TWO SUCCESSIVE BLOWS TO WTO – WHERE DOES THE US-CHINA DEAL AND THE APPELATE BODY PARALYSIS LEAVE THE EU?

The WTO suffered two successive blows: the Appellate Body is paralyzed and the US-China trade deal is a major departure from trade multilateral rules.

The impact might not be immediately felt, but it is potentially huge.

The Appellate Body is a WTO Supreme Court of the sorts that has the final word on adjudicating trade disputes. Without its rulings a party cannot request and eventually apply trade sanctions. The paralysis as from December,10 of the Appellate Body comes after a determined blockage by the US to the renewal of its Members.

What does that mean? A country can commit a violation of trade rules without facing the rule of international law. Blocking some imports, applying illegal subsidies, and other trade restrictive measures, can go on unchecked. The rule of law in international trade is no longer upheld by the highest trade court.

As the EU is the largest trading block in the world, it stands out to be the most potentially affected.

The Commission has taken the matter seriously. Other than attempting to unblock the US opposition, unfortunately to no avail so far, it has worked to create alternative mechanisms, like binding arbitration to settle disputes. But that needs the consent of both parties in a dispute.

The Commission is also proposing to get the power to sanction countries that are found by a trade panel in violation of WTO rules, plugging the whole created by the paralysis of the Appellate Body. That is a welcome move that strengthens the EU. However it will not be effective against the US, China or other emerging large economies, who will hardly accept unilateral trade sanctions from the EU without retaliating.

The other big blow to the WTO comes from the US-China trade deal. This deal foresees that China increases imports from the US in 2020 and 2021, against the reduction and suspension of some of the tariffs raised in the trade war.

On agriculture it foresees that China will increase imports in 2020 by 12.5 bn $ and by 19.5 bn $ in 2021, bringing total US agriculture imports to 40 to 50 bn $ in 2021. To put it in context, in 2017, the last year before the trade war started, the US exported 24 bn $ to China. So the deal foresees almost doubling that amount! Moreover it will have dollar amount allocations to specific groups of products. If China does not comply, the US might snap-back the additional tariffs, according to a specific dispute settlement arrangement.

The US-China deal also reduces SPS barriers to US exports, including accepting hormone treated beef. It streamlines the approval of GMOs in China to a maximum 2 year period. On GIs it allows the US to export products considered generic, and the US to oppose registration of GIs in China.

There are two serious implications from this deal: first, this is managed trade, not free trade under multilateral WTO rules; and second, this displaces other countries from the large Chinese market.

Some question the deal will ever be implemented, or that it will fall short on its promises. The deal might fall apart as a result of renewed US-China tensions, but the fact is that it is structured and equipped to stand. It goes well beyond a political declaration, it has targets and a dispute settlement mechanism that can be quickly activated. So we are well advised to take it seriously.

Although both the US and China claim that the deal respects WTO rules, it can only work through directed Chinese State trade purchases, which will displace normal free trade flows. Both the US have the capacity to double its agricultural exports to China, and China to accommodate those imports. What it takes is for China through its State controlled economy to direct more imports from the US to the detriment of the others – e.g. the EU, Brazil, Argentina.

When such large and powerful countries like the US and China flout multilateral trade rules and engage on managed trade, the WTO is seriously at risk.

For the EU, other than this systemic risk, comes the hard fact that its agri-food exports will to a large extent be displaced from the Chinese market to give way to US products. In 2018 we exported 10 bn euros worth of agri-food products to China, and trade was bound to be increased with the pork crisis. Now EU exports will come second after the US.