26 Apr 2018

NZ must heed US moves to disable World Trade Organisation

8:02 am on 26 April 2018

By Charles Finny *

Opinion - The Trump administration is likely to cripple the World Trade Organisation by October, making economies largely reliant on free trade agreements, and it's a threat New Zealand cannot ignore.

The World Trade Organization (WTO) headquarters are seen in Geneva on April 12, 2018.
The World Trade Organization is set to release its latest forecasts as trade tensions between the United States and China ratchet up. / AFP PHOTO / Fabrice COFFRINI

The World Trade Organizationb headquarters in Geneva. Photo: AFP or licensors

New Zealand's size and reliance on trade makes having global trade rules, backed by a dispute settlement system, particularly important for us. For years in the past, the lack of such a system meant our exporters faced potentially huge tariffs on all goods.

The 1947 General Agreement on Tariffs and Trade helped with that, and in 1995 the World Trade Organisation (WTO) applied those rules to the key industry of agriculture and boosted the dispute resolution system, a huge win for New Zealand.

However, the WTO - in particular the dispute resolution system which gives it heft - has recently come under threat from the US.

The system consists of two levels. If a complaint cannot be resolved by consultation between parties, a panel of experts will make recommendations on how to resolve it. But these decisions can be appealed and, if appealed, they can't be adopted.

As at least one party is usually unhappy with a panel report, the matter is usually resolved by appeal to the WTO's seven-member Appellate Body. Their decisions are binding: you either implement the decision, or pay the other parties compensation.

Three members must sit on every appeal, with members from the countries involved in a dispute excluded. This is a great system as it stops members vetoing decisions.

For some time however, the US has been vetoing all replacements to the panel of seven members. Members are appointed for a fixed four-year term. These terms can be extended, but the US is vetoing extensions too.

At this point there are four members able to hear appeals. This becomes three members on 30 September: India, the US and China.

So from 1 October 2018, the WTO will be unable to hear appeals involving the US, China or India. From 10 December 2019 there will be only one member left, so no new cases involving any other will be able to be appealed.

A WTO member will then need only lodge an appeal to avoid having to implement a dispute recommendation heard by a Panel. An appealed Panel report cannot be considered, but because no appeals can be heard nothing will happen. Unless the US changes its position, the system can be simply avoided and the WTO becomes essentially toothless.

If that happens, free trade agreements - including plurilateral deals like the revised TPP and our bilaterals with China, Korea, ASEAN and Taiwan - become more important. They contain rules based on the WTO's, but are often more rigorous. They also contain a dispute settlement system that can resolve disputes over these rules.

Donald Trump

US President Donald Trump. Photo: AFP

No one is sure whether this is a thought out strategy from the US, but some of those around President Trump have been highly critical of the WTO and the Dispute Settlement System. They seem to yearn for a return to the 1970s and 1980s when the US could throw its weight around and coerce others to deliver what it wanted.

Thankfully about 53 percent of New Zealand's trade is done through free trade agreements and this will grow when CPTPP comes into effect.

It is also likely that non-members might seek to join the TPP to be part of that rules-based trade system, and the 16-nation RCEP deal including India and China might be more likely to succeed too.

New Zealand exporters should be watching this situation closely. While our FTAs provide protection a fully functional WTO is an even better means of ensuring larger players play by the rules.

* Charles Finny is a partner in the Wellington Government Relations Consultancy Saunders Unsworth. He has a long background in trade policy having been involved in several bilateral FTA negotiations. He also spent many years working on the GATT and WTO.

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