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Trump's assault on WTO may be close to victory

WTO's dispute arm is expected to start slipping into the institutional equivalent of a coma thanks to U.S. veto of new appeals judges

By Shawn Donnan and Bryce Baschuk

President Donald Trump’s assault on the World Trade Organization -- and the global system of rules that guide international businesses -- may be quietly scoring a major victory.

Thanks to a U.S. veto on new appeals judges, the WTO’s dispute arm is expected to start slipping into the institutional equivalent of a coma at the end of this year. That has set off a scramble by the European Union, Canada and other countries to set up a temporary alternative allowing the use of arbitrators rather than three-judge panels to hear appeals.

But by creating that system, WTO members may be giving Trump and aides -- who, like him, have deep-rooted skepticism of multilateral institutions -- the very thing they want.

“The U.S. went into the dispute settlement system thinking that it was going to be an arbitration process that would be limited in its ability to force members to do things that they had not agreed to,” said Stephen Vaughn, who until earlier this year oversaw the Trump administration’s assault on the WTO’s appellate body as the U.S. Trade Representative’s general counsel.

Arbitration would above all provide the flexibility the U.S. is after, Vaughn said. It would see disputes treated as individual cases, avoiding the precedent-dependent system the WTO appellate body has become.

“It doesn’t have to be a one-size-fits-all system,” said Vaughn, who argues the WTO should allow members to “not only set up different dispute settlement systems between different countries but also varying dispute settlement systems from one case to the next.”

The only shortcoming that Vaughn, now a partner at law firm King & Spalding, identifies in the EU-Canada arbitration system is that the U.S. is not included. The U.S. has been both the biggest user and target of the WTO’s dispute settlement system, according to WTO data.

“It may be that inviting people to participate in a dispute settlement process that does not involve the United States is like inviting people to see the E Street Band without Bruce Springsteen,” he said.

Vaughn, like former boss U.S. Trade Representative Robert Lighthizer, is a former lawyer for the steel industry, which has long harbored a grudge against the WTO for repeatedly rejecting how the U.S. calculates what trading partners have long complained are exorbitant anti-dumping duties.

He and Lighthizer also share a broader skepticism of the WTO. In one of his first public appearances in 2017, Lighthizer spoke wistfully of how disputes were resolved behind closed doors before the WTO’s 1990s creation. In written testimony submitted to the Senate Finance Committee this week Lighthizer again enumerated a list of grievances about the appellate body ranging from its disregard of a 90-day deadline for decisions to what the U.S. claims has been the body’s “over-reach” on issues such as anti-dumping duties.

Lighthizer, whose office did not respond to a request for comment, told U.S. lawmakers in March his ultimate goal is to reform the WTO and he sees the appellate body as leverage. “If you are not willing to be bold and use the only leverage you have with the WTO, which is to say that we won’t approve the appointment of appellate body members without reform, then I don’t know any other way to do it.”

One major reform goal, enunciated in a presidential memo last week, is unwinding the WTO system that now allows China and other WTO members to label themselves “developing countries.” The U.S. has long argued that gives those countries unfair advantages in the WTO ranging from being able to hold the line on higher tariffs in negotiations to taking more time to comply with existing agreements.

By blocking new appointments the U.S. has steadily eroded the appellate body’s ranks as judges’ four-year terms expire. Once made up of seven members the body now has only three, the minimum number required for a panel. Two more members’ terms expire Dec. 10 and the last member’s term ends in December 2020. The body is likely to limp on for a year or two, though it will be unable to hear new appeals. Judges whose terms have expired are being allowed to continue work on cases they are already assigned to.

But the assault on its foundations goes beyond staffing.

Among the Trump administration’s goals is killing the rule prohibiting WTO members from unilaterally blocking appellate rulings. And that is not something the EU-Canada arbitration proposal would prevent.

The U.S. wants to see a return to the “positive consensus” rule that fell out of favor after a 1980s surge in trade disputes. Under the WTO’s predecessor, the U.S. and other countries increasingly vetoed dispute rulings, which left the system broken and led to a rise in unilateral trade retaliation. Eventually that led to calls for peace and the 1994 creation of the WTO and its binding dispute system.

The return of its dispute veto powers would help the U.S. as it prepares to defend a series of WTO challenges to its invocation of national security as justification for tariffs on steel and aluminum. It could also help the U.S. avoid WTO-sanctioned retaliation for targeting foreign trade abuses with unilateral tariffs under Section 301 of the Trade Act of 1974 -- the key instrument Lighthizer has deployed in his trade war with China.

Lighthizer’s allies say their real concern is sovereignty after years of what they see as the WTO imposing obligations the U.S. never agreed to. “That was always going to be very, very troubling to a country like ours that thinks rules and regulations are the responsibility of the U.S. and are brought about through a democratic process here as opposed to being imposed on us from the outside,” Vaughn said.

The fight is not over yet. Some in Geneva still argue it’s too early to say the U.S. is winning with other WTO members rallying around the institution. Or, that the EU and Canada are playing into Trump’s hands when the U.S. has yet to delineate its own plan and continues instead to pursue its trade wars.

“It’s a fallacy to say that they are playing into U.S.’s hands because we don’t even know what those ‘hands’ are,” said Alan Yanovich a Geneva-based attorney at Akin Gump Strauss Hauer & Feld LLP. “All we have seen so far is an inclination to destroy: Destroy trade and destroy institutions.”

--With assistance from Jenny Leonard and Richard Bravo.
To contact the reporters on this story:
Shawn Donnan in Washington at sdonnan@bloomberg.net;
Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net
To contact the editors responsible for this story:
Simon Kennedy at skennedy4@bloomberg.net
Sarah McGregor, Brendan Murray
© 2019 Bloomberg L.P.
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