Crisis in the WTO: Roots and Restorations

Since its inception in 1995, the Dispute Settlement System (DSS) of the World Trade Organisation (WTO) has built a formidable reputation in dealing with international trade disputes, thus leading it to be widely considered as the “crown jewel” of the World Trading System. It has been hailed to be one of the most effective dispute resolution mechanisms in place, with the DSS adjudicating on almost 600 cases in its 24 years of existence. This also makes it one of the busiest dispute resolution forums when compared to its international counterparts, such as the International Criminal Court that has dealt with a limited 27 cases and has issued a final verdict on merely 13 cases so far, in its existence of a span of over 15 years. The reliance on the system by the developed, the developing as well as the least developed countries (LDCs) represents the fairness, efficiency and effectiveness of the mechanism.

In this context, the impasse in the appointment of members to the Appellate Body (AB), which is the apex tribunal of the Dispute Settlement System, is an issue of concern. The WTO faces the imminent threat of its biggest governance crisis since its inception, upon the retirement of two of the three existing members in the originally seven-membered Appellate Body on December 10, 2019. The AB will then face a stalemate since no new appeal can be taken up for hearing as it will be unable to meet the minimum criteria for hearing an appeal of any panel report – which is a three-membered Appellate Body. The consequences of this Appellate Body grinding to a halt will have wide and far-reaching consequences. On the halt of the Appellate Body, the panel reports will seldom become binding since it would be restricted to the disputes where no appeal is sought by the aggrieved country. This would lead to a direct violation of the rights of the aggrieved party as per the WTO rules. Furthermore, this imminent crisis is likely to disrupt the order of the world trading system and runs the risk of returning to a trading system based on power, where giant players could act unilaterally and use the tool of retaliation to move forward. In such a chaotic system, the less powerful players are likely to lose their interests in the system.

The Background

The issue can be traced back to the US blocking appointments of two US-American members to the Body in 2011 and 2013. However, what came as unprecedented was the US blocking the re-appointment of a South Korean national to the Body in 2016, stating underperformance as the reason. Furthermore, since the positions can be filled only with the consensus of all the members, the vacancies in the AB remain unfilled. Since 2016, the US has been raising several concerns regarding the AB’s work.

These concerns include the continuance of AB members beyond their term to complete the adjudication on appeals already taken up by them. The US claims that this violates the rules laid down in the Dispute Settlement Understanding (DSU) and has disrupted the appointment process of new members to the Appellate Body. Further, it complained against the AB’s disregard to the strict 90-day timeline in issuing AB reports and claimed the AB to be “overreaching” in its interpretations and decisions. In particular, the US criticises that while the Panels are kept in check by the Appellate Body, there is no such system to keep the AB in check. The US has also alleged the Appellate Body to be wrongly attempting to set precedents by laying down obiter dicta in the settlement of disputes. It has complained that these excursions by the Appellate Body wrongly guide future disputes in the DSS, thus acting as an impediment to the goal of prompt settlement of disputes. While US diplomats have supported their vetoing decisions in the appointment process of AB members by stating the above ambiguous reasons, scholars from around the globe interpret the US blocking of AB vacancies as being aimed at permanently terminating the functioning of the AB and thus putting an end to ‘judicial restraints’ on US trade protectionism strategies. This political tactic is not new to the US, with it already being used by the US government to prevent NAFTA panel proceedings initiated against it. Also at the WTO DSS, this does not come as unprecedented, taking into account the various recent failures faced by the US at the forum in defending its protectionist strategies. The US has had a rough history, especially in recent times, to have been fairly aggressive in using the dispute settlement mechanism to pursue its market access objectives. With the ongoing US-China trade war, and the decisions of the panels requiring the US to make necessary compliance measures, thus restraining its ambitious market access goals, the vocal criticism of the AB by the US comes as no surprise.

The Challenges Ahead

In an attempt to change the US’s stance in the appointment of members of the AB, the European Union, China, India and several other WTO members submitted a proposal that addressed the various issues stated by the US at the WTO General Council Meeting held on the 12th of December, 2018. The proposal put forward suggested amendments to the DSU which involved permitting the outgoing AB members to hear appeals on pending matters only if at least one hearing had already taken place. Also, the AB shall address issues necessary to the dispute only, it shall not make any obiter dictum outside its purview, it shall extend the 90-day timeline only upon agreement of the parties, and the legal interpretations by the Appellate Body shall not concern themselves with the municipal and domestic laws of the member states. Furthermore, an annual meeting shall be held by the AB and DSB where the work of the AB shall be looked into in order to ensure its fairness and efficiency. However, in spite of the proposal attempting to address the concerns of the US, it was rejected by the US government.

In this deadlock situation, it is essential for the other WTO members to move ahead even if it is without the US. It is pivotal to save the WTO DSS which is moving towards a cliff’s edge, without which the world is to lose a system that has ensured trade stability in the world for decades. Similar to the renegotiation of the Trans Pacific Partnership Agreement (TPPA) by the 11 signatories post the US’s withdrawal with a view to enhance their economic welfare, it is now necessary for the WTO members to continue their legal compliance to the WTO DSU rules in order to ensure the existence of a global trading and legal system for the welfare of the global public. The potential options that lie in front of the WTO members include resorting to arbitration proceedings as provided by Article 25 of the DSU. The advantage of the ad hoc arbitration instead of an appellate review is that it does not depend on the functioning of the Appellate Body and does not affect all the members but only the parties to the dispute. The difficulty lies in the parties reaching an agreement to arbitrate, since such an agreement could be reached only if both parties have a fair chance of winning, which is seldom the case in WTO disputes. Another option that lies in front of the members of the WTO is for the parties to simply agree to not to appeal. The plausibility of this solution appears to be bleak since this would not keep the panels in check and would in turn overpower them, which may lead to its abuse. Some scholars have also suggested the appointment of AB members by means of a qualified majority vote, rather than by consensus. Though this would violate WTO rules, the emergency crisis demands such a move in order to save the system in place. Another option would be the formation of ad hoc panel proceedings outside the WTO, without the USA. However, this solution appears to lack political and legal underpinnings and would rather be an unfortunate admission of the failure of the WTO DSS and indicate the formal closure of the decades old world trading dispute settlement system. Thus, the most plausible way ahead would be for the countries to move ahead with consensus by majority members in the appointment of members to WTO AB, rather than by unanimity. Taking into consideration the necessity for a timely and practical solution, this may be the last opportunity to save one of the most efficient DSSs in the international framework.