The world trade body cannot be wished away soon but it faces “a lot of uncertainty ahead”
The major upsetting of political apple carts globally in the past year has serious ramifications for multilateral establishments. With increasing clamour against immigrants and “unfair” trade practices, and the imperative to provide jobs to an estimated 201 million unemployed people in the world, protectionist rhetoric has found resonance in wide swathes of the world’s population, particularly in the developed world. Where does this unfolding situation leave the liberal trade order that most conspicuously finds expression in the World Trade Organisation (WTO)?
History in a capsule
The General Agreement on Tariffs and Trade (GATT) – concluded by 23 countries at Geneva in 1947 – is a set of multilateral trade agreements that aimed at abolishing quotas and the reducing tariff duties among contracting nations. Its cardinal principle was of trade without discrimination. For instance, the most favoured nation (MFN) clause requires that once a tariff rate is fixed between a country and its largest trading partner, the same rate be automatically extended to other members. GATT was one of the most effective tools for liberalising trade, and by 1995 about 125 nations signed up to abide by its rules, governing 90 percent of the world trade. GATT was modified and enlarged in scope in many rounds of negotiations thereafter, with the Uruguay round proving to be the biggest expansion in GATT’s history. It slashed tariff rates on industrial goods by 40 percent, put together new agreements on trade in services and reduced agricultural subsidies. It also agreed to establish the WTO in 1995, thereby phasing out GATT.
Ironically, the original multilateralists – like the US, Belgium, France, the Netherlands, and the UK, who were members of GATT from the day the agreement kicked in on January 1, 1948 – are now some of the loudest voices against more globalisation and integration. US president Donald Trump has harped on how pursuing an ‘America First’ policy will bring jobs back to domestic shores. The UK has given its verdict with Brexit – and its broad approach in future towards movement of people into its boundaries. On March 15, the Netherlands will hold elections where far-right leader Geert Wilders’ Party for Freedom will probably become the largest party in the country. Wilders wants an exit from the EU. France will soon follow suit with its elections, where far-right leader Marine Le Pen is making strong strides in the election campaign. She also wants less globalisation for the French people. This, in spite of the fact that France’s growth has been the strongest in the past six years, stronger than that of Germany, and unemployment has fallen in the EU last year.
If these western countries actually end up configuring their trade policy around nativist instincts, then this would spell havoc for the current international trade order.
Of particular importance is the Trump administration’s relation with the WTO. One can safely say that things are going to get much more complicated from here on.
Trump has threatened to withdraw from the WTO to protect the country from “unfair” foreign competition. At the very least, he would probably implement what he calls the ‘border adjustment tax’, which would impose a 20 percent tax on all imports while making exports tax-free. Experts fear that this might make imports much more expensive.
Additionally, the Wall Street Journal reports that Washington is planning to change the way it calculates trade deficit that would make the trade gaps between the US and other countries look larger. Trump has railed against the trade deficit between the US and China and Mexico, in particular. He has threatened to unilaterally increase tariffs for Chinese goods and imports from other countries that harm American producers.
If Washington does indeed go ahead with these proposed changes then they would likely be challenged at the WTO (though proponents of the tax plan claim that it would be WTO-compliant). For instance, in 2002, US president George W Bush unilaterally slapped steel imports from the EU and Japan with tariffs as high as 30 percent which were lifted only after the EU threatened to impose $30 billion in retaliatory tariffs and the matter was taken to the WTO.
However, the costs and the length of time required to fight and win a case at the dispute settlement body (DSB) can dissuade many of the developing countries from taking that route. The resources at the DSB are stretched thin and there is a backlog of cases waiting at the dispute settlement division. It could take a couple of years for a case to reach the appellate board – the highest trade court – that delivers a legal ruling subsequent to which the complainant imposes retaliatory charges against the US.
Trump’s choice of Robert Lighthizer, who served as deputy US trade representative (USTR) under president Ronald Reagan, to be the next USTR gives a fair indication of what to expect of American behaviour at the trade body. Throughout his career as a lawyer, he has defended domestic steel companies from foreign competition, has shown his disapproval for WTO rules and verdicts that rein in the US’s capacity to take trade safeguard actions. Lighthizer had said in 2007 that the WTO’s dispute settlement system was “veering off course”. He will likely come to Geneva with a civilising mission.
“I see little evidence that the Trump administration wants to withdraw the US from the WTO. Rather it is more likely that they will pursue a ‘get tough’ strategy through aggressive use of the dispute settlement system,” Rob Howse, a law professor and WTO legal expert at New York University, told this reporter in an e-mail interview.
“If that were to fail, one might expect to hear some talk of withdrawal. But given the time frame for WTO dispute proceedings, the outcomes of this litigation would probably not be fully known until the end of Trump’s term in office.
“Further, under the Uruguay Round Agreements Act it is the role of Congress to review or reconsider US participation in the WTO,” he added.
The US has been one of the biggest users of the dispute settlement system in the world trade body. The USTR would probably try to ensure that the appellate body’s rulings are interpreted “appropriately”. Such an interventionist approach by the US is not new, though. Washington blocked the reappointment of an appellate body member, South Korean law professor Seung Wha Chang, last year arguing that some of the rulings during his tenure had gone beyond its legal scope. This move met with much uproar from other WTO members. However, during Obama’s presidency, the threat of the US withdrawing from the WTO was never a possibility. But the unpredictability of Trump’s behaviour pushes much within the realm of the possible.
There are other challenges that confront an anxious WTO, including the interpretation of legal texts by the appellate body and how international agreements, like the Paris climate deal, sit with WTO jurisprudence.
“The appellate body must normally accept the facts as determined by panels, who lack professional adjudication skills,” Howse said. “Panels understand next to nothing about the complexities of global and domestic markets in green energy and UN climate regime. You need different people than amateurs from diplomatic missions and such. One could use both economic and environmental expertise,” he added.
Proliferation of BITs/RTAs?
Would the Trump ascendancy, Brexit and the possibility of increasing numbers of anti-trade leaders taking charge in Europe lead to a proliferation of regional trade agreements (RTAs) and bilateral deals that bypass the WTO? The US certainly looks set to increasingly travel a bilateral trajectory. While the multilateral experiment has not been a linear journey, and bilateral investment treaties (BITs) and RTAs have always criss-crossed the global trade landscape, the importance of plurilateral agreements would grow in the near future. President Trump withdrew from the ambitious Trans-Pacific Partnership (TPP) the first day of assuming office. He looks determined to re-negotiate the North Atlantic Free Trade Agreement (NAFTA) with Canada and Mexico to clinch a “fairer” deal for the American people.
“There are many models that will come up. Several important issues will be dealt with outside the WTO… We are in an era of trade barriers that does not augur well for WTO. Middle-income countries have a lot at stake,” said Harsha Vardhana Singh, former deputy director-general of WTO, at a conference of WTO in New Delhi.
However, BITs and RTAs come with their own set of problems. Though the success of the coming through of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) on February 15 this year will likely buoy RTA enthusiasts, it is important to remember that the CETA deal was achieved after much heartburn. The tiny Belgian province of Wallonia had blocked it fearing competition from Canadian farmers. After much diplomatic chaos, including a cancelled visit to Europe by Canadian prime minister Justin Trudeau, could the deal finally be sealed. And this was in spite of the fact that the EU and Canada are as friendly as two parties could get in international politics.
India is reluctant to extend 83 BITs with different countries in the EU that are set to expire this year or have already expired while the EU wants India to extend these contracts by six months till the talks restart. India has objected to the arbitration and dispute settlement mechanisms in the BITs and proposed a model BIT in 2015.
“It [the model BIT proposed by India] is much more balanced between investor interests and those of legitimate public policy. The model BIT, for instance, contains a tightly-drafted general exceptions clause like that of GATT Article XX, safeguarding key policy objectives like health and the environment,” Howse writes in the International Law and Policy Blog.
Governments have found themselves dragged to court for violating an RTA rule when legislating for public welfare when such government measures have eaten into the profits of powerful corporations. Additionally, the investor court dispute settlement judges are private arbitrators who profit from such cases. There are many instances where rich governments have insisted on stronger intellectual property (IP) protection that has led to TRIPS-plus [Agreement on Trade-related Aspects of Intellectual Property Rights-plus] clauses. Thus, even BITs and RTAs require insertion of WTO-like rules to protect weaker contracting parties.
“And anti-corruption and corporate responsibility obligations are imposed on investors [in the model Indian BIT], making this one of the first models for an investment agreement to be genuinely not one-sided; typically investment agreements impose burdens on states without any corresponding responsibilities on corporations, hardly an equitable state of affairs,” Howse writes in the blog.
“It is a challenge to rein in such expansion of jurisdiction by arbitrator creativity, since arbitrators are judges for hire, and when they grant jurisdiction they get paid handsomely to hear the case,” he adds.
The Regional Comprehensive Economic Partnership (RCEP) – a free trade agreement (FTA) being negotiated by 16 countries in the Asia-Pacific region including India – has also met with resistance from many quarters. Such mega trade deals are often shrouded in secrecy, though they affect the lives of millions of people. Leaked texts show that proposals by certain developed countries like Japan and South Korea want high IP protection – stronger than those asked for by WTO’s TRIPS agreement – for the protection of plant varieties and to either accede or ratify over a dozen international IP-related agreements.
Similarly, the Transatlantic Trade and Investment Partnership that is being negotiated since 2013 between the US and the 28 nations of the EU is stuck on the issue of IP standards.
The state of trade and political flux could also open up unexpected opportunities.
A leaked document published by The Guardian shows Indian tariffs for Scotch whisky and British prime minister Theresa May’s visa rules for skilled Indian workers that have played spoiler for an FTA between the UK and India could help the EU strike an FTA with India. “In case the UK (including Scotland) would leave the EU, this could possibly facilitate FTA negotiations [for the EU] as tariffs on wines and spirits constitute an obstacle. This, as well as financial services, would then become a bit less of an offensive interest of the EU,” says the document drawn up by members of the European Parliament (MEP).
The Trade Facilitation Agreement, which aims at easing custom procedures globally, signed by 112 countries entered into force on February 22, just in time to serve as a throbbing pulse that indicates that multilateral trade agreements are alive and kicking. For instance, India, which has been piggy-backing on the IT sector (it currently accounts for only 3 percent of services’ export) and wants a similar Trade Facilitation in Services agreement to expand its service sector, has to go to the multilateral trade body to thrash out such a deal.
The WTO is not to be wished away any time soon, even in the age of increasing protectionism and proliferating RTAs. The WTO rules still serve as the baseline on which to build bilateral trade deals.
However, it is safe to agree with WTO director-general Robert Azevêdo who said last month that there is “a lot of uncertainty ahead of us”.
(The story appears in the March 1-15, 2017 issue of Governance Now)
Photos: (from L to R) Robert Lighthizer (COURTESY: WIKIPEDIA CC), Rob Howse (COURTESY: nyu.edu), Harsha Vardhana Singh (GN Photo) and Robert Azevêdo (COURTESY: wto.org)