Originally published as
“Alternative to the alternative: Turkey and EU use arbitration for WTO appeals”
and previously as one section in
“Arbitration — the stop-gap when WTO appeals are unavailable”
By Peter Ungphakorn
POSTED AUGUST 30, 2022 | UPDATED SEPTEMBER 26, 2022
Türkiye told World Trade Organization members on August 29, 2022 that it would comply with dispute rulings that said it was violating WTO agreements by giving preferences to locally-produced pharmaceutical products, even though the rulings have not been formally adopted.
So far, the case is unique among WTO legal disputes. It is the first use of appeal-by-arbitration as a route to a second legal opinion on a ruling, while the WTO Appellate Body cannot function.
And because at the time arbitration was the only route open to Türkiye to appeal the case, neither the first-stage “panel” ruling, nor the findings in the appeal, have been formally adopted by the WTO’s membership.
This raises questions about the status of the rulings in WTO law. When a ruling has been formally adopted, governments (and others involved in trade) can assess with a degree of confidence whether similar policies or measures comply with WTO agreements.
When the membership has not adopted a ruling, that confidence is weakened, although some legal experts suggest the difference is small. The US treats non-adoption as significant without explaining why.
Continue reading or jump to:
● The bilateral agreement
● First case: pharmaceuticals (DS583). Not adopted — Türkiye’s appeal | Appeal procedure | Panel ruling revealed by appeal-by-arbitration | Selection of arbitrators | No ‘adoption’ | Members’ comments | Secretariat support?
● Second case: steel tariffs (DS595). Adopted
The bilateral agreement
Türkiye’s statement to the August 29 session of the Dispute Settlement Body — the WTO membership meeting to oversee legal disputes — meant that two parallel cases brought by Türkiye and the EU against each other had concluded, except for the final steps of implementing the rulings.
They both came under a bilateral agreement on appeals for two specific legal disputes, where each had brought a case against the other.
- DS583 (an EU complaint about Türkiye’s measures on pharmaceutical products — rulings not adopted)
Türkiye appealed the panel ruling and therefore neither the panel ruling nor the arbitration decision was adopted by the WTO membership. They are not official rulings. See below
- DS595 (Türkiye’s complaint about EU “safeguard” tariffs on steel — ruling adopted)
The EU did not seek arbitration to appeal the panel ruling, so the ruling was adopted by the WTO membership and is therefore official. See below
The procedure that the EU and Türkiye had agreed was similar but not the same as the more well-known Multi-Party Interim Appeal Arrangement (MPIA) set up by a group of 50 WTO members — 30% of the membership — but not including Türkiye.
Both procedures use arbitration under WTO litigation rules (Article 25 of the Dispute Settlement Understanding, the WTO rule-book on legal disputes) as an alternative means of appealing.
The need arises because the US is blocking appointments to the Appellate Body, leaving it with no judges. Full-blown appeals in this situation simply disappear “into the void”.
In the same August 29 meeting but under a separate agenda item, the US blocked for the 57th time a call from a large majority of WTO members (126 out of 164, or 77%) for Appellate Body judges to be appointed.
The biggest difference between the EU-Türkiye procedure and the “multi-party” one is in the selection of arbitrators. Under the multi-party version, the arbitrators are picked from a list. The EU and Türkiye agreed on a complicated combination of arbitrators from the multi-party list and former WTO Appellate Body judges.
The two procedures also differ in how they refer to administrative and legal support, but both are unclear about what that means.
First case: pharmaceuticals (DS583). Not adopted
The appealed case is the first of the two, DS583 (Türkiye’s measures on pharmaceuticals).
Türkiye’s appeal
The appeal was lodged by Türkiye (at that time still “Turkey”) on April 25, 2022 under a bilateral agreement with the EU on appeals in two specific legal disputes, where each had brought a case against the other.
On May 4, the WTO announced the three arbitrators. They had been picked at random on April 28 and they were all men: South Korean Seung Wha Chang, Mexican Mateo Diego-Fernandez Andrade and Guohua Yang from China. (More below.)
Exactly three months after the appeal was filed, on July 25, 2022, the arbitrators issued their report (WT/DS583/ARB25 with annexes in WT/DS583/ARB25/Add — the code “ARB25” means this was an arbitration under Article 25 of the Dispute Settlement Understanding as an alternative to regular dispute proceedings.
The arbitrators upheld the panel’s conclusion that the local production (“localisation”) requirements set by Türkiye could not be justified under the exceptions of the General Agreement on Tariffs and Trade (GATT Article 20).
On August 22, Türkiye announced it would comply with the original ruling and the appeal by arbitration. This was placed on the agenda of the Dispute Settlement Body (DSB) meeting a week later, under the heading “implementation of the recommendations of the DSB”.
Before the meeting it was unclear what the Dispute Settlement Body’s recommendations would be.
As widely predicted, on August 29, the Dispute Settlement Body simply listened without making any decision or recommendation. It noted the statements made in the meeting and the information provided by Turkey on its intentions to implement of the recommendations and rulings of the panel and the arbitrators, and nothing more.
The follows what the EU and Türkiye wrote specifically in their agreement, that the arbitration ruling would not be adopted:
“15. The parties agree to abide by the arbitration award, which shall be final. Pursuant to Article 25.3 of the DSU [Dispute Settlement Understanding, the WTO agreement governing legal disputes], the award shall be notified to, but not adopted by, the DSB and to the Council or Committee of any relevant agreement.”
Appeal procedure
The EU and Türkiye had agreed on the procedure for appeal-by-arbitration in early 2022. The published procedure was specifically for this case, but with references to the other one, in a 5-page document (WT/DS583/10 of March 25, 2022).
Türkiye moved first, producing a document on April 25, which was circulated three days later. It was called a “notification of an appeal” — the phrase used for normal appeals — but in this case under the Dispute Settlement Understanding’s arbitration rules.
The document has a number of interesting features. (They are also described in this Twitter thread, while Simon Lester also commented on it in this blog post.)
This case began in 2019. The EU complained that Türkiye’s measures on pharmaceutical products discriminated against foreign products or producers, among other accusations. These included “localisation” conditions requiring local production in order to qualify for support, and banning imports that compete with localised products. Full details of the dispute are here.
Significantly, the move to arbitration took place before the panel ruling was circulated, a step copied from the Multi-Party Interim Appeal Arrangement.
Türkiye and the EU had received a confidential copy of the proposed ruling on November 11 the previous year. They then moved to ask the panel to suspend its work, pre-empting the ruling’s circulation.
The procedures agreed by the EU and Türkiye said that if the case was appealed, the panel’s report and ruling would be made public — which, crucially, is not the same as the panel circulating the report to the membership. Again, this was copied from the multi-party arrangement.
Panel ruling revealed by appeal-by-arbitration
So when Türkiye declared it was appealing by arbitration, only the first three pages were about the appeal. The remaining 144 pages consisted of the panel’s findings (with four annexes published here). This was necessary for the appeal to be understood. It also allowed everyone to see the report, and the WTO website could now publish a summary of the ruling, including this:
“On 25 April 2022, Turkey filed a notice of recourse to Article 25 under their agreed procedures. In their agreed procedures, the parties refer to this notice as a Notice of Appeal. This notice was circulated to the DSB [Dispute Settlement Body] on 28 April 2022. The notice includes the full text of the report transmitted by the panel to the parties, which is thereby made public even though it has not been circulated by the panel for the purposes of Article 16 of the DSU [Dispute Settlement Understanding]. The following is a summary of the panel report as included in the parties’ notice of recourse to Article 25: ….” [Hyperlinks added.]
The WTO webpage then proceeded to summarise the ruling itself, including this:
“The Panel upheld the European Union’s claim that the localisation requirement [foreign producers to commit to localise in Turkey in order to qualify for various support measures] is inconsistent with the national treatment obligation [non-discrimination between local and foreign suppliers] in Article III:4 of the [General Agreement on Tariffs and Trade, GATT] because it is designed to create a financial incentive for consumers to select domestically produced pharmaceutical products (the cost of which is mostly borne by the government) over imported pharmaceutical products (which over time will cease to be paid for by the government), and thus accords ‘less favourable treatment’ to those imported pharmaceutical products.” [Hyperlink added.]
Selection of arbitrators
The way arbitrators were chosen under the EU-Türkiye arrangement overlaps with the multi-party version. They were picked from a mixture of former Appellate Body judges and the multi-party arrangement’s list of arbitrators. How this works is complicated and is related to the other case, DS595, brought by Türkiye against the EU:
“7. The arbitrators shall be three persons randomly selected, in the physical presence of representatives of the parties, from a combined list of former Appellate Body Members and appeal arbitrators.4 The random selection will be conducted at the same time as the random selection in DS595 European Union — Safeguard Measures on Certain Steel Products, so as to ensure that one randomly selected appeal is heard by two former Appellate Body Members and one MPIA appeal arbitrator whilst the appeal in the other dispute is heard by one former Appellate Body Member and two MPIA appeal arbitrators. If there is only one appeal it will be heard by one former Appellate Body Member, one MPIA appeal arbitrator, and the third person shall be drawn at random from the remaining persons on the combined list. The random selection shall be made immediately after the filing of any notice of appeal and the arbitrators informed immediately.” (From WT/DS583/10)
4 JOB/DSB/1/Add.12/Suppl.5, 3 August 2020 [Hyperlink added]
In the end only this case was appealed by arbitration, and the three arbitrators picked were:
- Seung Wha Chang (former Appellate Body judge, a South Korean whose second term was blocked by the US)
- Mateo Diego-Fernandez Andrade (multi-party list, Mexican)
- Guohua Yang (multi-party list, Chinese)
(Full details blogged by trade lawyer Simon Lester.)
No ‘adoption’
The procedures that Türkiye and the EU agreed for appeal-by-arbitration said specifically that neither the arbitration ruling (the “award”) nor the panel report would be adopted by the WTO membership in the Dispute Settlement Body. This is why pre-empting the report’s circulation was significant legally — once circulated, the panel report had to be either adopted or appealed though the full Appellate Body system.
As would happen with arbitration under the multi-party procedure, the membership was simply informed of the result. The membership did not adopt the result. Whether this has implications for the body of WTO law and what might be called its “jurisprudence” is debatable.
For example, EU trade lawyer Lothar Ehring points out that both the panel and arbitration rulings are official WTO reports even if members have not “adopted” them.
In any case they can be cited in future disputes, although rulings that have not been adopted may be lower down in the hierarchy, says law professor Holger Hestermeyer or Kings College, London, in a series of tweets and replies.
Members’ comments
The fact that the rulings had not been adopted mattered to the US when it spoke in the August 29 Dispute Settlement Body meeting:
“In accordance with the parties’ agreed procedures, and consistent with Article 25.3 of the DSU [Dispute Settlement Understanding, the WTO agreement covering disputes], the arbitration award has not been adopted by the DSB [Dispute Settlement Body].
“Accordingly, the arbitration award does not contain ‘adopted recommendations or rulings’ within the meaning of the DSU.
“The United States therefore takes note of Türkiye’s statement today with respect to implementation of the arbitrator award, although we do not consider such statement of intentions as required under Article 21.3 of the DSU.” [Hyperlink added.]
The US was positive about the quick resolution — one of its concerns about formal appeals has been how they have repeatedly exceeded 90-day deadline, which is supposed to be absolute.
The US also pointed out that members have a range of options, including consultations and mediation.
But it did have some reservations. It said the bilateral agreement between the EU and Türkiye: “incorporated many of the most troubling practices of appellate review under the Appellate Body.”
It went on:
“The US concerns with certain practices of the Appellate Body are well known. We encourage Members to consider different approaches to resolving a dispute, rather than furthering the Appellate Body’s problematic interpretations or conduct. If a Member supports dispute settlement reform, then a bilateral arrangement presents a unique opportunity to explore alternative approaches.
“Nevertheless, we welcome the engagement between the parties to this dispute that led to the agreement.”
No one else seemed to have reservations.
Türkiye repeated its commitment to implement the ruling. It added that it was considering options for making its measures comply with WTO rules and would consult the EU on the “reasonable period of time” for doing so — the phrase used in the rules for implementing rulings.
The EU said the appeal by arbitration showed that a functional and efficient alternative exists when proper appeals are not possible, this one similar to the multi-party arrangement.
Japan had a similar reaction, adding that the appeal was settled quickly, within the target 90 days:
“Japan welcomes Members’ use of the Article 25-based arbitration as a means of dispute settlement under the current situation. The arbitration has played a provisional complementary role to review the appealed findings of the panel report during the time of the Appellate Body dysfunction. Moreover, thanks to the efforts of the Arbitrators and the Secretariat, the arbitration award was issued within the 90-day period, which contributed to the prompt resolution of the dispute. Japan positively appreciates these developments.” [Hyperlink added.]
(Trade lawyer Simon Lester has written this blog post on reactions, the prospects of the US using arbitration as a way to appeal, which he considers unlikely, and ongoing domestic pressure in the US to continue to block WTO Appellate Body appointments. Julia Qin followed up suggesting that nevertheless this might be a practical compromise solution to the Appellate Body deadlock.)
Secretariat support?
On one question the EU-Türkiye arbitration procedure is silent. This is whether whether the WTO Secretariat can provide any support, as it would have done in the initial panel stage. The EU-Türkiye procedures simply cross-reference the Working Procedures for Appellate Review:
“… the arbitration shall be governed, mutatis mutandis, by the provisions of the DSU and other rules and procedures applicable to Appellate Review. This includes in particular the Working Procedures for Appellate Review, …” [Hyperlink added]
But those working procedures refer to support from the Appellate Body Secretariat, which is semi-autonomous from the WTO Secretariat and is suspended along with the Appellate Body itself.
Some Secretariat staff are understood to have helped with the arbitration in this case (Türkiye’s “localisation” requirements for pharmaceuticals, DS583), although the details are hazy other than the fact that the arbitrators themselves took the lead.
The multi-party procedure deals with Secretariat support differently. It refers specifically to “appropriate legal and administrative support”, but leaves open the question of where that support would come from, except that it “will be entirely separate from” the WTO Secretariat.
Would it include seconding WTO Secretariat staff? Would the support come from some or all of the countries participating in the system? Who would pay for it? So far, those questions are unanswered, but the WTO Director-General is supposed to play a role:
7. The participating Members envisage that appeal arbitrators will be provided with appropriate administrative and legal support, which will offer the necessary guarantees of quality and independence, given the nature of the responsibilities involved. The participating Members envisage that the support structure will be entirely separate from the WTO Secretariat staff and its divisions supporting the panels and be answerable, regarding the substance of their work, only to appeal arbitrators. The participating Members request the WTO Director General to ensure the availability of a support structure meeting these criteria.
The US, which has previously questioned the implications for the budget if the Secretariat works on other forms of appeal, did not mention this issue in the August 29, 2022 meeting.
See also: Does ‘holding the pen’ give WTO staff too much power over disputes?
Second case: steel tariffs (DS595). Adopted
What about the other case (DS595 on EU steel tariffs)? This was about safeguard measures (contingencies to shield producers temporarily) on steel imports. The measures were 25% safeguard duties on imports, except duty-free allowed on limited import quantities (“tariff-rate quotas”).
Türkiye claimed the way the measures were constructed and applied did not comply with the General Agreement on Tariffs and Trade (GATT) and the Safeguards Agreement.
On April 29, 2022, the EU and Türkiye allowed the panel report in DS595 to be circulated, meaning neither of them would appeal because neither had asked for the panel to suspend its proceedings.
The panel concluded that some aspects of the EU’s measures complied with the two agreements covering safeguards, and others did not. For those that did not comply, the EU was required to make the necessary changes.
Because neither the EU nor Türkiye sought arbitration to appeal, therefore the panel report became a legal ruling adopted by the Dispute Settlement Body (ie, the WTO’s membership) on May 31, 2022.
On August 9, 2022, the EU and Türkiye announced they had agreed that the period for the EU to implement the ruling would be until January 16, 2023.
See also Arbitration — the stop-gap when WTO appeals are unavailable, and a longer piece on the problems in the WTO’s Appellate Body, which includes a reading list here. The Multi-party Interim Appeal Arrangement is listed among 18 “plurilaterals” in the WTO.
Updates:
August 31, and September 26, 2022 — adding the paragraph on Simon Lester’s post on the US reactions and the link to it; and then the link to Julia Qin’s follow up in the same paragraph
Originally:
Published on May 3, 2022 as Alternative to the alternative: Turkey and EU use arbitration for WTO appeals with these updates:
August 24–25, 2022 — adding the updates on the arbitrators’ report, Türkiye’s August 22 announcement on complying with the arbitration, and the agenda of the August 29, 2022 DSB meeting; and the summaries of the panels’ rulings. Some editing for clarity
May 6, 2022 — adding the list of picked arbitrators
Image credits: Photomontage uses: kirk-lai (steel) and Analuisa Gamboa (pills), Unsplash licence; flags public domain
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