Trump is threatening to blow up the WTO - and potentially cause anarchy

The Trump administration’s visceral aversion to multilateral institutions and its fixation with trade issues means that in three weeks’ time the World Trade Organisation may, at a practical level, cease to function.

On December 10 the terms of two members of the WTO’s Appellate Body, the ultimate adjudicator of trade disputes, will expire.

That body is supposed to have seven members but since Trump became president the US has been blocking appointments to the panel.

President Donald Trump has threatened to pull the US out of the WTO.Credit: Bloomberg

It’s now down to only three members – the minimum number with which it can operate – so once the terms of two of the three remaining members expire the appeals body won’t have a quorum and will be unable to function. The WTO would be impotent and irrelevant.

Separate to the question mark over the future of the appeals body, there have been reports that the US – the biggest contributor to the WTO’s funding – has threatened to block its budget for the next two years, undermining any capacity for the organisation to operate.

What that might mean for world trade, already under acute pressure from the US trade war with China, is anyone’s guess but there is potential for a free-for-all if the WTO, established to replace the General Agreement on Tariffs and Trade(GATT) at the Uruguay round of trade talks in 1995, is rendered ineffective.

We know they have been screwing us for years and it’s not going to happen again.

Donald Trump on the WTO.

If the WTO’s ability to arbitrate the world’s trade disputes were to be gutted by the US actions it would, in theory, allow every country to set its own rules on trade, threatening a frenzy of new tariffs and counter-tariffs and other unilateral actions, including the withdrawal of existing tariff concessions.

Without an appeals body to hear and settle disputes and award penalties, the likelihood is that the parties to any dispute would take matters into their own hands, igniting escalating trade wars.

The WTO was created to try to prevent that kind of outcome, although the trade war the US initiated with China demonstrates rather starkly that it hasn’t always succeeded.

The World Trade Organisation headquarters in Geneva. The US is threatening the WTO's funding and undermining its ability to adjudicate trade disputes.Credit: Alamy

Trump and his key advisers are distrustful of multilateral organisations in general and the WTO in particular. They believe the agreements impinge on US sovereignty; that the US unfairly shoulders too much of the burden of funding them and, in the case of the WTO’s, has tilted the playing field toward US competitors.

"We will leave [the WTO] if we have to. We know they have been screwing us for years and it’s not going to happen again,’’ Trump said earlier this year. Last year he said the WTO was the single worst trade deal ever made.

The US has a particular complaint about the ability under the WTO’s rules of countries to designate themselves as "developing" countries, a status held by China, India, South Korea, Singapore, Mexico and other economies where that status might be questioned.

Developing countries get concessional treatment on contentious issues such as export subsidies and lower tariff rates and are allowed leeway on state interventions in their economies that developed economies wouldn’t be allowed.

Not surprisingly, the US doesn’t regard China as a developing country.

Ironically, given that other key blocs within the WTO hold similar views to the US on China – on its status within the WTO, its state subsidies, centrally-directed industrial policies, protection of domestic sectors and lack of protection for intellectual property – the US could have used the WTO as a forum for generating global pressure for reforms to its practices.

Instead, given that the administration sees trade through a protectionist, "America First" lens, the administration is going it alone, using the threat – in China’s case, the reality – of tariffs to coerce trading partners into deals it believes are more favourable for the US.

Another irony is that only last month the Appellate Body ruled in America’s favour in the longest-running dispute the WTO has heard.

A dispute that lasted 15 years ended with a ruling that the US could impose tariff penalties of $US7.5 billion ($10.6 billion) on European Union exports – the largest in WTO history – in retaliation for EU subsidies of Airbus. Trump hailed the decision as "a nice victory".

There is a good argument for reforming the WTO and adapting its rules to a very different world to the one at its creation but the US is threatening to simply blow up the global rules-based order for trade at a delicate moment.

Global trade flows are drying up, partly as a consequence of Trump’s trade war with China. The WTO said on Monday that goods trade had stalled in the first half of this year and appeared likely to remain below trend in the second half.

Its "barometer’’ of trade had a reading of 96.6, below the baseline for the index of 100 and therefore recording declining growth in the volume of global merchandise trade. This will probably be the worst year for global trade since the financial crisis.

With the US trade conflict with China yet to be resolved, the prospect of an implosion of the WTO and the potential for anarchy to develop in the vacuum that would leave wouldn’t provide any confidence that 2020 and beyond would be any better.