Understanding the WTO Dispute Settlement System
The dispute settlement system (DSS) of the World Trade Organization (WTO) has long been considered by most WTO Members and trade practitioners as the “crown jewel” of the WTO. It ensures the rule of law in trade politics among 164 countries. The composition of panels is automatic. The decisions are binding through the application of the negative consensus rule. Any party may appeal a panel decision to an independent and standing body of seven members appointed by all WTO Members. Unilateral retaliatory measures are prohibited. If the losing Member does not comply with the recommendations of a panel or Appellate Body (AB), the wining Member could be authorised to impose trade sanctions against the non-conforming State, proportionate and equivalent to the loss of trade benefits caused by the non-conforming measure.
Almost 70% of WTO Members have used the WTO dispute settlement system. The users include superpowers, developed, developing and least developing countries. Most disputes have resulted in compliance with panel and AB decisions. Few disputes have ended in retaliation. Diplomats, investment treaty practitioners, law of the sea and environmental protection stakeholders are jealous of the effectiveness and legitimacy of the WTO dispute settlement system. If one were to compare the DSS with other state-state dispute resolution systems and take as a barometer the high rate of compliance of WTO decisions, it would prove to be a great success. All is good, or so it seems.
The crisis of one became the crisis of the other
Underneath the success story of the DSS there has been a growing feeling of disenchantment with the rules-based multilateral system. As explained below, the crisis of multilateralism became the crisis of the DSS.
By the mid-2000s, multilateralism was in a crisis. By that time, the consensus and trust that drove the construction of the liberal regime created in 1995 had ceased to exist. In 2011, the Doha Round collapsed. Hope of reform further eroded with each WTO ministerial conference. The negative effects of globalisation on industrialised economies led countries to question the benefits of economic interdependence. Self-interest emerged. As China’s economic power began to rise, the United States increased its use of antidumping and anti-subsidy duties. The volume of WTO trade disputes increased. This led to a litigation dynamic of the United States (and other Western powers) versus China and vice-versa. The aggravation of disputes between these major players in international trade and the stalemate in the negotiation process heightened the importance of the interpretative powers of the Appellate Body. As the AB’s rulings became more authoritative, its legitimacy deteriorated. The US continued to lose trade remedy cases. For the US, the most concerning issue was the number of AB rulings declaring WTO-inconsistent the US practice for calculating dumping margins called ‘zeroing’. As the cases against zeroing increased, the US turned to anti-subsidies duties. The AB again ruled against the US. The AB’s interpretation on what constituted a ‘public body’ (essentially that not all Chinese state-owned enterprises automatically count as subsidy providers) in US —Anti-dumping and Countervailing Duties (China) became extremely controversial. Australia, Canada, Mexico and Japan among others disagreed with the AB. The controversy over the concept of ‘public body’ only increased the dissatisfaction with the AB. But very few would have predicted what happened next. As the former Chair of the Appellate Body Ambassador Ujal Singh Bhatia of India noted in 2019, the “transformation of the AB from ‘crown jewel’ to a problem child in urgent need of reform in the space of a few months has been as dramatic as it is mystifying”.
From ‘Crown Jewel’ to a disabled body
The appellate members are appointed by consensus of all WTO members. This means that a single Member can block the appointment of any AB member. Since 2017, several Members have made proposals to ﬁll AB vacancies. All have been rejected by the United States. By 2019, the AB was down to the minimum quorum of three appellate members necessary to resolve appeals. By 11 December 2019, the WTO Appellate Body ceased to function. It lost six of the seven appellate members. The paralysis has left at least ten appeals pending without a mechanism to bring them to a close. In the view of the United States, the AB has exceeded its mandate by filling gaps in the text, giving new interpretations, creating obligations not agreed by the Members and affecting the Members’ right to regulate in the area of trade remedies. In doing so, the argument goes, the AB has altered the delicate balance between Members’ rights and obligations. For the United States, the AB’s “judicial activism” restricts members’ ability to regulate against unfair trade practices. In fairness, the current position of the Trump administration is not unique. It has been shared by several US administrations and, at times, by some other Members. The EU, Japan and others have proposed reforms to address some US concerns. They have been rejected by the United States.
What caused the AB crisis?
Using a plane crash as an analogy, one would ask: what caused the AB to crash? Was it a design/structural flaw, weather conditions or human error? As with most plane crashes, the AB stalled and collapsed by a cocktail of factors. There is a design flaw in that the system creates an incentive for WTO Members to appeal panel reports. Since its inception, most panel decisions have been appealed on most of their findings and often by both parties to the dispute. This increases the workload of the AB affecting the AB’s ability to deal with cases more effectively. But this can hardly be the sole cause. Inefficiency of proceedings has been the norm for some time and that has not prevented AB members to be reappointed.
The weather conditions. The AB was caught in a perfect storm. China’s role as the biggest exporter in the world, its economic structure and practices, the negative effects of globalisation, the WTO’s inability to update disciplines around industrial subsidies and state owned enterprises (SOEs) as well as the lack of accountability for countries that fail to meet their notification obligations, created the perfect storm for the WTO dispute settlement system.
The human error (i.e. the behaviour of AB members). Have the AB members exceeded their mandate? For the United States, the AB’s practice is a ‘clear’ case of ‘persistent overreaching’ by “adding obligations that were never agreed” by the WTO Members, issuing advisory opinions, adding obiter dicta and allowing the continued service of ex-AB members after their terms had expired.
What the United States is calling for is less so-called ‘judicial activism’ and more deference to WTO Members on questions of interpretation of the WTO Agreements. Something akin to the role of the NAFTA Free Trade Commission in trade and investment disputes. Others, like the European Union, see the AB’s role of filling the gaps and ‘activism’ as necessary to resolve trade disputes. This may be explained by the EU’s experience with the European Court of Justice which has been pivotal in the consolidation of the Single Market. The discontent with the AB goes beyond procedural frustrations. The clash between Members reflects an ideological divergence over the foundations of the system. The real issue here is how powerful the Appellate Body should be. It is clear that WTO Members have different expectations for the Appellate Body.
How can the UK help?
Now that the UK is an independent Member of the WTO it should take a leading role in rescuing the multilateral trading system and assume its responsibility to strengthen the WTO dispute settlement system. The UK must first acknowledge that the paralysis of the AB is a fundamental issue which requires urgent attention. The UK must also form coalitions with like-minded countries to defend the compulsory and binding nature of the DSS and the independence and impartiality of AB members and panellists.
It must remind other Members that it is only through binding resolutions that international trade law can be enforced, predictability in the business environment be ensured and the carefully negotiated balance of concessions between its Members be maintained. The UK should also acknowledge that the longstanding US concerns must be taken seriously. It should recognise that pursuing alternative appeal systems that exclude the US would further undermine the legitimacy of the DSS. In this sense, the UK should engage with the United States in a constructive dialogue to reconcile differences in expectations about the role of the WTO dispute settlement system. Reform in the DSS is imperative. The UK must identify landing zones in both substantive and procedural issues. Leaving aside the merits of the argument that the Appellate Body overreached in its ‘zeroing’ line of decisions, it appears obvious that a reform of the dispute settlement system (and survival of the AB) must address the question of trade remedies. One way forward may involve further clarification of the mandate of the Appellate Body, including, inter alia, limiting the scope of appeal, a higher degree of deference to governmental actions in the context of trade remedies and addressing the standard of review of panels’ findings of fact.
Although the UK is, understandably, likely to prioritise its attention on more pressing and existential regional processes such as its trade negotiations with the EU, the US and Japan, it is nevertheless imperative that it plays an active role in the selection process of the next WTO director-general and a leading role in the next ministerial conference. It should engage in finding a common solution to tackle pressing issues such as harmful fisheries subsidies, agricultural subsidies, transparency obligations, DSS and SOEs.
The UK, together with the US, developed the idea of the then International Trade Organization in 1947. Since then, it has thrived through the liberalisation of trade and investment. It shares a border with one of the largest economies in the world (the EU) and is currently negotiating a trade agreement with the United States, the main architect of the WTO, a superpower, the most important player in the WTO and the only country blocking the appointment of AB members. This reality will have to be factored into any policy stance for the future. As a result, the UK needs a strengthened dispute resolution system. It cannot afford the luxury of losing a binding set of multilateral rules that help steer asymmetrical relationships with larger world powers, and with over 160 nations.
It is now time for the UK to prioritise the reform of the WTO dispute settlement system and shape the future of the trading system, thus contributing to preserve a source of certainty and security, in an increasingly uncertain and insecure world.