Background

U.S. Trade Representative Robert Lighthizer recently laid out the main elements the Trump administration wants to see in a reform of the World Trade Organization. It may reasonably be expected that the U.S. would actively push for these reforms if President Trump is re-elected. However, a successful realization of these changes could allow a resumption of the WTO dispute settlement process, including cases that have been brought against the Section 301, Section 232, and other trade measures the U.S. has taken in recent years.

Lighthizer’s primary complaint against the WTO has long been its dispute settlement system, which he said in an op-ed in The Wall Street Journal “rewards litigation over negotiation and has attempted to create a jurisprudence often divorced from the text of the rules agreed to by the WTO’s member states.” He criticized the Appellate Body in particular, arguing that it has veered away from its limited original mandate of “quickly correcting errors of law, not fact” and instead has come to see itself as “a high court empowered to create a new common law of free trade.”

Lighthizer claimed that while the U.S. has often won WTO cases against it at the dispute settlement panel stage, “the Appellate Body has consistently reversed those decisions by interpreting the WTO rules in ways that diminish rights and create new obligations not found in the text.”  This has allowed major trade competitors like China to “use the Appellate Body as both a sword and a shield,” he said, “successfully challenging U.S. trade-remedy laws that prevent our market from being flooded with dumped or subsidized products, while skillfully exploiting the system to escape accountability for their nonmarket behavior.”

As a result, Lighthizer said the WTO’s current two-step dispute settlement system (incorporating dispute settlement panels and the Appellate Body) should be replaced with a single-stage process in which ad hoc tribunals are impaneled to resolve particular disputes in an expeditious manner. The rulings of these one-off panels would only apply to the parties in the dispute, he said, and “not become part of an ever-evolving body of free-trade jurisprudence.” In addition, rather than give the losing party an automatic appeal, Lighthizer proposed a mechanism that would allow the WTO membership to “set aside erroneous panel opinions in exceptional cases.”

Lighthizer suggested that these changes could help minimize WTO members’ use of litigation and thus reinvigorate their interest in negotiating. This could not only advance current talks on e-commerce and fisheries but also allow WTO members to address “the profound distortions to the world economy that result from China’s nonmarket practices, such as excess capacity, forced technology transfer, subsidies and the activities of state-controlled enterprises.” A recent report from the Congressional Research Service noted that concerns over these practices and the WTO’s inability to tackle them have led the Trump administration to increase its use of unilateral mechanisms such as antidumping, countervailing, Section 232, and Section 301 tariffs.

The Trump administration has also consistently called the WTO unfair to U.S. interests, and Lighthizer’s op-ed highlighted as examples “wildly uneven tariffs” among WTO members, “rules that apply to some countries but not others,” and the erosion of “the most-favored-nation principle requiring WTO members to treat each other equally.” He noted that the General Agreement on Tariffs and Trade that preceded the WTO “was based fundamentally on the principle of nondiscrimination” but allowed developing countries to maintain “much higher tariffs” and make use of “special and differential treatment, which absolved them of certain trade obligations altogether,” in the expectation that “these countries would agree to reduce tariffs and to adhere fully to the rules as they developed.”

However, Lighthizer said, this has largely not happened because the pattern of major trade-liberalizing negotiating rounds among WTO members ended in 1994. Not only did this erode the MFN norm, he said, but it also spawned “the proliferation of bilateral free-trade agreements that discriminate in favor of preferred trading partners.” The CRS report noted that the number of such agreements has increased seven-fold since 1990, with around 300 agreements notified to the WTO and in force. FTAs have often provided more negotiating flexibility for countries to advance new trade liberalization and rulemaking that builds on WTO agreements, the report stated, but they vary widely in terms of scope and depth.

Lighthizer therefore called for WTO members “to end the free-trade-agreement land grab” and asserted that “except for agreements intended to foster regional integration among contiguous states—like those governing trade within the EU, or the U.S.-Mexico-Canada Agreement—WTO members should be required to extend genuine, unconditional most-favored-nation treatment to one another.”

This comment has puzzled several observers considering that the U.S. already has 14 mostly bilateral FTAs and is negotiating one-to-one deals with Japan, Kenya, Brazil, and the United Kingdom. President Trump has frequently expressed his preference for bilateral agreements as a way to maximize the leverage afforded by the size of the U.S. economy, and Lighthizer himself said recently that the U.S. “should have a multilateral system or a bunch of bilateral systems.”

Frank Lavin, a former international trade official in the U.S. government, pointed out a number of drawbacks associated with the op-ed’s proposed approach in a recent Forbes article but said the most significant is that “it freezes the U.S. out of trade improvements” since it already has FTAs with its neighbors. “Many countries around the world are hungry for better trade relations with the U.S.,” Lavin wrote. “It is a nice victory for China if the U.S. closes the door on alternatives.”

Finally, Lighthizer encouraged WTO members to agree on baseline tariff rates that apply to all with minimal exceptions. He said a starting point would be “benchmark rates based on the average tariffs in industrialized countries, with limited deviations for each member to address its own political sensitivities.” An article from the Peterson Institute for International Economics opined that this position essentially gives U.S. trading partners “a binary choice: cut your tariffs to the average U.S. level, or we will raise our tariffs to your level.”

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