Can the WTO Survive? Its Dispute Settlement Function Must Be Restored Urgently

KAWASE Tsuyoshi
Faculty Fellow, RIETI

Established in 1995, and having celebrated its 25th anniversary this year, the World Trade Organization (WTO) is lauded as one of the most successful forums for international dispute settlement. Over 580 disputes have been filed with the WTO to date, including large-scale cases such as the Airbus vs. Boeing dispute between the U.S. and the European Union (EU), and the Fuji v. Kodak film case between the U.S. and Japan.

Among the cases above, a considerable number of cases were settled within the procedural process before a panel decision was made at the first trial, or by the Appellate Body (AB) on appeal. While the WTO's legislative function has significantly waned due to the inability to conclude the multilateral trade negotiations (Doha Round), its dispute settlement system has been described as the ‘jewel in the crown’ of the WTO, by those who praise its system of settling trade disputes effectively.

However, the jewel is now losing its shine and luster, as the AB, which plays a key role in dispute settlement procedures, has been suffering a significant decrease in its functionality.

In fact, in the last few years, there have been significant delays in the AB's proceedings (see Table 1). In addition, since the summer of 2017, the U.S. has objected to the appointment of new AB members (each serving a four-year term that is renewable once) to fill vacant positions, due to its dissatisfaction with the judicial performance of the AB. Currently, the AB has only three members—the bare minimum required to form a division to review individual cases. Moreover, two of the three members will complete their terms of office by December 2019, leaving the AB essentially defunct (see Table 2). So far, no promising solutions have been found to deal with the situation.

Table 1: Changes in the Number of Days Spent on Appellate Reviews
Table 1: Changes in the Number of Days Spent on Appellate Reviews
Source: Calculated by the author based on (as of May 31, 2019).
Table 2: AB Members' Terms of Office
Table 2: AB Members' Terms of Office
Note: The AB members' nationalities merely show the current membership and therefore are subject to change.

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The delay in the AB's proceedings is one of the reasons why the U.S. has adopted hardline tactics. While, according to the WTO rules, the AB is responsible for circulating its report within 90 days, the process has taken more than a year in some of the recently-appealed cases. The main causes of the delay include an increasing number of appeals and complexity of disputes, and an insufficient number of legal affairs officers in the AB Secretariat, who are responsible for assisting the AB.

Another concern of the U.S. is the continued service of outgoing AB members in dispute cases. Under the current rules, outgoing AB members are essentially automatically authorized to complete the disposition of any appeal they were assigned before the expiration of their terms of office. The U.S. expressed its concern over the fact that such a continued service does not require any approval from the WTO Members in the Dispute Settlement Bodies.

However, its gravest concern does not lie in these technical issues, but in the AB's judicial activism. According to the U.S., the AB has been abusing the authority granted to it by the WTO member countries and restricting their policy discretion, by providing judicial decisions that are irrelevant to the resolution of individual disputes (obiter dicta and advisory opinions), adding to or diminishing the Members' rights and obligations through the interpretation of the WTO Agreements (judicial law-making), and requiring panels handling subsequent cases to follow its judgments and interpretations of the WTO Agreements (stare decisis).

The criticism of the U.S. is now centered on the decisions that relate to trade remedies such as anti-dumping duties and countervailing duties against subsidies. These trade actions were implemented by the Trump administration as important policy measures to address its priority issues such as the protection of the steel industry and the response to the trade conflicts with China.

One of the most obvious targets of the criticism by the U.S. is a series of decisions related to "zeroing," a special anti-dumping-duty calculation methodology that results in an inflated duty rate. In response to the complaints filed by Japan, the EU, South Korea, Mexico, and other jurisdictions against the zeroing, the AB expressed its interpretation of the WTO Anti-dumping Agreement that zeroing was not a legitimate duty calculation methodology, although the Agreement does not explicitly state so.

In addition, it is stipulated by the WTO's Agreement on Subsidies and Countervailing Measures that if a member government and its "public body" grant any subsidies, injured Members have the right to impose countervailing duties. However, the Appellate Body applied a stricter interpretation of the term "public body," and determined that the fact that China's state-owned enterprises are operated under ownership of the Chinese government did not alone meet the definition of a public body. This made it difficult for the U.S. to impose countervailing duties against China. Despite wide support for such AB interpretations, there is still strong criticism of them in the U.S., particularly among influential lawyers representing the steel industry. Robert Lighthizer, the current U.S. Trade Representative, stands at the head of the list.

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Member states have repeatedly urged the U.S. to agree on the appointment of new AB members to fill the vacancies. However, the U.S. strongly insists that the AB must address the aforementioned concerns before nominating its new members, leading the WTO, which can virtually act only by consensus, to a dead end.

In order to break the stalemate, like-minded Members led by the EU have been actively proposing certain revisions of the dispute settlement procedures since the summer of 2018, as part of the WTO reform initiative. These revisions include those intended to address the concerns expressed by the U.S., such as the speeding up of the appellate reviews, procedures to extend the 90-day deadline for unavoidable reasons, and approval of member states to allow outgoing AB members to continue to rule appeals. However, the U.S. has not agreed on the fulfillment of vacant positions at the AB, stating that these revisions are insufficient. Moreover, as the WTO needs consensus even for these relatively technical revisions, their implementation would be a tough challenge for the organization.

In addition, the judicial-activism issue may, if handled improperly, seriously undermine the WTO's dispute settlement mechanism. For example, limiting the scope of the (de facto) stare decisis doctrine will result in a situation where the WTO rules, which have a significant impact on the international business environment, are applied in a manner that varies from case to case, forcing global enterprises to operate in an unstable and unpredictable market.

As stipulated in the DSU, the mandate of the AB is to interpret the WTO agreements and thereby clarify their meanings, in accordance with customary rules of interpretation of public international law (Vienna Convention on the Law of Treaties). It is not a realistic option to develop another version of the interpretation approach. Moreover, if, as a result of giving too much consideration to specific Members' intentions, the AB becomes unable to interpret the WTO rules from a neutral and impartial point of view, their authority will no longer be recognized.

Another challenge hampering the normalization efforts is the gap in the concept of appropriate judicial power between the U.S. and the EU. Unlike the U.S., the EU has actively promoted the juridification of international systems, drawing on the successful experiences it gained through the establishment of the European Court of Justice and the European Court of Human Rights. It has also made proposals designed to strengthen the AB's autonomy by extending the AB members' terms of office and discontinuing the reappointment practice in order to prevent the Members' political interventions (like those done by the U.S.), by the appointment of additional AB members and legal affairs officers for the AB Secretariat, and automation of the new-member-appointment and vacancy-filling process. Other member states, such as India and China, also voiced significant support for these proposals, stating that it would be effective to employ strong WTO procedures to tame Washington's unilateralism.

On the other hand, the arguments made by the U.S. deserve some attention. The current DSU requires the AB to decide all issues appealed before it, forcing it to make decisions that are unnecessary to adjudicate on individual cases. Further, it is true that, in some cases, they have made rulings in a manner that might be interpreted as an expression of their own opinion rather than an effort to settle individual disputes. By doing so, the AB members have exceeded the scope of the mandates bestowed to them—if the purpose of the WTO's dispute settlement function is to maintain a proper balance between the interests of member countries.

Moreover, under the current system, feedback is rarely given to the AB members concerning their decisions, depriving them of sufficient opportunities to properly understand how their decisions are evaluated by member countries. If it is difficult to reform the system in a short period of time, the minimum necessary requirement for the WTO is to launch a forum, in which the AB can discuss interpretations and decisions with the Members without prejudice, and through which the AB can gain a better understanding of how the Members evaluate its performance. At the same time, it needs to accept the criticism voiced by the U.S., as proposed by some member countries.

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In the first place, the arguments made by the U.S. are partly intended to address issues caused by the quarter-century-old rules that are out of touch with reality, with one example being the definition of the "public body." These issues must be addressed by amending substantive rules in the WTO Agreements, rather than by merely changing the AB's interpretations. It must be recognized that the restoration of the WTO's dispute settlement function is inseparably linked with restoring its capacity to make or revise rules through negotiations.

The number of pending appeals is increasing at every moment, and more and more cases will be appealed in relation to the unilateral measures that have been implemented by the Trump administration since 2018, meaning that without significant reform, the burden placed on the organization and the dispute settlement process will continue to increase, consistently reducing its performance. This situation must be resolved and operations must be returned to normal through significant reform at the earliest possible date. As the chair country of the G20 Osaka Summit, which is scheduled in this summer, Japan is expected to demonstrate its leadership in the reform of the WTO.

>> Original text in Japanese

* Translated by RIETI.

March 29, 2019 Nihon Keizai Shimbun

June 6, 2019