WTO Reform

WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies

The GATT and the WTO were created by market economy countries, and the rules embodied within each reflect an effort to identify principles and rules that would promote reciprocal trade among its members. While there have long been members of the GATT and now the WTO that have not been market economies in fact, the problem of the distortions that occur to the global trading system from state-directed or non-market economies has come into sharp focus in the last twenty years with the accession and rapid growth of China and the accession of a number of other countries or the emulation of China’s model by existing members with substantial state direction, state ownership of business, state planning, forced technology transfer and massive subsidization.

While a number of WTO members have been concerned about the disconnect between the WTO rules-based system and such non-market economies where various conduct is not actually addressed by WTO rules, the United States has led the effort to obtain a reaffirmation of the market-oriented nature of the WTO and the need to address the distortions that exist but are not addressable under the WTO.

The European Union, Japan and the United States since the 11th Ministerial Conference in Buenos Aires in 2017 have been working on addressing the massive industrial subsidies, challenges from state-owned or invested enterprises and forced technology transfer. The recent joint declaration with identified changes to the Agreement on Subsidies and Countervailing Measures was the subject of a prior post. See https://currentthoughtsontrade.com/2020/01/14/wto-reform-joint-statement-of-january-14-2020-of-japan-the-u-s-and-the-eu/

The U.S. Raises the Issue of Nonmarket Economies in 2018

But the United States has led on the broader issue. The U.S. teed the issue up in a presentation to the General Council during the summer of 2018 with the submission of a fourteen page paper. China’s Trade-Disruptive Economic Model, Communication from the United States, WT/GC/W/745. The paper was broken down into four sections. The first dealt with “non-market oriented conditions set by the government and the party” looking at the objectives of control and at control at the firm level. The second section deal with “non-market allocation of resources” and covered non-market allocation of key means of production, industrial policies, and the use of law as an instrument of the Party State. The third section reviews the “costs to WTO Members of China’s economic model” covering topics like non-reciprocal and protected markets, excess capacity created by the Chinese model and the extensive use of forced technology transfer. The forth section looked at “benefits to China of its economic model”. The U.S. paper and the additional document submitted by the U.S. (2017 Report to Congress on China’s WTO Compliance) are included below.

WTGCW745

WTGCW746

While the effort of the U.S. has been vigorously opposed by China and other like minded Members of the WTO, to the United States and other major players like the European Union and Japan, there cannot be meaningful WTO reform without addressing the distortions flowing from economic systems that are not premised on market principles or where the state has a large role.

The March 3-4, 2020 General Council Meeting

The first meeting of the WTO’s General Council in 2020 will be on March 3-4 (an informal meeting was held on February 21st). On the agenda will be the United States paper in the form of a draft General Council Decision titled “The Importance of Market-Oriented Conditions to the World Trading System”. WT/GC/W/796. The text is copied below:

“THE IMPORTANCE OF MARKET-ORIENTED CONDITIONS TO THE WORLD TRADING SYSTEM DRAFT GENERAL COUNCIL DECISION

“Communication from the United States

“The following communication, dated 20 February 2020, is being circulated at the request of the delegation of the United States.


“The General Council decides to adopt this declaration on the importance of market-oriented conditions to the world trading system.

“The General Council recalls that the World Trade Organization (WTO) was established to promote Member economies’ participation in a world trading system ‘based on open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions’.1

“The General Council also recalls that the establishment of the WTO reflected Members’ ‘desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples’ and, during the period of time during which the Uruguay Round was being negotiated, ‘significant measures of economic reform and autonomous trade liberalization were implemented in many developing countries and formerly centrally planned economies’.2

“The General Council expresses its serious concerns with non-market-oriented policies and practices that have resulted in damage to the world trading system and lead to severe overcapacity, create unfair competitive conditions for workers and businesses, hinder the development and use of
innovative technologies, and undermine the proper functioning of international trade.

“The General Council affirms that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system, to ensure a level playing field for Members’ workers
and businesses.

“The General Council affirms Members’ citizens and businesses should operate under market-oriented conditions and notes the following elements indicate and are important so that market-oriented conditions exist for market participants:3

“i. decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals;

“ii. decisions of enterprises on investments are freely determined and made in response to market signals;

“iii. prices of capital, labor, technology, and other factors are market-determined;

“iv. capital allocation decisions of or affecting enterprises are freely determined and made in response to market signals;

“v. enterprises are subject to internationally recognized accounting standards, including independent accounting;

“vi. enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law, and private property law, and may enforce their rights through impartial legal processes, such as an independent judicial system;

“vii. enterprises are able to freely access relevant information on which to base their business decisions; and

“viii. there is no significant government interference in enterprise business decisions described above.

“The General Council agrees to reaffirm Members’ commitment to open, market-oriented policies in order to achieve market-oriented conditions that are critical to ensure a level playing field for workers and businesses and a fairer and more open world trading system that benefits their peoples.

“1 Marrakesh Declaration of 15 April 1994, fifth preambular paragraph.
“2 Marrakesh Declaration, paras. 2 and 4.
3″ This decision is without prejudice to the rights or obligations of any Member under the Marrakesh Agreement Establishing the World Trade Organization.”

Conclusion

While a lot of attention remains on reform to the dispute settlement system to permit a return to a two-tiered level of review of Member actions, there has been a growing recognition that significant reform is needed for the WTO to restore its relevance in a rapidly changing global environment. While reform needs to address updating of rules to cover new areas and making existing rules more effective, there cannot be meaningful reform without addressing the disconnect between Members who operate on market economy principles and those that don’t.

While it is highly unlikely that in a consensus based system Members with economic systems that are not premised on market principles will agree to address the massive distortions their economic systems create, the future of the WTO depends on finding ways to address the differences and distortions. Look for a contentious General Council meeting on this topic.

USTR's Report on the WTO Appellate Body — An Impressive Critique of the Appellate Body's Deviation from Its Proper Role

On February 11, 2020 the U.S. Trade Representative released a Report on the Appellate Body of the World Trade Organization . https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The Report is a total of 174 pages, the report itself being 122 pages along with four appendices. The Report does not lay down what it views as the required solutions to the widespread problems that the United States has with the Appellate Body’s actions over the first twenty-five years of the WTO. But the report lays out the U.S. concerns in great detail, why the concerns reflect violations of the limited role of the Appellate Body within the WTO’s dispute settlement system and how WTO Members are harmed by the actions of the Appellate Body over time. The report goes over the issues that the U.S. has reviewed extensively at the Dispute Settlement Body and the General Council over the last two years and adds several additional concerns.

On the critical issue of Appellate Body overreach, the Report lays out examples of specific major problems for the United States in terms of the Appellate Body creating obligations or limiting rights under the WTO Agreements but identifies a number of other examples as well. It is fair to opine that the overreach issues flagged in the report constitute an absolute minimum of issues that need to be corrected for there to be an adequate restoration of rights and obligations in the view of the United States.

The appendices review concerns expressed over the last twenty years by members of Congress, various U.S. Trade Representatives and their Deputies on the continuing problem of WTO Appellate Body overreach vis-a-vis U.S. laws, regulations and practices, and actions by Congress calling for the U.S. Administration to address problems of WTO Appellate Body overreach.

In short, the Report is an extraordinary document that lays out in a comprehensive and coherent manner the U.S. view on why the WTO dispute settlement system has deviated far from its intended path. The full report is included below.

USTR-report-on-the-AB-of-the-WTO

The Report’s release at the time that the WTO Members seek a road forward on the dispute settlement system and how to restore an appellate body level of review gives all WTO Members notice that the U.S. is serious in insisting on Members coming to grips with how and why the Appellate Body has strayed so far from the limited mandate of the Dispute Settlement Understanding. Without a coming together of the Membership on the causes, one can expect that the United States will continue to block the start of selecting Appellate Body members.

Because certain major WTO Members seem unconcerned with (or are even supportive of) the violations that characterize a large number of Appellate Body decisions (at least on particular issues), it is not clear that meaningful movement and discussion will occur in the coming months in the lead up to the 12th Ministerial Conference in Kazakhstan in early June of this year. If not, resolution of the current impasse on the WTO Appellate Body is likely to drag on indefinitely.

Excerpts from the Executive Summary

The Executive Summary provides a concise review of the U.S. concerns. Excerpts are provided below (Report at 1-3):

“The United States and other free-market nations established the World Trade Organization (“WTO”) in 1995 as a forum for negotiating and implementing trade agreements. The dispute settlement mechanism of the WTO was designed to help Members resolve trade disputes arising under those agreements, without adding to or diminishing the rights and obligations to which Members had agreed. When the WTO dispute settlement system functions according to the agreed rules, it provides a vital tool to enforce Members’ WTO rights and obligations. For more than 20 years, however, the United States and other WTO Members have expressed serious concerns with the Appellate Body’s disregard for those rules.

“As detailed in this Report, the Appellate Body has repeatedly failed to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements, as negotiated and agreed by WTO Members. The Appellate Body has strayed far from the limited role that WTO Members assigned to it, ignoring the text of the WTO agreements. Through this persistent overreaching, the Appellate Body has increased its own power and seized from sovereign nations and other WTO Members authority that it was not provided. For example:

“ The Appellate Body consistently ignores the mandatory deadline for deciding appeals;
“ The Appellate Body allows individuals who have ceased to serve on the Appellate Body to continue deciding appeals as if their term had been extended by WTO Members in the Dispute Settlement Body;
“ The Appellate Body has made findings on issues of fact, including issues of fact relating to WTO Members’ domestic law, although Members authorized it to address only legal issues;
“ The Appellate Body has issued advisory opinions and otherwise opined on issues not necessary to assist the WTO Dispute Settlement Body in resolving the dispute before it;
“ The Appellate Body has insisted that dispute settlement panels treat prior Appellate Body interpretations as binding precedent;
“ The Appellate Body has asserted that it may ignore WTO rules that explicitly mandate it recommend a WTO Member to bring a WTO-inconsistent measure into compliance with WTO rules; and
“ The Appellate Body has overstepped its authority and opined on matters within the authority of WTO Members acting through the Ministerial Conference, General Council, and Dispute Settlement Body.

“The Appellate Body’s persistent overreaching has also taken away rights and imposed new obligations through erroneous interpretations of WTO agreements. The Appellate Body has attempted to fill in “gaps” in those agreements, reading into them rights or obligations to which the United States and other WTO Members never agreed. These errors have favored non-market economies at the expense of market economies, rendered trade remedy laws ineffective, and infringed on Members’ legitimate policy space. For example:

“ The Appellate Body’s erroneous interpretation of the term “public body” threatens the ability of Members to counteract trade-distorting subsidies provided through SOEs, undermining the interests of all market-oriented actors;
“ The Appellate Body has intruded on Members’ legitimate policy space by essentially converting a non-discrimination obligation for regulations into a ‘detrimental impact’ test;
“ The Appellate Body has prevented WTO Members from fully addressing injurious dumping by prohibiting a common-sense method of calculating the extent of dumping that is injuring a domestic industry (“zeroing”);
“ The Appellate Body’s stringent and unrealistic test for using out-of-country benchmarks to measure subsidies has weakened the effectiveness of trade remedy laws in addressing distortions caused by state-owned enterprises in non-market economies;
“ The Appellate Body’s creation of an “unforeseen developments” test and severe causation analysis prevents the effective use of safeguards by WTO Members to protect their industries from import surges; and
“ The Appellate Body has limited WTO Members’ ability to impose countervailing duties and antidumping duties calculated using a non-market economy methodology to address simultaneous dumping and trade-distorting subsidization by non-market economies like China.

“For many years, successive Administrations and the U.S. Congress have voiced significant concerns about the Appellate Body’s disregard for the rules agreed to by WTO Members. As set forth in the Appendices to this Report, in multiple Congressional Sessions, up to and including the current Session, Senators and Representatives of both parties have voiced urgent concerns and the need for reform in numerous resolutions, reports, and statements.1

“1 See Statements by Members of the United States Congress Expressing Concerns with Appellate Body Overreaching (Appendix A1); Congressional Legislation and Reports Expressing Concern with Appellate Body
Overreaching (Appendix A2); Statements by U.S. Trade Representatives or Their Deputies on Appellate Body Overreach (Appendix B1); and Statements by the United States to the WTO Dispute Settlement Body Expressing Concerns with the Appellate Body’s Failure to Follow WTO Rules and Erroneous Interpretations of the WTO Agreements (Appendix B2).

“Unfortunately, U.S. efforts were ignored, and the problem has worsened as too many WTO Members remain unwilling to do anything to rein in this conduct. The proper functioning of the WTO Appellate Body has a disproportionate impact on the United States because more than one quarter of all disputes at the WTO have been challenges to U.S. laws or other measures. Specifically, 155 disputes have been filed against the United States, and no other Member has faced even a hundred disputes. According to some analyses, up to approximately 90 percent of the disputes pursued against the U.S. have led to a report finding that the U.S. law or other measure was inconsistent with WTO agreements. This means that, on average, over the past 25 years, the WTO has found a U.S. law or measure WTO-inconsistent between five and six times per year, every year.

“But these failings have dire consequences for U.S. interests in the WTO, and for all WTO Members, as well. The negotiating function of the WTO has atrophied as the Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved through negotiation; the effectiveness of WTO tools designed to address distortions by nonmarket economies has been greatly diminished; and the WTO dispute settlement system continues to lose the credibility necessary to maintain public support for the system.

“In short, the Appellate Body’s failure to follow the agreed rules has undermined not only WTO dispute settlement, but the effectiveness and functioning of the WTO more generally. Furthermore, by encouraging behavior that distorts markets, the Appellate Body has helped to make the global economy less efficient. Lasting and effective reform of the WTO dispute settlement system requires all WTO Members to come to terms with the failings of the Appellate Body.”

Additional Comments

The Executive Summary lists seven ways in which the Appellate Body has deviated from the limited role assigned to the Appellate Body within the Dispute Settlement Understanding. The last two listed have not been the focus of much of the U.S. commentary over the last several years but reflect additional concerns with the Appellate Body’s conduct. The first issue goes to decisions where the Appellate Body has ignored the clear Dispute Settlement Understanding requirement to recommend a party bring its actions into conformity with its WTO obligations where during the pendency of a dispute the Member alleged to be acting inconsistent with WTO obligations withdraws the measure in question. Report at 64-68. The second deals with situations where the Appellate Body has articulated how WTO bodies should carry out their functions even though the functioning of various WTO bodies is not an area properly before the Appellate Body. Report at 69-74. A third additional issue that is not listed in the Executive Summary but is in the full report (Report at 74-80) is “The Appellate Body Has Departed from WTO Rules by Deeming Decisions Not Made under Article IX:2 to Be Authoritative Interpretations of Covered Agreements”.

A major part of the Report is a review of selected Appellate Body decisions which have incorrectly interpreted various WTO Agreements and have thus either created obligations or reduced rights of the United States (and other Members). See pages 81 – 119. The opening paragraphs of this part of the Report summarize the concerns (page 81):

“In addition to failing to follow the rules that WTO Members have adopted, the Appellate Body has erroneously interpreted and applied numerous important WTO agreements. The Appellate Body has overreached on substantive issues, engaged in impermissible gap-filling, and read into
the WTO agreements rights or obligations that are not there.

“The texts of the covered agreements result from extensive negotiations among sovereign nations and autonomous customs territories, and reflect differing negotiating objectives and positions. It is often possible to reach agreement on only one particular obligation or discipline while being unable to reach agreement on any obligation or discipline even in a related area. As such, ‘gaps’ in the text of a covered agreement may simply reflect a situation where there was a limit upon what negotiators could agree. WTO Members have not agreed to delegate to WTO adjudicative bodies the task of filling in gaps in the covered agreements, and it is critical for WTO
adjudicators to respect these limits.

“Despite this, the Appellate Body has expanded its own power and attempted to substitute for negotiators to re-write, reduce or supplement the agreed text. Among other interpretive errors, the Appellate Body has engaged in impermissible gap-filling and read into the text of the covered agreements obligations or rights that are not present in the text. This conduct is inconsistent with the Appellate Body’s role and adds to or diminishes Members’ rights and obligations, contrary to Articles 3.2 and 19.2 of the DSU.”

Five examples are reviewed at length, including four that address issues from trade remedy agreements (Subsidies and Countervailing Measures; Anti-Dumping; Safeguards) and one that involves the Technical Barriers to Trade Agreement. Moreover, four additional decisions are referenced in footnote 195:

“195 For example, this Report does not discuss the dispute US – Continued Dumping and Subsidy Offset Act Of 2000, in which the Appellate Body’s interpretation of the Subsidies Agreement in effect created a new category of prohibited subsidies that was neither negotiated nor agreed to by WTO Members; or other examples, such as US – Gambling, US – Cotton, US – FSC.”

The problem of the Appellate Body (or panels) creating obligations or diminishing rights not contained in the various agreements of the WTO is not limited to these nine cases where the U.S. has raised serious concerns but has included concerns raised by many trading partners. In a paper prepared for the Asia Society Policy Institute in early 2018, I reviewed excerpts from various Dispute Settlement Body meetings where various WTO Members raised concerns about creating obligations or diminishing rights. The paper is enclosed below.

Final-Asia-Society-Paper-re-dispute-settlement

Conclusion

The fundamental questions facing the WTO membership on the dispute settlement system are whether Members will agree to conform the dispute settlement system to the limited role envisioned at its creation in 1995 and restore balance to the Agreements that were negotiated. The United States has laid out its case that a limited role for the Appellate Body was all that was intended and all that the U.S. supports. Many Members have seen the deviation from the Dispute Settlement Understanding but have looked the other way or even encouraged the expansion of the deviation for a variety of reasons, not least of which is achieving through disputes what wasn’t achieved through negotiations. Without a resolution acceptable to the United States, the WTO dispute settlement system will struggle to regain its full measure of legitimacy and there will be no restoration of an Appellate Body.

WTO Reform – Developments from Davos and What Might Be on U.S. Agenda

This year’s World Economic Forum had the usual side meetings of trade ministers and an unexpected meeting between President Trump and WTO Director-General Azevêdo. Trade ministers are discussing what needs to be accomplished ahead of the 12th Ministerial Conference (“MC12”) to be held in Kazakhstan in June 2020 with a focus on how to achieve agreement on fisheries subsidies to address illegal, unrecorded and unregulated fishing and overfishing and hence deliver on the UN sustainable development goal 14.6 during 2020. There are, of course, many other issues potentially on the agenda for MC12.

The potentially more interesting development out of Davos was the meeting between President Trump and DG Azevêdo. The President and the Director-General spoke about the meeting and need for WTO reform at a press conference the President held before leaving Davos. Here is the relevant exchange:

“[President Trump]: One of the people that was very important for me to meet from the World Trade Organization is Roberto Azevêdo. And he is a highly respected man. He happens to be this gentleman right here. I
thought I’d have him say a few words.

“But the World Trade Organization — as you know, I’ve had a dispute running with them for quite a while, because our country hasn’t been treated fairly. China is viewed as a developing nation.

“India is viewed as a developing nation. We’re not viewed a developing nation. As far as I’m concerned, we’re a developing nation, too. But they got tremendous advantages by the fact that they were considered “developing” and we weren’t. And they shouldn’t be. But if they are, we are.

“And we’re talking about a whole new structure for the deal, or we’ll have to do something. But the World Trade Organization has been very unfair to the United States for many, many years. And without it, China wouldn’t be China, and China wouldn’t be where they are right now. I mean, China — that was the vehicle that they used. And I give them great credit. And I also don’t give the people that were in my position great credit, because, frankly, they let that all happen. But the vehicle was the World Trade Organization.
And Roberto and I have a tremendous relationship, and we’re going to do something that I think will be very dramatic. He’ll be coming with a lot of his representatives to Washington sometime — maybe next week or the week after — and we’ll start working on it.

“So I’d like to introduce, just for — briefly — Roberto, and say a few words on behalf of the WTO. And then I’m going to introduce Larry Kudlow to say exactly where we are, in terms of our economy. Some of you know, but we’ve had some tremendous numbers just over the very recent past.

“So, please, Roberto.

“DIRECTOR-GENERAL AZEVÊDO: Well, thank you, Mr. President. And I think it’s fair to say that we have been saying, for quite some time, that if the multilateral system, if the WTO is to deliver and perform its role in today’s global economy, it has to be updated. It has to be changed. It has to be
reformed.

“This is an agenda that is squarely before members. I don’t think anybody in Geneva misses the point. I think they understand that the — the system has not been functioning properly in many areas. That’s something that we’re trying to address.

“I’m very happy that, in the conversation today with President Trump, he agreed that this is something that needs to happen; the WTO has to change. We are committed to effect those changes. And this is something we are serious about.

“And I am going to be, together with President Trump, as soon as possible, discussing what needs to change, what needs to be effected in the WTO, and we are committed to doing that.

“And, of course, I will be talking to all of the other WTO members, making sure that they all understand that this is serious. This is a path that we all have to be on together if we want to make the WTO relevant and performing to today’s requirements, frankly.

“So thank you very much, Mr. President. It’s an honor to be with you and with everybody else.

“Thank you.”

https://www.whitehouse.gov/briefings-statements/remarks-president-trump-press-conference-davos-switzerland/

U.S. Objectives for WTO Reform – Articulated and Possible

In the first three years of the Trump Administration, the Administration has identified a range of areas for reform and provided some specifics as well as identifying areas of key negotiating interest.

Dispute Settlement

WTO dispute settlement reform has been a top priority for the Administration with a wide range of issues of importance but an overriding issue of preventing panels and the Appellate Body from creating rights or obligations not contained in the negotiated agreements. This is also an area of priority for other WTO members for the different reason of wanting to get the Appellate Body functioning again. While the U.S. has not articulated specifics in terms of what type of reform is needed, the problem areas are clear. The U.S. position has been that the existing DSU text is clear and that proposals to date do nothing more than restate the existing requirements. Without understanding why the system has deviated from the plain language of the DSU, it is not possible to identify the reforms that are needed has been the Administration’s position. Much has been written about this area and one can assume it will be an important part of the upcoming discussions between the Administration and the WTO Secretariat. Broader reform of the WTO is unlikely if reform of the dispute settlement system isn’t achieved. It would be unacceptable to many WTO Members not to find a solution to the dispute settlement system.

Improved transparency

Much of the value of the WTO flows from the requirement of WTO Members to provide notifications on a wide range of topics, notifications which are important for other WTO Members to understand what trading partners are doing and whether there are potential WTO problems with the actions of particular trading partners.

Unfortunately, many WTO Members have failed to file required notifications in a timely manner, and, in many cases, notifications that are filed are demonstrably incorrect. In the areas of subsidies, the United States has over the past decade filed counternotifications on subsidy programs on China and India believing that the notifications submitted by those two countries were woefully incomplete. The counternotifications were an effort to identify the magnitude of the problem of under reporting.

While the WTO Secretariat has been tasked with providing periodic updates on notifications by Members, the present system has no consequences for failure to file notifications in a timely manner or for filing incomplete notifications.

How to address the transparency issue is of importance to many WTO Members. Indeed, lack of transparency and full notifications can complicate efforts to move specific issues forward. For example, the United States has raised concerns about the lack of information on cotton subsidies from China and India within the discussions on addressing concerns of cotton producting Members in Africa.

The U.S. and other countries have put forward proposals on modifying notification requirements and potential consequences for failure to keep notifications up to date. Because of the importance to the overall operation of the WTO, one can expect some effort in any reform package to ensure greater likelihood of notification requirements being met in fact.

Who gets Special and Differential Treatment under New Agreements

During the history of the GATT and the WTO to date, whether a Member was a developing country was a matter of self-selection, and, as a result, there have never been criteria that would help Members decide on eligibility. Nor has the organization had any system for graduating Members as their economies grew. Over the years, this has led to the situation where some of the wealthiest countries, largest exporting countries and others have maintained developing country status and hence taken lower levels of commitments through special and differential treatment provisions contained in agreements for developing countries.

As the comments of President Trump indicate, the United States has felt that the WTO system has permitted a number of countries not to assume responsibilities commensurate with their state of development and importance to the global trading system.

The United States has put forward proposals to have various countries, based on objective criteria, be ineligible for special and differential treatment for new agreements. Three WTO Members have indicated that they will not seek special and differential treatment in future agreements, though not agreeing that they are not developing countries — Korea, Singapore and Brazil.

While the need to have advanced economies carry their weight as part of the system would seem to be obvious, this is a highly sensitive issue where a number of major economies will fight hard against modifications of the current system. China, India and South Africa are three who have opposed any changes.

Obviously there has been some positive movement by the actions of three WTO Members. At a minimum, hopefully more Members will make similar commitments. And the United States has indicated that special and differential treatment provisions will not be agreed to in future agreements if certain countries don’t opt out of receiving such benefits. Thus, this issue will be an important and ongoing one that will generate a great deal of debate within the WTO and, hopefully, a meaningful advancement through its outcome. As the United States has indicated in statements at the WTO’s General Council, failure of many Members to carry their proper weight in liberalization has frustrated the ability of the WTO’s negotiating function to achieve the types of success that the system needs.

Update Rules to Address Different Economic Systems

For the United States, the European Union and other countries, the GATT and now WTO rules were written for and are applicable to market economies. WTO Members with different economic systems historically were not significant players in the global economy or when they joined the GATT or WTO undertook obligations which held the promise of the Member’s economy shifting to market economy principles.

The rise in importance of non-market economies like China engaged in different versions of state capitalism has created major challenges for the global trading system and for the viability of the WTO. The size and extent of industrial subsidies, forced technology transfer, role of state-owned and state-invested enterprises, state planning and resulting massive global excess capacity and targeting of technologies are just a few of the challenges market economy countries around the world have been confronting. Existing WTO rules don’t adequately address the many distortions flowing from the actions of the WTO members with non-market economies.

The United States, European Union and Japan announced an initiative at the 11th Ministerial Conference in Buenos Aires to address some of these issues. They recently released a joint statement outlining actions needed on industrial subsidies in particular.

The United States has also indicated that there is need for the WTO to address the disconnect that flows from major economies being within the WTO without being market economies.

While one would hope that a major trading nation, like China, who has benefitted enormously from WTO membership would understand the need for their to be an understanding on how different economic systems can coexist and rules to deal with major distortions or differences, this is an area where it is hard to see meaningful reform under a consensus system such as that used in the WTO.

Updated Rule Book to Address Current Commercial Realities

The Uruguay Round was the last major update of the global trading system’s rule book and occurred over 1986-1994. Technology and the organization of much of business today is dramatically different than the world that existed in the 1980s. There are few rules within the WTO dealing with electronic commerce. The plurilateral effort underway to come up with rules for the e-commerce field is important and long overdue.

Similarly, the world is facing issues of critical importance to the maintenance of food supplies, commercial activity and survival of islands, coast lines and much more. For example, more than one third of fish species are overfished. The oceans of the world are suffering massive pollution with waste areas in some locations being the size of states or smaller countries. Similarly, water temperatures are rising and weather patterns are shifting with consequent effects on agricultural productivity, on human and animal health and much more.

A few of these issues are being pursued within the WTO at the present time, including fisheries subsidies (negotiations now in their 19th year) and the plurilateral talks on e-commerce. Other topics are receiving consideration as well including domestic regulation of services, facilitating investment, the role of women and of small and medium sized enterprises.

Much more can and should be done to address the changes we are currently facing and that can be predicted. Where trade is affected, the WTO should have an important role. But a system that takes decades to work through a single issue, like fishery subsidies, will need a serious review as to how to permit much more timely responses and rule setting that can be ahead of the curve.

Free Trade Agreements and MFN

While Article XXIV of GATT 1994 deals with customs unions and regional trade agreements, the reality is that there are now hundreds of free trade agreements that have been negotiated and are in place of various breadth and different levels of coverage. While such agreements can permit countries to address bilaterally or plurilaterally issues not covered by the WTO, there is no doubt that free trade agreements lead to significant trade diversion as large volumes of trade are done at tariff rates that are more advantageous that the most favored nation rates negotiated during the GATT rounds. For some countries, the bulk of their trade may be at non-MFN rates. Do such facts favor additional efforts at bilateral or plurilateral liberalization even if not on an MFN basis?

Moreover, as many WTO members are opting not to contribute to further liberalization on new topics, there is the challenge of Members willing to liberalize providing benefits to non-participating members. While this is not a new problem, WTO reform may need to explore whether MFN has continuing relevance in a world of bilateral and plurilateral deals and/or whether plurilateral deals on topics not presently covered by WTO agreements should permit participating Members only to be the beneficiaries of the texts.

Conclusion

Other countries have raised a series of topics that they would like to see addressed in WTO reform talks that are not addressed in this note. What is clear is that if the United States is going to find satisfaction in a WTO reform effort, some major changes to the system will be needed. Deputy Director-General Alan Wolff had indicated in the past that WTO reform by 2025 was possible (looking at being ready for adoption by the 15th WTO Ministerial). https://www.wto.org/english/news_e/news19_e/ddgaw_13nov19_e.htm That timeline, while ambitious for the WTO based on past experience, is almost certainly unacceptable to the current U.S. Administration.

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.

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.