Dispute Settlement, Compensation & Retaliation under the WTO
- Dispute Settlement, Compensation and Retaliation Under the WTO
Robert Read
One of the key outcomes of the GATT Uruguay Round negotiations was the creation of more effective system of dealing with international trade disputes, the WTO Dispute Settlement Understanding (DSU). This entered into force on 1 January 1995. The DSU succeeded the original GATT system for dispute settlement which had become increasingly unable to resolve major trade conflicts between its Member countries. This Chapter outlines the structure and operation of the WTO trade dispute settlement system, particularly with respect to the implementation of dispute panel findings and the issues of compensation and retaliation. The first section provides an overview of the objectives of the DSU in the context of the shortcomings of the previous GATT dispute settlement system. Section 2 summarises the key articles and procedures of the DSU. This is followed by a discussion of the DSU framework for the suspension of concessions, compensation and retaliation supported by illustrative examples from recent cases. The final section offers a brief critique of the key issues that have arisen in the first decade or so of the operation of the DSU.
42.1The Origins of the WTO Dispute Settlement System
Prior to the introduction of the DSU, the GATT system of dispute settlement had been functioning more or less successfully for almost 50 years in spite of its evident shortcomings. The new WTO DSU was the outcome of a thorough overhaul of the GATT system although it mirrored much of the original GATT legal framework and retained the accumulated body of case law and precedent.
The GATT Dispute Settlement System
The GATT system of dispute settlement was founded upon two principal articles: Consultation (Article XXII) and Nullification or Impairment, i.e. compensation (Article XXIII). The operation of the dispute system from 1947 led to the incremental evolution of procedures and case law based upon accumulated legal interpretation and precedent. The linchpin of the GATT system for settling trade disputes was the principle of consensus which required all parties to a dispute to accept the outcome of any investigation. Any findings only became binding if a panel report was accepted by consensus. Defendants in a case could therefore veto this ratification procedure and so avoid complying with the findings.
The consensus requirement was one of several weaknesses of the system leading to growing frustration about its failure to resolve trade conflicts among GATT Members. The principal shortcomings of the GATT system were: a lack of clear objectives and procedures; ambiguity about the role of consensus, leading to adverse decisions being blocked; a lack of time constraints, leading to delays and uncertainty; and frequent delays in and partial non-compliance (Read, 2005). The survival of the GATT system for almost fifty years owes much to the its members’ commitment to multilateralism and their realisation that persistent flouting of the trade rules and conflict served to undermine the long-term benefits of a relatively liberal global trade regime.
The GATT system was, to some extent, a victim of its own success in that it was originally intended to regulate the trade of just 23 countries. Its rules were simply not designed to deal with the massive growth of world trade in the latter half of the 20th Century. This was partly fuelled by trade liberalisation under the GATT Kennedy and Tokyo Rounds, a rapidly growing membership (there are now 147 WTO Members) and the increasing volume and complexity of trade conflicts. All of these developments placed increasing stresses and strains on an imperfect dispute settlement system. By the start of the Uruguay Round negotiations in 1986, the general view among GATT Members was that the system for the settlement of trade disputes needed to be reformed.
It is important to note that some 88 per cent of all GATT trade dispute cases 1948-89 were resolved through full or partial compliance. This compliance rate however, did fall to 81 per cent post-1980 – a period covering more than half the total number of cases (Hudec et al., 1993). The actual performance of the GATT dispute settlement system can thus be regarded as having been reasonably successful; a view reinforced by the incorporation of its basic legal framework into its successor, the WTO Dispute Settlement Understanding.
The WTO Dispute Settle System
The DSU superseded the GATT system from 1 January 1995 and is regarded as being one of the central achievements of the Uruguay Round negotiations. The desire for the reform of the GATT dispute settlement system was made very apparent in the Punte del Este Declaration at the commencement of the Uruguay Round:
To assure prompt and effective resolution of disputes to the benefit of all contracting parties, negotiations shall aim to improve and strengthen the rules and procedures of the dispute settlement process, while recognizing the contribution that would be made by more effective and enforceable GATT rules and disciplines. Negotiations shall include the development of adequate arrangements for overseeing and monitoring of the procedures that would facilitate compliance with adopted recommendations. (GATT, 1986)
There was however, no clear consensus as to how any new system for settling trade disputes should be constructed. The United States sought the creation of a rule-oriented approach (‘automaticity’), along the lines of the NAFTA system, with a defined timetable for dispute resolution and the potential for cross-retaliation. In contrast, the primary objective of most other members of the OECD, along with many developing countries, was a system that would constrain unilateral action by the United States. The final outcome of the negotiations was the DSU which dealt with many of the perceived weaknesses of the GATT system as well as, at least partially, satisfying the differing objectives of its leading members.
The new negative consensus requirement means that the implementation of panel findings can no longer be blocked by respondents, so triggering the right of plaintiffs to retaliate. Automaticity is a pivotal element of the DSU, which includes a clearly stipulated timetable for the dispute settlement procedures and limited potential for cross-retaliation between sectors. Unilateral action is constrained by the requirements that Members abide by the rules and procedures of the DSU and that their national laws comply with their obligations under the WTO.
The introduction of the DSU must also be viewed as having been a necessary condition for the successful implementation of the range of revised and new trade rules, known collectively as the Uruguay Round Agreements. The more substantial legal framework of the DSU is capable of enforcing the complex rules of these agreements but this would not have been possible under the previous GATT system.
42.2The Key Articles & Operating Procedures of the WTO Dispute Settlement System
The DSU is an integral part of the Uruguay Agreements, running to 27 Articles and four Appendices. This Section outlines the principal operating procedures of the WTO dispute settlement system with respect to the key articles of the DSU.
The Grounds for a Complaint Under the WTO DSU
GATT Article XXIII, Nullification or Impairment, stood at the centre of the GATT dispute settlement system and its paragraphs continue to define the conditions under which violation of the WTO rules permit Members to seek redress and their means of so doing. There are three specific circumstances identified in GATT Article XXIII under which WTO Members are permitted to make a complaint under the DSU. The standard case is where a Member country violates the WTO rules and thereby adversely affects other Members. The second is ‘non-violation’ where harm is caused even though there is no specific violation of a GATT provision. Finally, there is a ‘catch-all’ provision. The scope of the application of the article covers all of the component multilateral agreements of the WTO. This means that any Member country may seek redress with respect to any violation of the WTO rules by another. There is no requirement to demonstrate that a violation has resulted in injury since all Members are legally obliged to conform to the WTO rules.
The WTO Complaints Procedure
The primary objective of the WTO DSU system is to settle trade disputes between Members by means of bilateral consultations and mediation in the first instance. Recourse to the establishment of a formal dispute panel is intended as a last resort when all other avenues of conciliation have been exhausted. Further, the provisions permit third parties, including other Member countries and the WTO Secretariat, to mediate in a dispute and take part in the consultations. Any agreed solution however, must be consistent with the WTO Agreements. It is only after the failure of the consultation and/or mediation process that a plaintiff may have recourse to the formal dispute provisions. Third parties with a ‘substantial trade interest’ in a dispute may also engage in the consultation process, subject to the agreement of the respondent.
The specific guidelines and timetable for consultations to take place are provided in Article 4 of the DSU. Consultations are a mandatory condition for a subsequent request to be made to establish a dispute panel. A respondent has a 10-day limit within which to reply to a request for consultations, a maximum of 30 days to enter into consultations and a minimum of 60 days to engage in the consultations. If a Member does not meet one or more of these deadlines, a plaintiff may request the establishment of a panel immediately. In practice, many parties to disputes often take considerably longer over consultations that the minimum of 60 days (WTO, 2004).
Many trade disputes never go further than the consultation stage, particularly given that WTO Members are under an obligation to resolve their disputes by this means. The parties to a dispute may also make use arbitration as an alternative method, subject to mutual agreement.
The Establishment of a WTO Dispute Panel
In the event of that a trade dispute is not resolved through consultations, a plaintiff can then proceed to a formal request for the establishment of a dispute panel no earlier than 60 days after the request for consultations. Such a request is submitted in writing to the Chair of the Dispute Settlement Body (DSB) and sets out briefly and clearly the grounds for a complaint. This request forms the legal basis for a complaint and its contents define the scope and extent of the remit of a dispute panel investigation and adjudication. The formal request document is then circulated to all WTO Members, so as to inform the respondent together with any interested third parties, and included on the agenda for the next meeting of the DSB. The first time that a request is presented to the DSB, a plaintiff has the right to block a panel being set up. Under the negative consensus requirement introduced in the Uruguay Round, any such request is automatically accepted at a second DSB meeting.
Where there is more than one plaintiff in a case or where several Members file similar complaints, Article 9.1 provides for the establishment of a single panel ‘whenever feasible’. Co-plaintiffs however, may request the publication of separate reports.
Any third party country with ‘substantial interest’ in a trade dispute also has a right to make submissions to and be heard by a panel, even if they were not involved in the consultation process. Participation in panel procedures as a third party requires the DSB to be notified, in practice within 10 days of the establishment of a panel. In the event of nullification or impairment of their benefits, third parties may also have recourse to the DSU.
The Functions & Procedures of WTO Dispute Panels
The functions and procedures of WTO dispute panels are laid out in Articles 7, 8 and 11 to 15 of the DSU. Their primary function is to assist the DSB by making an objective assessment of the facts and conformity with the relevant WTO agreements. Their Terms of Reference are to examine the facts of a trade dispute with respect to the complaint as laid out by the plaintiff in the request for the panel’s establishment. Panels are thus required to investigate the evidence in the context of the relevant provisions of the WTO agreements cited by the parties of a dispute. They then make recommendations or rulings to the DSB with regard to the relevant WTO agreements.
The composition of WTO dispute panels is set out in Article 8 of the DSU. A panel normally has three members but may, in certain cases, have five. The panellists are nominated by the WTO Secretariat from an indicative list that includes the nominees of Member countries. Panellists are required to possess expertise appropriate to a case but may not be citizens of parties or third parties to a dispute.
The procedures for dispute panels are set out in Appendix 3 of the DSU, including a proposed timetable for panel deliberations (shown in WTO, 2004). This timetable is, to some extent, flexible dependent upon the complexity and evidential needs of particular cases. In general, most dispute cases take between 9 and 12 months from the establishment of a panel to the publication of its report. Dispute panels have the power to seek information and technical advice from any appropriate individual or body and evidence may also be requested from an Expert Review Group. All Panel deliberations are confidential and non-attributable.
Panel procedures normally begin with the receipt of (often lengthy) written submissions by the plaintiff and respondent, which are then exchanged. Any third parties may then make their own submissions. These tend to be shorter commentaries on specific aspects of a case (WTO, 2004). This is followed by a closed oral hearing involving all of the parties after which the parties exchange written rebuttals to each other’s legal arguments. A second closed oral hearing is then held, during which the parties’ arguments and rebuttals are presented. Where expert evidence, usually of a scientific nature is required, additional sets of oral hearings may be held. A panel then drafts the ‘descriptive’ section of its report outlining the arguments of each party and summarising all of the factual and legal arguments which is circulated to the parties for comments and corrections. This is followed by the circulation of the Interim Review, which contains the description of the case along with a panel’s findings and conclusions regarding the legal validity of the complaint. Again, the parties are permitted to make comments, request corrections and ask a panel to review specific points. These amendments and elaborations are then incorporated to produce a Final Panel Report which is circulated to all WTO Members and published.
The Adoption of Panel Reports
A Final Panel Report – and therefore its recommendations - has no standing until it is adopted at a meeting of the DSB. Under he negative consensus requirement however, Final Reports are automatically adopted and their rulings become binding if they are placed on the agenda and submitted to the DSB. A victorious plaintiff may therefore choose not to add a Report to the DSB agenda, in which case it will not be adopted. This contrasts with the potential of losing respondents in trade dispute cases to use a veto under the GATT dispute settlement system which enabled them to block the implementation of panel rulings indefinitely. Once a Panel Report is adopted by the DSB, its recommendations become binding on the parties to a dispute.
The Role & Function of the WTO Appellate Body
A party (but not a third party) to a dispute has 60 days after the publication of a Final report to lodge an appeal. In this case the Report is not submitted to the DSB until the appeal process is completed. Although respondents and plaintiffs may appeal against the findings of a dispute panel with respect to the case in question, it is not unusual for parties to request clarification or reinterpretation of particular legal points with respect to their broader implications for future cases. The Appellate Body has the power to modify or reverse the findings and recommendations of a Panel Report following procedural rules that have been amended periodically since 1996.
The Appellate Body has seven members, three of whom (the division) are selected to preside over an appeal by rotation. An appellant has ten days to submit its legal arguments concerning the relevant point(s) of law in a Panel Report, followed later by an oral hearing. The collegiality of the Appellate Body is sustained by sanctioning deliberations between the division and its remaining four members to ensure jurisprudential consistency and coherence. The objective of the Appellate Body is to resolve dispute cases and this may also require it to complete the legal analysis of a case by examining other claims not dealt with by the original panel. After drafting, the Appellate Body Report is circulated to all WTO Members and published. It is also submitted to the DSB for adoption and the parties to a dispute must accept its recommendations unconditionally in the absence of a negative consensus.