A looming crisis

 

Never in post-war history has the rules-based global trading system been under such pressure. Now, tragically, the United States seems intent on destroying the system whose establishment it led in the early post-war years. The tariffs imposed by the United States unilaterally on the EU, China and many other countries are in clear breach of the WTO rules.

 

To ensure the WTO can take no action against the United States for imposing these tariffs, the Trump Administration is rendering the WTO’s dispute-settling mechanisms inoperable. It is vetoing any new appointments to the relevant body, known as the Appellate Body. As a result of US vetoes, from 11 December 2019 the Appellate Body will be down to just one member from a normal panel of seven – from whom three are needed to adjudicate on any case.

 

The United States is returning to a world where might is right – where economically and militarily strong nations wield their power to serve their own interests at the expense of the less powerful.

 

Just weeks ahead of this cathartic event, APEC leaders will meet in Santiago, Chile, over 11-17 November 2019. Since APEC’s membership includes the main protagonists, can leaders pull back from the brink and agree to save the WTO?

 

What went wrong?

 

In the aftermath of World War II, a group of 23 countries, led by the United States with Australia’s strong support, founded the General Agreement on Tariffs and Trade (GATT), which developed a set of rules to govern trade between them. They sought to end discriminatory trade deals by requiring that any reduction of a tariff for one country must automatically be offered to other member countries – known as the most favoured nation (MFN) rule.

 

The goal of the GATT founders was to encourage countries to trade with each other instead of invading each other. By integrating their economies, the rewards from trading would be great and the incentive to attack each other would be diminished.

 

But the system could never work if the basic rules could be ignored with impunity. And so a system of settling trade disputes was established and further strengthened when the 123-member World Trade Organization (WTO) superseded the GATT in 1995.

 

Under the WTO’s dispute-settling procedures, if a member alleges another member has breached the rules and discriminated against it by erecting an unwarranted trade barrier, it could ask for the formation of a panel to hear the dispute. Decisions of panels could be appealed to the Appellate Body.

 

The United States, along with other countries, has been complaining that the dispute-settling procedures have not been working properly. Their complaints include inordinate delays and judicial activism, where the Appellate Body has developed its own interpretations of the WTO rules. The United States has also complained that China has used its developing-country status at the WTO to avoid rules that apply to developed countries.

 

Many of these complaints appear to be legitimate. But the correct response is to change the rules rather than destroying the rules-based trading system.

 

Possible signs of progress

 

At the G20 leaders’ meeting held in Osaka in June 2019, leaders agreed to work together to reform the WTO’s dispute-settling procedures ahead of the crucial meeting of WTO Ministers to be held in Kazakhstan in June 2020. While these seem encouraging developments, G20 countries have agreed only to negotiate, as have the United States and China on their particular grievances.

 

By June 2020, the WTO’s dispute settling procedures will have been inoperable for more than six months and members will have been free to flout the rules with impunity.

 

APEC to the rescue?

 

The 2019 APEC leaders’ meeting will end less than one month before the WTO’s Appellate Body will cease to operate. APEC’s members include the chief protagonists – the United States and China – as well as influential WTO members such as Australia, Japan, Canada, Chile and Indonesia.

 

If APEC leaders could agree to appoint new members to the Appellate Body on the basis of progress made in reforming the WTO’s dispute-settling, the rules-based global trading system could be saved. The APEC leaders’ communique would serve as guidance from the United States, China and all other APEC members to the WTO Ministerial Meeting in June 2020.

 

APEC has an unsurpassed opportunity to preserve and save the rules-based global trading system. Will it rise to the challenge?