On Labor Day, Switch in Heaven that Saved Seven at the WTO?

By Todd Tucker |

Washington State workers got a Labor Day reprieve when the World Trade Organization sided with the U.S. over the state’s aircraft subsidies. But — after years of the U.S. trying to throw its weight around in the Geneva court — the result may be more mixed than it appears at first glance.

What They Found

Today’s decision reverses a November ruling by a lower WTO panel comprised of Australian lawyer Daniel Moulis, former Canadian civil servant Terry Collins-Williams, and Swiss Wilhelm Meier. As I wrote at Duck of Minerva earlier this year:

the WTO last year found that Washington State tax incentives to locate production in the Seattle area in fact created incentives against Boeing using European components, even though nothing in law required it.

On the one hand, this is a laudable attempt to look beneath the surface of a legal text to see what is going on beneath. On the other hand, it revealed the difficulty of drawing the line on where the contextual consideration stops.

For example, the Washington State measures would have had the same in fact effect on components from Kansas or South Carolina. Thus, the measure is not really an international trade barrier of the kind the WTO was created to adjudicate. But the panel determined that, so long as some foreigners could be impacted, even a facially neutral subsidy scheme could not stand.

The U.S. also argued that it would be uneconomical in the case of the 777X model to separate and outsource the kinds of massive components — wings and fuselage — from the final assembly of the overall plane. Thus, the supposed market opportunity that the EU was claiming Airbus was being shut out of was not an opportunity that existed on the market (whatever the Washington legislature chose to do). For the panel, none of this was dispositive. For them, it was enough that “for other aircraft models” besides the 777X, wings could be outsourced or imported, and that it was conceivable that the production processes might change in the future to make outsourcing economical. The panel also deemed that no “import substitution effect or a detrimental impact on imports” need even be shown to stretch WTO obligations beyond their negotiated textual basis (paras. 7.354–7.357).

The Appellate Body division found otherwise, arguing that…

an assessment of whether a subsidy is contingent … requires a thorough analysis of whether the conditional relationship between the granting of the subsidy and the use of domestic over imported goods is objectively observable on the basis of a careful and rigorous scrutiny of all the relevant evidence. This is especially important when the alleged contingency is not clearly expressed in the language used in the relevant legal instrument…

a subsidy requiring the siting of certain production activities in a Member’s domestic territory can ordinarily be expected to increase the supply of the subsidized domestic goods in the relevant market, which would have the consequence of increasing the use of these subsidized domestic goods in downstream production and adversely affecting imports…

subsidies in these circumstances have consequences for the input-sourcing decisions of the subsidized producers to the extent that, having been required to produce an input domestically, and for reasons of production costs and efficiency, they will likely use these inputs in their downstream production activities. This holds particularly true in circumstances where the subsidized inputs are very specialized in nature and the manufacturing and assembly stages of the production chain are highly integrated. However, while a subsidy may operate in such factual circumstances so as to foster the use of subsidized domestic inputs, and thereby result in adverse effects on imports …, such effects do not, in and of themselves, demonstrate the existence of a requirement to use domestic over imported goods.

To these adjudicators, the Washington State subsidy only related to “siting,” not to using foreign goods. This was true, even though the siting requirement — in conjunction with the realities of aerospace integration — would mean that no foreign wings would ever be used.

The ruling comes at a decisive moment in the WTO’s history

In one respect, the U.S.’ clean sweep could be evidence of an enhanced sensitivity in Geneva to the volatile domestic politics of U.S. trade relations. It is rare that a challenged country prevails on all counts. Indeed, in 90 percent of cases, the complainant wins on at least one. Was the Appellate Body pressured to rule the way it did? As Manfred Elsig, Mark Pollack, and Greg Shaffer wrote last year at the Monkey Cage,

on May 12, the U.S. government announced that it would block the reappointment of South Korean Judge Seung Wha Chang to a second term. The Office of the U.S. Trade Representative (USTR) objected to Chang’s role in a series of decisions with which the United States disagreed. Although AB members issue rulings as a collective three-judge panel, the United States accused Chang of making “wrong” decisions, as well as decisions that went beyond what was needed to settle an individual dispute based on the parties’ specific arguments.

The international trade community responded quickly to the U.S. announcement. The South Korean delegation warned that the U.S. message “is loud and clear: ‘if appellate body members make decisions that do not conform to US perspectives, they are not going to be reappointed.’”

The other six AB judges sent a letter to Xavier Carim, the chairman of the Dispute Settlement Body, noting their concerns “about the tying of an Appellate Body member’s reappointment to interpretations on specific cases and even doing so publicly.”…

[earlier] In 2011, the United States blocked the reappointment of Jennifer Hillman, a widely respected U.S. member of the AB, raising early concerns about the AB’s judicial independence. In 2013–2104, the the United States blocked consensus over James Gathii, a chaired law professor in Chicago who would have been the first and only black African on the Appellate Body.

Today’s ruling shows that the U.S. strategy of badmouthing the Appellate Body for overstepping its mandate is working (or at least not hurting).

(Notably, the appeals case was also chaired by a U.S. attorney, Thomas Graham. The other two members were Peter Van den Bossche of Belgium and Shree Baboo Chekitan Servansing of Mauritius — a relative newcomer who will require support of the Trump administration to be reappointed next year — just before the U.S. midterms.)

Whether you think this political pressure is a good thing or bad thing depends on your perspective. To legal scholars like Shaffer, it is evidence that Obama top trade attorney Tim Reif (who was retained by Trump) is in “lobbies’ pocket” and willing to use power to threaten the rule of law. Yet to realist theorists like Richard Steinberg, the organized hypocrisy of the WTO (where all countries are equal on paper but the preferences of the powerful are known informally and matter more) is what helps the system endure to the net benefit of everyone, even if some like the U.S. benefit more than others.

But there’s an alternative to the “power trumping law” argument. Today’s ruling could be the AB playing a long game.

The ruling carried no real immediate downside. EU companies had not really lost out on any business because of the Washington State requirement, as wing outsourcing was impractical to begin with. So there was no major distributional issue at stake, and was just the latest chapter in the long book of the E.U. and U.S. challenging each other’s aircraft policies and trying to clarify the law. It will give Team Trump something to trumpet, and perhaps make some “U.S. wins” headlines. But no one’s livelihoods were immediately at risk with the outcome of the case.

In contrast, and ironically, the U.S. may have more to lose by winning over the longer run. As Zeeshan Aleem from Vox reports, the U.S. is trying to convince the WTO that China is de facto subsidizing its aluminum sector. Many Chinese subsidies are like the ones the EU complained about: not contingent on paper on the use of domestic inputs, but certainly encouraging them nonetheless. As a result of today’s ruling, U.S. workers negatively affected by these Chinese policies will now have a weaker case. It’s the nature of the system: a respondent that wins today is just a complainant that loses tomorrow, and vice versa.

Happy Labor Day!

Also published on Medium.

Todd N. Tucker is a Fellow at the Roosevelt Institute. His interests revolve around global economic governance, including dispute settlement and the domestic regulatory implications of international trade, investment, and tax treaties.