Insights into Editorial: Ironing out the wrinkles in trade disputes adjudication
WTO appellate body has become dysfunctional as two of the three remaining judges has retired.
The US has stalled appointments of members in the appellate body of WTO’s dispute settlement system.
Presently, there was only one active Appellate Body member left. This makes the appeals process of the WTO dysfunctional, given that a minimum of three Appellate Body members are needed to consider an appeal of a panel report.
WTO Appellate Body:
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.
This Appellate body was established under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). The Appellate Body has its seat in Geneva, Switzerland.
Under the erstwhile positive consensus rule, reports issued by panels composed to hear disputes under GATT, could be adopted only if each of the contracting states favoured its adoption. This effectively handed a veto to the losing state.
It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members.
The Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel.
Appellate Body Reports once adopted by the Dispute Settlement Body (DSB), must be accepted by the parties to the dispute.
Dispute Settlement of the World Trade Organization:
- WTO is an international body that also deals in Dispute Settlements.
- The member country will approach the WTO’s dispute settlement body when a country fails to comply with WTO rules.
- All the members are encouraged to settle the disputes through consultation or a panel if the consultation fails.
- The constituted panel will circulate the verdict of the dispute settlement amongst WTO members who can decide to reject the ruling.
- If the ruling is approved, the member country that violated the rules must change rules in line with the WTO Agreement.
- In the case of failure to do so, the complaining country and the violating country may determine a mutually-acceptable compensation, failing which, the complaining country may retaliate suitably.
Consequences of fall of Appellate Body:
- The fall of the Appellate Body effectively marks a return to the previous system as it hands states an opportunity to appeal an adverse panel ruling and effectively indefinitely delay its adoption.
- The majority of the disputes at the WTO concern trade remedy matters.
- In such matters, if a state violates the rules, for example those concerning dumping of goods or grant of subsidies, affected states can without recourse to the WTO, adopt countermeasures such as imposition of anti-dumping and countervailing duties.
- 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.
- While the fall of the Appellate Body may see the adoption of more unilateral sanctions by states, possibly leading to increased trade wars, it will not render the WTO rules unenforceable.
- The threat of reciprocal sanctions may in fact 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 mechanism.
Alternative pathways for future trade disputes:
Finally, although the membership could not prevent the fall of the Appellate Body, several states have adopted ad hoc solutions.
States such as Indonesia and Vietnam have, through a no appeal pact, 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 with former Appellate Body members appointed as arbitrators.
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 understanding and instead appeal the report “in limbo” with a view to avoid the adoption of the report altogether.
In a vastly changed global economic landscape, the re-emphasis on diplomatic solutions in lieu of judicialized solutions to resolve inter-state trade disputes may not be an entirely bad outcome.
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.
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.
The ongoing negotiations between the United States and India in relation to the Panel report in US-Carbon Steel, where the U.S. has appealled an adverse report to a dysfunctional body, may offer an insight into how the dispute settlement system evolves.
It presents an opportunity to the members to rethink and “iron out some of the creases” with the present system.