Steel Yourself: The WTO as the Latest Battleground in Trump’s Trade War

Posted on Aug 13, 2019

Solomon Leung

President Donald Trump has long called for a reconfiguration of US trade policy–pulling out of a number of trade deals, and imposing a slew of tariffs on some of the United States’ major trading partners. At the most recent meeting of the World Trade Organization (“WTO”) Dispute Settlement Body (“DSB”) on October 29, 2018, an unprecedented seven countries–Canada, China, the EU, Mexico, Norway, Russia, and Turkey–requested that the DSB establish a panel to examine US tariffs on steel and aluminum. However, the US has blocked these requests per WTO procedure, to be reconsidered on November 21, 2018. At the same meeting, the US also requested panels to investigate retaliatory measures by Canada, China, the EU, and Mexico.

Navigating the WTO Dispute Resolution Process

The WTO provides a framework for negotiating multilateral trade agreements, and a forum to settle trade disputes over measures that violate these agreements. The General Council, as the DSB, is responsible for dispute resolution procedures. Participation in this system is compulsory per the Dispute Settlement Understanding; WTO members must consent to the WTO’s jurisdiction to settle trade disputes as a condition of membership. Before requesting a panel appointment, members should seek to resolve the dispute through private negotiations. Once a panel is appointed, an adjudicative proceeding follows, where each member party offers evidence, and concludes in the panel issuing a report­–a recommendation that the DSB may reject on a consensus basis. Either side may appeal the ruling on the legal findings.

While member states of the WTO are generally committed to encouraging trade and reducing tariffs, the General Agreement on Tariffs and Trade (“GATT”) Articles XX and XXI provide for certain exceptions, including matters related to environmental protection, public health, and national security. The White House has insisted that the steel and aluminum tariffs are in the interest of national security–which would also authorize the President to implement these tariffs under Section 232 of the Trade Expansion Act of 1962 without congressional approval. However, one of President Trump’s tweets stating that these tariffs “are in response to [Canada’s] of 270% on dairy” suggests a retaliatory posture instead. Such a finding would question the legality of these tariffs, both internationally and domestically.

Effectiveness of WTO Dispute Settlement

Not only has there been debate over whether the WTO promotes international trade, but there also remains a question of how effective the dispute resolution process really is. Per WTO procedure, the losing party must comply with the recommendations of the DSB or negotiate mutually acceptable compensation. Otherwise, the complaining party will be allowed to retaliate. However, the system is geared towards inducing compliance in the future, with no way to compel the offending party to compensate other members for their losses stemming from trade agreement violations.

A statistical analysis of the WTO’s dispute settlement system from 1995-2015 found that about 80% of offending parties comply with DSB rulings, which is generally considered a relatively good rate. In the remaining 20% of cases, the prevailing party may request that the DSB suspend trade concessions. In this case however, several countries have already implemented retaliatory tariffs before undergoing full WTO proceedings. This is no surprise; even though the WTO aims for the dispute settlement procedure to take fifteen months, including appeal, disputes initiated in 2007-2011 lasted an average of about twenty-eight months. Historically, the US has been the biggest offender, and there are serious concerns over how effective retaliatory measures are when implemented against powerful, more-developed economies.

GATT Out: The Effects of a Possible US Exit

Another wrinkle in proceedings would be the possible withdrawal of the US from the WTO. President Trump has threatened a US withdrawal on multiple occasions, and has allegedly proposed the US Fair and Reciprocal Tariff Act. The act itself would give the President power to unilaterally determine tariff rates, circumnavigating and effectively exiting the WTO. As the draft bill stands now, it is highly unlikely that Congress will agree to its terms, but considering this administration’s withdrawal from the Trans-Pacific Partnership (“TPP”) and the renegotiation of the North American Free Trade Agreement, a US exit from the WTO is within the realm of possibility.

This would not only be unprecedented, but could also have wide-reaching effects. For the US, this would mean losing Most Favored Nation status among WTO members, potentially subjecting US exports to tariffs from countries that the US has no separate free trade agreements with. The US would also lose access to a forum to settle trade disputes, although it would be free to retaliate with unilateral tariffs. From an international standpoint, exiting another multilateral trade agreement may also shift global trade leadership towards China, the world’s second-largest economy. Although there is concern that a US exit would undermine the credibility of the WTO, there are already signs that a multilateral agreement without the US is still viable, notably the revived TPP, now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. If anything, these threats to pull out of the WTO revisit preexisting concerns over imbalances and negotiation impasses, and several member countries are already looking at potential WTO reforms.

What’s Next?

The next DSB meeting will be on November 21, 2018, and the US will no longer be able to block the current requests for a panel. That delay, combined with the length of the dispute settlement process, suggests that any resolution from the WTO dispute settlement system may be years away.

In the meantime, the US may come to agreements with a number of these parties, possibly mooting some of these disputes. The US has been renegotiating free trade agreements, with the latest being the United States-Mexico-Canada Agreement (“USMCA”). However, this agreement currently does not resolve the question of steel and aluminum tariffs, although it remains to be seen if those may be addressed in further negotiations. Another curious aspect of USMCA is Article 32.10, which allows USMCA parties to expel any party that enters a free trade agreement with a non-market country, e.g., China. It remains to be seen how that provision may coexist with WTO membership.

If such negotiations do not resolve these disputes, then the DSB will rule on the matter. Thus, the WTO will have to reexamine the national security exception. If the US prevails, this pave the way for more tariffs in the future that test the boundaries of the national security exception. If the US loses, it will be asked to remove these steel and aluminum tariffs, with the threat of retaliatory tariffs if it does not comply. By that point, the damage will have already been done, and if current retaliatory tariffs are not able to move parties to negotiate, it’s doubtful that WTO-sanctioned retaliation might either. And in the unlikely event that the US leaves the WTO? Neither the US nor the WTO member countries–save for those with separate free trade agreements with the US–would be bound to constrain tariffs, so this could be just the beginning.