Is the United States Trying to Undermine the WTO?

Originally published in the Agricultural Policy Review by the Center for Agricultural and Rural Development at Iowa State University. Reprinted with permission. View the brief.

A native of Eustis, Nebraska, Clayton Yeutter (1930–2017) was a tireless advocate for US agriculture. In his roles as the US Trade Representative and Secretary of Agriculture under the Ronald Reagan and George H.W. Bush administrations, Yeutter oversaw an unprecedented expansion of US agriculture into global markets and negotiated resolutions to bitter trade disputes, which, for example, resulted in the opening of Japanese markets to US beef and citrus. Yeutter envisioned a better way, however, where trade disputes could be resolved fairly under established international law. The World Trade Organization (WTO) emerged as a key component of the Uruguay Round of the renegotiation of the General Agreement on Tariffs and Trade (GATT). Yeutter was instrumental in creating the WTO’s dispute-settlement mission—a preeminent legacy.¹ Starting in the mid-1990s, countries could bring trade disputes before the WTO as an impartial referee.

The WTO dispute-settlement mission is now under significant threat. The United States has chosen to block the appointment of new members to the WTO’s Appellate Body. Without an operating Appellate Body the technical process for resolving disputes hits a dead end. The following quote is pulled from the WTO’s web page:

“Currently, the Appellate Body is unable to review appeals given its ongoing vacancies. The term of the last sitting Appellate Body member expired on 30 November 2020.”

The United States is actively engaged in strategically undermining WTO review because it knows that its actions cannot stand up to that review (Bown and Keynes 2020). By operating outside of the agreed rules, the United States is losing sight of Yeutter’s vision of an orderly trading system. The obvious risk for US agriculture is that all of the hard-fought market access, protected under WTO bindings, will be ignored by our trade partners and ultimately lost.

Trade disputes almost always arise when a country implements a so-called trade remedy against another country. Take the case of international dumping with anti-dumping duties (tariffs) as the trade remedy. WTO members agree not to sell goods in other countries’ markets at prices below the fair or normal price in their own market. It is considered unfair, for example, for a Canadian producer to sell lumber to a US distributor for $1.00 per board foot when it sells the same product to Canadian distributors for $1.50 per board foot. This is dumping, a type of WTO-inconsistent price discrimination that harms US producers. In the United States, we have laws that allow recourse in the form of anti-dumping duties, or tariffs, which brings the price of the Canadian export back up to the fair price of $1.50 as it leaves Canada. Commitments made by the United States as a signatory to the GATT do not allow it to place arbitrary tariffs on Canadian lumber, but an anti-dumping duty is okay to the extent that the gross-of-tax price is roughly consistent with the fair price.

A trade dispute arises when the facts are in question. Canada may claim that the price differences, or some portion of the differences, charged by its firms are justified because of product quality or contract-specific differences. More commonly, they may dispute the method used by the United States to measure price differences across many contracts and the method used to calculate the implied duty. In this regard, Canada may allege that the United States is the party violating WTO commitments by justifying a protectionist tariff under the guise of anti-dumping law. To the extent that Canada and the United States cannot resolve the dispute, the countries can bring the case before the WTO as a judge of the facts. If the United States implements the anti-dumping law in a consistent manner, Canada will have to either stop dumping or live with the US tariffs. If, however, Canada can show that the duties are unjustified or incorrectly calculated, the United States will need to modify its policy or face a set of retaliatory tariffs. Canada may then legally place tariffs on any US sourced products such that US exports reduce by a value equivalent to the Canadian export damage caused by the illegal US duties.²

It is not surprising that the United States has adopted a hostile posture toward WTO dispute settlement in recent years. The United States seems to want to operate outside of the GATT rules, which it originally spearheaded, negotiated, and ratified. A couple of stinging losses for the United States at the WTO exemplify this—in 2019 the WTO ruled in case DS471 that the United States had imposed illegal anti-dumping duties damaging Chinese exports by $3.579 billion per year on a set of 25 products (WTO 2019).

In January of this year, on a subset of those products, the WTO ruled in case DS437 that the United States had imposed illegal countervailing duties (another type of trade remedy) damaging Chinese exports by another $645 million per year (WTO 2022). China originally brought these cases to the WTO in 2013, with the final decision going against the United States after years of stalling the inevitable. The decisions illustrate the United States’ consistent violation of trade remedy procedures. The US violations in these cases precede, by many years, the recent trade war between the United States and China. Under WTO rules, the findings in DS437 and DS471 alone legitimize any set of Chinese tariffs on agricultural goods that reduce annual imports from the United States by over $4.2 billion.

A simple example illustrates how the United States uses anti-dumping law to artificially inflate tariffs against its trade partners. A key component of case DS471 was the practice of zeroing by the United States Department of Commerce (USDOC) in its calculation of the anti-dumping duties in question. Consider a set of transactions on a relevant product like Steel Cylinders imported from China. To simplify the example, let us assume that the fair price for Steel Cylinders as they leave the Chinese factory gate is $5.00. Assume that the USDOC sees four transactions each of equal quantity—two transactions where Chinese firms sell to US buyers at a price of $4.00 and two at a price of $6.00. On average, are the Chinese firms dumping Steel Cylinders into the US market? The WTO would say no, the average price that the firms sells to US buyers is $5.00, so there is no dumping and the appropriate anti-dumping duty is zero. The USDOC, along with the import-competing industry, have a different approach. They calculate the average price to be $4.50, arguing that China is dumping by $1.00 on two of the transactions and by zero (hence the label zeroing) on the other two transactions. The average of {1, 1, 0, 0} is $0.50 so the USDOC calculates an anti-dumping tariff that effectively raises the price of all imports by $0.50. WTO’s Appellate Body consistently rejects this type of creative mathematics.

The United States inevitably, and predictably, loses cases before the WTO because it is unwilling to bring its policies and methods in line with its commitments under the GATT. Of course, now with no Appellate Body, there is no venue to hear the cases. Under WTO rules, the United States can appeal any case brought against it, but without an Appellate Body there is no one at the WTO to reject the established errors in the US methods. Could this be the US strategy to avoid loses at the WTO? If so, it is a short-sighted strategy because it fails to acknowledge the enormous benefits the United States gets out of having a rules-based trading system. At some fundamental level, trust in a set of rules and norms for international transactions facilitates trade. Clayton Yeutter saw these benefits in terms of marketing US agricultural goods across the globe. It has been a good run, but if we do not support and respect our institutions of law and order we cannot expect to depend on them when needed.