WTO: Dispute Settlement Mechanism & Current Challenges

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Following the 1970’s, the WTO became a vital organization for international trade. The DSM of the WTO made a drastic improvement on its GATT foundations. To adapt to the current geopolitical climate, however, the DSM has to evolve. In this essay, I will discuss the current challenges that the WTO’s DSM faces, and what to expect in the future. This essay will be divided into five sections.

In the first section, I will provide a technical introduction to the DSM of the WTO. In the second section, I will discuss the current problems facing this DSM. In the third section, I will present a case study of the United States, which led to a strong retaliation against WTO’s DSM. In the fourth section, I will discuss potential reforms to the DSM in order to avoid retaliation in the future. Finally, in the fifth section, I will discuss two crises which will affect the future of the WTO: the rise of China and the embedded liberalist agenda. These five sections will provide a helpful account to understand the current challenges of the WTO.

DSM in the WTO

On page 164, Chaisse and Chakraborty lists the three important faculties of the dispute mechanism of the WTO. First is the panel procedure, which is ‘provision of compulsory jurisdiction over a case brought by its members.’ (164) Unless there is a clear consensus against a panel, it becomes established in any given dispute. Second, there is the Dispute Settlement Understanding, DSU, which provides a given set of rules for any dispute. Third, the Dispute Settlement Body, DSB, adopts the report, and ‘that report becomes binding

on disputing parties as a matter of international law.’ (164). These three faculties are applied in all cases of the WTO dispute settlement mechanism.

Now I will explain the three steps of WTO dispute settlement, which will indicate the difference between the WTO and GATT’s DSM. As Chaisse and Chakraborty states, the first step is the ‘consultation between the complaining party and the responding party. If the parties fail to settle the dispute by the end of sixty days, the complaining party ‘may ask the DSB to establish a dispute’ (164) So far, the first step is no different than GATT’s dispute settlement process. The second step, however, notes the difference between dispute settlement under GATT and WTO. Chaisse and Chakraborty states:

‘The Panel… receives oral and written arguments from the parties to a dispute… The adoption of the report is a significant change from procedures under GATT… The DSB automatically adopts the report of the first Panel unless… there is DSB consensus against adoption.’ (165)

In GATT, a report is not adopted by a Panel and a Dispute Settlement Body. This marks the difference between the GATT and the WTO.

Now I will consider why this difference is significant. I will base my evidence on Zangl’s paper, “Judicialization Matters! A Comparison of Dispute Settlement under GATT and the WTO.’’

By allowing the adoption of a report, the dispute to undergoes a more consistent and objective outlook. This increases reliability, which is a desired outcome for implementing law in a dispute. For instance, four GATT and WTO cases are compared to test the difference between the compliance of the United States, Zangl states: ‘‘While the United States openly disregarded … all but one of the four GATT cases… in two of the four WTO cases the United States strictly followed the procedures throughout the whole dispute.’’(845) This is a remarkable development. Not only did the US not disregard two WTO cases, they fully complied to the set of rules. This is a significant difference of success that the WTO has achieved. Zangl notes that ‘‘in each of the four WTO cases the United States behaved more compliantly than in any single GATT case.’’ (845) It is also noted in the paper that although not as much as the United States, the European Union also increased their compliance under WTO’s DSM. The increased compliance of major world economies explains why the difference of WTO’s adoption rules is significant.

Problems of WTO’s DSM

In the GATT system, when there is a dispute, ‘‘the members of the Legal Office were supposed to provide their understanding of where GATT case-law was on a specific issue.’’ (6) This was problematic due to the involvement of subjectivity in decision making. The Appellate Body is introduced to address this problem. In the operation of WTO’s DSM, the Appellate Body (AP) is an important part of this system. Hoekman and Mavroidis states: ‘‘the WTO Appellate Body (AB), is a body of seven people that addresses issues reported by panels confronting the trading system.’’ (1) Through the addition of seven members, and ‘‘adding language in both the DSU and the Working Procedures’’, they address the problem of subjectivity. (7) It is also important to note that AB members are not in connection with any political organization. By reducing subjectivity and increasing transparency of international law, the trading community would then be taking another step towards depoliticization.

Although this sounds like the cornerstone of multilateralism, the US, especially in 2016 to current times, have strongly opposed the AP. The underlying reason is the power dynamic in play, as Hoekman states that: ‘‘A key objective of many countries in acceding to the WTO was to reduce the prospects of confronting ‘aggressive US unilateralism’’’ (24). Under WTO’s DSM, small countries gained more political power by being able to file complaints under the WTO. The fact that small countries were successful in challenging large nations, the US felt threatened of losing their global hegemony. The US feels threatened by the fact that multilateralism of the WTO allows small nations to successfully challenge their hegemonic structure. Opposing the Appellate Body is the approach they are taking to challenge WTO’s DSM.

Retaliation towards the AB: United States

In 2016, the Obama administration demonstrated their critical view of the AP’s of WTO, as they were the first administration ‘‘to oppose reappointment of an Appellate Body member’’ (Hoekman, 24). This matter had to be resolved when the term of the sitting members expire. If not, ‘‘the Appellate Body will be down to 3 members in September 2018, …and will cease to be operational at the end of 2019 when two more vacancies arise.’’ (Hoekman, 10) This demonstrates the risk that the US poses towards the WTO. A decision to oppose the reappointment of an AP leads to the potential collapse of WTO’s DSM. After Trump ‘‘has taken this approach further and to date has blocked all new appointments.’’ (Hoekman, 24) The future of WTO’s DSM is in jeopardy following the backlash by the US.

As Hoekman states, ‘‘a key objective of many countries in acceding to the WTO was to reduce the prospects of confronting ‘aggressive US unilateralism’’’ (24). The functioning of WTO allows small countries to get stronger in a global scale. By opposing the AP, the US intends to eliminate the threat of losing hegemonic power in international trade. If WTO’s DSM ceases to exist, small countries will not be able to file complaints against the US, which is beneficial towards pressing their unilateral agenda over international trade. In other words, this action can be seen as the US pressing their unilateralist vision of international trade over the multilateralist structure that the WTO intends to create.

Reforming the AB

The link between the Dispute Settlement Understanding and the Appellate Body is problematic. As Hoekman and Mavroidis states: ‘‘the DSU prohibits the AB from addressing how panels have considered the factual dimensions of each case.’’ (10) Most of the cases taken by the AB make judgment on sensitive disputes that do not tolerate subjectivity. The fact that the AB does not justify their decisions due to the DSU is a flaw in the DSM. And the current system cannot remain as it is, since ‘‘bringing back the AB will not resolve this source of underperformance because the DSU prohibits the AB from (re-) considering the facts of a case and their interpretation.’’ (10) To improve reliability, action needs to be taken to change the AB.

The DSU prohibiting the AB to justify their analysis has created problems in the past. For instance, ‘‘in the 1980s…The US Congress changed the law in this regard leading the DOC to impose countervailing duties in all then pending cases involving nonmarket economies… China was unhappy with this change and challenged the shift in approach.’’ (10) China filed a complaint to the WTO to oppose the change in US’ approach. In order for the AB to review this case, they had to evaluate the decision of the congress, which was problematic, as the US argued that this was a factual issue since it was municipal law, which is a WTO violation ‘‘as per the unambiguous wording of DSU Article 17’’ (10). Hoekman and Mavroidis states: ‘‘If the AB took the view that on this occasion, it was not dealing with a factual issue, it should have explained why this was so. It did not, instead spending several pages discussing in detail the US law, a matter it had no mandate to address.’’ (10) This is a massive blunder by the AB. Not justifying why they believe this is not a factual issue leads to unreliability. To avoid this blunder, the AB needs to be able to stop and justify their analysis.

The current crisis is led by the US. The blunder of the AB discussed above unreasonably damaged the US. If the AB was able to stop the case or explain why they believed this was not a factual issue, they would be consistent with the WTO law, and gain reliability by the US. They did neither, which damaged both the reputation of the WTO and the US. If the DSU does not prohibit the AB from providing justification on an analysis, it will be the first step to reform the AB. If cases like the one discussed above could be avoided, Trump might not have blocked future appointments of the AB.

The crises of the WTO: the rise of China & embedded liberalism

China became a vital player in the global market in recent times, as Wu states that: ‘‘In 2013, China surpassed the United States to become the world’s largest overall trading nation.’’ (262) As China rose to the top, the same pattern emerged in their WTO cases, as ‘‘between 2006 and 2015 (China had) forty-four cases…Only the United States and the European Union (“EU”) outrank China in active disputes.’’ This proves that China has become one of the most urgent matters for the WTO. So, what makes the rise of China problematic for the WTO? It is mainly due to the unique economic structure of China. As Wu states: ‘‘Private enterprises drive much of China’s dynamic growth… Alongside the Chinese Communist Party, SOE’s play an active role in the management of state-owned enterprises.’’ (264). SOE’s are highly problematic for the WTO. They function as an extension of the state in the Chinese economy. The Chinese economy is a mixture of a market and command economy, unlike any other country. These two factors make it challenging for the WTO to mandate rules towards China. The question is, does the uniqueness of China allow the WTO to treat them differently? Many of these questions are still in process for the WTO. So far, it has been problematic: ‘‘Between 2009 and 2015, China-related cases accounted for 90% of the cases brought by the 4 largest economies against each other.’’ (264) The rise of China is a pressing issue for the WTO.

When the constitutional structure of the WTO does not represent their character, there is a deep problem. The embedded liberalist structure of the WTO has been under stress. The debt crisis of the 1980s is a good example. Among domestic laws, there were fears of a ‘race to the bottom’ in the domestic world. As Howse and Nicolaidis states: ‘‘it gave a new, nonprotectionist foundation to traditional “level-playing-field” concerns about fair trade. It put in question the sustainability of the legitimate policy interventionism that was the domestic side of the ‘embedded liberalism’ bargain.’’ (9) In this event, a nonprotectionist approach to trade has been taken by developed countries due to an irrational fear of a ‘race to the bottom’. This completely undermined the principles of embedded liberalism in trade. The fact that WTO’s values could be underpinned by economic chaos leads one to question whether the WTO is successful in maintaining their agenda. To stabilize WTO’s agenda of embedded liberalism, they either need to completely change their agenda or make a radical construction to international policies that can undermine their agenda. In either case, the fundamental constitution of the WTO needs to be rebuilt.

The problem of the rise of China and the fundamental structure of embedded liberalism are unavoidable and substantial issues. It will take many years before we can see the WTO successfully address either one of them, if they can address them at all. In my opinion, the rise of China is a bigger threat for the WTO than their problematic constitution. The reason for my argument is simple: major disputes are more existentially threatening than structural problems. China is responsible for 90% of the major disputes of the WTO. In my opinion, for an international trade organization, major disputes are more problematic than the constitution. China is an external problem, while the constitution is an internal problem. The external problem, China, is a time-sensitive issue. WTO has a mission bring these disputes into justice. We have seen above that when there is a problem in the rulemaking of disputes, such as the AB not justifying to the US why evaluating the congress was not a violation of Article 17, countries retaliate towards the WTO. If the major disputes towards China are not addressed, the complaining countries will retaliate, which is an existential threat for the WTO. The problem of embedded liberalism, however, does not pose the same existential threat.

References:

Bernhard Zangl. “Judicialization Matters! A Comparison of Dispute Settlement under GATT and the WTO.” Wiley on Behalf of The International Studies Association International Studies Quarterly, Dec., 2008, Vol. 52, №4 (Dec., 2008), pp. 825–854 (n.d.).

Chaisse and Chakraborty. “Implementing WTO Rules through Negotiations and Sanctions: The Role of Trade Policy Review Mechanism and Dispute Settlement System.” University of Pennsylvania Journal of International Economic Law 28 (2007).

Bernard M. Hoekman and Petros C. Mavroidis. “To AB or Not to AB? Dispute Settlement in WTO Reform.” European University Institute, May 2020.

Hoekman, et al. “Revitalizing Multilateral Governance at the World Trade Organization: Report of the High-Level Board of Experts on the Future of Global Trade Governance.” Bertelsmann Stiftung, 2019.

Mark Wu. “The ‘China, Inc.’ Challenge to Global Trade Governance.” Harvard International Law Journal Volume 57, Number 2 (Spring 2016).

Robert Howse and Kalypso Nicolaidis. “Enhancing WTO Legitimacy: Constitutionalization or Global Subsidiarity?” Governance-an International Journal of Policy and Administration 16-#1 (2003).