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US sanctions pose existential threat to WTO

Friday, 02 November 2018
This is an opinion article by an external contributor. The views belong to the writer.
The European Union plans to create a “special purpose vehicle” for trade with Iran in response to the reimposed trade sanctions by the US on the country

With reports that the World Trade Organisation’s (WTO) dispute settlement body will open adjudication requests from the European Union, Canada, China and others against US President Trump’s Section 232 steel and aluminium tariffs, the Gordian knot of the trade war is only getting tighter. The dispute sheds light on the waning power of the WTO itself, mostly due to the fact that the disruptive politics of the Trump administration are laying bare the cracks in the body’s structure, and by extension, those in the international trade system.

Indeed, the problem is that the White House’s actions are changing the laws of global trade. The WTO’s arbitration mechanisms are premised on dealing with traditional disputes relating to tariffs and other conventional barriers to commerce. But as Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, said Trump had “weaponized” trade policy by using sanctions and national security tariffs to advance commercial interests. Were the administration to continue down this road, the WTO’s very purpose would be called into question.

Pulling the WTO’s teeth

Despite its cumbersome legislative process, the WTO dispute settlement process has worked well in the past to resolve traditional trade issues, even if Washington’s blocking of the reappointment of one of the WTO’s four remaining appeals judges is causing an internal crisis.

But sanctions are a different beast entirely that cannot be resolved through the process. They fundamentally contradict WTO objectives of trade liberalisation, instead blocking trade for often non-economic reasons. Worse, since there is no recourse for US sanctions, the White House is increasingly tempted to flout international rules by dressing up commercial actions as sanctions.

That’s a problem because sanctions can sometimes be more damaging for the global economy than for the targeted entity. Due to America’s secondary sanctions regime, which allows the US to fine, seize assets or even levy criminal charges at companies transacting with blacklisted entities, the ripple effects of such measures are global in nature – and reach much farther than their initial purpose. The moral hazard is very real: for a president obsessed with protecting American manufacturers, what better way to harm their competition than by pushing secondary sanctions?

More damage through sanctions than tariffs

One case in point is the fate of Europe’s industrial heartland, which has been hanging in the balance after the U.S. Treasury passed sanctions on Rusal owner Oleg Deripaska in April. For many small and medium-sized enterprises (SMEs) operating in the aluminium downstream sector, aluminium imports are integral to their core business. Consequently, the sanctions threw the aluminium market into complete shock as businesses frantically sought to devise adequate responses to the predicted aluminium supply shortages.

This constriction of aluminium supplies is now threatening the closure of smelters across the European continent and is pushing SMEs towards the edge of survival. Since such companies are major growth drivers for the EU’s three largest economies (Germany, France and Italy), the sanctions could have far-reaching effects on employment and social welfare.

Although the sanctions deadline was postponed until 12 December to allow for a resolution, they remain an ongoing worry for European metals companies, especially in Germany. WirtschaftsvereinigungMetalle, a major industry association representing more than 600 firms, warned specifically that knock-on effects could lead to substantial job losses.

And it’s not just sanctions on Russian aluminium that are shattering the WTO system. Scrapping the Iran deal is following a similar pattern. Coming into effect on 5 November, these measures would essentially prohibit the import of Iranian oil in an attempt to politically and economically isolate the country from world trade. Yet while the sanctions clearly affect European businesses – many of which have announced their intention to pull out from Iran and freeze current and planned contracts to avoid not being able to do deals with the much larger American market – Tehran’s economic significance is ultimately limited. Unlike in the case of Rusal, losing Iran as a trading partner will be painful for companies exposed to the market, but it won’t be an existential threat.

Sticking it to Washington?

Faced with this barrage of threats, it is no wonder then that the EU, China and Russia hope to establish parallel structures. In the 1990s, Europe filed WTO complaints and passed regulations meant to block the effect of extraterritorial US sanctions on entities dealing with Cuba, Iran and Libya – and Washington folded. But that road is now effectively blocked – in the decades since, the US-led international financial system has become too powerful.

Announced at September’s UN General Assembly, the so-called special purpose vehicle (SPV), a multinational European state-backed intermediary to handle deals with companies interested in Iran business, provides a way around the US banking system. Apart from allowing Iran to continue trading with the rest of the world, the SPV would shield European firms from US backlash.

Considered unthinkable in previous years, this step is now an inevitable change in the international system. More than ever, Europe needs to set up payment channels that do not depend on Washington’s policy whims. Decoupling from the dollar by replacing the role of US global banks in handling payments for international trade means that the proposed parallel structures can help negate the fall-out of an increasingly erratic sanctions regime that intrinsically fails to distinguish between friend and foe.

The process needed to establish the right channels is complex and costly, but it offers the EU an opportunity to begin investing political and economic capital to challenge US economic dominance. This is particularly important given that Brussels plans to symbolically launch the SPV on 4 November, ignoring Washington’s warnings that anyone defying American sanctions will be placed under punitive sanctions themselves.

With the SPV, this threat and its potential consequences is losing its edge, even if the US are very likely to sanction the European institutions and officials involved in establishing it. But considering the dramatic economic consequences Europe is already facing with Rusal, Brussels has no choice but to create entirely new structures.

What the pervasive use of sanctions show is that the WTO’s biggest problems are not caused by the US refusal to appoint judges. In reality, the body is being sidelined by new political realities, in which the hitherto unthinkable has become the new normal.