Road Rules and Road Rage

In the short span of ten days, one of the crown jewels of multilateral governance, the World Trade Organization’s (WTO) dispute settlement system – and in particular the functioning of its Appellate Body (AB) – will grind to a halt. The AB, established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), is a standing body that hears appeals from reports issued by panels in trade disputes brought by WTO Members. Appellate Body Reports, once adopted by the WTO’s Dispute Settlement Body, automatically become authoritative decisions that must be accepted by the parties to the dispute. The Appellate Body is composed of seven persons who serve for four-year terms and, as per the DSU’s rules, a division of three panelists is required to hear each appeal. Owing to the Trump Administration’s formal objection to aspects of the AB’s functioning (dating to Spring 2017) and the exercise of a veto on appointing new panelists (dating to September 2018), the AB will lack the requisite three-person quorum to hear cases from 11 December 2019 onwards. This will, in effect, sabotage the functioning of the WTO’s dispute settlement system. In retrospect, the U.S.’ kneecapping of the North America Free Trade Agreement’s (NAFTA) dispute settlement mechanism in late-2000 by similarly blocking the establishment of a panel that could arbitrate a Mexican claim against the U.S.’ sugar policy restrictions, can be seen today as an unfortunate harbinger of what was to come.

The incapacitation of the WTO’s Appellate Body is the most significant illustration of the Trump Administration’s a la carte regard – and disregard – for international trade law. It is hardly the only instance though. Over the past year-and-a-half, the Trump Administration has taken recourse to a number of sparingly used, unconventional trade remedy instruments to execute its ‘America First’ trade policies. While many of these statutory instruments are, in principle, compatible with international trade law and the U.S.’ multilateral obligations, the Administration has willfully misinterpreted them in ways that knowingly violate international trade law. In some instances, the trade law interpretations have been inconsistent with the Executive Branch’s own solemn commitments to Congress – let alone to the WTO and its international partners.

On 6 July 2018, United States Trade Representative (USTR) Robert Lighthizer, citing China’s allegedly illicit policies and practices related to technology transfers and intellectual property theft, imposed a first tranche of 25 percent additional duties on $34 billion of imports under authority of Sections 310-10 of the Trade Act of 1974. The duties violate the WTO’s non-discrimination principle (most favored nation) and the predictability principle (related to tariff bindings). More to the point, the duties also violate the U.S. legal commitment to its WTO partners and the Executive Branch’s solemn pledge to Congress to submit its WTO-judicable claims to the Dispute Settlement Body and, until that body rules, stay its hand on enforcement action. Forced on the back foot at the WTO to justify its Section 301 actions, the Administration defended the duties as necessary to protect “public morals” – even though there is nary a reference to the words ‘public morals’ in over 250 pages of two Section 301 investigative reports released by USTR in 2018.

On 8 March 2018, President Donald Trump, citing the displacement of domestic steel by excessive imports and the consequent adverse impact on the economic welfare of the industry which, in his view, was undermining U.S. “national security”, imposed a 25 percent duty on a range of imported steel articles under authority of Section 232(b) of the Trade Expansion Act of 1962. This use of the Section 232(b)-based ‘national security’ exception to restore the capacity utilization of the steel industry is clearly at odds with the text of GATT Article XXI’s ‘security exceptions’, which requires that the action be “taken in time of war or other emergency in international relations” and should touch upon the member state’s “essential security interests.” It also contradicts the reasoned interpretation of these two terms that was furnished by the American delegate, no less, at the time of drawing up the charter of the multilateral trading system’s rules in the late-1940s.

On 28 May 2019, the U.S. Commerce Department, under authority of Section 771(5)(A) of the Tariff Act of 1930, issued a proposed rule to treat currency undervaluation as a countervailable subsidy. As per the interpretation, the additional domestic currency received by an exporter as a result of currency undervaluation (arising at the time when the exporter exchanges the U.S. dollars received for his/her domestic currency) is to be henceforth treated as a countervailable benefit that is ‘specific’ to the exporting and importing sector of that country. This interpretation to redress alleged undervaluation is highly problematic; only three types of “specificity” (enterprise-specificity; industry specificity; regional specificity) are admissible within the meaning of the WTO’s Subsidies and Countervailing Measures (SCM) agreement. The proposed rule will also violate the convention that it is the International Monetary Fund (IMF) and its surveillance rules, not the WTO and its anti-dumping/countervailable duty disciplines, that is the appropriate forum to discipline exchange rate manipulation-related behavior.

Finally, on 5 August 2019, the U.S. Treasury Department designated China to be a “currency manipulator” under authority of Section 3004 of the Omnibus Trade and Competitiveness Act of 1988. In its Statement of Action, Treasury contended that a depreciation of the renminbi in early-August (following Trump’s announcement of a new tranche of tariffs) had been a deliberate ploy, given Beijing’s substantial foreign exchange reserves and its history of managing its exchange rate. This designation is at variance with, both, domestic statute and international convention. It subjectively tags China as a manipulator without basis in objective fact and randomly ascribes ill-intent to its exchange rate-related policies and practices, even though there is neither fundamental misalignment in the RMB’s value nor an increase in net exports on its current account. To the contrary, China’s policies and practices have had the effect of securing a significant decrease in net exports over the past couple of years.

The Trump Administration’s dispiriting misuse of domestic trade enforcement authority and disregard for international rules has been a body blow to global trade and investment. The failure of the body of global trade and investment law, equally, to keep pace with cross-border commercial developments on the ground has been a silent contributory factor, too, to the ‘America First’ approach practiced by the Administration. The phenomenal rise of China from a mid-size trading power to the foremost global trading power today has only exacerbated this dilemma. Its unique brand of state-led and guided capitalism has generated disquiet within the multilateral trading system, given that it has both benefitted from gaps within the WTO’s rulebook as well as accentuated distortions within the trading system that had not been fully envisaged at the time the rulebook was drawn up in the mid-1990s.

Going forward, the negative externalities radiating from China’s state-owned enterprise (SOE) policies and practices, particularly in the area of market-distorting industrial subsidies, need to be captured within equivalent multilateral disciplines. Two WTO agreements in this regard merit particularly urgent updating – the Agreement on Trade-Related Investment Measures (TRIMs) to cope with de facto coerced technology transfer-related grievances, and the Agreement on Subsidies and Countervailing Measures (ASCM) to capture a more broad-based definition of state-provided and state-linked industrial subsidies. For its part, China too would be well-served by firmly inscribing a number of reform principles that upgrade and anchor its trade, investment, industrial and intellectual property rights (IPR) policies and practices to Organization of Economic Cooperation and Development (OECD)-level standards, particularly as its growth model transitions from high-speed to high-quality growth.