Trump’s World Trade War: the need for a rules-based response
The United States is threatening the multilateral trading system with a World Trade War - a combination of aggressive unilateral trade restrictions and a wilful disabling of the rules-based dispute settlement system of the World Trade Organization (WTO). Other WTO Members must unite around a coordinated response.
On 1 March 2018, U.S. President Donald Trump announced plans to impose a 25% tariff on steel imports and a 10% tariff on imports of aluminium. The announcement came after the release on 16 February 2018 of two reports by U.S. Department of Commerce recommending such actions, purportedly on the basis that current quantities and circumstances of steel and aluminium imports ‘threaten to impair the national security’ of the United States.
The Security Exception
Article XXI(b) of the General Agreement on Tariffs and Trade of 1994 (GATT 1994) allows a WTO Member to adopt or maintain certain measures which that Member ‘considers necessary for the protection of its essential security interests’. Specifically, clause (ii) of that article further circumscribes this ‘security exception’ to measures relating to ‘the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying the military establishment’.
Because the security exception in Article XXI(b) hinges on what the relevant WTO Member itself ‘considers necessary’, it is an open question whether Article XXI(b) is a substantive exception or a jurisdictional defence. In other words, it is questionable if the merits for invoking the security exception would be susceptible to judicial review within the WTO dispute settlement system. This is because, according to this argument, what a Member ‘considers necessary’ is a question not capable of settlement by litigation, i.e. a non-justiciable question.
However, as Professor Peter Van den Bossche points out in his major work, The Law and Policy of the World Trade Organization (4th edn., Cambridge University Press, 2017)—citing the panel’s statement in US – Nicaraguan Trade (1986)—‘it is imperative that a certain degree of “judicial review” be maintained; otherwise the provision [i.e. Article XXI(b) GATT 1994] would be prone to abuse without redress’. He goes on [page 620]: ‘At a minimum, panels and the Appellate Body should conduct an examination as to whether the explanation provided by the Member concerned is reasonable or whether the measure constitutes an apparent abuse.’
World Trade War
While the proposed U.S. tariffs raise interesting questions relating to the ‘security exception’, the real concern is the broader context of the proposed measures. They come at a time when the U.S. for several months has refused to agree to the initiation of replacement procedures for the three vacant seats on the Appellate Body (viz. the Appellate Body appointments crisis). There are currently only four serving members instead of seven. If the deadlock over appointments continues, there will be only three members in September 2018, with two further members retiring in 2019.
The real risk of President Trump’s World Trade War is that even if panel proceedings against the proposed measures are promptly instituted and eventually found GATT inconsistent, by the time the panel reports are issued, the number of Appellate Body members might have fallen below three. Three is the minimum number necessary for the Appellate Body to hear a case and to issue rulings. This is a problem because panel rulings cannot be adopted and take effect if they are appealed. If the Appellate Body cannot rule on cases, this means that, if the panel finds for the complainants, the United States could simply lodge an appeal and be virtually sure that the panel report would not take effect and not be enforceable.
In this situation, it is important that the response by the other WTO Members recognizes that this is no ordinary trade dispute, but an existential challenge to the rules-based multilateral order that has brought prosperity to the world since 1947.
Six Recommendations for Defending the Multilateral Rules-based Trading System
In shaping their response, Members would be well advised to consider the following six recommendations:
- Members should unite in a coalition to defend the multilateral trading system. Coordinating their response at the political level in solidarity is the best way to ensure that the multilateral system is not eroded and to avoid a harmful escalation due to piecemeal retaliation.
- Coalition Members should reaffirm their commitment to the rules-based system and not be tempted at the many possibilities of applying disproportionate, non-rule bound retaliation, even where it could usefully target U.S. economic interests, e.g. selective measures against U.S. foreign investments or intellectual property rights or various types of embargo.
- Instead, Coalition Members should faithfully use the WTO dispute settlement system at the panel level, even if the Appellate Body becomes effectively unable to operate. This is because, even an unadopted panel report carries legal authority, which unilateral—and WTO law inconsistent—retaliation does not.
- Coalition Members should move to have the panel report adopted in the event that the Appellate Body fails to hear the case. The Coalition should take the position that the appeal is implicitly rejected if no Appellate Body report is issued within 90 days of the appeal and thus that the appeal is then deemed ‘completed’ for purposes of Article 16.4 of the WTO Dispute Settlement Understanding (DSU).
- Coalition Members should seek to confirm this interpretation by acting through the General Council to issue a binding authoritative interpretation, pursuant to Article IX.2 of the Marrakesh Agreement, clarifying the legal consequences of a failure to conclude Appellate Body proceedings within the 90-day limit prescribed by Article 17.5 DSU. The decision to adopt the interpretation would be taken by three-fourths majority of the Members. Given the nature of the interpretation as a clarification, it would not be relevant to formally amend the DSU.
- Coalition Members should seek to preserve the smooth functioning of the dispute settlement system, among themselves, while the Appellate Body stalemate persists by providing for a provisional appellate mechanism. For this purpose, the Coalition Members should activate arbitration pursuant to Article 25 DSU and provide for an appeal or annulment mechanism in the arbitration procedures.
WTO law is about how to avoid a trade war and how to lawfully sanction trade-law transgressions. It is the economic equivalent of jus ad bellum. However, WTO law does not define acceptable conduct in a trade war, i.e. the economic equivalent of jus in bello. The multilateral trading system thus needs laws of ‘trade warfare’ or rules of engagement, such as the six recommendations above, to prevent that a World Trade War results in the disintegration of the rules-based order.
Written by Jens Hillebrand Pohl
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