The Dispute Settlement Mechanism of the WTO: the Weaknesses of Its Framework - Research Paper Example

 Abstract International trade is often touted as the key to progress and development for countries looking to accelerate their economic growth. However, together with the increase in number and complexity of commercial cross-border transactions will be an increase in the number of disputes that are expected to materialize between parties on opposite sides of the border. Disputes settlement within a single jurisdiction is already sufficiently contentious, although the contending parties are similarly bound by the legal system in that country. International disputes settlement, however, is prone to many complicated issues as conflicts of laws at the municipal level as well as regional and global conventions come into play. The World Trade Organization disputes settlement framework encounters such controversies in the course of its implementation. It is worthwhile creating a bird’s eye-view of WTO disputes settlement and the issues that have beset it through the years. This study therefore proposes to conduct a broad review of WTO disputes settlement literature, in the course of which it intends to highlight the major issues surrounding it. A comprehensive view of these issues will shed light on the strengths and shortcomings of the WTO framework and may yield new insights into its continued relevance and viability as a tool for global development. World Trade Organization Disputes Settlement 1. Introduction The world of international trade has been growing in volume and complexity due to advances in technology, the expansion of multinational corporations, and the interlinking of international markets for goods and services, human resources, and factors of production. Greater cooperation and commercial interaction among countries were fostered by such global institutions as the World Trade Organization, the International Monetary Fund, and regional institutions such as NAFTA, the EU, and ASEAN, among others. Necessarily, therefore, institutional means of disputes resolution must be addressed by a system that makes coherent integration of the many bilateral and unilateral disputes settlement mechanism that have emerged. 2. Historical background of the World Trade Organization The World Trade Organization (WTO) began its existence on 1 January 1995, however, its trading system is more than 50 years old. The General Agreement on Tariffs and Trade (GATT) is the body that created, in 1948, the rules for the system by which the WTO trades. At that time, the Agreement gave birth to a de facto body to implement the rules. The GATT evolved through numerous negotiations, the last and most significant of which was the Uruguay Round, lasting from 1986 to 1994, creating the WTO.1 The WTO was conceived as an organization for liberalizing trade. It also functions as a forum for governments to negotiate trade agreements, as well as settle trade disputes. It also oversees a system of trade rules that are implemented among Member-States. While the WTO works to liberalize trade, it also upholds the observance of trade barriers when extenuating circumstances call for them, such as the protection of consumers and the spread of disease.2 3. Institutionalization of Disputes Settlement (DS) under the WTO The heart of the WTO lies in the set of agreements, signed by the majority of trading countries, that embody the ground rules for international commerce that had been argued and assented to by the signatory countries. These rules act as contracts between states to observe the limits agreed upon in the conduct of their trade policies. The goal is to facilitate the conduct of business by producers of goods and services, exporters and importers, in such a way as to allow government to meet their social and environmental objectives. But among all its functions and mandates, the third function of the WTO, and that which has direct relationship to this discussion, is the settlement of disputes arising out of the conduct of trade relations among it signatory states. It interprets the terms of trade agreements and provides resolution to the quarrels that arise out of counterparty states’ conflicting interests. On this rests the rationale for the dispute settlement processes that are specified in the WTO agreements.3 The principal type of disputes that are put before the WTO concern the failure of one of the parties (a country signatory to the bilateral agreement under the WTO) to fulfil its obligations to the other party (another country signatory) which it has undertaken to fulfil when it signed the WTO Agreement. The DSU, otherwise entitled the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), embodies the procedural convention the member states agreed to observe in relation to the settlement of inter-country disputes. A cursory knowledge of the steps in the dispute settlement process is useful for an understanding of the issues facing the WTO as a venue for adjudicated resolution of such quarrels. The steps involved in the DSU procedure include: consultations, for which 60 days are allocated; the settlement and appointment of panellists, to be completed in 45 days; report of the panel to the parties in six months from the start of adjudication; report of the panel to the WTO members within 3 weeks from the report to the parties; and the adoption of the report by the Dispute Settlement Body (DSB) within sixty days from the time the report is released to the WTO membership, should no objection or appeal be filed within the time allocated. The entire process takes about one year from filing to resolution, if no appeals are made on the final report. However, appeals are allowed sixty to ninety days from the time the report is given to the members, until the report by the Appellate Body is rendered. From the release of this report, there are thirty days for a consensus objection to be filed, in the absence of which the Appellate Body report is formally adopted by the DSB.4 The WTO dispute settlement procedure has been described by observers as an improvement over its GATT predecessor. For one, the WTO process is seen as rules-based, while the GATT system was perceived as power-based. Secondly, the WTO procedure provided for the DSB which is a separate structure (separate chairman, staff, rules of procedure and panel reports documentation) than that of the General Council of the WTO. Thirdly, as seen in the preceding paragraph, a system of time limits is strictly adhered to, in an effort to ensure the speedy yet fair disposition of settlements. Lastly, the appellate review procedure is an innovation introduced by the WTO Agreement, a function performed by an Appellate Body pursuant to DSU Article 17.5 4. Conflict between regional trade agreements and the WTO dispute mechanisms The early optimism which greeted the WTO dispute settlement procedure has slowly waned in ensuing developments. Today the institutional dispute settlement procedure of the WTO is encountering increasing resistance. A research conducted by Ryan6 determined that the legitimacy of the WTO has been challenged by members who have increasingly lost belief in the effectiveness of the process. Majority of those who have questioned its legitimacy are vocal citizens from members states classified as developing countries, and the WTO’s detractors that have criticized it as being unfair and undemocratic. The principal issue behind complaints and criticisms against the WTO is the inequality with which the dispute settlement system, in particular the Appellate Body which is a quasi-judicial body, exercises its discretion and authority, particularly in the matter of procedural and formal controversies. Some of the apparent predisposition in certain issues may be due to the clash between the interests of the WTO as an institution, and the interests of the developing member-state, in a way that decisions issues by the Appellate Body tend to worsen the situation of the developing countries in the near term.7 Another cause of controversy is the conflict that arises between regional dispute settlement agreements and the WTO. In the first 45 years of the GATT, prior to the birth of the WTO, there have been some 124 notifications of Regional Trade Agreements (RTAs) 8 to the GATT. Since its inception, the WTO has received notification of 380 RTAs, as of July 2007.9 Taking into account the RTAs already in force but not as yet notified to the WTO, those undergoing negotiation and those still in the proposal stage, then it is likely that by the end of the decade, there would be more than 400 RTAs in force, which substantially concern the same matters and address the same issues as the WTO.10 Practically all these bilateral agreements have provided for a form of dispute mechanism, which could be characterized as one of the following: (1) choice of forum agreements, with or without further requirements granting exclusive jurisdiction to the forum first chosen; (2) exclusive jurisdiction agreements requiring all disputes arising under the RTA to be brought only under the RTA’s dispute mechanism; and (3) preference agreements, which specify a preferred forum which can be changed to an alternative forum, only when agreement has been secured among the parties to the dispute.11 Majority of the notifications concern the first type of RTA, which provides the party to choose a forum, between the dispute settlement mechanism of the RTA and or the WTO’s Dispute Settlement Understanding (DSU).12 The matter of jurisdiction thus arose out of the interconnected web of RTAs and preferential agreements, where they overlap with WTO in its provisions on dispute settlement. The Brazil Tyres Dispute is instructional in this aspect. A Brazilian ban on imported tires was challenged by Uruguay in MERCOSUR (Mercado Comun del Sur, or Southern Common Market) arbitral proceedings. Uruguay claimed that the ban on imports of retreaded tires was tantamount to a new restriction of commerce between the two parties, “incompatible with Brazil’s obligations under MERCOSUR.” The findings of the MERCOSUR arbitral tribunal ruled that Brazil’s import ban was not in compliance with MERCOSUR regulation. To address this, Brazil amended its import ban to exempt retreaded tires from MERCOSUR countries. The EC thereafter filed a WTO challenge against both the import ban and the exemption, claiming that the Brazilian measures were inconsistent with GATT prohibitions on quantitative restrictions under Article XI. Brazil acknowledged that its import ban and the fines it imposed were inconsistent with Article XI, but its import ban was justified under Article XX(b) of the GATT as a measure required to protect human, animal or plant life or health.13 (Brazil contended that the import ban was grounded on the fact that tires were breeding grounds for mosquitoes, and that their disposal by burning and other means creates additional other side effects.) In the end, the Appellate Body ruled that the MERCOSUR exemption constituted arbitrary and unjustifiable discrimination. The Brazil Tyres case is but one example of the clash in the application of WTO laws and regional laws as far as dispute resolution is concerned. Other issues exist, such as (1) the jurisdiction of WTO over non-WTO laws; (2) duplicative proceedings and/or conflicting rulings; (3) the issues of res judicata (if an application to the WTO is considered appeal or relitigation; (4) good faith (in bringing dispute to one forum rather than the other); (5) the possible impact on third parties; and (6) preclusion of defenses (e.g., whether WTO members can raise the provisions of an RTA as a defense in WTO cases.) 14 5. The issue of equality and inequality in the WTO DS system The dispute settlement mechanism of the WTO is also termed the Dispute Settlement Understanding (DSU), and its creation in January 1, 1995 was generally lauded as a triumph of law over politics in international commerce. Where once there was the power-based system of the GATT, there is now superseding it the “rule-based system of the WTO. The perception of an objective system of resolving disagreements in trade transactions gave the impression of the provision of a greater protection for the weaker and poorer countries from the dominance of the strong and rich developed countries. The WTO was viewed as the driver to ensure an level playing field in global trade, a view that was nevertheless greeted with scepticism by the more pragmatic of academics and politicians. International relation scholars in particular predict that stronger states will take advantage of weaker states, because of the discrepancy of legal resources available to the rich and the poor countries. Substantial resources are necessary to pursue a complaint or mount a defense under a legal system, a matter that may turn against the interests of the poorer countries the WTO law purports to protect.15 Empirical studies have sought to determine whether the poorer and weaker countries are truly benefited by the WTO dispute resolution mechanism. In a statistical study of the results of litigation brought before the WTO, findings suggest that power does not matter significantly in determining the outcome of WTO dispute cases, for which the WTO dispute settlement body appears to be more or less fair and unbiased. However, the reinforced reciprocity principles and newly introduced rules of the WTO agreements were found to be favourable to developing countries, therefore rendering the law more advantageous for stronger, richer states.16 Another study17 focused on the distributive implications of institutional design in the WTO, specifically on how the rich and poor states relate to each other within the framework of the reformed system for dispute settlement. The results indicate that contrary to conventional wisdom that the poorer countries be principally benefited by the reforms, developing countries expressed greater disappointment and frustration with the DSU and its quasi-judicial procedures. The complaints stem from the institutional framework of the WTO as was conceived during the Uruguay talks, and the static structural features of the international economy. Commenting on the legal procedure of the WTO, the jurisprudence of the autonomous Appellate Body was seen to create a greater advantage for the developed countries. “The decisions to expand third party participation and to open the door to amicus curiae briefs seem likely to operate to the detriment of developing countries as they provide new channels for political advocacy and legal argumentation that will come disproportionately from advanced industrial states.”18 To address this concern the members of the Appellate Body sought to improve their access to information gathering concerning the perceptions of WTO member governments and interested non-state actors. The purpose of the body is to build its legitimacy by avoiding politically unsustainable and legally untenable and objectionable decisions. It was also the intention for the WTO legal procedures to give due deference to members’ governmental decisions, particularly where a question put before it engages debate on the grounds of “sovereignty” of the state.19 The move towards greater competency, while laudable, is also seen as a greater threat to developing countries in the long term, particularly since the body’s heightened sensitivity to member countries’ perceptions may make its members more responsive to criticisms from governments and private interests in powerful member states.20 6. Overlapping institutions & forum shopping in dispute settlement in international trade Mexico filed a case in 1996 against the U.S.21 to challenge the latter’s safeguard measure it felt prejudiced its interests. While the case was appropriate for filing in the WTO22 because the interests of other member-states were also affected, and also because Mexico’s arguments fall squarely within WTO law, Mexico nevertheless filed the case under the provisions of the North American Free Trade Agreement (NAFTA).23 Likewise, at around the same time, the U.S. challenged Canada for measures the respondent state implemented on periodicals. The U.S. brought this action to the WTO, although many perceived it to be properly within the purview of the NAFTA, because the issue appeared to be strictly a bilateral matter between the US and Canada. Furthermore, based on past cases, the U.S. had always resorted to NAFTA more easily than WTO.24 In assessing the reason for the seemingly strange choice of venue in the litigation of their cases, scholars 25 have observed that the overlapping of institutions in which to pursue disputes have given occasion to the litigant-states to conduct forum shopping, a key element in litigation strategy that has been given little attention to in international relations.26 The complainant-state tends to choose the venue based on whether it is its intention to set a regional precedent or a multinational one, or if it prefers no precedent to be set at all. By setting precedent, the country succeeds in introducing case law on the matter of the obligations in dispute. This precedent may in the future be used, pursuant to the doctrine of stare decisis, to provide an advantage to the complainant state when resorted to in litigation against its other trade partners who are member-states of the same institution. This advantage may be used for a host of intentions, including curbing the protectionist policies of the defendant, as well as encourage more ex ante settlement in disputes with other members in the same institution. Thus, in international law, forum shopping is resorted to when the complainant country wishes the precedent to apply only to the regional institutions as against the multilateral institutions, or vice-versa.27 In comparing the two systems, for instance, the WTO is considered less forthcoming than NAFTA on the point of permitting forum shopping. The WTO claims “compulsory jurisdiction” over disputes that arise among its member states. However, at the same time the WTO approves preferential trade agreements,28 on the ground that many of these agreements already have stipulated dispute settlement mechanism of their own. This tends to invite forum shopping.29 7. Remedies to Non-compliance with Recommendations The effectiveness of any procedure that seeks to grant relief and settle controversies is anchored upon its power to compel the parties to abide by the decision arrived at by the Dispute Settlement Body (DSB). Firstly, any compensation to be paid must be agreed to by the parties; in case no such agreement is reached on the 20th day after the end of the reasonable period designated, the complaining state may ask the DSB to suspend some of its commitments (suspension of concessions) to the offending state as stipulated under the WTO agreements. Should this fail to take effect of it is impractical, the complaining state may move for suspension of concession in other sectors under the same WTO agreement that had been violated; and if this still fails to yield results, then the complaining state may seek suspension of concessions under other WTO agreements.30 If the offending state objects to the level of suspension proposed, the matter shall be referred to arbitration to be completed within sixty days after the end of the reasonable period. During the course of arbitration, concessions may not be suspended. To illustrate the process the banana case filed against the European Community shall be held as example.31 The banana case was filed against the European community (EC) by five complaining countries, namely the U.S., Ecuador, Guatemala, Honduras, and Mexico. Both the dispute panel and the Appellate Body determined that that the rules for the importation of bananas by the EC were not consistent with the GATT. Consequently, the EC failed to comply with the DSB’s recommendations within the reasonable period determined through arbitration. The US then requested authorization from the DSB for suspension of concession to the EC in the amount of US$520 million. The EC requested for arbitration on the level of suspension requested by the US. Eventually, the arbitrators determined that the appropriate level of suspension was US$ 191.4 million, for which amount the DSB authorized the US to suspend concessions 32 8. Summary and conclusion This study set out to obtain a comprehensive view of issues surrounding the dispute settlement mechanism of the WTO, in order to gain some idea of the merits and weaknesses of its framework. The World Trade Organization was created out of a need to develop an institutional system of overseeing international trade and, as a necessary consequence of that mandate, to establish and oversee a dispute resolution mechanism to address issues on the implementation of trade agreements between countries. Because of the complexity of global trade, an interlocking network of bilateral and multilateral (regional and global) trade agreements and treaties have emerged, the applications of which tended to interfere with each other. Since trade agreements usually included their own dispute resolution provisions, a confusing and conflicting array of dissociated and overlapping rules have created pockets of opportunity for countries to take advantage of forum shopping and legal maneuvering through the rules that tended to conflict. Expertise and resources are proving to be the factors likely to determine the outcome of a dispute. For this reason, the rich countries tend to get the upper hand in the settlement of disputes against poorer countries, and the greater deference accorded by the WTO Dispute Settlement Body to opinions and reactions of countries further reinforces this advantage. There is still, however, the possibility that measures may be adopted to enhance the equality between rich and poor countries. The members of the dispute panels and appellate body have so far exhibited fairness in dispute resolutions, an optimistic indicator that the process may be working after all. In the future, the continued development of the dispute resolutions mechanism is no doubt continue as countries interact more regularly and consistently in global commerce. To this end, the WTO and other multilateral institutions will continue to play a significant role in creating a milieu conducive to international collaboration in a wide range of economic endeavors. Endnotes Read More