Olive You Always—Unless You’re from Spain

Today’s column wanders into the weeds of trade law, so be forewarned (apologies for one of the worst puns I’ve ever written, but it was too good to pass up)! The United States lost another World Trade Organization (WTO) case last week, and like some previous cases, the result could have lasting implications for U.S. trade law and the United States’ relationship to the WTO—or not (it remains to be seen). This time the issue was not about national security but involved olives from Spain. I would not be surprised if someone attempts to make a national security case out of it, but it is hard to see it prevailing. Tasty though they are, our military does not run on olives, or olive oil for that matter (which was not part of the case anyway).

This was a compliance case. The United States lost the initial case in December 2021, and, to its credit, indicated it would comply rather than appeal. An agreement with EU complainants gave the United States until January 2023 to do so. At that point the United States announced it had done so, but the European Union argued that our actions fell short. That led to another panel to determine who was right. Last week’s ruling on that question went in favor of the European Union. As of this writing, the United States has not announced what it will do this time around.

The case is important because both the initial panel and the compliance panel concluded that a provision of U.S. law was inconsistent with our WTO obligations. The provision in question is Section 771B of the Tariff Act of 1930, popularly known as the Smoot-Hawley Act. It specifies when a subsidy on an upstream agricultural product, in this case raw olives, can be deemed to be passed through to the downstream processor of the product, in this case ripe olives. The provision states the following:

“In the case of an agricultural product processed from a raw agricultural product in which – (1) the demand for the prior stage product is substantially dependent on the demand for the latter stage product, and (2) the processing operation adds only limited value to the raw commodity, countervailable subsidies found to be provided to either producers or processors of the product shall be deemed to be provided with respect to the manufacture, production, or exportation of the processed product.”

This provision was added to the 1987 Omnibus Trade Act by Senator Max Baucus (D-MT) to address the import of Canadian pork that was produced from subsidized Canadian hogs. No one was thinking about olives at the time. The WTO panels concluded, among other things, that the provision contravened parts of the General Agreement on Tariffs and Trade and the Agreement on Subsidies and Countervailing Measures because it required the Department of Commerce to pass through the subsidy to the downstream producer if the two criteria specified in the provision were met and did not provide discretion to take other factors into account. The Department of Commerce argued to the compliance panel that on further review after the initial panel report it had taken other factors into consideration, but the panel was not persuaded.

Subsidy pass-throughs are an important problem. If administering authorities cannot take upstream subsidies into account when examining the pricing of downstream imports, the importer can essentially get away with subsidizing, and countries can structure their agriculture programs to take advantage of that loophole. At the same time, the WTO rules do provide some flexibility. They do not specify a particular methodology that must be followed in calculating a subsidy, and they give governments discretion to determine how they are going to do it. In the olives case, it came down to how much discretion U.S. law permitted, and the panels concluded there was not enough to take into account other factors that might mitigate the impact of the subsidy. Remember, that these laws and rules are not intended to be punitive. The permitted tariff must offset the amount of the subsidy or dumping, not exceed it. Thus, correctly calculating the amount of subsidy is very important.

Losing these cases creates a dilemma for the United States. Concluding that U.S. law is inconsistent with its WTO obligations implies that the only acceptable fix is to change the law. That was the EU position, but the panel, as usual, was not that specific, recommending only that the United States bring its practices into conformance with its obligations. Those of you who are trade wonks, of course, know how difficult it is to get a trade bill through Congress even under the best of circumstances—and we certainly don’t have those now. So, the United States is faced once again with an unpalatable choice: make a likely fruitless effort to change U.S. trade law, which would also mean acknowledging that we were wrong when nobody on our side of the issue wants to do that, or undermine the WTO and compromise our economic relations with the European Union by once again rejecting a panel decision.

The larger issue is whether we are going to respect the WTO. There our record is mixed, and this administration's record in particular has been terrible. Unfortunately, thanks to our own actions in the Obama and Trump administrations, there is an out—appeal the decision to the non-functioning Appellate Body. That spares us a final loss, but the tactic is catching on, as more losing countries do the same thing. The result is a weaker WTO, which hurts us in the long run. If the United States appeals the olives case, the Office of the U.S. Trade Representative may breathe a sigh of relief that it is off the hook, but we will soon be annoyed that when we win a case and the other party appeals, we get no relief. The United States can send an important signal in not appealing and taking its lumps with the Congress, but the more important thing it can do is lead the WTO to a new dispute resolution system that prevents this kind of manipulation.

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