On June 27, 2022, the Subcommittee on Unfair Trade Policies and Measures of the Trade Committee under the Industrial Structure Council of the Ministry of Economy, Trade and Industry (chairman: Kimura Fukunari, Professor, Keio University) approved the Interim Report of the Special Task Force on Policy Response under the Suspension of the Function of the WTO Appellate Body, which was released immediately. Japan has placed emphasis on the rule of law under the multilateral trading system centered around the World Trade Organization (WTO). However, in recent years, the WTO regime has been rocked by the unilateralism of the United States and China and the paralysis of the WTO’s Appellate Body. The report recommends the Japanese government to seriously consider the possibility of (1) participating in the alternative appeal arrangement led by the EU and (2) introducing countermeasures against WTO member countries that file so-called appeals into the void (to be explained later), in order to restore the rule of law under the multilateral trading system.
The report reflects the results of broad discussions held by a task force comprised of law, economics and political science academicians as well as experts from industry on the pros and cons of those policy options. I contributed to the compilation of the report as the task force’s chair. Below, I will provide an overview of the report’s message, which could trigger a major turning point in Japan’s trade policy.
Restoring “Rule of Law” through MPIA
Two and a half years have passed since the WTO’s Appellate Body ceased to function at the end of 2019. The United States has alleged that the Appellate Body overreached its mandate, as its judicial activism creates new rules that go beyond the WTO Agreements as generally interpreted. As a result, since 2017, the United States has blocked the appointment of members to fill vacancies in the Appellate Body that have arisen due to the expiry of terms of office, creating a void and throwing the body into paralysis. While countries involved in disputes have retained the right to appeal against panel decisions with which they are not satisfied, there is no prospect for the gutted Appellate Body to begin deliberation in response to appeals. Consequently, “appeal into the void” cases have occurred, in which appeals are filed but disputes are left pending indefinitely. In the past two and a half years, more than 20 cases have been left in limbo in this way.
What is even more serious is that the number of disputes referred to the WTO has declined steeply in the meantime. During the period from the WTO’s establishment to 2019, around 22 or 23 cases were referred to the WTO each year on average. However, the number was only five in 2020 and nine in 2021. If appeals into the void are highly likely to lead to a stalemate in dispute settlement, contesting disputes at the WTO becomes a futile effort, so there would be no incentive for countries to do so.
In April 2020, the EU, concerned over the collapse of the rule of law, exercised leadership in concluding the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), under which like-minded countries have agreed on alternative appeal procedures that are to remain in effect during the paralysis of the Appellate Body (Note 1). The MPIA’s membership includes 25 countries/regions, including the EU, Australia, Brazil, Canada, China, Mexico, and Singapore. On the other hand, India, South Korea, the United Kingdom, the ASEAN member countries, and Japan, not to mention the United States, have stayed outside the MPIA (Note 2).
Article 25 of the Dispute Settlement Understanding (DSU), which prescribes the dispute settlement procedures under the WTO, provides for flexible arbitration procedures that are not constrained by the standard procedures. This provision is used in order to conduct arbitration under the MPIA as an alternative to the standard appeal procedure. In other words, any party to a dispute that is not satisfied with decisions by a panel of first instance refers its case to an arbitration procedure under the MPIA instead of appealing to the Appellate Body and undergoes a review process like the one implemented by the Appellate Body. The standard appeal procedure applies mutatis mutandis to cases contested under the MPIA in principle. However, in response to U.S. criticisms against the Appellate Body, procedural improvements have been made in order to speed up the appeal review process in particular. The improvements serve as a forerunner to reform of the Appellate Body.
It goes without saying that the MPIA is not an ultimate and perfect solution. Although the United States has at long last set out to discuss the Appellate Body issue with other WTO member countries over the past several months, the discussions are far from starting in earnest. At the 12th WTO ministerial conference (“MC12”) held in June, a ministerial declaration was issued for the first time in six and a half years. Under the declaration, the ministers agreed to aim to put into place a fully functioning dispute settlement system by 2024 (Note 3). However, at a meeting of the WTO Dispute Settlement Body (DSB) that was held immediately after the ministerial conference, the United States did not necessarily show a positive stance toward reform (Note 4), nor did it have shared ideas with China and the EU on what role the Appellate Body should perform or how the body should operate. As a result, there is uncertainty over the future of the reform of the Appellate Body. If appeals into the void continue to pile up in the meantime, resulting in a further decline in the effectiveness and credibility of the WTO’s dispute settlement process, the rule of law under the multilateral trading system will be lost.
For Japan, there is no option left other than to help restore the rule of law under the multilateral trading system, albeit on a provisional basis, by participating in the MPIA. There is no doubt that Japan is among the countries that have received the greatest benefits from the Appellate Body’s dispute settlement process, and therefore, the restoration of the judicial procedures through the MPIA will be in its national interests (Note 5). Moreover, from the viewpoints of economic clout and policy philosophy, engaging in a power game under unilateralism on the strength of a huge domestic market, as the United States and China are doing, is not an option available for Japan.
Why has Japan until now refrained from participating in the MPIA in the first place? There has been much conjecture, such as: that participating in the MPIA, which the Trump administration condemned as “the China-EU arrangement”(Note 6), would be regarded as an act of switching allegiance from the United States to China, or that Japan was expecting the United States to set about reforming the Appellate Body earlier, following the transition from the Trump administration to the Biden administration. However, as resorting to unilateralism is not an option for Japan as was explained above, the country’s interests are not aligned with U.S. interests in terms of maintaining the rule of law under the WTO regime. If Japan continues to be preoccupied with the intentions of the United States, which is lukewarm about reforming the Appellate Body, its trade interests will only be undermined by protectionist measures taken by other countries while the shaky rule of law remains unattended.
Indeed, Japan has already suffered material damage from appeals into the void. In each of Korea — Stainless Steel Bars (DS553) and India — Steel and Iron products (DS518), a panel report favorable for Japan has been issued, but the defendant has filed an appeal into the void, with no prospect in sight for settlement. In addition, China — AD on Stainless Steel (Japan) (DS601) is ongoing. If the current situation continues, even if a decision in favor of Japan is made, China may file an appeal into the void. If that prospect is to be avoided, Japan will have no option but to join the MPIA, as China has.
For Japan, which is particularly dependent on trade with China, the WTO’s dispute settlement process is indispensable as a policy tool to counter unfair Chinese trade practices. On the whole, China is satisfied with the performance that the Appellate Body has so far shown, and therefore, it joined the MPIA. Moreover, China aims to expand its discourse power under the international trade regime through its existing membership in the WTO and its future participation in the CPTPP (Note 7). As a result, China is expected to show some degree of respect for decisions made under the MPIA. If Japan continues to stay out of the MPIA all the same, that would be tantamount to abandoning an effective option in its trade policy toward China. Indeed, the EU and Australia have filed complaints with the WTO against Chinese measures suspected of being tools of economic coercion—trade sanctions against Lithuania imposed against the backdrop of the Taiwan issue in the EU’s case (DS610) and antidumping and countervailing duties imposed on Australian wine and barley in relation to Australia’s demand for China to investigate the origin of COVID-19 (DS598/602)—as they expect to achieve effective dispute settlement using the MPIA.
Develop Countermeasure System against Appeals into Void to Ensure Effectiveness of MPIA
The task force report also recommended that the government should consider the possibility of Japan introducing a countermeasure system against appeals into the void. The proposed countermeasure system would be targeted at countries that impede dispute settlement by filing appeals into the void against decisions delivered in panel reports. The EU introduced such a countermeasure system in February 2021 (Note 8), followed by Brazil.
As indicated by the abovementioned cases involving South Korea and India, even if Japan has joined the MPIA, a defendant may file an appeal into the void so long as it remains outside of the arrangement. To ensure the effectiveness of the MPIA, it is prerequisite to develop a countermeasure system and have defendants join it or another alternative appeal arrangement or commit themselves to other forms of constructive dispute settlement. For example, in Turkey — Pharmaceutical Products (EU) (DS583), Turkey, which was not participating in the MPIA, agreed to an arbitration procedure comparable to the MPIA as an alternative to the standard appeal procedure. While the reason that Turkey agreed to that procedure is not necessarily clear, the EU’s countermeasure system is considered to have been a factor.
In the 1970s and 1980s, Japan struggled to deal with unilateral countermeasures taken by the United States under Section 301 of the U.S. Trade Act of 1974 in disputes related to semiconductors, for example, and therefore, it has placed emphasis on judicial trade dispute settlements through the WTO’s dispute settlement process. If Japan were to resort to unilateral countermeasures, it would mark a major policy change for the country, so there will be many voices of caution against taking that step.
However, what I would like to emphasize here is that developing a countermeasure system against appeals into the void is fundamentally different from engaging in the kind of acts of unilateralism committed by the United States in the 1970s and 1980s and also by the United States and China in recent years. The countermeasures system would be intended not to force dispute counterparties to make a policy change in order to achieve favorable results for Japan but to restore the rule of law under the WTO’s dispute settlement process. It would not require dispute counterparty countries to rescind or amend their measures, nor would countermeasures be implemented only if they return to a normal track of arbitration.
It would also be important to exercise caution when implementing countermeasures in a specific case. The countermeasure system should be so designed as to ensure that Japan implements a countermeasure only if a counterparty country has filed an appeal into the void despite sufficient consultations between the two sides and after the passage of an appropriate period of recess, leaving no other policy option available. It would also be necessary to provide trading partners with careful explanations about the purpose of the countermeasure system in order to forestall the perception that Japan has changed course toward the kind of unilateralism embraced by the United States.
However, the rule of law under the WTO regime will be significantly weakened if we continue to avoid doing anything about the status quo, in which protectionism can be maintained unconditionally through abuse of appeals into the void, despite the presence of alternative procedures such as the MPIA. Developing a countermeasure system that would not allow appeals into the void to be filed with impunity would be in Japan’s national interests under the present circumstances, although it is necessary to exercise caution when implementing countermeasures. At the same time, it must be said that developing such a system is necessary for restoring the rule of law under the WTO regime, although it may not be the best solution.
Rule of Law under WTO Regime as Instrument of Economic Security for Japan
While the importance of economic security has recently been much talked about, free trade tends to be regarded as a concept that is in opposition to economic security. In particular, there are concerns that if the friend-shoring (Note 9) idea gains currency, groups of like-minded countries may monopolize control over strategic goods and technologies among themselves, eroding the free trade system.
For Japan, for which engaging in a power game as the United States and China are doing is not an option, as I already emphasized, it is essential to retain room for diversifying markets and procurement sources and to maintain a multilateral trading system under which free and non-discriminatory trade and investment environments are guaranteed, while strengthening its relationships with allies, mainly the United States. Japan is critically different in terms of its national security environment from the United States, a country that is self-sufficient in the procurement of natural resources and foods and that is bordered by friendly countries, Canada and Mexico. Looking at the United States and Japan from the viewpoint of geoeconomics, Funabashi Yoichi, an economics commentator, described the former as a country with a “national security surplus” and the latter as a country with a “national security deficit” (Note 10). At an event in June 2022 to celebrate the 10th anniversary of the founding of the Asia Pacific Initiative, headed by Funabashi, I had an opportunity to listen to a discussion between him and Professor Suzuki Kazuto of the University of Tokyo (who is a member of the task force that compiled the report) on the outlook on geoeconomics in a post-Ukraine world. In the discussion, both of them referred to the importance for Japan, a national security deficit country, of the rule of law under the multilateral trading system and they also mentioned the Appellate Body crisis in that context.
The Japanese government must be well aware of those points. For example, Article 90 of the Act on Promotion of Economic Security, which has recently been enacted, indicates that promoting economic security does not mean giving top priority to national security and introducing trade-restrictive measures at any cost, and makes it clear that avoid hindering Japan from conscientiously honoring international commitments must be a prerequisite for the Act. Meanwhile, a joint statement issued at the Japan-U.S. summit meeting in May 2022 proclaimed that the leaders recognized the importance of a multilateral trading system based on free and fair economic rules and that they would work together to address economic coercion through international frameworks, including the WTO (Note 11). To borrow Funabashi’s words once again, “The world helps those who help themselves,” and this applies not merely to the unilateral exercise of power. Given the position in which Japan finds itself, making efforts to restore the rule of law under the multilateral trading system through the MPIA and countermeasures against appeals into the void is exactly what “helping oneself” means.
I hope that the Ministry of Economy, Trade and Industry and other governmental organizations will work as one to rapidly implement the proposed policy options.