Policy Update 018 Pre-event Interview No.5

Challenges and Prospects for WTO Dispute Settlement Process: What Developed Countries Must Do to Maintain the Multilateral Trading System

KAWASE Tsuyoshi
Faculty Fellow, RIETI

The recent RIETI Symposium, entitled " Prospects for the Doha Round: Major Challenges in the Multilateral Trading System and their Implications for Japan" examined key issues facing the WTO from the following four perspectives: 1) the relationship of the multilateral trading system to the regional trade liberalization agenda; 2) functioning of the WTO system; 3) domestic processes of trade policymaking; and 4) global governance. In the fifth of our series of interviews with key participants in the Symposium, we spoke with RIETI Faculty Fellow Tsuyoshi Kawase about the challenges and prospects for the WTO dispute settlement process.

RIETI: How do you assess the current state of the World Trade Organization (WTO) system in terms of the establishment and implementation of multilateral trade rules?

Kawase: Regarding the implementation of the rules, the dispute settlement process has been substantially juridified and "automated" under the WTO Dispute Settlement Understanding (DSU). Today we have a mechanism for implementing a whole set of procedures, from the filing of complaints to judicial rulings to the enforcement of panel and Appellate Body rulings, that ensures neutrality and impartiality without intervention by the parties concerned. The current WTO dispute settlement mechanism, characterized by the considerable juridification and automation of procedures as compared to the era of the General Agreement on Tariffs and Trade (GATT), has proved surprisingly effective and efficient. It is fair to say that the WTO dispute settlement mechanism as it stands today is an extremely well-respected international regime.

However, no treaty is perfect and there always exist certain deficiencies or conflicts in the interpretation of provisions. The WTO rules are no exception. Some provisions are not clear as to what they mean in practice. Also, we have encountered a series of cases that were not anticipated at the time the rules were drafted. Where the existing rules cannot accommodate these developments, WTO members need to negotiate quickly to amend the rules. The WTO's decision-making in this regard, however, is not functioning properly.

RIETI: Why has the rule-making process at the WTO failed to make progress?

Kawase: In short, the consensus rule of decision-making, under which a single opposing vote can block the process, is preventing prompt and expeditious consensus-building. In addition, ever since the inception of the WTO, it has been extremely difficult to form a consensus for a number of reasons.

First, the number of member countries has drastically increased. As of today, the WTO has 148 member countries and they are extremely diverse. The GATT, the predecessor of the WTO, started with only 23 mostly Western countries that won World War II. In contrast, among the current members of the WTO are developing countries, including least developed countries (LLDCs), socialist states such as China, and economies in transition that are shifting from the socialist to capitalist systems such as former the Eastern European countries. Against this backdrop, it is becoming increasingly difficult to find common ground.

Since the 1999 WTO Ministerial Conference in Seattle, the decision-making process of the WTO has become, for better or worse, more transparent and democratized compared to the early years of the WTO regime or the GATT era. Whatever decisions the WTO makes, all the member countries feel compelled to take the floor and speak out. With such practices becoming the norm, it is difficult to have substantive discussions. In the past, a small number of major countries represented by "the Quad," namely, the United States, the European Communities (EC), Japan and Canada -- and large developing countries representing certain areas or interest groups played a leading role in the decision-making process. This so-called "Green Room" process of decision-making at the WTO, however, came under fierce criticism at the 1999 Seattle ministerial conference as being undemocratic and opaque. Ever since, it has been almost impossible for a small number of major countries and representatives of interest groups to make decisions for the membership as a whole. As a consequence, the WTO decision-making process has become more democratic and transparent, but at the same time the process is less efficient.

Meanwhile, when we look at the judicial function of the WTO, we see that the dispute settlement process has become much more automated than in the GATT era. In the past, the agreement of both the parties concerned had to be sought for virtually every step in dispute settlement process. Such was the case, for instance, for establishing a panel as well as for deciding what legal issues should be discussed ("terms of reference") by the panel. Under this system, rejection by either party -- typically, a respondent to a complaint -- could halt the dispute settlement process, thereby preventing any legal effect. The current DSU, however, has created a negative consensus rule, whereby the dispute settlement process proceeds automatically unless there is unanimous consensus against it. Consequently, when two countries fail to settle their dispute through bilateral consultation, the case is subject to a quick and automatic dispute settlement process, adjudicative decisions, enforcement, and, if the losing party fails to comply with the ruling, authorized retaliation.

Finally, there is an imbalance between "legislation" (rule-making by the member states), which is slow to make progress, and adjudication, which has become highly efficient as seen in the faster dispute settlement process.

RIETI: What problems have been caused by this imbalance?

Kawase: Because the legislative function is not working properly, the judicial function has been forced to deal with problems as they arise, creating a situation where the judiciary is burdened with an extremely heavy political responsibility in dispute settlement. Panels and the Appellate Body have been forced to make judgments on cases involving politically sensitive non-trade issues, for instance, in cases concerning trade and the environment, culture and human rights. In the high-profile "Shrimp-Turtle" dispute, the U.S. ban on the importation of shrimp caught in nets without turtle excluder devices (TEDs) was challenged by four Asian countries (Malaysia, India, Pakistan and Thailand). Environmental groups submitted amicus briefs to the WTO dispute settlement panel, but the question of how to handle such third-party opinions was left to the judgment of the judiciary.

So, on one hand, there is there is the reality that the political or decision-making element of the WTO is not dealing properly with cases involving highly sensitive political issues, although such issues, by their very nature, need to be solved legislatively. On the other hand, with the current automated dispute settlement process, panels and the Appellate Body cannot avoid rendering decisions. Meanwhile, when faced with a situation unanticipated by the drafters of the current rules, as exemplified by the amicus brief issue, the WTO is unable to rely on its legislative function to change the rules in a timely manner. Thus, panels and the Appellate Body have no other choice but to make judgments on their own. This has provoked fierce criticism from some member countries, particularly the U.S. and developing countries, as "judicial lawmaking."

RIETI: Although panels and the Appellate Body are quick and efficient in their decision-making, it is often pointed out that the implementation of rulings is not assured, or that some member countries are too slow to take corrective measures as required by panels or the Appellate Body. What do you think about this problem of nonimplementation?

Kawase: There are several reasons for nonimplementation but in the end, judicial judgment and acceptance of the norms underlying such judgment are crucial for ensuring implementation. For instance, in the "beef hormone" dispute, a case brought by the U.S. and Canada against the EC, the WTO ruled that the EC ban on imports of hormone-treated beef -- a measure implemented because of worries about cancer -- violated the Agreement on Sanitary and Phytosanitary Measures (SPS). However, the EC, which believes that scientific proof is not the only thing that matters and tends to be sensitive to consumer anxieties, is skeptical of the SPS agreement per se, to say nothing of challenging the interpretation of the rules by the panel and Appellate Body. Another significant example of nonimplementation is the dispute over the Foreign Sales Corporation (FSC)/Extraterritorial Income Exclusion (ETI) provisions of U.S. tax law, which the WTO ruled was an illegal subsidy and authorized the EC to impose $4 billion in trade retaliation. Although the FSC/ETI provisions were judged inconsistent with WTO rules, the U.S., whose tax regime centers on direct taxes, argues that the problem is with the WTO rules, which allow rebates on indirect export taxes but not on direct taxes. The U.S. believes the current WTO rules give an unfair advantage to European countries, whose tax regimes center on indirect taxes. Such feelings that the rules are unfair cause distrust about WTO rules per se and naturally affect a country's decision on implementation.

There are also cases in which a losing party does not comply with panel or Appellate Body ruling because it disagrees with the judgment or with the interpretation of the rules. For instance, the Continued Dumping and Subsidy Offset Act (CDSOA or "Byrd Amendment" as it is better known), which mandates the distribution of antidumping and countervailing duties collected from foreign companies to those U.S. companies harmed by dumping, has been found in violation of the WTO rules. But the U.S. is unhappy with the rulings, which it believes have been handed down by the panel and Appellate Body -- despite the absence of specific provisions prohibiting such conduct -- based on an overly broad interpretation of the provisions of GATT Article VI. The U.S. maintains that the WTO, if it finds certain conduct impermissible, should create a rule that explicitly prohibits such conduct. That is, the U.S. finds it unacceptable to get an adverse ruling based on interpretations by a panel or the Appellate Body in the absence of specific rules.

Another problem is the ambiguity of the term "implementation." panel and Appellate Body reports simply state that a certain measure is "inconsistent with WTO rules" and, therefore, that the panel (Appellate Body) "recommends that the DSB request (the violator) to bring (the measure in question) into conformity" with WTO rules. Although panels and the Appellate Body have the authority to "suggest" specific measures to remedy inconsistencies, they have hardly exercised that authority, in part, out of consideration for the sovereignty of the complained party. As a consequence, it is extremely unclear what concrete remedial measures would ensure consistency with the WTO rules in any particular case. For instance, in the aforementioned case of the Byrd Amendment, opinions differed over what would constitute a satisfactory remedy. The U.S. maintained that the situation could be remedied by amending the CDSOA, whereas complainant countries such as Japan and the EC demanded that the U.S. scrap the law. Likewise, the beef-hormone dispute remains unresolved; the EC insists that it has implemented the ruling by reassessing the risk of hormone-treated beef whereas the U.S. and Canada demand that the EC repeal the import ban.

To summarize, the question of what constitutes "implementation" is not as clear as it might appear at first glance. In addition, losing parties do not always agree with the interpretation of laws and rules by the panel or the Appellate Body, or they may be skeptical of the rules per se even before questions of interpretation arise. Both of these problems may result in nonimplementation.

RIETI: If nonimplementation or delayed implementation become rampant, winning a case at the WTO may become meaningless as it does little to prevent actual damage.

Kawase: This boils down to the issue of enforceability in the narrow sense, that is, the extent to which the WTO can force member countries to implement their obligations. The current WTO systems are flawed in the area of countermeasures as well as in the time frame for implementation of rulings.

First, regarding the time frame, the current DSU process provides a losing party an implementation period of up to 15 months following issuance of DSB recommendations, except for cases concerning prohibited subsidies, which must be remedied immediately after the DSB recommendations are published. In the case of a dispute over the status of implementation after the 15-month period, the panel is re-established. This necessitates another long period of time, a year or more, before the winning party is authorized to implement retaliatory measures. As such, even if a country prevails at the WTO, it takes too long before the country is allowed to take countermeasures.

Another problem is that the scope of countermeasures a winning party is allowed to take is too limited to be effective. The current system provides a 15-month implementation period for the losing party to remedy problems, while the winning party is allowed to take countermeasures only if such problems have not been remedied upon the end of the implementation period -- and only with respect to future damage to trade. Thus, should any problem remain after the implementation period, future damages (i.e., the extent to which future trade is restricted by outstanding problems) are calculated and rebalancing is authorized. The winning party is only allowed to take measures sufficient to redress such future damages; it cannot claim compensation for actual damages incurred in the past. This allows for a type of "hit-and-run" behavior that benefits the violator. In case of antidumping duties, for instance, it is extremely rare, though not unheard of, for a panel to recommend that such duties, including those collected in the past, be refunded. And even if a complaining country is lucky enough to get the antidumping duties refunded, that would hardly help solve the fundamental problem. The greatest concern for the complaining party is the lost benefits or export opportunities caused by the imposition of antidumping duties, but there is no way to recover such damages under the current system. Provisions for rebalancing measures thus fail to serve as a deterrent to violations.

RIETI: The problems you have alluded to thus far -- the cumbersome rule-making process, problems with implementation of DSB rulings -- seem to put the WTO under pressure from both sides: Losers in trade disputes feel their sovereignty is being infringed while winners wonder about the benefits of being in the WTO. Given this situation, how can we maintain the multilateral trading system?

Kawase: There are several ways to do it. One is to allow the imposition of harsher sanctions. Academics have shown considerable interest in this approach but it is not highly regarded by negotiators at the moment. Another possibility is to improve the normative function of WTO panels and the Appellate Body. Unfortunately, there is a huge gap between the U.S. and the EC in this regard. The U.S. believes the juridification and automation of the dispute settlement process have gone too far, and thus it is calling for a return to the old GATT system whereby parties to a case or WTO member countries in general are allowed to control the content of panel and Appellate Body reports to some extent. On the other hand, the EC is proposing that the current ad hoc selection system for WTO panels be replaced by a permanent panel. The EC's proposal is designed to enhance the degree of precision in the interpretation and application of rules by having a certain number of permanent panelists handle many cases and accumulate experience.

This raises the question of where to begin. It is a hard one to answer, but I think, first and foremost, developed countries must ponder the meaning and impact of nonimplementation. Up to this point, those guilty of nonimplementation have been have mostly been Quad countries. Developing countries, by contrast, have shown good faith, properly implementing recommendations as required by panels or the Appellate Body. Although the importance of the Quad framework has substantially diminished in recent years, the Quad countries still dominate the world in terms of trade volume. These leading countries must think about the impact they are having on the credibility and legitimacy of the WTO by not implementing their obligations, something that seriously undermines the WTO regime.

Unfortunately, Japan has joined the "league of nonimplementers," having failed to comply with the WTO rulings against its import restrictions on U.S. apples, a measure which Japan claims is necessary to prevent the spread of a bacterial disease known as fire blight. Other than this particular case, however, Japan has a fairly good record on implementation, partly because Japan has lost relatively few cases. Indeed, the SPS agreement is not perfect and Japanese apple growers' concern over fire blight is understandable. Yet it is wrong to try to solve the problem in disregard of legally established rules. If there is a flaw in the SPS agreement, Japan should seek to amend the agreement itself; Japan should not stain its reputation after having a good record for many years.

It is true that the legislative function of the WTO is not working properly. However, this makes it all the more important to firmly maintain the judicial function that is working properly at the moment. The ongoing impasse in rule-making makes it crucially important for WTO members, despite having made little progress in negotiations, to maintain the organization's raison d'etre by properly implementing the existing rules.

>> Original text in Japanese

Interview conducted by Mitsuko Nashima, online editor of the RIETI website, on July 8, 2005.

September 9, 2005

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