Why the WTO should judge less, lest it be judged

Hello from Brussels. They might not agree on how to take on China, but late last week it was announced that the EU and US would be suspending tariffs on each other in the Airbus-Boeing subsidy dispute while they negotiated a lasting solution.

Our mildly heterodox view is that the 16-year World Trade Organization litigation has in fact played quite a positive role in constraining subsidies and getting us within sight of an amicable resolution. But updating the defunct agreement on aircraft subsidies is going to be a tricky one. The US position is that the EU has the most to do in reducing state handouts, specifically what it calls “launch aid”. The EU says it’s getting there. The US disagrees. If there’s one thing concentrating minds it’s the threat to both of competition from Chinese aircraft manufacture: nothing like an external threat to make opponents into allies.

Today’s main piece is the final one of three examining the future of the WTO under new management, specifically getting the dispute settlement system going again. In Tit for tat we ask White & Case’s Iain MacVay about the UK government’s plans to set up eight freeports.

Exhuming the WTO’s appellate body

For years, while WTO negotiations marked time, it was the dispute settlement function that kept going, surprising many (including the present author) with the legitimacy it continued to enjoy from member governments. Eventually, though, a system flying on one wing started to stall. The US complained ever louder that dispute settlement panels and especially the appellate body, the higher authority, were taking far too long to rule on cases and getting judicially creative — filling in gaps left by negotiators and explicitly creating precedent as though they were the US Supreme Court or the European Court of Justice. Washington’s particular obsession was the AB repeatedly ruling US antidumping law (specifically a calculation technique called zeroing) illegal under WTO rules.

Eventually the Obama administration’s refusal to reappoint particular judges (including an American, Jennifer Hillman) escalated into Donald Trump’s refusal to fill any vacancies at all. Since last year, with the US absenting itself, the system has functioned only with a jury-rigged appellate body led by the EU. The US can put any case it loses at the lower stage in limbo by “appealing into the void”, ie to an AB it has itself disabled. To no one’s surprise except the delusionally optimistic, the Biden administration has signalled that it needs longstanding US complaints to be addressed before unblocking the AB.

So, where are we? Substantively there’s good news: previously opposed views have converged. But procedurally and politically, it’s not straightforward to set the AB off again on a corrected course. It’s going to take a long time, maybe into next year, to fix.

Over the past couple of years the EU, the US’s antagonist in this drama, has grudgingly accepted past rulings were too creative — as has Ngozi Okonjo-Iweala, the new director-general. A consultation process led by David Walker, the highly respected New Zealand ambassador, has come up with a set of basic principles for reform.

So what’s the problem? Well, judges are judges: once they’re in place it’s hard for the WTO’s member countries to make them stick to limited legal interpretations and defer to governments’ freedom to set trade policy. Andy Shoyer, veteran trade lawyer at the firm Sidley Austin in Washington, said: “Appellate body members come from different legal cultures, and it’s hard to discipline those whose instinct is to dig in to a question de novo rather than apply a deferential standard of review.”

It’s also optimistic to assume member governments can even agree a precise set of instructions to judges. Shoyer said there were various ways of constraining judicial over-reach, including member governments giving “authoritative interpretations” of WTO law to judges and allowing the AB to pick and choose whether they will hear an appeal. But, he said: “The problem is that they all, in reality, require a consensus among the membership which is likely to be elusive.” 

Preventing the AB from pretending to be the Supreme Court or the ECJ isn’t that simple. Certainly, the AB isn’t supposed to create formally binding precedent for future cases. But clearly it will refer to interpretations of the law in earlier AB rulings. To do otherwise would create a destabilising degree of uncertainty as the AB would make it up as it went along each time. How much precedent is too much?

Nor, incidentally, is the US quite as purist as it suggests. Bringing WTO cases to rein in China’s state capitalism, Washington has repeatedly complained that they have given unduly narrow interpretations of what constitutes a “public body” for the purposes of declaring trade-distorting government subsidies illegal. Judicial reach for me, but not for thee.

A pragmatic partial solution would be one suggested by the aforementioned Jennifer Hillman, now a professor at Georgetown University: carve out hearings against governments’ antidumping rules into a separate dispute settlement process that defers much more to governments. Let the Americans have their zeroing, for God’s sake: it’s a daft idea that basically means ignoring facts you don’t like, but it’s not worth blowing up the WTO over. But that’s not likely to go far enough.

These are fiendishly complicated issues that we’ve by necessity only sketched out. Happily, in Katherine Tai the US has a trade representative with long experience in WTO litigation. But as with everything in this area, it’s also going to take some politics and diplomacy to get consensus around reforms that might permit the AB to be unblocked and this arm of the WTO to function once again.

Tit for tat

Iain MacVay, partner at White & Case, discusses the creation of UK freeports and why it won’t undo the damage done by Brexit.

The UK chancellor has announced the creation of eight freeports as part of last week’s Budget. Can you tell us exactly what a freeport is? 

Iain MacVay, partner at White & Case: ‘Neither the EU nor third countries are going to treat products from UK freeports any differently to other products arriving from third countries’

Freeports are areas within the UK where customs processes, tariffs, tax and regulation are applied lightly or not at all. Once goods produced in the freeports are sent to the rest of the UK all normal tariffs, taxes and regulations apply. If exported they will be treated by third countries as normal UK exports. The idea is that the freeports allow businesses to produce goods, and possibly some services, without the full burden of the costs and bureaucracy applied to UK businesses outside the freeports. Some regulation will be necessary to avoid problems of tax evasion and other issues sometimes associated with the light touch regulation in freeports.

Does this structure get around some of the barriers imposed by Brexit? 

In short, no. The barriers imposed by Brexit are barriers faced by all third country imports into the EU. Neither the EU nor third countries are going to treat products from UK freeports any differently to other products arriving from third countries. There are additional risks for businesses based in freeports where the EU or other jurisdictions think the tax breaks or other benefits are subsidies. In addition to normal trade rules against subsidies, the UK commitment to level playing field rules in the trade deal with the EU may also have an impact on freeport policies.

There are freeports scattered around the world. What advantages would the UK freeports have going for them? 

Some businesses producing for consumption in the UK may find it attractive to locate in a UK freeport for manufacture or assembly of products. Similarly, producers with short supply chains close to the UK may see the UK freeports as a good alternative to EU and other regional freeports. It is harder to see the attractions of UK freeports for companies producing for third country markets. Freeports around the world with varying levels of customs, tax and regulatory structure offer stiff competition. There is a tension between the government’s commitment to maintaining employment, environmental and other important regulatory standards in the freeports and competition among freeports globally. 

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Source: Economy - ft.com