Explained: Why WTO needs an interim arbitration body

With WTO’s dispute settlement process set to fall apart due to appellate body vacancies remaining unfilled, a parallel arbitration procedure is a must

Explained: Why WTO needs an interim arbitration body
The WTO Agreement contains a set of rules for the conduct of international trade relations.

For more than two years, the US has obdurately opposed the appointment of persons to fill vacancies in the seven-member Appellate Body (AB) of the WTO. As a result, the strength of the AB has already been reduced to three. The matter will come to a head on December 11, 2019, when two more members retire and the requirement of a quorum of three members can no longer be met. The AB will not be functional any more.

In this context, the EU and Canada have jointly indicated their intention to resort to arbitration under Article 25 of the Dispute Settlement Understanding (DSU), and set up an interim arbitration procedure. This procedure will be followed in disputes involving the two WTO members if the AB is unable to hear appeals due to an insufficient number of members.

What would be the implication of the AB not being able to hear appeals? What is the need to provide an alternate mechanism, as the two big players on the WTO stage have proposed?

The WTO Agreement contains a set of rules for the conduct of international trade relations. Much of the business in the WTO for the implementation of these rules is transacted through dialogue and discussion, and several bodies have been set up for this purpose. A distinctive feature of the Agreement is a finely balanced structure for dispute settlement, with an enforcement machinery to ensure observance of rules. A member may raise a dispute on any measure taken by another member affecting its trade interest and ask for the establishment of a panel to examine the matter and submit its findings to the Dispute Settlement Body (DSB). The panel’s report is routinely adopted by the DSB, unless a party to the dispute notifies its intention to appeal.

The appeal is then heard by the AB and a report is submitted to the DSB, which must, likewise, adopt such report.

Once the AB report is adopted by the DSB, the member concerned is obliged to implement the findings and recommendations within a reasonable period of time. The rules provide for procedures to deal with disagreements on the reasonable period and on whether there has been compliance. In case of reluctance or refusal to implement, the affected member may seek enforcement by requesting the DSB to authorise retaliatory measures. The DSB may allow retaliation in the same sector (goods, services or intellectual property rights) or even authorise cross-retaliation, but it must be at the same level as the measure complained against. The process of enforcement is, thus, controlled multilaterally to ensure fairness of treatment towards all concerned.

If the AB becomes non-functional, the whole structure falls apart. At the stage of adoption of the panel report, the defending member will almost certainly notify its decision to appeal, with full knowledge that the AB does not have a sufficient number of members to hear appeals. In this situation, a notification of appeal will stop altogether any further action on the complaint. The absence of a functioning AB will not only deny the affected member two levels of adjudication on its complaint, but even the single level of adjudication will become infructuous. If the panel report is appealed against but the appeal cannot be heard, the dispute will be put in abeyance indefinitely. Without any rulings or recommendations adopted by the membership, there will be no need for surveillance of implementation. The inability of the AB to hear appeals will create a void in WTO’s dispute settlement machinery, changing it fundamentally. There will be retrogression to the inadequate system that existed in the early GATT days, when panel reports could not be implemented even after it had been demonstrated that the defending party was in breach of its obligations and had seriously affected the trade interests of the complaining party. There will be no option other than further negotiations to resolve the matter and the result of such negotiations will be determined, or at least influenced strongly, by the relative economic strength or clout of the two parties.

The EU-Canada proposal is aimed at redressing this aforementioned deficiency. The suggestion is to set up an alternative mechanism that will replicate the existing system in the WTO for carrying out hearings after the panel stage. Thereafter, all procedures for surveillance of implementation of rulings and recommendations by the DSB will also apply. After the panel report has been submitted to the parties, any party may request suspension of the panel proceedings and initiation of arbitration proceedings. The task will be carried out by three arbitrators selected by the Director General from a pool of former AB members.

A prior agreement between two members of the WTO on future disputes between them would create a mechanism in advance for handling the cases beyond the panel stage in the event the AB becomes dysfunctional. Such an agreement will remedy the situation created by the AB being knocked out of the system. But, a bilateral agreement will benefit only the two members party to it. What should other WTO members do? A multilateral agreement is out of the question as the US is likely to oppose such an agreement. It is the current political leadership in the US that is at the root of the problem, with the not-so-hidden agenda of seeking to hobble WTO’s dispute settlement machinery and, indeed, weaken the WTO itself. The alternatives are that individual WTO members sign similar bilateral agreements with their main trading partners or that about 25 members, which are prone to disputes, sign a plurilateral agreement.

Despite the seriousness of the consequences of the AB not being able to hear appeals, there is a lack of enthusiasm at Geneva to join the EU-Canada initiative. Most members want to wait until the end of the year in the hope that the US will agree at the last moment. They are not in favour of creating a parallel arbitration procedure. Some may even be quietly hoping for the collapse of the binding dispute settlement system so that they do not have to worry about disputes raised against them. India, too, faces disputes from important trading partners—the EU, Japan, Brazil and Australia, not counting the US.

But, the hesitancy seems to be based on false premises. The time to act is now. The US attitude is uncompromising, with no promise of change. The EU and Canada envisage recourse to arbitration only if the AB continues to be disabled through non-appointments to vacancies. If more members sign such an agreement, it would send to the US a signal of the resolve of these members to fill the void that will be created, and may even induce it to back down. For India, the appeals process being in abeyance does not mean that it will escape the consequences if it were to lose in any of the disputes raised against it. It means that India will be vulnerable to arbitrary retaliatory measures as the complainants will not be under the restraint of measures authorised by the DSB, and may be inclined to take action in accordance with their own interpretation of the rules. Only if continuity is maintained in the implementation of WTO dispute settlement procedures can it be ensured that WTO disciplines are followed on all aspects. Postponement of action on such an arrangement is not in India’s, or any other member’s interest.

The author is Professor at ICRIER
Views are personal

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.