Discord between U.S. and other World Trade Organization members including the EU and China appears set to paralyze the group’s top court
BRUSSELS—A stalemate between the U.S. and other members of the World Trade Organization, including the European Union and China, stands to cripple the organization’s top court, threatening the global body’s survival.
On Wednesday the court, called the Appellate Body, will no longer have enough judges to rule on big trade disputes between countries.
At stake are international rules negotiated over five decades by the U.S. and Europe to boost global trade. The WTO, established in 1995, is the most significant outcome of that effort, helping to head off damaging cycles of tariffs and retaliation between countries. Now it’s stuck.
Efforts to modernize WTO rules for challenges such as China’s market-distorting state capitalism have repeatedly failed. Talks among its 164 members to regulate e-commerce and other new arenas have stalled for years. And a trans-Atlantic dispute over operations of its top court has sparked the split now threatening the organization’s core.
“The WTO is in crisis,” said Cecilia Malmstrom, who last month ended her term as EU trade commissioner. “If nothing happens, it will become irrelevant.”
The WTO’s ability to police global trade rests on the seven-judge Appellate Body, which reviews arbitration rulings. When countries appeal those rulings, three judges examine each case. The Appellate Body already has four vacancies and two current members’ terms end on Tuesday. That will leave it with one judge, precluding WTO appeals and enforcement.
A U.S. block on new appointments triggered the current crisis. Consecutive U.S. administrations have complained of Appellate Body overreach. Two years ago U.S. Trade Representative Robert Lighthizer moved to discipline the court or bring it down.
Legal Battleground The U.S. and the European Union are the top litigators in a WTO dispute-settlement mechanism that is on the verge of collapse. Disputes by membersSource: WTO
“Without a functioning Appellate Body, the whole system is sailing into… uncharted water,” a Chinese diplomat said at a WTO gathering on Nov. 22. That would “further tilt the balance in favor of [major] powers.”
Mr. Trump said recently he is “very tentative on the WTO.” He has repeatedly attacked it for being unfair to the U.S. and threatened to quit if the organization doesn’t “shape up.” U.S. officials say the global trade watchdog has strayed from its purpose to liberalize and protect markets.
The U.S. administration’s stance on the WTO is consistent with its hostile position toward international trade pacts, which officials say sap U.S. negotiating power. Mr. Trump has pursued unilateral actions with China and other major trading partners. He exited a trans-Pacific trade deal negotiated by the Obama administration and has imposed steel and aluminum tariffs against allies, which have been challenged at the WTO as illegal.
“I’m not excluding the fact that on December 11 champagne corks will pop at the USTR building in Washington,” an EU diplomat said, referring to the day after the Appellate Body loses two more judges.
Europeans want to preserve the WTO. The EU has proposed creating an interim court, based on WTO rules and voluntary participation, to replicate Appellate Body functions and issue binding decisions. Canada and Norway have signed on. China, Russia and other countries are assessing the plan, which represents a snub to the U.S., which opposes the move.
Stopgap measures could prolong some of the WTO’s ability to settle disputes. But preserving WTO power as the ultimate trade enforcer would require resolving fundamental disagreements over the Appellate Body. There, the U.S. and the EU remain far apart.
Europeans favor a global trade court while Washington prefers ad-hoc arbitration for each dispute. EU officials say the Appellate Body has cemented international rules. U.S. officials say the body has aggrandized itself, seizing powers more akin to a court than its original role as a rules enforcer. They say it has missed deadlines, set precedents and undertook lengthy reviews it wasn’t designed to do.
“It simply will not work to paper over the problems,” said U.S. envoy to the WTO Dennis Shea in October.
The divide is also playing out in a personal fight at the WTO’s otherwise tranquil headquarters on Lake Geneva in Switzerland.
When the Appellate Body ruled against the U.S. in a dispute with China in July, one member wrote a rare and scathing dissent. The decision was “incoherent” and “unduly complicated,” the judge said. The opinion is anonymous but trade officials in Geneva widely believe it was penned by Thomas Graham, a U.S. judge on the body whose term ends Tuesday.
Mr. Graham didn’t respond to a request for comment.
The U.S. also slammed the judgment for undermining WTO rules against Chinese subsidies.
For Appellate Body Director Werner Zdouc, the WTO’s dispute-settlement system is to global trade what the Supreme Court is to U.S. law, according to current and former trade officials. Under his leadership, critics said, the body disregarded dispute-settlement rules designed to prevent countries from circumventing WTO regulations.
Through WTO spokesman Keith Rockwell, Mr. Zdouc declined to comment.
Few options remain to save the Appellate Body. Mr. Graham and Appellate Body Chair Ujal Singh Bhatia, whose term also expires Tuesday, could theoretically stay on to hear ongoing appeals. But Mr. Graham has said he wouldn’t extend his tenure unless Mr. Zdouc is removed, allowing an Appellate Body overhaul.
Appellate Body reform has broad support but WTO members differ on its direction, Mr. Rockwell said. The EU and other WTO members over the past year have offered proposals to revamp the Appellate Body and address U.S. concerns. Washington has said the WTO should follow existing rules.
In a move to further constrain the appellate body, the U.S. also briefly blocked its budget recently. Washington finally agreed to limited resources for next year only, funding Mr. Zdouc’s department at about 7% of its biennial budget of about $3 million. That’s enough to extend Messrs. Graham and Bhatia’s terms until about March, enabling them to issue rulings on three ongoing appeals. After that, China’s Hong Zhao would be left alone until her term ends in November, with at least 10 appeals awaiting review, many more in the pipeline and no new colleagues.
Western powers now risk splitting over global trade, with the U.S. acting unilaterally and the EU rallying some partners to preserve a broken WTO system. China could be left to build its own global links, largely freed from Western rules.
“The problems of the WTO go far beyond any [Appellate Body] crisis,” said Clete Willems, a former Trump administration trade official currently with the law firm Akin Gump. Citing lengthy WTO litigations and Chinese trade practices, he said, “The question is do we have a system that is fit for purpose, given where we are on world trade.”