New era in trade dispute settlement

Heli Honkapää,
Commercial Counsellor,
Ministry for Foreign Affairs,

The dispute settlement system of the World Trade Organization (WTO) is seen as the central pillar of the rules-based trading system. The two-stage and binding system has benefited the WTO members – both big countries and smaller economies like Finland – for a quarter of a century. The second tier, Appellate Body, has had the final word on trade disputes and the compliance with its rulings has provided legal security and predictability to the business environment.

While the United States has brought the most cases of all WTO Members and won an overwhelming number of them, it started to challenge the role and existence of the Appellate Body a couple of years ago. The absence of consensus to fill open vacancies, despite a joint proposal by the large majority of the WTO membership, resulted in the Appellate Body losing a quorum (three adjudicators) in December 2019. In addition to being unable to hear new appeals, the Appellate Body can complete only four out of 15 pending appeals. For instance, the ongoing appellate procedure in a dispute over certain measures relating to the EU’s energy sector, which was initiated by Russia (DS476), is now suspended.

The WTO Members tried to avoid the impasse by engaging in an informal solution-oriented consultation process facilitated by David Walker, New Zealand’s Ambassador to the WTO. The draft General Council decision suggested by Ambassador Walker at the end of last year was a delicate compilation of altogether 12 proposals. The draft decision, however, was declined by the United States, which did not formulate any proposal or counterproposal of its own during the consultation process.

Currently, WTO Director-General Roberto Azevêdo is leading political consultations with the aim of identifying solutions, including structural changes, to restore the Appellate Body. The prospects of finding a near-term solution are, however, not very promising. The United States maintains that no solution is possible until others have explained why the Appellate Body has departed from the agreed rules. It has also objected the funding and resources of the Appellate Body recently. Further, in light of the publication of a USTR report on the Appellate Body’s alleged flaws (still with no concrete solutions) and the US trade policy agenda in February 2020, the United States is not showing any inclination to compromise anytime soon.

With the demise of the Appellate Body, the WTO is now facing an unprecedented situation. Given the right to appeal set forth in Article 16.4 of the Dispute Settlement Understanding (DSU), the lack of a functioning second tier might encourage countries to avoid their obligations by appealing a panel decision into the void. As a result, the trade dispute would remain unresolved.

Such a scenario could obviously be avoided if the parties, such as Indonesia and Australia in a dispute over Australia’s anti-dumping measures for copy paper (DS529), opt to accept the panel report. Some countries, such as Ukraine in a systematically important dispute regarding the use of security exceptions (measures concerning traffic in transit, DS512), had decided not to appeal even before in order to avoid rulings falling into the void. The following examples illustrate options that the countries have resorted to during the first quarter of 2020:

In a dispute over US countervailing measures on certain steel products from India (DS436), the parties agreed to delay an appeal until the Appellate Body is operational again. Notably, the agreement was reached after an initial announcement by the United States to appeal the compliance panel report just a week after the Appellate Body ceased to function.

In a dispute over US anti-dumping measures on certain oil country tubular goods from Korea (DS488), the parties agreed on holding bilateral consultations before a request could be made to establish a compliance panel. The parties also agreed, among other things, not to appeal such a panel report while leaving open the possibility for review procedures under Article 25 of the DSU (arbitration).

In a dispute over Russian measures on importation of live pigs and pig products (DS475), the EU requested the compliance panel to suspend its proceedings. The panel’s authority will lapse in January 2021 unless the EU indicates that it wishes the panel to recommence its work.

In a dispute over customs and fiscal measures on cigarettes from the Philippines (DS371), Thailand opposed the request by the Philippines on authorisation to retaliate since, pursuant to the parties’ sequencing agreement, the ongoing appellate proceedings should be completed first. Subsequently, the parties have engaged in bilateral consultations to resolve their procedural disagreements, including a mutual agreement to resort to the Article 25 of the DSU.

While determined to find a lasting improvement to the situation with the Appellate Body as a matter of priority, the European Union together with other active system users such as Canada, Brazil, Mexico and China, are working towards a multi-party interim appeal arbitration arrangement (MPIA). The political commitment was formally agreed at the end of March and the goal is to make the regime operational in the coming months.

The main objective of the MPIA is to preserve the right of the endorsing members to binding, independent and impartial appeal review. The MPIA would reflect the core features of the Appellate Body review in the framework of Article 25 of the DSU. The envisaged regime will be open to any WTO Member. In March 2020, countries such as Russia, South Korea, Japan and India are still considering their position. The United States is absent as well. Besides the ultimate number of the participating Members, there are other interesting questions, such as the utilisation rate of the regime and the impact of the arbitrator awards in the WTO panels’ interpretations.

The MPIA is not an automatic mechanism but requires each WTO Member to agree to it individually. Therefore, the European Union is also in the process of adapting the trade enforcement regulation (654/2014) to the changed circumstances. The purpose is to extend the scope of the regulation to situations where the WTO panel sides with the EU, where the panel report has been appealed into the void, and where the third country has not agreed to interim appeal arbitration. Given the urgency for appropriate trade enforcement tools, the European Commission aims at concluding the legislative process by mid-2020.

In sum, it is unlikely that the Appellate Body’s ability to function will be restored in the near future, at least not in the form it existed up to December 2019. The United States is expected to continue raising its systemic concerns and to press for reform of the dispute settlement system as part of its efforts to reform the WTO. Although the proposal by Ambassador Walker did not lead to an outright solution, the work was very important and could pave the way for lasting improvements when there is political will. Meanwhile, as described above, several WTO Members have decided to put in place contingency appeal arrangement. Others may prefer settling disputes through consultations, under their free trade agreements or by agreeing not to appeal panel reports.

Thus, although the paralysis of the Appellate Body is a very regrettable incident as such and increases uncertainty about the compliance with the WTO obligations, there are certain means to manoeuvre in the new era. It is too early to predict how efficient they are in ensuring stability in the rules-based trading system, especially since outside pressures show no signs of easing.

Expert article 2714

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