In U.S. actions, the worry of global trade lawlessness

Why in News?

• Four separate World Trade Organization (WTO) panels recently ruled against the decision of United States to impose import duties on steel and aluminium in 2018, that sparked a wave of trade wars around the world.
• This is a significant development in international trade law, as these tariffs were found to be inconsistent and in breach of the WTO rules, setting wrong precedence for other nations and challenges the rule-based liberal trade order.

 

What is World Trade Organization (WTO)?

• The Geneva-based 164-member WTO is a multilateral body which formulates rules for international trade (exports and imports) and adjudicates disputes between two or more than two countries on trade-related issues.
• It describes itself as a “member-driven”, “consensus-based” organisation and is the world's largest international economic organisation representing over 98% of global trade and global GDP.
• It officially began operations on January 1, 1995, in accordance with the 1994 Marrakesh Agreement, thus replacing the 1948 General Agreement on Tariffs and Trade (GATT).

 

What is the organisational structure of WTO?

Image Caption: WTO organisational structure

• The highest authority of the WTO is the Ministerial Conference, which is composed of all member states and usually convenes biennially (every 2 years) and consensus is emphasised in all its decisions.
• The daily work is handled by three bodies whose membership is the same. The only difference is the terms of reference under which each body is constituted.

 

What is the Dispute Settlement Body (DSB) of WTO?

• It decides the outcome of a trade dispute on the recommendation of a Dispute Panel and possibly on a report from the Appellate Body of WTO.
• Appellate Body is a standing body of 7 persons that hear appeals from reports issued by panels, which may have amended the Panel recommendation if a party chose to appeal. 
• Only the DSB has the authority to make these decisions, panels and the Appellate Body can only make recommendations.

 

What is the issue of U.S .tariff hike?

• The U.S. had imposed tariffs of 25% and 10% on steel and aluminium during the presidency of Donald Trump, citing unfair competition and national security interests.
• The WTO panel found these tariff rates breaching the U.S.’s obligations under the General Agreement on Tariffs and Trade (GATT) and recommended U.S. to bring these into conformity.
  • The GATT obligates countries not to impose tariffs beyond bound rates.
  • Bound rate is the maximum rate of duty (tariff) that can be imposed by the importing country on an imported commodity.
• Further, these tariffs breached Article I of GATT because they discriminated between some foreign producers of steel and aluminium over other. e.g., Canada, Mexico and its allies like Japan, UK and EU were exempted from these tariffs.
  • This led to nations like China, Norway, Switzerland, and Turkey to raise case against U.S. in WTO.

 

What are the reasons for U.S. tariff hikes?

• National security reasons: The U.S. defended its tariff hikes under Article XXI of GATT which allows countries to deviate from their trade obligations on grounds of national security.
  • This article allows a country to take any action ‘which it considers’ necessary for the protection of its essential security interests taken in time of war or other emergency in international relations.
• New economic order is evolving: The international economic order today is moving away from the post-Cold War neoliberal order toward a new geo-economic order.
  • Economic and security interests ran relatively distinct tracks in the neoliberal order, and the US, as its indisputable hegemon, promoted free trade and interdependence because it did not fear the rise of strategic adversaries such as China.
  • However, convergence of independent economic and security tracks heralded the geo-economic order where countries such as U.S. embraced protectionism as the difference between the size of the Chinese and American economies began to shrink.
  • The American consensus on the geo-economic order is evident as both Trump and Biden administration backed tariffs in guard of national security.
• Evade international oversight: The U.S. increasing used the national security jargon to justify such economic nationalism in an attempt to blunt the possibility of international courts reviewing state action.
• Against China’s unfair trade practice: The US said that its tariffs were aimed primarily at China, which for years has been selling its steel below market prices owing to its unfair government support.
• Environmental concerns: The U.S. claimed that its tariffs promote trade in metals that are produced in ways that minimise carbon emissions and impose tariffs on metals that are deemed to cause too much pollution.
• Protect domestic industry: The U.S. cited that tariff were needed to protect domestic manufacturers from global overproduction of the metals.

 

WTO observations on the issue

• The U.S. assertion related to national security rule in Article XXI is not entirely ‘self-judging’ and that WTO can review the action of a state taken purportedly to protect its national security.
  • It is consistent with previous WTO jurisprudence laid down in the Russia-Transit and the Saudi Arabia- IPR cases.
• The Panel also rejected the U.S.’s argument that its hiked tariff rates are due to global excess capacity, which could have led to excessive imports of these two commodities used in defence production, thus compromising the U.S.’s national security.
  • It held that the “global excess capacity” situation asserted by U.S. does not constitute an ‘emergency in international relations’ under GATT as it lacked severity.
• WTO panel also observed that if the country does not abide by the decision, the countries that brought the complaints are entitled, under WTO rules, to impose retaliatory and punitive tariffs on the US products.

 

How US responded to the WTO’s ruling?

• The Biden administration has rejected the WTO Panel’s ruling calling it ‘flawed’, as WTO has no right to decide U.S. national security policy and consequently denied to remove the illegal tariff rates.
• The U.S. could appeal the ruling, sending it into a legal void since Washington has blocked appointments to the WTO Appellate Body, rendering it incapable of giving a judgment.

 

Conclusion

• Unlike, Neoliberalism based on principles of non-discrimination in international economic relations and a peaceful dispute settlement through neutral international courts, the new geo-economic order risks ‘international trade lawlessness’.
• With ever-heightening geopolitical tensions in current scenario, other nations could also likely trigger the national security exception and brazenly pursue unilateralism and economic nationalism.
• This particular ruling thus has importance not only for member’s future policies but also how it impacts their overall support for the WTO system and following a rule-based order.

 

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Q1) What is the most favored nation status?

The most favoured nation (MFN) principle is based on the idea that countries should treat all their trade partners equally—that no one country should be “more favoured.”

 

Q2) Which WTO bodies are involved in dispute resolution?

The General Council convenes as the Dispute Settlement Body (DSB) to deal with disputes between WTO members. Such disputes may arise with respect to any agreement contained in the Final Act of the Uruguay Round that is subject to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).

 

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Source: In U.S. actions, the worry of global trade lawlessness