How do we prevent another trade war in the future?

Introduction

The international trade regime was set up with the aim of establishing a global free trade market. The World Trade Organisation (hereinafter referred to as “the WTO”) was certainly on the path to achieve this objective but the recent trade wars have certainly put a stay on this objective.  This threatens to undo the development achieved in the past seventy years.

About a year ago, the Trump administration initiated what turned out to be a global trade war against some of the U.S.’s biggest trading partners, including the European Union, China, Canada and Mexico.[i]

The United States, the European Union and China together account for more than a one-third share in the global merchandise trade.[ii] The major international traders are corporations and individuals and the contribution directly by State entities is rather negligible. The World Bank stated that the tariff escalation could result in the reduction of global exports by 3% ($674 billion) and global income by 1.7% ($1.4 trillion) with losses across all regions.[iii]

The dispute between the U.S. and the EU took almost a year to be settled through negotiations and the one with China took a year to reach the WTO through their dispute resolution mechanism. Under the current provisions of the Marrakesh Agreement establishing the World Trade Organisation (hereafter referred to as “the WTO Agreement”), there is nothing that could prevent the leaders of the U.S., E.U. and China from beginning an everlasting trade war. If they choose to do so, it could lead to the collapse of the WTO as a whole.

 

Need to expand locus standi

No State should be forced to settle disputes with another trading partner. Hence, granting powers to the Dispute Settlement Body to suo moto take cognisance of alleged WTO violations is not advisable. Every WTO dispute resolution process commences with the consultation stage.[iv] Only on failure of such a process does a panel get established to decide the dispute on merits. No member state can be forced into consultations and if at all they are, a peaceful settlement is improbable.

 

When it comes to international trade, the contribution of state governments is minimal. The bulk of the trade is carried out either by individuals or corporations. Hence, they are the real stakeholders when a new interpretation of the covered agreements is made by the Ministerial Conference or when an individual state decides to hike tariffs. However, they do not find any representation at the WTO directly. They expect their government to act responsibly. Hence, during the chain of actions and reactions that we saw recently, the real victims are these non-state entities.

 

The aggrieved is usually the most appropriate party to initiate dispute resolution in order to enforce their rights. However, as noted above, the WTO dispute resolution mechanism can only be initiated by a WTO member state and not private parties.[v] However, several WTO member governments have domestic legislation by which aggrieved importers or exporters can petition their governments to initiate a WTO dispute.[vi] The US retaliatory measures against China were initiated in response to a petition under a similar legal provision in the American legal system. However, the government has no obligation to act on such petitions. Any action taken would depend on the lobbying power of the petitioners. The WTO has, over the years, recognised the importance of providing private parties a role in trade dispute resolution. Though the WTO Appellate Body has acknowledged that private parties and organisations can submit amicus curiae submissions directly to the WTO even without being a part of the member state’s submissions, private parties play a minimal role in the initiation of a WTO dispute.[vii]

 

The only possible solution to prevent the escalation of differences between Governments into a trade war that can economically affect every region of the World is by expanding the locus standi to initiate a WTO dispute. The locus standi to initiate a WTO dispute should be expanded to include any party which would under the current system be named a third party to the dispute. According to Chad Bown, “countries with sizable exports to the disputed market that are affected only indirectly by the defendant’s policy are likely to become third parties”.[viii] The very fact that a number of nations, including India, which were not directly affected by the trade war were preparing for retaliatory measures, indicate their need to force a settlement of the dispute. By expanding the locus standi, developing and least developed member states, which are the worst hit by trade wars apart from the direct victims, are encouraged to initiate WTO disputes themselves and hence, prevent an escalation of the situation like we witnessed recently.

 

Conclusion

In order to expand the locus standi for initiating a WTO dispute, an amendment to the Dispute Settlement Understanding (hereafter referred to as “the DSU”) is essential. The same will require the invocation of the relevant provision of the WTO Agreement and subsequent procedures. As per Article X of the DSU, any member state can initiate the amendment proceedings before Ministerial Conference.[ix] The high stakes involved in the issue will certainly attract strong revolt from the major trading blocs. The United States and the European Union, which would have been prejudicially affected if the proposed solution were already in force, are sure to object. The possibility of a consensus is highly unlikely. This leads to the requirement of two-third members supporting the amendment in order to pass the proposal.[x]That is when the role played by India as a leader of the developing countries bloc becomes crucial. If India succeeds in lobbying other developing states and least developed member states as it did during various roadblocks to the Doha rounds of negotiations,[xi] passing the amendment is certainly possible.

This post has been authored by Anand Nandakumar, a student at National University of Advanced Legal Studies, Kochi.

 

[i]Peterson Institute of International Economics, Trump’s Trade War Timeline: An up-to-date guide,https://piie.com/system/files/documents/trump-trade-war-timeline.pdf(last visited Sept. 9, 2018).

[ii]World Trade Organisation, Trade Profiles, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=E28%2cUS%2cCN(last visited Sept. 9, 2018).

[iii] Caroline Freund, Impacts on Global Trade and Income of Current Trade Disputes,http://blogs.worldbank.org/trade/impacts-global-trade-and-income-current-trade-disputes(last visited Sept. 9, 2018).

[iv]Understanding on Rules and Procedures Governing the Settlement of Disputes, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401, 33 I.L.M. 1226 (1994) at Article 4.2 (entered into force on Jan. 1, 1995).

[v]Id., at Art. 3.

[vi]For example, section 301 of the United States Trade Act of 1974 or Trade Barriers Regulation of the European Communities

[vii]Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products, ¶ 15-22, WTO Doc. WT/DS58/23 (adopted on Oct. 12, 1998).

[viii]Chad Bown,Participation in WTO Dispute Settlement: Complainants, Interested Parties and Free Riders, 1 W..B.Econ.Rev.287, 305 (2005) (discussing nature of third parties in WTO dispute)

[ix]Marrakesh Agreement Establishing the World Trade Organisation, 1867 U.N.T.S. 154, 33 I.L.M. 1143 (1994) at Art. X.1 (entered into force on Jan. 1, 1995).

[x]Id.

[xi]Roberto Azevedo, Director General, WTO, Address at the Partnership Summit of the Confederation of Indian Industry (Jan. 16, 2015), https://www.wto.org/english/news_e/spra_e/spra46_e.htm (last visited Sept. 9, 2018).