A bit of bother down at the WTO court — Why? And is it a killer? Long read

WTO dispute settlement is in trouble, but it can struggle on at least for a while. So can the organisation’s other important functions

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Uncertain future: even WTO disputes won’t end, though

By Peter Ungphakorn
POSTED AUGUST 21, 2019 | UPDATED AUGUST 23, 2019

This looks at the WTO Appellate Body crisis in some depth.
A simpler version is here

A casual glance at the headlines might mislead us into thinking the World Trade Organization (WTO) will grind to a halt at the end of this year (2019), that the blame lies entirely with US President Donald Trump, and that the WTO’s demise will bring anarchy to world trade.

Only the last of those three assertions is possibly correct; and only if the WTO really does die — which it certainly won’t, not in the near future.

This is an attempt at an explanation. It shows that even WTO dispute settlement could well survive, but in a less powerful form. Other important work in the WTO will continue, and therefore so will the WTO itself.

But be warned: simple explanations of complex issues cannot tell the whole story. And even this attempt is not that simple. Sorry.

It’s also important to remember that dispute settlement in the WTO is not about any old disagreement. It’s only about whether countries are keeping their promises — complying with the agreements they signed. The agreements are often called “WTO rules” for short, but they are really promises that member governments have made to each other.

Double-check: the ability to appeal a round-one victory
Double-check: the ability to appeal a round-one victory

ONLY ABOUT APPEALSBack to top

What’s happening?Back to top

JUMP TO
ONLY ABOUT APPEALS
What’s happening?
And the present crisis?
THE PROBLEM
What’s the US’s complaint?
Did Trump start this?
Is it an excuse?
Why has “overreach” happened?
What does this mean?
POSSIBLE SOLUTIONS
Alternatives
Canada-EU: appeal by arbitration
Indonesia-Vietnam: agreement not to appeal
TO SUM UP
SOME TECHNICALITIES
Appellate Body members and their terms
Zeroing
FIND OUT MORE
.
SEE ALSO
The short version of this article

This is not even about the whole dispute settlement system, but one vital part of it: appeals. That fact alone means dispute settlement can continue in some form.

In 1994 over 120 countries agreed to update the multilateral trading system. They created the WTO, which came into being the following year.

Among their reforms, they created a more effective system for settling legal disputes over alleged violations of WTO agreements.

(They also expanded the system, adding services and intellectual property to the previous focus on trade in goods.)

Dispute settlement was more effective in a number of ways. Two are important, here:

  • Adoption” of rulings. Previously (under the General Agreement on Tariffs and Trade or GATT), dispute rulings would only hold if there was consensus support among all members. If any country objected there would be no consensus. This meant countries losing a case could block the ruling.
    .
    The new WTO dispute settlement system reversed this. From now on rulings could only be blocked by consensus. The rulings would stand (or more accurately, be “adopted” by the membership) more or less automatically..

(Jargon: “positive consensus” — consensus needed to adopt. Replaced by “negative consensus” — consensus needed to reject).

  • Appeals. Under GATT, appeals were not possible. The WTO system introduced an appeals stage, a double-check aimed at both strengthening legal interpretation and easing concerns that poor first-stage rulings would be adopted semi-automatically. Appeals can only be on points of law, not evidence.

This meant disputes now went through two stages.

First stage, cases are heard by “panels” of three independent experts. The panellists are picked by the countries in the dispute. If those countries cannot agree, then the WTO director-general picks the panellists. The panels issue rulings (officially panel “reports”), which are either appealed or adopted by the WTO membership in meetings of the Dispute Settlement Body. This comprises all members and is responsible for the whole dispute settlement system.

Second stage, appeals, WTO members created a new institution: the Appellate Body, consisting of seven judges (officially Appellate Body “members”), three of them hearing each appeal, along with a small staff. It is so special it’s not even part of the WTO Secretariat, although it is in the same building and administratively its office reports to the WTO director-general. Its rulings are also adopted by the WTO membership in the Dispute Settlement Body.

If the case is appealed, the two rulings are adopted by the WTO membership simultaneously: the panel ruling with any amendments made by the Appellate Body.

The new rules also gave the system teeth. If the complaint is upheld, the complaining countries can retaliate or seek compensation through alternative benefits in trade.

This made WTO dispute settlement unique in international arrangements and not just in trade. Some have called it the “jewel in the crown” of the WTO.

And the present crisis?Back to top

The first stage is not affected by the crisis. Panels can hear cases and issue rulings as normal.

It’s the second stage that’s in trouble. The US has blocked the replacement or reappointment of appeals judges whose terms have expired. There are normally seven. At least three are needed to hear a case. Right now there are only three left. From December 10, 2019, there will only be one. There are no signs of a change of heart from the US, so from December appeals will not be possible. (A list of Appellate Body judges is below.)

Overreach: has the negotiated balance been disturbed?
Overreach: has the negotiated balance been disturbed?

THE PROBLEMBack to top

What’s the US’s complaint?Back to top

To sum up some pretty complex legal arguments:

Overreach”. The US accuses the Appellate Body of rewriting the rules by trying to fill in gaps in WTO law (the WTO agreements). The appeals judges do this by drawing on provisions in international law outside the WTO to interpret what the rules mean. This, the US argues, upsets the balance of rights and obligations that were the reason why countries reached agreement in the first place. By interpreting the law in this way, the Appellate Body has “overreached” its mandate and altered countries’ rights and obligations in ways that WTO members have not negotiated, it says.

Legal precedents. Worse, in the US’s view, this has then created legal precedents. Panels and appeal rulings often cite previous Appellate Body interpretations in new cases. So, the US says, the new judgements are added to the body of WTO law — without negotiation.

Broken deadlines. The US also complains that the Appellate Body regularly breaks the 90-day deadline for circulating its findings. And it objects to appeals judges continuing to work on their cases when the deadline is missed and if their terms have also expired. As the number of judges has dwindled and the backlog of appeals cases has lengthened, meeting the deadline is now impossible.

(All these arguments are made regularly in US statements, such as this one by Ambassador Dennis Shea to the WTO General Council, July 23, 2019.)

The US is not alone. The EU and some other members have similar concerns about overreach, and are starting to present proposals to deal with the problem. But the US has only raised objections.

Did Trump start this?Back to top

No, it began during the administration of his predecessor, Barrack Obama.

And then there were 13: and only 3 judges to work on the appeals
And then there were 13: with only 3 judges to work on the growing backlog (click the image to see it full size)

But the US position has hardened because of Trump’s disdain for the WTO, multilateralism and systems based on rules rather than power. Still, the US remains active in most areas of WTO activities.

Even in August 2019 it continues to appeal first-stage panel rulings. This is four months before the Appellate Body is unable to function, but within the 90-day period when appeals should normally be completed.

But times are no longer normal. As the remaining Appellate Body judges have dwindled to three, the backlog of Appeals cases has lengthened to an unmanageable 13, at the time of writing, according to the WTO website. They were filed between May 2018 and August 2019.

Is it an excuse?Back to top

Some observers argue that the real problem is that the US lost some cases that were politically important for its powerful lobby groups, in particular on “zeroing” in antidumping calculations (explained below).

Rumours spread that top US trade officials want to return to the old GATT system (pre-WTO), with no appeal and rulings only adopted by consensus.

Comments by US Trade Representative Robert Lighthizer (the Cabinet minister in charge of US trade negotiations and agreements) have fuelled the speculation.

“Before 1995, before the WTO, under the GATT, there was a system where you would bring panels and then you would have a negotiation. And trade grew and we resolved issues eventually. And it’s a system that was successful for a long period of time,” he said in September 2017.

But he went on: “Now, under this binding dispute-settlement process, we have to figure out a way to have — from our point of view — to have it work.”

So, whether the US really wants to roll back time is unclear, and is doubted by some trade experts.

Nevertheless, rulings against the US over zeroing are clearly a sore point.

Challenge of ambiguity: speech launching Appellate Body annual report, 2017 | Photo: WTO
Challenge of ambiguity: speech launching Appellate Body annual report, 2017 | Photo: WTO

Why has ‘overreach’ happened? Back to top

It happened because WTO agreements are often unclear, in the way they are written, or because unexpected situations arise. And crafty trade lawyers regularly find new, unintended ways of using the rules.

Even if the negotiators had drafted them as clearly and precisely as humanly possible, they could not have anticipated everything that would crop up in the future.

In fact, some key provisions are deliberately vague, because of “constructive ambiguity”. This is when a deadlock is broken by a fudge. Text is written in a way that allows all sides to claim they got what they wanted. If their interpretation is challenged the reply is “see you in court” — meaning “see you” in WTO dispute settlement, and ultimately “see you” in the Appellate Body.

In other words one of the functions of WTO dispute settlement is to clarify unclear agreements.

Suddenly the apparently simple task — of passing judgement without affecting rights and obligations — doesn’t look so simple after all.

How can you clarify rules that were deliberately vague?

Or do you say “this is ambiguous so we can’t rule either way”? That would leave rights and obligations fairly and squarely in the eye of the beholder, not in a body of law that’s supposed to be objective.

The Appellate Body chose to dig deeper into the meaning of some of the words, looking beyond WTO agreements and at other sources such as international law outside the WTO.

“Between ‘clarifying rules’ and ‘not adding to or diminishing obligations’, there is scope for interpretation of the rules,” tweeted Debra Steger in this conversation. Steger is a Canadian legal expert who negotiated the new WTO dispute settlement rules, and became the first head of the Appellate Body Secretariat.

“Whether or not you agree with certain decisions of the AB [Appellate Body], it is a major step to say that there are a lot of AB reports where it ‘makes rules’,” she said.

Chief appeals judge Ujal Singh Bhatia echoed that argument: “Adjudicators have to discern the ‘ordinary meaning’ to be given to treaty terms in their context and in light of the object and purpose of the instrument in which they appear, and they may have recourse to supplementary means.”

Addressing “constructive ambiguity” directly, Bhatia distinguished between lack of clarity and real gaps in the law. He said clarifying ambiguity is a task assigned to the Appellate Body by WTO rules.

He was referring to Article 3.2 of the Dispute Settlement Understanding, which says the system has “to clarify the existing provisions of [WTO] agreements in accordance with customary rules of interpretation of public international law.” It also says rulings “cannot add to or diminish the rights and obligations provided in the covered agreements.”

Essentially, Bhatia and Steger are arguing that the Appellate Body has to do both; the US places more weight on the part about preserving “rights and obligations”.

What does this mean?Back to top

Another Canadian legal expert, Robert McDougall, says an incapacitated Appellate Body undermines three key features of WTO dispute settlement:

  • “quasi-automatic” adoption of rulings
  • a chance to correct “bad” panel rulings, through appeal
  • consistency between disputes — by setting legal precedent and creating case law.

But, he stresses, this does not mean the end of WTO dispute settlement, let alone the WTO itself:

“While WTO members are justifiably worried about the consequences of a diminished dispute settlement mechanism, contrary to the scenarios posited by some, it will not bring about the collapse of the rules-based trading system.

“Of course, hard cases will again be more difficult to resolve, some members may take opportunistic trade measures, and the trading system may be less secure and predictable (if that is possible). But a diminished dispute settlement mechanism is unlikely, on its own, to open the floodgates for trade distorting measures.

“WTO members will continue to respect their trade obligations, which will remain binding, just as they do their international commitments in other areas. The evaluation of the consistency of national measures with the trade rules will not change, even as the evaluation of the risk, and consequence, of legal challenge obviously will. The prospect of formal legal challenge is however only one, and not even the most significant, factor in the adoption of measures that might affect trade.”

What has happened so far, both within dispute settlement and in other important areas of WTO work, suggests he is right.

Temporary fixes: the only realistic solution for now
Temporary fixes: the only realistic solution for now

POSSIBLE SOLUTIONSBack to top

WTO members are now trying to break the impasse in talks coordinated by New Zealand ambassador David Walker, the present chair of the Dispute Settlement Body.

Some serious and detailed proposals have been tabled. One of the latest is from 14 members (42 if the EU’s member states are counted) in late 2018. It tackles most of the points the US has raised including missed appeals deadlines, Appellate Body judges continuing to work on their cases after their terms have expired, “overreach” and legal precedent. The proposal does not go into actual rulings such as on “zeroing”.

There is little sign that the US is willing to accept any solution. What would it take? Perhaps agreement to legalise “zeroing” formally — unlikely to be accepted by most countries. Or perhaps a new US administration and a revival of American faith in rules-based multilateralism, but even that is uncertain.

Worse, “if the Appellate Body and with it the WTO’s binding, two-stage dispute settlement system, cannot be restored soon, it is not likely to come back,” writes former appeals judge Jennifer Hillman.

She argues that the present two-stage dispute settlement set-up was achieved because the US was unusually in favour of multilateralism in the 1980s and 1990s, at the end of the Cold War. There are no signs that Congress will regain enthusiasm for it. she says.

AlternativesBack to top

So far, two serious alternatives have been agreed by some countries to bypass formal appeals. Patches like these could well keep dispute settlement going, but they are weaker than with formal appeals:

  • Appeal, but in a different way — through arbitration (under Article 25 of the WTO dispute settlement agreement, officially an “Understanding”), as agreed by Canada and the EU
  • Just don’t appeal — by agreement, as in a dispute involving Indonesia and Vietnam

They are the only two ideas that some WTO members are actually putting into practice. Both are voluntary.

Countries that have agreed to use these alternatives may accept that the findings are binding on them, but members in general are under no obligation to use either method, or any other. It seems unlikely that the US would.

Some other ideas are floating around. So far they have not caught on.

One is for voting to appoint Appellate Body members instead of by consensus.

Another, from Hillman, is to remove “trade remedies” (anti-dumping measures, tariffs to “countervail” subsidies, and safeguard import restrictions in response to import surges) from the mainstream dispute settlement system, including the possibility of no appeals in these cases.

A third is a left-field proposal from trade lawyer Simon Lester suggesting that the countries in a dispute might be able to manipulate Article 17 of the rules on disputes (on appeals) to turn an arbitration result into a ruling formally adopted by the WTO membership.

This is more detail on the two solutions WTO members are actually implementing:

Canada-EU: appeal by arbitrationBack to top

On July 25, 2019 — after several months of discussion — Canada and the EU announced they would use voluntary arbitration as a way to appeal panel rulings.

The agreement would apply until the Appellate Body is able to function again, says the text circulated to WTO members. The appeal would be heard by three former Appellate Body judges picked by the WTO direct-general. Their terms in the Appellate Body would have to have expired by the time they are picked. (Lists of former and current judges are below.)

At the August 15 meeting of the Dispute Settlement Body, Canada and the EU said they would explain the agreement at the next meeting, scheduled for September 30.

This patch would seem to have an important legal difference compared with a normal appeal. The result of the arbitration would not be adopted by the WTO membership (in the Dispute Settlement Body). It would simply be notified to them. Therefore it’s unlikely it would be seen as an official interpretation or clarification of WTO law and could not be cited as a precedent in future cases.

The idea of using arbitration has been around for some time. Among advocates are a group of lawyers affiliated with Sidley Austin LLP, some formerly at the WTO (2017), Jens Hillebrand Pohl of Maastricht University (September 2017)  and former Appellate Body judge James Bacchus (October 2018).

It remains to be seen whether other countries follow suit, or sign on to this agreement.

Indonesia-Vietnam: agreement not to appealBack to top

In March 2019, Indonesia and Vietnam agreed that in one dispute between them, if the Appellate Body could not function, they would simply accept the first-stage panel report without appealing.

So far only one case has seen this approach, a Vietnamese complaint (DS496) about Indonesia imposing “safeguard” trade barriers on iron and steel products.

The method allows the panel ruling to be adopted by the Dispute Settlement Body, adding it to WTO jurisprudence.

“This kind of agreement between parties to a dispute is one way that WTO dispute settlement can continue to function if the Appellate Body crisis is not resolved. It will be interesting to see how quickly the idea spreads,” wrote trade lawyer Simon Lester.

TO SUM UPBack to top

So, WTO dispute settlement can muddle along, at least for a while, despite the crisis in the Appellate Body. Other WTO functions — monitoring and peer review of how the present agreements are implemented, negotiation, and technical assistance and capacity-building — can continue.

It’s not even clear if those areas of work would be hampered if dispute settlement broke down completely, although ultimately it would depend on countries continuing to have faith in the system as a whole. For now, we are a long way away from that.

But, as one expert put it: nothing compares to the Appellate Body.


SOME TECHNICALITIESBack to top

Appellate Body members and their termsBack to top

Now: the depleted Appellate Body (2017–20, with no replacements or extensions).

Nationality Term of Office
Term to Nov 2020 (0 left)
Hong Zhao
.
China
.
Dec 1, 2016–Nov 30, 2020
Term to Dec 2019 (1 left)
Ujal Singh Bhatia
.
Thomas R Graham
.
.India
.
US
.
Dec 11, 2011–Dec 10, 2015;
Dec 11, 2015–10 Dec 2019
Dec 11, 2011–Dec 10, 2015;
Dec 11, 2015–10 Dec 2019
Term expired 2018 (3 left)
Shree Baboo Chekitan Servansing
.
Mauritius
.
.
2014–2018
.

.Before: when there were seven (1995–2017)

Nationality Term of Office
Term expired 2017
Peter Van den Bossche Belgium 2009–2013, 2013–2017
Ricardo Ramírez-Hernández Mexico 2009–2013, 2013–2017
Hyun Chong Kim Korea 2016–2017
Term expired 2016
Seung Wha Chang Korea 2012–2016
Yuejiao Zhang China 2008–2012, 2012–2016
Previous
David Unterhalter South Africa 2006–2009, 2009–2013
Shotaro Oshima Japan 2008–2012
Lilia R Bautista Philippines 2007–2011
Jennifer Hillman US 2007–2011
Luiz Olavo Baptista Brazil 2001–2005, 2005–2009
Giorgio Sacerdoti Italy 2001–2005, 2005–2009
Georges Michel Abi-Saab Egypt 2000–2004, 2004–2008
Arumugamangalam Venkatachalam Ganesan India 2000–2004, 2004–2008
Merit E Janow US 2003–2007
Yasuhei Taniguchi Japan 2000–2003, 2003–2007
John Lockhart Australia 2001–2005, 2005–2006
James Bacchus US 1995–1999, 1999–2003
Claus-Dieter Ehlermann Germany 1995–1997, 1997–2001
Florentino Feliciano Philippines 1995–1997, 1997–2001
Julio Lacarte-Muró Uruguay 1995–1997, 1997–2001
Christopher Beeby New Zealand 1995–1999, 1999–2000
Said El-Naggar Egypt 1995–1999, 1999–2000
Mitsuo Matsushita Japan 1995–1999, 1999–2000

Source: WTO


ZeroingBack to top

Zeroing
(Click the image to see it full size)

ZEROING
The most prominent cases involving “overreach” accusations are fiendishly complicated but at their heart are efforts to protect industries such as steel against competition from cheaper imports. The issue is “antidumping” actions and the US’s use of a method called “zeroing” to calculate tariffs imposed on imports in response.
.
Broadly speaking, “dumping” is when a product is exported more cheaply than its normal price. The exact meaning of a “normal” price is also complicated. It can be the price in the exporting country, or something different. (If you really want details, look for “normal value” here.) Let’s just say a dumped product is abnormally cheap, or even sold at a loss, to gain market share.
.
The WTO Antidumping Agreement allows countries to respond. They can impose import duties to offset the abnormally low price. But even alleged dumping prices fluctuate, as do the “normal values”. Sometimes they are below the normal price; sometimes they are above it. The solution is to calculate what has happened over a period of months, and use that for the tariff to bring the abnormally cheap price back to a normal level.
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Question: What do you do when the price is above the normal level, and there is no dumping?
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The simplest answer is: take an average, where the extent of dumping (the “dumping margin”) is positive (there is dumping) when the price is below the normal level and negative (there is no dumping) when it’s above. The offsetting duty is then that average.
.
The US method: do that, but if the price is above the normal level, then count the margin as zero instead of a negative amount. That’s “zeroing” and clearly it produces a bigger dumping margin — and a higher offsetting tariff — than in the straight average calculation. The US is saying when there is no dumping, that shouldn’t count towards the dumping margin.
.
The US approach has been challenged in a number of WTO disputes. In all or almost all cases the US has lost.
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US attempts to negotiate changes to the Antidumping Agreement in the WTO’s deadlocked Doha Round talks have also been blocked by other WTO members.
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In April 2019, the US Trade Representative’s Office hailed a finding by a WTO dispute panel, which overruled a previous Appellate Body judgement that “zeroing” was illegal. The case is DS534. In it, Canada complained about US anti-dumping calculations on imports of softwood lumber, the latest in a long series of disputes about lumber. The case has not concluded yet: Canada has appealed.


Find out moreBack to top


Updates: August 23, 2019 — correction to clarify that the proposal for voting is only for appointing Appellate Body judges; adding links to articles by Graham Cook, Simon Lester, Markus Wagner, Jennifer Hillman; adding Hillman’s warning about the Appellate Body not coming back; adding Lester’s “party modification” proposal as another possible solution. August 21, 2019 — adding link to Bacchus/Lester article.

Credits: Photos mostly CC0 (including boxer by Heloisa Freitas via Pexels and reaching hand by Gage Walker via Unsplash). Ujal Singh Bhatia from WTO


Author: Peter Ungphakorn

I used to work on trade issues and am now retired. I am an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions, with periodic analyses for AgraEurope www.agra-net.com/agra/agra-europe. This blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form or tweeting @CoppetainPU — Copyright © Peter Ungphakorn except where stated