European Union

Brexit takes place at 11 p.m. London time on January 31, 2020

The European Union goes from 28 member countries to 27 at the end of January 31st as the British referendum to withdraw from the EU is brought to fruition by votes in the EU Parliament (621 votes in favor, 49 against, 13 abstentions) on January 29 and the European Council (unanimous) on January 30. The provisional text voted on by the Parliament is embedded below.

European-Parliament-agreement-on-withdrawal-of-UK-from-EU-P9_TA-2020-0018_EN.pd_

While the votes were not in doubt, withdrawal from the EU does not establish what the relationship with the EU will be after the interim period of 2020. What is clear is that by Saturday, February 1, the U.K. is no longer part of the EU and will be treated as a third country under EU laws and regulations.

There was a debate in the European Parliament on January 29th ahead of the vote which provides some clues as to the challenges facing the U.K. in the coming months. For example, while the EU is willing to consider an FTA with the U.K. with zero tariffs and quotas, it is dependent on the U.K. adhering to EU regulations (level playing field concept in Europe). While some U.K. industries (auto and aerospace) have urged their government to adhere to EU standards, it is not clear that the U.K. has the intention to do so across the board. Protecting the rights of Europeans in the U.K. (and of U.K. citizens in the EU) was reviewed at length by various Parliamentarians and representatives from the European Commission. It is obviously an important issue for the EU. As is dealing with climate change through aggressive actions by EU governments and any government wishing a special or close relationship. A number of speakers reviewed the challenges likely based on the short interim period and the complexity of negotiations anticipated.

The debate had many Parliamentarians from the remaining 27 member countries and the European Commissioners who spoke thanking their colleagues in the U.K. for the U.K.’s contribution over the 47 years of the U.K.’s membership in the EU, expressing regrets on the decision to leave but looking forward to working with the U.K. going forward, with some hoping that future generations of citizens in the U.K. will decide to rejoin.

There were some comments made on lessons to be learned from Brexit with some focusing on the need for EU reform, for member countries accepting all obligations versus a system of exceptions, and a general belief that the EU needs to be able to take action more quickly.

A number of Parliamentarians from the U.K. and Scotland spoke. A number representing constituents who voted against Brexit in the referendum expressed their concern with the withdrawal and indicated they would vote against the document.

A large group of U.K. Parliamentarians seemed to agree with the harsh words of Nigel Farage, a strong Brexit proponent and, by his own words, anti-EU. His views were that the U.K. had joined a common market not a political union. He opposes the expansion of the EU into traditional national issues and its push to become a super-nation with all the trappings of a nation (Parliament, Council, Court, etc.). He also views the EU as undemocratic and antidemocratic using as an example the failure of the EU to honor referendums in various countries that opposed the constitution (2005). His description of the U.K. feelings towards the rest of Europe was summed by his statement “We love Europe, we simply hate the European Union.” Mr. Farage reviewed that the new British Prime Minster Boris Johnson had indicated that there would be no “level playing field” agreed to in negotiations with the EU.

For access to the videos of the debate see https://www.europarl.europa.eu/news/en/press-room/20200128IPR71204/brexit-deal-approved-by-the-european-parliament

As noted above, the level of ambition in any new U.K.-EU relationship will depend in part on whether there is a “level playing field” in the regulatory arena. Prime Minister Johnson’s comments simply suggest that the next eleven months will be difficult for the parties as they see if they can find a new relationship acceptable to both sides or whether the U.K. assumes the status of any other third party without a Free Trade Agreement (“FTA”) with the EU.

The U.K. will also be under pressure from the U.S. to abandon various EU regulations to facilitate an FTA with the U.S.

So the U.K. will not be part of the EU in just over 24 hours. But the road ahead with the EU will likely keep markets uncertain for months to come.

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

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

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

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

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

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

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

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

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

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

Likely Coverage of Disputes by the 17 WTO Members

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

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

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

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

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

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

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

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

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.

European Union Moves to Authorize Retaliation in Disputes Where There is No Alternative to the Appellate Body Pursued

With the WTO’s Appellate Body not able to handle appeals at the present time because of diminished membership, the EU has put forward a proposal that would authorize the EU to retaliate whenever a dispute where the EU has received what it views as a favorable ruling is appealed by the other party during the period when any such appeal cannot be considered by the Appellate Body. They have also proposed such actions in bilateral agreements where they view the other party as frustrating dispute settlement. https://ec.europa.eu/trade/policy/policy-making/enforcement-and-protection/. http://www.europarl.europa.eu/RegData/docs_autres_institutions/commission_europeenne/com/2019/0623/COM_COM(2019)0623_EN.pdf

The proposal is not adopted as yet, and the EU portrays the initiative as a way of protecting EU interests and consistent with its efforts to increase enforcement of its negotiated trading rights. This proposal, if adopted, will put pressure on smaller trading partners to join alternative dispute settlement approaches such as the arbitration approach the EU has agreed to with Canada and separately with Norway.

The proposal doesn’t address what the EU expects trading partners to take against EU products where it files an appeal (such as the EU did against the second 21.5 panel decision on December 6 which found against the EU in terms of compliance with its obligations on Airbus). WT/DS316/43 (11 December 2019)(notice of appeal); WT/DS316/RW2 (2 December 2019)(panel report on 2nd 21.5 request). But at least for larger WTO members, if the EU files an appeal that will not be heard during this interim period while Members seek ways to resolve open issues, the EU proposal invites similar action by such other Members. Retaliation has, of course, already been authorized for the U.S. against the EU for its WTO-inconsistent actions on Airbus. But should there be other cases that the US (or other countries who opt not to use arbitration under DSU Article 25 or not to simply adopt panel decisions without appeal) brings against the EU which the EU loses in part or whole, the EU is inviting retaliation without opportunity to correct its practices and without arbitration of the amount of retaliation being available. Virtually every Member who has been authorized to take retaliation has been subject to arbitration with amount authorized typically significantly less than the retaliating Member has sought. Thus, the EU may find its approach has costs for EU industry as well.

At the last Dispute Settlement Body (“DSB”) meeting of 2019 held on December 18, the effort to get the process for selecting Appellate Body members started was again unsuccessful because of opposition from the United States. So there will be some considerable period when there is no functioning Appellate Body and only four of the appeals pending on December 10 will be completed by the AB members who were involved in appeals prior to December 10. However, besides the EU efforts with Canada and Norway (which is reportedly being pursued with additional countries), there are alternative approaches being explored by other WTO Members including agreeing to adopt panel decisions without appeals or developing a different arbitration approach to that presented by the EU (e.g., reports that Australia and Brazil are exploring a different system).

For the United States, the U.S. indicated that it had filed on December 18th an appeal from a panel report in DS436, India’s resort to Article 21.5 of the DSU in its challenge to U.S. countervailing duty orders on hot-rolled steel products. The notice of appeal from the U.S. (WT/DS436/21) is not yet available on the WTO webpage. At the DSB meeting, the U.S. made the following comments on the WTO dispute settlement system:

“And the United States is determined to bring about real WTO reform, including to ensure that the WTO dispute settlement system reinforces the WTO’s critical negotiating and monitoring functions, and does not undermine those functions by overreaching gap-filling.

“As discussions among Members continue, the dispute settlement system continues to function.

“The central objective of that system remains unchanged: to assist the parties in the resolution of a dispute. As before, Members have many methods to resolve a dispute, including through bilateral engagement and mutually agreed solutions.

“For instance, today, the United States appealed the compliance Panel’s report in DS436.

“While no division can be established to hear this appeal at this time, the United States will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process.

“Consistent with the aim of the WTO dispute settlement system, the parties should make efforts to find a positive solution to their dispute, and this remains the U.S. preference.

“And the United States will continue to insist that WTO rules be followed by the WTO dispute settlement system. We will continue our efforts and our discussions with Members to seek a solution on these important issues.”

Statements by the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, December 18, 2019, “6. Appellate Body Appointments, Proposal by Some WTO Members (WT/DSB/W/609/Rev.15), https://geneva.usmission.gov/wp-content/uploads/sites/290/Dec18.DSB_.Stmt_.as-deliv.fin_.public-1.pdf.

It is certainly the case that the U.S. and the EU have very different views of the role of dispute settlement and the Appellate Body in particular and whether there are major problems with the operation of dispute settlement over the first twenty-five years of WTO operation. But the EU is traveling down a path of increasingly ignoring WTO limitations on its actions, a charge that they make with regard to the United States.

For example, when a WTO member disagrees with an action of a trading partner, it is expected to seek consultations and, if necessary, file a dispute, await resolution of the dispute, permit a reasonable period of time for implementation if a violation was found before retaliation is permitted. Yet the EU (followed by many other countries — Canada, Mexico, China, Russia, Turkey, India) created a facially false basis for retaliating against the United States without pursuing the required steps, when the U.S. took action under a domestic law (Section 232 of the Trade Expansion Act of 1962, as amended) on imports of steel and aluminum based on a report finding threats to U.S. national security from such imports. The EU and the other countries have claimed the action was a disguised safeguard action permitting immediate retaliation. WTO members don’t have to agree with another Member’s actions, but unilateral action is not authorized and the creation of false predicates to justify retaliation don’t change the action from being unilateral and unjustified.

The proposed regulation represents one more step by the EU to create its own system of enforcement regardless of the agreements to which it is a party using circumstances it does not like to justify its own unilateral actions. Let’s hope that whether adopted or not, the EU proceeds cautiously and reflects on its own actions consistency with international agreements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Challenges with the Negotiations Function

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

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

Challenges to the Committee Oversight Function

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

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

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

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

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

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

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

Conclusion

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

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

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