‘The WTO Is in Crisis’: Dispute Puts Global Trade Regulator at Risk

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.”

Cecilia Malmstrom, until recently the EU trade commissioner, says the WTO risks becoming irrelevant. PHOTO: CHRISTOPHE MORIN/BLOOMBERG NEWS

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
ComplainantRespondentU.S.E.U.ChinaCanadaIndia0 cases100200300

“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.

Dennis Shea, right, the U.S. envoy to the WTO, speaking with a Chinese diplomat. PHOTO: DENIS BALIBOUSE/REUTERS

“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.”

James Rickards: “Donald Trump is a Genius”

Preview of Sunday’s episode: James Rickards is a renowned lawyer, economist, and finance expert. Jim is also the author of Currency Wars: The Making of the Next Global Crisis and five other books.

As China Talks Begin, Trump’s Trade Negotiator Tries to Keep President From Wavering

WASHINGTON — In the middle of his crowded dinner in Buenos Aires with President Xi Jinping of China, President Trump leaned across the table, pointed to Robert Lighthizer, the United States trade representative whose skepticism of China runs deep, and declared, “That’s my negotiator!

He then turned to Peter Navarro, his even more hawkish trade adviser, adding, “And that’s my tough guy!” according to aides with knowledge of the exchange.

Now, with talks between China and the United States set to begin this week in Beijing, Mr. Lighthizer, aided by Mr. Navarro, faces the assignment of a lifetime: redefining the trade relationship between the world’s two largest economies by Mr. Trump’s March 2 deadline to reach an agreement.

And he must do it in a way that tilts the balance of power toward the United States. His approach will have significant ramifications for American companies, workers and consumers whose fortunes, whether Mr. Trump likes it or not, are increasingly tied to China.

First, however, Mr. Lighthizer will need to keep a mercurial president from wavering in the face of queasy financial markets, which have suffered their steepest annual decline since 2008. Despite his declaration that trade wars are “easy to win” and his recent boast that he is a “Tariff Man,” Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.

Mr. Trump has repeatedly told his advisers that Mr. Xi is someone with whom he can cut a big deal, according to people who have spoken with the president. On Saturday, Mr. Trump called Mr. Xi to discuss the status of talks, tweeting afterward that good progress was being made. “Deal is moving along very well,” Mr. Trump said.

The administration has tried to force China to change its ways with stiff tariffs on $250 billion worth of Chinese products, restrictions on Chinese investment in the United States and threats of additional levies on another $267 billion worth of goods. China has responded with its own tit-for-tat tariffs on American goods. But over a steak dinner during the Group of 20 summit meeting in Argentina, Mr. Xi and Mr. Trump agreed to a 90-day truce and to work toward an agreement that Mr. Trump said could lead to “one of the largest deals ever made.”

Mr. Lighthizer — whose top deputy will meet with Chinese officials this week ahead of more high-level talks in February — has played down any differences with Mr. Trump and views his role as ultimately executing the directive of his boss. But the trade representative, who declined to be interviewed, has told friends and associates that he is intent on preventing the president from being talked into accepting “empty promises” like temporary increases in soybean or beef purchases.

Mr. Lighthizer, 71, is pushing for substantive changes, such as forcing China to end its practice of requiring American companies to hand over valuable technology as a condition of doing business there. But after 40 years of dealing with China and watching it dangle promises that do not materialize, Mr. Lighthizer remains deeply skeptical of Beijing and has warned Mr. Trump that the United States may need to exert more pressure through additional tariffs in order to win true concessions.

When Mr. Lighthizer senses that anyone — even Mr. Trump — might be going a little soft on China, he opens a paper-clipped manila folder he totes around and brandishes a single-page, easy-reading chart that lists decades of failed trade negotiations with Beijing, according to administration officials.

Bob’s attitude toward China is very simple. He wants them to surrender,” said William A. Reinsch, a former federal trade official who met him three decades ago when Mr. Lighthizer was a young aide for former Senator Bob Dole of Kansas. “His negotiating strategy is simple too. He basically gives them a list of things he wants them to do and says, ‘Fix it now.’

Mr. Trump’s selection of Mr. Lighthizer last month to lead the talks initially spooked markets, which viewed the China skeptic’s appointment as an ominous sign. It also annoyed Chinese officials, who had been talking with the Treasury secretary, Steven Mnuchin, a more moderate voice on trade and the primary point of contact for Liu He, China’s top trade negotiator. Mr. Mnuchin has urged the president to avoid a protracted trade war, even if that entails reaching an interim agreement that leaves some issues unresolved.

Mr. Mnuchin, who attended the G-20 dinner, helped Mr. Trump craft an upbeat assessment declaring the Buenos Aires meeting “highly successful” in the presidential limousine back to the airport, according to a senior administration official.

The disparate views among Mr. Trump’s top trade advisers have prompted sparring — both publicly and behind the scenes.

During an Oval Office meeting with the trade team the fall of 2017, Mr. Lighthizer accused Mr. Mnuchin and Gary D. Cohn, the former National Economic Council director, of bad-mouthing him to free-trade Republican senators.

The argument grew so heated that the White House chief of staff, John F. Kelly, quickly pulled the combatants into the nearby Roosevelt Room and away from the president, where the argument raged on for a few more minutes, according to two witnesses.

Emily Davis, a spokeswoman for the United States trade representative, disputed the account.

Mr. Lighthizer has since worked to increase his own face time with Mr. Trump. He has joked to colleagues that he has more influence with Mr. Trump during winter months because he is able to hitch a ride on Air Force One during the president’s flights down to Mar-a-Lago, which is several miles from Mr. Lighthizer’s own $2.3 million waterfront condo in Palm Beach, Fla.

He used that access to argue to Mr. Trump that the United States has never had more leverage to extract structural reforms on intellectual property, forced transfer of technology from American companies and cybercrime. But while Mr. Trump has jumped at the chance to claim victory in changing China’s ways, experts say that what Mr. Lighthizer is demanding would require significant shifts in how Beijing’s central government and its manufacturing sector coordinate their activities, and that might simply not be possible in the short term.

“Good luck with that,” Mr. Scissors said.

Those who know Mr. Lighthizer say he will try to force concessions through a combination of pressure tactics, like tariffs, and public condemnation. Mr. Lighthizer — who described his own negotiating style as “knowing where the leverage is” during a 1984 interview — typically presents few specific demands during initial talks while publicly bashing efforts by the other side.

He used that approach during recent talks with Canada and Mexico to revise the North American Free Trade Agreement, criticizing foreign counterparts as intransigent and characterizing complaints by American businesses as pure greed.

Mr. Lighthizer’s unsparing view of China comes, in part, from his childhood in Ashtabula, Ohio, an industrial and shipping town on the Great Lakes hit by the offshoring of steel and chemical production. For much of his career, Mr. Lighthizer was a lonely protectionist voice in a Republican Party dominated by free traders, alternating between jobs in government and a lucrative private law career representing large American corporations like United States Steel in trade cases against China.

Mr. Lighthizer found his way into Mr. Trump’s orbit through his work in the steel industry, where he gained prominence by filing lawsuits accusing Japan and China of dumping metals into the United States, in violation of trade laws. In 2011, Mr. Lighthizer caught Mr. Trump’s eye with an opinion piece in The Washington Times, in which he defended Mr. Trump’s approach to China as consistent with conservative ideology and compared the future president to Republican icons like Ronald Reagan.

Taciturn in public and self-deprecating in private, Mr. Lighthizer sees himself as a serious player on the world stage: Two recent guests to Mr. Lighthizer’s Georgetown townhouse were greeted by the stern visage of their host staring down at them from an oil portrait on the wall.

The trade adviser is guarded around Mr. Trump, often waiting until the end of meetings to make his points and quietly nudging the president away from actions he views as counterproductive, current and former officials said. That was the case in mid-2017 when he cautioned the president against withdrawing unilaterally from the World Trade Organization, adding for emphasis, “And I hate the W.T.O. as much as anybody.”

He does not always get his way. In the wake of a new trade agreement with Mexico and Canada this fall, Mr. Lighthizer urged Mr. Trump to consider easing steel and aluminum tariffs on those countries and replacing them with less burdensome quotas. Mr. Trump rejected his plan, according to negotiators from all three countries.

A poker-faced Mr. Lighthizer broke the news to his Mexican and Canadian counterparts by declaring the proposal was inoperative, one of the officials said.

The president also ignored Mr. Lighthizer’s advice in early December when he announced that he intended to begin the six-month process of withdrawing the United States from Nafta in order to pressure House Democrats into passing the new United States-Mexico-Canada Agreement.

That threat undermined months of quiet negotiations between Mr. Lighthizer, labor groups and Democrats like Senator Sherrod Brown of Ohio and Representative Nancy Pelosi of California to try to win their support for the new trade deal. Mr. Trump has yet to follow through on his threat, and Mr. Lighthizer continues trying to work with Democrats to get the new trade deal approved.

Bob is trying to provide stability and focus in a completely chaotic environment,” Mr. Brown said. “I can’t speak for Bob, but I am certain he is frustrated. How could you not be frustrated as the U.S. trade representative for a president who knows what his gut thinks but hasn’t put much of his brains into trade?

 

Don’t Believe the Hype About Trump’s Trade Deal with the European Union

maybe intending it as a compliment—craftily packaged together a number of small concessions and previously agreed upon initiatives which allowed Trump and his allies to hail the agreement as an American win. “This is a real vindication of the President’s trade policy,” Wilbur Ross, the Secretary of Commerce, told reporters as he travelled to the Midwest with Trump on Thursday.

In reality, the Europeans gave up little except their prior refusal to negotiate under threat.

.. Juncker’s pledge that the E.U. would import more U.S.-grown soybeans, for instance, formalized something that was likely to happen anyway. After Trump imposed hefty tariffs on Chinese steel and aluminum products, earlier this year, China responded by imposing equally hefty levies on U.S. agricultural exports, including soybeans. That made American soybeans prohibitively expensive for Chinese buyers

.. Brazil, traditionally the E.U.’s largest supplier, is now shipping more of its produce to China, encouraging the Europeans to shop elsewhere. “While China concentrates its purchases on Brazil, the rest of the world turns to the U.S.,

.. Looking years ahead, Norway’s reserves have plateaued, and the Europeans will eventually need alternative suppliers. U.S. producers could well be among them. But, again, such a result may well have occurred without Wednesday’s agreement.

.. hopefully nobody tells Trump that these concessions were largely illusory.

.. Both sides provide subsidies or tax breaks to politically powerful groups, such as farmers, and to industries they deem strategically important, such as commercial-aircraft manufacturers in the E.U. and military contractors in the U.S. These policies proved sticking points when the Obama Administration and the E.U. engaged in unsuccessful negotiations about a transatlantic free-trade treaty, and they will almost certainly prove to be sticking points again.

.. One way to think of the outcome of Wednesday’s meeting is that Trump is happy to declare a victory whenever he can get away with it. However, a more optimistic reading of this week’s developments is that Trump has finally realized that he needs the E.U.’s support in his campaign against China’s much more overtly mercantilist trade practices, and that, in this area at least, the United States and Europe have common interests.

.. E.U. officials wanted to persuade the Trump Administration to pursue grievances against China through the World Trade Organization (W.T.O.), the global ruling body for trade disputes, rather than by dishing out tariffs unilaterally. The article also noted that Robert Lighthizer, the U.S. Trade Representative, a key player in the Trump orbit, is not necessarily averse to this idea.

.. “Comfortingly, there is mounting evidence that Mr Lighthizer is not out to torpedo the WTO,”

.. If Lighthizer could persuade Trump to go down this route, and his negotiating team could construct a common front with the E.U., there is a possibility that, sometime in the future, China might be persuaded to make some real concessions in areas like opening its markets and respecting intellectual-property rights. If that did occur, the Trump Administration could claim a genuine victory.