Fixing the WTO

October 15, 2018

CSIS was privileged last week to host the U.S. ambassador to the World Trade Organization (WTO), Dennis Shea, for a public conversation. Ambassador Shea did not make front page news, no doubt much to his relief. No surprise there. Even in the best of circumstances, the WTO rarely makes the front page, and we are hardly in the best of circumstances. He did, however, do an excellent job of both defending and explaining the administration's policy toward the organization. (Since we did not ask about other aspects of the administration's trade policy, he was not stuck defending China tariffs or the steel and aluminum tariffs or the threatened auto tariffs.)

On the plus side, what the ambassador referred to as the president's "disruptively constructive" policy appears to have refocused WTO debates on the U.S. agenda, which is to force the organization to address the shortcomings we have identified. These are not new problems—previous administrations have also complained about them—but other nations have clearly preferred to sweep them under the rug and discuss other matters.

Some of the U.S. complaints go to the core of the WTO's responsibilities, for example, the issues of notification and differentiation. The first refers to the requirement that members notify (i.e., report) their subsidies to Geneva. The rationale for the rule is sensible—how can nations know what problems need to be negotiated if they don't have basic information about members' activities? Unfortunately, this rule is often honored in the breach, as many countries, including China, notify either incompletely or not at all, and efforts to call them out have not been particularly successful.

The second—differentiation—refers to the long-standing principle of special and differential treatment (S&D) for developing economies. Despite it being a sensible idea—poor countries should not be expected to meet WTO standards as completely or as rapidly as richer ones—it too has been taken advantage of by countries, which should have graduated from developing status but continue to insist on S&D treatment in order to avoid having to meet obligations they are now capable of meeting. For example, there are 10 countries of the G-20 that claim developing-country status at the WTO (Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Saudi Arabia, South Africa, and Turkey). In addition, Singapore, Qatar, and Kuwait also claim developing-country status.

Failure to respect these rules weakens the organization and illustrates what has become its most significant underlying problem—emerging economies are unwilling to take on greater responsibility for maintaining the system at the very time rich countries are running out of gas and are increasingly reluctant to continue to pay more than their share. This is the mentality on both sides that killed the Doha Round and thus far has prevented the organization from moving on. Highlighting it seems to be forcing other nations, at long last, to pay attention—witness the Canadian effort to tackle WTO reforms that will be discussed at a minister-level meeting in Ottawa next week and the recent European Union paper on the same subject.

Similarly, the United States has also been forceful in its denunciation of the WTO Appellate Body's failure to adhere to its own rules, its arrogation of power, and its judicial overreach. Some have dismissed these efforts as nothing more than a bunch of ex-steel lawyers (Ambassador Lighthizer and his team) seeking revenge for cases they lost, but that is misguided. The problems are real as previous administrations have flagged them as well, and it does the organization a disservice to belittle them.

On the negative side, both of these attacks on the WTO demonstrate once again the administration's proclivity for making a correct diagnosis of the problem and then ruining it with the wrong prescription for a cure. (See China for another example.) Its confrontational approach has succeeded in placing its concerns on the agenda and in forcing countries to address things they should have dealt with long ago, but its ham-fisted tactic of destroying the Appellate Body in order to get its way may make an eventual solution more difficult to reach while at the same time seriously compromising U.S. interests. The United States is one of the biggest users of the dispute settlement process as both a complainant and respondent, and we have some important cases pending such as those on aircraft subsidies, our use of steel and aluminum tariffs for national security, and China's market economy status. If the appeals process goes awry, we may well find ourselves unable to secure our victories or appeal our defeats. And that, in turn, could prompt our impatient president to pull the United States out of the organization, an act that would do profound damage to our economy and to the trading system as a whole. My last question to Ambassador Shea was whether he had his bags packed and was ready to leave. He does not, and we should all hope he can keep his suitcase in the closet.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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