Ability to police global trade could be neutered by battle to safeguard US sovereignty

The World Trade Organization is set to plunge into the biggest crisis in its 25-year history later this week as the climax to a long-running and bitter dispute means the Geneva-based body will cease to be able to settle disputes between its member states.

Unless Donald Trump backs off at the last minute and agrees to a peace plan, Washington’s protracted battle to safeguard US sovereignty will lead to the neutering of the WTO’s ability to police global trade.

However, hopes are fading that the US will agree to a blueprint drawn up by a senior diplomat in Geneva that would keep the WTO’s appellate body – the ultimate arbiter of trade disputes – operating beyond the 11 December deadline.

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One trade source said the failure to resolve the row amounted to an “existential crisis” for the WTO because it affected its ability to fulfil one of its core functions.

The looming paralysis will lead to a backlog of unresolved disputes and make it easier for countries to break WTO trade rules without facing penalties.

Trade sources in Geneva admitted that the long-running wrangle over the power wielded by judges on the appellate body was unlikely to be resolved this week and that, as a stopgap measure, attempts would be made to settle disputes by arbitration. Even so, a backlog of cases is likely to build up over the coming months.

The US has expressed reservations for many years about the willingness of WTO appellate body judges to overstep their mandate and use their rulings to make trade law.

Concerns first raised by Washington when George W Bush was president surfaced again under Barack Obama’s presidency. However, the issue has come to a head since Trump arrived in the White House with a protectionist agenda at odds with the WTO’s commitment to breaking down trade barriers.

The appellate body needs a minimum of three judges to function and in recent years the US has been blocking the appointment of new members to replace those on the seven-member panel whose terms have expired. The long-anticipated crunch moment finally arrives at midnight on Tuesday, when two of the remaining three judges to the appellate body have to step down.

Resolving a trade dispute between the WTO’s 164 members is a two-stage process, with a country that loses a case having the right to appeal before the aggrieved party can impose retaliatory sanctions.

Last week, the US rejected the idea that the terms of the retiring judges should be extended so that they could hear appeals currently in the pipeline.

The one concession the US was prepared to make was that judges would be able to complete their deliberations on three cases where hearings had been concluded.

“President Trump has made it clear throughout his term that he has no time for multilateral deals and even less time for WTO judges telling him what he can and cannot do,” said Joe Zammit-Lucia of the Radix thinktank.

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New Zealand’s trade ambassador to the WTO, David Walker, has been trying to broker a deal that accepted the need for reform of the appellate body and this will be put forward at a three-day meeting of the body’s general council this week.

Walker’s plan would involve reducing the financial incentive for judges to string out cases and limit their ability to make rulings that effectively make new trade laws.

The US is far from the only WTO member unhappy with what is seen as “mission creep” on the part of the appellate body judges and there is a general acceptance in Geneva that it needs to be reformed. However, Washington has been the most overtly resistant to the idea of its sovereignty being eroded.

One trade source said it was time for Trump to make up his mind. “Do the Americans want to fix it or do they want to break it,” he said.