WTO: China blames US as appeal court comes to a halt, sparking new fears for global trading system

12/12/2019    15

The appeal court at the World Trade Organisation has disintegrated after the tenure of two of its final three judges expired, with China laying the blame squarely at the feet of the United States.

The World Trade Organisation’s (WTO) Appellate Body is the final court of appeal for trade disputes heard at the Geneva-based trade body and it requires a minimum of three judges to hear cases.

It is considered by many to be the WTO’s most effective mechanism, since its rulings can result in tariffs being placed on contesting member nations, meaning it is viewed as a deterrent against unilateral protectionism.

But with the US blocking the appointment of new judges, allowing the number to dwindle from seven, it can no longer function.

This removes a vital cog in the multilateral trading system, critics say, which could usher in a period of further disruption to global trade, after a year and a half in which the US and China have already been operating outside WTO rules during their bitter tariff war.

Quizzed on the Appellate Body’s demise at a press conference in Beijing last week, Chinese Ministry of Commerce spokesman Gao Feng blamed the obstruction of “some country”, referring to the US, adding that China will “strive to maintain the operation of the WTO dispute settlement mechanism and defend the rules-based multilateral trading system”.

Chinese scholars, meanwhile, said that the death of the appeals body places further pressure on the multilateral trading system, which is already in crisis largely due to Beijing and Washington flouting the rules.

“The most urgent issue is the survival of the WTO in this turbulent time. I don’t say that the WTO will die, but what kind of survival, what kind of existence, what kind of role it will continue to play?” said He Weiwen, a senior fellow at the Centre for China and Globalisation, at a recent seminar in Beijing.

“The US has been bypassing the WTO to deal with their issues with China, [but] China is most concerned about settling a potentially escalating trade war with the US,” said Heiwai Tang, a professor in trade and economics at the University of Hong Kong.

With the retirement of Thomas Graham and Ujal Bhatia at midnight in Geneva on Wednesday morning, the body was left with only one judge, Chinese professor Hong Zhao. It is tradition that retiring judges continue to adjudicate cases which have already started, but Graham, an American lawyer, has refused to confirm whether he will follow the precedent.

Disputes can still be heard at the WTO, but the loss of the Appellate Body removes the possibility to appeal. Seasoned watchers of the multilateral system have said that this could unleash more of the sorts of trade wars that are becoming more common.

The US-China trade war, for example, is often said to have legitimised the subsequent Japan-South Korea trade dispute, opening a Pandora’s box in which trade tariffs are weaponised to achieve political goals.

“It is very common,” said Stuart Harbinson, Hong Kong’s former representative at the WTO. “Well over half and I would think probably three quarters of cases go to appeal.”

US officials have long criticised the Appellate Body for going “beyond its mandate” when judging appeals, and it wants cases to be judged more literally and quickly. The body’s annual report for 2018 showed that the average trade dispute spent 859 days at panel stage, then 395 days on appeal, meaning 1,267 days, or three and a half years, in total.

Washington, along with other significant voices, has also criticised China at the WTO for refusing to update its “developing country” status, and said that the WTO rules are not equipped to deal with a state-led economy such as China’s.

“The US wants a system that operates like the arbitrator of a contractual dispute and narrowly resolves the matter between the members and does not create new laws and regulations, and does not operate like the European Court of Justice,” said Clete Willems, a partner at Akin Gump who spent eight years at the Office of the US Trade Representative (USTR) and two years in the Trump White House.

“To put it more broadly, the system needs to respect its mandate. It needs to be quicker and it needs to get a handle around the issues surrounding non-market economies,” he added.
Among other WTO members – China included – there is acknowledgement that the rules, which have been barely touched since the body was founded in 1995, need an upgrade to deal with the modern economy, especially on issues such as e-commerce, technology and state subsidies.

Indeed, a review process conducted by New Zealand’s permanent representative to the WTO, David Walker, has made numerous recommendations, none of which have been accepted by the US. Frustrated at the lack of progress, the European Union and Canada led other members to explore the establishment of a shadow appeal court, which would be staffed by former WTO judges. This too was torpedoed by the US, which threatened to block the 2020 budget in response.

After the failure of the Doha Round to negotiate a global trade deal, the demise of the Appellate Body is another blow to an institution criticised by many for being a talking shop. Advocates, however, argue that with 96 per cent of global trade happening under WTO rules, it is the engine which keeps commerce ticking along.

“I am very concerned about the WTO, as are most trade economists I know,” said Phil Levy, chief economist at freight forwarder Flexport and former senior trade adviser to former US president George W. Bush. “The WTO has two main functions – a negotiating forum and an adjudicating body. Both are now in serious trouble.”

Yu Yongding, a noted Chinese economist and former adviser to the central bank, added: “The problem now is that the US is very resistant to the WTO. USTR reports seldom mention the WTO. So for the US, the existence of the WTO is a burden to them, and it has no enthusiasm in being a part of it. China certainly hopes there is plurilateral mechanism, and China is willing to participate.

Source: SCMP