Will the U.S. Walk Away from Binding Dispute Settlement?

As negotiations to revise NAFTA continue, the Trump administration may be prepared to seek an end to binding dispute settlement procedures under NAFTA. Such a development represents a significant departure from the consistent efforts of Congress and past U.S. administrations over a period of decades to lead the global charge for making dispute settlement in trade agreements binding and enforceable.

Is this really about NAFTA?

Canada and Mexico are unlikely to be board with this idea. And while the U.S. proposal focuses on NAFTA, many observers are wondering if the administration is preparing to push the same approach at the World Trade Organization, where binding dispute settlement is generally considered central to the organization’s effectiveness.

U.S. Trade Representative Robert Lighthizer recently foreshadowed such a move in an appearance at the Center for Strategic and International Studies, where he spoke positively about the non-binding dispute settlement system of the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO. Mr. Lighthizer has been highly critical of the WTO Dispute Settlement Body for judicial overreach. Many who might agree with him with regard to certain decisions nonetheless sympathize with the overarching conventional wisdom, which has long held that GATT dispute settlement was ineffectual because a losing party could simply block decisions from going into effect, rendering them advisory in nature. But toothless decisions may, in fact, be the attraction for the Trump administration if they seek greater space for unilateral measures that could become subject to the losing end of cases in the WTO.

The WTO’s track record settling disputes

The system’s success and credibility can in part be judged by its heavy use. Over 500 cases have been brought to dispute settlement by WTO members in the last 12 years, more than were brought over nearly five decades of the GATT. The United States has been a frequent user of the system, pursuing more cases than any other WTO member on behalf of a range of U.S. exporters from aircraft manufacturers to auto parts and beef producers. But numbers do not capture the full picture.

As a former U.S. trade litigator and negotiator, I have seen firsthand how the mere possibility of dispute settlement has motivated WTO countries to take seriously their agreement commitments. For every case taken to dispute settlement, several others have been averted. A case the U.S. successfully litigated against Japanese restrictions on apple imports was followed in short order by successful negotiations to remove similar restrictions on lettuce and tomato imports, without resort to dispute settlement. Other countries cited the mere risk of dispute settlement as the reason for their careful scrutiny of commitments made in the WTO’s new Trade Facilitation Agreement. Simply put, its a powerful lever for better adherence to existing commitments.

What’s good for the goose

It would seem difficult to reconcile the stated desire to hold other countries accountable for compliance with trade agreements on the one hand, with the active pursuit of less effective trade agreement enforcement procedures on the other hand, unless you believe the United States should not be held to the same standard to which we hold others.

President Trump and his team have long expressed their belief that unilateral pressure is a more effective means to solve trade problems. Such a unilateral approach would risk bumping up against trade agreement rules if, for example, the administration were to raise U.S. duties on a trading partner’s goods without first resorting to WTO dispute settlement procedures.

Rendering dispute settlement rulings “advisory” would at a minimum shield U.S. trade actions from WTO-authorized countermeasures. However, any such benefit is likely to be illusory, as our trading partners would almost certainly retaliate in any event. For example, the European Commission made clear they would respond “in days” without going to the WTO if the U.S. were to restrict imports of European steel products under Section 232 of the Trade Expansion Act. China would no doubt do the same.

This highlights a potential flaw in a strategy of returning to the unilateralism of the 1980s, namely that our trading partners are far stronger economically, and the international economy far more integrated. Without the legitimacy and leverage provided by agreed-upon, binding dispute settlement, the leverage used in the past of threatening to withhold U.S. market access is simply not what it once was, and comes at a potentially far greater cost to our exporters.

Different forms of overreach

The administration has argued that trade agreement dispute settlement could interfere with U.S. sovereignty, a point alluded to by President Trump in his appearance at the United Nations. In particular, the administration has strongly criticized WTO dispute settlement for judicial overreach, creating obligations WTO members have not bargained for.

While previous U.S. administrations leveled similar criticisms with respect to particular dispute settlement findings, none viewed this as negating the overwhelmingly positive benefits of the system, or suggested that these problems were the norm rather than the exception. None viewed U.S. sovereignty as under threat. The primary reason is because only Congress and the administration can change U.S. laws or administrative practice in response to adverse WTO dispute settlement decisions.

Can Trump build a credible case for reform?

Rather than weakening the global dispute settlement system in response to perceived flaws, can the Trump administration instead propose improvements that address its concerns?

Here are some possibilities. The Trump administration can propose that WTO members provide additional guidance to dispute settlement adjudicatory bodies as to proper interpretive approaches. Or, dispute settlement procedures could be modified to provide better member oversight of dispute settlement rulings, for example, by enabling members to collectively negate particular elements of rulings or by providing disputing parties greater flexibility in how they settle disputes.

Such approaches to updating dispute settlement procedures, perhaps beginning in NAFTA, would reinforce the strengths of these systems, address the potential for judicial overreach, and ensure that this critical enforcement tool continues to thrive.

Avoiding the return to Calvinball

In our Essential, Avoiding Calvinball, we talk about how the world of commercial transactions runs smoother if the players aren’t making up the rules as they go along. While the rules of the WTO establish a framework for behavior among nations engaging in trade, it’s the dispute settlement system that establishes those rules as credible and enforceable.

Many regard the WTO’s dispute settlement mechanism as fundamental to achieving the secure and predictable trading environment that saw global trade in goods and services triple since the WTO was established in 1995. Were the administration to roll back the binding nature of dispute settlement in trade agreements like NAFTA and the WTO, it would undermine the value of those agreements for every U.S. trader, not only for those whose trade issues may be directly litigated.

The original version of this article appeared in The Hill.

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