Market Overview

11 December 2019

Trade agreements to replace WTO

World trade organization (WTO) lost its role after its enforcement arm, the Appellate body, forfeited its function to render any judgments. United States has blocked the appointment of new judges to replace those whose terms have expired yesterday. As of today, the only one acting judge remain in the Body while at least three needed to enforce trade ruling.

European Union called the shutdown of the World Trade Organization's appellate body is “a very serious blow" for the global trading system. The EU Commissioner for trade, Phil Hogan, said “this is a regrettable and very serious blow to the international rules-based trade system, which, for the past 24 years, has relied on the WTO’s Appellate Body – and dispute settlement generally."

Europe will propose ways of implementing sanctions on those countries that are violating trade rules and adopt illegal trade measures as well as sanctions for blocking the renewal of Appellate body. That will mean sanctions against the United States responsible for WTO’s enforcement ruling paralysis.

The EU backed by Canada and Norway is trying to create a temporary replacement panel with the same structure as the Appellate Body. China, Russia, and a number of other countries are considering whether to sign on.

WTO Director-General Roberto Azevêdo has insisted that the demise of the Appellate Body does not mean that the organization’s existing rules no longer have force. “WTO disciplines and principles will continue to underpin world trade. And members will continue to use WTO rules to resolve trade conflicts — in regular WTO bodies, through consultations, via dispute settlement panels, and through any other means envisaged in the WTO agreements,” he said last week. His claim, however, are more inconsistent when no enforcement is in place. The function of WTO without it make no real sense.


Trade agreements are not to be disputed

Trade agreements are the only real arrangement of world trade remaining so far. Does it mean they could not be violated? No, they could and will be if one of the parties consider it effective. “If you have no rules, everyone can do what they want and that would be really, really bad, not least for the smaller and developing countries,” European Union Trade Commissioner Cecilia Malmstrom said last summer.

One can expect more trade tariffs will be imposed by countries with mature domestic market like the United States, China, the United Kingdom, Japan and the European Union. Other countries have to ally their terms or struggle to continue exports.

The United States President administration seemed to be reluctant to the WTO’s fading relevance. Trump has made it clear that he disdains the idea of international regulation of US trade policy. Not only has the US delayed the appointment of the judges to WTO’s Appellate body, but also has cut the funding for the Body, slashing its budget by 93%.


Why WTO has been dumped?

The WTO rulemaking requires full consensus that allows any of 164 members to disrupt any proposal. As a result, such issues like regulating electronic commerce were not resolved. China was allowed to apply relaxed trade rules as for the developing countries despite the size of the world second largest economy.

It seems the almost 35-years era of WTO is ending and will be replaced by the trade agreements without any independent recognized ruling. The other way is to introduce some kind of international court ruling. Regional enforcement vehicles of international trade matters will not be effective. 

Meanwhile, trade wars could unwind to a hurricane with the United States in the eye of it.


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Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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