By John Murphy
The continued success of the World Trade Organization (WTO) is critical to the U.S. business community. The global rules-based trading system the WTO embodies has benefited countries around the world — but none more than the United States. And that holds for its dispute settlement system as well.
While the WTO was created in 1995, it built on the foundation of the 1947 General Agreement on Tariffs and Trade (GATT). Combined, the WTO and the GATT have revolutionized global commerce. Eight successful multilateral negotiating rounds have helped increase world trade from $58 billion in 1948 to well above $25 trillion today. This 40-fold increase in real terms has brought a rising tide of commerce, job creation, and rising incomes.
It isn’t just the tariff elimination brought about under the GATT and the WTO that benefits American companies and the workers they employ. WTO rules protect U.S. firms operating abroad from unfair, discriminatory treatment. American firms rely on these rules every day of the year.
It’s become commonplace to say the WTO’s accomplishments are long in the past, but this isn’t so. The WTO’s Trade Facilitation Agreement, which entered into force in early 2017, is a cost-cutting, competition-enhancing, anti-corruption agreement of the first order. Once fully implemented, it has the potential to increase global merchandise trade by up to $1 trillion annually.
In addition, a new WTO agreement entered into force in 2016 expanding U.S. firms’ access to other countries’ government procurement markets valued at $1.7 trillion; and another eliminated duties on $1.3 trillion of information technology goods the same year. These trade pacts are delivering for American workers and companies.
An Adjudicator of Disputes
In addition to serving as a forum for negotiations, the WTO also has a critical role in dispute settlement. The WTO’s Dispute Settlement Understanding outlines procedures for panels to rule on disputes brought by its member states, and it also establishes an Appellate Body in the event panel decisions are appealed.
The United States has been a major beneficiary of WTO dispute settlement, bringing and winning more cases than any other WTO member. In fact, the United States has won or favorably settled more than 90% of the completed WTO cases it has brought, which total more than 100 of the 350 disputes on which decisions have been issued.
However, the benefits of this system go much further. The fact that the WTO’s rules are enforceable under its dispute settlement system motivates governments to adhere to the commitments they have undertaken without resort to litigation.
Underscoring bipartisan political support in the United States for the principle of binding dispute settlement, House Democrats in 2019 pressed the Trump administration to prioritize dispute settlement in the United States-Mexico-Canada Agreement (USMCA) negotiations. Specifically, they urged removal of the NAFTA-era threat of “panel blocking,” thus allowing decisions to be binding and effective. House Ways and Means Chairman Richard Neal (D-MA) memorably insisted that, of his priorities, “enforcement, enforcement, enforcement is the most important of all.” This imperative surely applies at the WTO as well.
The benefits of WTO dispute settlement for the United States aren’t just theoretical. These wins include the following examples:
(1) Dispute with the EU over Tariffs on IT Products: In 2010, WTO dispute settlement proceedings upheld the U.S. claim that the EU violated its WTO tariff commitments by imposing duties as high as 14% on flat panel computer monitors, multifunction printers, and cable, satellite, and other set-top boxes. The EU had claimed it could charge duties on the products simply because they incorporated newer technologies or additional features.
The United States successfully argued that the EU was taxing innovation in a manner that could impair continued technological development and raise prices for millions of businesses and consumers. At the time, global exports of the covered products were estimated at more than $44 billion, so the EU’s elimination of its duties to comply with the WTO ruling was significant: It meant real market access, more sales, and direct benefits for American workers. Absent the WTO decision, it’s likely the EU would still be levying the duties today.
(2) Dispute with China over Barriers to U.S. Movies: In 2009, the WTO Appellate Body upheld panel decisions that Chinese film import restrictions were inconsistent with the country’s WTO obligations. China subsequently agreed to significantly increase market access for U.S. movies to comply with the decision.
At the time, Chinese box office revenue was approximately $2.1 billion annually, much of it coming from 3D, IMAX, and similar enhanced format movies which are a rapidly growing sector of the film industry. The WTO decision played a key role in bringing about China’s compliance with its obligations, and it’s difficult to see how the United States could have achieved this objective otherwise.
The U.S. record in WTO dispute settlement with China is especially strong: As the Peterson Institute for International Economics has reported, U.S. officials had challenged Chinese practices 23 times in the WTO as of 2019 — and won 20 times, with three cases pending.
(3) Dispute with Indonesia over Barriers to U.S. Agricultural Exports: In 2016, WTO dispute settlement proceedings upheld the U.S. claim that Indonesia’s restrictions and prohibitions on U.S. apples, grapes, potatoes, beef, poultry, and other agricultural products violate commitments the country has made as a WTO member. The WTO ruled in favor of the United States on 18 out of its 18 claims, which involved a complex array of trade barriers.
Because Indonesia is the fourth most populous country in the world, the long-term benefits to U.S. agricultural producers are potentially very large. U.S. exports of the affected products had reached $115 million even with the onerous barriers in place. As in the other cases cited above, the United States had no obvious way to press for the elimination of these barriers outside WTO dispute settlement.
Reform and the Appellate Body
Despite these and many other successes, the future of the WTO dispute settlement system — and particularly its Appellate Body — is in jeopardy. U.S. administrations over the past 20 years have raised concerns about “overreach” in Appellate Body decisions, arguing that some are not clearly supported in the WTO agreements and that the slow pace of its operations saps its utility.
There’s growing agreement in the United States and elsewhere that a number of these concerns have merit and call for reform; the question is, what is the appropriate remedy? The Trump administration’s answer was to block Appellate Body appointments to the point that, by December 2019, the retirement of term-limited Appellate Body members had left it without the quorum it needs to function. At no time did the Trump administration offer concrete proposals to resolve its complaints, to the frustration of other members.
As a result, U.S. companies have been unable to secure relief from discriminatory treatment abroad or to address instances in which a trading partner has otherwise violated its WTO obligations. While governments may continue to request panels to consider violations, either party can exercise its right to appeal a panel decision, which, with the Appellate Body inoperative, dispatches the dispute to perpetual limbo. Other governments have been developing workarounds to continue to use the system for their citizens, but the United States remains shut out of this crucial element of the WTO’s binding dispute settlement process entirely. What was once an important tool in the U.S. enforcement toolbox is unavailable, and no effective substitute has been identified.
The price of allowing this impasse to linger could be high. Executives with American companies fear that other countries’ compliance with the WTO agreements will decline over time if its dispute settlement system is no longer binding. They are concerned that new trade barriers and discriminatory treatment will become more common.
The time is ripe for the United States to lead efforts to overcome this impasse. Over the past several years more countries have come to recognize the need to address the concerns the United States has raised. The United States should lead reform efforts by engaging substantively with other WTO members to address its concerns and restore a binding dispute settlement system.
The Chamber has expressed support for efforts to translate the Walker Principles (articulated by New Zealand’s Ambassador to the WTO David Walker) into a form that can address the legitimate concerns that U.S. administrations have identified. The logical next step is for the United States to detail how it might seek to operationalize these reforms in a concrete way.
The stakes are high, but the door is open for reform of WTO dispute settlement and restoration of the Appellate Body. The U.S. business community stands ready to support this important undertaking.