing with nonelectrical equipment, electrical equipment and furniture respectively. The U.S. trade balance with China improved by $17.0 billion, $18.8 billion and $4.0 billion for these three chapters respectively, largely due to contractions in imports from China on those items.  In a prior post (October 13) on the announced likelihood of a first phase U.S.-China agreement, I reviewed the contraction in U.S. exports of agricultural products, particularly soybeans, that happened in 2018 (down $10.2 billion from 2017).  There has been some limited improvement in U.S. exports of soybeans in the first nine months of 2019 and so no agriculture products saw huge declines in exports in 2019 or large reductions in the US trade surplus with China this year.

 Some of the U.S. trade balance improvement vis-à-vis China on these specific manufactured  goods was offset by increased deficits with Mexico ($1.7 billion for Chapter 84, $1.3 billion for Chapter 85), the EU ($6.9 billion for Chapter 84), Taiwan ($4.3 billion for Chapter 84, $1.7 billion for Chapter 85) and Vietnam ($0.5 billion for Chapter 84, $7.6 billion for Chapter 85, $1.3 billion for Chapter 94).

The challenge for any administration attempting to change trade flows is the time it takes to achieve new agreements, to implement specific actions, and to design and obtain approval for new legislation.  Such challenges reflect the state of play for many of the Trump Administration’s trade efforts to date.  Benefits from the initial agreements with Japan signed on October 7 will likely be seen in 2020 if Japan is able to implement the agreements through legislation this month as is reported as possible in the media.  Changes from the USMCA will depend on whether and when Congress takes up implementing legislation.  The Administration is hoping to conclude and sign a first phase trade agreement with China yet this year.  Such an agreement with China will likely result in at least a standstill on tariffs against China and likely some reductions in tariff levels phased in over time based on results of implementation efforts by both sides.  An agreement with China would also improve market conditions for some U.S. products shipped to China, with reported commitments for increased purchases of various U.S. agricultural products as but one example.  Discussions are ongoing with other countries on specific trade concerns, and so additional improvements in market access may yet occur during the current term of President Trump’s Administration. 

Businesses understandably look for predictability in both the trade environment and the rules of engagement with trading partners.  With the heavy focus on revising domestic trade policy and the aggressive use of legislative tools on the books, the Trump Administration’s efforts to date have created a great deal of uncertainty for businesses.  Some businesses have been harmed at least short term, others have benefited from the actions taken by the Administration.  Whether the changes being pursued by the Administration will achieve the objectives sought is an open question.  A review of the changes in trade flows (U.S. imports and U.S. exports) from the Trump Administration’s first thirty-three months in office show that changes towards greater trade balance will not occur quickly nor without a fair amount of disruption to supply chains, business models and companies and many workers.  A more sustainable trade environment is an important objective.  Not since the early 1970s has an Administration been concerned about large and increasing trade deficits.  The Trump Administration has been concerned and has been attempting to change domestic and international trade policy to restore greater balance.  Whether meaningful change will occur is almost certainly a multiple Administration project.  Whether the project will be pursued will depend in part on what is achieved under the current Administration.

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