WTO Ruling Underscores Impasse: The Plot Thickens

Watching China’s case against President Trump’s unilateral tariffs winding through the World Trade Organization dispute process was like a movie with a completely predictable plot. The ruling, which found that tariffs on $350 billion in Chinese goods violated global trade rules, was hardly unexpected.

Prologue: The Obama administration does not reappoint an American WTO judge and then blocks the reappointment of a Korean judge. At least three judges are needed to hear an appeal, so the decisions effectively emasculate the WTO’s appellate body and foreshadow trouble.

Act I: Enter President Trump, the leading “tariff man.” He campaigned against China, and his U.S. Trade Representative (USTR) delivered a damning report that was an open invitation for him to use his favorite tool of tariffs.

Act II: U.S. tariffs. Chinese retaliatory tariffs. More U.S. tariffs, eventually covering more than 60 percent of the customs value of U.S. imports from China.

Act III: China takes the case to the WTO. The WTO rules against the United States.

Now, we wait for the sequel: “Trump Strikes Back” or “Return of the Biden.”

Meanwhile, China reportedly “hopes” the United States will respect the WTO ruling and uphold the multilateral trading system. The U.S. Trade Representative promptly released a statement entitled “WTO Report on U.S. Action Against China Shows Necessity for Reform.”

The United States can appeal the decision within the next 60 days. But the Trump administration has yet to approve new judges and the WTO appellate body is unable to hear new cases. So while the WTO action might feel formal, with no strong legal arm and members going rogue, little is likely to happen from Geneva.

What is likely, however, is that the China tariffs remain in place for the foreseeable future — at least until a new presidential administration is seated. But even Mr. Biden has stated he is not in a hurry to remove the tariffs without some major changes in the WTO.

The WTO ruling indicates the trade body does not dispute the U.S. allegation of China’s illicit trade practices. They simply have no remedy for such conduct. It is hard not to conclude that major change is needed if the United States, one of the trade body’s founding members, is to remain an active participant.  

A Trump second term is likely to continue the tariffs and invigorate the push for WTO reform, if not withdraw the United States from the trade body altogether. U.S. Trade Representative Robert Lighthizer said that the WTO ruling underscores the Trump administration’s position that the WTO is “completely inadequate” to address China’s technology practices: “Although the panel did not dispute the extensive evidence submitted by the United States of intellectual property theft by China, its decision shows that the WTO provides no remedy for such misconduct.”

The WTO ruling underlines some deeper issues that need to be addressed.

The United States has called for systemic reform of the WTO, and Washington is not alone in its attempts to respond to an encroaching China that appears to be undermining the liberal order set forth decades ago. The European Union is addressing state owned enterprises, forced technology transfer and subsidies in its investment dialogue with China. Australia is flexing its muscles on China issues, such as weeding out foreign state-owned enterprise influences and maintaining free speech and journalistic freedom.

Needed WTO reforms encompass larger issues on the role of the state, state-owned enterprises, subsidies, and sovereigns’ rights to respond to what they deem as unfair. But it doesn’t really matter what you think “unfair” is, because unless it is in the rule book, the WTO is unlikely to touch it. WTO members did not revise the rule book when China acceded in 2001—a mistake in the eyes of the Trump administration, which was made clear in its 2018 annual report to Congress on China’s WTO compliance.

To the extent the appellate body has ruled on such issues in the past, it has deemed U.S. actions on foreign subsidies inappropriate, and the United States, in turn, has deemed the body’s rulings as judicial activism. Hence the Obama move to disable the appellate body.

Members of the WTO hold fundamentally different views on how to define illicit trade practices. Regardless of who wins the presidential election this fall, these tensions are not going away. After going it alone on trade for four years, Trump is likely to continue on this path. A Biden team is unlikely to lift the tariffs anytime soon but may be more willing to work with international partners to seek trade reforms. The irony is that if Biden wins he would enter office with leverage created by Trump: The section 232 tariffs on steel and aluminum. But that leverage could be put to good use. Our closest allies like Japan and the EU may be more motivated to work with us on the heavy lifting of trade reform if it means getting out from under the far reaching tariffs and regaining some ‘normalcy’.

Trade policy will continue to get more complicated, at least until the next administration gets settled in and plots its course. Stay tuned.