Explainer | The US has crippled the WTO’s appeal court. What does this mean for Asia?

Washington’s decision to block the nomination of new judges to the court sees the organisation facing its biggest ever crisis, experts say
Observers warn that a toothless WTO could lead to an escalation of trade tensions such as the ongoing spat between Japan and Korea

World Trade Organization (WTO)

Meaghan Tobin

Published: 7:00am, 18 Dec 2019

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The United States’ decision last week to block the nomination of new judges to the World Trade Organisation’s appeal court – effectively crippling it – sees the organisation facing what experts warn is the biggest crisis in its 25-year history.

The judgment of the court allows countries to slap tariffs and other penalties on those who do not abide by the rules of global trade – and without it, economists worry the world’s trade watchdog has finally been defanged.

The WTO was set up in 1995 to give countries a framework for governing global trade, and today sets the rules for 96 per cent of it. The organisation’s rules, and the knowledge that its 164 members agree to play by them, keep trade barriers between countries low and create stability for investors.

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Without the threat of the appeal court’s judgment to keep countries in check, trade officials warn the international trading system has lost its impartial arbitrator – and could splinter into tit-for-tat spats such as the trade war between the US and China.

More than 20 per cent of WTO disputes have been brought by nations in Asia, leaving the region vulnerable if trade rules become tougher to enforce. Japan, India, China and South Korea have been among the most active users of the WTO’s dispute settlement system, and the collapse of the appeals body leaves multiple cases in limbo.

In remarks last week, China’s Foreign Ministry spokesperson Hua Chunying called the collapse of the appeals body “the most severe blow to the multilateral trading system since the establishment of the WTO”.

Without the WTO’s appeal court, trade officials warn the international trading system could splinter into tit-for-tat spats such as the trade war between the United States and China. Photo: Reuters

What happened to the WTO’s appeal court?

Though the US has been by far the most active user of the WTO’s dispute settlement system – lodging more than 20 per cent of cases in the body’s history – it was Washington’s decision to constrict it.

The appeal court needs a minimum of three judges to take on new cases, but last week the terms of two expired with no one to take their place. The US has blocked the nomination of new judges for more than two years, partly out of what Washington officials have described as a desire to force the institution to reform.

The term of the last remaining judge, China’s Hong Zhao, expires in November 2020. The two outgoing judges plan to stay on to complete three more decisions, but a further 10 cases, including two involving South Korea, will be left in limbo. One of the cases is against the US for its imposition of high anti-dumping tariffs, and the other was filed by Tokyo against Seoul for its tariffs on stainless steel.

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Yose Rizal Damuri, head of the department of economics at the Centre for Strategic and International Studies (CSIS) in Jakarta, said the appeals body was important in giving recourse to countries that had lost disputes.

Until an appeals case has been settled, any decision which has gone through WTO dispute settlement does not have any legal force. “If the appellate body isn’t functioning, this makes the multilateral trading system uncertain,” said Yose. “It reduces the credibility of the WTO.”

China’s President Xi Jinping has called for China to step up as a guardian of multilateralism, and Beijing has backed the EU’s calls for a free international trading order. Photo: EPA

Where does this leave international trade disputes?

Valerie Hughes, formerly director of the WTO’s appellate body secretariat, said it was likely the appeals body could be replaced in time – and, for now, its collapse did not spell the end of the enforceability of WTO rules.

Countries can still bring cases to the body at the panel level, Hughes said in an article for Canadian law firm Bennett Jones, where she is senior counsel.

However, member states do not have a strong track record of abiding by the reports of the WTO’s panel – 70 per cent of the panel’s decisions have been appealed.

Indonesia last week brought a WTO suit against the European Union over plans to phase out palm oil as a base for biofuels. Malaysia has also threatened similar action over the plan. But without a functioning appeals body, Indonesia will have no recourse if the EU does not abide by the WTO’s decision, or vice versa.

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The EU has been in talks with other countries to set up a “plan B” alternative which could be used on a voluntary basis.

Canada and Norway have endorsed the plan, and last week China’s ambassador to the WTO Zhang Xiangchen said Beijing would work to support the EU’s vision, according to Bloomberg.

Officials from Australia and Japan have also signalled interest, and Channel News Asia reported that Singapore’s Ministry for Trade and Industry on Friday said the island nation was working with other countries to explore an interim solution.

Shoppers browse at a discount store in Tokyo. Observers say a toothless WTO could lead to an escalation in trade tensions, such as those between Japan and South Korea. Photo: Reuters

How could this impact Asia’s trade?

Observers warn that a toothless WTO could lead to an escalation of trade tensions such as the ongoing spat between Japan and South Korea.

Since the WTO’s founding, Japan has been one of the most active users of the dispute settlement system, bringing 26 cases – beating India’s 24, and China and South Korea, who have each brought 21.

Two thirds of the cases South Korea brought were against the US.

Thailand and Indonesia were also active users of the system, having lodged 14 and 12 complaints respectively. Yose at the CSIS said while Asean nations tended to work out trade disputes between each other under regional or bilateral mechanisms, the WTO was an essential mechanism for Asean nations to bring cases against countries outside the region.

A non-functional dispute mechanism at the WTO could negatively impact Asean’s trade with countries outside Asia, he said.

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For now, in the absence of the appeals body, Indonesia and Vietnam have signed agreements pledging not to appeal if they lose a case. Yose said the most practical option might be for WTO members to agree to an emergency measure, removing the appeals process altogether until a longer-term solution could be settled.

President Xi Jinping has called for China to step up as a guardian of multilateralism, and China has backed the EU in calls to uphold the rules for a free international trading order.

“China will continue to try to lay claim to a leadership role now that the US has stepped back,” said Michael Plummer, professor of international economics at Johns Hopkins School of Advanced International Studies in Bologna.

Plummer said negotiations over the Regional Comprehensive Economic Partnership (RCEP) – a China-backed regional trade agreement which could be signed next year – could provide insight into how Beijing could take the lead on global trade rules.

If the agreement goes forward, Plummer said “China will have created a template for how to have a trade agreement between countries that are extremely diverse – from the richest to the poorest”.

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