Is the WTO One of Trump’s ‘Big Quagmire Deals’? Here’s What’s at Stake.

Chad P. Bown (PIIE)

February 28, 2017
Photo Credit: 
Reuters/Denis Balibouse

In a speech Friday, President Trump reaffirmed his abhorrence of US trade agreements, especially “these big quagmire deals that are a disaster.” And the Financial Times reported Monday that his administration was debating a new strategy—leveling unilateral US trade sanctions against China and other trading partners, and bypassing the World Trade Organization (WTO) dispute settlement process.

A separate sign of Trump’s ultimate WTO strategy will become evident in how his administration deals with ongoing trade disputes that President Barack Obama initiated on behalf of US farmers, workers, and companies. The anecdotal evidence is that prior presidents have continued to pursue their predecessors’ cases. But will President Trump?

How does the WTO handle disputes?

The establishment of the WTO in 1995 ushered in a major new system for countries to resolve their bilateral trade frictions. Since 1995, the United States has brought 114 formal disputes against trading partners, more than 20 percent of all cases filed worldwide. It has challenged friends and foes alike.

The new procedures resulted, in part, from US frustration with the toothless scheme under the prior General Agreement on Tariffs and Trade (GATT). The GATT approach was based much more on diplomacy than law. Any country—even the potential defendant in a case—had veto power, effectively halting meaningful dispute settlement.

The WTO dispute resolution system let countries challenge each other through an explicit legal process. It required the rigorous presentation of evidence but also allowed for the possibility of appeal. Countries can be authorized to retaliate, but only in a formulaic and limited fashion.

Trading partner retaliation does make concrete the economic costs of maintaining an illegal policy. Sometimes—albeit on only a handful of occasions—WTO-sanctioned retaliation has been the final push needed to convince policymakers to comply with rulings and remove a trade barrier.

Obama launched a final flurry of WTO disputes

The Obama administration initiated five new WTO trade disputes during its last months in office. In July, it challenged China’s export restrictions on raw materials that were hurting US semiconductor and medical device manufacturers. In September, it charged Beijing with subsidizing Chinese rice, corn, and wheat growers, causing US farmers to lose billions of dollars of exports.

Obama continued to push this trade agenda even after the November election. Before Trump’s inauguration in January, Washington formally accused Beijing of restricting US exports of rice, corn, and wheat and of subsidizing Chinese aluminum companies. And the United States blamed the Canadian province of British Columbia for implementing a grocery store law that discriminated against California winemakers in favor of local varieties, such as Wayne Gretzky Okanagan Great Red.

But WTO procedural constraints mean that Obama had time only to start these disputes. Whether Trump carries the puck forward will send an important signal regarding whether the WTO is an integral part of his trade strategy.

What typically happens after US administrations change over?

Were these last-gasp Obama cases routine trade business? And do new presidents normally pursue their predecessors’ WTO grievances?

Recent research by Paola Conconi, Maurizio Zanardi, and their coauthors finds US presidential elections tend to influence the timing of WTO dispute filings, especially those with economic interests in key electoral (“swing”) states. But if domestic politics drove the filing of those cases and winning them would mainly help a political opponent, incoming presidents may choose to drop them entirely and focus on their own priorities.

This research has a caveat: Given the short life of the WTO, there are only two presidential transitions available to investigate.

WTO disputes aren’t resolved overnight, so successor governments may have to wrap up

Admittedly, any given WTO dispute takes a long time to fully litigate. Research from Henrik Horn, Louise Johannesson, and Petros Mavroidis finds three years are needed just to obtain basic WTO rulings. Finalizing the authority to make a WTO-sanctioned tariff retaliation threat requires even longer.

So Obama’s US trade representative, Michael Froman, wasn’t breaking new ground by handing off these brand-new disputes to his still unconfirmed successor, Trump’s trade representative nominee, Robert E. Lighthizer. After the November 2008 election, the George W. Bush administration passed the baton on four newly initiated disputes—two of which were then litigated through the formal WTO process.

The outgoing Clinton administration did not file any new WTO disputes between the contested “hanging chad” Florida recount election of November 2000 and the Bush inauguration. However, when leaving office, Clinton handed Bush at least 12 cases that had yet to be prosecuted to the point of reaching any WTO legal decision.

According to the WTO, Bush reached some legal conclusion—either bringing a case to a formal legal decision or negotiating a “mutually agreeable solution” logged in the WTO’s official public record—in roughly 75 percent of those disputes.

Continuance of these offensive disputes may be politically important to maintain any Trump support for the WTO

Trading partners challenge the United States with WTO disputes just as frequently as the United States brings offensive cases. It is thus equally important to recognize that Trump also inherits many disputes in which he must defend US policy.

In some of these, it is likely the WTO will rule the US policy to be illegal. At that point Congress may need to work with Trump to implement domestic legislation to bring the United States back in line and avoid WTO-authorized trading partner retaliation.

The most politically contentious defensive case may turn out to be the dispute that Beijing brought in December, lodged after Trump had stated that China was not a market economy. But the United States also faces ongoing claims from Brazil, Canada, India, Indonesia, and South Korea.

And some of Trump’s own policies may turn out to be questionable at the WTO. For example, leading US corporate tax reform proposals include a controversial border tax adjustment that trading partners have already threatened to challenge in Geneva.

Politicians are best to think of WTO dispute settlement in reciprocity terms. You win some, you lose some. Indeed, the empirical record is that countries win most of their offensive cases and lose most of their defensive ones.

A new US strategy of threatening and potentially implementing trade retaliation outside of the WTO dispute settlement system would be very worrisome. During the campaign, Trump threatened to potentially pull the United States out of the WTO entirely.

But even the choice of dropping offensive cases would likely make the domestic politics of WTO dispute settlement more difficult down the line. The United States will almost inevitably lose a defensive case on Trump’s watch. At that point, having given up the offensive cases means he will lack any WTO disputes of his own to claim he has “won.” For that reason alone, a Trump decision to let go of these five Obama-era disputes could be a very bad sign for multilateralism and the WTO.