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August 13, 2020

Media reports last month signalled a stand-down in trade battles between the United States and China, ostensibly because both are increasingly focused on other geopolitical disputes, over such things as espionage, human rights and intellectual property. By contrast, U.S.-China trade seemed to be emerging “as an area of calm.” I wouldn’t be so sanguine.

For decades, it was taken for granted that fixed tariff rates, agreed to under the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO), were pretty much sacrosanct. Governments made formal commitments not to increase their duty rates, meaning in trade parlance that these rates were “bound.” This stabilized the global trading system and was one of its cornerstones since Day 1. Along comes U.S. President Donald Trump, who blows this structure out of the water, elevating unilateral tariff hikes to a new order of trade weaponry.

U.S. unilateralism continues. Witness the recent surcharges on Canadian aluminum, using a specious 2018 Commerce Department report listing Canada as a security risk. And Trump threatens still further tariff hikes: on Canadian steel, on European cars and on other all kinds of other imports. Not a good example for other countries to follow, whatever the China-U.S. armistice might entail. And even if there is an armistice — which seems unlikely — it’s uncertain how long it can last, given that unilateralism in Washington can erupt at any moment.

There’s also the problem that some trade disputes are beyond effective government control but instead are privately initiated by the business sector.

Start with anti-dumping and countervailing duties. Typically, these are categorized as protectionist actions, including in regular reports of the World Trade Organization. Their effect may be protectionist, but the disputes that lead to them are initiated through complaints filed by private parties, in full compliance with the WTO Agreement and its GATT predecessor that laid down today’s “trade remedy” system.

Every country now has laws giving its own industries the right to file these kinds of complaints, which, once properly documented, authorities are obligated to investigate. It’s true that there can be aggressive use of investigative powers by state agencies. The U.S. is often cited in this regard though it’s not unique. But the fact is these actions are privately driven and, to a large degree, not under government control. So even if there is a peace agreement on trade among governments, privately driven trade disputes, like the Canada-U.S. softwood lumber saga, will be difficult to rein in.

Moreover, there is good reason to suppose they will become more common. In combatting COVID-19, governments have extended unprecedented financial support to their own companies. As industries resume production, ramping up idled capacity, they will turn to foreign markets to absorb large elements of that production. When these subsidized goods are exported, they can generate trade complaints from local producers who want to stop them with anti-dumping and especially countervailing (anti-subsidy) duties.

For years, the multilateral order has provided some measure of discipline on the use of trade remedies. That was because inappropriate remedial action by one WTO member against another’s imports could be challenged under the WTO dispute settlement system.

But today the WTO system is paralyzed. The U.S. has been blocking appointments to the organization’s Appellate Body, its court of last resort, which no longer has an effective quorum. Whatever happens on the U.S.-China trade front, the WTO adjudication system’s current dysfunctionality can only encourage more widespread deployment of trade-remedy actions, including retaliatory tariffs on imports, since countries no longer have to fear an adverse WTO ruling.

A different set of concerns arises from the use of Investor-State Dispute Settlement (ISDS) mechanisms. The right of foreign investors to invoke binding arbitration against host countries is enshrined in thousands of country-to-country investment protection treaties around the world. Governments everywhere have enacted exceptional support measures to deal with the pandemic, with huge amounts of capital being directed toward struggling local industries. Targeted relief to home-grown enterprises, which many such measures involve, increases governments’ exposure to claims by foreign investors of discriminatory or unfair treatment.

Whether these claims succeed will depend on how arbitration panels apply terms like “non-discrimination” and “fair and equitable treatment” for foreign investments, which are standard provisions in these treaties. But it is not unreasonable to envisage a potential flood of ISDS cases, given the magnitude of pandemic relief programs and the dollars at stake. All of the ingredients for protracted litigation are present.

Though reports about the U.S. and China backing off their own tit-for-tat trade battles are encouraging, best not become too hopeful for peace on the international trade and investment front. The global community has constructed a complex system of trade and investment laws that cannot entirely or easily be curbed by government. Even if governments were able to come to a consensus to do something about commercial disputes, private parties have the right to pursue remedial action whatever governments may try to do amongst themselves.

Published in the Financial Post

Lawrence Herman, a former Canadian diplomat, is counsel at Herman & Associates and a senior fellow of the C.D. Howe Institute.