The World Trade Organization’s (WTO) dispute settlement mechanism has not been fully functioning since December 2019. A viable alternative has emerged, but it will need more countries to sign on to help prevent cycles of tariffs and retaliation. 

The United States started blocking the appointment of new judges to the WTO Appellate Body in 2017. Once the Appellate Body fell below three members in December 2019 it could no longer hear new appeals. The United States has cited concerns regarding judicial activism and sovereignty as reasons for the block. With no functioning appeals process, decisions can be appealed without resolution, making it difficult for WTO members to resolve disputes. 

A temporary solution has emerged: arbitration and a speedy appeals process 

Simple arbitration has always been an option. Article 25 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes allows WTO members to use arbitration if the parties agree to a set of rules. But the case record shows that most countries have preferred the full dispute and appeal process. In fact, before the Appellate Body collapsed, the arbitration option was only used once and that was for an EU copyright case against the US involving Irish country music. 

In April 2020, once it became clear the Appellate Body was no longer functional, the European Union led an effort to set up an alternative system called the Multi-Party Interim Appeal-Arbitration Arrangement (MPIA). The agreement offers members access to an independent arbitration and appeal process for dispute settlement once the panel report is complete. So far 53 members have signed up, including Australia, Brazil, Canada, China, Japan, Mexico, and New Zealand, among others. The United States is noticeably absent. 

To use the MPIA process, the parties must agree to utilize that appellate arbitration process before they know the panel’s ruling. This is necessary otherwise the losing party can appeal into the void leaving the other party with no resolution. In other words, the parties either agree to accept the panel’s ruling and not appeal or they agree to an arbitration and appeals process within the MPIA framework. 

The MPIA arbitration process operates under a strict 90-day deadline, which is shorter than the traditional appeals process. It is possible, however, that MPIA cases could drag on during the implementation or negotiated solution phase. There have been 13 cases so far. Of these, two have been completed, three have been resolved without appeal, and eight are ongoing. 

James Bacchus and Simon Lester found that the WTO appeals process in cases between 2015 and 2019 took 117 to 170 days. The entire dispute process however includes extensive panel meetings and reviews and cases can drag on for several years. The European Commission’s regime for importing bananas was challenged by the United States and several other countries— the case began in 1996 and was not settled until 2012. Another well-known dispute involved government subsidies for large civil aircraft (namely, Boeing and Airbus). The US initiated a case against the EU in 2004, and that same year the EU initiated a case against the US. Both cases were resolved 17 years later with a 2021 agreement.

Recent cases 

The first case to use Article 25 arbitration since the Appellate Body collapse was the EU case against Turkey regarding its discriminatory practices in pharmaceuticals. Initial consultations were requested in 2019, but the panel was not composed until 2020 and by that time the Appellate Body has stopped fully functioning. At issue was Turkey’s “localization requirement” that forced foreign pharmaceutical companies to produce their products in Turkey to qualify for reimbursement under Turkish social security schemes. The EU argued that these measures discriminated against foreign pharmaceutical products and were incompatible with Turkey’s WTO commitments. The WTO panel ruled in favor of the EU. Turkey wanted to appeal but since it was not a member of MPIA, both parties agreed to send the case to non-WTO arbitrators and abide by their findings. (MPIA members agreed to a pool of 10 standing arbitrators and for each case three are randomly selected). This was the first time a WTO dispute appeal had been resolved in this way. The arbitrators supported some of Turkey’s arguments but agreed with the main WTO panel’s key finding that the localization requirement breached global trading rules. They advised Turkey to adjust its measures accordingly and a status report by Turkey indicates they are doing so. 

The first MPIA case was the EU case against Colombia and its antidumping duties on frozen fries. The initial ruling was in favor of the EU and Colombia appealed. Within 90 days, the MPIA panel found in favor of the EU and determined that Colombia’s duties violated WTO rules and unfairly restricted access to the Colombian market. 

Options facing WTO members that have a complaint 

Even without a fully functioning appellate body, WTO members still have options to resolve disputes. One option is simple arbitration under Article 25 and remains available to all WTO members. A second option is arbitration and appeals under MPIA for parties that have signed onto that agreement. Even if all the parties in a dispute have not signed on, it is still possible to use MPIA as long as everyone agrees to a clearly defined set of issues to be resolved and a set of rules and procedures for arbitration. A third option is to go through with consultations and a panel report and hope a resolution can be achieved. 

Requests for WTO DSU consultations have dropped off substantially since 2019 (figure 1). A few countries have filed even in the absence of a fully functioning appeals process. There have been some cases that have been resolved (e.g., Australia’s cases against China over duties on wine and barley) and others appealed into the void (e.g., India appealed a ruling against its tariffs on mobile phones; the United States appealed a ruling against its section 301 tariffs on imports from China). 

Absent a shared interest in resolution, there is little recourse for complainants even with a panel report in their favor. The complainant could choose to impose retaliatory tariffs but that can lead to a tit-for-tat tariff war with no resolution. For instance, China imposed retaliatory tariffs against the United States in response to the 301 tariffs. 

A large country may be willing to risk this, but smaller countries tend to be more exposed with less leverage regarding retaliation. Large countries can also be vulnerable though, especially exporters that are heavily reliant on WTO rules. US agricultural exporters are exposed because their market access abroad is heavily reliant on WTO rules like the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) agreements. 

Still working it out 

Countries need ways to resolve grievances. Otherwise, there is little use of having trade rules. That is why the dispute settlement mechanism has long been considered the crown jewel of the multilateral trading system. When it stopped fully functioning in 2020, some characterized the moment as an “existential crisis.” 

The EU-led effort on an interim appeal-arbitration process appears to be working well so far, at least as a temporary fix while WTO members discuss broader reform options. But the United States has not signed on, which leaves many in the lurch. 

Experts have suggested other alternatives. For instance, the WTO could pursue a stronger monitoring role or use the “specific trade concerns process” in the WTO TBT and SPS committees to head off disputes before they are filed. Also, regional trade agreements such as USMCA and CPTPP have their own dispute resolution mechanisms. 

U.S. objectives for reform were circulated in July 2023 and include a streamlined dispute settlement process and ending judicial overreach. In September 2023, U.S. Trade Representative Katherine Tai said it is not the Biden Administration’s goal to restore the Appellate Body although recently Deputy USTR Maria Pagan indicated the U.S. is open to a focused appeals process, presumably to avoid judicial overreach. Technical talks for how to reform the dispute settlement process are underway and expected to finish by the end of the year.

Opinions expressed are solely those of the author and not the Yeutter Institute or the University of Nebraska-Lincoln.

Christine McDaniel is a Senior Research Fellow at the Mercatus Center and a Non-Resident Fellow at the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska-Lincoln

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While both U.S. proposed modification documents are presently restricted (and hence not available to the public), the notices constitute USTR following the requirements of Executive Order 13944 of August 6, 2020 to take steps within 30 days after the Food and Drug Administration had published its list of drugs and active pharmaceutical ingredients that are essential. See Executive Order 13944 of August 6, 2020, Combating Public Health Emergencies and Strengthening National Security by Ensuring Essential Medicines, Medical Counter- measures, and Critical Inputs Are Made in the United States, 85 Fed. Reg. 49,929 – 49-934 (August 14, 2020). USTR’s obligations extend beyond the WTO and include any trade agreements with government procurement commitments. But for purposes of this post, I am focusing just on the WTO Agreement on Government Procurement (1994 and Revised). The Executive Order is embedded below but is an effort to address perceived supply chain problems and “over reliance” on imported product including active pharmaceutical ingredients (“APIs”).

While the United States is a major pharmaceutical research and development country, U.S. pharmaceutical companies have moved much API production offshore as well as finished product production. China and India are the largest suppliers of APIs to the United States. With the challenges of the COVID-19 pandemic, the Trump Administration has pursued efforts to onshore manufacturing of essential medical products including through the Executive Order 13944. See, e.g., Datex, Onshoring U.S. Pharmaceutical Manufacturing:COVID-19, Congress and Puerto Rico Pharma Hub, Ideas for returning pharmaceutical manufacturing to the U.S., https://www.datexcorp.com/onshoring-u-s-pharmaceutical-manufacturing-covid-19-congress-and-puerto-rico-pharma-hub/; Fierce Pharma, June 3, 2020, U.S. seeks to onshore drug production in response to COVID-19. Is pharma even interested?, https://www.fiercepharma.com/manufacturing/pharma-pushes-back-u-s-legislation-to-bring-drug-manufacturing-stateside; Policy & Medicine, August 26, 2020, Trump Signs Executive Order Regarding Medical Supply Chain, https://www.policymed.com/2020/09/trump-signs-executive-order-regarding-medical-supply-chain.html.

While onshoring is not supported by pharmaceutical companies and has been cited as not likely cost-effective or necessary to address the current or future pandemics, to date both the Trump Administration and President-elect Biden have expressed support for at least some onshoring to ensure greater availability of medicines and materials. See, e.g., S&P Global Market Intelligence, October 15, 2020, US drug onshoring is more complex than Trump, Biden political pitches –experts, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-drug-onshoring-is-more-complex-than-trump-biden-political-pitches-8211-experts-60714320.

Deputy Director-General Alan Wolff in a statement to the World Economic Forum on November 12, 2020 reviewed some of the reasons for WTO Members not to put excessive reliance on onshoring and to use supply chains and strengthen them. See WTO, 12 November 2020, DDG Wolff calls for new initiatives to cut tariffs on medical supplies and equipment, https://www.wto.org/english/news_e/news20_e/ddgaw_12nov20_e.htm.

“On the feasibility of localization

“Trade this year has proved to be essential to meet the world’s needs for medical supplies. National stockpiles proved inadequate. Investment was only part of the answer.

“Trade played a critical role in meeting the vastly increased demand for medical goods and medicines. WTO data show that trade in personal protective equipment (PPE) more than doubled from May 2019 to May 2020. It was a key factor in creating supply resilience, even though some shortages persist even in advanced economies.

“Purely domestic supply chains would have been unable to meet a surge in demand of the suddenness and magnitude experienced. Export controls may have exacerbated the problems, even though many have been subsequently rolled back.

“It appears that the shock persisted in policymakers’ minds in many countries, following initial calls for re-shoring manufacturing production for key products.

“Supporters of localization tend to portray it as risk-free. This is wrong. Concentrating industry at home might insulate it from turbulence elsewhere, but the domestic sources of supplies are more vulnerable to localized disruptions, such as from a hurricane or an outbreak of disease. In addition, the economics dictate that complete self-sufficiency is unworkable for any country, rich or poor.

“Deep and diversified international markets offer the most promising and cost-effective path to supply resilience. But its viability will hinge on whether countries and their citizens feel that international markets can be trusted in a crisis

“On reliance on global supply chains

“Economics will be the key determinant of the resilience of international supply chain.

“If countries can be confident that they will be able to rely on international markets for imports when they need them, they will have less reason to restrict exports.

“The preliminary evidence suggests that moves to diversify supply chains have primarily seen production shift from one low-cost country to another.

“Increasingly sophisticated machines have already been diminishing the importance of labor cost arbitrage in the choice of manufacturing location.

“Productivity will be a key determinant of which firms are able to go compete internationally.

“A few years ago, the Brookings Institution looked at five key determinants of the manufacturing environment: 1) overall policies and regulations; 2) tax policy; 3) energy, transportation, and health costs; 4) workforce quality; and 5) infrastructure and innovation. It is instructive that when the study made recommendations for how to improve the manufacturing environment, at the top of their list was political and economic predictability, including open trade policies.

“On shoring and near-shoring have to obey these economic rules if they are going to play an increasing role in national choices.”

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The U.S. commitments under the GPA include purchases by the Departments of Health and Human Services and of Defense. The two sets of Annex 1 obligations (1994 GPA; revised GPA) are embedded below.

The Food and Drug Administration list of essential pharmaceutical and other medical products is embedded below and constitutes what is presumably being proposed for withdrawal from coverage of the GPA 1994 and revised GPA in the U.S. Annex coverage. It is a long list of products, if, as assumed, it is the FDA list that has been put forward.

Modification of Annexes under the WTO 1994 GPA and under the WTO revised GPA

While the WTO’s Agreement on Government Procurement envisions expanded coverage over time by signatories, both the original agreement and the revised agreement provide for possible modifications of the Agreement with rebalancing of benefits for other countries or retaliation where action is taken without rebalancing. The 1994 Agreement in Article XXIV:6 provides for rectifications and modifications of commitments:

“Article XXIV: Final Provisions

* * *

“6.     Rectifications or Modifications

“(a)    Rectifications, transfers of an entity from one Annex to another or, in exceptional cases, other modifications relating to Appendices I through IV shall be notified to the Committee, along with information as to the likely consequences of the change for the mutually agreed coverage provided in this Agreement. If the rectifications, transfers or other modifications are of a purely formal or minor nature, they shall become effective provided there is no objection within 30 days. In other cases, the Chairman of the Committee shall promptly convene a meeting of the Committee. The Committee shall consider the proposal and any claim for compensatory adjustments, with a view to maintaining a balance of rights and obligations and a comparable level of mutually agreed coverage provided in this Agreement prior to such notification. In the event of agreement not being reached, the matter may be pursued in accordance with the provisions contained in Article XXII.

“(b)    Where a Party wishes, in exercise of its rights, to withdraw an entity from Appendix I on the grounds that government control or influence over it has been effectively eliminated, that Party shall notify the Committee. Such modification shall bodog casino become effective the day after the end of the following meeting of the Committee, provided that the meeting is no sooner than 30 days from the date of notification and no objection has been made. In the event of an objection, the matter may be pursued in accordance with the procedures on consultations and dispute settlement contained in Article XXII. In considering the proposed modification to Appendix I and any consequential compensatory adjustment, allowance shall be made for the market-opening effects of the removal of government control or influence.”

The revised Agreement has more detailed provisions for modifications and rectifications contained in Article XIX:

“Article XIX — Modifications and Rectifications to Coverage Notification of Proposed Modification

“1. A Party shall notify the Committee of any proposed rectification, transfer of an entity from one annex to another, withdrawal of an entity or other modification of its annexes to Appendix I (any of which is hereinafter referred to as ‘modification’). The Party proposing the modification (hereinafter referred to as ‘modifying Party’) shall include in the notification:

“a. for any proposed withdrawal of an entity from its annexes to Appendix I in exercise of its rights on the grounds that government control or influence over the entity’s covered procurement has been effectively eliminated, evidence of such elimination; or

“b. for any other proposed modification, information as to the likely consequences of the change for the mutually agreed coverage provided for in this Agreement.

“Objection to Notification

“2. Any Party whose rights under this Agreement may be affected by a proposed modification notified under paragraph 1 may notify the Committee of any objection to the proposed modification. Such objections shall be made within 45 days from the date of the circulation to the Parties of the notification, and shall set out reasons for the objection.

“Consultations

“3. The modifying Party and any Party making an objection (hereinafter referred to as “objecting Party”) shall make every attempt to resolve the objection through consultations. In such consultations, the modifying and objecting Parties shall consider the proposed modification:

“a. in the case of a notification under paragraph 1(a), in accordance with any indicative criteria adopted pursuant to paragraph 8(b), indicating the effective elimination of government control or influence over an entity’s covered procurement; and

“b. in the case of a notification under paragraph 1(b), in accordance with any criteria adopted pursuant to paragraph 8(c), relating to the level of compensatory adjustments to be offered for modifications, with a view to maintaining a balance of rights and obligations and a comparable level of mutually agreed coverage provided in this Agreement.

“Revised Modification

“4. Where the modifying Party and any objecting Party resolve the objection through consultations, and the modifying Party revises its proposed modification as a result of those consultations, the modifying Party shall notify the Committee in accordance with paragraph 1,and any such revised modification shall only be effective after fulfilling the requirements of this Article.

“Implementation of Modifications

“5. A proposed modification shall become effective only where:

“a. no Party submits to the Committee a written objection to the proposed modification within 45 days from the date of circulation of the notification of the proposed modification under paragraph 1;

“b. all objecting Parties have notified the Committee that they withdraw their objections to the proposed modification; or

“c. 150 days from the date of circulation of the notification of the proposed modification under paragraph 1 have elapsed, and the modifying Party has informed the Committee in writing of its intention to implement the modification.

“Withdrawal of Substantially Equivalent Coverage

“6. Where a modification becomes effective pursuant to paragraph 5(c), any objecting Party may withdraw substantially equivalent coverage. Notwithstanding Article IV:1(b), a withdrawal pursuant to this paragraph may be implemented solely with respect to the modifying Party. Any objecting Party shall inform the Committee in writing of any such withdrawal at least 30 days before the withdrawal becomes effective. A withdrawal pursuant to this paragraph shall be consistent with any criteria relating to the level of compensatory adjustment adopted by the Committee pursuant to paragraph 8(c).

“Arbitration Procedures to Facilitate Resolution of Objections

“7. Where the Committee has adopted arbitration procedures to facilitate the resolution of objections pursuant to paragraph 8, a modifying or any objecting Party may invoke the arbitration procedures within 120 days of circulation of the notification of the proposed modification:

“a. Where no Party has invoked the arbitration procedures within the time-period:

“i. notwithstanding paragraph 5(c), the proposed modification shall become effective where 130 days from the date of circulation of the notification of the proposed modification under paragraph 1 have elapsed, and the modifying Party has informed the Committee in writing of its intention to implement the modification; and

“ii. no objecting Party may withdraw coverage pursuant to paragraph 6.

“b. Where a modifying Party or objecting Party has invoked the arbitration procedures:

“i. notwithstanding paragraph 5(c), the proposed modification shall not become effective before the completion of the arbitration procedures;

“ii. any objecting Party that intends to enforce a right to compensation, or to withdraw substantially equivalent coverage pursuant to paragraph 6, shall participate in the arbitration proceedings;

“iii. a modifying Party should comply with the results of the arbitration procedures in making any modification effective pursuant to paragraph 5(c); and

“iv. where a modifying Party does not comply with the results of the arbitration procedures in making any modification effective pursuant to paragraph 5(c), any objecting Party may withdraw substantially equivalent coverage pursuant to paragraph 6, provided that any such withdrawal is consistent with the result of the arbitration procedures.

“Committee Responsibilities

“8. The Committee shall adopt:

“a. arbitration procedures to facilitate resolution of objections under paragraph 2;

“b. indicative criteria that demonstrate the effective elimination of government control or influence over an entity’s covered procurement; and

“c. criteria for determining the level of compensatory adjustment to be offered for modifications made pursuant to paragraph 1(b) and of substantially equivalent coverage under paragraph 6.”

Likely consultations with trading partners will extend into Biden Administration

Considering the list of other GPA signatories, it is certain that a number of signatories will seek compensation from the United States or will pursue retaliation if the U.S. proposed modifications take effect. Assuming a desire by one or more signatories to seek rebalancing and/or to pursue retaliation, the timing of implementation of the modifications appear to vary based on the relevant Agreement but will almost certain extend into the Biden Administration after January 20.

Thus, while the incoming Biden Administration intends to have its focus on domestic challenges in the early part of its first term, the modification of U.S. WTO GPA commitments is another example of an important trade issue that will require focus in the early days of the new Administration.

Conclusion

During the COVID-19 pandemic there has been concern both within the Trump Administration and in the U.S. Congress about the shortages of personal protective equipment and the high reliance on offshore production of APIs and essential medicines for the treatment of patients with COVID-19 in the United States. The concern on domestic capabilities is held by both Republicans and Democrats and has been identified as an issue of importance to the incoming Biden Administration. While there is opposition from the pharmaceutical companies and certainly concerns from economists and some policy professionals about over reliance on onshoring, the United States has been taking some actions to encourage onshoring. The Executive Order 13944 addresses U.S. government procurement of essential medicines and other medical goods.

Action last week by USTR in submitting proposed modifications to its Annex 1 commitments under the 1994 GPA and the revised GPA is a necessary step to comply with WTO obligations if a change in coverage is to occur. Because of the likely actions of trading partners in the coming weeks and months, the Biden Administration, if it chooses to move forward with the Trump Administration initiative, will face an important WTO task in the early months of the new Administration to negotiate a rebalancing of commitments or face retaliation by WTO GPA partners. Similar obligations and needs will be present in FTAs that include government procurement commitments as well. This increases the importance for the Biden Administration to fill the USTR posts early as well.

Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, bodog poker review|Most Popular_Congressional

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• World Trade Organization (WTO) Director-General Roberto Azevêdo announced on 14 May that he would step down from the position.
• The position has an important role in advancing global trade and cooperation, despite holding little formal power.
• With the organization under threat, the new Director-General will have the chance to make a big difference.

Yet, the position of the Director-General holds almost no formal power. He or she cannot single-handedly reform the organization, force governments to take any specific action or even dictate the agenda.

So why does the Director-General matter? Here are five reasons why the position – and who holds it – are important, especially right now.

1. The Director-General Bodog Poker is the only person who can speak up for the WTO with no vested interests beyond that of the organization itself.

This is particularly important now. The WTO and its rulebook play a vital role in the global economy, but the organization is under threat. The problems confronting the WTO – US-China trade tensions, the unilateral raising of trade barriers, the fact that the WTO’s Appellate Body can no longer function – were formidable even before COVID-19. Now, the pandemic has further frayed international relations and brought a proliferation of new export restrictions, demands to “reshore” supply chains, forecasts that global trade could shrink as much as 32% this year and led to the postponement of the WTO’s biennial ministerial conference, which could have been a venue to attempt to address some of these issues. In such dire times, the Director-General’s role in championing the system around the world, at G7 and G20 meetings, in the media and with the private sector is essential.

2. The Director-General wields a great deal of soft power.

WTO members drive the organization’s work – but the 164 member governments have never been more divided than they are today. Without overstepping the office’s mandate, the Director-General can use the soft power of the office combined with his or her political connections and clout to convene, coax, and cajole members into action. Of course, the Director-General can’t achieve anything without the members – but at the same time, if members want to make progress, they need the Director-General’s help.

3. The Director-General can be the difference between success and failure in a negotiation.

The first multilateral agreement in the history of this “member-led” organization came at the hands of the Director-General: the Trade Facilitation Agreement, which was finalized during the Bali ministerial conference in 2013. When ministers arrived at the conference, trade facilitation negotiations had been underway for about 10 years and the draft agreement was in its 17th iteration. As talks continued, the ministers could not bridge the gaps necessary to finalize the deal. With time running out, they asked Director-General Azevêdo to put forward a proposal that, with his knowledge of parties’ red lines, he thought had the greatest chance of being accepted by everyone. He presented his compromise text – and, to great acclaim, the deal was done.

4. The Director-General can make discussions more inclusive and democratic.

A long-running criticism of the WTO was that decisions are often taken by a handful of powerful countries, then presented to the other members as a fait accompli. These small gatherings are known within the WTO as “Green Room meetings”, named for the Director-General’s private meeting room. The Director-General cannot remove power politics from global trade, but he or she can change how debates and negotiations are structured, starting with eliminating such old-fashioned practices. Significant progress has been made on this front. As the new great power rivalry grows, the next Director-General will need to work hard to ensure the voices of other players continue to be heard, while keeping discussions productive.

5. The WTO is entering a new era and the Director-General has an opportunity to help shape it.

There is a broad consensus that the WTO needs reform, but no consensus on what reform should look like. The Director-General can attempt to advance this debate, demanding leaders’ attention, brokering deals, galvanizing efforts towards finding potential ways forward, and offering a positive narrative for the organization’s future role. However, progress may be hard to come by. Even an optimist would accept that major reforms seem unlikely in the current political context.

Despite this challenge, the Director-General can make a difference by working with members to deliver incremental change. Large groups of members have already been pursuing innovative work on topics including e-commerce, investment facilitation, and SMEs. Many will see the further development of this work as a test of the organization’s viability. By supporting these efforts, the Director-General can help to deliver some quick wins while also laying the groundwork for a more fundamental transformation of how business is done at the WTO.

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In recently implemented EU RTAs, Canada, Japan and Singapore open more procurement to the EU than they do under the GPA; and Korea made procurement commitments that it subsequently added to the GPA. With regard to RTAs with non-GPA parties, Vietnam will open slightly more procurement to the EU than it covered under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). In a recently completed RTA with the EU, Mexico agreed to broader commitments, in particular relating to procurement by its states, than under earlier agreements, including the U.S.-Mexico-Canada Agreement and CPTPP. The EU has also reached an agreement in principle with the founding members of Mercosur.

This reference paper begins with an examination of a European court decision that defined the scope of the EU’s authority to conclude RTAs, specifically the extent to which it must share authority with its member states. The paper then examines the procurement commitments in the EU’s recent RTAs. The discussion of agreements with four GPA parties considers the extent to which market access commitments exceed GPA coverage and how they relate to EU reciprocity restrictions in the GPA. The section then turns to RTAs with three non-GPA parties. The paper concludes with a brief look at pending RTA negotiations.

The reference paper is based on posts published in Perspectives on Trade and other publications.

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Trump announced over the weekend that the G7 summit, which was slated for this month, likely will be held in September — and said he hoped to invite South Korea, Australia, India and Russia as well. None of the four are members of the G7. Trump had hoped to hold an in-person summit in the Washington, DC, area this month but postponed it after German Chancellor Angela Merkel said she would not attend due to the pandemic.

Clete Willems, a partner at Akin Gump, said the countries must remain in touch and work toward an in-person meeting, which he said would be hard to “replicate” virtually. Willems served as the deputy assistant to the president for international economics through March 2019 and was also deputy director of the National Economic Council. He played a key role in the trade talks between the U.S. and China, among others, and was a lead negotiator at G20, G7 and Asia-Pacific Economic Cooperation meetings.

“I think whether or not they get together virtually now versus in person later — that’s not going to change the fact that these guys are on the phone with each other on a very routine basis,” he told Inside U.S. Trade. “I understand from the White House that they are talking almost daily to each other.”

“As long as the White House and these other countries are able to come up with safety protocols that allow them to travel, I think it’s so much more valuable to have an in-person meeting,” he added. “I think to the extent that it takes them a couple more months for them to figure that out is worth doing. My understanding is that they are all in touch anyway.”

Kelly Ann Shaw, a partner at Hogan Lovells, said postponing the summit was logical given the pandemic. Shaw took over for Willems at the White House last year and left in November.

“A few additional months to prepare and observe will create a better atmosphere for cooperation and creative thinking among Leaders on ways to rebuild the global economy,” she told Inside U.S. Trade in an email.

Wendy Cutler, vice president of the Asia Society Policy Institute and a former acting deputy U.S. Trade Representative, also lauded the administration’s decision to delay the summit.

“Postponement of #G7 meeting is a blessing in disguise,” she tweeted on Monday. “Gives over 4 months to prepare for real, meaningful outcomes instead of just grandstanding and blaming others.”

Trade policy was a focal point of last year’s G7 summit, which was held in Biarritz, France.

Shaw said the G7 “at its core” was a forum to address “global economic growth and related political challenges” and contended that trade will be discussed at this year’s meeting.

“Trade is an indelible component of growth and has been on the agenda since the original Declaration of Rambouillet in 1975 — it certainly will be a part of this year’s G7,” she continued. “There may be a number of trade issues on the table in September, including the proliferation of export restrictions, supply chain vulnerabilities, unfair trade practices, and non-market economies.”

Willems said he was less hopeful that trade would bodog sportsbook review take up as much of this year’s agenda, contending it would likely take a backseat to health and economic issues related to the COVID-19 outbreak.

“I don’t know how much of a focus trade is going to be. My understanding is that there is going to be a lot of focus on coronavirus and the health and economic aspects of that. I think there is going to be a lot of focus on China, some of that may have trade ramifications,” he added. “They will definitely want to have a China focus and that is where you could get much of trade stuff. I don’t know — in terms of an independent trade section — how much I would expect there.”

He also lauded the inclusion of other countries that share G7 ideals, adding, “Australia, India and Spain all went to last year’s [summit].”

“As a neutral matter, it’s not unprecedented for there to be more than just the G7 countries,” he said. “The idea of having certain additional countries attend who share many of the same viewpoints as the other G7 members and who are going to be key allies in working on all of these issues would be important. I would definitely put Australia and South Korea on that list. I’m not so sure whether Russia meets that criteria. I think they want to think long and hard about their inclusion.”

Russia’s membership to the G8 was suspended in 2014 due to its annexation of Crimea.

Trump on Saturday called the G7’s membership “outdated,” adding, “I don’t feel that as a G7 it properly represents what’s going on in the world.”

Canadian Prime Minister Justin Trudeau said he would not support Russia’s inclusion at the G7 meeting. The United Kingdom took a similar position on Monday. — Isabelle Icso (iicso@iwpnews.com)

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Despite the positive role trade has played, the COVID crisis has witnessed the rise of several protectionist policies (González 2020). For instance, many nations imposed export restrictions on medical supplies in an effort to boost local availability (Figure 1). And the possibilities of further and wider trade restrictions have multiplied as US-China trade tensions have reignited. 

More broadly, some policymakers are calling for greater self-reliance in general and repatriation of international supply chains in particular. The US Trade Representative Robert Lighthizer wrote last week, “businesses have been rethinking the way that overextended, overseas supply lines expose them to unacceptable risk … the era of reflexive offshoring is over… ” (Lighthizer 2020). Similar sentiments were expressed in a 17 April 2020 resolution in which the European Parliament declared it “supports the reintegration of supply chains inside the EU” (European Parliament 2020).

In this column, we argue that policies geared towards restricting exports and dismantling supply chains could backfire with negative consequences for trade in both the short and long term – and not just trade in medical equipment. Our argument is based on three facts. First, the interdependence of national manufacturing sectors is pervasive. Second, it has grown substantially in recent years. And third, China plays a unique role in the global network of trade in intermediate inputs. 

Figure 1 Export controls on medical supplies and medicines reported in 2020: 83 nations have imposed a total of 150 measures

Source: Global Trade Alert website,  https://www.globaltradealert.org/, accessed 9 May 2020.

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If the world is to ramp up the production of essential medical equipment to meet the swift rise in pandemic-driven demand, there is no alternative to international trade given the integrated nature of global manufacturing. The same is true for medicines, vaccines, and medical tests that will become important in defeating the virus. Trying to shut down this sort of supply-chain trade will simply make it harder to fight the virus for all nations.

Whatever merits there may be to addressing risk in international supply chains, pursuing this goal in the midst of a pandemic could lead to serious, unintended consequences. Pursuing policies aimed at forcing companies to alter their supply chain practices can easily lead other nations to respond. A spiral of retaliation could disrupt world productive capacity in virtually all manufacturing sectors given the high level of interdependence we documented. This could make economic recovery more challenging, to say the least. In short, keeping trade channels open will help us fight the disease and help the world economy recover. 

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Most trade takes place by sea, and—for navigational safety purposes—virtually all cargo ships report their position, speed, and other information many times a day. A new IMF methodology using these data can help better inform us how international trade is affected by the COVID-19 pandemic.

Building on machine-learning techniques, we can provide better answers to simple questions such as: How big is the drop in trade activity? Should it be attributed mostly to exports or to imports?

A new approach

Using over one billion messages from ships over a period of five years, the newly-developed methodology closely replicates official trade statistics for many countries and for the world in aggregate. It is available at a daily frequency in real time, while official statistics are typically delayed by many weeks. At the global level, our indicators built from ships’ radio signals closely approximate monthly official trade statistics (with a correlation of nearly 0.9 in levels, and around 0.4 in quarter-on-quarter growth rates).

The top panel of our Chart of the Week shows a dramatic fall in Chinese exports in the wake of initial lockdown measures to contain the spread of the virus. Exports resumed in early to mid-March, though in late-April the recovery remained incomplete and showed renewed signs of weakness.

The lower two panels show that as China started reopening its economy, world exports initially recovered across the board. In the specific case of oil and related products, the recent export performance is especially strong but is not fully matched by an increase in world imports—in line with reports that crude oil is being stored at sea.

However, more recently, exports of less commoditized goods (those transported in containers, and finished vehicles) appear on course for a second dip. The situation is perhaps best reflected in the very weak readings for vehicle exports and imports as companies across the supply chain halt production and households postpone purchases of durable goods.

Daily monitoring of trade developments in real time will help provide a reliable early warning regarding potential economic contagion effects amid the pandemic.

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If the U.S. pulled out of the GPA, it would lose access to the sub-central procurement of all GPA parties, except Australia with which it has a free trade agreement (FTA) that covers sub-central purchases. U.S. FTAs with other GPA parties (Canada, Israel, Korea and Singapore) do not include such coverage.

The value of sub-central government purchases typically far exceeds that of central governments. For example, Canada’s provinces and territories purchase more than twice as much as its federal government: Can$7billion versus Can$3 billion at the federal level in 2014 (the most recent statistics reported to the WTO). 

Similarly, in the European bodog sportsbook review Union, more than half of its GPA-covered procurement is undertaken at the sub-central level. In a February 2020 report to the WTO, EU statistics for 2014-16 show that the greatest value of EU contracts covered by the GPA in each of the three years was procured by sub-central entities: 54 percent in 2014, 52 percent in 2015 and 62.5 percent in 2016. EU procurement under the GPA totaled EUR 403 billion in 2016, with sub-central procurement accounting for EUR 252 billion, central government entities EUR 83 billion and utilities EUR 68 billion.

The share of government procurement by sub-central governments is even higher in China. The WTO’s 2018 Trade Policy Review of China pointed out that 95 percent of China’s government procurement is at the local level. In its latest offer in negotiations to join the GPA, China offered all 22 provinces and four province-equivalent cities such as Beijing and Shanghai. That would be lost to the U.S. if it pulled out of the GPA and China completes its GPA accession.

To date, the Trump administration has stated explicitly its intention to “exclude sub-federal coverage (state and local governments) from the commitments being negotiated” in its negotiating objectives for bilateral agreements with Britain, Japan and the EU, as well as the revision of NAFTA. By contrast, the UK’s negotiating objectives include seeking “new and more secure access to the US procurement market . . . at all levels of Government.”

If the U.S. refuses to cover sub-central procurement in new FTAs, it could expect a repeat of its experience in negotiating the U.S.-Korea FTA. In those negotiations, the U.S refused to pursue state coverage based on its concern that it would be highly unlikely to equal, not to mention surpass, the 37 states to which Korea already had access as a GPA party. Korea responded by refusing to cover not only its sub-central entities but also any government enterprises in the FTA. As a consequence, the Korea FTA is limited to central government procurement.

The U.S. position in the Korea FTA negotiations reflected the challenges of covering state procurement under trade agreements. The U.S. covers 37 states under the GPA and two FTAs (with Singapore and Chile), which carried over GPA coverage without consulting the states. In subsequent FTAs, the administration only covered state purchases with the explicit authorization of each state. That approach brought 31 states into the U.S.-Australia FTA in 2005, the high point in FTA state coverage. The number of participating states dropped to 23 states under the Morocco FTA, 22 (plus Puerto Rico) under the Dominican Republic-Central American-U.S. FTA, and even more precipitously to eight states in the last attempt by the administration to gain state authorization.

In FTAs with the Colombia, Panama and Peru, the U.S. applied a reciprocity policy in an attempt to raise state participation. Under it, a state’s goods, services and suppliers would have rights to participate in the procurement of the trading partner’s sub-central entities only if it agreed to cover some of its procurement under the FTA. Only eight states plus Puerto Rico signed on to those FTAs. (Two more were subsequently added to the Peru FTA.)

From this experience, it would be highly unlikely that the administration could regain the level of state coverage that it has under the GPA in bilateral agreements. As a consequence, its FTA partners would be unlikely to open their sub-central procurement to the U.S. and could follow the Korea example and offer even narrower coverage.

Losing access to the procurement of Canada’s provinces and territories would be particularly ironic since a 2010 U.S.-Canada bilateral agreement finally gave the U.S. access to that procurement along with a Canadian commitment to bind that coverage under the GPA, a move Canada had long resisted.

Moreover, Canada’s provinces would not likely take loss of rights to participate in state procurement without a response. The province of Ontario already has in place a reciprocity law. It enacted the Fairness in Procurement Act, 2018 in retaliation for a Buy American law adopted by New York. The law allows Ontario to exclude American suppliers from participating or being awarded contracts in its procurement or even apply more stringent criteria to American proposals. Other provinces – and GPA parties – could follow suit if the president were to carry out his threat and withdraw the U.S. from the GPA. 

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Government purchases are a trillion-dollar opportunity for U.S. businesses

Governments buy a wide variety of goods and services from the private sector, from bridges and road construction, to power plants and digital infrastructure, to office and hospital supplies. In 2018, global government procurement amounted to $11 trillion or 12 percent of global GDP. The U.S. government procurement market alone was $837 billion in 2010.

While most countries have regulations to ensure government procurement is handled in a fair and transparent manner, procurement processes are susceptible to a high incidence of corruption, particularly in the form of undue influence on the bidding outcomes of public contracts.

Enter global procurement trade disciplines

The first agreement on government procurement – called the “Tokyo Round Code on Government Procurement” – was negotiated in 1979 by a small group of countries who wanted to develop a set of harmonized rules governing public procurement that would set a high standard for transparency and openness.

That agreement was subsequently renegotiated as the Agreement on Government Procurement (GPA) in 1994 as part of the creation of the World Trade Organization (WTO), and members agreed to further expand the GPA in 2012. As of May of last year, when Australia became the most recent member to join the GPA, 48 countries were party to the Agreement, with 34 countries having observer status (including 10 of those in active negotiations to join the agreement).

The GPA now covers $1.7 trillion in government procurement activities from its member countries. The GPA includes general disciplines to ensure fair, open and transparent procurement processes for products that exceed a dollar threshold specified by the agreement. Additionally, each country has committed to a “schedule” which specifies which of its entities and purchases are subject to the agreement.

Countries typically exclude defense and national security purchases from the agreement as well as set-asides for small, minority-owned and veteran-owned businesses. Disputes under the GPA can be raised through the WTO dispute settlement system.

Some WTO members but not all

The GPA is a so-called “plurilateral” agreement, meaning only a subgroup of WTO member countries are party to it, and therefore the WTO’s most-favored-nation principle does not apply. Rather, the countries that are parties to the agreement grant each other access to their government procurement markets under the terms of the GPA, but that access is not offered to WTO member countries that are not GPA members.

The United States includes similar procurement language from the GPA in its bilateral free trade agreements, like the recently negotiated U.S.-Mexico-Canada Agreement. All told, the United States has procurement agreements with 58 countries, including the GPA countries and countries with which it has separate free trade agreements.

Even for countries that are not GPA members, the rules in the agreement have become the accepted norms for government procurement globally, with most countries aspiring to this level of fairness and transparency, even if they don’t implement the GPA fully.

The relationship between GPA and “Buy American” requirements

Prior to the GPA, Congress enacted a series of domestic content statutes to ensure that public procurement projects funded by U.S. tax dollars benefit U.S. firms and workers. The Buy American Act of 1933 requires federal government procurement of U.S.-origin articles, supplies and material or manufactured products to be produced “substantially all” from domestic inputs.

While equipment can have a minimal amount of foreign content to qualify, the allowed amount is extremely low. The act generally also allows a price preference for domestic end products and construction materials.

Buy American requirements may be waived under three circumstances: (1) if a decision is made that it is in the public interest to do so; (2) if the cost of U.S.-made products is unreasonable; or (3) if the products are not available in sufficient quality or quantity from U.S. producers. Since the GPA was negotiated, a fourth circumstance was introduced: Buy American can be waived with respect to procurement bids originating from countries that have provided reciprocal access to their own domestic procurement markets.

A push for expansion?

The Trump administration is reportedly reviewing the benefits of the WTO’s Government Procurement Agreement. As reported to the WTO, the United States offered more procurement opportunities to foreign firms in 2010 (the last year for which data are available) than the next five largest GPA parties combined, which include the European Union’s 27 members, Japan, South Korea, Norway and Canada.

The United States may open as much as 80 percent of federal contracts to foreign suppliers, whereas the European Union, Japan and Korea may open somewhere between 13 and 30 percent of central government contracts to foreign suppliers.

And while foreign suppliers are able to compete for certain U.S. government contracts, the GPA and bilateral free trade agreements enable U.S. companies to compete in the nearly $2 trillion dollar government procurement market in the other signatory countries, an opportunity that would be significantly limited by withdrawal from the GPA.

In many cases, such as sales of medical devices and medicines to state-run hospitals, software for government agency use, sales of power equipment, and the construction of hard infrastructure, the GPA offers the primary form of access by U.S. companies to foreign markets.

Worse than losing reciprocity

Ironically, American withdrawal from GPA would also complicate the ability of U.S. companies to sell their products to the U.S. government. Very few U.S. products today are 100 percent American. Supply chains of U.S. companies are increasingly global, meaning that even products manufactured within the United States are likely to have non-U.S. components or materials.

Today, U.S. companies selling equipment to the U.S. government containing non-U.S. content from a GPA signatory country are not subject to the Buy American Act. However, if the United States were to withdraw from GPA, Buy American regulations would apply, potentially disqualifying U.S. companies from selling products that contain foreign content to the U.S. government.

Participation in the GPA not only maintains U.S. companies’ ability to compete for foreign contracts, it also gives the U.S. government leverage to negotiate greater market access under better terms by seeking to expand coverage. This may be particularly important as economies grow around the world and begin to spend higher percentages of their budgets on government procurement.

Also, the race is on to set technology standards around the world such as 5G. If U.S. companies cannot bid to secure government contracts, they may find themselves on the outside of key growth markets, ceding them to competitors from Europe, Canada, Japan and China.

Another way to improve the WTO

While the global trade rules in the GPA seem like an arcane subject, the agreement has had a profound impact on government procurement practices globally. It opened an enormous government procurement market for the signatory countries – including the United States – and created a set of open and transparent regulations that even non-signatories countries work toward. Working within the agreement to improve and expand coverage would benefit U.S. suppliers not just to compete overseas, but to compete for contracts here at home.

Orit Frenkel is the Executive Director of the American Leadership Initiative, which is advancing a new smart power paradigm of American global leadership. She is also the President of Frenkel Strategies, a consulting firm specializing in trade and Asia. Previously she spent 26 years as an executive for GE and before that as a trade negotiator at the Office of the U.S. Trade Representative.

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