By Emre Peker 

GENEVA -- The U.S. and the European Union are squaring off at the World Trade Organization in a dispute that threatens to cripple the WTO and undermine Western efforts to counter China's state capitalism.

At the heart of the conflict is a move by President Trump, a critic of the WTO, to block appointments to the WTO's Appellate Body, which has final say on trade disputes.

An EU-led group of 12 WTO members is expected Wednesday to propose organizational changes to address the U.S. complaints when a meeting of the WTO's general council convenes.

Washington and Brussels agree the WTO must change to counter what they both see as China's market-distorting trade practices. But the EU and others worry that Mr. Trump's approach could doom the global trade watchdog. The U.S. has said it wouldn't green-light the selection process to replace retiring judges on the Appellate Body until broader issues with the WTO's dispute-resolution system had been settled.

The threat has prompted supporters to rally. The WTO regulates annual merchandise trade of more than $17 trillion--slightly less than the size of the U.S. economy.

"I never heard so much support for the WTO system," WTO Director General Roberto Azevedo said in an interview.

EU proposals for the Appellate Body include extending its members' terms, making the part-time jobs full-time and addressing U.S. concerns including delayed decisions by the body, rules on transitions when its members retire and issues about fact-finding and the establishment of precedent.

While few expect the U.S. to buy into the EU plan, its supporters -- including Australia, Canada, India, Mexico and even China -- hope at least it will bring the U.S. to negotiations.

The EU-led effort follows an agreement earlier this month by Group of 20 leaders in Argentina to fix WTO shortfalls. The Buenos Aires declaration followed earlier efforts, including a trilateral push by the U.S., EU and Japan and a 13-country initiative led by Canada.

"We have encouraged our G-20 partners to reform the WTO, and they took a good first step in Buenos Aires," Secretary of State Mike Pompeo said last week in Brussels.

Mr. Trump has repeatedly called the WTO unfair and said it favors China over the U.S. He also has attacked the principle of multilateral trade regulation. "Look how bad WTO is to U.S.," Mr. Trump tweeted in April. "Bilateral deals are far more efficient, profitable and better for OUR workers."

The Trump administration's complaints about the WTO echo some made by previous administrations, but until last year the U.S. refrained from steps that would effectively cripple the organization. Presidents Bush and Obama each derailed the reappointment of an American member on the Appellate Body body over disagreements with judgments the court issued. Successive U.S. governments have criticized the court for judicial overreach and delayed rulings.

The WTO's supporters, including diplomats and trade officials in Geneva, say the multilateral system anchored in the WTO has worked well for most members -- including the U.S.

The U.S. has won 86% of the cases it brought and 25% of the complaints it faced since the organization was founded in 1995, according to James Bacchus, a founding judge and former chair of the Appellate Body who is also a former Democratic congressman from Florida. The U.S. is the top litigator at the WTO, with a win rate above the global average.

"It's been extremely useful for the U.S.," EU Trade Commissioner Cecilia Malmstrom said recently, after unveiling proposals to improve the functioning of the WTO court. "Now it's time for them to come out of the woods and say what [they] want."

The EU might not like what it hears. The U.S. WTO representative, Dennis Shea, has charged the 28-member bloc with trying to make the dispute-settlement system less accountable.

The EU proposals to extend jurors' terms and making the part-time postings full-time "goes in the precise opposite direction," he said in an October discussion at the Washington-based nonpartisan think tank, the Center for Strategic and International Studies. "Frankly, there's a fundamental difference between us and some others, like the EU," Mr. Shea said.

The U.S. is preparing a comprehensive response to the EU push, diplomats in Geneva said. A U.S. spokeswoman declined to comment.

A philosophical divide over the Appellate Body's remit is central to the spat. Washington sees it as a panel to handle contractual issues on a case-by-case basis. Europeans want a global trade court that sets precedent and is independent.

"We know what the U.S. concerns are -- we don't know what will make them happy," a Geneva-based trade official said. "There's no magic wand to fix it."

The EU effort seeks to directly address procedural shortcomings highlighted by the U.S., which precipitated Washington's surprising blockade of appointments during a regular monthly meeting in August.

Since then, WTO members have repeatedly introduced measures in hopes that the U.S. would reverse course before membership of the seven-member Appellate Body dips below the three-person minimum required to maintain the appeals process. Two of those members' terms expire Dec 10, 2019.

So far, Washington has shown no indication to budge.

"Shameless political intimidation of the appellate body at the WTO," Mr. Bacchus said, "could undermine the whole system."

Write to Emre Peker at emre.peker@wsj.com

(END) Dow Jones Newswires

December 11, 2018 15:51 ET (20:51 GMT)

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