By Christmas 2019 the WTO was supposed to be dead — why wasn’t it? A short explanation

Reports of the WTO’s demise are premature. Yes, dispute settlement is in trouble, but even that can hobble on

Not even for WTO disputes: Santa won’t deliver the knockout punch

By Peter Ungphakorn
POSTED AUGUST 21, 2019 | UPDATED FEBRUARY 13, 2021

This short explanation skims the surface of some pretty complicated issues. If you want more detail, with more links and references,
then try this longer version
.
See also:
How the WTO deals with problem trade measures—it’s not just dispute settlement and The WTO is surprisingly busy — considering it’s supposed to be dead

The doom-mongers had already written off the WTO. From December no new appeals in WTO disputes would be possible and the whole organisation would grind to a halt, they claimed. They were wrong.

The problem is with the appeals stage of WTO legal disputes. Some countries are finding ways to work around that. WTO disputes cannot be the same without a properly functioning Appellate Body, but they can continue even if the system is weaker.

As for the rest of the WTO’s work, it does not rely on dispute settlement. True, member countries participate in those functions more confidently if they know the disputes system is working well, but it will still take years before they lose confidence so badly that they give up on the WTO altogether.

What are WTO ‘disputes’?Back to top

JUMP TO
What are WTO ‘disputes’?
What is the present crisis?
What’s the US’s complaint?
What’s the Appellate Body’s defence?
Possible solutions
Alternatives
To sum up
More?

SEE ALSO
• A more detailed version of this
Arbitration — the stop-gap when WTO appeals are unavailable
Appeals ‘into the void’

They are not about any old disagreement between WTO members.

WTO dispute settlement is only about claims that a country has broken its promise to fellow-members by violating WTO agreements (often called “WTO rules” for short).

WTO Disputes can go through up to two stages. Some are settled out of court even before they get to the first stage.

The two stages are:

  • Hearings and a first ruling (a “report”) by a panel of three experts.
  • Appeals (optional) heard by three out of the seven judges in the Appellate Body (Appellate Body “members”). Appeals are only on points of law, not evidence.

There are timetables and other procedural details for disputes (outlined here).

One important point is that the whole system is managed by the WTO’s membership (currently 164), meeting as the Dispute Settlement Body.

WTO members have agreed that they will adopt rulings semi-automatically: the rulings can only be rejected by a consensus among the membership, meaning if only one country accepts the ruling — ie, refuses to reject it — then there is no consensus, and the ruling is adopted. That applies to first-stage panel rulings, or panel rulings as modified by an appeal, if there is one.

What is 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 — appeal — that’s in trouble. Some countries are now exploring ways to bypass the problem.

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. Up to December 10, 2019, there were only three left. Then in 2020 there was only one is left — too few for appeals to be heard — and now none.

There has been no change of heart from the US, so for now new appeals are not possible. Worse, some first-stage panel rulings have been appealed “into the void”, stopping all proceedings and leaving the cases unresolved.

Eleven of 14 existing appeals were suspended except three that were close to completion, including one on Australia’s law on plain packaging for cigarettes (now due to be completed by the end of March 2020)

Overreach: is the Appellate Body rewriting WTO rules?
Overreach: is the Appellate Body rewriting WTO rules?
What’s the US’s complaint?Back to top

To sum up some pretty complex legal arguments:

Re-writing WTO law. The US accuses the Appellate Body of rewriting the rules by trying to fill in the 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 their terms have also expired. But with only three judges left and a growing backlog of appeals, meeting the deadline is now impossible.

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

Underlying the US complaints is discontent about losing some specific cases, particularly over tariffs a country can raise against imports that are considered to be sold at unfairly cheap prices — known as “dumping”. The main point of contention is the methods used to calculate the scale of “dumping” and therefore the size of the tariff imposed to offset it.

The US uses a method called “zeroing”, which overlooks prices that are higher than the norm and treats the scale of dumping in those instances to be zero rather than “negative” dumping. Other countries oppose zeroing because it artificially produces a higher tariff. (Zeroing is explained in more detail here.) Almost all dispute rules on zeroing have gone against the US. But it has not raised this issue specifically in the more generalised discussion over reforming the Appellate Body.

Note that this started before Donald Trump’s presidency, during the Barrack Obama administration.

The Appellate Body Secretariat. In early December 2019, days before the Appellate Body was due to lose its quorum, news broke of a bombshell.

One of the two Appellate Body judges whose terms were about to expire, the US judge Thomas Graham was reported to have demanded that WTO Director-General Roberto Azevêdo fire Werner Zdouc, the head of the Appellate Body’s Secretariat.

Behind the scenes, the US had long blamed Zdouc, a civil servant, for interfering in appeals, including “overreach”.

Azevêdo is said to have refused. Graham then said he would stop working completely on December 11 even though rules allow Appellate Body judges to continue to work on appeals they had already started.

By then 14 appeals were listed as incomplete on the WTO website, among them one on plain packaging for tobacco products.

At the same time, the US was reported to have threatened to block the WTO budget for 2020–21, and then the 2021 portion only, subject to tough conditions including slashing the allocation for the Appellate Body.

What’s the Appellate Body’s defence?Back to top

Appellate Body chair Ujal Singh Bhatia says interpreting unclear WTO agreements is a specific task in dispute settlement rules and is not the same as filling in gaps in WTO law. Clarification is needed particularly when the rules have deliberately been written ambiguously, he says.

This kind of fudge is known as “constructive ambiguity”. It allows negotiators to claim that they got what they wanted by interpreting the agreement in their favour. It’s one reason why cases end up in the WTO court.

The differences over clarifying the rules boil down to a question of how much interpretation still preserves the balance of rights and obligations struck in negotiated agreements, and when it steps beyond that into creating new rules.

Challenge of ambiguity: speech launching Appellate Body annual report, 2017 | Photo: WTO
Challenge of ambiguity: speech launching Appellate Body annual report, 2017 | Photo: WTO
Possible solutionsBack to top

WTO members are now trying to break the impasse through talks coordinated by New Zealand ambassador David Walker, who chaired of the Dispute Settlement Body in 2019–20 and became General Council chair in early 2020.

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, re-writing WTO law, 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 with a new US administration and a revival of faith in rules-based multilateralism, but even that is uncertain.

AlternativesBack to top

So far, two serious alternatives have been agreed by some countries to bypass formal appeals. Patches like these could keep dispute settlement going, but they lose some of the strengths of the formal appeal system:

  • Appeal, but in a different way — through arbitration (under Article 25 of the WTO dispute settlement agreement, officially an “Understanding”). This approach has been developed into a text by a group of WTO members released on April 30, 2020, as a way to appeal cases against each other while the Appellate Body cannot function. By August 3, 2020, the group had expanded to 50 members (counting the EU as 28).
    .
    This solution makes appeals possible, but neither the first-stage panel ruling, nor the appeals judgement is “adopted” by the WTO membership. The rulings do not become part of WTO legal jurisprudence. (More in this here)
    .
  • Just don’t appeal — by agreement. The first case where this has happened is in a dispute involving Indonesia and Vietnam, over iron and steel “safeguard” measures. They have agreed that if the Appellate Body is not functioning, they will simply accept the first-stage panel ruling. Because the panel’s report is formally adopted by the membership, it becomes part of WTO legal jurisprudence. But this method loses the opportunity to double-check a ruling.

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, for a full legal ruling, although the US and South Korea have now agreed not to appeal an arbitration decision on whether the US has complied in a case it lost.

Meanwhile, New Zealand Ambassador David Walker has been consulting WTO members informally on a possible solution. On October 15 and December 9, 2019, he circulated a proposed General Council decision that would allow Appellate Body vacancies to be filled, in return for new disciplines to deal with the concerns of the United States and others. The US remained dissatisfied. Details are here.

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 since only a tiny number of trade measures become legal disputes, most potential problems defused in regular committees (more here). 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.

See also this Twitter thread:

More?Back to top

A reading list is here


Updates:
February 13, 2021 — adding “appeal into the void”
August 3, May 3, March 27, January 24, 2020 — updating the section on appeal by arbitration.
February 15, 2020 — adding link on US-S.Korea agreeing not to appeal arbitration on implementation.
December 13, 2019 — updating on developments after two of the last three terms expired, including work continuing on three appeals
December 10, 2019 — adding the reference to the December 9 General Council meeting, with a minor revision to “To sum up”
December 3, 2019 — adding the section on US judge’s demand that the head of Appellate Body Secretariat be sacked
November 1, 2019 — adding link in “To sum up” section to data on low number of disputes compared with measures introduced
October 21, 2019 — adding sentence on EU-Norway agreement to use arbitration
October 17, 2019 — adding the paragraph and link on David Walker’s consultations and proposed decision

Image credits:
Photos CC0 (pencil and notebook by Angelina Litvin via Unsplash), except Ujal Singh Batia, from WTO

Author: Peter Ungphakorn

I used to work at the WTO Secretariat (1996–2015), and am now an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions. (Previously, analysis for AgraEurope.) Trade β Blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form on the blog or tweeting @CoppetainPU