Written by student-Xuhui(Emma)

The World Trade Organization (WTO) has long been considered an effective institution because of its enforceable dispute resolution procedures. Since its inception in 1995, the WTO dispute settlement mechanism has resolved an impressive number of trade disputes and has earned a reputation as the “crown jewel” of the global trading system. Today, however, the dispute settlement mechanism is in crisis. WTO members have failed to negotiate updates to the rulebook, including rules on dispute settlement itself. As a result, the WTO Appellate Body increasingly is asked to render decisions on ambiguous or incomplete WTO rules. For the past few years, US officials have blocked appointments of Appellate Body members to force WTO members to negotiate new rules that address US concerns and limit the scope for judicial overreach.

On 10 December, 2019, the Appellate Body was reduced to one member after the second terms for two of the remaining three members expired. Normally composed of seven members, the Appellate Body no longer has the minimum three members needed to hear new appeals, so WTO dispute settlement system will grind to a halt. Failure to resolve this crisis thus runs the risk of returning the world trading system to a power-based free-for-all, allowing big players to act unilaterally and use retaliation to get their way. In such an environment, less powerful players would lose interest in negotiating new rules on trade.

American complaints about the Appellate Body

Appellate Body members’ term of appointment

Article 17:2 is clear that persons are appointed to the Appellate Body by the DSB to serve a four-year term and each person may be reappointed once. There is nothing in the language to suggest the four-year term is to be interpreted as flexible, nor is there a guarantee that, once appointed, a second term should be seen as normal practice. Notwithstanding this hard rule, certain Appellate Body members have continued to work on appeals after their term’s expiration. The justification for this is found in Rule 15 of the Appellate Body’s Working Procedures, adopted by the group without DSB approval. The US rightly contends that members continuing to work on appeals after their term’s expiration undercuts the DSB’s authority to decide on Appellate Body appointments.

Additionally, an Appellate Body member’s 2017 resignation while working on an ongoing appeal—and without providing the 90-day notice required by the Working Procedures—resulted in that appeal being finally decided by just two members of the division. This raises the issue of whether the Appellate Body acted consistently with art. 17:1.

Review of facts / treatment of municipal law

Article 17:6 clearly states that the Appellate Body is only authorised to review panel reports’ issues of law and legal interpretations. The Appellate Body is barred from reviewing reports’ factual findings. The US has argued that despite this clear, unambiguous text, the Appellate Body has consistently reviewed, and even reversed, panel fact-finding. It has done so, Washington maintains, under different legal standards that it has had to invent, and has reached conclusions not based on panel factual findings or undisputed facts.

A second serious point of contention concerns the Appellate Body’s assertion that it has authority to review panel findings on the meaning of a WTO Member’s challenged domestic law. The Americans argue that the meaning of domestic law is an issue of fact, while the issue of law in a WTO dispute is whether that fact is consistent with WTO obligations. But the Appellate Body, without justification, has treated the meaning of municipal law as a matter of WTO law, to be decided by the Appellate Body de novo in an appeal under DSU art. 17:6. It has been argued that the Appellate Body’s expansion of its review authority—contrary to the DSU text—has added complexity, duplication and delay to almost every dispute, as a party to the dispute can now challenge on appeal every aspect of the panel’s findings.

Overreaching interpretations, “obiter dicta” and stare decisis

The Americans have long argued that the Appellate Body has wrongly dared to venture into uncharted territory by interpreting provisions that WTO Members left unclear in the texts—often deliberately so, to provide for “constructive ambiguity”—and by delivering opinions on issues not necessary to resolve a dispute.

The Americans also argue that the above situation is made worse by the Appellate Body’s position that: its decisions should serve as precedents (stare decisis); and panels should follow past Appellate Body decisions absent “cogent reasons”. Noting that nothing in the DSU text supports the Appellate Body’s position, the US has said that while “Appellate Body reports can provide valuable clarification of the covered agreements, [they] are not themselves agreed text, nor are they a substitute for the text that was actually negotiated and agreed.”

Disregard for appeal time frames

DSU art. 17:5 provides that, “as a general rule”, Appellate Body proceedings shall not exceed 60 days, and “in no case…exceed 90 days”. In practice, these time frames are rarely respected. The Americans have argued that cases drawn out far longer raise concerns regarding transparency, inconsistency with “prompt settlement of disputes”, and uncertainty regarding reports’ validity.

Fixing the Appellate Body problems will clearly require reaching agreement on broader reforms to the WTO system. This was certainly apparent in a statement made by the US representative at his country’s December 2018 Trade Policy Review. He cited four main areas of concern with the WTO: 1) problems related to the DSU and Appellate Body; 2) Chinese actions incompatible with the WTO’s design; 3) the fact that the WTO’s negotiating arm has proven incapable of addressing a flawed approach to developing Member status and issues relevant to the 21st century economy; and 4) certain Members’ persistent lack of behavioural transparency.

To avoid this outcome, academics and practitioners have suggested six solutions, other than changes to DSU procedures, to try to accommodate US demands. We assess each proposal in the subsections below. Each is flawed; all address a symptom rather than a cause of the crisis. Importantly, these solutions bypass, though to different degrees, the repeated requests of the United States to discuss its procedural and systemic concerns. None of them is likely to yield a solution to which all WTO members can adhere.

Allow Automatic Completion of Appeals

Under Article 16.4 of the DSU, WTO members can appeal a panel decision and the ruling is not approved until the appeals process is concluded. Inaction by the Appellate Body thus can block enforcement of DSU rulings. To avoid this blockage, Steve Charnovitz has suggested that the Appellate Body could introduce a new provision in its Working Procedures stating that an appeal shall be considered automatically completed as soon as it is filed unless the Appellate Body decides otherwise. The findings of the panel would thus become final. While the Appellate Body cannot deprive WTO members of the right to file an appeal per Article 16.4 of the DSU, it can amend its own Working Procedures, in line with Article 17.9 of the DSU.

There are at least two concerns about this solution. To start, the Appellate Body is required to address the issues raised on appeal according to Article 17.12 of the DSU. It is questionable whether the automatic completion of an appeal would satisfy this requirement. Moreover, even the proposal’s proponent recognizes that the United States would strongly object to such unprecedented activism by the Appellate Body. And it is far from clear that this solution would be politically acceptable to other WTO members. Despite being endorsed by former director-general of the WTO, Pascal Lamy, this solution would increase US hostility toward the WTO.

Enable Appeals through WTO Arbitration

Another suggestion is that WTO members could resort to arbitration proceedings under Article 25 of the DSU as a substitute for appellate review. Article 25 allows WTO members to settle their disputes through ad hoc arbitration within the WTO subject to certain conditions.

The main advantages of using Article 25 of the DSU are that an ad hoc arbitration does not depend on the composition or existence of the Appellate Body and does not require any action by WTO members as a whole, since awards are automatically binding for the parties to the dispute (Anderson et al. 2017). However, arbitration proceedings must be consistent with the object and purpose of the DSU. In addition, according to Article 25.4 of the DSU, the rules on retaliation envisaged in the DSU would generally apply to arbitration awards. The main difficulty with the ad hoc arbitration solution is reaching agreement between the parties. Anderson et al. suggest that the parties should conclude an agreement at the latest by the time the WTO panel’s interim report is issued. A recent statistical analysis of WTO disputes confirms that complainants predominantly win (Johannesson and Mavroidis 2016). Consequently, if a WTO member is quite sure it will lose the dispute, it has no incentive to conclude an arbitration agreement before the interim panel report is issued. To the contrary, it would benefit from the inability of the DSB to adopt the panel report. Thus, in practice, ad hoc appeal-arbitration would be limited to cases where both WTO members see an equal chance of winning at the panel level and want to retain a possibility of appeal.

Moreover, in any given dispute two parties may always compromise and even agree on an arbitration outside of the WTO framework instead of an appeal.This option, however, also requires the agreement of both parties.

Another suggestion is a plurilateral binding arbitrationappeal agreement. It is, however, not clear whether Article 25 of the DSU would encompass such a plurilateral agreement. Moreover, if an arbitration-appeal agreement is devised as a plurilateral agreement within the WTO framework, it may require approval by the Ministerial Conference subject to consensus. Under current circumstances reaching consensus on such a plurilateral agreement is mission impossible.

Reach Ex Ante Procedural Agreements Not to Appeal

Another ad hoc solution suggests that parties to a dispute should simply agree to abstain from an appeal. As Luiz Eduardo Salles notes, WTO members have successfully implemented ex ante bilateral procedural agreements. But it is unclear if an agreement not to appeal can be reached on a plurilateral basis. Such an agreement would give panels the final say, a far-reaching change in the WTO dispute settlement system. Ex ante plurilateral protocols have been suggested as a solution to deal with other imperfections in the DSU beyond the current Appellate Body crisis (e.g., to address sequencing, remand, and postretaliation) and may be worthwhile for the WTO membership to explore.

Waive Appellate Review by WTO Members

Instead of an ad hoc agreement to refrain from appeals, WTO members could adopt a temporary waiver on appellate review. The WTO experience in adopting waivers is very limited for the same procedural reasons as the adoption of authoritative interpretations. Article IX:3 of the Marrakesh Agreement requires a three-fourths majority, but in practice waivers are adopted by consensus.

Appoint Appellate Body Members by Voting

Some academics describe the current Appellate Body crisis as an emergency that justifies the appointment of Appellate Body members by a qualified majority vote and not by consensus. Pieter Jan Kuijper has suggested that the general voting rules in the Marrakesh Agreement (Article IX:1) should override the consensus rule in Article 2.4 of the DSU. Without delving into the diplomatic constraints on this solution—namely, potential US withdrawal from the WTO—it appears impossible from a legal standpoint. The DSB can adopt decisions only by consensus.

Establish a Dispute Settlement Agreement among WTO Members Minus the United States

Major trading partners could form a coalition and replicate the appellate body procedure or the whole WTO dispute settlement mechanism in a separate agreement outside the WTO framework (Kuijper 2017). This agreement, however, would not apply to disputes involving the United States, which would have to follow DSU procedures. This solution lacks both political and legal underpinnings and would be an admission of a complete failure of the WTO dispute settlement system.

The way forward

The Appellate Body impasse will soon damage not only the WTO’s judicial function but also its viability as a negotiating forum. In practice, there are few options for resolving the crisis unless WTO members commit to new approaches to updating and clarifying WTO rights and obligations. The best solution to the current crisis is constructive discussion and negotiations.

Most importantly, WTO members should agree on new procedures for the Appellate Body to submit issues of legal uncertainty arising on appeal to respective WTO committees for further discussion and negotiation among WTO members. Such “legislative remand” procedures would create a productive link between the dispute settlement function and the role of the WTO as a forum for permanent negotiations. If a consensus cannot be reached in those negotiations, WTO members should invoke the latent tool of “authoritative interpretations,” authorized by a three-fourths vote of the members, to clarify the issue under dispute. This process would return the WTO to its essential focus on negotiations, with WTO countries rather than Appellate Body members interpreting and augmenting WTO trading rules.

Reference:

1. Payosova Tetyana, Gary Clyde Hufbauer, and Jeffrey J. Schott, The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures, peterson institute for international economics, March 2018.
2. Stoler Andrew, Crisis in the WTO appellate body and the need for wider WTO reform negotiations, the university of Adelaide, policy review 01 March 2019.

https://www.wto.org/english/news_e/news19_e/dsb_18dec19_e.htm