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Enforcement of Trade AgreementsAlan Wm. Wolff

Notes for a Talk to the Council on Foreign Relations

Washington, DC

March 23, 2010

When we think of enforcement of trade agreements, most of us would think

first of the WTO's "binding" Dispute Settlement System.

To lead off our discussion, I would make three observations and six

recommendations:

FIRST OBSERVATION The primary form of enforcement, far more

dominant than any other, is self-restraint.

In the world economic downturn created by the financial crisis over these

last few years, there was no surge in protection. The WTO is the dog that did not

bark. Its commitments on the whole held.

The United States stimulus package was modified to avoid violating the

WTO Government Procurement Agreement.

The Cash for Clunkers program was not limited to the purchase of

American-made cars.

In this period of severe economic stress, there was not a surge in safeguard

cases, nor of antidumping and countervailing duty cases, and no protectionist

legislation. There are a number of reasons for this, but chief among them is the

existence of enforceable international trade rules rules.

SECOND OBSERVATION When challenged, WTO members generally

change their practices in order to live up to the letter of their obligations.

In the three complaints regarding Chinese practices that I or my firm was

directly involved in, China responded by suspending or removing the complained of

measure [WAPI, semiconductor VAT rebate, and kraft linerboard].

The EU amended its import practices with respect to bananas, and states

that it will change duties on information technology goods as a result of the US

winning its WTO challenge.

The US removed its export-related direct tax incentives [DISC, FISC, FIEs].

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The record is not perfect. Sometimes the compliance can be ragged EU on

beef hormones, US on cotton subsidies. But these are the exceptions.

THIRD OBSERVATION These positives noted, the U.S. Congress is very

critical of the record of enforcement of our Americas' international agreements.

Why?

One reason is that there are a lot of practices complained of but not

challenged.

a. Before there can be dispute settlement, a party needs to bring a case. It

may have its own policy reasons for not doing so.

This takes a willing WTO member, a government, and in every instance I

know of a willing private party at interest.

Governments and companies often for policy reasons do not challenge whatmay well be found to be violations of the rules

There has been no currency manipulation case brought against

China, although the WTO rules are clear that exchange rate

transactions are not to frustrate the intent of the WTO/GATT

articles.

There is no US case against Canada's log export restrictions, nor

against its restrictions on exports of lumber (both of which are

potentially actionable);

Boeing deferred pressing the US government to bring a case

against Airbus subsidies for a quarter-century.

There are no cases against China for technology transfer or local

content requirements that are made part of an inward foreign

direct investment transaction. These are viewed as private

contractual matters.

In a globalized world, within multinational companies and within

industries, there are competing interests of market and investment

access, access to government permissions and subsidies, supply

chain management, etc.

Smaller companies and fragmented industries may not have the

resources to petition for and support an enforcement action.

b. The international rules may not cover the grievance.

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Paul Volcker gave me my first trade assignment at Treasury:

"Fix the border tax adjustment problem." The VAT is adjusted at

the border, and income taxes are not. The U.S. cannot invoke

dispute settlement against foreign countries which can rebate on

export a large portion of domestic taxes and charge these same

taxes on imports and the U.S. cannot do so.

Domestic subsidies in most cases are not prohibited.

Export restrictions are not as well regulated as they should be.

The toleration of private restraints of trade is not a clear WTO

violation.

More fundamentally, the WTO (and the GATT before it) assumed

that market forces would determine competitive outcomes. This is

not the case with countries that are characterized by a largemeasure of state-developmental capitalism.

Similarly, the WTO rules do not remove competitive advantages

that may be derived from fundamental systemic differences a

different national savings rate, different labor laws, that may

enhance exports and depress domestic demand.

c. The WTO rules may be ambiguous in application

When does a standard have the effect of creating "an unnecessaryobstacle to international trade"

At what point does a government's failure to enforce its intellectual

property laws become a violation of the TRIPS Agreement?

d. The facts creating the trade abuse may be difficult to demonstrate.

A myriad of market-limiting factors in Japan in the 1960s, 1970s and

1980s, were very difficult to prove to the satisfaction of a GATT panel.

The Chinese government's actions with respect to China's SOE's today

pose similar difficulties. (See AB DS 379 of last week).

Small companies (and small countries) cannot easily bring a complex

case.

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e. The dispute settlement system may fail to get the right answer

The Appellate Body may go with its biases, exercise no judicialrestraint, and "fill in the blanks" creating rules where the WTO

member countries could not or did not agree often the case where

import restrictions have been applied. [e.g. Byrd Amendment, double

counting, zeroing, steel safeguard action].

f. Other reasons for Congressional discontent with the DSU:

WTO litigation can take a very long time, and justice delayed can be

justice denied.

Even with what USTR declares to be a "win", the results may notshow up in commercial gain. [A "win" on IP did not much curb

counterfeiting in China.] Governments and petitioners tend to spin

their announcements pertaining to WTO outcomes.

RECOMMENDATIONS

What are the cures for the deficiencies in the effectiveness of the WTO and

its dispute settlement?

1.Enforcement depends upon facts

:

There needs to be better information in the hands of the U.S.

government about foreign trade-distorting practices.

2. Enforcement depends not only on a policy leaning toward enforcement

but a strategy.

It requires an assessment of national interest as distinct from

private sector interests. [politically a thankless idea.] Priorities

need to be set.

There needs to be a strong linkage between market opening

negotiations and efforts and enforcement strategy. (e.g. Japan

semiconductors).

3. There needs to be something to enforce, namely better, more

comprehensive, rules.

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This will take negotiation of something more ambitious than Doha

will provide.

e.g. an agricultural safeguard understanding

agreed food and product safety standards

enhanced rules on trade and investment distorting domesticsubsidies

emerging country duties bound at applied rates.

4. There needs to be an independent domestic review of WTO Appellate

Body and Panel findings that affect U.S. trade, in effect an audit, with

independent advisory opinions provided.

Whether there is a "win" or a loss, Congress and the public

need to have a clearer understanding of what the current

dispute settlement process is yielding in order to address

any shortcomings.

There is no effective legislative body within the WTO to

correct error in Appellate Body decisions. It is worth

thinking about how these errors can be corrected. [The

latest problem, not minor, occurred last week in DS 359

where the Appellate Body got the economics and law wrong

on dumping and subsidies, as well as for state-owned

enterprises].

5. At present, a domestic industry has a right to petition the US

government to open a foreign market where there is an WTO-inconsistent or unreasonable measure blocking access.

There should be a similar explicit U.S. private sector statutory right of

petition to the US government challenging US noncompliance with the

WTO finding or rule, or with respect to a US practice that in trade

law would be deemed "unreasonable" if practiced by a foreign

country (the exception being any measure taken under U.S. statutory

remedies in response to a foreign unfair trade practice i.e. dumping

duties or countervailing duties).

6. Enforcement depends upon bench strength. The US governmentshould have on its team private sector lawyers with client interests

that are supporting the US government's position before the WTO

and provided that the private sector lawyers act within US

government guidance in any presentation to the panel.