The US & the WTO: Taking Stock of Recent Trade Strategy Manoeuvres

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Peter Draper, Executive Director, Institute for International Trade, University of Adelaide

The US and the WTO: Taking Stock of Recent Trade Strategy Manoeuvres.

I recently travelled to Tokyo, Geneva, and Florence to engage in a series of discussions and meetings concerning the fortunes of the global trading system. Events are moving fast, but an underlying set of structural features characterising current contentions is apparent. This is my attempt to make sense of them.

Since the US is still the most critical actor in the global trading system it is essential to start with the Trump Administration’s trade negotiations strategy. Other actors are important but receive less attention below.

Those familiar with negotiations theory will know that there is a spectrum of approaches from integrative (value-creating) to distributive (value-claiming). The former is analogous to ‘win-win’; the latter to ‘(I) win (you) lose’, and is employed by the Trump Administration in all its trade negotiations. It is most likely to succeed in bilateral settings where the negotiating adversary is substantially less powerful. (Normally trade negotiators refer to each other as ‘partners’ but this seems inappropriate under a distributive approach). Tactically, it relies on credible threats delivered from a stronger bargaining position, with the aim being to improve the status quo ante from the US’s standpoint. Demand the maximum, and demand more if your adversary blinks.

This approach, from a narrow negotiating viewpoint, has delivered mixed results to date. Mexico just yielded to it in the context of immigration politics, less so in the context of the US-Mexico-Canada Agreement (USMCA), where it and Canada were able to secure some US concessions and get US steel tariffs removed, albeit subject to a ‘managed trade’ framework. China has (so far) rejected a bilateral deal with the US; Japan is playing for time; and the EU has limited the scope by excluding agriculture.

So, notwithstanding President Trump’s predictably unpredictable behaviour and the deleterious consequences of his Administration’s approach to trade, their basic trade negotiations strategy is clear, even if the results are mixed. How does this play out in the World Trade Organization (WTO)?

US concerns with the WTO predate the Trump Administration. In my view these boil down to three issues: the way the dispute settlement system, especially the Appellate Body, functions; whether China’s state capitalist development model can be accommodated in a system of rules designed to promote free(r) market capitalism as well as the perceived existential threat that China poses to US global leadership; and the slow-pace of decision-making, hence updating of rules, in the WTO.

Much has been written about the Appellate Body issue. From the US perspective, and particularly USTR Lighthizer, the system has evolved contrary to US expectations at the conclusion of the Uruguay Round. Specifically, adverse decisions concerning trade remedy (anti-dumping) cases involving the US, and the related issue of Chinese subsidies to, and through, state-owned enterprises, are particularly important. To this should be added emerging findings concerning invocation of GATT Article XXI national security exceptions, notably the recent Russia-Ukraine transit case. In relation to findings counter to US interests in these cases, the US argues that the Appellate Body ‘overreaches’ its mandate in various ways, and particularly by interpreting texts deliberately left ambiguously worded at the conclusion of the Uruguay round. The US is not alone in expressing these concerns, although it is very difficult to gauge the extent of support for its position.

In keeping with its distributive approach, the US has paralysed the system by blocking appointment of new judges to the Appellate Body. In Geneva this is referred to as ‘hostage-taking’, and the US is not the only guilty party. For example, India blocked approval of the Trade Facilitation Agreement prior to its adoption at the Bali Ministerial meeting in 2013. Nonetheless, the US has not specified what reforms it wants and speculation in Geneva is that it would like to ‘experiment’ with a dispute settlement system that does not have a functioning Appellate Body.

The European Union, in keeping with its own multilateral origins and traditions, has a different approach to the mandate of the Appellate Body. It supports judicial interpretation of agreed texts and associated accumulation of precedent, and is actively promoting reform proposals as well as workarounds should the Appellate Body cease to function. It would appear to have widespread support from the membership, although the true extent is also difficult to gauge.

These transatlantic differences amongst two of the three main trading powers are reflected in how each approaches the third pillar of the trading system: China. If the US can secure reforms through the WTO that would contain, if not dismantle, China’s state capitalist model no doubt it would be delighted. Clearly, it has not placed its faith in Geneva, although it is not foreclosing that option either. Rather, it is pursuing a highly distributive bilateral approach with China while it is in a position of relative strength, subject to the vagaries of the US electoral cycle and Chinese domestic political economy.

This approach may just have failed if recent press reportage is anything to go by. If it fails, then the US’s best option is to return to the WTO and work with like-minded countries to pressure China to reform. If it succeeds, then the EU, and others, will be under immense pressure to forge their own bilateral deals with China; a dynamic that underpins recent China-EU diplomacy. Quite how this would redound in the WTO remains to be seen, if it transpires.

The last paragraph underlines the evolving trilateral meeting initiative led by Japan, with the EU and the US. A key Japanese objective is to keep the US engaged in the multilateral trading system by reminding it that it is not alone in seeking to reform Chinese state capitalism. Not surprisingly this initiative is focusing particularly on reforms to industrial subsidies, and related reforms to the role of state owned enterprises in the trading system.

A big question is whether these three players can agree on how industrial subsidies should be disciplined? A second, equally big, question is what incentives China will have to cooperate? Interestingly, China may be open to revisiting subsidies disciplines if this means it can provide more subsidies to research and development, particularly to basic research – an arena where it is substantially behind the advanced countries. China is also reportedly gearing up to substantially increase both the level and transparency of its subsidies notifications to the WTO; a core demand of the trilateral group.

Nonetheless, if a deal amongst these four players (US, EU, Japan, and China) were to emerge the odds of it being multilateralised through the WTO are exceedingly low since developing countries have their own interests in a broader subsidies discussion. To take an obvious example, Brazil and South Africa, inter alia, would very much like to see agricultural subsidies on the table, whereas Indonesia and India want more space to subsidise their agriculture sectors to support subsistence farmers. Which means the deal would have to consist of the four majors agreeing on how to constrain their own industrial subsidies as they cannot bind non-signatories.

Which brings me to the issue of decision-making in the WTO. I have long been a proponent of plurilateral, or smaller group, negotiations, and this approach is now gathering pace in Geneva. The ‘Joint Initiatives’ launched at the 2017 Buenos Aires WTO Ministerial are now starting to shape up, particularly e-commerce talks, chaired by Australia. The US is engaged in this negotiation – a core objective for Australia, and a positive signal that the US is keeping the multilateral option open. Interestingly, the US is also engaging in the multilateral fisheries subsidies negotiations, apparently observing that if the members cannot forge an accord in an area so closely linked to achieving the Sustainable Development Goals, then they are truly incapable of forging multilateral deals.

However, with all negotiation approaches the challenging issue of special and differential treatment (SDT), or more lenient consideration for developing countries, is a key issue. Here too the US is engaged in the debate, having recently issued a substantive, if not widely accepted, critique of established practices (WT/GC/W/764). In essence, the US argues that a number of rapidly growing developing countries that pose substantial competitive challenges to US business, especially China, are hiding behind SDT in order to avoid making painful commitments. And so it is arguing for objective quantitative criteria to be developed and for countries to be ‘graduated’ from accessing SDT. This has met with strong resistance from China and India, inter alia. Norway recently sponsored a middle-ground framework arguing that SDT should be applied on a case-by-case, self-selection, basis, with Aid for Trade support being offered as incentive for countries to step up their commitments – a model pioneered in the Trade Facilitation Agreement. Apparently, China could support this.

It is unlikely this debate will be resolved soon, but at least the US is engaged in it. Overall, while one can take issue with the atmospherics accompanying US trade negotiations, in my view the logic of its strategy means that it needs to keep the multilateral route open, even if it doesn’t know what it wants to do with the system it created.

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