In the aftermath of the infamous WTO Appellate Body’s loss of quorum, the details of which can be found in our previous post here, the WTO Membership is faced with the challenge of negotiating solutions that balance the United States’ concern over the WTO dispute settlement process against the preservation of the legitimacy and viability of this system as an impartial forum for resolution and enforcement of trade disputes between sovereign states.

The WTO crisis did not occur overnight. In anticipation of the deadlock, numerous proposals for its resolution have been tabled over the past several years. This article briefly outlines the main contentious issues and provides a high-level summary of legal, institutional and political paths to overcome this crisis.

WTO Dispute Resolution Process

The WTO is the successor of the General Agreement on Tariffs and Trade (the “GATT”), a free trade agreement setting out the rules for international trade. The disputes under the GATT were decided by panels of several independent experts. To become binding the rulings of the panels – (the “Reports”) were to be approved by the GATT Council acting on the basis of consensus of the GATT members. The striking feature of the GATT dispute settlement structure, therefore, was the fact that a contracting party (including the unsuccessful respondent in a dispute), was able to block the adoption of a panel’s Report. In other words, under the GATT the member states retained considerable political control over the decisions of the adjudicators. However, this very control led to an incapacity to resolve the most controversial issues through this forum. In part, this inability to hold the countries responsible to their commitments was the reason for the institutional reform which led to the creation of the WTO.

Although the WTO dispute settlement system bears some features of the GATT’s process, it is fundamentally different. Disputes are heard by ad-hoc panels, established by the Dispute Settlement Body (the “DSB”), a forum which is composed of representatives of all WTO Members. Panels are formed for each individual dispute. Panel reports may be appealed to a standing appellate authority, the Appellate Body, whose members are also appointed by the DSB. For a panel or appellate Report to become binding it must be adopted by the DSB, which is done under the negative consensus rule prescribing that the Report is binding unless the DSB, comprising all WTO Members, decides to the contrary. This rule represents a drastic departure from the GATT process. The unconstrained right to veto the Report was converted into its antipode – an automatic adoption of the Report. This feature was a direct result of the practical reality that the agreement of all WTO members, including the successful party, is not likely to occur.

The language of various WTO rules suggests that there was an intention to preserve at least some degree of Members’ political control over the dispute resolution process. The WTO rules contain provisions limiting the adjudicators’ ability to interpret WTO law: the DSB “cannot add to or diminish the rights and obligations provided in the covered agreements”[1], the WTO Members have “exclusive authority to adopt interpretations” of obligations contained in WTO agreements[2], etc. However, as the subsequent practice of the Appellate Body has demonstrated, these controls put little restraint on the Appellate Body’s decision-making power, at least in the eyes of the US. WTO Members have never directly interfered with the Appellate Body’s decision-making through the DSB as the extremely diverse membership of the WTO impaired its ability to reach a unanimous decision. The Appellate Body appointments de facto became the only measure available to WTO Members to apply pressure on the system. With the growing dissatisfaction over the Appellate Body’s independent decision-making and very little support from the other Members, the US decided to pull the trigger.

What does the United States want?

The reasons for the US dissatisfaction with the WTO Appellate Body process were voiced over the years via different forums and on various occasions. The essence of the US position can be characterized as follows: while the rules agreed by the WTO Membership are sufficient to allow the efficient resolution of trade disputes, those rules have not been properly observed by the Appellate Body. A summary of the specific US grievances was listed in the US president’s 2018 Trade Policy Agenda[3]. All of these issues could be roughly broken down into three groups of concerns[4]: the Appellate Body procedure, the perceived judicial overreach, and the approach to trade remedies.

Procedural concerns

This is the most-cited group of concerns, some of which were referred to as motivation for blocking Appellate Body judicial appointments. It encompasses such issues as failure of the Appellate Body to meet timeframes for the delivery of its reports, as well as the controversy with the transitional period of the judges.

The WTO rules set out specific timeframes for appellate reports: a report is to be adopted within 60 days from the decision to appeal with a possible 30 day extension[5]. The 90-day timeframe was observed by the Appellate Body up until 2011. However, since 2011, with the rising workload of the court, the situation significantly deteriorated. The Appellate Body began to extend the timeframes of the reports and in some cases the delays took more than a year. The root of the US’s dissatisfaction lies in the fact that the Appellate Body’s extension decisions were taken unilaterally without the DSB or parties’ consent[6].

Under the Working Procedures for Appellate Review[7] the Appellate Body judges may continue working on their assigned appeals even after the expiration of their terms to complete the appeal. With the significantly increased volume of cases over the past years, this option was routinely utilized by the Appellate Body and its judges regularly considered appeals beyond the terms of their mandates. Again, the US argument is that neither the WTO working procedures, which were drawn by the Appellate Body itself, nor the numerous specific decisions to extend a mandate of a judge that had previously expired, have been approved by the DSB.

Alleged judicial overreach

This subset of US concerns encompasses such issues as interpretation of questions of fact and law, advisory opinions and precedents. Essentially, the root of the US concerns with judicial overreach is the idea that the Appellate Body judges are engaged in unintended lawmaking rather than solely helping Members to resolve their trade disputes.[8]

The jurisdiction of the WTO appeal process is limited to consideration of questions of law. The US contends that these very strictly defined parameters are routinely violated by the Appellate Body, which consistently interprets issues of domestic law that arguably should be treated as questions of fact, and engages in unwarranted review of the panels’ fact-finding process.

The WTO rules have numerous provisions to the effect that the WTO dispute resolution mechanism is aimed at achieving the settlement of a dispute. Some of the Appellate Body reports contain lengthy obiter dicta or provide advisory opinions, which, as claimed by the US, could make up the majority of the ruling. The US asserts that findings unrelated to the issues in dispute lack legal authority as they are beyond the power granted to the Appellate Body.

The US has also claimed that the Appellate Body treats its reports as precedents that are binding for the panels. As the Appellate Body observed in one of its rulings “Ensuring "security and predictability" in the dispute settlement system, as contemplated in Article 3.2 of the DSU, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case”[9]. The US claims that such an approach is not consistent with the WTO rules.

Trade remedies

This final category comprises a broad array of anti-dumping, anti-subsidy, and countervailing duty disputes that – taken together – represent a large chunk of the US cases before the WTO. Trade remedy disputes deal with measures imposed by the WTO Members in their domestic law to address potential harmful effects of unfair foreign practices on Members’ domestic industry. The treatment of trade remedies by the Appellate Body became an area of great concern for the US due in large part to recent instances of unsuccessful litigation efforts in the WTO system. According to some data, trade remedy cases comprise 45% of all WTO cases. More than half of these cases involve trade remedies imposed by the US. In more than 90% of these cases, the US was unsuccessful[10]. These WTO defeats have resulted in substantive changes to US domestic trade law. The trend was perceived by the US as an unwarranted erosion of its own law due to failure of the Appellate Body to respect the founding principles of the WTO and to stay within the confines of its mandate. The US asserts that the Appellate Body has been making rather than simply applying the law in the field of trade remedies by creating new rights and obligations beyond those contained in the WTO agreements.

Possible Solutions

In the anticipation of the WTO appellate system’s impasse, the WTO Members, legal practitioners, and academia have offered various reform proposals, ranging from quick procedural fixes to major institutional reforms purported to redesign the system altogether.

Arbitration as an interim solution

As we mentioned in our previous post on the topic, Canada and the European Union issued a Joint Statement announcing the creation of an interim appeal arbitration arrangement which will govern the resolution of disputes between the parties until the Appellate Body resumes its functions. By the end of January 2020 this initiative received support of another fifteen WTO Members[11]. This solution is aimed to neutralize the effect of the lockdown by allowing the parties to resolve their forthcoming trade disputes under the WTO rules using effectively the same arbitrators. Although a workable interim measure, this solution has its downsides and is not particularly suitable in the long-term. Given the current uncooperative US position, it is unlikely that it would sign on to this arrangement, which would leave a large portion of potential disputes out of the reach of this mechanism. In addition, there is no guarantee that the unsuccessful party would not appeal a decision. Should this happen, it will effectively grind to a halt the final adoption of the award as the appeal through the Appellate Body is stalled. This option also does not provide for formal adoption of an arbitration decision by the DSB, the full consequences of which remain unclear.

Strengthening procedural protections

In 2018 the delegations of the EU and the other eleven countries, including Canada, Australia, China, and India issued a Communication, proposing amendments to the WTO settlement process designed to resolve existing concerns. The Communication suggests revamping the system through the amendment of the DSU. In particular, the changes for which it advocates include requiring judges to complete the disposition of a pending appeal during his or her term, mandatory consent from the parties to the extension of the 90-day timeframe, introducing stronger language that the panels cannot provide legal interpretations of domestic legislation, and limiting the Appellate Body’s jurisdiction to only those issues raised on appeal by the parties.

Institutional changes to address trade remedies

It is clear now that the most contentious issues for which solutions are elusive lie in the area of trade remedies. While the US is dissatisfied with the Appellate Body’s imposition of remedies, other Members, particularly developing countries, might have reservations about the more protectionist approach preferred by the US. The gravity of these concerns is such that an institutional reform and, probably, the revision of the conceptual underpinnings for the WTO system, might be required. This is obviously not something that could be accomplished overnight. To gain time and to allow for a gradual transformation of the system some proposals call for the creation of a specialized appellate body to hear trade remedy cases[12]. This measure contemplates the creation of a highly-specialized institution with unique background in trade remedy disputes. It remains an open question whether merely raising the bar for judicial expertise and specialization without an in-depth re-examination of foundational approaches toward trade remedies, would be sufficient to resolve the tension between Members.

Key Takeaways

While the above measures, in particular the additional procedural protections that could be implemented relatively quickly, could ease the strain, it is debatable whether they would help to achieve the right balance between the control by sovereign governments and the autonomy of WTO adjudicators - if that is what the US aims to achieve. A striking feature of the current crisis is the absence of a clear message from the US articulating what changes to the Appellate Body process the US seeks. While ruthlessly voicing its concerns, the US has not tabled any proposals on what measures could be taken to cure the situation. It might be that the best solution the WTO community has at the moment would be to start a meaningful conversation between its Members to probe an equilibrium between the diversity of various perspectives.

The WTO Appellate Body deadlock can be interpreted as yet another casualty of the rise of protectionist tendencies worldwide. In the globalized economic system, expansion of trade tensions affects every industry, if not every household, causing disruptions in intertwined production chains, leading to currency wars, and yielding shortages or overproduction. However, the escalation of the Appellate Body crisis to its present paralysis could also be viewed as providing the Members with a unique opportunity to revamp the trade system’s foundational principles to reflect current trading behaviours and to establish new rules of the game.