World Trade Organization (WTO)

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Talks on World Trade Organization (WTO) reform continued this past Thursday, January 24, 2019, in Davos, Switzerland. The “Ottawa Group” of 13 members, chaired by Canada, met on the need to protect and increase the functionality of the organization, focusing particularly on the dispute settlement mechanism and transparency aspects.

The United States has objected that the WTO’s existing rules are not adequate to respond to practices of non-market economies (most notably, China). The U.S. points to practices such as failure by countries to comply with transparency obligations to notify government subsidies; the anticompetitive behavior of state-owned enterprises (leading to overcapacity in sectors such as steel and aluminum); and the ability of countries to “self-declare” developing status and maintain exclusions from WTO obligations long after their economic situations have changed for the better.

Many WTO members privately agree with these U.S. concerns about the functioning of the WTO. Where they diverge, however, is over the U.S. approach to the WTO’s dispute settlement mechanisms. Over several administrations Washington has expressed concerns about the operation of the Appellate Body, which reviews panels’ findings, prompting the U.S. to block new appointments to the body. Three judges are required to handle cases, and by December 2019 (or earlier, if conflicts of interest arise with any one judge), only two members will remain. As a result, the WTO will be unable after that date to issue binding rulings in trade disputes.

The EU, Canada, and others have submitted WTO reform proposals in an effort to respond to U.S. concerns over the Appellate Body’s “overreach” and operation. For example, others have proposed that the Appellate Body refrain from interpreting domestic laws and generally act within its 90 day deadline for reviewing a panel’s findings. They have proposed expanding the number of Appellate Body judges from seven to nine, and for limiting the ability of any judge to serve beyond his or her appointment term. Washington has rejected these proposals, saying that they merely perpetuate the faults of the Appellate Body, and do nothing to correct them. Meanwhile, Washington has not set out its own blueprint for how it wants the WTO dispute settlement system to operate.

Greater consensus exists among the Ottawa Group and other WTO members on the need to improve WTO procedures for monitoring and transparency, and the process of notifying members’ trade policies. Some members hope that making progress in such procedural areas will ultimately bring the United States around and ease the way toward reaching greater consensus on the more difficult dispute settlement reforms.

During this meeting, volunteers within the Ottawa Group offered to lead reviews of the functioning of certain WTO committees, with the aim of improving the WTO’s deliberative function, and strengthening its ability to address trade concerns as they arise, without resorting to litigation:

  • Brazil – Sanitary and Phytosanitary Measures Committee
  • Singapore – Technical Barriers to Trade Committee
  • Switzerland – Rules of Origin Committee
  • Australia – Council for Trade in Services
  • Norway will examine the development dimension of WTO reform

It is important to note that the members must reach a consensus in order to make any significant changes to WTO rules. The Group intends to continue talks in May 2019.

On April 30th, the President issued two proclamations extending country exemptions for certain U.S. allies on the steel and aluminum tariffs pursuant to Section 232(b) of the Trade Expansion Act of 1962.

The President extended temporary exemptions for Canada, Mexico, and the European Union, granted a permanent exemption on steel tariffs for South Korea, and is considering permanent exemptions for Australia, Argentina, and Brazil. Trump’s administration unveiled its decision to extend the country exemptions just prior to the May 1st deadline, leaving the countries unaware whether the tariffs would go into effect by midnight.

In addition, the proclamation creates new limitations by eliminating the ability of manufacturers to receive a refund on steel/aluminum duties when exporting from the United States. Specifically, the new proclamation eliminates drawback claims on steel and aluminum. The elimination of drawback claims follows the elimination of foreign trade zone benefits for steel/aluminum imports in the earlier revisions to the steel/aluminum proclamations.

The United States temporarily extended the country exemptions for Canada, Mexico, and the European Union until June 1st, 2018. Trump originally stated that a successful NAFTA renegotiation between the three countries would result in a permanent exemption for Canada and Mexico. However, Canada and Mexico said that there is no connection between the NAFTA renegotiations and the Section 232 tariffs.

The United States determined to permanently exempt South Korea after the two countries concluded discussions to reduce steel overcapacity. South Korea agreed to limit its exports of steel products to 70 percent of its current volume, or 2.86 million tons of steel, to the U.S. each year. However, South Korea is no longer exempted from the aluminum tariffs as of May 1, 2018.

The proclamations also indefinitely extended temporary exemptions for Australia, Argentina, and Brazil. Although the agreements with Australia, Argentina, and Brazil will be finalized shortly, the President threatened to re-impose the tariffs if the deals are not finalized quickly. “Because the United States has agreed in principle with these countries, in my judgment, it is unnecessary to set an expiration date for the exemptions. Nevertheless, if the satisfactory alternative means are not finalized shortly, I will consider re-imposing the tariff,” the President said in the steel and aluminum presidential proclamations.

What’s Next?

China, India, and Turkey have requested WTO consultations with the United States over the Section 232 tariffs on imported steel and aluminum products. If the European Union does not receive a permanent exemption, then it is also likely that the EU will request WTO consultations with the U.S.

Countries argue that the tariffs violate the WTO’s Agreement on Safeguards and Article XXI’s National Security Exception pursuant to the 1994 GATT Agreement. If the U.S. successfully sets a precedent of Article XXI for national security reasons, then other members of the WTO could invoke the never-before-used Article to apply tariffs or sanctions as retaliation against U.S. exports.

On August 18, 2017, the Office of the United States Trade Representative (USTR) launched a formal investigation pursuant to Section 301 of the Tariff Act of 1974 on the People’s Republic of China (PRC). The probe sought to determine whether the acts, policies, and practices of the PRC related to technology transfer, intellectual property, trade secrets, and innovation were discriminatory towards U.S. firms and undermined the United States’ ability to compete fairly in the global market. Section 301 allows the President to seek removal of any act, policy, or practice of a foreign government that violates an international agreement or that unfairly burdens or restricts U.S. commerce.

On March 22, President Trump issued a Memorandum stating the USTR found PRC actions do undermine U.S. firms’ ability to compete fairly in the global market by (1) requiring or pressuring U.S. companies to transfer technology to Chinese companies; (2) imposing restrictions on, and intervening in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms; (3) obtaining cutting-edge technology by directing and facilitating the investment and acquisition of U.S. companies by Chinese companies; and (4) conducting and supporting intrusions and theft from the computer networks of U.S. companies.

In response, the President has directed the USTR to address these violations via a combination of retaliatory tariffs, World Trade Organization (WTO) dispute settlement, and the Department of the Treasury to address via investment restrictions.

For complete details, please see Crowell’s Client Alert.

On January 22nd, President Trump imposed new “safeguard” tariffs on imported solar panels and washing machines, which will be in place for the next three years before tapering downward.  For the renewable energy industry, this is another major blow from this administration. Solar panels, most of which currently come from China will have an additional tariff rate of 30% imposed. Notably, there are already more than 150 other U.S. trade measures in place against various Chinese products. This new measure threatens to handicap a $28 billion industry that relies on parts made abroad for 80 percent of its supply chain.

Trump has also imposed a tariff of 20% on imported washing machines.  This is the first use of safeguard tariffs by the United States since 2002 when President Bush used them to restrict steel imports.  This decision comes on the heels of a determination by the International Trade Commission (ITC) that imports of these goods had injured domestic producers.

While many have seen the action as a necessary means of protecting American manufacturers, members of the South Korean government have harshly criticized the move and signaled a willingness to formally air their grievances before the World Trade Organization (WTO).  Significantly, the 2002 safeguard tariffs imposed by the Bush Administration were ultimately withdrawn after an adverse ruling at the WTO put the United States under the threat of retaliation.

The 11th biennial ministerial conference of the World Trade Organization in Buenos Aires, Argentina failed to deliver any concrete results. As EU Trade Commissioner Cecilia Malmström bluntly stated, “[W]e failed to achieve all our objectives, and did not achieve any multilateral outcome.”

The main areas of contention were agriculture and fisheries, involving the failure to agree on modalities to protect developing countries’ ability to ensure their populations’ food security through public purchase and stockpiling of foodstuffs and the failure to agree to ban subsidies for illegal, unreported, and unregulated fishing, respectively.

Please click here for more information on the conference.

The Trump administration is threatening to undermine the World Trade Organization’s dispute settlement system, often considered the crown jewel of the multilateral trade system, by blocking efforts to fill a number of vacancies at the WTO Appellate Body (AB). The AB hears appeals by WTO Members from reports issued by WTO dispute settlement panels. It can uphold, modify, or reverse these panels’ legal findings. It is a standing body of seven persons serving renewable four-year terms. Each appeal before the AB is heard by three of its members.

In recent years the AB has been hearing an increasing number of appeals, such that even with seven members available to consider multiple appeals at once, the limits of the system were being tested. In accordance with the WTO Dispute Settlement Understanding, the AB should rule upon an appeal within 60 days, extendable to a maximum of 90 days. Given the complexity of many recent cases, these are tight deadlines in the best of times. However, the AB is now down to five members, with the term of one set to expire in December 2017, and another in September 2018. Absent the approval of new members, the AB might be reduced to three members in one year’s time.

To the frustration of many WTO Members, the Trump administration has not clearly articulated its reasons for blocking the approval of new AB members. Past administrations have expressed concern over what has often been perceived in the U.S. as judicial activism on the part of AB members. There is also the perception that the AB has failed to act in the U.S. interest in important disputes. However, beyond these general concerns, the Trump administration appears to remain purposefully vague in a seemingly willful attempt to undermine the WTO, which President Trump has often denounced.

Given a lack of progress in key areas of the multilateral trade negotiations under the aegis of the WTO in recent years, the dispute settlement system has become the organization’s most important feature and has been instrumental in preserving confidence in the organization’s usefulness. By obstructing what until now has been the largely routine exercise of approving new members of the AB, the Trump administration is striking at the heart of the WTO with no clear resolution in sight.

For more information, contact: Charles De Jager

The U.S. was on the losing side in two cases at the World Trade Organization in April.

In the first, a WTO-appointed arbitrator said the U.S. must correct its antidumping and countervailing duty (AD and CVD) calculations on washing machines imported from South Korea by the end of 2017. If not, the U.S. could face retaliatory action from Seoul.

The dispute began in 2012 when Whirlpool Corp. petitioned for AD and CVD duties on Korean washing machines, primarily targeting Samsung. It alleged Samsung’s pricing tactics and receipt of an unfair government subsidy caused injury to the U.S. domestic industry.

Whirlpool was successful with its petition. The Department of Commerce imposed significant AD and CVD duties. The U.S. International Trade Commission concurred, finding the imported washing machines were a threat to U.S. manufacturers.

South Korea then pursued dispute settlement proceedings at the WTO. Although it succeeded on a number of its claims at the panel stage, both sides appealed portions of the decision.

In September 2016, the Appellate Body (AB)  upheld some of Seoul’s key claims. The DOC then asked to be granted 21 months to implement the AB’s findings and recalibrate AD and CVD rates. The arbitrator disagreed and determined 15 months from September 2016 was enough time for the U.S. to comply.

In the second case, three other arbitrators ruled Mexico can impose $163 million in retaliatory trade restrictions against the U.S. because U.S. dolphin-safe labeling rules for tuna products, modified in 2013, were found discriminatory by the WTO on four occasions.

The core finding is tuna caught in the eastern Pacific Ocean, a mainstay of the Mexican fishing industry, faces more stringent U.S. labeling requirements than fish captured in other waters.

In 2016, the U.S. revised its labeling requirements again in an attempt to bring them into WTO compliance. These modified rules are under consideration by a U.S.-requested compliance panel. Should the panel find the updated U.S. labeling requirements adequate, Mexico would no longer be allowed to retaliate. Until such time, Mexico can maintain its retaliation in the amount established by the arbitrator.

For more information, contact: Charles De Jager

On February 22, 2017, the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) entered into force after receiving four additional ratifications, meeting the required two-thirds acceptance of the agreement from its 164 members.

The TFA “seeks to expedite the movement, release and clearance of goods across borders, launches a new phase for trade facilitation reforms all over the world and creates a significant boost for commerce and the multilateral trading system as a whole,” according to the WTO.

It is expected to reduce members’ trade costs by an average of 14.3 percent, according to a 2015 study by WTO economists. The TFA is unique in that developing and least-developed countries are allowed to set their own timelines for implementing the agreement and a Trade Facilitation Agreement Facility was created to aid these countries in receiving the maximum benefits of this multilateral accord.

For more information, contact: Charles De Jager