A global Catch-22

David Dodwell says frustration with the US appeal over ‘Made in Hong Kong’ label reflects growing dismay at WTO’s crippled dispute settlement process

If there is one thing worse than finding yourself embroiled in an international trade dispute, it is discovering there is no way of resolving it. That frustration was at the heart of complaints by Hong Kong Secretary for Commerce and Economic Development Algernon Yau Ying-wah, while meeting Apec trade ministers in Detroit, over a cynical and mischievous 2020 executive order by then US president Donald Trump insisting that Hong Kong exports be labelled “Made in China”.

Hong Kong immediately protested to the World Trade Organization, arbiter of trade disputes. After two years of deliberation, a panel of WTO judges ruled last December that the United States had broken trade rules and that Hong Kong was entitled to use “Made in Hong Kong” export labels.

Problem solved? No. The US simply appealed against the ruling, confident that its “Made in China” executive order could not be challenged. Why? Because the WTO’s appeal process was essentially euthanised on December 11, 2019, by a Trump administration decision to block the appointment of new judges to the WTO’s court of final appeal. WTO dispute panels still meet and make rulings, but there are no longer any judges to hear an appeal.

Hong Kong is not the only victim of America’s wilful strangulation of the WTO’s dispute settlement function. At least 15 appeals against WTO rulings have been lodged over the past three years as losers now routinely appeal into the legal void, confident they will suffer no consequences. Such is the existential challenge to the WTO, and its international rule-making role, that the very future of the body may be in jeopardy. This is despite broad recognition the trade-liberalising leadership of the WTO – and the General Agreement on Tariffs and

Trade that paved the way for it – has been pivotal in driving economic growth and poverty alleviation.

“The system was designed to promote international trade, and it has done so,” wrote Alan Wolff in a policy paper for the Washington-based Peterson Institute for International Economics. He noted that, since 1948, trade volumes had grown 45-fold and trade value about 400-fold, to a record US$32 trillion last year. Despite these colossal benefits, Wolff, a veteran trade negotiator and WTO deputy director general until two years ago, poses a grave question in his paper: “Can the World Trade Organization be saved? Should it?” Perhaps predictably, he insists it can and should be saved – but whether it will be is another matter.

In its 28-year life, it boasts the flimsiest of track records in liberalising trade: efforts to forge a new global trade liberalisation pact failed catastrophically; the only deals it has cut are an insubstantial Trade Facilitation Agreement and an agreement to rein in fisheries subsidies that, after 20 years of negotiation, is not yet final. Its main achievement may possibly be negotiating China into the organisation in 2001.

Efforts to liberalise farm trade, to address e-commerce and digital trade, and to bring order and transparency to the use of subsidies and the role of state-owned enterprises, have made negligible progress. And it has struggled to find traction on climate change and the global management of pandemics. Perhaps most troubling, the WTO has been all but abandoned by the US, one of its original architects, and the most forceful driver of the rules-based international order that sits at its core. As more countries demand a say in the shape of international trade rules, so US leaders have become progressively grumpier with practices that fail to serve US interests, and increasingly inclined to tackle trade problems unilaterally.

The WTO’s dispute settlement process has been attacked for “overreach”, undermining US sovereign prerogatives. Nowhere is this clearer than in America’s increasing use of threats to national security as justification for tariffs and other protectionist measures against practices particularly concentrated in China. As many WTO members have protested against the dubious misuse of the national security threat, US officials have become increasingly petulant. As Wolff explained: “The red line position of the United States is that what is in a country’s national security interest is a nonjusticiable issue, a matter that only a sovereign can decide, and a decision that cannot be reviewed.”

Since the WTO’s international trade rules depend on reciprocity, with all parties willing to make concessions, the “non-reviewable, non-actionable” status of protection based on “national security” has created a Catch-22 that the WTO has been unable to resolve. Wolff has tabled a possible solution, “insulating national security claims from panel review while not shielding members from the consequences of invoking the exception”. In short, anyone harmed by “national security” protections should be allowed to retaliate.

Such a compromise would only be helpful if the US also agreed to restore the WTO’s dispute settlement process by releasing its chokehold on the appointment of appeal judges. Many believe this is essential to saving the WTO. Sadly, that does not look likely any time soon.

Meanwhile, Hong Kong’s right to export “Made in Hong Kong” goods to the US remains in limbo. And the WTO’s future hangs by a thread.