Saving a Derailed WTO Dispute Settlement System: Can the Multiparty Interim Arbitration be the Answer?
Introduction
The WTO Appellate Body has been paralyzed since December 2019. It has been working at a reduced capacity since 2017, and a full-blown crisis turned into a shutdown in early December, when two serving Members, namely, India’s Ujal Singh Bhatia and United States’ Thomas Graham demitted office. The apex world trade ‘court’, a permanent standing body with the strength of seven Members, has currently only one Member. The Appellate Body needs a minimum of three judges to hear an appeal from a panel ruling. At the same time, there are several disputes piling up before the WTO panels, whose work is expected to commence once the COVID-19 situation eases.
This is a man-made crisis of extraordinary proportions. It ought to have commanded better attention, but we are living in more worrying times. The COVID-19 pandemic has drowned out a number of issues which needed immediate international cooperation. The Appellate Body shutdown is one such crisis where international attention is a priority, once we address the pandemic. Perhaps we should not wait that long. The longer the paralysis continues, the greater will be the challenge in restoring the Appellate Body – once touted as the “crown jewel” of the WTO legal system.
The Appellate Body crisis is grave. It is common knowledge that rules are only as good as their enforcement. The WTO legal system has been fairly efficient because it stemmed protectionist policies and provided an opportunity for aggrieved Members to seek prompt international legal remedies. The WTO dispute settlement system is rule-based and automatic in nature, which means no Member can block the dispute process once it is triggered. It was a dramatic improvement over the weak GATT dispute settlement system, the WTO’s predecessor. During the GATT period a number of sensitive rulings were not formally adopted.[i]
The ongoing Appellate Body crisis creates an incentive for certain Members to adopt WTO inconsistent measures undeterred by the possibility a WTO challenge. Even if the concerned Member loses at the WTO panel stage, it can appeal the panel ruling thereby avoiding compliance. This will effectively preempt any dispute settlement ruling from achieving finality, and in the meantime the infringing State could carry on with trade practices or policies as if nothing happened. This possibility is often referred to as “appealing into the void”.[ii] Such a situation has arisen only once so far, notably in a dispute involving India, namely, US – Carbon Steel (21.5).[iii] India had won some decisive rulings on certain aspects relating to the U.S. anti-dumping and countervailing legislation way back in 2014 and was awaiting compliance.
This piece will examine the genesis of the crisis, the reasons for lack of consensus in finding a solution to the impasse, and the features and effectiveness of the stop-gap arrangement mooted by Members, including the EU, to restore the functioning of the currently crippled dispute settlement system.
Genesis of the Crisis
The Appellate Body crisis owes its genesis to the disenchantment of one Member- the United States (U.S.) with how the WTO appeal mechanism worked.[iv] In order to understand the genesis, one has to travel down the memory lane. Strong enforcement of legal rights was not a feature of the GATT. Power dynamics, diplomacy and persuasion played a key role in GATT dispute settlement. During the Uruguay Round negotiations (1986-1994), a comprehensive set of rules on disputes were framed for the first time. The creation of the Appellate Body was mainly an “afterthought”, and not part of an original design.[v]
The U.S., apparently, had its own reasons to be “aggrieved” with the functioning of the Appellate Body – some of them reasonable, others rather unreasonable. One systemic concern was adherence to the original timeline of the proceedings (from date of notice of appeal to the date of circulation of report). As a general rule this period is 60 days, but it can extend up to 90 days. As a matter of practice, most of the Appellate Body proceedings exceeded this period by months, if not years. For example, the appeals in Aircraft subsidy cases were indeed complex and exceeded the prescribed timeline by months, if not years. As if this was not bad enough, the WTO Membership was not able to fill vacancies in the Appellate Body as they arose.[vi] In essence, the first part of the problem, namely, the inability to complete the appeal process on time, was an unanticipated change in the nature and character of the panel proceedings which acquired extraordinary complexity and legalese, while the second was a failure on the part of the Members, precipitated by the U.S.’s own position. The latter concern related to the transitional arrangement for outgoing Appellate Body Members. The Appellate Body Members continued to serve their original term, where the hearing on a dispute had started during their term. In most domestic jurisdictions, when judges retire, they retire. Had the WTO appellate process functioned on time as originally envisaged, the transitional arrangement would have ensured that the outgoing Members ceased their duties within one or two months after the expiry of their terms, but this did not happen. In a way, this problem is also interlinked to the first systemic concern.
The third set of concerns is more substantive and relates to the role of the Appellate Body itself. A bit of history of about the evolution of the WTO dispute settlement system is in order. Trade remedy investigations such as anti-dumping, countervail investigations and safeguards had assumed disproportionate significance in the U.S. The U.S. was the leader in using such instruments and these measures were considered as the “third rail” of U.S. public policy.[vii] The U.S. had long nursed grievances on how the WTO DSB interpreted some of its domestic statutes and procedures on controversial issues, such as “zeroing” in anti-dumping, the meaning of “public body” in countervail actions, and the overall conduct of safeguard investigations. The U.S. had repeatedly stated that the Appellate Body had overstepped its mandate under the Dispute Settlement Understanding (DSU).[viii]
The U.S. had also argued that the interpretation of municipal (domestic) law should be considered as a matter of fact. Findings related to operation of municipal law were examined as a question of law in certain cases, and not necessarily as a question of fact, which had implications for the final outcome in a dispute settlement proceeding.[ix] Yet another concern was that the Appellate Body had rendered “advisory opinions” and had also resorted to judicial gap-filling. An added concern was the perceived precedential value of Appellate Body reports. The trade remedy bar in the United States, a rather powerful lobby, was fierce in its attack of the Appellate Body interpretation of some of the WTO provisions, especially the lack of deference to domestic investigating agency’s decision making.
The crisis is also attributed to the consensus rule (Article 2.4 of the DSU) – that a decision is deemed to be adopted by consensus when no Member formally objects – one of the trumpeted achievements of the Uruguay Round. It appears that this widely proclaimed strength of the organization in reaching decisions through consensus appears to be its undoing.[x] Although the WTO Agreement provides for a mode of decision making by majority vote under Article IX: 1 of the Marrakesh Agreement, this option is not viewed seriously by other Members. The U.S. is too powerful a Member for its opposition to be bypassed through a majority vote. In such a situation, the only surviving option, at least for the time being, is to find a stop-gap mechanism which can, on the one hand, preserve the two-tier nature of WTO dispute settlement, and at the same time, keep the Appellate Body restoration process on track.
A Stop-gap Solution
Most of the WTO Members are working on a contingency plan assuming that the political process of finding an end to the stalemate would run concurrently. The European Union (EU) is a major proponent of this proposal.[xi] At the Davos meeting in Switzerland in January 2020, the EU and 15 other countries agreed to the multi-party interim appeal arrangement.[xii] On 27th March 2020, the European Union has released the revised and agreed terms of the multi-party interim appeal arbitration arrangement (Multi-party Arrangement).
The contingency plan pivots around Article 25[xiii] of the DSU, a provision which suggests expeditious arbitration as an alternative means of dispute settlement based on terms which are clearly identified by the parties. The contingency plan is to develop an interim arrangement which seeks to mimic the appellate process and thereby preserve the two-tier adjudicative process, without requiring the consensus of all Members. The stop-gap arrangement is assumed to function only until such time the Appellate Body resumes its operation.[xiv]
For this alternative process to be effective, it requires a fair amount of tinkering, adjustment and manipulation of the existing DSU rules and procedures, although by avoiding any formal amendments. First, the proponents determine the procedures for this alternative appeals process in the Multi-party Arrangement.
The Article 25 process needs significant elaboration and embellishment. As of now, Article 25 is devoid of elements both in its contents and practice. In terms of the Multi-party Arrangement, the participating Members will have to complete two separate formalities: (i) endorse the political communication to the DSB; and (ii) enter into appeal arbitration agreements for specific disputes. This mechanism is currently envisaged for all future disputes between the parties and also pending disputes, with the possible exception of disputes where the interim report has already been issued. This mechanism is also based on the understanding that the endorsing Members will not pursue disputes under Article 16.4 and 17 of the DSU as long as the Appellate Body is not in operation or has insufficient Members. The appeal arbitration procedure will also be based on the substantive and procedural aspects of the Appellate Review mechanism outlined in Article 17 of the DSU.
On the appointment of arbitrators, the proposal is to create a pool of 10 standing appeal arbitrators, who shall serve on a rotation basis. Similar to the Appellate Body, a division of three appeal arbitrators will hear the appeal arbitration. On the question of collegiality, the proposal seeks to incorporate the Appellate Body practice. The arrangement also envisions the use of the existing support structure, although separate from the staff of the WTO Secretariat servicing the panels. It is expected that some redeployment of the erstwhile Appellate Body staff could be made however, it is not clear as to who will bear the bill for the additional expenses.
Putting the Multi-party Arrangement into effect involves a series of procedural steps (See figure 1 below). The parties would request the panel to notify the parties of the anticipated date of circulation of the final report, no later than 45 days in advance of that date. Following the issuance of the final panel report to the parties, but not later than 10 days prior to the anticipated date of circulation of the report to the WTO Membership, a Participating Member may request that the panel proceeding be suspended. The suspension of the panel request is to initiate the arbitration under the agreed procedures.
It is also important to note that under the existing provisions (Article 16.4 of the DSU), once a report is circulated, it has to be adopted within a period of 60 days, unless appealed or rejected based on positive consensus. In addition, one has to be appreciated that WTO panel reports are confidential documents and cannot be shared with non-parties before circulation. Therefore, there is a need to lift the confidentiality of the panel report when shared with the arbitrators and staff. These are complicated arrangements, but to its credit, the multiparty arrangement deftly fits this scheme within the framework of the existing DSU.
Figure 1: Multiparty Interim Appeal Arbitration Arrangement:
(As of 27 March 2020)
This is not to say that there are no design flaws. The arrangement only mentions the notification of the award to the DSB and not its adoption.[xv] To restate, the award will be binding on the parties, but it will not be adopted. This raises questions as to whether the process could substantially weaken the panel process and the integrity of panel reports.
Again, one of the major design challenges of the Multi-party Arrangement is that it should be able to replicate the Appellate Body mechanism to the extent possible. Otherwise, it may look like a second panel process, which will be a sheer repetition and waste of resources. Moreover, it is unclear whether the original panel will remain in indefinite suspension or not. It is proposed that the parts of the original panel report which have not been appealed will also become part of the arbitration award. It is therefore, not surprising that several other key Members such as Japan, Indonesia, and India, to name a few, who had taken keen interest in preserving the two-tier dispute settlement system have not joined the proposal so far.[xvi] There is a fear that investing all the negotiating and political capital in designing a “make-shift mechanism” will detract the Members from restoring the Appellate Body, which should be the ultimate goal.
An alternative that is not the best, but better than the worst
The Multi-party Arrangement that is based on Article 25 arbitration mechanism is riddled with challenges. The greatest weakness is that the most important trading Member, the U.S., is unlikely to be part of it. The U.S. can shelter it from adverse rulings, but at the same time, will not be able to use the WTO mechanism to discipline market access barriers abroad. It is also not clear whether the non-participating Members could use this mechanism to bring proxy disputes through other participating Members. On the other hand, if the U.S. chooses to join this interim arrangement, it will be a travesty, and intriguingly, could place the non-Party States who had genuinely attempted to fix the Appellate Body crisis, spectators of a sordid drama. An Appellate Body by another name could satisfy some, but could also strip the two-tier adjudication process of its authoritative and persuasive force, legitimacy, sanctity and reputational features.
A major concern is that every Member could face, once in a while, certain types of disputes where compliance with international obligations could be hard and unviable, if not impossible. The multi-party agreement provides no bulwark against opportunistic breach and strategic misbehavior.
Despite the major flaws with the multi-party interim arrangement, it can at least serve two important objectives. First, to preserve the objective of the dispute settlement process for the time-being and allow the WTO system not to become completely dysfunctional; second, it can provide the key Members with a breathing period to pursue deliberations and discussions to find a solution. These twin goals are necessary to save the WTO and prevent the trading system from slipping back to the world where it was eighty years ago. The world battling a pandemic does not deserve a deliberate man-made disaster in global economic governance.
Conclusion
Enforcement of trade agreements is extremely valuable because non-cooperative actions on the part of trading Members can engender terms of trade externalities and beggar-thy-neighbour policies. This is a self-evident truth, although the virtues of free trade and cooperative behavior are always under attack. An onslaught on the WTO Appellate Body and its judicial organs could appear as a bold move and satisfy domestic constituents in the short run, at least in some countries. However, the WTO, despite all its failings, has to be preserved because it has been a symbol of global cooperation in matters of commerce. If this is the larger goal, looking for out-of-the box solutions such as the multi-party arbitration mechanism, however imperfect they may be seems to be useful ad-hoc arrangements.
*The views expressed in this blog are personal and should not be attributed to his Institution. The author is grateful to Amandeep Bajwa for helpful research assistance.
[i] Some argue that the GATT had good success rate of roughly 70 percent. That could well be true. But a more valid criterion is the percentage of adopted cases where the stakes were high.
[ii] Pauwelyn, Joost ‘WTO Dispute Settlement Post 2019: What to Expect? What Choice to Make?’ (7 July 2019) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id= 3415964>.
[iii] United States – Countervailing Measures on Certain Hot-rolled Carbon Steel Flat Products from India, WT/DS 436/RW, circulated on 15 November 2019.
[iv] For an excellent commentary see, Charnovitz, Steve, “How WTO Dispute Settlement Succumbed to the Trump Administration (December 17, 2019); GWU Legal Studies Research Paper No. 2019-73. Available at SSRN: https://ssrn.com/abstract=3505266
[v] Van den Bossche, Peter, ‘From Afterthought to Centrepiece: The Appellate Body and Its Rise to Prominence in the World Trading System’, in G. Sacerdoti, A. Yanovich and J. Bohanes (eds.), The WTO at Ten: The Contribution of the Dispute Settlement System (2006) 201.
[vi] Article 17.2 of the DSU, inter alia, states, “Vacancies shall be filled as they arise.”
[vii] Mankiw, N. Gregory, and Phillip L. Swagel. “Antidumping: The third rail of trade policy” Foreign Affairs, 84 (2005): 107.
[viii] Ambassador Dennis Shea, Statement at the WTO General Council on Selection of New Appellate Body Members (May 8, 2018) (transcript available at https://geneva.usmission.gov/2018/05/08/ambassador-dennis-sheas-statement-at-the-wto-general-council/).
[ix] Article 17.6 of the DSU states, “An Appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel.”
[x] Charnovitz, Steve, “A WTO If You Can Keep It.” Questions Int’l LJ, Nov (2019).
[xi] European Union, ‘Multi-party Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU’, 27 March 2020; See also European Commission, “Proposal for a Regulation of the European Parliament and of the Council”, December 12, 2019, https://data.consilium.europa.eu/doc/document/ST-15088-2019-INIT/en/pdf.
[xii] These sixteen participating Members are Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, the European Union, Guatemala, Hong Kong (China), Mexico, New Zealand, Norway, Singapore, Switzerland and Uruguay.
[xiii] Since Article 25 DSU is an existing provision, no consensus vote is needed to use it.
[xiv] European Union, Proposal for a Regulation, note x above.
[xv] Para 15, Annex to the Multiparty Arrangement, 27 March 2020.
[xvi] In terms of the Multi-party arrangement any WTO Member is welcome to join arrangement at any time, by endorsing the multi-party communication.