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A global trade war

The global trading system is currently experiencing actions by governments not seen prior to the establishment of the World Trade Organisation (WTO), at least not on the same scale.

The origin hereof is the actions taken by President Trump imposing tariffs in what appears to be a manner that does not comply with WTO rules. The WTO is a rules-based system and was specifically established to ensure that the rules are adhered to (coincidentally, the WTO’s predecessor was never established as the USA adopted a protectionist stance backed by increasing tariffs).

Adherence to the WTO rules is achieved by holding nations accountable to any action that is incompatible with the WTO rules through a dispute settlement mechanism. For this system to work a few key elements must be present. Firstly the system requires that one (or more) nation needs to initiate formal proceedings against the errant nation. Secondly the WTO must be equipped with sufficient staff to administer the disputes. Lastly there must be some finality to any decision take by the WTO’s dispute settlement system. The final say on all WTO legal matters rest with the WTO’s Appellate Body.

The Appellate Body is a seven member (judges) body, where each judge serves a four year term (which can be renewed only once). Currently three seats are vacant, which does not allow the Appellate Body to operate at full capacity. The USA has been blocking the selection process to fill these vacancies. A fourth seat can become vacant if Shree Baboo Chekitan Servansing is not endorsed for a second term by September 2018. The USA can block the endorsement. If this happens the Appellate Body would have even less capacity as three judges must sign off on any ruling made by the Appellate Body. Two other members’ final terms come to an end on 10 December 2019. If these vacancies are not filled it would mean that no decision by the WTO dispute settlement mechanism may be enforced as any losing party would merely appeal to the Appellate Body which cannot make a decision as it would not have the legally required three members. Should the USA continue on the current trajectory, the global trading system will essentially be in the same position as it was prior to the establishment of the WTO in the sense that nations will be free to do as they please as there will be no enforcement of the rules. Coincidentally the last time this happened the solution was the establishment of the dispute settlement mechanism, albeit with some flexibility, and as such it would be interesting to see what the response would be should this again occur.

The focus of President Trump’s efforts seems to be on China, but other nations are also affected by these tariff increases. As such they also stand to lose if they do not take action at the WTO and if they do not engage with the USA in order to ensure the maintenance of the WTO’s dispute settlement mechanism. Closer to home, the South African Development Community (SADC) saw the abolition of the SADC Tribunal which was the equivalent, and in some respects improved, version of the WTO’s dispute settlement mechanism for regional disputes. This predictably resulted in nations violating the agreed rules of trade within SADC and as a result hereof trade in numerous products have been negatively affected. However, this resulted in impetus to negotiate a more comprehensive free trade agreement with more members (being the member countries of COMESA and EAC) where adherence to the rules would once again be subject to dispute settlement.

More WTO Member States are coming out in support of the WTO advocating the economic benefits derived from having a rules-based system. More importantly many Member States are supportive of an improved reform of the current system. Time will tell whether the USA’s protectionist stance will in fact lead to more effective global trading system.

Rian Geldenhuys
© Trade Law Chambers 2018

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