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Effectiveness Of Dispute Settlement System Under WTO: A Jewel In The Crown?

The Dispute Settlement System (DSS) was formed to resolve trade disputes between the member states of WTO. This multilateral trading system has been facing unprecedented challenges ever since its establishment in 1995. The trade and tariff war continue to digress from its established and precedent rules, therefore escalating in the backdrop of several complex factors. The primary factor is the emerging economic rivalry and the deadlock between developed and developing countries such as that between the USA and China.

The Dispute Settlement System of WTO is considered as a central pillar for the multilateral trading system, which has made several contributions towards the stabilization of the global economy. Even though the WTO Dispute Settlement System (DSS) can be seen as a great development within the periphery of International Economic Relations and Trade Law, this system is far away from a neutral technocratic procedure in terms of its operation and structure. It is evident that larger economies and the developed members of WTO are better-positioned than the developing members and the poorer economies.

The first part of this paper gives a brief overview of the WTO and its DSS process. The second part entails an analysis of why the DSS is diminishing and failing as a mechanism to resolve trading disputes between the ratified members of WTO. Lastly, the paper conclusively reflects upon the suggestions as well as the recommendations for reform, which shall ensure effective and efficient functioning of the WTO DSS.

WTO and DSS: An Overview

Before the establishment of WTO and DSS, any trade-related disputes were governed and resolved by GATT (General Agreement on Tariffs and Trade), 1947. However, the GATT, 1947 had its own weaknesses which disabled its efficiency and limited its effectiveness. There were no consistent rules and obligations, lack of appeal and lack of strict enforcement of rulings deferred from the purpose of having a dispute resolution mechanism in trade law.

One of the main criticisms with the GATT system was that the reports produced by the panel of experts could only become binding when they were adopted by a consensus by the GATT parties. This means that anybody could block these reports from becoming legally binding. There was an immediate and necessary requirement to establish a platform which addressed and reformed these faults and improve the governance of international trade law.

In 1995, WTO was established to provide an avenue for dispute settlements between member states and international trade negotiations. The DSS was created as a result of an eight-year-long Uruguay Round of negotiations conducted within the framework of GATT, 1947 which highlighted the importance of adopting Dispute Settlement Understanding (DSU) to govern trade disputes between the ratified states.[1]

The main agenda of DSS is to provide “security” and “predictability” of the multilateral trading system to the member states as is described in Article 3(2) of the Dispute Settlement Understanding (DSU).[2] The WTO DSS primarily channels the behaviour of all member states, therefore resolving any differences which arise between them on trade matters while ensuring that the provisions of the covered agreements are properly applied and adhered to. DSU offers a forum not only to the aggrieved state to validate their rights but also allows the respondent state to defend or acknowledge its claims, thus interpreting, clarifying as well as applying the rights and obligations which are provided within the WTO agreements.

The goal of DSS is essentially to settle the disputes between its members via a mutually agreed upon solution, following the provisions and procedures that are mandatory in order to conduct efficient and timebound adjudications.

The DSS essentially comprises of three stages:

  1. Consultations between the member states;
  2. Adjudication by the Panels or by Appellate body; and
  3. Implementation of the declaration which also includes the possible countermeasures in case the losing party fails to implement the given ruling.

A dispute is said to have been arisen when any of the member states adopt a trade policy/measure which is considered to be inconsistent with the obligations laid out in the WTO trade agreement and is firmly opposed by one or more member states. Since WTO has a compulsory jurisdiction on all its members who have signed and ratified the agreement, this system is deemed mandatory for all the ratified member states.

With the establishment of DSS, several reforms were brought in international trade laws which broadened the scope of GATT, 1947. These reforms were essentially crucial for the developing countries as well as the LDC's as they ascertained a rule-oriented system, in contrast to the existing power-oriented one. An example of this shift is the replacement of consensus-based procedure with a negative consensus mechanism which was used for the establishment of panels and adoption of Appellate Body (AB) reports, this meant that any ruling is considered automatically binding and adopted unless there's a negative consensus made against it.[3]

WTO DSS is one of the most active international dispute settlement systems in the world. Ever since its establishment in 1995, DSS has witnessed 595 disputes and has issued over 350 rulings in total.[4] It has a higher compliance rate as compared to other major international adjudicatory bodies like International Court of Justice (ICJ) which was established in 1945, International Criminal Court (ICC), established in 2002 and the ITLOS, established in 1982 which have received 177[5], 27[6] and 29[7] cases respectively till now from their respective years of establishment. From the given statistics, it is evident that the high frequency with which the member states approach and invoke DSS subtly enhances the confidence in the mechanism to resolve disputes related to international trade law

The WTO dispute settlement system is promising and effective if we view it as an avenue which allows its member states to seek legal advice and adjudication if their rights have been infringed. However, at this juncture, it must be noted that this is merely one way of viewing the entire system.

WTO DSS: A jewel in the crown

I. Developed V. Developing Member States

It is crucial to understand that WTO DSS as a platform is successful, for seeking legal help and advice by the member states in situations where dispute related to trade law arises, however the question which arises is that whether all the member states have an easy and equal access to such a dispute settlement system. It is imperative to notice that not all countries have the same economic resources, political stability and social understanding.

Different member states differ in terms of development which can adversely affect their ability and capacity to access such a system. Even though several developing countries are actively involved in the cases where they perform as complainants, the prime issue arises when they’re brought in as respondents. Since this system is mandatory and binding for all the member states, very often the richer and developed states like USA, Japan, Canada and EU end up manipulating the opposing poorer or lesser developed member states like Korea, India, Ethiopia, Sudan etc.

For example- the USA-India dispute on solar panel[8] which drastically hampered India’s ability to revamp its renewable energy (International obligation) under Jawahar Lal Nehru National Solar Mission and compete with china who had a major share of solar cells in the U.S.

Moreover, it can be seen that the frequent users of this mechanism amongst the developing member states are usually the larger economies like China, India, Brazil etc. and very rarely is it seen that smaller economies amongst developing nations approach the WTO DSS. For example, India is an active participant in WTO DSS and has been a complainant, respondent and has also participated as a third party in several WTO cases.

Initial reactions to India ratifying and becoming a participant of WTO were cynical and gloomy as there was a grave apprehension that this could affect the country’s poverty and sovereignty, this apprehension further grew after India lost the “Mailbox” Patent Case[9]against the USA after which India enacted its Patent Amendment Act, 1999 for the grant of exclusive market rights. However, these losses further enhanced India’s institutional as well as human capacity and enabled India to become a proactive litigant, following which India won several jurisprudential important cases before the DSS like US-Shrimp Case[10] which argues upon the rights of the states to have private regimes for environmental protection.

From India's example, one might wonder that DSS is an amicable platform for the developing member states as well as the poorer economies, however, it is apparent that India is one of the most active and leading developing member state of WTO. Several poorer economies show apprehension to even approach DSS as a complainant. This happens because the smaller economies are reluctant to approach the system due to their fear of losing out on their dependence on other countries (political barriers).

For example- Israel's relationship with the USA is now a fundamental pillar of the country's national security as the USA supports its military, diplomacy and economy. In such a case, if a dispute ever arises between these two countries, then it can be inferred that Israel would show hesitation to approach WTO DSS due to its dependence on the USA.

Another reason as to why several developing countries (specifically smaller economies) refrain from bringing cases is lack of experience (no proper expertise in international trade) and resources. It is absolutely undeniable that the cost of hiring a private counsel for litigating WTO matters has increased over the past years, thus making it difficult for poorer economies to approach WTO DSS (economic barriers). An example of this would be the Chile-Price Band System Case[11], wherein the Association of the Argentine Edible Oil Industries paid a private US-based law firm $4 million just for writing the briefs and for preliminary legal advice.

Moreover, bringing a case to WTO DSS does not only involve the cost of hiring an expert legal team to commence litigation but also requires legal, technical as well as economic expertise in international trade law within the local Government for a more efficient and effective outcome (Expertise Barriers).

Apart from the aforementioned reasons as to why not all member states have equal access to this mechanism, there are several other grounds which causes reluctance in participation by several member states. These can include cultural differences, delayed results and ineffective remedies due to non-compliance by the offending member state.

This reasoning can be inferred with the help of EC & Certain Member States- Large Civil Aircraft Case[12]. In this case, the European Union and certain other member states had failed to implement the recommendations as well as the rulings of DSB to bring the measures into conformity with the obligations specified in their SCM Agreement.

The same can be seen as an unsuccessful WTO dispute settlement system case due to non-compliance by EU and certain other member states thus causing a delay in time and henceforth resolved inefficiently.

Moreover, the average time taken at each stage of the DSS procedure is longer than what is given as the statutory deadline in the DSU. These delays are caused because of several reasons like- unavailability of lawyers having expertise in international trade law, unavailability of the panellists, delayed reports submitted to WTO due to improper or delayed translations and sometimes delays are caused intentionally to trigger the opposing member state.

One of the greatest significances of WTO DSS is that it depoliticizes the disputes between countries and softens the diplomatic importance of the disputes, therefore, resolving the disputes practically. This happens primarily because WTO has a compulsory and exclusive jurisdiction (as no other dispute settlement process is available to the disputing parties) in trade law matters for all its members which cannot be invoked.

This is essentially how WTO DSS can be differentiated from ICJ which may have a mutually voluntary jurisdiction, or which is enforceable by special agreements. The main issue with such a stringent jurisdiction as that of WTO DSS is that it treats all its members at par with one another and often fails to understand the differences between the economic, social and political conditions of its member states. Even though the number of developed and developing countries approaching the WTO for the settlement of disputes is impressive, the number of developing and lesser developed countries who are reluctant in approaching this system is substantial, therefore raising objections to the efficiency and effectivity of WTO DSS.

From the above arguments, one can conclusively argue that fundamental distinctions and biases exist between the developed and developing countries. The WTO tends to be influenced by larger and richer economies like EU, due to which poorer economies like Ethiopia, Sudan, Kenya etc. continue to suffer due to their inability to participate in the WTO DSS proceedings. Some criticisms of the WTO DSS are the following:
  1. Free Trade benefits the developed counties more than the developing countries. The developing countries require extra trade protection as they tend to usually specialize in primary industries (for example- Agriculture) and need to diversify themselves into other sectors, which would enable them to come up with new industries in order to diversify their economy (The Infant Industry Argument). Many of the developed and highly industrialized countries used tariff protection during the early stages of industrialization. Hence WTO is often criticized for being ignorant and unfair towards the needs of developing and deindustrialized countries.
     
  2. The “Most Favored Nation Principle”- countries should be able to trade without any form of discrimination. This implies that local firms aren’t allowed to favour the local contractors, thus giving an unfair advantage to the MNC's which prevents the local firms from being favoured thus hampering the right of developing economies from emerging, industrially.
     
  3. Incompetence to Reduce Tariffs on Agriculture often aggrieves the farmers in developing nations as developed countries like the USA and EU maintain high tariffs on agriculture.
     
  4. Insensitivity towards Environmental Hazards”- often the concept of free trade fails to consider environmental degradations and the impact trading has on the environment. In an era of increasing global warming and the future potential of natural and environmental disasters.

WTO fails to identify the domestic conditions of its member states. Firstly, it fails to address the ongoing political discomfort which heavily affects the member states while entering into a legal dispute with one another, for example- the ongoing USA- China Trade War. Secondly, several poorer countries are dependent upon the developed countries for their economic stability like in the example of Israel and the USA.

Finally, several member countries have social imbalances which can further prevent them from approaching WTO DSS. Lack of expertise and resources continues to worsen this issue. DSS has resolved several disputes within the developing countries like India, however, the worst affected are the poorer economies or the least developed countries who fail to take advantage of this system. Even though WTO offers a plethora of opportunities for its members, it fails to distinguish the basic difference between the developed and the developing countries.

II. USA claims on the incompetency of AB

Apart from the ongoing and persistent argument of WTO being biased and unfair towards the developing countries, the DSS faces another major crisis within the Appellate Body. This crisis exists because the USA continuously and repeatedly vetoes the initiation of the procedure to firstly nominate and then appoint the AB members.

United States criticize the WTO DSS in multiple ways (prior to Trump administration) by claiming that the AB has reversed the factual findings of the panel and has created several new obligations along with reinterpretation of the existing obligations in matters which aren't agreed upon by the WTO members.

The US further argues that such practised have made the US trade remedies less effective at addressing subsidies and dumping.[13] In addition to this, there have been claims made against the AB’s failure to provide reports within the period of 90 days as per the DSU. The current US administration also claims that remedies which are available under WTO law aren’t as elaborate as they claim to be. They fail to preserve intellectual rights (such as trade secrets, patents and even industrial designs) as well as technological innovations.

As a blanket rule, WTO promises to prohibit unfair trade practices, however it fails to plug and reform several loopholes. As a result, the appeals mechanism in DSB is slowly diminishing.

Conclusion
WTO DSS maintains an amicable record in resolving many disputes between several countries and has effectively helped in stabilizing the global economy. However, access to this dispute settlement, in my opinion, is a grave problem pertaining to the effectiveness of the WTO DSS. In order to tackle this issue, it is imperative to make adjustments which lead to an increase in the number of sanctions, ensure proper compliance of WTO agreements and laws pertaining to international trade within a reasonable time and without any undue delays, ensure that the developing and lesser industrialized countries get reasonable tariff protection which would enable them to grow industries belonging to different sectors which would not only grow them economically but would also increase their participation in WTO DSS, WTO should provide for a legal recourse by establishing a pool of legal officers comprising of WTO members who could assist developing and poorer economies in legal disputes in terms of hiring legal counsels, drafting etc. The WTO should also come up with new rules and obligations which would be in the best interest of the environment.

Apart from the above, there must be a parallel dispute settlement structure within the WTO mechanism which would enable the members to participate in an equal and an alternate dispute resolution. As per Article 25 of DSU, disputing parties can resolve disputes via arbitration as they can mutually agree to either use arbitration for the entire dispute settlement or simply at the appeals stage which can circumvent the non-functioning of AB.[14]

The question which arises is that whether article 25 of DSU can help in retaining the role of WTO whilst maintaining the standards of DSU? The disputing parties could mutually agree upon the arbitration procedures and unlike the selection procedures of AB, outside parties would have no control or influence over the arbitration procedure and awards. This can be seen as a huge advantage as a stricter implementation of article 25 would incapacitate the USA from affecting the appeals procedure, therefore retaining the stature of WTO and DSU.

Lastly, the panels and AB should avoid delays in producing the reports and should conduct the settlement procedures fairly in just and durable time as per the DSU.

Therefore, it can be concluded that there is a clear deficiency within the current DSS mechanism as several member states have no realistic access to this system and this failure arises from the complexities of the barriers within the system itself.

End-Notes:
  1. Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of Marrakesh Agreement Establishing the World Trade Organization, 1869 U.N.T.S. 401, April 15, 1994 [https://www.wto.org/english/docs_e/legal_e/28-dsu.pdf
  2. Article 3.2, Dispute Settlement Understanding
  3. WTO Handbook, Pg. 18
  4. “Dispute Settlement”, World Trade Organization [https://www.orfonline.org/wp-content/uploads/2019/09/ORF_OccasionalPaper_209_WTO.pdf]
  5. International Court of Justice” [https://www.icj-cij.org/en/decisions]
  6. International Criminal Court” [https://www.icc-cpi.int/Pages/cases.aspx]
  7. International Tribunal for the Law of the Sea” [https://www.itlos.org/cases/list-of-cases/]
  8. DS456: India- Certain Measures Relating to Solar Cells and Solar Modules
  9. DS50: India- Patent Protection for Pharmaceutical and Agricultural Chemical Products
  10. DS58: United States- Import Prohibition of Certain Shrimp and Shrimp Products
  11. DS207: Chile-Price Band System & Safeguard Measures Relating to Certain Agricultural Products [https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds207_e.htm]
  12. DS316: EC & Certain Member States- Large Civil Aircraft Case [https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm]
  13. Center for Strategic and International Studies [https://www.csis.org/analysis/article-25-effective-way-avert-wto-crisis]
  14. General Understanding of Article 25 of Dispute Settlement Understanding. [https://www.wto.org/english/tratop_e/dispu_e/dsu_e.htm]

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