WTO Dispute Settlement Crisis

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WTO Dispute Settlement Crisis

What is the issue?

  • Since its inception in 1995, the WTO dispute settlement mechanism has resolved an impressive number of trade disputes and has earned a reputation as the “crown jewel” of the global trading system.
  • Today, however the World Trade Organization’s (WTO’s) dispute settlement mechanism is going through a “crisis”.
  • The body is at risk of becoming inoperable by the end of 2019 as the United States continues to block appointments to the Appellate Body over a variety of concerns related to the body’s independence and activism.
  • Despite a general agreement among WTO members on the necessity to reform the WTO and find a solution to the Appellate Body crisis, consensus on a path forward has remained out of reach.
  • The Appellate Body will not be able to operate by mid-December absent a resolution from the WTO membership.
  • Unless the issue is resolved, the body could become defunct, and countries locked in international trade disputes will be left with no forum for recourse.

What is the WTO’s Appellate Body, and why is it important?

  • The World Trade Organization (WTO) has long been considered an effective institution because of its enforceable dispute resolution procedures.
  • Its process calls for ad hoc panels to issue rulings on disputes over member country compliance with their WTO rights and obligations, subject to review by a standing Appellate Body composed of seven “judges” (technically members).
  • Decisions by the Appellate Body are final and binding, and generally respected by disputing parties.
  • The Appellate Body, set up in 1995, is a standing committee of seven members that presides over appeals against judgments passed in trade-related disputes brought by WTO members.
  • With over 500 international disputes brought to the WTO and over 350 rulings issued since 1995, the organisation’s dispute settlement mechanism is one of the most active in the world, and the Appellate Body is the highest authority in these matters.
  • Countries involved in a dispute over measures purported to break a WTO agreement or obligation can approach the Appellate Body if they feel the report of the panel set up to examine the issue needs to be reviewed on points of law. Existing evidence is not re-examined; legal interpretations are reviewed.

Why appeals are stuck at WTO, how India will be hit if process breaks down?

  • The Appellate Body can uphold, modify, or reverse the legal findings of the panel that heard the dispute. Countries on either or both sides of the dispute can appeal.
  • The WTO’s dispute settlement procedure is seen as being vital to ensuring smooth international trade flows. The Appellate Body has so far issued 152 reports. The reports, once adopted by the WTO’s disputes settlement body, are final and binding on the parties.

So, what is the problem in the WTO Appellate Body?

  • Over the last two years, the membership of the body has dwindled to just three persons instead of the required seven. This is because the United States, which believes the WTO is biased against it, has been blocking appointments of new members and reappointments of some members who have completed their four-year tenures. Two members will complete their tenures in December this year, leaving the body with just one member.
  • At least three people are required to preside over an appeal, and if new members are not appointed to replace the two retiring ones, the body will cease to be relevant. Between 1995 and 2014, around 68% of the 201 panel reports adopted were appealed.
  • While the US is directly involved in more disputes than other WTO member countries, several countries—including India—enter disputes as third parties.
  • India has so far been a direct participant in 54 disputes, and has been involved in 158 as a third party.
  • The understaffed appeals body has been unable to stick to its 2-3 month deadline for appeals filed in the last few years, and the backlog of cases has prevented it from initiating proceedings in appeals that have been filed in the last year. The three members have been proceeding on all appeals filed since October 1, 2018.
  • In February 2019, the body said it would be unable to staff an appeal in a dispute between Japan and India over certain safeguard measures that India had imposed on imports of iron and steel products. The panel had found that India had acted “inconsistently” with some WTO agreements, and India had notified the Dispute Settlement Body of its decision to appeal certain issues of law and legal interpretations in December 2018.
  • The body has so far been unable to review at least 10 appeals that have been filed since July 2018.

What can happen if this situation is not addressed in time?

  • With the Appellate Body unable to review new applications, there is already great uncertainty over the WTO’s dispute settlement process. If the body is declared non-functional in December, countries may be compelled to implement rulings by the panel even if they feel that gross errors have been committed.
  • Should such a country refuse to comply with the order of the panel on the ground that it has no avenue for appeal, it will run the risk of facing arbitration proceedings initiated by the other party in the dispute.
  • This does not bode well for India, which is facing a rising number of dispute cases, especially on agricultural products. In the last four months alone, four cases have been brought to the WTO against India’s alleged support measures for its sugar and sugarcane producers.
  • Also, the overall weakening of the WTO framework could have the effect of undoing over two decades of efforts to avoid protectionism in global trade. This is a major concern currently, as trade tensions, for example between the US and China and the US and India, are on the rise.

And what is the way forward from here on?

  • To ensure the proper functioning of the dispute settlement system, there are several paths forward.
    • For example, WTO members could agree on new procedures calling on the Appellate Body to submit issues of legal uncertainty arising on appeal to respective WTO committees for further discussion and negotiation among WTO members.
    • Such “legislative remand” procedures would link the dispute settlement function with the role of the WTO as a forum for permanent negotiations.
    • When a consensus cannot be reached among all WTO members, the General Council (comprising all WTO members) can use the latent tool of “authoritative interpretations” by a three-fourths majority vote to resolve ambiguities in the WTO text.
  • While new appointments to the Appellate Body are usually made by a consensus of WTO members, there is a provision for voting where a consensus is not possible.
  • The group of 17 least developed and developing countries, including India, that have committed to working together to end the impasse at the Appellate Body can submit or support a proposal to this effect, and try to get new members on the Appellate Body by a majority vote.
  • This, however, may be an option of the last resort, as all countries fear unilateral measures by the US as a consequence of directly opposing its veto.

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