The US Mid Terms and Trade
Fresh Opportunities for WTO Reform?
Thursday 8th November 2018: The US Mid -term elections concluded as expected, with gains in the Senate for Republicans and the House of Representatives for the Democrats. How significant will trade policy now be and how can the US move forward on trade internationally? Here David Collins*, Professor of International Economic Law at City University, considers the next steps.
This week’s US Mid-term elections are a good moment to take stock of the health and future prospects of the world’s trading system, and the role of the US within it. Its chief pillar, at least for now, is the 164-member World Trade Organization (WTO). Since the election of Donald Trump as president in 2016, and arguably for some time before, the WTO has been the object of much US hostility. Despite the WTO’s many achievements in liberalizing trade an unlocking growth in world GDP, there is some legitimacy in the charges now levied against it by the US and others.
The WTO dispute settlement system is among the most successful and busiest international courts, enjoying a high rate of compliance and widespread respect among the international community. But the WTO’s Appellate Body, normally consisting of seven adjudicators, has been reduced to the bare minimum of three because the US has repeatedly blocked the appointment of new members. By the end of next year, the court will have become dysfunctional, imperilling the enforcement of global trade rules. The US cites growing “judicial activism” as the reason for its opprobrium towards the court, an issue which echoes that controversy surrounding the appointment of judges to the US Supreme Court. A number of senior individuals in the US government believe that the WTO Appellate Body often exceeds its jurisdiction, rendering decisions which go behind resolving the immediate dispute between the two parties. Excessive delay in the proceedings, which now regularly exceed specified timeframes, coupled with the growing complexity of disputes and an overloaded caseload has exposed some of the flaws in the WTO dispute settlement system.
There may be other elements of truth to the scorn levied by President Trump and other US officials regarding the WTO’s rules. Chief of these are the allegations that the organization has been slow to redress the explosive incorporation of China into the global economy since it joined the WTO in 2001, after which point global commerce changed radically. Many Western countries, the US in particular, have struggled to respond to, or even to accept, China’s ascendancy as the factory of the world. The sufferings of the US manufacturing sector unable to compete with China’s lower labour costs played a major role in the election of a president who promised to put America first, with trade policy as one of his primary tools. At the heart of the matter is the reality that WTO rules were designed to facilitate free trade between market countries. In many respects the rules have failed to accommodate China’s state-centred model of economic development. Special anti-dumping laws aimed at facilitating retaliation against China’s predatory pricing have expired, perhaps prematurely. Allegations of subsidization are difficult to prove in the case of China for similar reasons. Many have rightly argued that these omissions in WTO law have allowed China to pull ahead of the US and other countries illegitimately. This casts into doubt the WTO’s rule as the world’s guardian of fair trade.
Some believe that the WTO has not adapted to other changes in the modern global economy. Much of the WTO’s core rules on trade in goods were drafted in the 1940s. Although the WTO itself was created in 1995 and many laws were updated at that time, global commerce has moved on since consumers fell in love with shopping on the internet more than ten years ago. But there are limited provisions in WTO law covering digital trade and progress to develop these has been sluggish. The WTO also needs to address pressing concerns regarding the protection of intellectual property. Several developing countries have failed to uphold their commitments in this regard and this has acted as a disincentive to foreign investment. As it stands today the WTO only weakly controls requirements placed by host states on foreign investors – allowing countries, again like China, to impose mandatory transfers of technology on incoming firms. This undermines the hard-won advantage of many Western companies seeking to expand into new markets. While China has promised to curtail these practices, there is scant evidence that it has done so meaningfully.
Which brings us back to the US mid-terms. With the Democrats now controlling the House of Representatives, President Trump has less room to manoeuvre when pursuing a trade agenda aimed at resolving some of these trade issues. This may prevent him from enacting protectionist measures which he feels rightly or wrongly (most wrongly) may be in the interest of Americans. Under the US Constitution, trade matters fall within the purview of Congress. President Trump has managed to minimize the role of Congress in his trade policy so far by framing tariffs on steel as matters of national security and therefore within his presidential powers. This is a dubious claim that would almost certainly fail to withstand scrutiny by a WTO judicial panel. It is a matter of much controversy whether national security issues may rightly be assessed by the WTO courts under the General Agreement on Tariffs and Trade (GATT), but this assumes that the measures were imposed in good faith and this is unlikely given that the measures have been levied against the US’s closest allies (e.g. Canada and the EU). Tariffs on steel have already led to retaliation by other WTO Members, raising prices for US consumers on a range of goods. It is difficult to imagine that a Democratically-empowered Congress will countenance these policies much longer. Many Republicans are also growing weary of the president’s bombastic approach to trade, even as it appears his pressure on China has worked to open dialogue with that country, much as his hard-line stance was felt by some to have secured a more favourable revision to the North American Free Trade Agreement (NAFTA) with Mexico and Canada.
Rather than pursuing its trade aggrievances unilaterally, the US must re-assert itself through established international mechanisms. These include the negotiation and dispute settlement features of regional agreements like NAFTA and the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) from which the US mistakenly withdrew in the early days of the Trump presidency. A post-Brexit free trade agreement with the UK would be another step in the right direction. This could open lucrative markets for both countries, especially in services. That President Trump is seriously considering such a treaty should be welcome on both sides of the Atlantic. A US-China free trade agreement, once unthinkable, now appears a credible possibility. It would bring much relief to world markets. Most important of all, the US must re-engage with the WTO, helping the organization modernize itself through reforms from within. Rather than block appointments of new Appellate Body Members, the US should participate in WTO reform initiatives, such as those led by the EU, Canada and Japan. The US should then use the WTO’s properly appointed dispute settlement system, where it has enjoyed much success in the past, to bring its trade grievances. The US has a strong legacy of leadership in establishing and upholding the rule of law and it is difficult to envisage much progress for 21st century global trade without its help. It may be that the new pressures of a Democratic House of Representatives (coupled with Republic gains in the Senate) could be precisely the impetus for US leadership to abandon its aggressive unilateralism and make the rules of international trade work more fairly for the entirety of the global community.
*David Collins is Professor of International Economic Law at City, University of London and the author of Politeia’s Negotiating Brexit: The Legal Basis for EU & Global Trade (4th edition, July 2018). He previously practised commercial litigation in Toronto and was a prosecutor for the Attorney General in Ontario. His previous publications include An Introduction to International Investment Law (Cambridge, 2016) and The World Trade Organization Beginner’s Guide (London, 2015).