Black Lies, White Lies and Some Uncomfortable Truths in and of the International Trading System

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The international trading system is not just about trade in which the only calculus of its worth and importance can be measured in the growth (or otherwise) of aggregate welfare, economically speaking. Since trade, in goods and services, is the principal modality of transnational intercourse, the international trading system and the legal system which undergirds it, reflects and constitutes the concomitant principal modus operandi of peacetime international relations. It is based on a respect for multilateralism and the rule of (international) law. That modus operandi radiates into other spheres of international cooperation, contributing ultimately to stability and peace. For some, on both right and left, it greases, too, the wheels of ‘globalism’, ‘the reign of capital’ (‘capitalism’ as an expression is somewhat out of fashion) and I have even seen the spectre of ‘international financiers’ being resurrected. But be as it may your view of these assorted alleged vices or virtues, I think there is a broad consensus that one should be careful not to throw the baby – multilateralism and the rule of law – out with whatever dirty bathwater within the system is not to your liking.

However, it is just this that is unfolding in front of our eyes. In trying to redress what he believes are ‘horrible’ terms of trade to which his country, the USA, had given its consent and enshrined in binding international legal instruments, Mr. T. and his crew seem almost more interested in throwing the baby out than cleansing what he considers is the dirty bath water.

Thus, for example, the WTO dispute settlement is slowly being asphyxiated by an American strategy of blocking appointments to the Appellate Body – the de facto World Trade Court. The by now infamous imposition of tariffs on certain steel products and the threats of doing likewise on trade in automobiles (there will be no Mercedes Benzes on 5th Avenue! – not such a bad outcome if it means their replacement by the ever fresh Fiat 500) is illustrative. In both cases the formal justification offered is ‘national security’. This is a black lie if ever there was one. Yes, legal terms, like beauty, are often as elastic as the beholder wishes them to be. And with that reasoning just about any weakening of the trading position of a state may be reducible to a threat to national security. I will not waste my and your time in explaining that this is not what the national security clause is about, though I feel some compassion for the young lawyers in the American government service who were required to write learned disquisitions and briefs trying to justify this legal construct. We all know what it is really about.

I will take some of my and your time to assert that pursuing these measures and the strategy behind them not only does violence to the international system but almost certainly will not benefit the economy and the aggregate welfare of the United States. In addition, it is further eroding the credibility of the United States as a reliable interlocutor when the agreements and treaties entered into by one administration are cast aside with the flimsiest of legal excuses by a subsequent one.

But there is an interesting ‘little’ inflection to the usage of national security. Those affected by the American measures, and especially those with some economic powder in their kegs such as the European Union, have threatened retaliation and by now, I expect, will have already started the process. And why should they not? But they have cast their retaliation as sitting within the legal framework of the WTO. This, I believe, is the White Lie in our story.

At the heart of the WTO Dispute Settlement System is Article 23, which provides as follows.

Article 23

Strengthening of the Multilateral System

  1. When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.
  2. In such cases, Members shall:

(a) not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in the panel or Appellate Body report adopted by the DSB or an arbitration award rendered under this Understanding;

(b) follow the procedures set forth in Article 21 to determine the reasonable period of time for the Member concerned to implement the recommendations and rulings; and

(c) follow the procedures set forth in Article 22 to determine the level of suspension of concessions or other obligations and obtain DSB authorization in accordance with those procedures before suspending concessions or other obligations under the covered agreements in response to the failure of the Member concerned to implement the recommendations and rulings within that reasonable period of time.

On its face, then, it would seem that the EU would and should be precluded from retaliating until such time as a violation by the USA has been established through the normal dispute settlement procedures and the appropriate countermeasures indicated. And yet, as we have all heard there is talk of retaliation with only a very short delay – 30 days and 60 days and 90 days are apparently being counted – etc. From all that can be garnered the EU is planning to use the exceptional regime for countermeasures under the Agreement on Safeguard. That regime indeed provides that in the face of a Member of the WTO resorting to the Safeguard regime and introducing new tariffs and the like, if certain conditions are not met, the ’victim’ states may adopt countermeasures which circumvent the strictures of Article 23 (the Safeguard regime is very short and fairly straightforward and thus comprehensible to non-specialists. Take a look:

The only problem is that the United States has not invoked the Safeguard regime as justification for its measures with the various triggers specified therein, but instead has invoked national security for which there is no regime of expedited countermeasures and which, on its face, is subject to Article 23 DSU.

I understand the European manoeuvre. In the face of the patent bad faith utilization of national security as a means of upending legal commitments which the United States had previously undertaken they are resorting to the most immediate and expeditious means of retaliation. What’s a little white lie in the face of a big black one? But be your moral and political judgement as it may be, the legally minded among you will and should feel queasy and everyone, including the most hardened IR realists, cannot but notice and be concerned by the corrupting spiral of bad faith and illegality into which everyone is sucked once the plug is pulled on multilateral legality.

The uninitiated may be tempted, therefore, to ask why the EU would not take the legal Kings Road and follow Article 23, putting in motion the full dispute settlement process of the WTO. Have we not been reading for a couple of decades now, thousands of pages, hundreds of articles, dozens of books all extoling the juridification of the WTO with its effective system of dispute settlement?

The uncomfortable truth is that from its inception the WTO system has suffered from a profound Original Sin (or sins) rooted in its conception as a system of inter-state dispute settlement rather than a system designed to ensure compliance. The unfolding kerfuffle over steel and cars and the reactions thereto only serve to bring into sharper relief than usual the systemic design flaw of the aptly named Dispute Settlement Understanding of the WTO.

Let me outline, then, these systemic flaws. The departure point is that for the most part states, as such, do not trade. The highest volume of trade in both goods and services is carried out by individual traders, more often than not small and big corporations. When there is a violation by the regulatory regime of a state of international trade law, such as imposing an illegal tariff or a discriminatory tax or non-tariff-barrier, the economic consequences will be suffered directly by the traders and the consumers of their product. They will, of course, be reflected in the trade statistic of the state, but the state as such is not the victim of the violation, it is individuals.

And yet, unlike investment regimes, the individuals harmed most directly have no direct standing to seek redress under the WTO DSU regime. They must enlist their (or some) government to initiate the process, which is intergovernmental. The ‘barriers to entry’ by harmed individuals into this process are huge. So many stars have to align for a violation to translate into a procedure under the DSU that in reality the WTO dispute settlement system deals with a fraction of all real and alleged violations. You have a better chance with a one arm bandit at a Las Vegas or Macao casino.

But the true Original Sin, the one for which the WTO is no legal paradise, is the fact that under the system the remedy for a violation is the cessation of such. With no more. You may be thinking, for not more than a minute, ‘what’s wrong with that?’ Is that not what compliance is all about? It is not what it is all about. As distinct from the classic regime of state responsibility where restitutio in integrum is the driving norm and the specialized regimes of say, the European Union and the investment world, the economic damage suffered as a result of the violation is not restituted. As a method of dispute settlement among states it is easy to see why this may be extoled. A state allegedly violates. Authoritative legal bodies, rather than a unilateral determination by the allegedly victim state, will decide through judicial proceedings whether in fact such violation took place, and then the offending state, if all goes well, will bring the violation to an end. And if it does not, there are possibilities for judicially controlled countermeasures.

Now let’s add one more crucial element – the time factor. On paper, if you work your way through the DSU it would seem to aim at guaranteeing a swift process, measured in months. In reality it can take years. The consultations and negotiations leading to the formation of a Panel can drag on somewhat. The proceedings before such quite often exceed the prescribed time. Then there is the almost inevitable appeal and the proceedings before the Appellate Body. Even if a violation is established by a Panel and confirmed by the Appellate Body, the matter does not end there and then. The violative state has a period, of about a year, to comply. Then the extent to which it has or has not can, and often does, become a matter for dispute which will have to go before a Compliance Panel. Even if it is confirmed that the offending state has not adequately complied, the matter does not end there. A further proceedings might be needed to establish the contours of the countermeasures. Take a look at the Internet Gambling saga where the United States, found in violation, dragged the procedure through all its stages. And all through this saga the violation continued. Not months, but years.

In traditional proceedings, international, transnational and domestic, as long as the violation continues, damages accumulate and these will be reflected in the eventual remedy prescribed. A legal actor who persists in a violation throughout dispute settlement will pay a heavy price for that if the case goes against that actor. The very fact that, if found in violation, a remedy will include compensation for damage suffered is the bedrock of compliance incentives. And I do not even mention the denial of justice towards those who in reality suffered the consequences of the violation.

Now back to the WTO. Imagine the following hypothetical scenario. State A complains to state B, alleging a violation of a WTO obligation. State B has every incentive (or at least no disincentive) to play it out. When all is said and done, eventually, very eventually, they can smile and bring the violation to an end. Why, we asked, is the EU not taking the Kings Road and following Article 23 and the normal dispute settlement procedure? Mr. T.’s tariffs on steel and maybe even automobiles will be in place. Huge damage, some of it irreparable, will be incurred. After years of litigation, winning all the way, the Americans will say Oops, and, perhaps even a new administration, will remove the offending ‘national security’ tariffs. If you are new to this field you might be incredulous. Take a look at the aforementioned internet gambling saga.

So we have a black lie, a white lie and a very imperfect system even at the best of times, shown at its weakest when it would be most needed. Investment arbitration (not without its systemic problems) may, in some respects, look appealing. And certainly the idea, promoted by many, including The Economist (which should know better), to resolve the issues of investor-state dispute settlement by adopting a system similar to the WTO trade dispute settlement, should be aborted before birth. The investment regime needs very serious retooling. But let’s take the best, not the worst, from the international trading regimes.

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