By Marina Carneiro de Castro

1. Introduction

Indian Ambassador Ujal Bhatia, one of the three last remaining members of the World Trade Organization (WTO) Appellate Body (AB), stated in May 2019 during the launch of their annual report for 2018 that the crisis of the AB is the crisis of trade multilateralism itself.[1] This affirmation remains central to what will be analyzed in this paper, as 2023 marked the U.S.’ sixth year of blocking new appointments of AB members for the WTO dispute settlement system.

This blockage and its effects are strongly linked with the phenomenon of international order fragmentation. How is it that one nation, alone, succeeds in making a global trade organization’s appellate body disappear? Years later, how can that same nation dare to take advantage of its own blockage by appealing into the void of its own creation as a strategy to not comply with the Dispute Settlement Body’s (DSB) report considered harmful to its own interests?[2] These questions will be developed further, followed by recommendations to mitigate this crisis.

2. WTO and Multilateralism 

2.1. What does the WTO stand for in the context of global economics?

The WTO’s predecessor was the General Agreement on Tariffs and Trade (GATT). It was created against the post-World War II backdrop as an attempt to make the world trade system multilateral and to optimize welfare gains that could be obtained from trade liberalization. Before the creation of the GATT, even though there were already some movements toward a liberal trade system such as Most Favored Nation (MFN) clauses in specific treaties, international trade was conducted mostly through bilateral arrangements. The Most Favored Nation clause establishes that if a country agrees with another country on a tariff lower than the one it practices at the time of the agreement, the new lower tariff will apply to all other nations with whom the country trades this specific product. This meant that products would have different tariffs for different countries and that trade disputes could only be resolved, if at all, by negotiations between countries, with no dispute settlement structure in place.

The GATT’s creation was a product of U.S. power that aimed for a multilateral liberal postwar world, with the exception of liberalization on farm products—this was made noticeably clear by the American government during negotiations for the GATT’s institution.[3] The fundamentals of a multilateral trade system revolved around the MFN principle of non-discrimination, reciprocity, transparency, and, more practically, the reduction of economic barriers and the facilitation of trade in products and capital between nations.

An area of innovation pioneered in 1995 by the WTO was a dispute settlement structure paired with a two-stage decision mechanism that allows the losing party to contest injustice, seeing their initial decision reanalyzed and reviewed by an independent appeal body. Even though the GATT also had a dispute settlement mechanism, it was not exactly similar since the losing parties had the possibility of blocking adverse panel reports, and it worked more as a sort of expert report auxiliary in negotiations.[4] Evidently, a system conceived in these terms leaves dispute settlement solutions to be guided by powerful and economically advantaged countries’ interests rather than established international legal grounds.

2.2. The WTO Appellate Body Crisis

Since 2016, the United States has refused to appoint new Appellate Body members, rejecting over a dozen proposals for processes that would reform the filling of vacant spots and selections. In December 2019, the terms of two of the three remaining AB members came to an end, making the AB non-functional, since there is a requirement of at least three members for each appeal.[5]

However, to fully understand the complexity of the issue, many factors must be taken into account: firstly, the U.S.’ announced reasons for initiating and maintaining the blockage; secondly, the actual geopolitical and economic reasons behind the blockage; and lastly, the reasons why the United States has the power and capacity to maintain this blockage for years across three different presidential administrations with no effective solutions from other countries.

The reasons presented by the United States for this blockage are noted in the Report on the Appellate Body of the Office of the United States Trade Representative (USTR).[6] This 174-page document expresses the nation’s discontent with the DSB. The main complaints are: the non-respect of deadlines, especially the ninety-day limit for issuing a report; the overreach of the decisions in which the body overrules beyond its authority; the misinterpretation of WTO agreements; and the USTR’s erroneous and self-asserted capability of creating binding precedents.

These publicly released reasons do not fully translate to the United States’ short-term interest in seeing an inoperative AB. The Trump administration, besides leading the blockade of the AB, also led a trade war against China and other countries, including long-standing economic and military partners. Since 2018, the United States has used economic and political reasons to elevate its tariffs on imports.

The primary grounds for Trump deciding to increase tariffs were claims that these imports presented a national security threat, caused injury to American industry through unfair trade practices, or served as a bargaining instrument to affect Mexican immigration. The main products concerned were solar panels and washing machines, which the United States believed were hurting American industry, China’s forced transfer of technology and intellectual property from the United States, and, finally, steel and aluminum, which were the main trade war issue in which the Trump administration announced a national security threat.

Considering China’s non-market economy status, its consistent surplus in exports for years, and government subsidies that have made it the second-largest economy in the world, hypothetically allowing it to retaliate against the United States with tariffs, there was a natural escalation to this trade war.

There are three main concerns of the United States regarding China’s place and practices in the international economy: (i) China has had a chronically large trade surplus that hurt job creation in the United States; (ii) China has been using illegal and unfair trade methods to obtain forced transfer of technology from the United States at a discount price; and (iii) a concern that China “is out to get” the United States, threatening its national security and its international economic, political, and military standing.[7]

It was especially while concerned about unfair trade practices for technology and intellectual property that the USTR self-initiated an investigation against China in 2017, under the Trade Act of 1974 (Section 301). The 215-page report was released in 2018, affirming that China was indeed conducting unfair trade practices regarding technology, innovation transfer, and intellectual property.[8] Following this report, in April 2018, Trump released a list containing $50 billion worth of 1,333 Chinese products under consideration for 25 percent tariffs.

This initiated a more than year-long trade war in which Trump and China kept increasing their respective tariffs on each other, marked by the announcement of an extraordinary $250 billion in tariffs from the United States and $60 billion from China. In October 2019, the United States and China reached an accord where China agreed to buy an additional $200 billion worth of U.S. exports. At that point, COVID-19 significantly impacted the international economy, and China was unable to fulfill its initial commitments in the agreement. The Biden administration had announced that it would enforce the execution of this agreement, but in March 2022, it also excluded tariffs on 352 products that were reinstated by the Trump administration.[9]

Considering not only the reasons provided by the United States for blocking the appointment of Appellate Body members but also the economic policy it pursued under the Trump administration, we may conclude that it is not in the United States’ best interest to have a fully-functioning dispute settlement structure in the WTO. This is evident from its pattern of disregarding fundamental free trade principles enforced by the DSB and the AB.

Lastly, one might wonder how the United States can singularly continue for years to block an international organization with broad adoption and different presidential mandates, without any effective solution coming from other countries. Pauwelyn predicted in 2019 the possibility that the rest of the WTO members would decide to use Article 25 appeal arbitration, which would allow for an interim appeal arbitration body to review the Dispute Settlement Report and temporarily play the function of the AB. This option was effectively used when the European Union created the Multi-Party Interim Appeal Arbitration Arrangement.[10]

Although this option proved effective for dispute settlement between countries that agreed to this temporary solution (53 out of 164 countries), the fact is that the United States has been a main agent, either as claimant or defendant, in 47 percent of WTO disputes up until 2019, when the AB effectively stopped functioning (21 percent of the time as claimant and 26 percent as defendant). Moreover, concerning the AB, up until the same year, the United States was a main party in 68 percent of the appeals, and in 42 percent of these, it was the original defendant.[11] It is difficult to imagine another WTO member besides the United States finding a solution, especially considering it still plays a major role in most contemporary WTO disputes.

2.3. Does the AB Crisis translate itself into a multilateral trade crisis?

From the discussion up to this point, it is safe to affirm that the AB crisis goes beyond the simple discontent with the technical, philosophical, and judiciary issues initially argued by the United States. As well appointed by Goldstein: 

“GATT’s creation stemmed from American power (…) Yet, American power did not ensure that the document constructed would adhere to the functional needs of the United States. Although negotiators might have thought that the agreement served the long-term interests of the American economy, neither the original GATT document nor the stickiness of these rules over time has proved optimal from the American perspective”.[12]

Years later, what we see is the same American reaction to when a multilateral, liberal trade system ceases to exist due to conflicting interests. The trade war led by Trump, the refusal to appoint new AB members, the imposition of different tariffs on different countries, and the bargaining to obtain economic results such as the reduction of imports into the country clash against the very core idea of a multilateral world trade system that was conceived to reduce as many economic barriers as possible and facilitate more capital circulation.

3. Trade War Evolution: United States Appeal Into the Void

3.1. Trump’s vs. Biden’s administration

The refusal to appoint Appellate Body members did not start and did not finish with the Trump administration, even though it notably escalated the trade war against China. The first President to block appointments to the AB was Obama, but it was only in 2019 under Trump that this action started to show its consequences, as the mandates of the three remaining members ended at the end of that year, rendering the appeal stage of the DSB inoperative.

It is important to analyze what changed and what remained the same with Biden’s election. It is already evident that he did not, nor intended to, restore the AB member appointments by the United States. However, some new actions have been taken since the new mandate. The new U.S. Trade Representative, Katherine Tai, has been very vocal about the need to reform the WTO, especially its DSB. She has gone to Geneva and has led speeches, interviews, and talks about America’s commitment to reforming the international organization.

Nonetheless, when the United States decides to appeal into the void of its own creation, it makes it hard to conceive a true engagement with the reform of the system for judiciary and philosophical reasons, rather than the short-term utility of just blocking an appeal body that has been judging American economic practices illegal for years now.

Both Democratic and Republican parties in the United States use the WTO as an instrument for the country’s international economic interests. Therefore, it is not surprising that Biden would continue to block the AB. The innovation is that the new president is not as straightforward as Trump about the blocking and the U.S.’ unwillingness to see a fully functioning AB:

“Hypocritically, the Biden administration has pretended for nearly two years that, unlike the Trump administration, it wishes to restore the full functioning of the WTO dispute settlement system. U.S. Trade Representative Katherine Tai has whispered sweet trade nothings into the ears of WTO members and WTO supporter in Geneva and elsewhere, and, as people sometimes tend to do, they have heard what they wanted to hear;”.[13]

It is clear from both the Trump and Biden administrations that the desire is to contain China strategically by politicizing the WTO and dismantling the rules-based multilateral trade system. In other words, the idea that it would be a Trump vs. Biden administrative posturing is misleading, as what is observed de facto is just a continuation of Trump’s endeavors by Biden.

3.2. United States - Certain Measures on Steel and Aluminum Products (DS544, DS552, DS556, and DS564)

Regarding the above-mentioned tariff augmentations on steel and aluminum, China, Norway, Switzerland, and Turkey moved actions against the United States in the WTO DSB. In January 2023, the much-awaited report from the DSB was published. Unsurprisingly, the DSB concluded that the tariffs on steel and aluminum are inconsistent with the multilateral liberal trade system.

Even though the report affirms that American trade measures go against WTO rules, the main argument by the United States is simpler: we know that these measures are against the rules, but we only did it because they are a national security threat for us, and that is why it is also illegal for other countries to retaliate against us.[14]

The WTO does allow exceptions in cases of national security threats under Article XXI. However, it also specifies the categories of what could be considered a national security measure. The DSB questioned the United States about the national security urgency that led to the tariff increases, to which the United States responded that once something is stated to be a national security measure, the WTO must believe the statement, ask no more questions, and accept the exceptions to WTO rules.

The DSB ruled against this position, stating that the tariffs were not implemented during a specific wartime or international emergency that could clearly justify them. Following this decision, the United States decided to take advantage of the appeal void it created since 2019, appealing to an AB that it knows will not function anytime soon, with the clear objective of blocking the unfavorable decision against its trade practices.

Pauwelyn, at the moment the AB ceased to function, predicted four near-future possible scenarios to watch for: (i) the risk of countries appealing into the void followed by a block on DSB reports; (ii) ex-post or ex-ante no appeal pacts (NAPs) that would lead to the automatic adoption of panel reports by the DSB; (iii) use of the Article 25 arbitration option; and/or (iv) floating panel reports that are neither adopted nor appealed.[15] Each one of these scenarios has taken place to varying degrees.

Long after this prediction, the two scenarios that played a bigger role in the last years of the AB crisis were scenarios (i) and (iii). From the appeal-into-the-void perspective, Pauwelyn considered it a very possible scenario but wondered if the possibility of reputational setbacks for instrumentalizing an institutional crisis for individual gains would stop countries from appealing.

What the author could not predict at the time was that the United States itself would use this option, clearly not preoccupied with reputational setbacks and openly blocking a decision it had already declared it would not abide by. In January 2023, in Geneva, Ambassador María Pagán gave a statement about the U.S.’ decision to appeal the steel and aluminum reports:

“The United States therefore has notified the DSB of its decision to appeal these damaging and erroneous reports. While there may be those who will criticize the U.S. decision to appeal – or perhaps any U.S. response – the United States will continue taking necessary if unpopular actions when it is the right thing to do”[16] 

It is always interesting to see under what diplomatic discourse the United States legitimizes its own illegal actions. Justifying appealing a decision into the void of an AB that was dismantled by itself because it is evident that the original report goes against its interests (by the argument that “it is the right thing to do”) just shows how comfortable the country has become with ignoring rule-based systems when the outcomes would be unfavorable.

3.3. Policy recommendation

In terms of effective measures to mitigate this crisis, recall that Section 3.2 addressed the four possible scenarios and actions predicted by Pauwelyn that could translate into policies. Specifically, even though the Multi-Party Interim Appeal Arbitration Arrangement is a temporary solution for the countries that agreed to it, an effective policy recommendation cannot ignore the fact that the United States still represents an important and powerful role in international trade and needs to be a part of the solution.

The last few years have shown that this crisis will likely not be resolved without deep changes in the WTO structure. Even though the technical and procedural problems are not the sole reasons the United States blocked the AB appointments, this is an actual opportunity to address these problems, which many members of the organization also recognize.

The Appellate Body crisis and WTO reform were key points of discussion at the 13th WTO Ministerial Conference that took place in Abu Dhabi from February 26-29, at the time of this article’s original writing.[17] This reform needs to be comprehensive and aim to resolve the problems mentioned above, such as the non-respect of delays (by implementing sanctions in case of non-compliance by the DSB), overreach (by imposing limits on the topics of conflicts), and misinterpretation (by clarifying the legislators’ intentions) when drafting new rules of international trade law. Most importantly, it is urgent that this Conference, as well as future reform efforts, learn from the clear mistakes stemming from not having a binding agreement to address the refusal of a member to appoint a new AB member.

The composition of the AB is regulated by Article 17 of the Dispute Settlement Understanding (DSU), which only states that “the DSB shall appoint persons to serve on the AB for a four-year term, and each person may be reappointed once” without any clarification on what happens if this appointment doesn’t reach a consensus or is blocked by a member.[18] Gaps and omissions in legal texts are fertile grounds for power abuse. This is why a revised DSU should be drafted, implementing the appointment of new AB members based on a majority vote rather than consensus in case one member refuses to follow up with appointments, for instance.

In addition, this reform is the most promising policy recommendation since it calls the United States to the debate—it gives the country the chance to voice and address its concerns regarding the dispute settlement mechanism. However, the other members of the organization need to be clear on the obligation of abiding by the new rules they agree on and implementing sanctions, options, and conditionalities in case of non-compliance. A policy in these terms takes time and effort, but it is the solution that respects and honors the multilateralist trade order rather than the fragmentation that has been taking place for nearly seven years.

A rules-based multilateral system was created for a reason at a time when the horrors of war were still fresh and an international trade order lacked accountability. A trade order in which only one country can show such disregard for international law and dispute settlement bodies is an international order more vulnerable to future conflict. Even if more focused on economics, a trade war is still a war and has incredibly significant effects on a developing country’s industries and citizens’ livelihoods.

4. Conclusion 

The Biden administration is not too dissimilar from the Trump administration in trade-related matters. While Biden has been more vocal about WTO problems and the need for reform, it was under his administration that the hypocritical decision to appeal into the void was made. The AB remains blocked, allowing the United States to continue taking illegal, protectionist, unfair trade measures under the justification of national security threats, which remain unspecified. The international community is hypnotized to believe, as Ambassador María Pagán stated in Geneva in January 2023, that the U.S. government is simply doing “the right thing.”

About the author

Marina Carneiro de Castro is a first-year International Governance and Diplomacy master’s student at the Paris School of International Affairs at Sciences Po Paris. She received a bachelor’s degree in law from the Federal University of Minas Gerais (UFMG) and the Université Paris 1 Panthéon-Sorbonne. She is interested in the fields of international trade, international law, and the geopolitics of cybersecurity.

Endnotes

1. Pauwelyn, Joost. ‘WTO Dispute Settlement Post 2019: What to expect?’, Journal of International Economic Law, 22(3), (October, 2019) pp. 297–321. doi:10.1093/jiel/jgz024.

2. World Trade Organization.” DS544: United States - Certain Measures on Steel and Aluminium Products: current status” wto.org. January 26, 2023. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds544_e.htm

3. Goldstein, Judith. “Creating the GATT Rules: Politics, Institutions, and American Policy.” In Multilateralism Matters: The Theory and Praxis of an Institutional Form, edited by John Gerard Ruggie, 201-232. Columbia University Press, 1993.

4. Pauwelyn, “WTO Dispute Settlement.”

5. Galbraith, Jean. “United States Continues to Block New Appellate Body Members for the World Trade Organization, Risking the Collapse of the Appellate Process” The American Journal of International Law 113, no. 4 (October, 2019): 822–31. https://www.jstor.org/stable/26818017.

6. Office of the United States Trade Representative. “Report on the Appellate Body of the World Trade Organization” ustr.gov. February 2020. https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf.

7. Liu, Tao. and Wing Thye Woo. ‘Understanding the U.S.-China trade war,’ China Economic Journal, 11(3), (October, 2018) pp. 319–340. doi:10.1080/17538963.2018.1516256.

8. Office of the United States Trade Representative “Findings of the investigation into China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation under section 301 of the trade act of 1974.” ustr.gov. March 22, 2018. https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.

9. Bown, Chad, and Melina Kolb. “Trump’s Trade War Timeline: An Up-to-Date Guide.” Peterson Institute for International Economics. December 31, 2023. https://www.piie.com/blogs/trade-and-investment-policy-watch/2018/trumps-trade-war-timeline-date-guide.

10. Geneva Trade Platform.  Multi-Party Interim Appeal Arbitration Arrangement (MPIA). WTO Plurilaterals. June 9, 2021. https://wtoplurilaterals.info/.

11. Pauwelyn, “WTO Dispute Settlement.”

12. Goldstein, “Creating the GATT Rules.”

13. Bacchus, James. “Echoing Trump, Biden Embraces International Trade Lawlessness.” Cato.org, December 12, 2022. https://www.cato.org/blog/echoing-trump-biden-embraces-international-trade-lawlessnes.

14. Bown, Chad. “The dreaded WTO ruling on Trump’s national security tariffs.”Trade Talks Podcast. Episode 175. January 22, 2023. https://tradetalkspodcast.com/podcast/175-the-dreaded-wto-ruling-on-trumps-national-security-tariffs/.

15. Pauwelyn, “WTO Dispute Settlement.”

16. Office of the United States Trade Representative “Statements by the United States at the Meeting of the WTO Dispute Settlement Body,” ustr.gov. January 27, 2023. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2023/january/statements-united-states-meeting-wto-dispute-settlement-body.

17. World Trade Organization. “13th WTO Ministerial Conference,” wto.org.February, 2023. https://www.wto.org/english/thewto_e/minist_e/mc13_e/mc13_e.htm.

18. World Trade Organization.”Dispute Settlement: Legal Text,” wto.org. 1994. https://www.wto.org/english/tratop_e/dispu_e/dsu_e.htm.

Disclaimer

The views expressed in this paper are solely those of the author and do not reflect the opinions of the editors or the journal.