US and China Unwanted in WTO

'Only if we speak with one voice will we be able to assert ourselves in a harsh geopolitical environment,' said Chancellor Merz at the conclusion of the European Council.

At the press conference following the European Council in Brussels, both Chancellor Merz and EU Commission head von der Leyen expressed support for not only a revamp of the World Trade Organization (WTO) — they simply want a complete restart with a new organization, without the USA and most likely also without China.

The EU must act as one

Chancellor Merz mentioned three personal takeaways from the 16-hour European Council meeting. The monumental increase in defense spending, where Germany leads the way, he says. Second, standardization and scale-up of defense production. And third, improvement of the competitivity of EU, including removal of trade barriers and excess bureaucracy.

Merz at the press conference. Photo: Bundesregierung/Marvin Ibo Güngör

On the competitiveness in particular, Merz said:

Finally, we discussed the competitiveness of the European Union in great detail. And that was the topic that occupied us until late this evening. We examined various aspects. Some aspects were trade relations and also trade agreements. I am grateful to note that we agree in principle. In any case, none of the heads of state or government raised any fundamental objections, which means that we agree in principle that the Mercosur agreement must be adopted as quickly as possible. There are still a few minor issues here and there, but they are really only minor issues. In his conclusions, the Council President just pointed out again that in the agricultural sector, we will have imports in the low single-digit percentage range, which will not seriously endanger the agricultural market in any single country in the European Union. We therefore want to see that we reach a conclusion as quickly as possible. Because the conclusion of the Mercosur agreement will, of course, also be noticed around the world—that is, how quickly the Europeans are actually moving forward with further agreements, given the global situation. We are also discussing further agreements, for example, in the entire Indo-Pacific region. A major free trade agreement with India is on the table. How confident are we, how quickly can we negotiate with the Europeans? If Canada takes ten years and Mercosur takes 20 years, that is no proof that we understand what is necessary now and that we must reach such decisions quickly. We have discussed the issue of tariffs and America in detail. We have encouraged and motivated the Commission President to reach a swift agreement, a swift understanding with the Americans, in the less than two weeks remaining. However, if there is no agreement or agreement with America on tariffs, then the European Union is ready and able to take appropriate measures of its own. We have also encouraged the Commission President to do so.

New WTO

In this context, another point that personally surprised me. The Commission President raised the issue on her own initiative – I believe I'm allowed to say this because it will also be included in the corresponding communiqué – whether we as Europe should not establish a new type of trade organization that gradually replaces what we no longer have today with the WTO. You all know that the WTO no longer works. The WTO's panels have not been filled for a long time. This began in the Trump I administration, the Biden administration continued it, and the Trump II administration didn't do it either. I have discussed precisely this issue with Keir Starmer and Emmanuel Macron in recent days. Can't we gradually establish something with our trading partners around the world that institutionally replaces what we originally envisioned with the WTO? That is, that we develop dispute settlement mechanisms through an institution like the one the WTO was originally supposed to be?

As the Chancellor correctly states, von der Leyen has mentioned this idea of replacing the WTO earlier, latest at her speech in Aarhus on 3 July for the inauguration of the Danish presidency of the EU Council. She mentioned not only reforming the (stalled) WTO reform process but also ‘structutal cooperation’ with other countries on rules-based trade:

We are moving forward with our partners with Mexico, Mercosur, we aim for an agreement with India by the end of the year. In today's economic landscape, Europe carries an important responsibility. It is to champion a free, open, and fair trade system. Therefore, we fully support the WTO reform progress. And in parallel, we pursue our structural cooperation with CPTPP countries to tap into the vast potential of rules-based-trade.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that von der Leyen mentions is an 11-country agreement originally signed in Santiago de Chile in 2018. The agreement aims to reduce trade barriers and promote economic integration among its members that currently include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The United Kingdom has also joined, becoming the first European country in the bloc.

Merz and von der Leyen are referring to the near-total breakdown of the WTO's dispute resolution mechanism. WTO was formed in 1995 with the active participation of USA, as a replacement for the temporary GATT agreements. From 1948 to 1994, the GATT provided the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce. It seemed well-established but throughout those 47 years, it was a provisional agreement and organization.

WTO was an expansion, including also services in addition to goods covered by GATT. The main point of criticism against WTO was that USA has to give up some sovereignty when accepting rulings of the WTO. Like with GATT, USA found it difficult to influence the organization to a sufficient degree, especially with an increasing number of member states and that those members became more confident and demanding in having a say in resolution of trade disputes.

China joined WTO in 2001 after a 15-year negotiation process with first GATT then WTO. This seems to have been a turning point for the US government, since after about a decade with China, US started to block appointment of replacement judges for the WTO panels, especially Asian judges. Steve Charnovitz of George Washington University Law School writes:

The Obama Administration has not yet apologized for its unilateral action in May 2016 to unseat Appellate Body Member Seung Wha Chang, a distinguished jurist from South Korea. Although this hostile act by the United States has been roundly criticized by other governments within the World Trade Organization (WTO) and by many outside commentators, the Obama Administration refused to back down from its action to threaten WTO judges with non-reappointment if their judicial opinions rankle the U.S. Trade Representative (USTR).

Although the Obama Administration had refused in 2011 to go along with the widely-supported reappointment of Appellate Body Member Jennifer Hillman from the United States, reportedly on the grounds that she had not upheld U.S. protectionist measures being challenged in WTO dispute settlement, this most recent Obama Administration action to blackball another country's judge is a more serious assault on judicial independence in the WTO. Starting next week (26 September 2016), the WTO Dispute Settlement Body (DSB) is scheduled begin a focused discussion on improving the appointment process for Appellate Body Members. Below I offer a proposal to clarify the Dispute Settlement Understanding (DSU) regarding reappointment.

This blockade of new/replacement panel judges is a de facto cancelling of WTO authority and has continued under every US administration after Obama, regardless of party affiliation, as successive governments have opposed WTO rulings that they argue undermine US national interests.

As a result, trade disputes can no longer be conclusively resolved once a party appeals. Currently, unresolved cases include disputes between the EU and Indonesia over nickel ore exports, rulings on subsidies for aircraft manufacturers Boeing and Airbus, and anti-dumping cases against China.

Continue without the US

But can Europe realistically create a new WTO without US involvement? And how effective would an alliance with like-minded global partners be, especially in the Asia-Pacific? In an interview with the German public service channel DW, Jürgen Matthes, an international trade policy expert at the German Economic Institute (IW), expressed support for the initiative:

A formal EU application to join the CPTPP would be a strategically important move in several respects. It would send a clear signal to the US that its protectionism is isolating it, while the rest of the world continues to liberalize trade.

It would cover nearly all continents, a remarkably large trans-regional trade agreement with the EU as the largest bloc. And maybe some African countries could be brought on board as well.

Such a club, however, would initially exclude China, which Matthes argues is not known for playing by fair competition rules.

The goal is to form a strategic trade alliance that addresses today's pressing issues in global trade — not only US protectionism, but also the massive market distortions caused by China's subsidies, which current WTO rules don't effectively address.

Workaround

Within the existing WTO, a likely ‘coalition of the willing’ has already created a workaround to the WTO's stalled appeals process called the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). In practice, MPIA provides an alternative dispute resolution system that functions without US participation. According to the EU Commission, 57 countries, representing 57.6% of global trade, have joined the MPIA, including the UK and all EU member states.

This is what von der Leyen described in the statement above as ‘structured cooperation’ with CPTPP members as a potential starting point for rebuilding or replacing WTO.