When Hong Kong was returned to China by the end the of its lease to the United Kingdom in 1997, among the agreements made between the United Kingdom and China was a fifty-year guarantee of one country, two systems. After over one hundred years under British rule, today Hong Kong is uniquely part-Western and part-Chinese. It is no longer the same city it once was under Chinese emperors. This is apparent in a common viewpoint among Chinese today, who may find Hong Kongers ‘spoiled’. In dramatic difference from the city of Shenzhen, fewer than thirty minutes north, Hong Kong has truly become a dual-language populace. In Hong Kong, cab drivers speak English and street signs retain both Chinese and English spellings.
Is the world coming to an end? Hopefully not. But it could be the end of world trade as we have known it for the past two decades. During a course I took in the winter of 2018, my International Economics and Politics professor mentioned how the World Trade Organization (WTO) may face a severe crisis in the near future. At the time, the likelihood of such a crisis seemed low and distant. However, with the end of 2019 looming near, international trade is quickly heading into uncharted waters as the Appellate Body of the organization is facing extinction. The World Trade Organization (WTO) can be understood as the only global organization mediating nations by establishing the international rules of trade. At its core, the WTO is held up by the many multilateral agreements that are signed and negotiated by a majority of the world’s trading nations. The WTO is unique from other major international organizations because it yields effective enforcement through its dispute settlement mechanism. The dispute settlement mechanism, as the name suggests, is a system of solving disputes that may arise when one country or a group of countries believe that another country’s trade policies could be considered as a violation of WTO policies and principles. If the dispute cannot be settled through negotiations, an impartial panel of experts issue a ruling on the matter.
The Appellate Body essentially acts as a supreme court and hears appeals about rulings issued by panels. This translates into a strong enforcement mechanism because the ruling goes into effect unless all WTO members vote unanimously to block the ruling. The defendant must then end the offending policy or pay compensation to the complainant. If no agreement can be reached on compensation, the injured party is authorized to impose retaliatory tariffs. Thus, this system differentiates the WTO from other international organizations because it imposes real economic consequences for flouting rules.
As mentioned before, the Appellate Body may shut down at the end of this year. How did this happen? The answer is complicated. The immediate reason is that the United States vetoed the appointment of judges to such body. On December tenth of this year, two of the three remaining members will retire. Without them, the body will not be in quorum and will be forced to stop operations. The body typically consists of seven people but needs a minimum of three judges to hear cases and issue rulings. It is important to note that WTO panels will still be functional, but there will be no finality on issues since appeals to these decisions will be impossible.
Why has the United States blocked appointments of judges? They have a long-standing list of complaints and criticisms of the WTO. Most importantly, the United States believes the Appellate Body has strayed away from its original mandate of a body that simply clarified existing rules. Instead, in many cases the system has been accused of “judicial activism”—taking decisions that are not grounded in preexisting rules of the organization. The reason for this is that the original rules of the WTO have seen almost no revision since the organization was created twenty-four years ago. Negotiations on new rules have been slow. The last round of negotiations started in 2001 and ended in failure in 2015. Other than asserting that the body is overly deliberative, the United States also believes the dispute mechanism process simply takes too much time. The 2019 Annual Report presented by the body showed that the average trade dispute takes about three and a half years, in total, before it is settled.
How are other countries reacting to this? Canada and the European Union have agreed on a “shadow Appellate Body” that will operate similar to the current body. The United States expressed concern that other WTO members, including the European Union, are not as concerned about how the body has overstepped its jurisdiction. Although the Trump administration has been more assertive about the issue than other administrations, America’s grievances with the organization go back to President Obama’s term when his administration blocked the appointment of judges in 2016.
The possibility of resolution seems low when there is disagreement among members on whether a problem exists or not with the dispute settlement mechanism itself. Furthermore, the United States has not signaled that it would be willing to lead reforms that might save the Appellate Body. Any leverage the White House might have will be substantially lowered once the body ceases to function in December. In fact, quite the opposite direction, as they are going from leading reform to threatening to block the passing of the international organization’s budget.
What will this mean for world trade? Some have argued that dispute settlements should proceed as usual, only without America’s involvement, but that comes at the risk of ostracizing the system’s most frequent user. Disputes will still be decided by the panels. Without an appeals system however, the decisions could be used by countries to pressure trade rivals. Without a functional appeals system, international trade disputes could evolve into tit-for-tat tariff wars. Countries may feel emboldened to flout trade laws.
There is no question that the WTO needs structural reform, but the United States will not lead this reform unless other countries concede that the international organization has overstepped its jurisdiction. This is yet another example of the country’s decreasing appreciation of international organizations. Earlier this year, the United Nations declared a cash crisis, partly due to lack of funding from its largest contributor, the United States. The question remains whether the economic hegemon sees these global regimes as worth saving. Do they see the WTO as vital to strengthening the global trading system and thus the American economy? The verdict is out. Meanwhile, what is certain is that global trade is entering a period of unprecedented uncertainties.