India

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.

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

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

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

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

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

WTCOMTDW239

WTCOMTDW239C1

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

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

“The General Council,

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

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

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

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

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

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

Agrees as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“The President issued two other instructions to the USTR.

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

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

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

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

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

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

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

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

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

Member of the OECD or in the accession process:

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

Member of the G-20:

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

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

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

0.5% of Merchandise Trade (includes):

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

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

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.