Why Has the US Launched an Offensive Against WTO's Dispute Settlement System?

The US has been blocking the appointment of ‘judges’ to WTO’s Appellate Body because of disagreements with both the procedure followed and some of the body’s rulings.

Geneva: “It is called Buyers’ Remorse – ‘We made the rules, we know what they mean and they should not apply to us’ – this is effectively the position of the US,” a seasoned trade official in Geneva says on the deepening crisis at one of the most important institutions for international trade governance – the Appellate Body (AB) at the World Trade Organization (WTO).

The ‘crisis’, put simply, is this: the US is unhappy about certain procedural issues and how some trade disputes have been resolved at the WTO. This has resulted in an impasse with potentially serious consequences for the rules-based regime of international trade.

Resolving trade disputes has been one of the core functions of the WTO. When countries cannot resolve matters with their trading partners, they show up at the door of the WTO. The AB, one of the highest adjudicating bodies of the international trade world, hears disputes brought by WTO members. After more than two decades, this mechanism is now under duress.

More than 500 disputes have been filed at the WTO by countries since 1995. The AB has adjudicated on complex and diverse issues including on environmental protection, renewable energy subsidies, tax evasion, money laundering, patent protection, animal welfare and food safety, among many others. The WTO has 164 countries as members.

This trust in the independence and autonomy of the AB has been under pressure from the US – a country that has brought more than 100 disputes to the WTO and has been a respondent in many more. By putting a spoke in the wheel of this well-functioning system, matters have now come to a tipping point where the US risks severely undermining the legitimacy of the international dispute settlement system. The AB is essentially an international trade tribunal.

The dispute settlement system has been called the crown jewel of the institution, the only ‘real’ functioning system in multilateral trade, given that the WTO has long been paralysed by members unable to make progress on key areas of negotiations including on the lack of consensus on the trading rules for the developing world. The dispute settlement system has increasingly become the raison d’être of the WTO itself, experts say.

How has the US managed to bring this system to a near brink and, some have even said, posed “an existential threat” to the WTO itself? By systematically blocking the filling of vacancies for ‘judges’ to the seven-member AB, it has acutely affected the functioning of the body, even as disputes continue to pile up.

The US has made clear that it has been unhappy with some of the rulings of the AB and is holding up the selection process to appoint new members. This is being seen as a pretext for a more concerted attack against the multilateral system of international trade. By doing so, the US “strikes at the heart of WTO”, trade officials believe.

Why is dispute settlement so important and what will this impasse around appointments mean going forward? The Wire spoke to a number of trade officials, lawyers, experts, former WTO staffers and delegates from permanent missions in Geneva who spoke on the condition of strict anonymity.

Why the dispute settlement system is important

The dispute settlement process at the WTO is administered by the Dispute Settlement Body (DSB). The DSB comprises all members of the WTO and is a political body bound by the Dispute Settlement Understanding – a set of rules that govern this process.

Pre WTO, many disputes were agriculture related and typically between US and what was then referred as the European Communities. Such disputes became numerous enough to negotiate comprehensive rules for the resolution of disputes. Individual parties to a dispute, typically the one whose measure was being challenged, could walk away or negotiate without accepting the results of the resolution. This right of the losing party was eliminated during the Uruguay round of negotiations.

One of the most important outcomes of the negotiations of the Uruguay round was strengthening of the dispute settlement system. Since then, during the key stages of the dispute settlement process, the DSB can establish panels, adopt reports of a panel and adopt reports of the AB – unless there is a consensus against it.

This innovation in decision-making – the negative or reverse consensus – meant that all members must object if the adoption of a report needs to be blocked. “One sole Member can always prevent this reverse consensus, i.e. it can avoid the blocking of the decision (being taken). To do so that Member merely needs to insist on the decision to be approved,” the WTO explains. (It is understood that the US had then pushed for this rule and now finds it problematic.)

The AB, established in 1995, is a standing body of seven persons functioning out of the WTO in Geneva. It hears appeals from reports issued by ‘panels’ in disputes brought by WTO members. It can uphold, modify or reverse the legal findings and conclusions of a panel. Once adopted by the DSB, the reports of the AB must be accepted by the parties to the dispute.

Each appeal before the AB is heard by three of its members. The members of the AB have renewable four-year terms, which are staggered to ensure that not all members begin and complete their terms at the same time.

American objections to the dispute settlement process

The US wishes to reform the dispute settlement process to address its concerns from transparency to staffing issues. In addition, the US believes that some of the rulings of the AB were not decided fairly.

What has been difficult according to other countries at the WTO is that the US is linking the broader reform of the dispute settlement process with the filling of vacancies for the members to the AB. This impacts the dispute settlement mechanism as a whole.

Procedural matters

Of the seven members the AB must have, it now has only five – Shree Baboo Chekitan Servansing, Hong Zhao, Peter Van den Bossche, Ujal Singh Bhatia (chairman), Thomas R. Graham. (The chairman, appointed for a one-year term, is responsible for the overall direction of the AB.) One member’s term came to an end in June, another will finish in December 2017. One member left to work as a trade minister in the Korean government. By September next year, another member’s term will conclude.

In order to ensure continuity, the AB members work on appeals they have begun working on till the process is complete, even if their term is over. The US has strong reservations about this. Ricardo Ramírez-Hernández, whose term concluded in June this year, continues to work on ongoing appeals proceedings in which he is involved.

If the US continues to block appointments of new members, the AB might be reduced to three members in one year’s time. (Each appeal before the AB is heard by three of its members.) Other countries want to launch a single selection process to fill all vacancies at the same time.

Letting members of the AB continue to work on appeals even though their terms have expired has been one of the key issues for the US. “The US believes that there needs to be a legal basis to show that a person who has ceased to be a member of the AB should continue serving on an appeal,” according to a statement of the US at a recent meeting of the DSB in September in Geneva. This was shared by the office of the United States Trade Representative (USTR) in response to queries sent by The Wire.

Thus as long as one member of the AB continued to serve despite the expiration of his or her term, the US is unwilling to consider the selection process for the other vacancies.  Only the DSB has the authority to decide whether that member should continue, the US has maintained.

Even with a seven-member team, the increased number and the complexity of appeals that the AB has had to consider means that members consider multiple appeals at once. (The Appellate Body Secretariat comprises fewer than a dozen lawyers and some support staff.)

Therefore, by blocking the process to appoint new members to the AB, the US has put additional pressure to a system already burdened with disputes. (A rise in protectionism has also led to an increase in disputes.)

Delays in resolving disputes can clog the system. Rules say that the AB should rule upon an appeal within 60 days, extendable to a maximum of 90 days. Fewer members at the AB mean that these deadlines are severely impacted. More importantly, increased time to resolve disputes affect countries and businesses for a longer period.

“To the extent that delays in dispute resolution involve delays in the assertion of the rule of law, they provide an incentive to those who benefit from those delays,” chairman of the AB Bhatia said in a speech earlier in the year, talking about some of the challenges faced by the institution. “Delays compel WTO members to look for other solutions, potentially elsewhere. And in this, it is the weaker countries that stand to lose the most,” he added.  Eventually countries could stop bringing their disputes to the WTO as a result of delays.

The rulings of a dispute are not only binding on the parties involved but also provide guidance to other WTO members. Countries attach significance to the reasoning provided in previous reports. This helps in avoiding future disputes, Bhatia had said in his speech.

Disagreements with AB rulings

The judges in the AB are selected to work on any appeal by a process that ensures “randomness, unpredictability and opportunity” so that all the seven members serve, regardless of their national origin, the WTO explains. To ensure consistency and coherence in decision-making, members exchange views with the rest of the AB before finalising reports. Therefore, the entire team of the AB comes together and seeks to provide balance to the rulings in terms of geography, legal traditions and expertise.

“By blocking appointments, the US is effectively throttling debate. There is a robust debate amongst all members. The members who have worked on an appeal come with tentative ideas and conclusions, but all seven members discuss till every vestige of reasoning is attacked. In this process specific angularities are taken care of,” a trade official in Geneva explained during an interview with The Wire.

In the light of this tradition, when the US singled out criticism of one member of the AB by referring to rulings in certain appeals, and opposed his reappointment in 2016, this was taken seriously. It was “decidedly unfair”, one trade official told The Wire. This prompted former AB members in 2016 to send a letter noting the threat to politicise the WTO dispute settlement system.

Reappointments of member to the AB are decided by consensus and only opposed under extreme circumstances. Members such as Korea were of the view that such an opposition by the US was “an attempt to use reappointment as a tool to rein in Appellate Body Members for decisions they make on the bench”.

This was not the first time that the US expressed displeasure with the dispute settlement system at the WTO. In the past too, the US blocked the reappointment of some members, including a US national, whose rulings were perceived as not being attentive enough to American interests, observers have pointed out.

The US has indicated that the AB was responsible for judicial activism, meaning that the tribunal had indulged in rule-making beyond what the members negotiated and signed up for at the WTO. In 2016, the US said the AB should not “use an appeal as an occasion to write a treatise on a WTO agreement”.

However, experts say trade law has broadly been functioning under whatever was negotiated in the Uruguay round and there has not been enough rule-making in the last two decades – a sort of a soft paralysis.

Robert E. Lighthizer, the USTR under the Donald Trump administration, said last month, “…The dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to…”.

Specifically, the US alleged that rulings arising from a bunch of disputes are flawed, typically involving trade remedies such as the imposition of countervailing duties including  United States — Countervailing Duty Measures on Certain Products from China (DS437) , United States — Countervailing and Anti-dumping Measures on Certain Products from China (DS449) and Argentina — Measures Relating to Trade in Goods and Services (DS453 – US as third party)

“The US is of the view that the AB says more than it has to. The US feels that the AB needs to be more conservative in its interpretation,” a trade lawyer told The Wire in a phone interview.

In his speech in June, talking about the evolution of the tribunal, Bhatia had said, “Its 146 adopted reports, along with more than 300 panel reports, constitute tens of thousands of pages of jurisprudence which is as wide in its reach as it is deep in its probing of the meaning of the covered agreements.”

A lawyer in Geneva who works on WTO disputes said, “Parties in dispute come to court because an agreement may not be clear. It is for the judges to have their own reading and rule accordingly after consideration of the evidence. It is an interpretation of law”. The WTO agreements are a map, they do not have everything, and it is the task of the AB to read the map, he added.

Not unlike a few members, the EU has also made its displeasure known at losing disputes, but it has not kicked up a fuss and or tried to take the system hostage, one trade official noted.

This was echoed by a developing country trade official in Geneva, “We are not happy with some of the rulings of the Appellate Body, but that does not mean we will call for an abolition of the court.”

There seems to be some disconnect on how the US now sees the WTO. “… Americans look at the WTO or any of these trade agreements and we say, OK, this is a contract and these are my rights. Others – Europeans, but others also – tend to think they’re sort of evolving kinds of governance. And there’s a very different idea between these two things,” Lighthizer said at an event last month.

What the US really wants

Countries want the US to come clear about its concerns and proposals for addressing the crisis. There are no concrete indications on how the US wants to reform the processes at the AB, WTO members believe.

The US position seems purposefully vague, observers say. “They do not want to show their cards, but want everyone else to reveal their positions,” one trade official said.

The protectionist lobby under the Trump administration has been active. The trade team of the Trump administration is currently staffed by those who have had interests in sunset sectors such as steel including, notably, billionaire investor Wilbur L. Ross, secretary of commerce.

Lighthizer’s previous stint in the US administration, his time as deputy USTR, saw frequent use of the American domestic statute called Section 301 of the US Trade Act of 1974. The statute empowers the USTR to investigate and launch unilateral retaliatory action against trade practices.

“There seems to be no long term vision at the USTR but one hopes that eventually the US will assess the benefits of the dispute settlement system at the WTO,” one observer said.

The ‘new economy’ companies in the US need WTO rules and may eventually prevail on the official trade establishment, a source said. After all, big American companies have a stake in the efforts to push for formal proposals on e-commerce rules at the WTO – currently very contentious amongst WTO members. (Many countries view potential multilateral rules on e-commerce as attempts to access markets through the backdoor.)

Way forward

Efforts are on to get the US to not restrict or stand in the way of the selection of the members to the AB. However, few people are optimistic that this crisis will resolve easily. Meeting after meeting, the impasse continues.

While any fundamental change in the mandate of the WTO is ruled out, there might be political accommodation at the margins, one trade official indicated. What this means is essentially dealing with US demands (when they come clear) as a part of a larger negotiations package. “The main deliverable will be unblocking of the appointments of the judges,” he added.

While the AB reserves the right to intervene, the AB alone cannot resolve this. “The AB does not get into street-fights,” a source in Geneva familiar with the institution said.

Others agree the AB should be independent from the process of addressing and resolving the issue. “The AB should be independent and maintain the integrity of the system,” one trade expert said.

It seems that countries steadfastly support the AB and will do everything to protect the autonomy and the independence of the AB. But when and how members will come together to challenge the US remains to be seen. It is for the larger members to carry the cross, one developing country trade official said.

The EU has been found wanting in its role to diffuse the crisis, some believe. The US contributes to a little more than 11% of the WTO budget. Five members alone (Germany, UK, France, Spain and Italy) account for more than 20% of the budget. “The EU has been a paper tiger and has not pushed the US enough. Why has not the EU stepped up and banged its fist on the table?” asked one trade lawyer in town who has worked on several disputes. The EU has proposed that new members should be found by the end of November 2017.

Voting against the US?

In the event that members cannot convince the US to change its position, they can come together and vote to resolve the issue. But this is the last option, since the WTO has traditionally been a system that has been built on consensus.

“Pushing a vote under normal circumstances would be revolutionary enough. The WTO has always decided by consensus and has never voted on anything, including in the darkest hours of negotiations when there was only one member holding out,” a former WTO staffer said. Article IX of the WTO Agreement provides for decision-making by consensus. Voting becomes an option only if a decision cannot be arrived at by consensus.

It will be a watershed moment and a shift from the consensus-driven culture at the WTO. It is a nuclear option that member states would not want to use, one official familiar with the rules said. Besides, the rules that govern the appointment of members to the AB provide for consensus only, and never a vote, as per Article 2 (4) of the Dispute Settlement Understanding.

An alternate option to bypass the dispute settlement process is to adopt the arbitration facility at the WTO, which will not be the most efficient way to resolve disputes, experts say.

It is therefore for the WTO members to resolve this. It is not entirely clear to what extent the director-general of the WTO, Roberto Azevedo, will intervene to resolve the crisis, although he reportedly has had discussions with the USTR on the issue.

“The independence of the AB is crucial,” said one trade official. Once countries lose trust in the autonomy, they will cease to put their faith in a system that has been working impartially for them. This is larger than all of us, he said. For now, it seems the crisis has not resulted in a chilling effect.

Some officials The Wire spoke to were not very optimistic. “I don’t see this resolving easily or soon. The benefits of WTO rule-making have gone to the US, which has benefitted disproportionately. It is the US against the rest and the US is not going anywhere,” said an official from one of the permanent missions to the WTO in Geneva.

Given the pessimism around multilateralism in trade in general, on the back of an increase in plurilateral agreements, lack of cohesion around the Doha Development mandate and prickly issues of e-commerce to public stockholding of food – there is undeniable disenchantment with WTO processes. Delays in dispute settlement bring into question WTO’s rules-oriented system itself, experts caution.

One official associated with dispute settlement said, “This is very important and I am willing to step up all my efforts to protect this. Where else will countries go faced with a trade bully? Much is at stake”.

Priti Patnaik is a Geneva-based journalist and researcher. She has previously worked as a consultant in the UN system including at the WHO. She tweets at @pretpat and can be reached at patnaik.reporting@gmail.com.