Editorial Notes

[Editorial Notes] Ironing out the wrinkles in trade disputes adjudication

The fall of the World Trade Organization Appellate Body is an opportunity to rectify issues with the present system Mark Twain famously quipped that “the reports of my death are greatly exaggerated”.
By IASToppers
December 25, 2019

Contents

  • Introduction
  • What is World Trade Organization’s (WTO’s) dispute settlement mechanism?
  • Background
  • Exaggeration of consequences
  • Appellate Body as a “safety valve”
  • Return to GATT
  • Trade remedy matters
  • Alternative pathways
  • Conclusion

Ironing out the wrinkles in trade disputes adjudication

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Introduction

With the retirement of two of the remaining three members of the World Trade Organization (WTO) Appellate Body and a veto by the United States on fresh appointments, the Appellate Body of the WTO been rendered dysfunctional. Although the demise of the Appellate Body has struck a blow to the rule of law, people has exaggerated its consequences.

Ironing out the wrinkles in trade disputes adjudication

What is World Trade Organization’s (WTO’s) dispute settlement mechanism?

  • The Appellate Body of the World Trade Organization, set up in 1995, is a body of 7 persons that hears disputes brought on by WTO members.
  • A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the WTO.

Background

Ironing out the wrinkles in trade disputes adjudication 1

  • The dispute settlement mechanism of WTO requires at least three members to function. However, United States has blocked the appointments of new members and the reappointments of members who had completed their four-year tenures. The US believes the WTO is biased against US, and has criticised it for being unfair.

Exaggeration of consequences

The consequences of the Appellate Body’s fall are overstated for a number of reasons.

  • First, the failure of WTO dispute settlement system marks a return to the dispute settlement system under the General Agreement on Tariffs and Trade (GATT) which has proved surprisingly successful in resolving disputes.
  • Second, most of the disputes at the WTO concern rules that are actually self-enforcing, with the Appellate Body only policing its enforcement by domestic authorities.
  • Finally, many States have conceived “alternative” strategies to overcome difficulties arising out of the absence of a functioning Appellate Body.

Appellate Body as a “safety valve”

  • The Appellate Body was set up in 1995 as a “safety valve” against erroneous panel reports in return for the membership agreeing to adopt reports using the “reverse consensus” rule in lieu of the “positive consensus” rule.

Appellate Body

  • Under the positive consensus rule, reports issued by panels composed to hear disputes, could be adopted only if each of the contracting states favoured its adoption.
  • However, under the reverse consensus rule, the report would be automatically adopted, unless each member objected to the adoption of a report.
  • To eliminate the likelihood of erroneous panel reports, the membership proposed the establishment of an Appellate Body, and the adoption of the report was postponed till after such appeal was adjudicated by the Appellate Body.

Return to GATT

  • The fall of the Appellate Body effectively marks a return to the previous system as it gives states an opportunity to appeal an adverse panel ruling and effectively indefinitely delay its adoption.

GATT

  • While states under the GATT regime would almost always veto unfavourable reports, a remarkable 71% of panel reports were adopted using the positive consensus rule.
  • Even where panel reports were not adopted by states they served as a basis for the parties to “bilaterally” resolve their disputes in a mutually satisfactory manner.

Trade remedy matters

  • The majority of the disputes at the WTO concern are trade remedy matters. In such matters, if a state violates the rules (example, concerning dumping of goods), then affected states can adopt countermeasures such as imposition of anti-dumping and countervailing duties without recourse to the WTO.
  • The dispute resolution mechanism primarily aims to police the adoption of such countermeasures, namely whether they were warranted and otherwise imposed consistently with the rules. As trade scholar Pauwelyn notes, the mechanism is geared to address “over-enforcement” rather than “under-enforcement” of WTO rules.
  • The threat of reciprocal sanctions can serve to encourage states to remain compliant with the rules even in the absence of a functional Appellate Body at the helm of the dispute

Alternative pathways

  • Finally, although the WTO member countries could not prevent the fall of the Appellate Body, several states have adopted ad hoc solutions.
  • States such as Indonesia and Vietnam have agreed in advance not to appeal the ruling of the panel in the dispute between them, effectively waiving their right of appeal.
  • The European Union (EU), Norway and Canada have agreed on an interim appeal system for resolving any disputes through arbitration using Article 25 of the dispute settlement understanding in a process mirroring that of the Appellate Body.
  • The EU has even threatened to launch countermeasures under general international law for countries that lose at the panel stage but refuse recourse to the interim appeal system under Article 25 of the dispute settlement.
  • Although the overall effectiveness of such alternative strategies to overcome the demise of the WTO Appellate Body is uncertain, they do represent good faith efforts by some members at resolving future trade disputes.

Conclusion

In sum although the fall of the WTO Appellate Body represents a turbulent period in the history of trade disputes adjudication, it by no means spells the end of the WTO. On the contrary it presents an opportunity to the members to rethink and “iron out some of the creases” with the present system.

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