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Uphill Battle for WTO
Reform Toward MC12By Tsuyoshi Kawase

Status Quo of WTO & Need for “Modernisation”
The World Trade Organization (WTO), which has been thecornerstone of the free trade system since its establishment in 1995,
now faces its greatest crisis as it approaches its 30th anniversary.
The Doha Round, launched in 2001, has effectively come to a stop,with its only notable outcome being the 2014 adoption of theAgreement on Trade Facilitation, which went into effect in February
2017. As for plurilateral agreements by groups of like-mindedmembers, there has been success in updating the Information
Technology Agreement (ITA) and the Agreement on Government
Procurement (GPA), but negotiations on new agreements such as
the Trade in Services Agreement (TiSA) and Environmental Goods
Agreement (EGA) have stalled. It has become obvious to everyone
that the rule-making function of the WTO has declined.
This situation stems from the fact that its members are
increasingly stratified and diversified, resulting in the growing
complexity of their respective interests. Today, two-thirds of its
members are developing countries. It had already become evident 20
years ago, at the third ministerial meeting in Seattle, that the GATT1947 decision-making process, still dominated by the developed
countries with the Quad – the United States, EEC, Japan, and Canada– in the lead, no longer worked. The turn of the century has seen therise of the BRICs. China and Russia joined the WTO in 2001 and2012 respectively. Today, these state capitalism states and emerging
economies have a major presence.
A quarter of a century after its entry into force, the WTO
agreements have become outdated as a result of the deterioration of
the WTO’s rule-making function. Agricultural products and natural
resources aside, the production lines of most products, fromsmartphones to jumbo jets, are no longer confined within national
borders but are manufactured through the worldwide division oflabor that we call the global supply chain (GSC). And goods andservices are not the only things that move between the production
bases in the GSC. The free, cross-border movement of capital,
people, knowhow, and data is essential to this process. But there are
no WTO agreements on digital trade or direct investment, andliberalization of the movement of natural persons has only beenachieved in a limited manner under the General Agreement on Tradein Services (GATS). The focus of rule-making has shifted to megaregions under agreements such as the Comprehensive andProgressive Agreement for Trans-Pacific Partnership (CPTPP),
https://www.jef.or.jp/journal/

Author Tsuyoshi Kawase

EU-Japan Economic Partnership Agreement (EPA), and the (currently
under negotiation) Regional Comprehensive Economic Partnership(RCEP), while the WTO declines in importance.
In addition, WTO rules assume market economies as its players;
state intervention in the market is considered the exception. But therise of state capitalist nations led by China means that thisassumption no longer holds in the real world. Some of the US
frustration with the WTO’s Appellate Body stems from the fact thatthe unfair trade advantages that China creates through state-owned
enterprises (SOEs) cannot be regulated through the interpretation of
the rules in force. As the trade dispute between the US and China
shows, this has been one of the reasons why the US is having
recourse to self-help in the form of unilateralism.
The WTO has been more successful in executing and monitoring
the rules in force. WTO members have the treaty obligation to notify
the WTO secretariat of the trade measures that they take. This
notification is then examined in detail by the committees andcouncils with jurisdiction as well as by the Trade Policy Review Body
(TPRB). This multilateral monitoring has worked to prevent the
adoption of protectionist trade policies. The WTO’s disputesettlement system has mandatory jurisdiction and juridical
procedures. It is held in high esteem as one of the most successfulinternational dispute settlement mechanisms, which is manifested by
the 590 cases filed since the establishment of the WTO. The
accumulation of precedents under the panels and the Appellate Body
has clarified the provisions of the agreements, and enhanced stability
and predictability in international trade under the WTO.
However, this enforcement and monitoring system is also showing
increasing signs of institutional fatigue. The dispute settlement
procedures in particular are in dire straits, with the Appellate Bodyon the verge of paralysis. The crown jewel of the WTO is losing its
luster.

Main Agendas & Discussions Among
WTO Members
This situation has given rise to a growing movement for WTO
reform (“Modernisation”) led by the European Union. In the summerof 2018, the EU reached summit-level agreements with the US andChina respectively on the necessity of WTO reform. Meanwhile, it
worked to produce a proposal for reform during the spring and earlysummer of the same year, and published it as a concept paper inJapan SPOTLIGHT • November / December 201923

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September (http://trade.ec.europa.eu/doclib/press/index.
cfm?id=1908). Canada also supported this initiative, hosting ameeting of a small number of the like-minded members (Ottawa
Group) in the same year in Ottawa, where it published a discussion
paper on WTO reform (WTO doc. JOB/GC/201). The Ottawa Grouphas met this year during the World Economic Forum’s annual
meeting in Davos in January and the OECD Ministerial Council
Meeting in May. The Trilateral Meeting of the Trade Ministers of theUS, EU, and Japan also agreed at its fourth meeting in September
2018 on the necessity for WTO reform.
As for broader venues including developing countries, the APEC
summit held in Papua New Guinea in November 2018 failed to
produce a joint communique – the first time that such a thing had
happened – because of a clash between the US and China over WTO
reform. However, an agreement was reached the following month at
the G20 Buenos Aires summit to support WTO reform. At the G20
Osaka summit in June this year, the Ministerial Statement on Tradeand Digital Economy listed specific issues regarding WTO reformand committed to their resolution, and the Leaders’ Declaration
endorsed this.
At the WTO, discussions on reform have been moving forward
since the autumn of 2018, as members have been submitting
specific proposals on the respective issues to the General Council
and other WTO bodies. The main items on the agenda and thecurrent state of the discussions are as follows.

Dispute Settlement Procedure
It is indisputable that the reform of the dispute settlement process
is of the greatest urgency. The US claimed in its 2018 Trade Policy
Agenda and 2017 Annual Report that the Appellate Body was adding
to or diminishing rights and obligations under the WTO Agreement inviolation of the provisions of the Dispute Settlement Understanding(DSU) and criticized this exercise of its powers as “overreach”.
Specifically, the US questions the Appellate Body’s routine disregard
for the mandatory 90-day deadline for its final report, its assertion ofstare decisis for its reports, which has no legal basis in the DSU, andits issue of obiter dicta and advisory opinions that are not necessary
to resolve the dispute.
Consequently, the US has prevented the nomination of
replacements for vacancies since the summer of 2017. The number
of Appellate Body members is currently down to three, the minimum
necessary to comprise a division to hear an appeal. The terms of two
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members will elapse on Dec. 10, pushing the Appellate Body to thebrink of suspension. DSU reform is truly an urgent challenge.
So far, the EU, Honduras, Taiwan, Thailand and others havesubmitted amendment proposals in response to US concerns.
However, the US has shown almost no interest in these and has
merely been repeating its position that they should revert to the DSU
agreed to in 1994, leaving the discussion at an impasse. The EU inparticular, while sharing US concerns, has also submitted a joint
proposal with China and India to enhance the independence of theAppellate Body (WTO doc. WT/GC/W/753). There is a significant gap
between the view of the US and the EU regarding the degree of
judicialization of the WTO dispute settlement procedure.

Institutional Issues: Regular Work & Transparency
An important role of the WTO as an administrative organization isto secure transparency, serving as a clearing house. It has members
submit notifications concerning trade measures according to their
obligations under the WTO Agreements, based on which the councils
and committees examine on a regular basis the trade measures of
the respective countries and their implementation. However, thisobligation to notify is not being adequately complied with, making it
difficult for the WTO subsidiary bodies to conduct this regular work.
On improving transparency, the EU, Japan and the US submitted ajoint proposal on notification procedures in November 2018 (WTO
doc. JOB/GC/204/rev.2 (revised version as of June 2019)). According
to this proposal, a member that fails to file a notice one year past thedeadline would be sanctioned in principle. The member would beineligible to elect chairpersons of committees and the like, ordered toincrease its contribution to the WTO, and suffer other disadvantages.
Developing countries oppose securing compliance with notification
obligations with sanctions. In June 2019, six developing country
members including India and South Africa proposed theimplementation of notification obligations based on inclusivenessthat take the resource limitations of developing countries into
consideration (WTO doc. JOB/GC/218).
As for activating councils and committees and making them more
efficient, 11 members including Australia, the EU and China,
submitted a joint proposal for procedural guidelines in July this year.
This proposal covers preparations for meetings, procedures fordiscussions on trade issues, and procedures for informal resolutions
by chairpersons of issues that are raised (WTO doc. WT/GC/W/777/
Rev.1).

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Special & Differential (S&D) Treatment & Developing
Country Status
In the WTO, there are many provisions that provide “special &differential” (S&D) treatment to developing country members,
exempting them from some of the obligations under the respective
agreement. In addition, developed countries have adopted
preferential tariff systems under which tariffs on imports fromdeveloping countries are reduced or eliminated altogether to improvetheir market access.
However, this developing country status is based on selfdesignation, and even China, the country with the second-largest
GDP in the world, is treated as a developing economy in the WTO.
Meanwhile, developing countries include the Democratic Republic ofCongo, Liberia, Niger, and Zimbabwe, the poorest countries of theworld, some even called “failed states”. The developed countries are
reluctant to place them in one bundle to be given preferential
treatment as developing countries. The US in particular makes noeffort to hide its strong dissatisfaction. In February this year, itoffered a proposal for an objective standard for receiving S&D
treatment. According to the US proposal, OCED member countries,
G20 participants, and high-income countries according to WorldBank standards, for example, will not receive S&D treatment inongoing and future negotiations. The main developing countries havereacted harshly against this proposal (WTO doc. WT/GC/W/764).
Because of this, the US suspended preferential tariffs for India in
June 2018. India fought back by imposing a tariff increase on US
products, a measure of questionable WTO consistency. Finally, US
President Donald Trump announced that unless the WTO’s current
system that uses self-designation for developing country status wasamended within 90 days from July 26, the US would no longer treat
countries that the USTR determined inappropriate as developing
countries in the WTO.
Meanwhile, in October 2018, Taiwan announced that it had
renounced its developing economy status on its own initiative. South
Korea has also decided to voluntarily abandon its self-designateddeveloping country status in future negotiations.

New Substantive Rules: Digital Trade, Fishery Subsidies & Others
As the Ministerial Declaration from the WTO’s Tenth Ministerial
Conference (MC10) in Nairobi in December 2015 shows, developing
countries support the continuation of the Doha Round because they
support its goals, which emphasize development, while developed

countries are reluctant because the negotiation agenda, which had
been established on the basis of the priorities at the time the round
was launched in 2001, is out of date. The substantive rules of theWTO, in the 25 years of its existence, have become outdated. Thereis an urgent need to create rules that match economic realities.
Discussions on the new, post-Doha trade issues of the WTO havebegun to gather momentum.
Rules for digital trade in particular are a topmost priority for WTO
members, given their indispensability to the movement of big data in
the GSC. Some 71 willing and able members issued a joint
declaration on digital trade rules at MC11 in Buenos Aires in
December 2017. Following so-called “exploratory work” for serious
discussions to identify elements that could be included in anagreement and issues that could arise in the negotiations, a meetingof the like-minded members on the occasion of the annual meetingof the World Economic Forum in Davos in January 2019 confirmed
their intent to begin negotiations, effectively launching the process
for a new agreement. At the G20 Osaka summit in June this year, a
Leaders’ Special Event on Digital Economy was held, where the“Osaka Declaration on Digital Economy” was issued, and the 27
participating states including the G20 members signed on to the
Osaka Track, an initiative to promote efforts on rule-making on digitaltrade in the WTO. Since the commencement of negotiations in the
WTO, Japan and other important players such as the US, the EU,
Canada, Brazil, and Singapore have introduced draft texts, leading tointensive discussions.
However, the key players are wide apart in their positions. The US
places importance on the free cross-border movement of data andseeks to achieve the “Three Freedoms” including a ban on sourcecode disclosure demands and a ban on demanding data localization.
These principles have already been incorporated in all agreements
initiated by the US including the CPTPP, the US-Mexico-Canada
Agreement (USMCA), and the newly agreed US-Japan Digital Trade
Agreement. China, on the other hand, demonstrated a cautious
position regarding free movement of cross-border data movement in
the position paper that it submitted to the WTO in April this year.
China regulates the outbound transmission from China of personal
information and important information designated by law. Its
fundamental orientation is incompatible with that of the US.
Meanwhile, the EU places absolute priority on protecting personal
information through general data protection rules (GDPR) andregards the freedom of data movement as a secondary concern.
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India has a significant presence in information technology but is not
one of the willing and able.
The G20 Leaders’ declaration in Osaka took up “Data Free Flowwith Trust (DFFT)” and gained the support of the participants
including the US, China, and the EU. However, this apparent
consensus on data free flow hides many differences. “Trust”, inparticular, means that from the government perspective for China,
and that from the individual’s perspective for the EU, while it is anempty word without substance for the US.
Negotiations on a fisheries subsidies agreement continues as anagenda item from the Doha Round. Negotiated as part of the Rule
Negotiations in the Doha Round, the talks had stopped as the overallround stalled. However, the UN Sustainable Development Goals(SDGs) were adopted in 2015, in which agreeing on regulating
subsidies that lead to illegal, unreported and unregulated (IUU)
fishing as well as overcapacity and overfishing was set as a target.
This gave new life to negotiations, and an agreement was reached at
the MC11 in Buenos Aires in 2017 to aim at adopting an agreementby the next ministerial conference. However, the key participants
have not been able to agree on the most important issue, which is
how to regulate IUU fisheries subsidies. Moreover, views have not
moved towards consensus on the introduction of S&D treatment
provisions for developing countries. The US and China in particular
are at odds as to whether China should be able to invoke thisexception by self-designation. India has also been a tough andoutspoken defender of S&D treatment, and claimed a broad range of
exemptions from subsidy restrictions for developing countries.
Efforts also continue at the Trilateral Meeting of the Trade
Ministers of the US, EU and Japan, which was launched in December
2017, to strengthen regulation of industrial subsidies and to create
new rules on forced technology transfer with China in mind.
Specifically, at the third meeting in May 2018, a Scoping Paper on
Industrial Subsidies and a Joint Statement on Technology Transfer
Policies and Practices were adopted. The scoping paper is anagreement on the necessity of developing more effective rules on
subsidies to improve transparency, strengthen regulation of publicbodies and state-owned enterprises (SOEs), and set a new list on
prohibited (“red”) subsidies. The Third Meeting also reachedagreement on a Joint Statement on Technology Transfer Policies andPractices, which expressed concern over forced technology transfer
to host countries through such means as joint ventures, foreign
investment regulation, technology license contracts, and support for
26 Japan SPOTLIGHT • November / December 2019

cybertheft through improper access. In light of this development,
China expressed its concern over the discriminatory treatment ofSOEs in subsidies regulation and investment examination for
security purposes in its May 2019 proposal for WTO reform (WTO
doc. WT/GC/W/773).

From Osaka to Nursultan: a Way Forward
The negotiations concerning these agendas touched upon above
clearly and implicitly target agreement or substantial progress at theMC12 in Nursultan, Kazakhstan, in June 2020. Reform of the disputesettlement procedures is of even greater urgency, since the Appellate
Body will be unable to operate as early as December 2019. But theprospects are grim.
No WTO member disputes the need for reform and the revival ofthe multilateral free trade system. For example, the Osaka G20
Communiqué committed all the participating countries to such goals
as “keep[ing] our markets open”, “a free, fair, [and] nondiscriminatory ... trade and investment environment”, and “a levelplaying field”. However, to China, which enjoys the fruits of the free
trade system under the current WTO regime, the word “free” mustshine red and bright, but to the US the words “fair” and “level” mustloom in bold, capital letters.
This state of affairs indicates that although no one disagrees thatmeaningful reform of the WTO is an urgent challenge, countries havedifferent interests in mind. There are no prospects for an end to theheated conflict between the US and China. More generally, the gulf
between developed countries and developing countries remains
stark, leaving little likelihood that a high-level multilateral consensus
will be created in the WTO, at least any time soon.

Tsuyoshi Kawase is a professor of the Faculty of Law at Sophia University
and Faculty fellow at the Research Institute of Economy, Trade & Industry(RIETI).