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Reform or die? If the US gets its way, the WTO might do both

Reform or die? If the US gets its way, the WTO might do both

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GENEVA — The United States put the World Trade Organization into intensive care by single-handedly killing off its highest court four years ago — in so doing endangering the global rules-based trading system.

Now Washington is — ever so quietly — floating the idea of a new-look appeals process that could help get the WTO off life support. And that is leading some trade diplomats in Geneva to question whether the patient would survive the operation that Joe Biden’s administration has in mind.

“It’s reform or die,” one senior Geneva trade diplomat told POLITICO, setting out the scale of the task before the WTO and its director-general, Ngozi Okonjo-Iweala.

“[Major powers] are contesting the norms, they are pushing the rules. And if we don’t accommodate and adjust and find a way to keep the big players in the system, then … we do fade into irrelevance,” they added.

The creation of the WTO in 1995 represented the high-water mark of globalization and the liberal world order following the fall of the Berlin Wall. But China’s accession six years later ushered in a new era of rivalry with the West that only intensified as its share of global trade grew. In Washington’s view, the WTO’s strict enforcement of its trade rules hurt U.S. jobs and industry while enabling China’s rise as a mercantilist superpower.

Successive U.S. administrations have vented their ire at the WTO’s powerful Appellate Body, or supreme court. So much so that Barack Obama started vetoing the appointment of the body’s arbiters in 2016, and Donald Trump finished the job by blocking more appointments. By 2019, the Appellate Body was paralyzed.

Biden has held that course, reflecting bipartisan abhorrence in Washington at the WTO’s perceived overreach.

The new U.S. idea is to only allow a trade dispute to advance beyond the first non-binding judgment to the legally-binding Appellate Body stage if both the plaintiff and the defendant agree to move ahead, according to people with knowledge of the talks who were granted anonymity because the discussions are preliminary and confidential.

Washington also wants to roll back some of the Appellate Body’s previous interpretations of international trade law. For instance, the U.S. wants to let countries decide for themselves when they can invoke a national security exception — a joker that can be played to legally violate trade rules — rather than let the Appellate Body decide.

That would effectively give the U.S. and any other WTO country a free pass to flout global trade rules, as Trump did when he slapped tariffs on imports of European steel and aluminum in 2018 on national security grounds. Biden subsequently suspended the tariffs, but Washington and Brussels are still in talks to lay the dispute to rest.

That the U.S. is finally engaging in a reform debate is at least a positive step, say trade experts. “It is very good indeed that the U.S. is making proposals about what it wants because until now, it has just said ‘no’ to everybody else,” said Lorand Bartels, an international trade law professor at the University of Cambridge and counsel at Freshfields law firm.

Some countries find the American reaction against China at the WTO to be unfair | Rajesh Jantilal/AFP via Getty Images

U.S. ambassador to the WTO María Pagán declined to be drawn in an interview with POLITICO on reform specifics but did say: “There is value in having a forum where [others are present] and it’s a place to talk to each other.”

“We’re very committed to the WTO,” said Pagán.

Hush hush, eye to eye?

The initial ideas were aired by the U.S. last month as part of a hush-hush brainstorming exercise that seeks to fix the WTO’s dispute settlement system by 2024. That’s the deadline trade ministers from the 164 member countries pledged to work toward at their ministerial conference last year.

The conversations, led by Guatemala’s Marco Tulio Molina Tejeda, have so far yielded over 70 ideas, ranging from speeding up the adjudication of trade disputes to making it easier for poorer countries to sue others over unfair practices, according to Geneva-based diplomats and officials.

“The United States is actively engaging and contributing in the brainstorming exercise facilitated by the WTO,” a spokesperson for U.S. Trade Representative Katherine Tai said in a statement to POLITICO. “Those issues stem from the work done in the interest-based discussions led by the United States over the last two years.”

So far, however, the U.S. has won scant support. 

It’s really the “U.S. against the rest,” a second Geneva trade diplomat said, adding that “everyone is strongly interested in having the Appellate Body back.”

The European Union would like to see “a two-tier binding dispute settlement system,” the bloc’s top trade official, Valdis Dombrovskis, said on a recent visit to Washington. “We would like to avoid situations where national security is used as an excuse for protectionism — as we saw with [the] Trump tariffs.”

On the face of it, revamping how the WTO keeps countries in check could offer it a path to redemption. But the American preference for a laxer system effectively means legalizing the waging of trade warfare, in an era of Sino-American rivalry that is already dividing the world into geo-economic factions, trade diplomats say.

Power play

In the eyes of the U.S., Beijing hijacked the free-trade club to legitimize an economic rise that, since 2001, has been powered by a vast and growing trade surplus while sheltering its domestic market from foreign competition. 

“The postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept,” National Security Adviser Jake Sullivan said in a landmark speech last month that signaled a clear break with the free trade consensus that has guided U.S. economic policy for much of the last half-century.

Washington now openly plays by its own rules: Last year’s $369 billion Inflation Reduction Act contains Made in America incentives that critics argue “tilt the playing field” toward companies based in the U.S. — and that’s illegal under WTO rules. A recent deal with Japan on critical minerals also violates the rules, according to an official based in Geneva. 

Some countries find the American reaction against China at the WTO to be unfair: “The push by some members to isolate China is inconsistent with [multilateralism’s] ethos. Those who studied history know that these very kinds of practices led to conflicts,” a third Geneva trade diplomat said.

Tower of Babel

Rivalries between its 164 members might run too deep to save the WTO: Every member would have to agree to the reform, meaning that all — including the U.S. and China — hold an effective veto.  

Just as in many international organizations, Beijing has consolidated support among developing countries, especially across Africa. Protectionist India, meanwhile, plays the role of disruptor, turning even the simplest question of which committee WTO members should hold reform talks into a conundrum.

Already at this early stage, a skirmish has broken out over when exactly countries should set the deadline for the revamp. Whereas many are aiming for February 2024, when the WTO holds its 13th ministerial conference (aka MC13) in Abu Dhabi, the U.S. maintains that the pledge means December 2024.

That would be a month after the next U.S. presidential election, in which the 80-year-old Biden has announced he will seek a second term. Trump, who openly scorns the WTO, is meanwhile on the comeback trail and the candidate to beat for the Republican ticket.

Staying alive

WTO boss Okonjo-Iweala, whose term has little more than two years to run, finds herself in a tough spot as the captain of a ship that’s adrift at sea, so she’s trying to cheerlead countries into making headway in the reform debate.

“We need to [reform] all the core functions — but the biggest focus now is reform of the dispute settlement system,” she told POLITICO in Geneva. “By MC13, we have to demonstrate seriousness that we’re on the reform path. We may not have finished the whole thing — that may be too ambitious — but we would have shown that this is on.”

The United States put the World Trade Organization into intensive care | Paul Ellis/AFP via Getty Images

She added that “momentum is good” and “the hope is that by summer, that we’ll be at a place where we will have some concrete, specific proposals about what that reform actually needs to look like.”

If the trade body doesn’t manage to pull itself together, it risks fading into complete irrelevance.

To some extent, that’s already happening: Back in 1999, around 40,000 anti-globalization protesters swarmed the streets of Seattle during the WTO’s ministerial conference. Nowadays, the trade organization is rarely in the public eye and few journalists cover the daily ins and outs of the Geneva-based institution.

If it weren’t for Okonjo-Iweala’s energy, the WTO might have slipped off the radar completely. Yet, paradoxically, several diplomats think that the international institution works best when it’s not making headlines.

Despite the reform-by-doing approach and less headline-grabbing technical work, the grim geopolitical picture begs the question of whether any of this can really heal the WTO.

“Current challenges should not take us back to 70 years ago,” China’s Ambassador to the WTO Li Chenggang told POLITICO. “Especially for the big economies, if we fight each other, we destroy the multilateral trading system [and thus] no one can benefit from the system. At this moment, the big members have more responsibility.”

Doug Palmer, Steven Overly and Gavin Bade contributed reporting from Washington. Barbara Moens contributed reporting from Brussels.

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