December 6, 2019

Unravelling the WTO Dispute Settlement Quagmire

By Leon Donadoni

Executive Summary

In light of the 12th Ministerial Conference of the World Trade Organization, this policy memorandum examines the causes of US discontent with regards to the dispute settlement system. We argue that procedural alternatives aimed at strengthening the Appellate Body’s legal activism will lead to dissensus among WTO members. To ensure the survival of the current framework, members must hence be willing to implement “legislative remand” procedures that bypass the Appellate Body in sensitive cases where “constructive ambiguity” can lead to the circumvention of national prerogatives.

Causes of US Resentment

 For decades, WTO members have been reluctant to reform the legal framework of the institution, causing numerous rules to remain vague, unfinished, and ineffective. In an attempt to shed light on the scope and parameters of the organization, the Appellate Body has been compelled to embrace judicial activism. Nevertheless, by establishing legally binding precedents for future cases, the Appellate Body has “overreached” and unintentionally undermined national prerogatives.[1] This has sparked severe backlash from the United States. For several years now, US officials have blocked the appointment of Appellate Body judges, thus threatening the functioning of the entire WTO. If a solution is not found by December 2019, the WTO’s dispute settlement system will grind to a halt, paving the way for a unilateral, forceful, and power-centric international trade order.[2]

Two systematic issues lie at the core of the US’ resentment against the Appellate Body. First, the US, along with a few other countries, is critical of the necessity for consensus among the members of the Dispute Settlement Body (DSB) to contest the Appellate Body’s rulings. Second, the US is concerned about the Appellate Body’s obiter dicta, where past verdicts have incidentally caused undesired spillovers that have broadened the WTO’s legal activism to issues that had not been initially raised by litigant parties. As a result, the US has accused the Appellate Body of infringing Articles 2.4, 3.2, and 19.2 of the Dispute Settlement Understanding by “establishing or abolishing rights and obligations” for WTO members, essentially “creating its own rules.”[3]

These issues bring into question the problematic practice of drawing a line between “norm interpretation” and “norm creation.”[4] The US has been extremely clear that it will no longer tolerate “constructive ambiguity” on behalf of the Appellate Body. The 12th Ministerial Conference, therefore, represents the last opportunity to secure the continued functioning of the WTO, an occasion that can be successfully seized only by striking a balance between preserving the Appellate Body’s executive functioning while diminishing its legal activism. To do so, it will be essential to reduce its interpretative power on sensitive cases that could lead to suboptimal national outcomes.

Constraining Problematic Solutions

 In an attempt to overcome the WTO impasse, members that have been prominently critical of US unilateral obstructionism – namely the EU and China – have proposed several strategies to bypass US demands. If consensus is the objective of the Ministerial Conference, such proposals must be addressed and constrained as they are doomed to alienate the US.

First, proponents have argued that the WTO should introduce a new provision within the Appellate Body’s Working Procedure that completely removes the opportunity for DSB members to contest rulings.[5] As we have seen, this goes against the first of the two issues mentioned above. It therefore seems improbable that such an action will persuade the US to terminate its blocking practice.

A second alternative strategy consists of appointing Appellate Body judges by qualified majority voting as opposed to consensus.[6] Such an approach, however, tackles the symptoms rather than the roots of the crisis, making US unilateral withdrawal from the WTO a likely outcome.

Last, several members are contemplating the formation of an exclusionary coalition that would replicate the Appellate Body’s judicial functions outside of the WTO.[7] While it is possible that a parallel structure may perform the same responsibilities of the Appellate Body, doubts remain on the effectiveness of a dispute settlement system that excludes the second-largest exporting country in the world. Moreover, such a drastic solution would be an inadmissible acknowledgment that the WTO has failed, leaving the international trade system irreparably damaged. It therefore appears evident that to achieve political consensus, critics of the US’ strategy must come to the recognition that increasing or replicating the Appellate Body’s interpretative powers cannot and will not strengthen the WTO.

Policy Recommendation: Adopting “Legislative Remand”

 In light of these considerations, this policy memorandum suggests that the 12th Ministerial Conference should focus on developing additional procedures for the Appellate Body that would enable the latter to submit any case involving potential obiter dicta to an ad hoc panel comprised by trade representatives of the DSB members. Such a committee would then serve as a platform where WTO dispute settlement is addressed through multilateral negotiation. In this way, the Appellate Body could continue to function ordinarily on matters that are not subject to potential spillover, while delegating cases with room for “constructive ambiguity” to an intergovernmental board that would reach an “authoritative interpretation” that would not hinder national sovereignty.[8]

Consequently, if the Republic of Kazakhstan wants to achieve consensus, the agenda of the 12th Ministerial Conference must include a proposal to change the Appellate Body’s Working Procedures by granting it “legislative remand” powers. Such a strategy would be mutually beneficial for all members for several reasons. First, it would be easily implementable. Second, it would resolve both of the US’ concerns, namely consensus, and spillover. Third, it would allow the EU, China, and other members to preserve the current WTO framework. Last, it would prevent the US from abandoning the institution, which could cause the unfolding of unfair, or perhaps even retaliatory, trade practices. Such a recommendation would return the WTO’s scope to its original emphasis on negotiation and would lead to a worldwide recognition of the Republic of Kazakhstan as a successful international mediator.

References

[1] Tetyana Payosova, Gary Clyde Hufbauer, and Jeffrey J. Schott. 2018. The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures. Peterson Institute for International Economics.

[2] Soumaya Keynes and Chad P. Bown. 2018. Holding the WTO Hostage, Trump Style. Peterson Institute for International Economics Trade Talks, Episode 4.

[3] Stewart, Terence P. 2017. Disputed Court: A Look at the Challenges to (and from) the WTO Dispute Settlement System. Global Business Dialogue. Washington: Law Offices of Stewart and Stewart.

[4] Tetyana Payosova, Gary Clyde Hufbauer, and Jeffrey J. Schott. 2018. The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures. Peterson Institute for International Economics.

[5] Steve Charnovitz. 2017. How to Save WTO Dispute Settlement from the Trump Administration. International Economic Law and Policy Blog.

[6] Pieter Jan Kuijper. 2017. The US Attack on the Appellate Body. International Economic Law and Policy Blog.

[7] Pieter Jan Kuijper. 2017. The US Attack on the Appellate Body. International Economic Law and Policy Blog.

[8] Tetyana Payosova, Gary Clyde Hufbauer, and Jeffrey J. Schott. 2018. The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures. Peterson Institute for International Economics.

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