Europe is worried that U.S. President Donald Trump’s tariffs on steel and aluminumare just the beginning.
The EU’s bigger fear is that Trump’s ultimate goal is to kill off the World Trade Organization and rip up the current rule book that underpins global trade networks.
European trade officials argue that their American counterparts are sick of WTO judgments they think are too lenient toward China, and are now ready to take a sledgehammer to the whole system.
America is well advanced in its plans to throttle the WTO’s appellate court, where countries resolve disputes over everything from subsidies to anti-dumping tariffs. Washington’s strategy is to block the appointment of judges, which should bring the system to a halt next year.
To the Europeans, Trump is making a cynical calculation that the U.S. is the world’s No.1 economy and can outmuscle any opponent in a trade dispute, without the need for international arbitration. In a world that returns to the law of the jungle, Trump reckons he wins.
Both Brussels and the WTO are moving into crisis mode over this attack on the appellate court. The EU reckons that America’s might-is-right approach will sap confidence in global trade and undermine economic growth.
Until recently, the prevailing theory in Brussels was that the U.S. was simply trying to exert leverage and was holding the system “hostage” over other concerns. Advocates of that view say Washington has not disengaged from the WTO in areas where it still sees that the body could help. On March 14, for example, the U.S. launched a WTO challenge against India over export subsidies.
In recent weeks, however, the mood about Trump’s ultimate motive has shifted dramatically. Even the normally highly diplomatic European Commissioner for Trade Cecilia Malmström reckons that Trump is planning to take a wrecking ball to the system, and that it’s time for the EU and its allies to draw up a “Plan B.”
In a closed-door meeting with trade ministers in Sofia at the end of last month, Malmström issued a stark warning that there was no “common solution” to America’s block on the appointment of WTO judges, because Trump’s policy is not to take the appellate court hostage, but to destroy it.
While ministers were discussing ways to convince the United States to lift the block on the judges, “Malmström was very, very pessimistic about the appellate body and said that Trump wants it to fail,” said one official in the room. A second official confirmed Malmström’s remarks.
French Trade Secretary Jean-Baptiste Lemoyne told POLITICO in an interview this month that Trump has a “policy which aims to gut the dispute settlement system of the World Trade Organization.”
No judges left on the bench
There’s now a race against the clock to save the court. The appellate court is supposed to have seven judges, but will be down to three this year — the legal minimum required for it to work.
According to Arancha González, head of the International Trade Centre, a joint U.N. and WTO agency: “There is a risk that some will underestimate the value of a dispute system with an independent appeal function, and only value it when it has gone. This would be taking a 20 years step backward in international economic governance.”
By the end of 2019, the court will be down to one judge and be unable to work.
The appellate body is the most powerful instrument in the WTO, because it has the authority to pass final rulings on trade fights between countries. Former WTO Director General Pascal Lamy likes to call the appellate body the “jewel in the crown” of the WTO, because of the key role the body has played in preventing the emergence of major trade wars since its creation.
Roberto Azevêdo, the current director general of the WTO, told POLITICO a response is needed quickly. “The dispute settlement system is a fundamental pillar of the WTO. Without an impartial and effective path for resolving disputes you would very quickly see members take matters into their own hands leading to a dangerous cycle of retaliation and counter-retaliation. The current situation is of grave concern. We need to find a solution quickly,” he said.
Asked about Washington’s position, the Office of the United States Trade Representative declined to respond directly to the EU accusation that the ultimate goal was to destroy the WTO. Instead, the USTR referred to page 28 of its annual trade report, which states that “the WTO is undermining our country’s ability to act in its national interest … First among those concerns is that the WTO dispute settlement system has appropriated to itself powers that the WTO Members never intended to give it.”
On March 10, the U.S. agreed a joint position with Japan and the EU that it would seek to enforce “existing rules by working jointly on current and new disputes in the WTO.” While some EU diplomats took heart from that, Malmström seemed far from convinced. Only two days later, she expressed concern that, on the appellate court, “the U.S. has not changed their mind.”
Time for Plan B
Not all the trade ministers in Sofia shared Malmström’s bleak assessment of American motives, three people present said.
Countries including Italy and Spain said they want to keep “an open door” for the Americans. They cautioned that the EU should avoid confronting the U.S. and should instead try to work with it. “There is no appetite for any initiative that would alienate the United States,” one diplomat said.
Malmström, however, said the EU would need to “eventually look for a Plan B,” according to the two officials, because Plan A risks leaving the EU without a proper international dispute settlement system.
Another senior trade diplomat said that behind the scenes, the EU and other countries are already acting. “Faced with the prospect of WTO dispute settlement crumbling, a large majority of members are already looking into a Plan B, some sort of ‘whatever it takes’ not to end up there.”
France last week emerged as a strong supporter of Malmström. Trade Secretary Lemoyne said he would push for the WTO to continue its work as a judge despite Trump’s opposition.
“It is necessary to think about all the forms of Plan B, which make it possible to maintain … a mechanism for those states that are in favor of having it. Because there is still a very strong majority of WTO countries that wish to continue to have this type of dispute settlement,” he said.
“So I think that now we must actually start to be creative and therefore France will also … put proposals on the table to restore efficiency to the WTO both in its function as a developer of standards and in its function as a judge.”