Standard of Review of WTO Adjudicatory Bodies - Research Paper Example

STANDARD OF REVIEW OF WTO ADJUDICATORY BODIES Name Professor Course Date 1 Introduction The World Trade Organization (WTO hereafter) was created in 1995 at the conclusion of the 7-year Uruguay Rounds after a series of negotiations to reform the world trading system. Its predecessor, the General Agreement on Tariffs and Trade (GATT hereafter), which was originally drafted in 1947, underpinned international trade and commerce for almost half a century before the Uruguay Rounds. Its inherent limitations and the rapid growth and development in world trade rendered it outdated and irrelevant. To give teeth to the new negotiated agreements as well as better authority than its predecessor, a new dispute settlement system, which is more defined and structured, was also integrated into the new agreements under the Understanding on Rules and Procedures Governing the Settlement of Disputes also known as the Dispute Settlement Understanding (DSU hereafter) (Understanding the WTO 2013). The DSU allows an aggrieved member to find relief when a trade policy or measure imposed by another member threatens to undermine or militate against its own products and services in that member’s market. It is a complex process that combines a multi-faceted approach to conflict resolution from consultation, mediation, conciliation, litigation, to arbitration. Considering, however, that the members are sovereign states and a supranational body, in the case of the EU, the dispute settlement system is not expected to be without controversies. One aspect of the dispute settlement system that carries the brunt of the controversy is the standard of review that the adjudicatory bodies of the WTO exercise when they hear and decide cases. The standard of review is the extent to which an adjudicatory body minds the business of a member, so to speak, as it deliberates on the facts, issues and legal implication of the case. The standard of review that a WTO adjudicatory body decides to employ in a case is a delicate matter because it may have the effect of encroaching too much into the sovereignty of a Member State or Body. 2.1 Background: The WTO Dispute Settlement System The WTO dispute settlement system is the body’s enforcement mechanism. It is triggered when a member state disputes a trade policy or measure of another for violating a WTO rule or rules or for failing to meet an obligation or when a group of third party states declares that it has a collective interest against a member state. The function of WTO adjudicatory bodies, primarily the panels, is to settle conflicts by interpreting the negotiated rules of the WTO. Since the DSU was signed by all member states as part of the WTO Agreement, it is compulsory in nature and does not require acceptance of jurisdiction by individual member states (WTO 2013). Figure 1 shows the flowchart of a typical dispute settlement process. As can be seen, there are three primary stages of the dispute settlement process: consultations; formal litigation stage, and the implementation stage. A mandatory consultation for 60 days is imposed upon parties to resolve their conflict preventing automatic resort to litigation. The Director General may mediate or conciliate before a dispute is referred to a panel. If bilateral talks fail, the Dispute Settlement Body (DSB hereafter) creates a panel to hear the case. The DSB, which is the overseer of the dispute settlement process, is the General Council carrying out its responsibilities under the DSU. The assumption of the panel to the case initiates the formal litigation stage which continues until the proceedings in the Appellate Body (AB hereafter) in case of an appeal. Panels are non-permanent bodies composed of three individuals and in rare instances, five, who may be government or non-government representatives who have gained a reputation for their expertise and independence of mind. The AB, on the other hand, is a permanent body that may uphold, reverse or modify a panel decision on appeal. The last stage is reached when the DSB adopts the report of the panel or the AB, as the case may be, in which case it takes over by implementing and overseeing the carrying out of the decision. Arbitrators can be called at any stage of the proceeding to adjudicate any specific issue before a panel or the DSB. On the other hand, experts can be called to assist on the following matters: sanitary and phytosanitary measures; technical barriers to trade; implementation of Article VII of GATT, and; subsidies and countervailing measures (Disputes Settlement System Training Module 2013; Butler 2000, pp. 5-7; Busch & Reinhardt 2004, pp. 1-3). 3 The Standard of Review of WTO Judicial Bodies 3.1 Definition of the Concept The term ‘standard of review’ is a feature of systems with legal rules and institutions. In the US’ judicial system, for example, standard of review refers to the extent to which an appellate court would review a lower’s court decision. Higher courts, such as the Supreme Court and even the Court of Appeal, usually do not dip their fingers into factual matters as trial courts are often regarded in the best position to determine the facts of the case having personally received the presentation of evidence by both parties to a case (Lester 2012, p. 126). Hence, the standard of review of appellate courts is usually confined to questions of law and rarely to questions of facts. The use of the term ‘standard of review’ within the WTO context has some similarities and parallelism to that in a national judicial system. But rather than applying to the relations between trial courts and appellate courts, the term is used to apply to the extent to which a WTO adjudicatory body, such as panels or the Appellate Body (AB hereafter), appraises the acts of a Member State, which may be a trade policy or national decisions regarding trade, that is the subject of the dispute. Ultimately, the standard of review when used in the WTO context entails a balancing act of the powers of the supranational body and the sovereignty of the national law. As a consequence of the authority given to WTO adjudicatory bodies to settle disputes under the DSU, these bodies are placed in a position to determine to what extent they can assert and overrule national trade policies. Croley and Jackson (1996, p. 194) provides a classic example illustrating standard of review as used in the WTO context: A Member State imposes a certain domestic product standard in line with its environmental policy, but is objected to by some foreign exporters for violating the WTO Technical Barriers to Trade Agreement. This objection is elevated to a Member State’s national court, which decides that the standard does not violate the WTO agreement. Another Member State brings this up to the WTO. The dilemma of the WTO adjudicatory body that is assigned to the case is whether to approach the case as if the national court did not make any determination on the merits of the case and base its findings purely on its appreciation of applicable WTO rules or consider or defer to the decision of the national court in the adjudication of the issue. The DSU itself gives a broad definition of the term as applied to panels, with an emphasis on the word “objective”. Article 11 states: The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements. Panels should consult regularly with the parties to the dispute and give them adequate opportunity to develop a mutually satisfactory solution. As can be gleaned from the above, the standard of review prescribed by the DSU to panels is a little too broad and too vague. This is simply because the above definition does not prescribe in simple steps how the panels are to allocate the powers of WTO authority and Member State sovereignty. As Ehlermann and Lockheart stated “any assessment of facts, whether it is highly deferential, marginally deferential, or not deferential at all, can be objective” (cited in Lovric 2010, p. 92). This is the reason why despite the existence of this provision, many scholars are still debating the standard of review that WTO adjudicatory bodies should use. On the other hand, the Anti-Dumping Agreement (ADA hereafter), a WTO major agreement that regulates how Member States can or cannot react to dumping, specifically provides for its own standard of review. Thus, such a provision is called a special standard of review as opposed to the broad definition provided by Art 11 of the DSU. The difference between the two provisions is that while Art 11 of the DSU is concerned with the perspective of the panel, i.e. an objective assessment of facts and applicability/conformity to WTO rules, Art. 17.6 emphasizes how the authorities of the Member States establish and evaluate the facts, i.e. proper, unbiased and objective. Nonetheless, the AB has declared that the ADA provision does not conflict or is contrary to the DSU provision because “it is inconceivable that Art. 17.6 should require anything other than that panels make an objective ‘assessment of the facts of the matter’” (cited in Voon & Yanovich 2006, p. 250). The provision of Article 17.6 is replicated in toto below: In examining the matter referred to in paragraph 5: (i)       in its assessment of the facts of the matter, the panel shall determine whether the authorities’ establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the panel might have reached a different conclusion, the evaluation shall not be overturned;   (ii)      the panel shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities’ measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations. 3.2 The Importance of the Standard of Review in the WTO Setting The significance of a standard of review stems from the need to respect state sovereignty and at the same time guaranteeing that trade liberalization flourishes. This is the underpinning of a multilateral trading system, one that is underscored by the DSU itself when it provides that the dispute settlement system “serves to preserve the balance of WTO Members’ rights and obligations” (cited in Jain 2003, p. 4). The significance of the WTO standard of review was highlighted in the Uruguay Rounds that created the WTO. The GATT, the predecessor of the WTO, had no specific provisions on the standard of review that should be used when adjudicating dispute cases. To remedy this, it was included as an agenda in the latter part of the Uruguay Rounds, but it unwittingly became almost a ‘deal breaker’ when the US vigorously pushed for a certain standard of review and it was opposed vehemently by other members. The US wanted a reasonable deference standard of review that would have the WTO panels limit their review in matters of involving government determinations. This was opposed by other Member States on the ground that it would severely weaken the WTO/GATT as it would mean granting nations too much leverage to develop their own approach in meeting their obligations under GATT, which might open the Pandora box of abuse. The topic became so important that it would have caused the collapse of the entire talks. Wisely, the subject was sidelined and the issue was left hanging and Art 17.6 of ADA (Zleptnig 2009, pp. 3-4; Spamann 2004, p. 2; Croley and Jackson 1996, p. 194) was dangled as a compromise provision with understanding that the issue would be tackled at a future time (Becroft 2012, p. 46). The manner by which the WTO exercises its standard of review is crucial because it could ultimately affect the organization’s existence as a supranational trade organization. Davey (2001) cited the general sentiments of academics that WTO controversial decisions, such as those that dangerously infringe on member’ sovereignty, may weaken the organization’s popularity and affect support for it (p. 1). The perception, for example, that WTO is infringing too much on the sovereignty of a Member or that decisions of its adjudicatory bodies result in constraining Member States from acting in the interest of its constituents could lead some member states to withdraw from the multilateral system, a move that could spur others that are undecided to follow suit. On the other hand, giving too much deference to national bodies may give the WTO the image of a rubber stamp, which may also damage its legitimacy. Jain (2003) believed that what is needed is “restraint” and “standard of review reinforces restraint” (p. 20). There are several instances in the operation of WTO adjudicatory bodies when the issue of standard of review becomes of primary focus. Zleptnig (2002) culled trade scholar perspectives on the issue, which can be summarized as follows: when a WTO panel examines domestic law as interpreted by domestic courts to determine if such are in accordance with WTO rules; when a WTO panel reviews a national statute or administrative action to find out if a specified standard in GATT has been met, and; when a WTO panel decides whether to ignore administrative view or to whether to determine if it is reasonable that it can be embraced (p. 2). In all of these instances cited by Zleptnig, the WTO adjudicatory body doing the review necessarily scrutinizes the action of the member state or entity, evaluates it and makes a determination whether it complies with WTO standard. In some cases, this entails passing judgment on acts of members done in the exercise of the latter’s sovereignty and function to shape policies for their people’s general welfare, as will be illustrated in cases that will be discussed later. 3.3 Application of WTO Standard of Review Since the incorporation of the DSU into the WTO system, the DSU has been swamped with cases that sought the resolution of conflicts arising from trade policies and measures that were perceived to anti-trade liberalization. A significant number of these cases touches on public law, which is defined by Black’s Law Dictionary as “that portion of law that defines rights and duties with either the operation of government, or the relationships between the government and individuals, associations, and corporations” (cited in Burke-White and Staden 2009, p. 11). Three of these cases are discussed in the following paragraphs with emphasis placed on the type of standard of review adopted by the respective panels or the AB hearing them. (a) The US-Hormones Case In the US-Hormones case (United States – Measures affecting the cross-border supply of gambling and betting services, WT/DS285/AB/R), the WTO adjudicatory bodies had to grapple with a trade measure that arose from a domestic policy prohibiting the use of certain substances on livestock to prevent, as determined by the Member, harmful effects on humans. The significance of this case is that it tested the mettle of the WTO in so far as it was prepared to encroach into a Member’s right to set public health policy goals. In the Hormones case, whose full title is EC-Measures concerning meat and meat products (Hormones), WT/DS26/AB/R and WT/DS48/R, the AB extensively discussed the subject of standard of review. The case involved heavyweights: the USA as complainant: the EC as respondent and; Australia, Canada, New Zealand and Norway as third parties. One of the issues in this case was an EC directive, which, in effect, banned imports of meat or meat products when the animals from where the meat products came from were treated with growth hormones. The EU prohibits the use of growth hormones on livestock within the EU itself. It was contended that this violated the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS hereafter). EC questioned the standard of review used by the Panel in the case, which should have been, according to the EC, a “reasonable deference standard of review” because the issue involved a determination by a Member of a particular science policy. The EC claimed that the GATT 1947 rejected the de novo standard of review, a practice that has been maintained in the present, while the “reasonable deference standard of review” is promoted in the present Article 17.6 of the ADA and should, by extension, used in the case because it similarly involves “highly complex factual situations, including the assessment of risks to human health arising from toxins and contaminants” (Appellate Body 1998, pp. 6-7). The AB rejected the contentions of the EC re standard of review. Its basis for the rejection is that Article 17.6 is applicable only to ADA and not to the SPS since the latter does not have a similar provision, and on the contrary is silent about the standard of review to be used. Thus, the Panel is authorized only to adopt the broad standard of review embodied under Article 11 of the DSU since Article 17.6 of ADA is specific only to cases arising under its provisions (AB 1998, pp. 41-46). The AB stated that the standard of review that should be used in the case should be one that “must reflect the balance established in that [SPS] Agreement between the jurisdictional competences conceded by the Members to the WTO and the jurisdictional competences retained by the Members for themselves” (1998, p. 28). Otherwise, the Panel would be committing an ultra vires because it would amount to adopting a standard of review that would destroy that balance (Appellate Body 1998, p. 28). (b) The Korea-Beef Case The Korea-Beef case is proof that the standard of review exercised by the WTO is an evolving process and that the prescription set under Article 11 of the DSU is too broad that it can embrace some types of standards to accommodate a WTO ruling. Officially labeled Korea – Measures affecting imports of fresh, chilled and frozen beef, WT/DS161/AB/R and WT/DS169/AB/R decided in 2000, the Korea-Beef case showcased how WTO’s adjudicatory power extended even into disapproving a measure taken by a Member as necessary to solve a prevalent problem hounding its domestic commerce and industry. To justify itself, the WTO adopted the least restrictive means test. In this standard of review, the adjudicating panel scrutinizes the action of the respondent member and determines whether there are other reasonable alternatives that it could have adopted rather than determining whether the action was the only means available, which entailed a flexible interpretation of the wording of the GATT law. This case involved the dual retail system of selling beef imposed by Korea in its domestic market. Under Korea’s dual retail system, a small retail store can sell only either imported or domestic beef, but not both and stores selling imported beef must put up a sign that says “Specialized imported Beef Store.” Big retailer stores can sell both, except that they must be sold in separate areas. Korea’s purpose for implementing this system was allegedly to eliminate deceptive practices justifiable under Article XX(d) of the GATT 1994. The said provision lays down a general exception to the Agreement when a measure is “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, […], and the prevention of deceptive practices” and so long as it is consistent with the chapeau of the Article. A scrutiny by the Panel of the circumstances at that time of the implementation of the system showed that there were, indeed, widespread deceptive practices in Korea regarding the sale of imported beef. However, the AB decided that the measure chosen by Korea did not fulfill the requirement of “necessity” under the said provision because “necessity,” according to the AB, encompasses measures that are not only indispensable, but also those contributory to the goal. This relaxation of the word ‘necessary’ created a “sliding scale of necessity” that could be moved in degrees depending on the balancing of the interests of the parties taking into account the nature and importance of such interests (Burke-White 2009, p. 29). The AB citing US-Section 337, found that Korea did not fulfill the “necessity” requirement under the said provision for failure to employ a measure that is the least restrictive to imported beef or the least inconsistent with the GATT provisions. (c) The US-Cross Border Supply of Gambling and Betting Services Case The case of US-Measures affecting the cross-border supply of gambling and betting services, WT/DS285/AB/R, illustrated the WTO straddling the thin line between supranational power and state sovereignty. In this case, while the WTO admitted that the acts of a Member State were measures necessary to protect public morals and/or public order, it nevertheless, declared such measures inconsistent with the General Agreement on Trade in Services (GATS hereafter). In 2003, Antigua and Barbuda disputed the “total prohibition” policy of the United States on the cross-border supply of gambling and betting services as contrary to the US commitments under the General Agreement on Trade in Services (GATS hereafter). The total prohibition policy resulted from the application of laws, both federal and state, that had the overall effect of banning cross-border betting supplies. The US’ position rested, inter alia, on the contention that the Wire Act, the Travel Act, and the Illegal Gambling Business Act represent domestic regulations that were justified by the General Exceptions in the GATS, specifically Art. XIV(a) on measures necessary for the protection of public morals or maintenance of public order, (c) on measures in compliance with laws or regulations not inconsistent with GATS and the article’s chapeau that their application will not lead to arbitrary or unjustifiable discrimination of countries with like conditions or is a disguised restriction to trade. Although the Panel exercised a deferential approach by giving credence to Congressional reports and testimonies that described said laws as designed to address protection of public morals and/or maintenance of public order and this finding was upheld by the AB, the Panel, which was upheld by the AB, passed judgment on the necessity of these laws. The AB reviewing the case acknowledged that the “necessity” of a measure is an objective standard, which is determined by the Member imposing as evidenced from legislative histories and similar documents, but “A panel is not bound by these characterizations, however, and may also find guidance in the structure and operation of the measure and in contrary evidence proffered by the complaining party” (Appellate Body 2005, para. 304). Thus, although the AB upheld the findings that the federal laws in issue were necessary for the public morals and public good, they were nevertheless, declared inconsistent with GATS for failure of the US to prove that they were applied consistently to both domestic and foreign suppliers. This part of the decision stemmed from the existence of the Interstate Horse Racing Act, a civil statute that was adopted after the three federal laws, that allowed interstate off-track wager and which Antigua claimed on the basis of the statute’s text permitted domestic betting suppliers, but not foreign ones, to engage remote betting. 4 Conclusion The exercise of standard of review by WTO adjudicatory bodies is a delicate and sensitive task because of its potential to intrude into national sovereignty. This has been illustrated in the cases of EC-Hormones, Korea-Beef and US-Cross Border Supply where the subjects in issue were national policies and measures designed to protect the health, the economy and the morals of the public. The WTO rose to the occasion by resorting to a standard of review that combined various approaches that allowed the WTO to acknowledge a member’s right to policymaking and in the same breath sidestep it to re-enforce WTO rules. The ability of the WTO to do this stems from a too broad definition of the term ‘standard of review’ under Article 11 of the DSU, which trade experts have criticized to be too vague to be definitive. It is this quality of vagueness that has allowed the WTO to sidestep national sovereignty issues by adjusting its standard of review as the circumstances require. By adopting the least restrictive means test in the Korea-Beef, for example, the WTO took a step towards an alternative standard of review without violating Article 11 of DSU. Burke-White and Staden (2009) believed that this accords, as a result, a degree of deference by balancing rights and interests of the parties. Burke-White and Staden (2009) deplored the continued application of private law standard of review to disputes that are significantly of public law nature and proposed that an alternative standard of review fitting to cases of such nature must be developed, such as in the case of the WTO in the Korea-Beef case. This is important when at stake are “disputes that implicate changes to a state’s economic and social constitution,” in which the result of the litigation will impact the social and economic life of the state (p. 10). In exercising its right of review, the WTO adjudicatory bodies must employ a combination of various approaches to ease the conflict between supranational power and national sovereignty. Spamann (2004) classified the different types of standard of review into three: de novo approach, in which the WTO panels review cases without regard to the determinations made by national bodies; total deference, in which the WTO panels accept the national bodies’ findings on the condition that they have met all procedural requirements, and; deferential standard of review, in which the panels may accept the findings of national bodies on the condition that they have met certain requirements, not only procedural but also substantive (p. 2). However, using exclusively one type is ill-advised because it would result in the definitive shifting of power to one side at the expense of the other side. Gruszynski ( ) observed that a de novo approach would tilt the power to the international level while a deferential approach would result in the empowerment of members and at the same time limit the adjudicatory authority on the international level (p. 5). This point is illustrated in anti-dumping cases. Although a special standard of review has been prescribed by ADA, a review of anti-dumping cases decided by WTO showed that the deferential standard of review prescribed under Article 17.6 “has had virtually no impact on the review of anti-dumping measures by the WTO” (Tarullo p. 5). Apparently, the WTO found the interpretation of members of ADA to be often inconsistent with its own, which is why it had to sidestep the special standard of review prescribed by ADA at times. The development of an appropriate standard of review in the WTO must be not be hindered, however, by national sovereignty concerns. Although its exercise is closely intertwined with national sovereignty issues, developing an ideal WTO standard of review will not make any progress if sovereignty issues are continuously attached to it, according to Spamann (2004, pp. 49-50). The nature of WTO as a multilateral negotiation system is enough justification to set aside the linkage between standard of review and sovereignty. When nations agree to be a part of the WTO agreement, they have already calculated the advantages of entering into a reciprocal obligations system over the disadvantages brought about by incidental infringement into their respective sovereignty so that the exercise of a WTO adjudicatory body of standard of review that impacts collaterally on their sovereignty has been voluntarily and tacitly assumed by them. REFERENCES: (2013). Understanding the WTO. 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