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US, China trade rivals spar as WTO's future hangs in balance

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The eventual victors of the U.S.-China trade war are far from a foregone conclusion, but the World Trade Organization is unlikely to be among them. Facing an "existential crisis," the WTO has become the battleground for the two global superpowers, potentially leaving it a shadow of its former self by year-end.

The Geneva-based organization, founded in 1995 to liberalize trade, has been pivotal in the development of global commerce, facilitating multilateral trade agreements and rules between its 164 member countries and adjudicating disputes brought before its appellate body. Its member countries now represent 98% of trade worldwide. But tension between two of its members — the U.S. and China — is threatening to leave the organization in disarray.

The tension goes beyond the parameters of the WTO and stretches into politics as China pursues its "Made in China 2025" plan to become a world leader in sectors such as IT and artificial intelligence and while the Trump administration is promoting its "America First" agenda, according to World Bank economist Aaditya Mattoo. "The big provocation and source of friction [between the two countries] is the China 2025 program, because it's China saying they will contest the cutting edge of technology," Mattoo told delegates at a recent WTO conference in Geneva.

China's WTO membership, which began in 2001, has played a pivotal role in laying the foundation for its 2025 plan, and the country has become "a rising power that [has] benefited enormously from the whole system of world-based trade," Mattoo said.

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Yet China's ascension has led to the U.S. crying foul. It claims that China is not upholding its duty as a WTO member by maintaining subsidies prohibited by global trade rules and pursuing what U.S. officials call "forced technology transfers" — requiring foreign companies that want to operate in China to share their intellectual property with local partners — among other issues. It also takes issue with China claiming "developing-country" status in the WTO, a self-ascribed term lacking a formal definition that affords different treatment to developed-country members, such as longer time frames for meeting new rulings.

The U.S., a founding member of the WTO, could soon turn its back on the organization rather than work with the other member countries to address the larger "existential crisis" hovering over the organization, a route that Zhang Xiangchen, China's WTO ambassador, advocated at the Geneva conference. "We support the necessary reform of the WTO," he said.

The WTO's "crisis" is happening at a time when it has a prominent role in today's global economy as trade barriers proliferate. It calculates that G-20 nations imposed restrictions on $481 billion of traded goods between mid-May and mid-October 2018 in the form of tariffs, import bans and export duties. This marked a sixfold increase and the highest level since records began in 2012. Iron and steel products are the primary source of trade interventions, followed by furniture, bedding, mattresses and electrical machinery. However, as barriers were erected, others were dismantled, with tariffs covering $216 billion of trade over that period scrapped or reduced.

Anger at appellate

To drive home its unhappiness with its standing in the WTO, the U.S. has turned its attention to the organization's appellate body, which sits within its dispute settlement unit. The disputes body has handled more than 500 cases between members since the WTO's founding, a number of which have headed to the body's appellate in the case of a country contesting a ruling. One recent ruling by the appellate involved Brazil, which the appellate ruled had violated WTO rules by using taxation to discriminate in favor of domestic automotive, electronics and technology manufacturers, following a complaint from the EU and Japan.

Read more: China tariff uncertainty limiting investment, expansion for American companies

According to U.S. Deputy Trade Representative and WTO ambassador Dennis Shea, the appellate judges have "strayed significantly" from what was outlined by founding countries. This includes unilaterally deciding to promote "rights and obligations not in any other WTO agreements" and extending the deadline for appeals beyond the pre-agreed 90 days.

However, Jeffrey Kucik, assistant professor of political science at the University of Arizona, said in an interview that while the appellate has ruled against the U.S. in most cases, it is not the result of the U.S. being treated unfairly or differently than other members. Most cases that get to the appellate body generally end in victory for the complainant, he said. The appellate has received more complaints about U.S. trade practices than any other member country or group, 150, compared with 85 for the EU and 41 for China. Many of the complaints against the U.S. have been about antidumping duties imposed in 2002 under then-President George W. Bush and more recently under President Donald Trump, who both aimed to protect the country's steel industry.

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Nonetheless, the Trump administration has begun using its veto power to prevent the appellate body from replacing four judges as their terms ended, most recently Shree Baboo Chekitan Servansing from Mauritius in September 2018.

With the terms of two judges set to end in December — those of Ujal Singh Bhatia of India and Thomas Graham of the U.S. — the appellate will have only one of seven judicial vacancies filled, by Hong Zhao of China. Her term ends one year later in 2020. Bhatia and Graham departing without replacements would leave the body two judges short of the minimum required to function as an appeals court.

Paralysis of the court would be a blow to the organization. "The WTO effectively becomes toothless," Peter Dixon, a London-based economist at Commerzbank, said in an interview. "If you don't have a resolution system in place, you have a system of possibly complicated bilateral relationships."

In other words, without recourse to a third party, "countries take actions into their own hands," a situation that generally works in favor of the larger complainant, Dixon said.

WTO panels would still be able to rule on disputes if the appellate disintegrates, but members would no longer be able to file appeals, meaning any new rulings would only be binding if the affected country accepts the decision, said Yuriy Rudyuk, a partner at law firm Van Bael & Bellis in Brussels.

It boils down to fish

In the coming months, the WTO's ability to operate will be tested in another way as members face off over a pivotal ruling on how and whether to allow countries to subsidize their fishing industries, which will force into the limelight a long-simmering debate over the differential treatment developing-country members such as China are afforded.

"It's been remarked to me that the WTO won't save the fish; it's the fish that will save the WTO," Shea said at the Geneva event.

The WTO has a self-imposed deadline of 2019-end, ahead of its next major ministerial gathering in 2020, to decide whether to require member countries to remove or renegotiate national fishing subsidies as it seeks to address depleting global fish stocks, 90% of which the United Nations deems either fully exploited or overexploited.

Read more: Tough stance on China not paying off: US trade experts

Countries disburse subsidies of about US$35 billion annually to the fisheries sector; about US$20 billion is usually to enhance fishing capacity, according to the International Centre for Trade and Sustainable Development. Fisheries in China along with Japan, South Korea, Chile and Peru could be the most heavily impacted by a WTO ruling.

But before a ruling can be made, a sticking point will need to be resolved involving the ongoing debate about whether developing countries should receive special or differential treatment in the final agreement.

The demarcation is drawing fire from the U.S. "There are too many advanced economies claiming developing-economy status," Shea said, noting that a number of G-20 countries have declared developing-country status at the WTO. China is one such country, despite being among the leaders of global trade.

As the fisheries negotiations near completion later this year, members will be watching to see whether China agrees to take developed-country status, which would require it to uphold any rulings more quickly than it would as a developing country while also potentially helping to cool tensions across the board at the WTO.

But as Shea sees it, "If [China] claims special and differential treatment in the fish subsidy, then that'll be a problem."