Via Financial Times

The rules-based international trading order is likely to suffer serious damage this week as the US carries out a longstanding threat to cripple the World Trade Organization system for dispute settlement.

The WTO’s appellate body (AB), which adjudicates on contested rulings over disputes between member countries, will become unable to function when Washington exercises a veto and blocks new judges from being appointed to replace two whose terms of office expire.

Trade officials say a meeting in Geneva this week of WTO ambassadors from the organisation’s 164 member countries will almost certainly be unable to persuade the US to relax its hard line. Robert Lighthizer, the US trade representative — who frequently tangled with the WTO in his former career as a lawyer for the US steel industry — has repeatedly said the body oversteps its brief and creates law rather than interprets WTO agreements.

The EU, which has sought to create a temporary alternative to the AB, is set to unveil a legal tool later this week allowing it to impose trade sanctions against countries even after the WTO system freezes up. Although not explicitly aimed at the US, the new enforcement regulation will allow Brussels to raise tariffs against imports from countries that seek to frustrate WTO litigation by appealing cases to an AB that has ceased to function.

On Friday Dennis Shea, the US representative to the WTO, told other ambassadors in Geneva that other countries had not seriously tried to improve the dispute settlement process. “The United States has . . . articulate[d] our longstanding concerns with the functioning of the appellate body,” Mr Shea said. “We have yet to see the same level of engagement from other members.” The US has also sought to paralyse the system by blocking budget allocations for the AB.

READ ALSO  City of London makes late scramble to limit Brexit disruption

The EU has proposed an ad hoc temporary version of the AB while the full version is in abeyance, and has so far recruited Norway and Canada. EU officials say they hope that bigger economies such as China, Russia and Brazil will join their temporary system once the main WTO body has ceased to function.

The WTO would still be able to negotiate new agreements. But, without such an alternative AB system, any disputes appealed from the first panel hearing would be left in limbo.

Trade Secrets

Trade Secrets is the FT’s must-read daily briefing on the changing face of international trade and globalisation.

Sign up here to understand which countries, companies and technologies are shaping the new global economy

The AB was created at the inception of the WTO in 1995. Panels of three judges drawn from a roster of seven with fixed-term offices hear appeals from dispute panels. The system can authorise trade sanctions if it finds a government in violation of WTO law. Some of the most contested issues in world trade, such as EU and US subsidies to Airbus and Boeing, and Chinese state support for its companies, have been arbitrated through WTO dispute settlement.

Both US Democratic and Republican administrations have long been unhappy with what they see as the judicial over-reach of the AB. In particular, AB rulings have repeatedly held that American anti-dumping rules, which allow the US to impose tariffs against imports deemed to be priced unfairly low and to damage domestic producers, contravene WTO law. The US wants to take the AB back to what it says was the original intent, a technical revising body rather than a routine court of appeal.

READ ALSO  Default concerns drive up borrowing costs for Chinese state companies

The imminent seizing-up of the AB has been met with dismay by many governments and business associations. Pierre Gattaz, president of the Confederation of European Business, or BusinessEurope, said on Friday: “The current system has provided massive benefits to business and consumers and is an essential element of the WTO.”