Many WTO Members seek a restoration of a two-tier dispute settlement process with binding results. Over the last 20+ years, the United States has raised concerns about the dispute settlement system and whether panels and the Appellate Body were abiding by the limitations contained in the Dispute Settlement Understanding. As has been widely reported and reviewed, this led to the blockage by the United States of new appointments to the Appellate Body which led to the effective shut down of the second tier review in early December 2019.
The U.S., during the Trump Administration, went to great lengths at Dispute Settlement Body meetings to lay out the deep concerns the U.S. had with what had happened to dispute settlement, culminating in February 2020 with the release of a report from the U.S. Trade Representative’s Office entitled Report on the Appellate Body of the World Trade Organization.
With no functioning Appellate Body, some WTO Members agreed to a temporary arbitration approach that looks similar to the Appellate Body. Called the Multi-party interim appeal arbitration arrangement (MPIA), the MPIA in 2021 covered over 50 WTO Members including the EU and its Member States; Australia; Benin; Brazil; Canada; China; Chile; Colombia; Costa Rica; Ecuador; Guatemala; Hong Kong SAR; Iceland;
Macao SAR; Mexico; Montenegro; New Zealand; Nicaragua; Norway; Pakistan; Peru; Singapore; Switzerland; Ukraine; and Uruguay. Most WTO Members, including the U.S., Japan, Korea, India, Indonesia, Malaysia, the Russian Federation and many others are not parties to the MPIA.
This has led to various actions being taken after a panel report is released — adopting panel reports as is; pursuing any agreed arbitration process between the parties to the dispute, using the MPIA (where both parties are parties to the MPIA), appealing panel reports despite the current inability of the matter to heard on appeal (delaying a final resolution). As of February 14, 2022, some 24 panel reports have been appealed with no final resolution possible prior to a solution. Other reports have been adopted without further action, some have led to bilateral solutions, etc.
Prior to the Appellate Body becoming inoperable for lack of Appellate Body members, there was much discussion on a possible solution to the impasse including a process headed by Amb. David Walker. For the United States, the problem with the approach of other Members was a failure to address the underlying causes of the system having gone off the tracks in so many disputes. For the United States, restating existing obligations contained in the DSU was an insufficient solution as the Appellate Body had felt at liberty to deviate from existing obligations despite clear directions.
As noted, the Biden Administration (still without a Deputy USTR in Geneva because of Senate inaction) has continued the blockage of new appointments to the Appellate Body. USTR Katherine Tai has spoken some on dispute settlement. Her words suggest an alignment with prior Administrations that the system is in need of reform. The question for WTO Members is what approach is needed to address underlying U.S. concerns and ensure that the dispute settlement system moving forward is limited to the parameters established by the Members and supports the negotiation function of the WTO instead of supplanting it.
The Trump Administration had argued consistently that WTO Members needed to engage in an examination of why the system had deviated from the DSU as a necessary prelude to any examination of possible solutions. While many Members talk about being willing to address U.S. concerns, there has been little apparent interest among Members in engaging in the type of review of why the AB deviated so significantly from its limited role, why Members accepted this deviation and many other questions that need to be addressed to have Members reach a common understanding on what needs to be done to have a system of dispute settlement that comports to the limits agreed to by Members.
Last week, the Centre for Trade and Investment Law (CTIL), the Indian Institute of Foreign Trade (IIFT), New Delhi, the Centre for Alternative Dispute Resolution (CADR), Rajiv and the Gandhi National University of Law (RGNUL), Punjab organized a conference on February 10 and 11 entitled “Conference on
‘Dispute Settlement in International Trade Agreements: Prospective Pathways”. One of the last speakers on the second day was Ambassador Dennis Shea, the Trump Administration’s Deputy U.S. Trade Representative and Permanent Representative to the WTO. Amb. Shea provided his recap of the problems with the WTO’s dispute settlement system and identified a series of questions WTO Members need to address if there is to be hope of a resolution to the current impasse at the WTO on dispute settlement. His comments can be found on his Linkedin page, https://www.linkedin.com/feed/update/urn:li:activity:6897931614924414976/, and are copied below.
“Good evening, everyone. Let me begin by thanking Professor Nedumpara, the Centre for Trade and Investment Law, and the Rajiv Gandhi National University of Law for this opportunity to share some thoughts about the World Trade Organization and WTO dispute settlement.
“When the Professor reached out to see if I would be available to be with you this evening, albeit virtually, I jumped at the opportunity. I suppose you can say I began my WTO journey in India. On one of my earliest days as the newly-minted US Ambassador to the WTO, I found myself in New Delhi, a participant in a WTO mini-Ministerial conference hosted by the Indian government. As you can imagine, there was great interest among the assembled to see and meet the person whom the Trump Administration was sending to Geneva. It was also something of a ‘hot seat’ experience as I was peppered with questions about the U.S. position blocking new appointments to the WTO’s Appellate Body. In retrospect, I suppose it was a good warm-up for my subsequent service in Geneva.
“Before I venture any further, I want to acknowledge the cordial relationship that I enjoyed with my Indian counterparts – most notably Ambassador Deepak and Ambassador Navnit – during my service at the WTO. Although we did not see eye-to-eye on many issues, we always maintained a friendly and open relationship, recognizing the strong bonds between our two countries. I would also like to extend my best wishes to Ambassador Bhatia, whom I understand will be speaking shortly. I suspect he may disagree with some of what I may say.
“I thought I’d spend my time highlighting the key elements of the U.S. critique of the Appellate Body and offer some thoughts on the way forward. I use the term ‘U.S. critique’ intentionally. While in Geneva, I tried to convey to my colleagues that concerns about Appellate Body overreach were shared broadly
across the political spectrum in the United States and were not just Trump Administration or Republican Party complaints. In all honesty, I don’t think this point registered fully.
“With the Biden Administration continuing to block Appellate Body appointments for more than a year, it should now be crystal clear that this U.S. critique is deep-seated, broad-based, and bipartisan. In fact, during my service as WTO Ambassador, I never once received a telephone call, email, text, WhatsApp, or
other communication from anyone in the U.S. Congress, Democrat or Republican, complaining about the positions I was taking vis-à-vis the Appellate Body on behalf of the United States. On the contrary, I was often encouraged to keep it up.
“Let me also put all my cards on the table and say that I don’t believe the Appellate Body is ever coming back, in current or modified form. There is simply no political energy in the United States for doing so, and of course, that matters in a consensus organization like the WTO. As the current U.S. Trade Representative Katherine Tai recently stated: ‘Reforming dispute settlement is not restoring the
Appellate Body for its own sake, or going back to the way it used to be. It is about revitalizing the agency
of Members to secure acceptable resolutions.’
“Of course, the WTO membership could conclude that, going forward, a bifurcated system of appellate review is acceptable – with some members participating in the recently-created Multi-Party Interim Appeal Arbitration Arrangement and others, like the United States and India, operating outside of it. But, if the goal is a reformed dispute settlement system in which all members participate, then understanding the U.S. critique of the Appellate Body is essential.
“Let me add that, as part of any re-examination of the WTO dispute settlement system, everything should be on the table – both the appellate stage, if there is to be one, and the panel stage which has received much less attention but merits scrutiny, particularly in light of the growing length of panel proceedings. While engaged in this re-examination, there should be no red lines, just open minds. The first step should be a discussion, not a negotiation.
“Was the Appellate Body designed to be an international court charged with creating a global common law of trade? This question is at the heart of the U.S. critique and, from the U.S. perspective at least, the answer is clearly and unambiguously ‘no.’
“The Appellate Body is not called a ‘court’ in the Dispute Settlement Understanding nor are its members described as ‘judges.’ The DSU envisions Appellate Body members as part-time employees, not necessarily based in Geneva, who would be reimbursed travel and per diem expenses when called upon to hear an appeal from a panel report. Their function was straightforward and limited: to correct egregious errors of law made by dispute settlement panels. The DSU explicitly prohibits the Appellate Body from engaging in fact-finding – that’s the job of the panels – and from adding to or diminishing the rights and obligations provided in the WTO agreements. The WTO membership created the dispute settlement system – of which the Appellate Body was just a part – to help resolve disputes, not to create a body of jurisprudence or impose new rules. The responsibility for issuing authoritative interpretations of the WTO Agreement has always belonged to the WTO members themselves, acting through the General Council or the Ministerial Conference.
“Because of the limited role of the Appellate Body, the DSU requires it to act quickly, completing work within 60 days as a general rule but never beyond a 90-day deadline.
“Unfortunately, the Appellate Body – with the encouragement of some key WTO members and individual Appellate Body members – soon morphed into something completely different.
“It began to regularly engage in fact-finding, adding unnecessary complexity and time to its work. It began to insist that its reports were entitled to be treated as binding precedent and must be followed by panels, absent ‘cogent reasons,’ a standard that appears in no WTO agreement. It routinely rendered advisory opinions on issues not necessary to assist the Dispute Settlement Body in resolving a dispute. It unilaterally declared that it had the authority to allow individuals formerly serving on the Appellate
Body, whose terms had expired, to continue to participate in and decide appeals, a practice that India first objected to in 1996.
“And beginning in 2011, the Appellate Body routinely violated the 90-day rule for completing its reports, and in many cases, did so without even consulting the parties to an appeal. In fact, some appeals took more than one year to complete.
“For more than 20 years, across multiple Administrations, the United States – joined by other similarly concerned WTO members – repeatedly complained about these and other deviations from the clear text of the DSU. We were obviously unsuccessful in effectuating change. During my tenure in Geneva, when I asked my colleagues ‘why’ the Appellate Body felt free to break the rules – the famous ‘why’ question as characterized by the media – I was usually greeted with silence.
“This silence is not surprising. It became clear to me that some WTO members saw the Appellate Body as an independent international court and its members as judges who inherently have more authority to make rules and create jurisprudence. The same members envisaged the body as the centerpiece – the ‘crown jewel’ – of the dispute settlement system, not just one component of that system.
“Some Appellate Body members also viewed themselves as ‘appellate judges’ serving on a ‘World Trade Court’ and commissioned with broad authority to develop ‘a coherent and predictable body of jurisprudence.’ We know all this because they said so.
“In an important 2020 speech at Washington, DC’s Georgetown University, former Appellate Body member Tom Graham described the prevailing ethos of the Appellate Body characterized by three specific attributes:
“First, an orthodoxy of viewpoint, about the role of the Appellate Body as a self-anointed international court, with much broader authority to over-reach the rules and create judge-made law than permitted by the WTO agreements, or intended by the negotiators who created them;
“Second, a mindset that declined to re-examine the premises by which the Appellate Body expanded its role; and
“Third, a group-think that de-legitimized serious systemic criticisms, and those who espoused them.
“In his Georgetown speech, Mr. Graham also described the high degree of control exercised by Appellate Body staff leadership; an over-emphasis on ‘collegiality’ that shaded into peer pressure to conform; an excessive striving for consensus decisions coupled with a discouragement of dissents that led to excessively long and unclear compromise reports; a sense of infallibility; and an undue adherence to precedent – not only with respect to outcomes but also to reasoning, definitions, and obiter dicta that had the effect of ‘baking in mistakes.’
“As far as I know, none of these critical Appellate Body ‘inside-the-tent’ operational issues has ever seriously been discussed at the WTO’s Dispute Settlement Body, the General Council, or even among informal groupings of WTO members.
“The effect of Appellate Body overreach and its accretion of power has been the diminution of the WTO’s negotiating function. Why negotiate when you can achieve a desired outcome through litigation? Not surprisingly, the last successful multilateral negotiation was the Trade Facilitation Agreement,
completed in 2013, and there have been no successful rounds of tariff negotiations since the WTO’s creation.
“While in Geneva, I was often asked ‘what does the U.S. want?’ What the U.S. wanted was a deeper discussion of why the Appellate Body felt free to depart from what WTO Members agreed to and why the WTO membership allowed it to happen. It seems the current U.S. Administration is seeking the same kind of deep-dive discussion, recognizing as we did that simply papering over the differences among WTO members with a few word tweaks to the DSU or with a General Council decision that simply repeats the words already in the DSU just won’t work as a durable solution.
“Going forward, there must be a shared understanding of the proper structure and role of the WTO dispute settlement system and what we all want to get out of it.
“So how would we start such a discussion? Beyond engaging on the substantial critique that I just outlined and what it might mean for any future system, let me suggest several questions. Some of these questions may sound quite basic but are still essential to consider nonetheless:
“What is the purpose of dispute settlement at the WTO? What objectives are we trying to achieve? What benefits do WTO Members hope to derive?
“Do we agree that dispute settlement should support the WTO’s negotiating and monitoring functions and not act to undermine them?
“What attributes do we want WTO arbitrators to possess?
“Is the timeliness of decision-making important? If so, how can we expedite decision-making without compromising fairness and quality?
“Do we even need a second-tier or appellate review at the WTO? If so, why? Has it been the shared experience of WTO members over the past 25 years that the Appellate Body has demonstrated greater expertise and competence than panel members?
“If a second tier is considered important, should a losing party at the panel level have an automatic right to appeal? Or should the lane for these appeals be narrower – perhaps through a mechanism that
allows the WTO membership to set aside erroneous panel opinions in exceptional cases, as suggested by former U.S. Trade Representative Bob Lighthizer?
“What other alternative appellate review structures are possible? For example, does it make sense to expand the roster of first-tier panelists and enlist some of them for ‘appellate duty’ when the need arises? Do we need a permanent and dedicated staff to assist the appellate reviewers or did that type of structure contribute to the Appellate Body exceeding its intended role?
“And what is the appropriate relationship between the WTO membership, acting through the Dispute Settlement Body, and the WTO arbitrators?
“Beyond these questions, there must be a shared understanding of the fundamental norms that underpin the rules-based international trading system. After all, these norms – and the rules they inform and buttress – are what the dispute settlement system is designed to protect.
“For the U.S., the fundamental norms of the WTO include openness, transparency, non-discrimination, and market orientation grounded in the rule of law. It’s this last one – market orientation – that seems to be now in dispute.
“As one of the main architects of the multilateral trading system, the United States has always believed that adherence to market-based policies among trading parties was essential if the system is to work effectively and fairly. We certainly held this belief when we joined the GATT and later when we signed the Marrakesh Declaration with its commitment to ‘open, market-based policies.’ And the U.S. has insisted in literally dozens of WTO accessions that the acceding party undertake domestic reforms to reduce the role of the state in the economy and increase market orientation.
“As former WTO Deputy Director General Alan Wolff has explained: ‘The WTO is not simply about coexistence; differences among members affecting trade which deviate from the principles governing the WTO, its core values, are to be progressively overcome.’
“Not surprisingly, the People’s Republic of China does not believe that market orientation is a core value
of the WTO, arguing instead that market and non-market economies both belong in the organization on
an equal footing. But in 2001, when China acceded to the WTO, there was an expectation that its economy would further open up, liberalize, and embrace market principles.
“Regrettably, this future has not materialized. In fact, we have witnessed significant retrenchment, a process that has been ongoing for well over a decade.
“Today, it’s as if one team is playing rugby and the rest of us are playing cricket.
“As I said in my final remarks at the WTO in 2020, China’s ‘state-led, non-market economic system is incompatible with the WTO and its norms. To believe the WTO can manage this system’s trade disruptive impact under current rules and through the dispute settlement process is fantasy.’
“In my mind, this is the most pressing issue facing the WTO – how to manage this fundamental incompatibility. And to be completely candid, I’m not sure the WTO is equipped to do so.
“What I do know is that, at least from a U.S. perspective, reform of the WTO’s dispute settlement system can only succeed if the market-orientation norm of the WTO is significantly reinforced, not only through changes to the rules that effectively discipline non-market practices both also through a widespread recognition throughout the membership that market orientation is a foundational principle or norm of
the international trading system.
“Thank you for listening. It’s been a privilege to have this opportunity to speak with you today.”
The EU and many other WTO Members are looking for reform efforts to include the restoration of a two-tier dispute settlement system. The objectives these Members have focus on timing and speed of process. One does not see from these Members a focus on the need for Member discussion of the types of questions that Amb. Shea has outlined above. If, as seems likely, the Biden Administration is supportive of reexamining the dispute settlement system to address the types of concerns Administrations of both parties have raised over the last two decades, pursuing negotiations before a full discussion of the core questions listed above will almost certainly lead to failure.
Similarly, resolving the dispute settlement challenge will not occur in isolation. There is the issue of correcting erroneous decisions of the past as well as the critical need to address the incompatibility of the market economy systems that have typified the GATT and now the WTO and the state controlled economic systems typified by China and others. Convergence of Member economic systems must be agreed and enforced. Coexistence plainly is not working. There are too many aspects of state-controlled economies which are not adequately addressed by the existing multilateral rules. It is not likely that mere modification of the rules or adoption of new rules will solve the incompatibility.
The challenge for the WTO is whether its diversity of Members and need for consensus makes any forward movement on these critical issues possible in the coming months and years. Let’s hope that Amb. Shea’s concern that the WTO may not be capable of meeting the challenge is not correct.
Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.
To read the full commentary from Current Thoughts on Trade, please click here.