Political underpinnings of WTO’s partial resilience in the post-Trump era
Source: World Trade Organization
By Srijan Shukla
The World Trade Organization (WTO) has faced an unprecedented political crisis over the past few years, but has managed to demonstrate partial resilience as an internationally trusted institution. While the number of cases filed at the WTO’s dispute settlement body has fallen drastically, some members continue to approach it to manage interstate trade disputes, indicating that it still maintains some level of legitimacy. Contrary to media expectations, almost all major economies have continued to adhere to the WTO’s trade laws. This article argues that this partial resilience of the multilateral trade body can be attributed to its institutional design, which is premised on consent-centric decision-making and the practice of legal pluralism. These ideas have ensured that states willing to trade with each other within the multilateral framework could move at their own pace, allowing them the flexibility to strike a balance between domestic political economy constraints and the gains from free trade. Unlike many other international institutions, the WTO’s resilience stems from its ability to leverage politics, as opposed to ignoring or mitigating them.
Background
A little over three years ago, the U.S. Government under President Donald Trump took the unprecedented step of blocking the appointment of new judges to the WTO’s Appellate Body (AB). For those not as invested in the workings of international trade law, this might have seemed like an extension of Trump’s quest to reset the global trading paradigm and obtain a better “deal” for U.S. working classes. However, for avid watchers of international trade and the WTO, it marked the end of an era. The AB is the second and final tier of the WTO’s dispute resolution mechanism, and Trump’s decision rendered the body defunct. In other words, Trump’s decision risked turning the supreme court of international trade law into a mere relic of the past.
The General Agreement on Tariffs and Trade (GATT, the precursor to the WTO) was formed in 1947 and gradually developed a dispute settlement mechanism. According to Luca Rubini:
For many years, it operated more as a mediation or conciliation system with working parties which included representatives of the litigating parties, aiming at finding a positive settlement between them. Through the years, with the constitution of ad hoc independent panels, there was a shift from a diplomatic to a more legalistic approach—where litigants argue on the basis of legal points and a winner (and a loser) necessarily emerge from the process.[1]
The dispute settlement process involves a panel of judges being established.[2] They then hear the case and release a verdict in the form of a panel report. Under the GATT regime, the formation of a panel had to follow a positive consensus, meaning that any involved party could block the establishment of the dispute settlement process if they so wished. Verdicts issued by the panel were also ineligible for further appeal. Following the WTO’s launch in 1995, two key changes were introduced. First, there was a regime shift from positive to negative consensus, ensuring that a panel would be formed if the complainant wanted. Second, the GATT’s one-stage dispute resolution system was reformed into a two-stage system, introducing an appeals court in the form of the AB.
Just a few years into the WTO’s existence, the cumulative work of the GATT and the WTO’s dispute resolution process came to be seen as the multilateral organization’s “crown jewel.”[3] Unlike other institutions such as the International Court of Justice, the WTO’s dispute settlement functioned as intended, and states managed to resolve their trade issues here, lending further credibility to the institution.[4] The numbers reflect this. From 1995 to 2021, 607 cases were brought to the WTO by 52 members. Among these 607 cases, a panel was formed in 365 disputes, and a report was released in 277 of them. Including complainants, defendants, and third-parties, 111 member states participated in the WTO’s dispute settlement process.[5]
For many observers and stakeholders, the shutting down of the AB in 2019 by the Trump administration raised a concern that states would no longer bring their disputes to the WTO. Many feared this might result in the abrupt death of the multilateral trading system altogether.[6]
However, three years into the post-AB era, the global trading system, underpinned by the WTO, is far from dead. This is not to say that the institution is not marred with mammoth structural problems—which if not attended to might undo the system one day—but so far, contrary to expectations, the system hasn’t crashed. Rather, evidence suggests that the multilateral trading system has demonstrated a certain level of resilience in the post-Trump era.
To begin with, major economies of the world have by and large continued to adhere to existing trade rules and laws, established by the GATT and WTO agreements and charters. While this might seem like an insignificant detail, it takes on mythical proportions when one looks at how the global economy became engulfed in tit-for-tat trade and currency wars during the interwar period of the 1930s.[7] Considering historically how nascent multilateral trade cooperation is, its continued resilience in face of a rapidly changing international political economy is a remarkable success.[8]
More substantively, and restating the core purpose of this article, the WTO dispute resolution process has continued to demonstrate partial resilience. The use of partial here needs to be contextualized. From 2008 to 2017, on average the WTO received 16.6 requests for dispute resolution each year. In 2018 and 2019, as a result of the Trump administration’s trade wars, disputes increased to 39 and 19, respectively.[9]
By the end of 2019, the AB was non-functional, which meant that any future appeals would be made into the “void.” Many expected that this might mean that states would no longer bring their disputes to the WTO. However, though the number of disputes brought to the WTO has fallen substantially, certain states have continued to file them. The WTO received 5, 9, and 8 dispute resolution requests in 2020, 2021, and 2022 respectively.[10] Evidently, the system didn’t completely crash. Moreover, a diverse set of members continue to participate in dispute resolution. Since 2020, states involved in disputes have included the members of the European Union, Russia, Egypt, Argentina, China, Australia, South Korea, and Brazil, amongst others.[11]
Additionally, following the demise of the AB, several WTO members came together to launch an interim body—coined the Multi-Party Interim Appeal Arbitration Arrangement (MPIA)—which is meant to perform the role of the AB until the latter manages to get reinstated.[12] Currently, the MPIA is a voluntary body, and has 52 members (including the European Commission). Recently, it offered its first verdict in a dispute between Columbia and the European Commission over frozen fries.[13]
These developments beg an important question: what is responsible for this partial resilience of the WTO and its dispute settlement mechanism? The answer lies in the unique political and diplomatic origins of the WTO. Key international institutions are either premised on an international balance of power, such as the United Nations Security Council, or by actively ignoring domestic politics within its members and prioritizing the interests of its key patrons, such as the International Monetary Fund’s conditionality-centric readjustment programs.[14] Unlike such institutions, the WTO was designed to leverage both domestic and interstate politics. This unique conception and design have rendered the organization sustained success, even in the face of dire adversity.
In a nutshell, the argument here is that at its core, the WTO’s resilience can be explained by the organization’s consensus-based decision-making model and its use of legal pluralism. Robert Hoswe and Joanna Langile explain that the “WTO’s legal architecture is fundamentally pluralist, building in acceptance and respect for different political and economic systems, and different approaches to governance and industrial policies among diverse nations.”[15] This accommodative structure has translated into a unique dispute resolution model. The fact that a staggeringly large number of disputes at the WTO are settled before a panel gives its ruling underscores the institution’s unique design, which encourages diplomatic bargaining. Even when disputes result in adverse rulings, states see it in their interest to at least partially adhere to verdicts to ensure they do not break the multilateral trade dispute resolution mechanism. Furthermore, even as the global economy has seen a proliferation of Preferential Trade Agreements (PTAs)—which often have their own dispute settlement mechanisms—there is an increasing effort to avoid forum shopping and possible inconsistencies with WTO case law.
The first section provides a brief overview of the WTO’s institutional design based on consent-based decision making and the practice of legal pluralism. The following section looks at how this institutional design has resulted in a unique dispute resolution system that encourages diplomatic bargaining. Further, it considers how the value of the WTO system is reflected in anti-forum shopping clauses within newly formed PTAs. Finally, the paper concludes by arguing that regardless of these sources of resilience, the WTO has substantive issues which cast a dark shadow on its surprising success.
The value of political consensus and legal pluralism
The architects of international institutions, and especially international law, face a fundamental conundrum. The international system is composed of nation states with diverse political, economic, social, constitutional, and legal systems. Then how does one use a normative framework for international law that can be applied and accepted by all these diverse states?[16] By and large, the bulk of international institutions tend to be based on some underlying logic of balance of power, like the aforementioned United Nations Security Council. While such institutional design has an element of seeing interstate relations as a zero-sum-game, the very idea of free trade theory is a negation of such thinking. By its very conception, starting in the post-Mercantilist era, the bulk of free trade theory argues that foreign trade is not a zero-sum game, and is mutually beneficial for all participants.[17]
However, such theoretical considerations aside, the policymakers running a country are met with their own political economy constraints. They often find themselves striking a balance between domestic trade protection-seeking interest groups and the larger idea of trade liberalization, which may potentially make their overall economy better off.
The design of the GATT, conceived in the late 1940s, tried to mitigate this very tension. The GATT’s institutional design intended to not just find a way to reconcile the normative pluralism among various member states, but also leverage it. Based on the notions of reciprocity and non-discrimination, the institution adopted a political consensus-based design. This model had a procedural and a substantive aspect.
According to the procedural part, there was no top-down direction by the GATT in terms of how a country’s trade policies should look. Instead, the degree to which a country wanted to liberalize its flow of goods and services was decided and negotiated by the country itself with the WTO and other member states. These terms would then be enshrined in the country’s terms of accession to the GATT.[18]
“The GATT contains no requirement that tariffs be reduced at any given pace or any particular extent—much less eliminated; it merely establishes a framework whereby voluntarily and reciprocally bargained tariff concessions can be made legally enforceable through ‘bindings’ that each state is required to respect in its customs policies,” write Howse and Langille.[19]
The GATT had no moral or even economic normative framework that drove its idea of membership. It was not a club of like-minded members. On the contrary, the institution was designed to facilitate trade between countries, whose internal systems looked very different from each other. “[The] purpose was never to maximize free trade. It was to achieve the maximum amount of trade compatible with different nations doing their own thing,” contends Dani Rodrik.[20]
The institution allowed its members the flexibility to manage the trade-off between domestic political economy compulsions and international commitments. It leveraged the presence of this flexibility to expand its membership by inducting a diverse set of states, all of whom faced unique domestic constraints. Moreover, this flexibility was often even more useful for state-level policymakers, who could wiggle out of domestic demands for protection by tying their hands internationally.
In substantive terms, these ideas were further boosted by the now active WTO use of legal pluralism. This pluralist legal practice resulted in several substantive laws and clauses, but several merit specific mentions.[21]
First is the special and differential treatment toward developing countries, which allowed these poorer states to get market access to developed countries, without having to provide reciprocal access or deny support to their infant industries. Second, both the GATT and the WTO have allowed its members the use of trade remedies—which include countervailing duties (against state subsidies), antidumping (against exports at less than fair value), and safeguards (against import surges). By and large, members have the right to use these instruments in time of need, without seeking the consent of the WTO.[22] Third, the most pronounced aspect of the WTO’s use of legal pluralism was evident in its AB’s rulings. For instance, a large portion of trade disputes contend with WTO laws on Sanitary and Phytosanitary (SPS) measures and the Technical Barriers to Trade (TBT). These agreements, which came into place following the Uruguay Round negotiations that led to the formation of the WTO in 1995, marked some of the most significant restrictions on a state’s domestic regulations.[23] However, through successive rulings, the AB has provided more space to manoeuver for its members and softened the rules.[24] Finally, WTO panels and the AB have also observed judicial economy, whereby the panels did not rule on certain arguments made by the litigants in order to avoid commenting on some of the most contentious arguments made by complainants.[25]
As a consequence, the ideas of consensus-driven decision-making and legal pluralism have ensured that the WTO has expanded its membership over the past seven decades. The WTO has accordingly remained relevant, even during the phases of global backlash against free trade such as in the 1970s or the one that is currently underway.
Diplomatic dispute resolution
Yet, the greatest success story of the WTO is its remarkable record in terms of dispute settlement. As an institution known for its highly functional dispute settlement mechanism, a large number of the disputes at the GATT and the WTO, have actually been settled diplomatically, i.e., without the involvement of judicial panels or AB judges.[26] This is even more significant given that the WTO has no real enforcing powers and the burden of complying to adverse rulings rests squarely with the states. In other words, at its core, the WTO is a diplomatic institution, not a legal one. And this is precisely the reason for its success.
The dispute settlement process at the WTO begins with a state bringing a dispute against another member before the dispute settlement body for violating a WTO law or using some protectionist trade policy. The first stage is a sixty-day consultation period, where the complainant and the defendant can negotiate and settle the dispute behind closed doors. If the dispute is not resolved there, a panel is formed, which is set to give its ruling within a stipulated time period. However, until a ruling is issued, the parties can continue to negotiate and attempt at a settlement. In the absence of an agreement, a panel report is issued. The involved parties can further appeal this ruling to the AB. Once the AB has given its own ruling—by accepting, rejecting, or modifying the panel's ruling—the losing party must comply and change its disputed policy if ordered. In case of non-compliance, the complainant can seek the sanction of the AB to facilitate a proportionate retaliation.[27]
Remarkably, an exceptionally large number of disputes are resolved either during the consultation stage or before the panel issues its report. According to Busch and Reinhardt, a settlement was reached either during the panel stage or before the panel issued a ruling in 155 of 298 disputes during the GATT era (from 1947 to 1994).[28] Arguably, real success is determined not by necessarily winning a case, but by ensuring that the defendant changes their disputed policy.[29] And remarkably, during the GATT era, according to Busch and Reinhardt, 67.1% of “disputes ending prior to a ruling (whether before or after the establishment of a panel) exhibited full or partial concessions by the defendant.”[30]
These numbers seem to have held up even during the WTO era. According to Davey, from 1995 to 2022, 600 consultations requests were made, of which 230 resulted in panel reports and 150 in AB reports.[31] Thus, even during this era, a majority of disputes are being settled during consultations or before the panel report.
This, according to Busch and Reinhardt, reflects that at the GATT and the WTO, the most effective bargaining and concession-seeking happens “in the shadow of the law”, before the panel stage and based on expectations regarding how the legal proceedings might play out. The authors propose a couple of phenomena that could be driving this bargaining under the shadow of law. While the WTO has no enforcement power, the most effective instrument available at its disposal is to issue a “normative statement” — in the form of a panel report — on the disputed matter in a relatively “timely manner.” Perhaps the threat of such a ruling might empower domestic actors within the defendant’s country to force their government to concede. Another possibility is that it might allow the head of state within the defendant’s country to claim that their “hands are tied” internationally, providing a political cover against protectionist domestic interest groups. In essence, hands being tied means that a country enters into a binding commitment, from which the leader’s credibility would be impacted domestically and internationally were they to deviate.
However, the most plausible explanation for early concession is how uncertainty regarding a defendant’s preferences plays into the bilateral bargaining process.[32] During this bargaining process, there is uncertainty regarding both a complainant’s ability to retaliate following an adverse ruling (against the defendant), as well as the associated political costs (for the defendant) of such a ruling and subsequent retaliation. Thus, the defendant sees it in their interest to mitigate this uncertainty by providing an early concession.
Here it becomes evident that when it comes to settling trade disputes, the actual legal powers of the WTO have less impact than the procedural setting it facilitates for the defendant and complainant to bargain. This is precisely what is responsible for the WTO’s partial resilience today, even amidst the unprecedented scale of the crisis the organization faces today.
While the number of cases going to the WTO has substantially declined over the last three years, the inherent value of the WTO case law is still widely acknowledged, even by the United States. The past two decades have seen a rapid proliferation of PTAs across the world, and many of these PTAs contained either full chapters on dispute resolution or substantive mentions of it.[33] Some stakeholders believe that the presence of these dispute mechanisms might provide a robust substitute to the WTO’s dispute settlement. However, many PTAs have dedicated significant space to clauses on forum shopping, and in some cases imposed explicit limits on doing so.
For instance, the PTA between India and MERCOSUR, the South American free-trade block, permits forum shopping, except in disputes over anti-dumping and countervailing duties.[34] India is one of the most prolific users of anti-dumping provisions among all the WTO members.[35] Similarly, in the ASEAN-New Zealand-Australia PTA, forum shopping is allowed, with the exception of disputes over ecommerce, competition policy, economic policy, and SPS.[36] Interestingly, in the past, both New Zealand and Australia have had several disputes with each other over SPS. In the recently concluded USMCA, the TBT chapter has specific clauses on when forum shopping is permissible.
As Busch argues, when one looks at how forum shopping is treated in many of the recent PTAs, a pattern begins to emerge.[37] When it comes to matters that are important for a country’s domestic political economy, parties want to avoid inconsistencies between WTO case law and the respective PTA’s case law. For example, over 90% of U.S. exports are covered by TBT, thus the United States deems it too risky to allow such inconsistencies to emerge in case law during dispute resolution. The same applies to India and its attitude toward anti-dumping, which it predominantly deploys against China.[38] This raises questions with respect to treating these dispute resolution mechanisms in PTAs as a substitute for the WTO. Even the United States, one of the most ardent critics of the WTO, acknowledges the value of WTO case law, underpinning its centrality to the international trade law regime.
Looking ahead
At a time when the global trade regime has come under tremendous pressure, best symbolized by the United States’ incessant attacks on the WTO, it is important to note that the institution has demonstrated partial, though substantive, resilience. Amidst a period of such crisis, the WTO’s partial resilience can be attributed to the organization’s institutional design. This unique institutional design — unlike that of many other international institutions — is premised on consent-centric decision-making and the practice of legal pluralism. This means that at its core, the WTO is a diplomatic institution which tries to leverage politics as opposed to ignoring it. However, regardless of this recent partial success, its future seems anything but rosy.
Among its most vocal critics has been the United States, which has a series of grievances against the organization. While it has a laundry list of issues against the WTO, there appears to be a growing consensus that the United States’ fundamental apprehension stems from a fear that the WTO might gradually curtail its ability to use trade remedies, especially against China.[39] It is no surprise that this is the very issue that might eventually result in the unraveling of the multilateral trading order.
Through the past seven decades, the WTO’s success has been premised on its ability to deploy legal pluralism and somehow create a framework which allows politically and economically diverse states to trade with each other. But as we have seen, there are limits to how far this mitigation exercise can go, especially when the underlying power dynamics in the international political economy have gradually shifted. One of the key reasons why the Uruguay Round—which eventually led to the end of the GATT and the WTO’s formation— was started in 1986 was because South Korea and Japan had become significantly large economies, resulting in fundamental imbalances in the international political economy.[40]
We now find ourselves in a similar situation, where fundamental imbalances between a now risen Chinese economy and the United States are unsettling existing norms and rules of the global economy. Scholars and trade practitioners have provided several ideas regarding potential WTO reforms. However, for the WTO to retain its position as the upholder of multilateral trade law over the long run, a successful reform package must address the implications of the rivalry between the United States and China, while preserving the organization’s unique institutional design.
About the author
Srijan Shukla is an M.A. candidate in international business and politics at the New York University and Stern School of Business. Prior to this, he was a journalist covering foreign affairs for ThePrint in New Delhi.
Endnotes
[1] Luca, Rubini, “‘The crown and the jewel’ The rise and fall of the WTO Appellate Body: a critical analysis,” International Economic Law and Policy Blog, October 15, 2021 https://ielp.worldtradelaw.net/2021/10/guest-post-the-crown-and-the-jewel-the-rise-and-fall-of-the-wto-appellate-body-a-critical-analysis.html.
[2] WTO, “The process — Stages in a typical WTO dispute settlement case,” accessed April 15, 2023, https://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c6s1p1_e.htm.
[3] Rubini, “The crown and the jewel.”
[4] Marc L. Busch and Eric Reinhardt, “Bargaining in the Shadow of the Law: Early Settlement Disputes,” Fordham Int'l LJ, 24, 2000, pp.158.
[5] WTO, “Dispute settlement activity — some figures,” accessed April 15, 2023, https://www.wto.org/english/tratop_e/dispu_e/dispustats_e.htm.
[6] “It’s the end of the World Trade Organization as we know it,” The Economist, November 28, 2019, https://www.economist.com/finance-and-economics/2019/11/28/its-the-end-of-the-world-trade-organisation-as-we-know-it.
[7] Charles P. Kindleberger, The World in Depression, 1929–1939 (University of California Press, 2013).
[8] Adam Posen, “The End of Globalization?” Foreign Affairs, March 17, 2022, https://www.foreignaffairs.com/articles/world/2022-03-17/end-globalization.
[9] WTO, “Follow disputes and create alerts,” accessed April 15, 2023, https://www.wto.org/english/tratop_e/dispu_e/find_dispu_cases_e.htm.
[10] Ibid.
[11] Ibid.
[12] Joost Pauwelyn, “The MPIA: What’s New? (Part I)” International Economic and Policy Blog, February 21, 2023, https://ielp.worldtradelaw.net/2023/02/the-mpia-whats-new-part-i.html.
[13] Arbitration Under Article 25 of the DSU, Colombia – Anti-dumping Duties on Frozen Fries from Belgium, Germany, and The Netherlands, WTO Doc. WT/DS591/ARB25 (December 21, 2022).
[14] Mark S. Copelovitch, The International Monetary Fund in the Global Economy: Banks, Bonds, and Bailouts (Cambridge University Press, 2010).
[15] Robert Howse and Joanna Langille, “Continuity and Change in the World Trade Organization: Pluralism Past, Present, And Future,” American Journal of International Law 117, no. 1, 2023, pp.1-47.
[16] Ibid.
[17] Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade, (Princeton University Press, 1996).
[18] Howse and Langille, “Continuity and Change.”
[19] Ibid.
[20] Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy, WW Norton & Company, 2011.
[21] For a longer exploration of this topic, see Howse and Langille, “Continuity and Change.”
[22] Chad P. Bown and Soumaya Keynes, "Why Trump shot the sheriffs: the end of WTO dispute settlement 1.0," Peterson Institute for International Economics Working Paper 20-4 (2020).
[23] Howse and Langille, “Continuity and Change.”
[24] Ibid.
[25] Marc L. Busch and Krzysztof Pelc, "The politics of judicial economy at the World Trade Organization," International Organization 64, no. 2, 2010, pp.257-279.
[26] Busch and Reinhardt, “Bargaining in the Shadow of the Law.”
[27] WTO, “The process.”
[28] Marc L. Busch and Eric Reinhardt, "Testing international trade law: Empirical studies of GATT/WTO dispute settlement," The political economy of international trade law: Essays in honor of Robert E. Hudec 457 (2002).
[29] See Chad P. Bown, “On the Economic Success Of GATT/WTO Dispute Settlement,” The Review of Economics and Statistics 86, no. 3, August 2004, pp.811–823; and Busch and Reinhardt, “Bargaining in the Shadow of the Law.”
[30] Busch and Reinhardt, “Bargaining in the Shadow of the Law.”
[31] William J. Davey, "WTO dispute settlement: Crown jewel or costume jewelry?" World Trade Review 21, no. 3, 2022, pp.291-300.
[32] For a detailed game-theoretic analysis look at Busch and Reinhardt, “Bargaining in the Shadow of the Law.”
[33] Hyeran Jo and Hyun Namgung, "Dispute settlement mechanisms in preferential trade agreements: Democracy, boilerplates, and the multilateral trade regime," Journal of Conflict Resolution 56, no. 6, 2012, pp.1041-1068.
[34] Government of India Ministry of Commerce and Industry, “India MERCOSUR PTA,” June 30, 2020, https://commerce.gov.in/international-trade/trade-agreements/india-mercosur-pta/.
[35] Chad P. Bown, "Trump ended WTO dispute settlement. Trade remedies are needed to fix it," World Trade Review 21, no. 3, 2022, pp.312-329.
[36] Australian Government Department of Foreign Affairs and Trade, “ASEAN-Australia-New Zealand FTA,” accessed April 15, 2023, https://www.dfat.gov.au/trade/agreements/in-force/aanzfta/asean-australia-new-zealand-free-trade-agreement.
[37] TradeCraft Podcast, “Ep. 33 - Dispute Settlement, Forum Shopping, and the Centrality of the WTO.”
[38] Marc L. Busch, “How India — not China — will steal the show at upcoming trade conference,” The Hill, November 15, 2021, https://thehill.com/opinion/international/581554-how-india-not-china-will-steal-the-show-at-upcoming-trade-conference/.
[39] Bown, “Trump ended WTO dispute settlement.”
[40] Bown and Keynes, “Why Trump shot the sheriffs.”