Wednesday, March 28, 2012

WTO dispute settlement as Trade Wars - A false alarm?

Whenever there is a request for consultation under the WTO dispute settlement system or a request for a panel to be constituted, headlines scream that a "trade war" is imminent. I had blogged about this issue briefly in the context of the request for consultations the U.S., EU and Japan have made with China in the matter relating to export restrictions of rare earth in this blogpost.
"3. The U.S is well within its rights to seek for consultations under the WTO. Countries would be expected to protect their domestic interests in the multilateral fora when they perceive a measure to be discriminatory or going against international trade rules. Viewing the consultation as a "trade war" may not be appropriate. After all, this is the mechanism to settle disputes in international trade disputes. Whether the U.S's stand is legally sustainable is different from the right to invoke the dispute settlement mechanism in the WTO. China should view it as a normal trade dispute that will inevitable lead to the WTO deciding on the issue. It is the same mechanism that China would rely on to challenge discriminatory U.S. trade practices."
This piece in the Free Malaysia Today carrying the statement of WTO Director General Pascal Lamy fortifies my view:
"The head of the World Trade Organisation today played down a dispute over China’s controls on exports of rare earth minerals, saying it was unlikely to escalate into a trade war.
The US, European Union and Japan have lodged a complaint with the WTO against China over its curbs on the shipments of the commodities, which are vital in the manufacture of high-tech goods.
But Pascal Lamy said: “Since the dispute settlement has been set up, no trade dispute has generated a trade war. That’s the experience of the past.
“I have no reason to doubt that… it will be different now.
“I do understand that the headline about trade wars (is) better than the headline about trade frictions. But that’s not a reality so far.”
"Trade Wars" carry more news value than a "Request for consultations" at the WTO! The WTO's dispute settlement mechanism is considered one of the strongest points of the WTO system ensuring reliability, rule based decision making and respect for the rule of law. One could argue on the effectiveness and success of the system but on the whole it has acted as an effective forum to air grievances and disputes related to international trade obligations. 
Is it a safety valve that prevents the "trade wars" which would have otherwise erupted due to a lack of a grievance handling mechanism? Should it not be viewed in a positive light rather than assuming that engaging with the dispute settlement mechanism, ipso facto, results in a  possibility of a trade war and retaliation?

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