Is the death knell ringing for the WTO?
The current trade war between the United States on the one hand and some of the world’s largest economies and trading nations on the other has put the relevance of the World Trade Organisation (WTO) under question.
If countries or blocs can impose punitive tariffs on each other’s imports in tit-for-tat moves, does the existence of the multilateral organisation, which sets the rules for international trade, really matter? The inordinate stalemate in concluding the Doha round has already raised questions about the efficacy of the WTO.
The WTO agreements confer certain rights and obligations on members with regard to both general rules or principles, which together define what members are entitled to do and what they cannot do, and specific commitments which each member has undertaken, such as tariff reductions and elimination of quantitative restrictions.
After the imposition of punitive tariffs on imports of aluminium and steel, China and India have also announced retaliatory tariffs on US products
As the WTO is a rule-based system, its members can impose additional tariffs on imports over and above their commitments only subject to following a due process. The WTO body of agreements spells out the special circumstances in which additional tariffs can be imposed together with the procedure which must be followed. As we shall see, a resort to retaliatory tariffs is in principle prohibited.
First, under the General Agreement on Tariffs and Trade (GATT), a country can impose additional import tariffs as well as quantitative restrictions to overcome a serious balance of payment (BoP) problem. Two, under the Agreement on Safeguards, a country can restrict imports of a product if they increase to such a high level as to cause or threaten to cause serious injury to competing domestic products. Imports can be restricted either by increasing the bound rate of tariffs or by clamping quantitative trade restrictions or quotas on them.
Three, as provided by the Agreement on Subsidies and Countervailing Measures (SCM) and the Anti-dumping Agreement, additional tariffs in the form of countervailing duty (CVD) or anti-dumping duty (ADD), as the case may be, can be imposed on subsidised or dumped imports if they cause or threaten to cause material injury to the domestic industry of a member country. However, the safeguards, CVD or ADD can only be imposed subject to an inquiry in which the importing countries must be given a reasonable opportunity to present their position.
In addition, a country can prohibit the import of a particular product on religious or moral grounds; to protect human, animal, or plant life or the environment; or to protect its essential security interests. The presumption is that such measures shall not be invoked arbitrarily and shall be necessary to obtain a legitimate policy objective. There is no provision in the WTO agreements for imposing additional tariffs on imports for security reasons.
If the exporting country feels that the imposition of additional tariffs on its products is unlawful, it can invoke the dispute settlement procedure of the WTO. In the dispute settlement process, an independent panel of experts, subject to an appellate review, makes rulings or recommendations whether or not the measure in question is consistent with a covered WTO agreement and that if it is inconsistent it should be made WTO-consistent or withdrawn. Such rulings or recommendations, however, have no legal effect until adopted by the dispute settlement body (DSB), which represents the entire WTO membership. In case the respondent country does not withdraw the measure in question within the stipulated time, the complainant can retaliate. However, any such retaliation must be authorised by the DSB. Unilateral retaliation is forbidden.
The current trade war has made a blatant departure from these binding rules. The US decision to levy punitive tariffs up to 25 per cent on the import of aluminium and steel from China, European Union, Canada and some other countries was based on national security reasons and following an inquiry by the Department of Commerce.
Under Article XXI of GATT, a country can invoke national security provisions in three sets of circumstances: one, to implement a United Nations resolution; two, to check the import of nuclear related materials and traffic in arms and ammunition; and three, to withhold information the disclosure of which would be contrary to its essential security interests. Obviously, the punitive tariffs on the import of metals did not satisfy the relevant criteria. Likewise, China has been accused by the United States of intellectual property rights (IPR) violation. But instead of challenging the alleged IPR violations in the WTO, the United States penalised Chinese imports on its own.
The response of US trading partners has also been arbitrary and unlawful. Instead of taking the United States to the WTO and waiting for adjudication by independent panels, they have proceeded unilaterally. The European Union and Canada have imposed duties on several American imports while China and India have announced retaliatory tariffs on US imports. South Korea, Argentina, Australia and Brazil have decided to put quantitative limits on the import of metals from the United States. These developments indicate that powerful countries can bypass the relevant rules and institutions without much ado. Such an attitude may sound the death knell for the WTO.
Published in Dawn, The Business and Finance Weekly, July 16th, 2018