The unappealing fate of the WTO’s Appellate Body

Unless there is a massive U-turn by the US, the institution will grind to a halt

FT premium subscribers can click here to receive Trade Secrets by email.

The Brussels chapter of Trade Secrets will decamp to the WTO in Geneva for the first half of this week to witness in person one of the few functioning bits of multilateral trade policy machinery come juddering to a halt — or for a more modern metaphor — to find a “404: Dispute Settlement System Not Found” message on the global governance website.

There’s unlikely to be much news as such, unless the Trump administration executes a last-minute about-turn extraordinarily abrupt even by its own spectacular standards and saves the WTO Appellate Body from paralysis. But out of the hand-wringing this week may come some sense of the way forward. Today’s tit-for-tat is with Brussels-based trade lawyer, Lourdes Catrain, while today’s chart of the day looks at US imports from China.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com, or email me at alan.beattie@ft.com.

Crisis at the WTO

First it was abstruse; then it was worrying; then it was critical. Now, right at the moment of crisis, it has turned unpleasantly personal.

The Appellate Body (AB) saga in the WTO is coming to a head this week. Unless the US pulls a massive U-turn and agrees to appoint new judges to replace the two retiring, one of the few remaining institutions of global governance by which Washington agrees to be bound will grind to a halt.

WTO members have been given a set of principles to reform the AB put together by David Walker, the New Zealand ambassador. (Amid all the turmoil it’s somehow comforting to know that one WTO tradition endures: the classy Kiwis doing the tricky stuff when it’s needed.)

However, the Walker plan will not be enough. It offers various specific suggestions such as limiting the time it can take to make judgments, and making it clear precedent is not created by previous rulings. If there’s one thing the US hates it’s the AB acting (in its view) like a supreme court — filling gaps in law from general principles and building up a body of jurisprudence providing the default for future decisions. As far as the Americans are concerned, there’s only one supreme court, and it’s not based in Geneva.

But for the US, this isn’t enough. There are still too few hair shirts and too little penitence from the rest of the WTO membership. The Americans don’t want, or don’t just want, technocratic fixes. They want a truth and reconciliation commission, guilt and repentance. They want a widespread admission that the AB started to go wrong right from its launch in 1995. They want a commitment to turn it back into an occasional technical advisory body rather than a routine court of appeal.

Enter the embodiment of the issue: Werner Zdouc, an Austrian who heads the secretariat supporting the AB. Few outside the trade world have heard of Zdouc: everyone inside the WTO has an opinion. As reported by Bloomberg, Thomas Graham, the retiring chair of the AB, threatened not to complete the outstanding cases in which he is currently involved unless Zdouc was moved from his job. The other AB members, however, have backed him.

It seems bizarre and petty. Actually it’s not entirely so. Despite not being a judge, Zdouc’s advice and briefings have long exerted a great deal of influence over the AB’s rulings. Graham is not the first AB judge to think his influence damaging. Even his fans accept that Zdouc’s instinct is always for the AB to extend its reach. He represents everything the US dislikes. If the AB is ever to come back from the dead, his removal from proximity to it will be a necessary condition.

It will not, however, be sufficient, and there is the problem. The US can have Zdouc moved, but that won’t guarantee the elimination of the judicially creative mindset. Even if the rest of the WTO membership professes a philosophical change of heart, how can they credibly commit to implementing it? Purity tests for new judges? Do we really want Brett Kavanaugh-style political hack ideologues on the AB? An oversight board where WTO members (ie the US) can rein in judges? That might work, though if you subject a judicial process to enough pressure from member governments, you might as well go back to negotiating rather than arbitrating disputes. (Many of course suspect this was USTR Robert Lighthizer’s ambition all along.)

These systemic issues aren’t going to be settled this week. But the longer that they remain unresolved, the more the AB’s absence will become familiar, the more the EU’s workaround alternative will gain support, and the harder it will be ever to bring the real thing back. Any country getting into a dispute with the US under WTO rules had better be aware that bilateral negotiations (or, to use the technical term, unilateral threats) will probably be the way to its resolution.

Charted waters

US imports of Chinese goods subject to tariffs have been dropping since Trump introduced the first list in July 2018. Time is also running out for the US and China to sign their ‘phase one’ deal that would cool trade war tensions before List 4B tariffs kick in on Friday — and there is little sign that companies have been stockpiling goods on that list in advance.

Tit-for-tat

Lourdes Catrain, a partner in the trade practice at Hogan Lovells in Brussels, joins us to answer three blunt questions.

There has been a lot of criticism of UK prime minister Boris Johnson’s claim that he can get a EU trade deal by December 2020. How long do you think it will take?

Based on the EU FTA track record of negotiating and approving free trade agreements, it would be almost impossible to negotiate and conclude the EU-UK FTA by December 2020. A couple of years is a more realistic scenario. Fishing rights, for example, is likely to be at top of the ‘red lines’ for both parties, and could lead to long negotiations.

How much of a headache are sanctions for multinational companies dealing in various jurisdictions right now, and how are they affecting supply chains globally?

Sanctions have become a key area of compliance of global corporations due to the increased use and toughening of US and EU sanctions programmes. The scope of US and EU sanctions regimes such as the Iran and Russia programmes is very different and, in certain cases, gives rise to a conflict of law issue that makes compliance particularly complicated for global supply chains.

Since May 2018, for example, EU subsidiaries of US corporations have been between a rock and a hard place when it comes to complying with sanctions on Iran: while they must comply with US Iran sanctions under US law, under EU law they cannot comply with certain aspects of the US sanctions.

Where does the current US/EU tariff war end — and how is it affecting companies you’re speaking to?

Global corporations are trying to steer the transatlantic ship with shifting winds. Naively, we thought that the steel and aluminium tariffs were going to be a temporary exception to trade rules. A year-and-a-half later, the adverse impact of the protectionist tariffs continues and, more worrisome, there are further US actions in the making that would further threaten transatlantic trade. I am very hopeful that the new leadership in the EU trade team will manage to prevent these various tariffs from causing irreversible damage for Europe.

Don’t miss

• US business fears watering down of Nafta trade revamp, as Democrats demand concessions amid ongoing talks to ratify the USMCA deal.
  Read more
• Shipping group MSC is now one of the top 10 corporate polluters in Europe, sparking concerns that the shipping industry, fuelled by the expansion of global trade, is not doing enough to cut emissions.
  Read more
• American collectors of fine wines have emerged as unlikely winners from President Donald Trump’s trade wars as buyers seek out bottles that are already in the US.
  Read more

Tokyo talk

The best trade stories from the Nikkei Asian Review

• Moscow’s energy diplomacy is facing headwinds as buyer nations, including China, push back on price and supply volume over the Power of Siberia pipeline.
  Read more
• African nations and environmental groups have criticised the continued sale of ivory in Japan, where ivory obtained before an international ban still fetches high prices.
  Read more