How Trump May Finally Kill the WTO

GENEVA—In an ornate stone palace on the shores of Lake Geneva, just a stone’s throw from the Quai Wilson and the Palais des Nations, the Trump administration is waging its latest battle against the international order that the United States helped to build.

At issue is the fate of a little-known part of a little-understood institution: the Appellate Body of the World Trade Organization. As soon as Wednesday, if U.S. President Donald Trump continues his administration’s yearslong campaign of obstruction, the WTO’s ability to resolve trade disputes between countries—pretty much its most important function—will likely be paralyzed. That means that the go-it-alone unilateralism that has characterized the Trump administration’s approach to trade could soon spread far and wide, essentially turning back the clock to a time when trade rivalries between nations were settled not with legal arguments but with tariff walls, trade barriers, and beggar-thy-neighbor protectionism.

“When you listen to the rhetoric from the Trump administration, they argue that the United States is better off in a power-based, law of the jungle system,” said Jennifer Hillman, the senior fellow for trade at the Council on Foreign Relations. “I think the last three years have shown how wrong that is.”

The specific battle between the United States and the other members of the WTO centers on the seven judges of the Appellate Body, who ultimately decide appeals on trade complaints between nations. At least three judges are needed to hear an appeal. But with the Trump administration systematically blocking the naming of any new judges since it took office, no new justices have replaced those whose terms expired. On Wednesday, barring an unlikely eleventh-hour breakthrough, two of the last three judges will leave, and the Appellate Body will be down to one. Soon after, the wheels of trade justice will grind to a halt, with essentially no way to ultimately resolve big trade disputes like the yearslong battle between Airbus and Boeing.

“We’re getting to a point where we could soon prove a counterfactual,” said Keith Rockwell, the director of external relations at the World Trade Organization. “We have the WTO essentially because of economic nationalism, and the lessons of the Smoot-Hawley tariffs, and all those destructive policies.”

What would happen if the WTO didn’t exist?

International trade is one of those arenas, like the United Nations itself, where the post-World War II United States took the lead in crafting international institutions that could tame the very economic nationalism that helped unleash the horrors of the 1930s and then a global conflagration. After some false starts at creating global rules for more open trade, shot down by isolationist Republicans in Congress, the United States and other major nations succeeded in 1947 in crafting an agreement—a General Agreement on Tariffs and Trade—to lower tariffs and trade barriers and to gradually roll back the kind of protectionism that had been in vogue since the late 1700s.

That, in turn, worked pretty well for several decades but came under pressure as new economic powers in Asia and increasingly global supply chains made life hard for a lot of U.S. industries threatened by imports—similar to what has happened over the past 20 years with the rise of China. Ultimately, the United States in 1994 helped transform the ad-hoc General Agreement on Tariffs and Trade into a formal World Trade Organization that codified the push for greater trade liberalization and, crucially, included for the first time a binding dispute settlement system, backstopped by the seven judges of the Appellate Body, who would ultimately rule on decisions made by the WTO panel arbitrating trade disputes.

The problem is that there was a fundamental misunderstanding baked into the birth of the WTO, and especially the dispute settlement system. U.S. trade negotiators then and now thought they had secured a way to ensure that other countries would play by the rules of the road and that trade tools enshrined in U.S. domestic law—such as the ability to levy tariffs on countries accused of dumping goods at below cost—would be respected, as they seemingly were in the WTO agreement.

“What the U.S. hoped for and what happened are two different things,” said Stephen Vaughn, who until this past spring was the chief counsel for U.S. Trade Representative Robert Lighthizer, the top American trade official.

Instead, time and again, the Appellate Body has ruled that time-honored U.S. tools such as countervailing duties on countries accused of flooding the U.S. market and harming U.S. manufacturers are illegal. And Europeans and others viewed the creation of a global trade regulator as more akin to an international court, with the possibility of judges interpreting trade law and creating legal precedents—an interpretation Washington has rejected since before Trump’s election.

Now, Trump has upended global trade with a series of unilateral trade wars that have all but rendered the WTO irrelevant, and he has embraced unilateral tariffs like few presidents before him. Since taking office, Trump has dusted off decades-old U.S. laws to justify slapping tariffs on NATO allies, European partners, Canada, Mexico, much of the rest of Latin America—and of course, repeatedly, China.

Trump has threatened to withdraw from the WTO when he hasn’t been actively trying to neuter it. In the meantime, countries hit with unilateral U.S. tariffs have reacted predictably—with tariffs of their own and trade boycotts that have affected tens of billions of dollars in U.S. exports and upended global trade flows, leading the International Monetary Fund, the OECD, and the WTO itself to repeatedly downgrade global growth estimates due to rising trade tensions. Three years on, none of the problems that spurred U.S. actions—not global steel overcapacity, nor a ballooning U.S. trade deficit, nor weaker currencies in other countries, nor China’s state-directed state capitalism—has been changed one iota.

Initially, U.S. trade officials hoped the WTO and its new dispute resolution system would hold countries that violate trade agreements and limit access to their markets accountable—and that has often been the case. The United States has won nearly all the cases that it has brought before the panel, such as the latest WTO ruling that Europe unfairly supported the aerospace giant Airbus in detriment to America’s Boeing, a ruling Trump was happy to celebrate.

But over the years, the system has just as often boomeranged against the United States, with legal rulings that have called into question core tools in the U.S. trade arsenal, such as trade remedies to protect domestic industries from unfair competition.

“The U.S. expectation was that our markets were wide open, and that we would be the ones bringing the complaints and winning cases,” Hillman said. “What it turned out to be was, yes, we have won more than any other country, but we’ve been a defendant even more, and lost the majority of those—lost more than we ever imagined.”

Many of the losses have involved U.S. industries exposed to competition from imports, such as steel, precisely the industries in which trade lawyers such as Lighthizer and Vaughn cut their corporate teeth—an experience that many say has colored their attitude toward the global trade body. They counter that the United States never agreed to give up its own trade tools and say WTO judges are essentially taking away U.S. rights enshrined by Congress.

“The U.S. was told the [Dispute Settlement Body] would make others live up to their bargain,” Vaughn said. “But if it is there to constrain the U.S., then that is not in our interests.”

The alleged overreach of the WTO’s appellate judges has rankled many U.S. administrations, not just the Trump administration. Indeed, the United States first began blocking new judges to the Appellate Body late in former President Barack Obama’s time in office, and it has only become more determined during the Trump years.

“This did not begin with Trump and will not end with Trump,” said Hillman, herself a one-term appellate judge whose renewal in 2011 was essentially blocked by her own government. “Some people think, if we just wait, everything can go back to the way it was, and that is not true.”

The specific U.S. grievances with the workings of the Appellate Body that have led to the current crisis are many, including complaints about how long appeals take and how all-encompassing the legal reviews have become. But most arguments are highly technical and focus on issues like methodologies used to calculate economic harms used to apply domestic trade remedies. They boil down to the argument that, in successive rulings over many years, WTO appellate judges have essentially stripped away in court trade tools that U.S. trade negotiators never gave up at the negotiating table. That, U.S. officials say, is a violation of the WTO understanding that it won’t take away rights or add obligations to any member nations.

“To us, it does matter what we thought we agreed to,” Vaughn said.

But many trade experts are dismissive of U.S. arguments. The complaint that the Appellate Body takes more than the mandated 90 days to issue a ruling, for instance, is a result of much more complex trade cases than foreseen—and the fact that, thanks to the United States itself, there are fewer judges to decide cases, dragging them out. In other ways, the Appellate Body is uniquely constrained: It can’t send a faulty ruling back where it came from or decide what issues it wants to consider, like other courts. So it has to make sometimes controversial rulings.

“You can’t take any of it seriously,” said Steve Charnovitz, a professor of international law at the George Washington University Law School who thinks the Appellate Body is unfairly blamed. “The concern about the Appellate Body exceeding its mandate—it’s pure sophistry.”

But WTO officials such as Rockwell acknowledge that the U.S. complaints aren’t entirely without merit; they were compelling enough to elicit more than a dozen proposals from other countries to address the concerns, including a sweeping draft reform proposal spearheaded by New Zealand. The question that will be finally answered next week, Rockwell said, is whether the latest proposed solution goes far enough to satisfy the United States.

“To date the U.S. has not accepted the draft decision because they say that it does not address the fundamental question from the U.S. point of view: How did the Appellate Body go off the rails?”

Former U.S. trade officials such as Vaughn, who is now back at private practice at King & Spalding law firm, say that reform proposals still don’t address the fundamentally different views of how the appellate system should operate.

“What is the purpose of negotiating a new text, if we would still have an international body making rules to which we never agreed?” Vaughn said. “The potential for such an outcome creates major problems for the United States.”

That is why many observers are doubtful that all sides will be able to reach a compromise, last-minute solution next week in Geneva, which would leave the world’s trade dispute body on life support, with the plug dangling by the bed.

“The U.S. government wants to decommission the Appellate Body. They’ve come close to achieving that. Why would they stop now?” Charnovitz said.

Does it really matter if the WTO’s dispute settlement system falls by the wayside? After all, global trade and global growth increased for decades before there was ever such a thing as the WTO. Many trade experts point to the durability of the less formal system under the General Agreement on Tariffs and Trade, which operated for decades in which trade far outpaced global economic growth and tariffs around the world steadily came down. Others see undermining the WTO as turning back the clock to a might-makes-right era they thought was long past

“The dispute settlement system is set up to be able to rein in the large countries that throw their weight around—that is the whole point of the WTO,” Charnovitz said. “For lawless countries like the United States, it’s not so bad. It will work fine for China and the European Union—it’s just not an optimal world trading system.”

If the appeals system is paralyzed by the end of the year and there’s no way to resuscitate it at further meetings next year—something the WTO’s Rockwell says he thinks just might be possible with some creative, far-reaching reforms to the way the appeals body works—there could soon be a very high-profile test of the brave new world.

By late next year, the WTO is expected to rule on a slate of challenges to the United States’ widespread imposition of tariffs on steel and aluminum on national security grounds. (That’s the same justification the Trump administration considered using for limiting imports of cars and car parts, and that Trump sought to use last week to reinstate tariffs on Brazil and Argentina.) Complainant countries argue that the U.S. national security argument is bogus, because the country isn’t at war with the countries it slapped tariffs on, and steel is neither nuclear material nor a weapon in its own right—the three permissible criteria for invoking the national security exception.

The WTO has already ruled, for the first time, in a similar case against Russia—finding that countries that invoke the national security excuse for trade restrictions are indeed subject to international oversight. That bodes poorly for U.S. chances in the looming steel cases—but if there’s no appeals court, there won’t be any binding ruling to worry about or comply with, Hillman noted.

“I think the United States is going to lose the case—and then what? Does it threaten to pull out of the WTO, or just file an appeal, and essentially block the panel report?” she said. “Then any other country can put tariffs on any product it wants [under a national security excuse], and there’s no longer a rules-based system.”

That’s what many trade experts fear is happening, after a halting, nearly centurylong quest to tame the global economic jungle, from the first tentative steps in the 1920s under the League of Nations through all the postwar trials and tribulations, through to today’s wheezing but still functional WTO.

“It’s been a longtime search in the world economy for a rules-based system, and we actually achieved that,” Charnovitz said. “And now we are dismantling it.”