Reference no: EM133391328

Does the WTO actually matter? Some argue that it does not. True-prior to COVID-19-trade blossomed since the WTO was established in 1995. However, trade blossomed for both WTO members and nonmembers alike. Therefore, it would be difficult to claim that WTO membership caused more trade. However, China's experience in the WTO seems to offer a resounding "yes" to the question. Since China joined the WTO in 2001, it became the world's largest merchandise exporter and the second-largest merchandise importer. In March 2018, when launching the first salvo of the trade war by imposing 25% tariffs on $200 billion worth of Chinese products, the Trump administration cited that China "took advantage" of its closer economic integration with the United States under the auspices of the WTO. This argument indirectly suggested that the WTO mattered.

Specifically, the United States alleged that China engaged in "unfair" trade practices. Denying these charges, China in April 2018 initiated consultations-equivalent to lawsuits-at the WTO, thus starting the first of ultimately three cases that China brought against the United States. Officially, the WTO recorded this as "United States - Tariff measures on certain goods from China I." For the purposes of our case, we will label this as "China versus the United States I." In August 2018, in response to another round of US tariffs hitting $16 billion Chinese products, China launched "China versus the United States II." In September 2019, triggered by a new round of massive US tariffs aiming at $300 billion Chinese products, "China versus the United States III" was launched. At the same time, China imposed retaliatory tariffs on US exports to China in response to all three rounds.

How the WTO would resolve these extraordinary disputes involving its top two members (by trading volume) is a test of the WTO's renowned dispute resolution mechanisms. In defense, the United States argued that the matters were "not a WTO issue" and that they were subject to bilateral negotiations between the two countries-ultimately leading to the Phase I Economic and Trade Agreement signed in January 2020. If there was any problem with unilateral actions, China already took unilateral actions to retaliate against US tariffs. Normally, a WTO member would only be authorized to impose retaliatory tariffs (punitive duties) after the WTO declared that it won a case.

Using a peer review process, the WTO formed a panel with representatives from three unrelated peer members to investigate: Argentina (chair), Botswana, and Chile. In September 2020, the panel ruled that China won and that US tariffs were unlawful according to WTO rules. Specifically, by singling out Chinese products, US tariffs violated the principle of nondiscrimination, which required equal treatment for all WTO members. US measures, according to the panel, "are prima facie [on the face of it] inconsistent" with the GATT 1994. Furthermore, the WTO does allow members to impose WTO-inconsistent measures to "protect public morals." However, given the indiscriminate nature of hitting a broad range of Chinese products, the United States failed to convince the panel that there was any credible relationship between the specific products concerned and any public morals objectives. In conclusion, the panel "recommends that the United States bring its measures into conformity with its obligations under the GATT 1994."

While China agreed that the ruling was "fair and objective" and hoped the United States would comply, US Trade Representative (USTR) Robert Lighthizer criticized it, arguing that the panel report "confirms what the Trump administration has been saying for four years: the WTO is completely inadequate to stop China's harmful practices." Under normal circumstances, if the losing side refused to remove its practices, the WTO-via its Appellate Body consisting of seven full-time judges (the panel members are ad hoc reviewers or jurors but not judges)-would authorize the winning side to retaliate with punitive duties on any products of its choosing. The Appellate Body decision would be final: it must be accepted by both sides in a dispute.

However, these are not normal times. During the Trump administration (2017-2020), the United States vetoed every nominee for the WTO Appellate Body. The purpose was to keep the number of judges below the required quorum and thereby deprive the WTO of the means to resolve disputes. Viewed as "rocking the boat," US practices forced the WTO to look for stop-gap measures. As a result, the WTO has not authorized China to impose any punitive duties when the fifth edition of Global Business went to press. Bear in mind that the September 2020 panel report only ruled on the first China versus United States case. How the other two panels would rule Cases II and III is not known. Clearly, resolving these cases would take years-if the WTO was able to resolve them at all.

Given the impasse, the WTO may not matter in the short run in terms of authorizing China to retaliate. However, the first panel report emboldened numerous US firms-such as Callaway, Ford, Home Depot, Ralph Lauren, Sysco, Tesla, Target, and Walgreens-to sue the US government in the US Court of International Trade (CIT) for USTR's "unlawful" escalation of the trade war with China, which severely increased their costs of materials and products from China. Immediately after the release of the WTO panel report on September 15, 2020, CIT saw nearly 3,000 lawsuits filed over a period of four days from September 18 to 22. These lawsuits dovetail from the lead case that first raised this issue, filed on September 10: HMTX Industries LLC et al. v. United States. By triggering an avalanche of domestic lawsuits against the US government's "unlawful" actions (according to the WTO), the WTO clearly matters.

ON ETHICS: Assuming that the WTO Appellate Body finds some stop-gap measures for the first China versus United States case, how much retaliatory tariffs would the WTO authorize China to impose? Can you predict the outcomes of Cases II and III?