Will Great Power Competition Doom the WTO?

By Abraham Yanchen Wu

As the products of victory from WWI and WWII, the General Agreement on Tariff and Trades (GATT) and the World Trade Organization (WTO) have proved to be reliable, effective, and overall successful in projecting the visions of the winning countries to reshape the global trade regime in different times. 

Since its creation, the world has witnessed the unprecedented success of the WTO’s effectiveness in settling economic and trade disputes among its 164 members and functioning as the leading force in shaping the international economic order. Notably, the dispute settlement system is referred to as the “crown jewel” of the WTO because rule-based arbitration fundamentally consolidates member states’ confidence in preserving equal trade relations.

However, in recent years, the WTO regime has become increasingly unstable as some powerful member states continuously express discontent with the WTO’s Appellate Body. This WTO legal system has been subject to mounting criticism, such as in 2016 when the Office of United States Trade Representative (USTR) under the Obama administration blocked the reappointment of South Korean member Seung Wha Chang.

Any individual state’s challenge to the WTO system is important because the WTO does not belong to and is not managed by any specific country. Its governance and arbitration system especially function through negotiations and common understandings among its member countries. In other words, achieving its binding rules, agreements, and principles is based on volunteerism.

America’s discontent with the dispute settlement mechanism has led it to block the appointment of new members to the Appellate Body, bringing dispute resolution to a halt. Simply put, the U.S. perceives that inadequate WTO agreements force it to turn to unilateral measures to address competitive distortions. The challenges facing the WTO are not merely a set of controversial cases but rather a threat to the WTO’s crown jewel: the legitimacy and effectiveness of the dispute settlement system.

As described in the USTR’s 2019 Trade Policy Agenda and 2018 Annual Report, the Trump administration cited several concerns with the Appellate Body as reasons for withholding support for WTO judges. A primary concern is that the appeals tribunal has allegedly exceeded its mandate when interpreting the WTO agreements, thereby “adding to or diminishing rights or obligations under the WTO Agreement(s)” without the consent of WTO Members, in particular when deciding disputes involving subsidies, trade remedies, and technical product standards. 

The growing influence of Chinese state owned enterprises (SOEs) raises the considerable problem that these organizations have blurred the lines between the actions of state and private entities, which, in turn, significantly challenges the existing WTO trade regime. China employs a magnificent pool of SOEs, and they have become increasingly competitive in the global market thanks to the expanding state’s power.

The WTO maintains strict restrictions on “government or public bodies” that provide subsidies to exporting firms. Once a firm purchases intermediate products or raw materials from an SOE, the firm will be qualified as accepting government subsidy and thus be subject to WTO penalties. 

Despite the definition of the SOEs, the determination of SOEs (whether it constitutes a “public body” or a private one) has proven controversial under current WTO rules, leaving controversial litigation outcomes remarkably likely. 

The most challenging situation occurred in the 2008-2012 case between the US and the PRC (DS379). The US Commerce Department argued that a set of Chinese SOEs constituted “public bodies” because the Chinese government owned a share in these SOEs. In Washington’s view, this violated the WTO rules for providing a subsidiary package to exports. 

Interestingly, the Appellate Body made decisions more favorable to China. The Appellate Body interpreted that “government owning a share” cannot solely determine an entity to be a “public body.” Rather, to be a “public body,” the entity must exercise “governmental authority” (and indeed, the Chinese SOEs in question did not).

After the litigation outcome in DS379 affected several subsequent cases and drew prior case law into conflict, the Trump administration sharply criticized the WTO Appellate Body.

Existing reform efforts are targeting U.S. concerns, but the effect is foreseeably palliative. A proposal by the EU that argues “the Appellate Body should address only the issues necessary for the resolution of each specific dispute” was drafted in direct response to American complaints. Linking back to the previous Chinese SOE case, this proposal aims to prevent the Appellate Body from interpreting the rule beyond the need for deciding the specific case, leaving less possibility for controversial or vague precedents.

However, such efforts are only limited to resolving upfront problems technically. A permanent solution to the crisis facing the WTO dispute settlement system will require a balancing between substantive multilateral concerns, especially the larger American-Chinese debates.

The dispute over the WTO’s interpretation of a “public body” represents a more fundamental question of whether the WTO system can handle the state capitalism of China. Thus, simply focusing on getting the Appellate Body functioning again misses the point of reforming the dispute settlement system. Instead, at the root of the crisis is a breakdown in the negotiation or rule-making function of the WTO.

Arguably, China does not want to contest the basic principles of the WTO system but rather wishes to gain more authority and leadership within it. China’s significant trade surplus and boosting economy are inextricably linked to the market size and effectiveness provided by the WTO rules-based system in international trade. 

On the other hand, China endeavors to consolidate the nation’s stability and economic security, which are significantly based on a pillar of its state capitalist economy: the SOEs. This dilemma makes the issue troublesome, because in the short term, China can neither forgo the openness to international trade nor make radical compromises on SOEs and governmental subsidies.

For the United States, the right question to tackle is how to realize the potential of the WTO once again. Though the new United States Trade Representative has acknowledged concern about the Chinese SOEs and governmental subsidies, it is an encouraging signal that the U.S. is seeking new common goals with China on recovery from the pandemic and climate change. These common issues can provide new reasons for the U.S. and China to work together on WTO structural reform and questions in the Appellate Body.

The time has passed to make the WTO function as effectively as it did twenty years ago. Rather, it is a time for both the United States and China to consider how to make the WTO work as well as possible, especially to address issues like the pandemic and climate change that impact trade. The WTO might be great again, but greatness will need a new definition in the era of great power competition.

Abraham Yanchen Wu is a senior undergraduate majoring in international studies at the University of Washington. His passions include China, the global political economy and international law.