US Reforms of WTO dispute settlement: the ‘Rules-Based Order’ takes another hit

Jun 27, 2023
Economic Globalisation

One of the more arcane developments in contemporary trade policy is the recently tabled US proposal for reform of the arrangements for managing trade disputes between members of the World Trade Organisation (WTO). It is a landscape marked by statistics, legal texts, and arguments. However, reflected in the microcosm is a wider universe featuring the inequities, instabilities and unsustainability of global capitalism and the global security risks arising from the resistance and protests of the declining hegemon.

The WTO was conceived in the Uruguay Round of negotiations (1986-94) under the aegis of the 1947 General Agreement on Tariffs and Trade (GATT). The seeds of this conception included the demands of transnational corporations (TNCs) in services, finance, and pharmaceuticals to ensure access to global markets on the most protected of terms and the need for the US and Europe to agree on a common set of rules for subsidising domestic agriculture.

The drive to expand the GATT (and create the WTO) was in part a response to the 1974 call in the UN General Assembly for a ‘new international economic order’ (NIEO) which would have enshrined the rights of developing countries: to protect infant industries, to nationalise the assets of foreign corporations, to protect domestic agriculture, and to access ‘special and differential treatment’ in trade and finance, to enable them to ‘catch up’. The promises of the NIEO were shredded through IMF-led structural adjustment, following the 1980s debt crisis, and by WTO-led trade liberalisation.

Over the next four decades global trade expanded dramatically and was restructured around global value chains controlled by giant transnational corporations (TNCs), largely headquartered in the global North and benefitting from heightened powers to expropriate raw materials; expanded flexibility in locating (and relocating) production; further reach for globally coordinated marketing, distribution and retail; and wider scope to realise profit in no-tax jurisdictions. Ownership structures were also changing with the rapidly expanding financial sector; buying and selling corporations and creating new options for asset speculation.

This centralisation of economic power, in TNCs and loosely regulated financial institutions, has contributed to deepening economic inequality, within and between countries, and to the failures of action around global warming and biodiversity loss.

Dispute settlement

One of the many new agreements which accompanied the formation of the WTO was the Dispute Settlement Understanding (DSU).This provides a set of rules and a multi-tiered mechanism for dispute resolution: consultation between the parties; appointment of a panel to determine the facts and explore possible settlements; an appeal against the panel report by one or other of the parties to the Appellate Body (AB), which will review the process and outcomes of the panel and make a determination; and finally, the (WTO General Council sitting as the) Dispute Settlement Board (DSB).

The US was centrally involved in the design of the dispute settlement system during the Uruguay Round but, from the turn of the century, has complained increasingly that the findings of the panels and of the Appellate Body have been unfair, in terms of both process and outcome.

Trade remedies’ are central to the US grievances. ‘Trade remedies’ refers to the protections (increased tariffs or import restrictions) that a country can implement if it can demonstrate that its domestic industry is being harmed by dumping or illegal subsidies by a trading partner, or by a surge of imports. The US is the most frequent complainant and China is the most frequent respondent to US complaints. China is the 9th most frequent complainant with the US the most frequent respondent to Chinese complaints. Fifteen of the 17 Chinese complaints against the US concerned trade remedies imposed by the US in relation to allegations of dumping and surging imports. One concerned the use by the US of the ‘security exception’. In most of the cases where a determination was made (by a panel or Appellate Body) at least some of the findings were unfavourable to the US.

The US accuses panel members and adjudicators of straying beyond their mandate, including making determinations of right and wrong rather than simply resolving disputes; of providing advisory opinions regarding what might be acceptable rather than sticking to the text of the relevant agreements; and of developing a coherent jurisprudence based on precedent rather than treating each dispute in isolation.

The US complaints came to a head in 2017 when the Trump administration started blocking new appointments to the Appellate Body. The AB should have seven members, three will join to hear an appeal. Appointments are made in the DSB and are supposed to be consensual. By December 2019, the Body had no members and the appeal mechanism was therefore inoperative.

The Biden administration has continued to block new appointments and has now brought forward a series of reform proposals directed to constraining the role of dispute panels and restricting access to the Appellate Body.

The national security exception

The invocation of national security in defence of otherwise illegal trade restrictions has been particularly controversial. This defence had been unusual prior to 2016 when it was used successfully by Russia in response to a complaint from Ukraine that Russia was blocking traffic from Ukraine, through Russia, to Kazakhstan and other countries.

Since then, there have been several instances where the national security exception was invoked as a defence including several disputes concerning US imposition of increased customs duties on steel and aluminium imports. While panels were established, none have been appealed to the Appellate Body because it has been rendered inoperative as a consequence of the US blocking of appointments.

The legal defence of trade remedy actions taken on national security grounds is based on Article XXI(b)(iii) of the GATT 1994:

Art XXI. Nothing in this Agreement shall be construed:

  • to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or
  • to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests
  1. relating to fissionable materials or the materials from which they are derived;
  2. relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
  3. taken in time of war or other emergency in international relations; or
  • to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

The US denies (2018) that the legitimacy of such trade remedies on national security grounds are open to adjudication in the dispute settlement process:

… it is simply not the role of the WTO to review a sovereign nation’s judgment of its essential security interests … if the WTO were to undertake to review an invocation of Article XXI, this would undermine the legitimacy of the WTO’s dispute settlement system and even the viability of the WTO itself.

However, this position is problematic. As House Democrats asked in 2006:

If the U.S. […] for any reason that it deems ‘necessary to its essential security interests’ can invoke a self-defining ‘essential security’ exception, what is to prevent other countries from using this exception to block U.S. exports or other U.S. rights such as enforcement of intellectual property rights without ample justification?

A ‘rules-based order’ or ‘might is right’

This story underscores the hollowness of US rhetoric regarding its defence of the ‘rules-based order’ in justifying its belligerence towards China. The essence of the US position is that the focus should be on dispute settlement, not the legitimacy of ‘trade remedies’. Constraining the jurisprudence of the panel and jurisdiction of the Appellate Body would clearly provide more space for big power bullying through bilateral threats and sanctions.

The imposition of ‘trade remedies’ by the US has been mainly focused on China, but also directed against the EU and some of the G20 countries. The existing dispute settlement arrangements have been largely restricted to larger and high- and middle-income countries which have the legal and diplomatic resources needed to engage at this level. The cost of engaging in the WTO dispute settlement means that trade sanctions against smaller and lower income countries are secure against WTO disputation.

The paralysis (and proposed reform) of WTO dispute settlement invites reflection on the structured unfairness of the prevailing international economic order. This unfairness is shored up by a wide range of mechanisms beyond trade sanctions, including corporate extortion, market sentiment, financial sanctions and the threat of military engagement.

The US is complaining that its capacity to force dispute settlement through bilateral arm wrestling is being constrained by the advice of the panels and judgements of the Appellate Body. Notwithstanding their rhetoric, the US grievances against the dispute settlement system underscore the value of a ‘rules-based order’. Rather than weaken them, dispute settlement arrangements should be strengthened (including through the development of a more coherent jurisprudence) and should be extended to smaller and lower income countries by creating a ‘small claims tribunal’ which would be more accessible.

The unsustainability, inequity and instability of globalised capitalism

The regime of globalised capitalism which was bolstered by the establishment of the WTO has proven incapable of addressing the existential crises of environmental degradation including global warming and deepening economic inequality. The combination of these trends is driving humanitarian crises and forced migration, currently managed with appalling brutality, and a growing risk of widening conflict.

Underpinning deepening inequality is the looming tendency to overproduction, linked to the financialisation of the global economy. With increasing productivity, the productive base required to produce for global consumption is shrinking in relative terms. As a consequence, consumer demand stalls due to the stagnation of wage earnings and small producer revenues. Slowing consumption leads to reduced opportunities for productive investment and an increased flow of funds into the financial sector which enables the global economy to tick over through debt-funded consumption. However, asset speculation, also driven by financialisation, leads to recurrent financial crises, each of which burns value and transfers title to the banks.

Debt-funded consumption and trickle-down demand help to defer a reckoning but the grievance of the alienated and impoverished, as manifest in the Trump movement the US, is a powder keg.

The WTO was created in part as a way of blocking the 1974 call for a new international economic order. With the 50-year anniversary of the NIEO coming up next year, the time is right for a new program of reform, including but not limited to the WTO, a program which works towards a new rules-based order, with meaningful disciplines directed to addressing environmental degradation, global warming, deepening inequality and alienation. A return to ‘might is right’ is not a useful answer.

The global security risks arising from the resistance and protest of the declining hegemon

The US deployment of trade remedies has been mainly directed at China. The demise of the Appellate Body, initiated by Trump from 2017, reflected in part the grievances of the Trump constituency over declining living standards and loss of pride. Those grievances have been channelled into a cultivated hostility to China although ‘globalisation’ has also figured in the Trumpian narrative.

The US polity faces a contradiction between the domestically oriented fraction of capital, aligned broadly with Trump and against ‘globalisation’, and the globally oriented fraction of capital, deeply invested in global value chains. However, the globalised fraction of US capital is happy to represent China as the cause of US travails, because of the challenge that China presents to US dominance of the global economy.

The narrative of a Chinese threat to US security has been increasingly prominent in the US, amplified by provocative manoeuvres in relation to Taiwan. This narrative belies the fact that US military spending is three times that of China and that the US has just over a thousand foreign military installations around the world, including surrounding China.

It appears that the security exception is being used to put a brake on Chinese technical and industrial development as well as protecting US domestic interests (eg steel and aluminium) against other G20 exporters. The line between defending the hegemony of the US state and advancing the interests of US based corporations is blurred.

Many of the provisions of the Biden ‘Inflation Reduction Act’ involve export restrictions and new subsidies which prejudice the interests of US allies as well as China and would be challengeable in the dispute settlement process if it had not been disabled.

Undoubtedly the Silicon Valley giants are actively engaged in lobbying US congresspersons regarding threats to their commercial interests. These threats include a range of challenges from Europe as well as China, such as EU moves against Google for anti-competitive practices, moves in many countries to tax big IT and moves within the WTO to drop the moratorium on tariffs on e-commerce.

The refusal of WTO panels to endorse trade remedies based on the security exception, has been a major theme in the US push to hobble the dispute settlement arrangements at the WTO. The current US Trade Representative does not accept that the invocation of the security exception is open to adjudication regarding its legitimacy.

There has been significant hand-wringing in the US commentariat regarding the Thucydides Trap which refers to the inevitability of war as a declining hegemon is eclipsed by a rising competitor. It is unlikely that the US elite would want such a war. However, there is a very real risk of war arising from bilateral brinkmanship. The narrative of China ‘stealing US jobs’ and ‘stealing intellectual property’ and the hardline against China in relation to Taiwan may be directed at soothing the Trump constituency in the US and justifying a retreat from the rules-based order but it carries real risks.

Successive Australian governments have joined the campaign against China with exuberance, including the belligerence of Morrison and the astonishing acceptance of AuKUS by Albanese.

The arguments over the reform of dispute settlement in the WTO, and the wider historical, economic and strategic context, provide no grounds for the assertion that Australia’s eager participation in the US war machine is about defending the ‘rules-based order’. Rather it reflects a cynical domestic populism and an ideological slavery to ‘defunct economists’, which can only serve to weaken the rules and promote disorder.

To the contrary, there is a pressing need to build a ‘rules-based order’ which can address environmental degradation and economic inequality, and help create the conditions for living well for all.

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