Prospects for the Doha Round -Major Challenges in the Multilateral Trading System and their Implications for Japan-

KOTERA Akira, RIETI Faculty Fellow and Professor at the University of Tokyo Graduate School of Arts and Sciences, made a presentation titled "What should be Dispute Settlement? -- On the Purpose of WTO Dispute Settlement Mechanism." The following is a summary of his presentation.

The World Trade Organization (WTO) regime is characterized by the three concepts of liberalization, multilateralism and legalism. In this presentation, I will examine the WTO dispute settlement mechanism, which constitutes the backbone of legalism, in terms of what it is and how it should be in the future, as well as what we should seek to achieve in the ongoing round of negotiation, i.e. the Doha Development Agenda (DDA). The very reason why the dispute settlement mechanism serves as the backbone of the WTO regime lies in the fact that it is so frequently used. That is, whenever a dispute occurs between WTO members, it is settled through the dispute settlement process. However, negotiations on the improvement and clarifications of the dispute settlement mechanism, despite being designated as an "early harvest" in the DDA negotiations, are stuck in deadlock.

Within the WTO dispute settlement mechanism, panel and Appellate Body procedures are of particular importance as highly legal or quasi-judicial decisions are made through these two sets of procedures. The rate of compliance with such panel and Appellate Body decisions is extremely high at 80% or more. In addition, a set of specific procedures have been put in place to deal with cases where a losing party fails to comply with the rulings or recommendations of the DSB within a reasonable period of time. In this regard, the existing WTO mechanism is quite remarkable as an international dispute settlement system.

There are some arguments that generalize the WTO dispute settlement mechanism as a judicial process. In this presentation, however, I posit three conceptual axes to identify the nature and challenges of the mechanism. The first axis is whether rulings are subject to enforcement or agreement. While domestic dispute settlement procedures are usually underpinned by enforcement as the ultimate solution to a dispute, international disputes are ultimately solved by agreement. The question I am raising here, however, is not about a choice between agreement and enforcement. Rather it is the question of to what extent elements of agreement or enforcement should be incorporated. The second axis concerns the question of whether disputes should be settled prospectively or retroactively. Some people are critical of the current future-oriented dispute settlement mechanism, under which a complainant can demand compensation only for future damages even if it wins the case thereby allowing for "hit and run" behavior by the complained party. They argue that winning parties should be allowed to seek remedies for damages incurred in the past. At the same time, there also exists a separate argument questioning the rationale of a money-for-damage mechanism under which a violator can effectively do anything as long as they pay for it. Finally, the third axis is whether a specific case subject to settlement is simple or complex. Disputes vary widely in their nature ranging from very simple ones to very complex ones and the ways in which disputes are settled naturally differ depending on the degree of their complexity. The question of whether a certain dispute is simple or complex can be determined by whether the points of dispute are homogenous in nature or consist of multiple heterogeneous factors.

The WTO dispute settlement mechanism is remarkable because the enforceability of panel and Appellate Body rulings has been substantially enhanced: 1) it eliminates the need for an agreement between parties concerned with commencing dispute settlement procedures; 2) it allows the adoption of panel recommendations without consensus; and 3) it has institutionalized "retaliation" against non-compliance. However, this does not mean that the current dispute settlement mechanism lacks any element of agreement or consensus. Some elements do remain as to how parties consult on issues and comply with the rulings. Consequently speaking, the WTO disputes settlement mechanism can be defined as an agreement-oriented system supported by enhanced elements of enforceability. It is presumed that the speculative intention of Japan and Europe hoping to prevent the United States from taking unilateral measures, as well as the speculative intention of the U.S. hoping to realize an efficient system for enforcing implementation, contributed to the creation of the mechanism.

Another important feature of the WTO dispute settlement mechanism is that the whole set of procedures is future-oriented, i.e. intended to ensure compliance in the future. The hit-and-run problem has been pointed out in this respect. However, when it comes to solving a major dispute, the prevention of future damage would be more important than the compensation of past damage even in domestic judicial procedures. In this sense, the WTO dispute settlement mechanism may be viewed more positively than domestic procedures focusing on past compensation.

Concerning the nature of disputes, it can be pointed out that whereas a simple dispute can be solved legally, finding a legal solution becomes more difficult or even impossible based on the degree of complexity of a dispute. This can reach point where the WTO dispute settlement mechanism can do no more than provide a clue as to how to solve the dispute. For instance, an anti-dumping duty dispute is adjudicable because interpretation of the WTO Antidumping Agreement would be the sole point of contention. In contrast, it is extremely difficult to adjudicate a case involving the issue of trade and the environment because it brings up the complicated question of how the values and norms of trade can or should be reconciled with those of environmental conservation.

The issue of trade and the environment can be cited as the foremost problem facing the WTO dispute settlement mechanism. For instance, in the famous tuna-dolphin case, the U.S. ban on the import of tuna caught in a means harmful to dolphins -- a measure implemented to protect dolphins -- was found in violation of the General Agreement on Trade and Tariffs (GATT) and the ruling sparked a wave of criticism from environment protection groups. The nature of this problem, however, is not the right or wrong of the ruling in substance, but boils down to the question of to what extent the WTO, as a dispute settlement mechanism, is able to ensure the legitimacy in its ruling. Other challenges facing the WTO include: 1) non-implementation with DSB rulings and recommendations that is occurring against the backdrop of a highly automated dispute settlement process; 2) the occurrence of cases in which the panel/Appellate Body rulings deviate from what had been intended by the drafters of the GATT/WTO rules, particularly in agricultural issues; and 3) emerging north-south gaps -- i.e. between developed countries such as the U.S. and the European Union and developing countries -- in the degree of ability to utilize the dispute settlement mechanism.

Confronted with the range of problems discussed above, a series of arguments has been made concerning how to ensure procedural justice comparable to that of judicial procedures. There have been arguments calling for introducing amicus curie briefs, establishing a permanent panel in replacement of the current ad hoc panel system, and opening up dispute settlement proceedings. All these arguments, though different in specifics, can be generalized as an assertion that the WTO dispute settlement procedures should be made more similar to court proceedings. Meanwhile, as a means to counter the hit-and-run problem, some insist that procedures for seeking compensation for damage be established. With respect to this argument however, it should be noted that the creation of such a money-for-damage mechanism would give rise to another question: Should a country be allowed to do anything as long as it pays for it? Such a question also concerns the fundamental issue of whether the WTO dispute settlement procedures should be made more similar to court proceedings. Member countries are generally satisfied with the current level of enforceability yet some countries deem it necessary to create a compensation mechanism.

It is presumed that "complicated disputes" such as those involving the issue of trade and the environment are, to some extent, being coped with by acknowledging the independence of non-trade values, such as that of the environment. However, there is a strong likelihood that some trade measures will turn into an issue, for instance, under the compliance mechanism of the Kyoto Protocol (an international treaty designed to limit global greenhouse gas emissions).

Other challenges such as the question of whether and/or how to facilitate the use of the dispute settlement mechanism by developing countries do exist. However, being low on most Members' priority lists, these are generally considered as issues that could be just as well taken up or foregone in the ongoing round of negotiations.

The three characteristics of the WTO -- liberalization, multilateralism and legalism -- will likely continue to survive in the future, which means that the WTO dispute settlement mechanism has taken root. Also, with the WTO playing a benchmark role, the phenomenon of a dispute resolution system as key in defining international economic relations has been spreading in areas other than trade, as exemplified by the arbitration system under the North American Free Trade Agreement (NAFTA). Finally, there is the question of whether the WTO dispute settlement mechanism should evolve into a system similar to the Court of Justice of the European Communities. This question -- though hitherto prevented from surfacing thanks to strenuous efforts by WTO panels and the Appellate Body to deal with the issue of trade and the environment -- will probably become the largest political challenge in the future. The question might arise, for instance, in the context of its relation to the Kyoto Protocol. And this would entail a trade-off relationship between how to secure procedural justice and how to keep the dispute settlement mechanism as efficient as the one we have today both time- and cost-wise. When matters reach this point, the WTO member countries will have to make serious efforts to seek a new consensus as to how they envisage the future of the dispute settlement mechanism.

In response to the above presentation, KAWASE Tsuyoshi, RIETI Faculty Fellow and Associate Professor of Law at the Osaka University Graduate School of Law and Politics, made the following comments.

Based on my experience of having been engaged in negotiations on improvements to the Dispute Settlement Understanding (DSU) in the Doha Round, I would like to comment on the directions envisaged by WTO member countries in making changes, with respect to some of the key variables presented by Professor Kotera, namely, "legitimacy," "future-orientedness" and so forth.

Regarding whether or not to further juridify the WTO dispute settlement process and turn it into a system closer to court proceedings, there exists a serious philosophical conflict between the U.S. and Europe. The U.S. believes that the current WTO dispute settlement mechanism has already gone too far in terms of procedural autonomy. Thus, it is proposing that "legitimacy," as referred to in Professor Kotera's presentation, be secured by allowing WTO members to control panel and Appellate Body decisions to some extent. In contrast, the European Communities (EC) is insisting that neutral and more specialized quasi-judicial proceedings be introduced as a means to ensure procedural "legitimacy." Specifically, the EC is calling for a turn of current ad hoc panels into a permanent panel or enabling the Appellate Body to remand cases to the panel. Meanwhile, on the question of procedural transparency, there is a serious north-south conflict. The U.S. and European countries are in general consensus on the need to ensure transparency by institutionalizing the filing and handling of amicus curiae briefs and making documents and dispute settlement procedures open to public scrutiny, steps considered with the presumption of civil society participation. Developing countries, however, remain distrustful of developed countries' motives. Thus, it is extremely difficult, if not impossible, to build consensus on this matter.

The problem of nonimplementation, pointed out by Professor Kotera, is partly caused by the limitation of the current "future-oriented" enforcement system, which was also referred to in his presentation. In this regard, Mexico has proposed a certain method of calculating the amount of retroactive remedies, and developing countries are generally enthusiastic about introducing collective sanctions and monetary compensations. However, it is least likely that the U.S., which has been increasingly subjected to sanctions in the recent years, can be persuaded into accepting such a "past-oriented" dispute settlement mechanism.

Finally, in the ongoing negotiations on the dispute settlement mechanism, developing countries are calling for human and financial contributions to their capacity building for dispute settlement. It is hoped that Japan will make active contributions in this regard, for instance supporting the Advisory Center on WTO Law in Geneva.

KOMETANI Kazumochi, of counsel at Nishimura & Partners and Professor at Hosei University Law School, made the following remarks.

I would like to comment based on my practical experience in international trade law as an administrator at the Ministry of Economy, Trade and Industry and a legal affairs officer at the WTO's Legal Affairs Division.

I generally agree with the points made by Professor Kotera with respect to problems faced by the WTO today, particularly with the view that how to deal with the so-called complicated cases, which are increasing in number today, will be a major challenge for the dispute settlement mechanism. However, I disagree with the direction of solution suggested by Professor Kotera, i.e. substantive legitimacy is hard to achieve and thus the "legitimacy" should be ensured by improving procedural justice. I disagree with his view based on: 1) the fundamental question as to whether the problem can be solved by improving procedural justice and 2) the practical question as to whether Japan will be able to keep up with the evolution of the dispute settlement mechanism if the problem is actually solved in such a direction.

In considering the question of whether the improvement of procedural justice can solve the problem, we should note that the fundamental premises underlying the idea of juridification are that the question of value judgment has been basically solved by agreement and that the remaining problem of legal interpretation is a technical issue and thus can be left to the judicial body. In reality, however, the interpretation of WTO provisions is inseparable from the question of value judgment, for instance, on the balance between the benefits of international trade and a nation's sovereignty over domestic regulations. As such, decisions made by a panel or the Appellate Body are hardly different from value judgments. Naturally, domestic courts also face and handle the same sort of problems. But unlike domestic courts or the EC, it is questionable that the WTO, a collective body made up of a number of countries with diverse values, has any common value.

Finally, given the reality that Japan has used the WTO dispute settlement mechanism less frequently and lacks legal experts specializing in WTO rules as compared to the EC and the U.S., it is questionable whether Japan will be able to keep up when things begin to move toward pursuing procedural justice.

FURUSAWA Taiji, Professor at Hitotsubashi University's Graduate School of Economics, made the following remarks.

In response to Professor Kotera's presentation, I would like to comment on the future direction of the WTO dispute settlement mechanism.

Thinking about the future direction of the WTO dispute settlement mechanism, we should note that the mechanism must be designed in a way of strengthening the international cooperation regime under the WTO. And the mechanism to sustain international cooperation is to punish countries deviating from the agreements and to appeal to morality.

Two roles can be envisioned for dispute settlement: 1) making court-like decisions as to whether or not a certain act of violation has occurred in relation to imposing punishment, and 2) formulating the future code of conduct through accumulating precedents in relation to appealing to morality.

Article XXIII of the GATT stipulates that any contracting party may seek settlement through the WTO dispute settlement procedures if it believes its trade interests are being adversely affected as the result of: (a) the failure of another contracting party to carry out its obligations under the GATT/WTO rules, (b) the application by another contracting party of any measure whether or not it conflicts with the provisions of the GATT/WTO rules, or (c) the existence of any other situation. Cases falling under (a) can be defined as simple disputes whereas the degree of complexity increases for those falling under (b) and (c) in that order, meaning that those falling under (c) are the most complex.

As far as simple disputes are concerned, there is little need for concern and it is considered advisable to impose sanctions as automatically as possible particularly in terms of preventing future deviations. Monetary punishment would be a desirable form of prevention in view of the need to promote the use of the WTO dispute settlement mechanism by developing countries.

With respect to more complex disputes, what is right cannot be determined in most cases and therefore the imposition of sanctions would not necessarily be desirable. Rather, it may be possible to establish a more powerful cooperation regime by appealing to the morality of each member country through the accumulation of precedents and discussions thereof.

The followings are Professor Kotera's response to the remarks made by the above three commentators.

The comments made by RIETI Faculty Fellow Kawase are supplementary to my presentation and I fully agree with his perception.

Regarding the points made by Counsel Kometani concerning the direction of solution, I believe that it would be most desirable if we could solve the problem in amending or establishing the norms. But the question is what would be necessary if we cannot solve the problem in such ways, and decisions are still left to the dispute settlement mechanism. Or what would be necessary to enable WTO panels and the Appellate Body to make circumventive decisions -- i.e. decisions based on interpretation of WTO provisions -- on sensitive issues involving policies of a concerned member country.

Professor Furusawa's comments are very clear but I find certain gaps between what he said and what we see in reality. First, disputes that would pose a complicated problem are those in which a complainant country would not know if there is a chance of winning, or it is unclear whether a certain act of a defendant country actually constitutes a deviation. Second, accumulation of precedents would not necessarily lead to the development of morality. Third, there is the question of whether a nation -- a very complex entity -- will be coaxed into compliance simply by the threat of punishment.

A question from the floor asked about the desirability and possibility of introducing a system in which concerned parties may select dispute settlement procedures.

Firstly, do you believe that the EC would still insist on the introduction of the quasi-judicial model even, for example, in the settlement of the dispute over its ban on the import of hormone-treated beef?

Secondly, we can see how the nature of respective disputes handled by the WTO is getting complex. In this circumstance, would it be desirable or possible to introduce a system in which parties to a specific dispute are allowed to choose settlement procedures, as is the case for disputes under the Law of the Sea Convention?

In response to this, Professor Kawase and Professor Kotera respectively made the following remarks.

Professor Kawase: There is a good possibility that the EC will deviate from its stance on the quasi-judicial model in cases such as the hormone dispute. But, on the other hand, it should be noted that the EC and Japan have had to file numerous complaints against the U.S. in very simple cases such as disputes over the abuse of antidumping and safeguard measures. In view of this reality, the EC seems to see the medium-term benefits of a very automatic and enforceable quasi-judicial dispute settlement system which would reinforce sanctions against noncompliance. With respect to the possibility of introducing alternative dispute settlement procedures, developing countries have been calling for greater use of good offices, conciliation and mediation provided for under the current WTO Dispute Settlement Understanding (DSU). In addition, Article 25 of the DSU sets down procedures for arbitration, an alternative means of dispute settlement which, unlike normal panel/Appellate Body procedures, may be applied based on the mutual agreement of the parties to the dispute. Arbitration under Article 25 of the DSU has been used once for settling the U.S.-EC dispute over Section 110 of the U.S. Copyright Act to calculate a proper amount of monetary compensation. My personal view is that it is worthwhile considering more active use of such procedures in dealing with politically sensitive disputes.

Professor Kotera: For the moment, we have a consultation process at the WTO and it will be quite possible to have a neutral individual get involved in that process, that is, to incorporate an arbitration procedure into the WTO consultation process. Considering the popular use of such a procedure in Europe, there is a high possibility that the Europeans will come up with such a proposal.

The following exchanges were made between I. M. DESTLER, Professor at the University of Maryland's School of Public Affairs, and Faculty Fellow Kawase.

Professor Destler: Based on its track record as well as on what have been suggested by public polls and other indicators, the U.S. has hitherto maintained a relatively high level of compliance with the results of dispute settlement at the WTO. Presently, however, there exists a certain disparity in cases involving the U.S. and there is a possibility that this disparity may evoke some problems in the future. That is, whereas there is the tendency that a complainant wins in 80% of the cases involving the U.S. either as the complaining party or the party complained against, the number of cases initiated by the U.S. has been decreasing since ever the inauguration of the Bush administration. Should those in the U.S. trade community -- if not Americans in general -- come to view the WTO dispute settlement procedures as something used against the U.S., or should they come to think that the U.S. is not sufficiently utilizing the procedures, it could bring a significant impact in the future.

Professor Kawase: I agree that the U.S. has been, in general terms, respecting WTO decisions and supporting the WTO. But when we look at the current state of implementation in the U.S., we can see that there are many cases of nonimplementation where an amendment of law, hence the approval of the Congress, is required to implement the WTO recommendations. I think this indicates that the U.S. Congress is dissatisfied with the way disputes are settled at the WTO.

Professor Destler: It is true that the U.S. has been in default on many such cases. In this regard, I would propose the use of "fast track" procedures, that is, to give the U.S. president authority to change American laws. Meanwhile, as to the question of how soon the Byrd Amendment will be abolished, I would say that the most practical possibility is to do this by inserting provisions to that effect in a law for implementing the agreements of the Doha Round.

A question from the floor asked for clarification of (1) the argument questioning the rational of a money-for-damage mechanism under which violators can effectively do anything as long as they pay for it and (2) the argument that the WTO dispute settlement mechanism, which is a framework for a state-to-state dispute, has played a benchmark role for an arbitration system for investment disputes, a framework for a dispute between a private person and the state. To this, Faculty Fellow Kotera responded as follows.

The argument concerning the possibility of money-for-damage compensation resulting in "no-holds barred" tactics by intentional violators does not exist for domestic dispute settling procedures. When we look at the international community as it stands today, however, no distinction is being made between civil and criminal cases, there is almost no case in which cross-border compensation has been paid, and there exists no institutional mechanism for compensation payment. That is, we have a situation where it is to some extent conceivable that some countries think they can do anything as long as they pay for it. The intent of my remarks about this was to pose the question as to whether we can solve problems in the international community, which is premised on the existence of sovereign states, by establishing an automatically enforceable compensation payment system as I believe that the element of agreement is and will continue to be crucial to solving international disputes.

With respect to the second question, the WTO dispute settlement mechanism has often been brought up as a model in the context that a function similar to the WTO Appellate Body should be established to solve investment disputes. This is because the relationship between investment and the environment has become a major issue in investment disputes and yet, under the current system, decisions differ from one case to another. Also, the WTO dispute settlement mechanism has been referred to in discussions of the transparency of dispute resolution, specifically in arguments calling for a system in which public opinions will be reflected in decisions on grave issues -- such as those concerning the environment and investment -- rather than leaving them to be solved between parties -- i.e. a state and an investor -- to each specific dispute.

A question from the floor asked about the tendency among the WTO member states to abuse the dispute settlement mechanism and measures required.

While many disputes brought to the WTO are purely based on a difference in the interpretation of certain provisions, there have been cases in which an intentional violator uses the dispute settlement mechanism (as a means to postpone taking remedial measures). Is the tendency toward such abuse strong? If so, what measures are required to prevent this?

To this, ARAKI Ichiro, Professor at Yokohama National University's International Graduate School of Social Science, and Counsel Kometani responded as follows.

Professor Araki: I am not sure whether the word "abuse" is appropriate to refer to the use of the dispute settlement mechanism in the manner described just now. My impression is that such use of the dispute settlement mechanism is not so abnormal in the eyes of diplomats in Geneva.

Counsel Kometani: I basically agree with what Professor Araki said. It is difficult to say anything definitive because there are no such cases that are unquestionably driven by a single motive.