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WTO VICTORY ON STEEL HIDES DEFICIENCES
Professor Joost Pauwelyn [1]
Duke University School of Law
JURIST Guest Columnist

In December last year, President Bush terminated controversial import restrictions on steel. In response, the World Trade Organization (WTO) was heralded as a mechanism that is 喪espected by even the biggest player.[2] The steel case itself was touted as the international law 粗quivalent of Marbury v. Madison.[3]

Actually, when explaining the action, the US administration did not even mention the trade organization. Rather than scape-goating the WTO, it went to great pains to explain that the steel safeguard had met its objective and that it was withdrawn solely because of 祖hanged economic circumstances. Of course, no commentator, let alone the US steelworkers union, failed to notice that the threat of WTO-backed trade sanctions, especially by the EU, had played a considerable role in bringing about the U-turn. These sanctions - also referred to as 薦uropean blackmail - were carefully targeted at products from crucial states for the Bush reelection campaign (textiles from the Carolinas, orange juice from Florida).

Adding to the joy of WTO supporters, the steel case also offers a classroom example of why restricting trade is, in most cases, shooting oneself in the foot. Higher tariffs on steel not only protects US steel producers, it also means higher prices for US consumers of steel. As some figures show, it may well be that more people lost jobs in the car and other steel consuming industries, than there are jobs to protect in the US steel producing industry.

The WTO has, in other words, good reasons to put up its 閃ission Accomplished banner. At the same time, this latest episode in US-EU trade wrangling does hide some fundamental deficiencies in the WTO system, more specifically: (1) other disputes that remain unresolved; (2) the broader scheme of legal remedies that is supposed to back-up WTO rulings; (3) the convoluted nature of WTO decisions; and (4) the increasing difficulty to enact safeguards in a system where safeguards play a legitimate role.

Other Unresolved Disputes: Why Implementing the Steel Case Was Easy

Although a trade war over steel has now been averted, a rather long list of non-implemented WTO rulings remains, most of them decisions against the United States (Foreign Sales Corporations, Anti-Dumping Act of 1916, Byrd Amendment, but also the Canada/Brazil Aircraft disputes and the EU hormone-beef ban). Conforming to WTO rules in the steel case was, indeed, relatively easy.

First, the President could do it on his own. In contrast to, for example, the ongoing Foreign Sales Corporations dispute, there was no need for Congressional approval.

Second, the violation of WTO rules in the steel case was rather obvious. No one expected the United States to win. The protection was not even sold as a response to unfair or dumped steel imports, rather it was labeled as a 壮afeguard, that is, in the words of the WTO Appellate Body, import restrictions on perfectly 素air trade from other WTO members. If, in these circumstances, the United States would have refused to comply, it would have lost a tremendous amount of credibility at any next occasion where it was insisting on others to comply with free trade principles.

Third, and most importantly, by the time the protection on steel was lifted, the safeguard had met most of its objectives, both political and economic. By enacting the safeguard, the US administration gained much needed support from the steel lobby in matters such as fast-track authority from Congress to conclude other trade agreements. Moreover, by keeping the WTO-inconsistent safeguard in place for 21 months, the US steel industry was given a time-out from import competition without the United States having to 叢ay for it at the WTO. As President Bush openly stated, 奏hese safeguard measures have now achieved their purpose it is time to lift them.[4] This alone should temper the chest bouncing and shoulder slapping recently witnessed at the WTO.

Legal Remedies at the WTO: Too Little Too Late

The point that after 21 months, the steel safeguard had achieved its goals without the United States having to 叢ay anything drives home the fact that at the WTO, the remedies offered to induce compliance are rather meek. Although it is common wisdom that the WTO is the only international organization with teeth, in effect, the legal remedies that it offers to successful complainants are extremely limited.

First, no damages are awarded for harm caused in the past. In other words, the United States did not have to compensate anyone for the 21 months lifespan of the WTO-inconsistent steel safeguard. This loophole offers a clear incentive for hit-and-run practices where countries enact protectionism, know it is illegal, but realize also that they can get away with it - 素or free - for at least as long as it takes to complete dispute settlement proceedings.

Second, once the WTO has made its final ruling and an on average 1 year time period to implement such ruling has lapsed (during none of which any compensation is owed), trade sanctions can, indeed, be imposed. In safeguard disputes, such as the steel case, retaliation is permitted even before that, namely directly after the WTO has issued its final ruling (another factor that may have prompted earlier implementation in that case). However, although a threat of retaliation by the EU may be both real and harmful even for a country like the United States, if and when the threat comes from, for example, Egypt or Thailand, it may not even reach the ear of the US President. Put differently, trade sanctions in essence the only legal remedy available at the WTO may (sometimes) work for powerful complainants, it is unlikely to work for smaller players. On the contrary, rather than putting pressure on the violating country, when a small player retaliates it is more likely to harm its own economy (higher input and consumer prices) as well as its own political interests (think of the risk of being cut-off from foreign assistance).

Third, in addition to the absence of retroactive remedies and the often unpalatable nature of trade sanctions, the amount of retaliation that the WTO can authorize is capped at the equivalent of the trade kept out by the original violation, in this case, the continued imposition of the WTO illegal safeguard. This is nothing more than a simple tit-for-tat or zero-sum game where, in principle, no more pressure is put on the violating country (by the trade sanction) than on the victim (by the original violation).

Given these deficiencies, one may ask why WTO members still comply with 90 per cent of WTO rulings and, in particular, developing countries have rarely faced the problem of non-implementation. The answer is most likely that it is not the legal remedies, nor the economic pressure exerted by trade sanctions that induces countries to behave. Rather, it is the political pressure of peer review, example-setting and shunning internationally, at WTO meetings, and the domestic political pressure, from both sectors harmed by the original violation (steel consumers) and those threatened by retaliation (orange growers), that pushes countries to eventually step in line.

Who (can) read WTO rulings?

A third deficiency that the WTO victory on steel may hide is that for the WTO to successfully press its views on countries and citizens alike, WTO rulings must be made shorter, clearer and readable to a broader audience. At the moment, they are not. Unlike, for example, US Supreme Court or European Court of Justice decisions, WTO rulings go on for hundreds of pages. These days, even trade experts have difficulty nailing down why exactly a measure is, or is not, conform WTO principles. If so, how can politicians predict what the WTO asks them to do, let alone explain to their constituencies why they cannot engage in certain conduct? The WTO affects an increasing segment of society, it should therefore be understood and understandable to an increasing number of people. The case law on safeguards offers a particularly bad example. After six cases, four of which were decided against the United States, not a single safeguard measure survived scrutiny by the WTO Appellate Body. To some, this may hint at bad faith on behalf of countries enacting safeguard measures, especially the United States, which repeat the same 僧istakes over and over again. To others, it may demonstrate that the Appellate Body case law on safeguards is so convoluted and complex that even the most advanced trading nation cannot figure it out.

Notwithstanding Steel, Safeguards Can Make Sense, As Long As Its Users 善ay For It

As Claude Barfield recently noted, 繕S steel tariffs gave safeguards a bad name.[5] To be sure, in purely economic terms, safeguards that is, import restrictions to off-set perfectly 素air trade rarely make sense. Nonetheless, for mainly political reasons the presence of a safety-valve, even one that is rarely used and strictly controlled, has clear benefits. By striking down all six safeguards that came before it, the WTO may have sent out a signal to the contrary.

First, with safeguards in place countries will more easily sign up to free trade rules.

Second, pressing countries to conform to WTO principles without safety-valve may alienate both governments and people from the organization. To put it bluntly, how many more losses will the US Congress bear before turning its back on the WTO? A careful balancing exercise, of imposing WTO discipline on all countries while not scaring anyone away, is called for.

Third, the WTO would gain legitimacy and support if people know and experience that its rules are not written in stone, or of some 祖onstitutional nature, since safeguards remain available. Trade liberalization is, after all, just an instrument to achieve nobler goals of human development, an instrument that must sometimes be set aside. If, for example, the Europeans really do not want to have hormone-treated beef come into their market, and such decision is genuinely supported by the people of Europe, should they not be able to keep hormone-treated beef out, even if such violates WTO rules? If so, one important caveat should apply, however: the Europeans ought then to 叢ay for such safeguard, that is, they ought to compensate, for example, the United States for the permission to violate WTO rules, be it in money terms or alternative access to EU markets. As noted earlier, however, such compensation is not currently ensured, a major deficiency in the system. The mere presence of a democratic safety-valve, combined with mandatory compensation to its victims, is more likely to strengthen the WTO than to undermine it. For one thing, it would rarely be used in practice or used only temporarily for as long as a country is willing to pay for it.

In sum, the US withdrawal of tariffs on steel is and remains a major victory for the WTO. At the same time, major deficiencies remain before the WTO is to become truly effective and supported by governments and people worldwide.


Notes

1. Associate Professor, Duke Law School. Formerly legal officer with the World Trade Organization (1996-2002).
2. EU Trade Commissioner Lamy at a news conference on December 4, 2003 available here.
3. David Sanger, A Blink From the Bush Administration, New York Times, December 5, 2003.
4. President痴 Statement on Steel Proclamation, December 4, 2003, available here.
5. Claude Barfield, US steel tariffs gave safeguards a bad name, Financial Times, December 8, 2003.


Joost Pauwelyn is Associate Professor at Duke Law School and a former legal officer with the World Trade Organization. Comments welcome at pauwelyn@law.duke.edu.

January 23, 2004

GUEST COLUMNIST

JURIST Guest Columnist Joost Pauwelyn is a professor of law at Duke University School of Law, where he concentrates on international economic law, in particular, the law of the World Trade Organization, public international law and European Union law. His research focuses on the problem of conflict of norms in public international law, in particular, the relationship between WTO law and other norms of international law, and the settlement of disputes in the WTO and other international tribunals, especially health and environmental disputes.

Prior to joining the Duke Law faculty, he served as a Legal Affairs Officer for the World Trade Organization in Geneva (1996-2002), first, in the Legal Affairs Division, then in the Appellate Body Secretariat.

Professor Pauwelyn has published numerous articles in the field of international trade and public international law. His latest work is a book on Conflict of Norms in Public International Law, published with Cambridge University Press in July 2003.