Digital Protectionism, Trade and the WTO

Bernardine Adkins: Good afternoon and welcome to this Gowling WLG webinar on Digital Protectionism and Trade and the WTO.

My name is Bernardine Adkins and I'm head of the EU, Trade & Competition Team and I'm joined by my esteemed colleague Sean Giles who, as well as working in trade law here in London, is our link man with our Guangzhou, China office as well.

What Sean and I are going to try and do is focus on the issues that you wouldn't necessarily have read about in the papers - and obviously the whole of trade at the moment is seen through the paradigm of Brexit. It's fascinating to watch the various reality checks that are taking place. We also want to cover a couple of those reality checks that have yet to happen. Remember where you heard it first - it's a question of time before people do realise that they are out there.

What we want to do is give you a brief overview of the WTO - a brief snapshot of where it is, what it is and look at what the UK is currently doing with the WTO with regard to Brexit and the rollover focus on what is the current problem, the most acute problem that is going on, vis-à-vis the US, see how the EU and other countries are reacting to that and do something very daring on our part … We're going to do some crystal ball gazing, which in this day and age is a very daring thing to do! Then we will really focus on the position of China and try and explain some of the myths that are floating around, because there's quite a loose narrative around this notion of China misappropriating technology, so we will really drill down into what that actually means and look at something quite specific which is the position of the EU - how the EU is interacting with China, which is a very distinct position from that of the US.

And then last by no means least, a brief wrap-up with the EU/UK free trade agreement which allegedly is going to be one of the "easiest in human history", so we will see.

The WTO - what is it?

As always with these multinational things, the British claim to have been - and, well quite rightly we were - a founding member back in 1948. 22 countries got together - to use the words of Winston Churchill - to "jaw jaw, not war war". Its purpose was to provide an arena for the peaceful settlements of trade disputes. It was originally called the GATT (the General Agreement on Trade & Tariffs). It is now called the WTO. There are some 164 countries signed up to it and its principles, and the WTO accounts for 95% of world trade. Contrary to what David Davis might have been suggesting on Question Time the other day, most major trading players (I think other than the US actually), tend not to trade upon just WTO terms alone. It's not such an easy flip-back. Most countries have specific bilateral agreements with their trading partners, so it's relatively unusual to be trading solely on WTO terms.

There are a couple of basic concepts I think it's useful to translate to you which colour the thinking as to how free trade works and how free trade agreements work. Sometimes it's a bit like working with a Rubic's Cube on some of this - the concept of "most favoured nation"- what does that mean?

So basically it means that where you offer a tariff to a country, say you offer India for example 3% on bicycles, you must offer that same tariff to everybody else - no discrimination. I see an interesting dynamic vis-à-vis Britain, so whatever Britain offers the rest of the world (a particular country) when it comes to conducting its own trade relations, it needs to offer that to everybody else - unless (and there is always an exception to this) the UK is negotiating a free trade agreement which covers substantially all the trade between those two countries. In that case, you are allowed to have a differential tariff rates.

But that is the basic premise, as I said, of the WTO. And it has been largely successful in bringing tariffs down. If you dive into the specifics of the various tariff schedules that are out there, you can see by and large they are relatively small - bar certain areas of discrete strategic importance. So for example in the UK we have 10% on cars, in contrast with the US which puts 2.3% on cars. Clothes are quite expensive and beef is very expensive. Frozen beef the EU has a tariff of 87%, for example. But others are quite small. But as you well know it is not all about the tariffs.

To go on about tariffs is really quite frankly to be stuck in 1970s thinking. By and large the WTO has been largely successful with respect to tariffs. It's more around the non-tariff barriers. That's where the real barriers to trade are.

Where we are with the UK is: "what's going to happen to the UK when we come out of the EU?" What we have created under the Withdrawal Agreement, should it come to pass, is that effectively we have agreed with the EU that we're going to create a "fiction". We're going to pretend - everyone's going to pretend - that we're still in the EU. Even though we are out of the EU and we are going to a third country as a matter of law, we're going to have this pretense that we're still in. And, we're also going to - at least we hope to extend that pretence to third countries.

So where the EU has negotiated free trade agreements with other countries - CETA/Canada being the most obvious recent example, Japan most recently coming into flow now - which accounts for one sixth of the world trade - they are basically exhorting, asking, these third countries to join in with that fiction to say "yes that's absolutely fine - the UK can rollover and we'll all pretend that the UK is still within that". And they've also asked that the same should apply to these things called WTO schedules. These schedules are basically a list of commitments that a particular member state, a WTO member state, will offer the world with respect to tariffs, quotas and limits on subsidies. [Asking to rollover schedules] was the first toe in the water that the EU and the UK took to say "please can we rollover and during this Implementation Period / the Withdrawal Period we can all pretend that the UK is still in and we can, in a nice and civilised way, transition the UK to having its own independent commercial policy".

Unfortunately, that fell rather flat and we had at least 20 countries saying "well actually we don't want to rollover, we now wish to open up specific negotiations with the UK, we're not at all happy with that rolling over." So where does that leave us generally in the absence of that rollover?

It's not the end of the world because it is possible to adopt schedules and yes, in theory, you're supposed to get these schedules certified, which means that you have to have 164 countries basically accept those schedules. That is not going to happen in any realistic timescale, so it is possible to trade on the basis of uncertified schedules and that would be what the UK would be looking at. For example, the EU tariffs are not fully certified either. I don't think it has been fully certified since 2004, since it has had a number of extra member states come on board.

But it is pretty worrying that we've had the initial, pretty hostile, signals from a number of member states saying "that's all very nice that you, the EU and the UK, have agreed that, but actually we want to have our own negotiations, thank you very much." The head of that queue was Russia, obviously they want to have their own specific trade advantages. And that does make one wonder what is going to happen for the other third country free trade agreements we've got, with countries such as Canada and Japan.

At the moment the government is issuing some very lovely press releases from about 20 countries where their trade representative has met with Liam Fox. They've had a lovely chat and said "yes we think rollover is a marvellous idea, we're interested in progress, yes we think it's lovely", wonderful fluff. The press releases all read very similar language so you do wonder who the author is. We will see as to whether that actually transpires in practice. I am sceptical as to whether it will be as simple as everybody is hoping it will be and, again, another area where the UK has had a little bit of a shock is in respect of the certification of its WTO schedules. It was hoping to be able to slip them under what was called a "rectification procedure" whereby cosmetic changes could be made to tippex out the word "EU" and write in "UK". The UK was hoping it would all be fine as long as nobody objected within the 45 days required, and of course everybody has jumped up and down and said "no we don't like that, you have to do it through the proper system."

So, moving swiftly on, we have a current problem with the US and the WTO and I'm going to pass you over to Sean to outline that to us.

Sean Giles: Yes, so at the moment there's an issue at the WTO which is in respect of the Dispute Settlement Procedure. When we talk about protectionism, one of the ways that we can reduce protectionism is by taking disputes to the WTO. They key part of this dispute settlement mechanism is that it reflects this idea of "jaw jaw, not war war" - it's about countries coming together and resolving disputes amicably - and that's countries, not businesses. So if a business has an issue with another country's tariff rate, for example, or trading practices, their only route to resolve that is to go to their country and lobby their government and ask that their government raises the issue at the WTO.

So just to contextualise the issue that we have at the moment, I'll give a brief overview of how the Dispute Settlement Procedure works. So, again, like I said, it is by consent. So it begins with a consultation phase where the complaining country will bring the dispute to the WTO Dispute Settlement Body, set out its case, and then there will be a 60 day period where there's mediation with the country against whom it is complaining. After that, there is a 45 day period where a panel is set up and the Dispute Settlement Panel is appointed and that panel is appointed in consultation with the disputing parties, which means that they - again - get a say in who is deciding the outcome. It's all designed to make sure that the outcome is something agreeable to both parties. Usually there are three members on the panel, occasionally it's five.

And then within 6 months that panel will report to the WTO and say "here's what our findings are". Then there's a 60 day procedure during which time the complainant countries can either accept the findings of the panel or appeal that panel to the Appellate Body. This is where the current issue lies.

So, a brief overview of the Appellate Body - it's a 7 member chamber essentially of members that are appointed, again, by WTO members and the countries themselves by consent. The rules state that on each appeal case there will be 3 of those members sitting and they will rotate, so it's never the same three people on each case. That then gives them a 60 - 90 day period for that Appellate Body of 3 members to produce a report following from the Dispute Settlement Panel's report. Then there is a 30 day period in which the Dispute Settlement Body will accept the report of the Appellate Body. There is no right to appeal above that.

The US over the past 10 - 15 years has been refusing to appoint new Appellate Body members, and it's refusing to renew the terms of the existing Appellate Body members. In consequence, we are now down to the bare minimum that the Appellate Body needs to operate - with just three members.

Bernardine: That's interesting Sean, so this isn't actually a Trump policy - this is something that has been ongoing for quite some time?

Sean: That's right, it was going on even during Obama's era, which is potentially surprising. But this is US policy not an "America First/Trump" policy, and that is sort of reflective of America's emotive engagement with international organisations generally. It's not in favour of the fact that the Appellate Body is acting quasi-judicially, i.e. it's making decisions which appear to be binding on the WTO members rather than by consent, it's not in the "jaw jaw" category, it's more of an actual court and the US doesn't like that. It also complains that the appeals are taking too long, they're not being finished within the 90 day appeal period, and they also take issue with the fact that outgoing Appellate Body members are able to continue to sit on the cases that they worked on before their term ended.

We are coming to a bit of a head at the moment because of the three members that are left, two of them will have their terms expire in December 2019. Unless something is done, it looks like the Appellate Body will be in complete disarray by the middle of next year when they can no longer take on any cases. The EU has just put together a proposal which we are going to talk through now.

Bernardine: That's right, because it was the G20 at the beginning of December, the G20 issued a joint statement saying that the multi-lateral trading system is falling short of its objectives but, nonetheless that the countries which have remained including the US, remain committed to improving the system. And the EU, for its part, has got a mandate from the Council / the Commission who are the civil servants, as you know, to start negotiating, to start pressing for reform and with Canada, has been carrying out some work on what could be done to address the specific concerns of the US. Because there is great concern that a lack of a dispute resolution mechanism could essentially result in the paralysis of the rules-based trading system. There is a concern that this would impact upon economic growth, because if you don't have fluid trade with complex supply structures, this will compromise economic growth, and also compromise political stability. There is huge concern at the possible paralysis taking place at the level of dispute resolution.

And so the EU, Canada, China, India, Norway, New Zealand, Australia, Korea, Iceland, Singapore, Mexico, Costa Rica, Montenegro, issued a communiqué to the [WTO's] General Council just a few days ago (although it has been knocking around for a week or so) essentially addressing the specific concerns of the US.

For example: the appellate process would take 90 days unless the parties agreed otherwise; appellate body members would no longer be part time; they would have an adequate secretariat; they would be more independent; they would only be there for six years, so they would not be worried about not being re-appointed; there would be nine members whereby you could have more hearings, so three lots of three panels could be heard at any one time. Simply designed to remove the sclerosis that was taking place. And that's why I don't want to exaggerate, and suggest that the system doesn't work, because it has been estimated that during the past 20 years the WTO has resulted in some 500 dispute settlements. Often, as people say, if they are aware that there is some mechanism there, countries tend to focus on discussing and mediating as between themselves for a resolution.

The EU and the other members, Canada et al, put this forward and were very much "the ball is now in the US court" and were waiting to hear what the US was going to say. We got the response last week from the General Council meeting, and it was something of a disappointment. The US ambassador to the WTO, Dennis Shea, largely dismissed the suggestions' very specific proposals. You do wonder, and I'm being crude, if he'd read them. Because there was a subsidiary extra paper, with a short few propositions on behalf of the EU, China and India, almost as an after-thought, and he simply talked about those. He has not focussed on the larger multi-lateral proposal, and has been very dismissive of them.

So where does that leave us? We haven't had any response yet from other member states. What is through the crystal ball? Well the reactions are varied, as you would expect, in this landscape. On the one hand, one extreme is "oh my goodness me, it's going to be international chaos, we need to have a rule based system, who is going to compromise it? It's all going to fall apart, we're going to have anarchy out there" - that's one extreme. And the other extreme says "listen, this is only the end of the line that is going to compromise by December, the system works quite well, we don't always have to have an appellate procedure, it will work well with mediation and people being of good faith and good international citizens". Then another theory is that this is a typical Trump process whereby he pushes everything to the eleventh hour (in fact I can think of somebody else who does this), and leaves it dangling off a cliff. The theory goes, there will be a moment where everybody throws their toys out of their cot, and it will all come together at the eleventh hour and something will be resolved. People point to what was achieved with NAFTA and Mexico and Canada. That was all done at the eleventh hour as well, especially with respect to Canada. I'm not so sure that can be achievable here because you have got 164 countries, but it may well possible - NAFTA wasn't changed that much, other than the name, something around dairy, something around minimum wage for Mexican car workers and that's more or less it. So query whether at the eleventh hour, wouldn't there be an awful lot of sturm und drang and something ultimately would be agreed. So we will see but the situation is very much in abeyance. The one thing I think it has brought to the fore, which is rather interesting, is how we are seeing China emerging in quite a distinct way.

Sean: I think, back to this "jaw jaw, not war war" point in the context of this trade war. The US has been quite accusatory towards China - it has accused them of forcing the transfer of technology from foreign companies to domestic Chinese companies. The reality is that last year, or this year, China passed a law that made it illegal to force the transfer of technology to local companies, and this is evidence actually of China's overall trajectory - as a country it is moving towards opening to global trade having joined the WTO in 2001. Since then we have seen China move towards being a country which is in favour of multilateralism and demonstrating that it is a global, law-abiding citizen. And this comes at a time when the US is seemingly trying to do the opposite, and says "we're turning away from that, we want to do America First". So it has to be borne in mind, in that context [of China emerging as a global trading nation], that China does have deficiencies. For example, there are restrictions on foreign direct investment, even now, so you have to have a joint venture in asset management, securities, life insurance industries - where foreign ownership is limited to a 51% shareholding. However, we have seen positive movements from China. Last year they reduced this JV requirement, vis-à-vis the requirement for manufacturing in the auto sector, especially with regard to electronic vehicles which was a big growth area in China that many western companies wanted access to. We can see that China is trying to demonstrate to the world that it wants to be an open free trading country, just at the time when the US is accusing it of being the exact opposite. We end up in a bit of a war of words, as well as a war with the WTO.

That said, there are still issues in China. A recent survey by the European Chamber of Commerce in China found that 19% of its members felt obliged to transfer technology to local companies. So while there may not be an official policy requiring it, there is at least a feeling on the ground that China is not this open free trading country that it wants itself to be.

But the key thing when we look at China, especially in the context of the WTO and the trade war, is that China is in favour of multilateralism because multilateralism underpins Chinese foreign policy. So it has an incentive to reform the WTO and make sure that there is a way of using this procedure to resolve disputes, rather than "war war" - and unilateral trade war actions. So, for example China referred the dispute with the US to the WTO dispute settlement panel in August, and it has taken steps to mitigate this dispute using the traditional multilateral dispute settlement mechanism - which it signed up to as part of signing up to the WTO. You also have the example of the main part of Chinese foreign policy at the moment, the Belt and Road Initiative, which has been dubbed the Chinese Marshall Plan. China is investing in infrastructure projects across the world - this includes a railway line from the east cost of Kenya into central Nairobi, allowing Chinese businesses to move their goods into Africa via Chinese infrastructure. China has also invested in a railway line between Budapest and Belgrade, so we see that China is investing in Europe, both non-EU countries like Serbia and EU countries like Hungary.

And we end up with this uneasy alliance of multi-lateralists - the EU, who believe that there needs to be a rules-based multilateral system based on a belief of the rule of law and of equality and fairness. China's motivations we don't know, but China has an additional policy aim in ensuring that there is multilateral dispute resolution and that's because it is keen to ensure that its foreign policy can be carried out, and that relies on multilateralism.

Bernardine: Sean, could you tell us a little more about the current dispute that China has, and about the Section 232 US issue?

Sean: China's complaint actually is that it has been singled out unfairly. There are sort of two waves of protectionism have come out of the US recently. The steel and aluminium tariffs is one example, they were applied universally to everybody - apart from a few countries who could negotiate an opt-out with Donald Trump. But China is saying there are specific targeted restrictions on Chinese imports and we have seen this recently in the news, there was a truce about this. The US said they are going to stall imposing new tariffs for 90 days whilst they resolve this bilaterally. So China feels it is unfairly treated by the US here and that is why it did naturally turn to the rules-based multilateral system [of the WTO] that it had agreed to, to resolve the dispute. And now we see Trump kind of moving towards the bilateralism that we saw in NAFTA too, trying to cut a deal on the side. I think it is also key that China is trying to influence multilateral dispute resolution, it has this policy of so-called creative compliance people talk about with the WTO - where China uses the WTO to implement its foreign policy.

And the US, interestingly is doing similar. It tried to justify its tariffs on China on the grounds of Article 21 of the GATT, which allows countries to impose tariffs for defence reasons, so in times of national security. The US claims that you cannot be challenged by the WTO for doing this, because if it's a genuine national crisis, then a country has to do something unilaterally - it can't wait for other countries to approve its actions. Interestingly, this was the same Article that was relied on in the Falklands War, in which the US agreed with the EU's position there, which was that when Argentina invaded the Falklands it was completely acceptable for there to be tariffs imposed on them without a right of challenge. The US says well "why is it any different now? Why can we be challenged?" I suppose there are two things - the first is that there was an actual war happening in 1982, and the second thing is that there is now a dispute settlement body, which there wasn't in 1982.

Potentially a more fitting comparison would be that of Swedish shoes. Sweden in 1975 attempted to impose tariffs on the import of boots into Sweden, because it claimed it was undermining its domestic boot industry, which produced boots for its army. So if Sweden could not produce shoes for its own army, then there was a national crisis of defence [so could impose tariffs]. Sweden was apparently quite literally laughed out of the room. There were no documents officially from that 1975 episode, but potentially the US could be equally laughed at for its position today.

Bernardine: We are very much seeing a very distinct, discrete position of the EU vis-à-vis China. Whereas the US appears to be taking more of a pugilistic attitude towards China, the EU is saying "look China is on a journey towards being a market economy" - it appreciates and sees the benefit of moving in that direction and wants to play nicely, it knows it's not going to be perfect as it takes these baby steps, but we need to be supportive of that. And also there is, I think, a little bit of soft war going on between the EU and the US, where the EU is very much encouraging other countries to adopt EU-style rules so we have seen that with respect to competition law, China adopted EU thinking on competition law, more of an administrative and regulatory system than the US - which is more litigation orientated. We have also seen that with respect to patent law where the Chinese have adopted more of a German style approach, but obviously the Chinese are making it its own, as to how they are developing these rules. The EU would rather have China as an international citizen and have the peer pressure and embarrassment if it does things it shouldn't do within the OECD and so on, to cajole and persuade China to take its part internationally.

Bernardine: But moving on, to wrap-up, I think the last thing we wanted to mention was the EU/UK free trade agreement. Something that is yet to be on people's minds and I think it is a question of time before they realise this. At the moment, an EU free trade agreement with the UK is being presented as very much somehow a separate and different option, be it Canada+ or Norway+. What people are not actually appreciating is the degree to which the EU, as somebody whose territory is completely contiguous to the UK, is going to insist that the UK has a similar regulatory regime to that of the EU. And we've seen this, as I mentioned, with soft harmonisation of regulations. Simply because the EU are not going to give the UK free access to its markets if the UK has some natural advantage with respect to the regulations. They are basically going to try and stifle regulatory arbitrage - to a degree, not completely - because the whole basis of the single market was regulatory arbitrage - all you did was harmonise rules on health and safety and consumer protection, and then everybody is free to have differing rules. That was the brainchild of Lord Cockfield and Margaret Thatcher, a great success - but there's a limit as to how far the EU is going to push that. What people are not appreciating is that is also going to happen within the free trade agreement - the EU is going to say "that's very nice, you can come into our markets on this, this and this basis". It is not simply with respect to quotas or how much or tariffs - it is going to be around regulatory systems.

And we've seen that from early days with the EU. I always thought it was a wonderful thing with the EU back in 1957 to have sufficient foresight for equal pay for women. I thought "my goodness me how the founding members of the EU were foresighted", but it was very gently explained to me by a Belgian diplomat who was involved in the negotiations that it didn't work like that.

What happened was the French worked out that they thought they paid their women more and realised "my goodness me if we start an open trade area we are going to be at a competitive disadvantage as we have got a higher cost base - we need to do something about this". So they insisted that they had equal pay for women vis-à-vis men, to bring everybody else up to the French level. Apparently at the last minute they did their sums again and thought "Woops! We've made a mistake! Actually we pay our women less - we are about to sign away a competitive advantage". So apparently the night before the signing of the treaty in 1957 in Rome, the embassy cars screeched out from the Farnese Palace round to the all the other embassies saying "That bit of the treaty - don't sign it, don't sign it - we don't agree to the equal pay for women". By then the ink was dry and everyone shrugged their shoulders and said "Too late. Doesn't matter. You can't have that change."

And that's how we got equal pay, which is a long winded way of saying that the EU-UK free trade agreement is not what everybody thinks it is or what they would like to think it is. That is likely to be, once it's finally cooked, not at all dissimilar from something as if we were in the EEA, obviously without the flanking policies and the free movement and so on, but it is likely to be something very similar. It is interesting. A sort of geeky thing I've done over the years is to watch how Switzerland implements various bits of legislation in this arena, and frankly it cuts and pastes EU legislation. So I suspect, more than suspect, I'm of the view that the free trade agreement is going to be very similar to us having to align to the EU rules, and I'm afraid at the moment so far the media have yet to twig that that is likely to be the case. I think that's the next storm in a teacup that is coming our way.

I hope this has been helpful. I hope it has given you some enlightenment.

Thank you very much indeed for anybody who joined, for joining in and for listening. As ever, you can email us with any specific questions.

Thank you.