The Rise and Demise of the WTO

“Mera bat, meri batting”

- Every gully cricketer ever

America has always stood for the wonders that capitalism can achieve. The pursuit of happiness became the driver of the entrepreneurial spirit that defines the American free market economy. Whereas civilizations in Europe and Asia grew, peaked, and died many times over, the people of the US never had to deal with such limiting factors. Economic opportunity and progress appeared to be god given — such a constant that generations of people came and went without knowing life without it.

However, such constancy and givenness of economic opportunity over a prolonged period of time brings with itself a sense of superiority and power, and the belief that you can get whatever you want. While this belief is not wrong in itself, it becomes problematic when "you can get whatever you want" turns into "you can get whatever you want from whoever you want however you want".

A hotshot Harvard MBA would call that arm-twisting and anti-competition, while a street-smart Indian would cite the example of the eternal quote above.

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The United States of America today boasts of the most potent weapon of modern times, and one that it is the proud and sole wielder of. No, this is no missile or bomb, but it is the US Dollar. The USA has successfully been able to install itself at the very center of the global financial system, starting right after World War 2 with the Bretton Woods Agreement of 1944, which was meant to replace the Gold Standard for foreign trade and firmly established the dominance of the US Dollar by fixing the price of gold, and other currencies’ exchange rates in USD, or the General Agreement on Tariffs and Trade of 1947 to eliminate trade barriers, essentially opening up under-developed markets for American industries, to the Nixon Shock of 1971, reversing the Bretton Woods Agreement when US Gold Reserves started falling, leading to gold being traded freely on world markets.

Patience and politics go hand in hand. Rome wasn’t built in a day. Neither was America.

So, why was the US in such a position that enabled it to become the master of the global economy?

It was a congregation of four factors that worked in America’s favor, and only in America’s favor that fueled its meteoric rise to the status of a global superpower:

1. Unlimited Land: The US has always enjoyed availability of productive land low in population density and rich in resources, and has remained on a constant state of expansion for close to a couple of centuries. Even when they realized they ran out of land, they were able to either add territories or buy up land for their corporation in other underdeveloped countries through economic proxies mostly used in the Cold War era.

2. Unlimited Cheap Labor: The US has vastly remained sparsely populated throughout its history, and the early statesmen there were quick to realize the need of a constant influx of immigration to fill up the blanks in terms of low-skilled workforce. They did this through the promise of the American Dream, that everyone gets what they deserve. And also, a little thing called slavery might have played a role in this for quite some time of that early meteoric rise.

3. Unlimited Innovation: The idea was simple, the greatest idea would win the biggest.

4. Geographic Isolation: The US has never been invaded with events being as major as for other great civilizations that have had to suffer invasions and the constant fear thereof. Being too far away from Europe and Asia during the earlier decades of 1900s and stability and an aversion to War after the turning events of both World War 1 and World War 2 left major forces in Europe and Asia to concentrate on rebuilding their own countries, America never has had to fear invasions and has instead focused on building their own country and economy throughout.

So, if America is such a great combination of luck and effort, and opportunity and reward, and eventual power, how did it find itself in the soup that it is in currently?

Let’s revisit what America always wanted. Expansion and growth for their citizens. Once opportunities dried up in their own hinterland, they started looking elsewhere. Observing the world’s major empires (the British, German etc) fighting and acquiring and then worrying over their overseas and inland territories, the Americans found a simple alternative to waging war and capturing geography.

The US would simply lend money to underdeveloped countries, where most of the cheap land and labor were, with the promise of help in economic and social development and protection from communist invasions and establishment of democracy.

This opened up new centers of economic activities for American corporations and also opened up so many markets with people going gaga over American products, American way of life, and most importantly, the American Dream. The American Dream was now closer to these people than it could ever have been, and came across as a ray of hope and a means to a quick rise economically.

This worked well for some time, until countries reached a certain level of development and/or realized that their own domestic corporations were suffering at the hands of their American counterparts and started making efforts to reverse this. Other countries too responded by closing their markets, and using tariffs and duties to implement regimes of protectionism.

The US responded with the General Agreement on Tariffs and Trade in 1944, which subsequently metamorphized into the World Trade Organization a full 50 years later.

Being the superpower that the US is, it contributes the largest amount to the WTO funds, and accordingly expects it to bear more benefit than loss to its own economy and corporates.

The idea, again, was simple – get members to agree to some basic terms on free international trade and offer the promise of a platform where they could resolve international disputes. In return, however, what the US wanted to gain was essentially a legal, binding system that could be used to arm-twist smaller countries and economies into whatever the US wanted from them. And given the dominance in administration, funding, and knowledge that the US enjoyed, that is precisely what the US got.

On the outside, the world just might think that they agreed to the formation of the WTO since one, the GATT was not as inclusionary in nature, and two, nations in the 1980s were fed up with America’s unbridled and unchecked weaponization of the Section 301 of the US Trade Act of 1974, that weaponizes “the United States with the authority to enforce trade agreements, resolve trade disputes, and open foreign markets to U.S. goods and services. It is the principal statutory authority under which the United States may impose trade sanctions on foreign countries that either violate trade agreements or engage in other unfair trade practices.”

What that essentially means is, the US can start negotiations with whichever countries’ markets they want to enter and try and get them to agree what they want. If the latter does not happen, the US government is well within its rights to impose trade sanctions on those countries.

But the important question here is, why would the rest of the world sing to the US’ tunes if they too have economic interests there, and have already got what they want?

The answer to this question brings us back to the US installing themselves at the center of the global financial system.

Given that much of the global trade is done in US Dollars, and most banks use the SWIFT Messaging System for international payments, the US can and does impose sanctions and enact on them and fines persons, entities, organizations, regimes and even entire countries.

How real the threat is can be seen from what happened with Russian firm Rusal, the world’s largest aluminium producer for a long time, only to be overtaken by a Chinese firm in 2015. Though it sold only 14% of its products in the US, did not use American banks, and was listed in Moscow and Hong Kong only, Rusal saw its bonds and shares plunge when secondary sanctions made it difficult for Rusal to refinance its dollar borrowings since global banks, businesses and exchanges were forced to stop dealing with the Russian company.

The WTO was largely meant to be a similar US instrument, albeit democratic and international, one that would help the US further its economic interests. However, the US failed on including one factor in its calculations. The WTO as a tribunal works both ways.

No doubt, the US has won the maximum number of disputes and appeals throughout the history of the WTO, but it is also a fact that the US has lost most disputes that other nations brought out against them.

Current US President Donald Trump has always called out WTO and other international trade collectives for causing the US to lose out on many counts in terms of trades, even going as far as calling the WTO “was the single worst trade deal ever made” back in August 2018.

Trump thinks like a businessman, and businessmen hate unions.

In this case, the US is the huge corporate trying to negotiate better trade terms for itself, while the weaker countries are the smaller entities that have formed a collective and are not going to budge easily. Trump believes it is easier to negotiate a better deal with a country individually for that very reason. And, he is armed with tools like the Trade Expansion Act of 1962, whose Section 232 lays out how a US President can tax specific imports if the Department of Commerce deems them a threat to national security, and the Trade Act of 1974 whose Section 301 allows the US President to take tariff or non-tariff based actions against another country whose policies violate an international trade agreement or are deemed to be unjustified or burden the US economy in any manner.

So, what’s up with the WTO?

Any dispute between two parties would have already gone through multiple trials and appeals and counter-appeals at lower levels, and the WTO is no different. When a dispute between any two parties is brought before the WTO, consultations and panel inquires are held, based on which the WTO releases a Dispute Panel Ruling. This ruling can be challenged with the Appellate Body, which might modify or uphold the ruling of the lower panel. The Appellate Body comprises of 11 judges, all from the member countries, and a minimum number of 3 judges is required to sign off a ruling from the Appellate Body.

With the US spending more than two-and-a-half years to achieve this situation of paralysing the Appellate Body of the WTO, a quick solution with any sort of compromise ffrom the US' side does not seem likely at all.

The US believes that these judges overstep their mandate “adding to or diminishing rights and obligations” of WTO members. The US, in a 2018 trade report, accused the WTO of routinely failing to meet the 90-day deadline to decide on appeals, permitting panel members to serve beyond their terms and issuing opinions on matters not necessary affecting the subjects of its rulings or to resolve disputes. Moreover, the US believes the compensation structure WTO allows the judges of the Appellate Body enables, rather incentivizes them to drag cases on for longer than required to boost their own pay. Calculations suggest the judges can make more than 300,000 Swiss francs (US$ 303,000) a year, with per diem pay, and other monetary components like food allowance and house rent allowance included in the compensation structure.

It is interesting to note that Trump is not the first US President to raise this concern. The Obama government too blocked the reappointment of two members of the Appellate Body, however, it also agreed to approve the appointment of replacement candidates to keep the Appellate Body’s roster full.

The US government has made clear its demands of a reform in the WTO, failing which the US will keep blocking, rather vetoing decisions regarding appointments and budgetary allocations, which require to be unanimous, essentially sending the WTO in a state of paralysis, and the world, in the words of EU officials, in “the rule of the jungle”.

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Putting up the ultimate question in everyone’s mind: is Trump wrong in doing so?

No. And Yes. And No.

Looking at it from the US perspective, it might be the right thing to do, which might or might not lead to better conditions in the long run. The US argues that it is easier to negotiate a deal in its favor when it is negotiating with just one party, and is not obligated to any third party’s rulings, given the position in the world order and the global financial system that the US commands.

However, as we have seen, Trump and US Trade Representative Robert Lighthizer, also hailed as the champion of sanctions and tariffs, have been fighting a trade war with China and simultaneously and continuously blocking WTO appointments since more than two years now, reducing the number of active judges in the Appellate Body to just one and simultaneously bringing the WTO to the verge of complete shutdown within days due to non-passage of the biennial budget.

While Trump says the US is in a better position to negotiate a trade deal now, China, the world’s second largest economy, too seems to be in no mood to relent and has just agreed to Phase 1 negotiations, with unclear agendas and timelines.

While Trump wants to continue fighting the taiffs war with China, calculations suggest the US would have bled more.

The rest of the world however waits in agony for what is going to happen next. WTO was an important tool and as EU Trade Officials rightly put it, the global trade will be pushed into the “rule of the jungle”. The rest of the world might see Trump as the reason a lot of proceedings might go into limbo.

And that is what is exactly happening, and the US essentially vetoed a WTO Dispute Panel Ruling it lost against India by filing an appeal with the Appellate Body, right after paralyzing that very Body, sending the dispute into legal vacuum.

What next?

Uncertainty.

The US has agreed on a WTO budget for 2020, just avoiding a complete shutdown for the WTO, though with major cuts in the funding for the Appellate Body, with a 100,000 Swiss franc limit on the earning of its Judges, an 87% reduction, and limiting the operating fund of the Appellate Body to the same figure, a 95% reduction.

But there is not a sufficient number of judges in the Body, which has lately and unfortunately been involved in infighting as well.

The EU though has shown that its trade is not to be held hostage by the US on multiple occasions recently, by moving to form an alternate body to the WTO with similar legal processes with the support of Canada.

The EU previously came up with a plan for a special purpose proxy to try and circumvent US Sanctions against Iran as well, but with the recent military escalations between US and Iran with the start of this year, no one knows where global trade and economy is headed currently.