The World Trade Organization in crisis
The World Trade Organization (WTO) has until very recently been considered as one of the most effective international organisations thanks to its unique dispute settlement mechanism which allows for enforceable dispute resolution procedures. This mechanism relies on ad hoc panels of experts to issue panel reports on disagreements over WTO members’ compliance with their rights and obligations, subject to review by a standing Appellate Body composed of seven members. This litigatory sophistication guarantees a rules-based trading system crucial for a smooth flow of world trade. Indeed, members of the WTO are aware of the rules, and they comprehend that penalties may follow any violation. This legal certainty generates incentives for businesses to operate on open markets with greater sales, creating more jobs, and fostering economic growth.
Nonetheless, the system is far from being perfectly consensual. Indeed, a deeper rift exists among member states. Notably, the United States is extremely dissatisfied with several arrangements in the WTO, such as the status of China as a developing country, the judicial activism of the Dispute Settlement mechanism as well as rule 15 of the Appellate Body Working Procedures, which enables former Appellate Body Members to continue to serve on appeals to which they were assigned during their terms. On the 1st of October 2018 the idyll of international trade began to stumble, with the United States blocking the appointment of new members in the Appellate Body, thereby leaving it with three members only. Pursuant to article 17.1 of the Dispute Settlement Understanding (DSU), the Appellate Body cannot function with fewer than three members. As a consequence, on the 10th of December 2019, the whole system became paralysed with the expiry of two members’ terms. As from today, the Appellate Body still lacks a quorum to review new appeals.
Under article 16.4 of the DSU, panel reports adopted by the Dispute Settlement Body will not be binding on the disputing parties if one of them notifies its intention to appeal. In other words, a panel report will not be considered for adoption until after completion of the appeal. Thus, a key consequence of a dysfunctional Appellate Body as identified above lies in the fact that panel reports will never become binding on parties to a dispute when appealed. This further leads to an absence of an obligation to implement and comply with the report within a reasonable period of time, which leaves the door open to trade retaliation. Those current developments put the global commercial order in jeopardy, as the disappearance of transparent and predictable trade rules and obligations is extremely harmful for the private sector. The troubling situation in the WTO threatens a system which the primary goal is to provide liberal, safe and foreseeable access to foreign markets for the goods and services of exporting enterprises.
The European Alternative
In order to preserve the continuation of a compulsory international trade system based on rules, the European Union and 15 other WTO members took the matter into their own hands last January in Davos, by establishing a contingency appeal arrangement for trade disputes. The agreement was consolidated on the 27th of March 2020, and was entered into between Australia; Brazil; Canada; China; Chile; Colombia; Costa Rica; the European Union; Guatemala; Hong Kong; Mexico; New Zealand; Norway; Singapore; Switzerland; and Uruguay. This agreement was approved by the Council of the European Union on the 2nd of April 2020.
Practically speaking it is a multi-party interim appeal arbitration arrangement (MPIA), the existence of which is based on the right granted to WTO members under article 25 of the DSU to resort to arbitration as an alternative means of dispute settlement. The MPIA mirrors the normal WTO rules on appellate review. Through a notification to the Dispute Settlement Body, any member of the WTO can join the MPIA. In disputes between the participating members, the MPIA replaces the original appeal procedures and it will apply to any future dispute between participants. This mechanism is expected to be in effect as long as the Appellate Body remains dysfunctional.
Similar to the EU-Canada and the EU-Norway agreements, the MPIA is established under the regime of article 25 of the DSU, however the MPIA distinguishes itself from the latter two by embracing the following originalities:
- Pursuant to paragraph 4 and annex 2 of the agreement, appeals under the MPIA will be heard by three arbitrators selected from a pool of 10 standing appeal arbitrators. In the words of Thibaud Bodson, this increase in the number of arbitrators aims to enhance “the efficiency and internal organization of the Appellate Body while also improving the geographical balance on the Appellate Body after numerous accessions to the WTO since 1995”. The pool of arbitrators will comprise persons of recognised authority, with demonstrated expertise in law, international trade and the subject matter of the covered agreements generally. This, instead of having three former members of the Appellate Body serving as permanent arbitrators. On the 13th of May 2020, the European Union nominated Prof. Joost H. B. Pauwelyn as its candidate for the pool of 10 standing arbitrators. However by the 26th of July 2020 the standing pool remains incomplete. Based on the current states that are parties to the arrangement, the pool will most likely be composed of arbitrators coming from developed as well as developing countries.
- Pursuant to paragraph 7 of the agreement, participating member states will provide the MPIA’s arbitrators with “appropriate administrative and legal support” without relying on the support structure of the WTO Secretariat.
- Pursuant paragraph 12 of the agreement, the original 90-day period for appeals is confirmed and arbitrators can take suitable organisational measures to rationalise the proceedings (such as time or page limit). The MPIA allows arbitrators to encourage parties to limit claims that cannot be subject to an objective assessment of the facts pursuant to Article 11 of the DSU. Therefore, one can say that arbitrators are obliged to address all issues raised in the procedure. According to paragraph 14, on a proposal from the arbitrators, the parties may agree to extend the 90-day time period. Thus, the arrangement embraces the idea of a strict deadline that shall be rigorously observed, thereby saving time and money for all parties.
Assessment of the Alternative
One may rightfully question whether the MPIA will live up to expectations in ensuring the stability and predictability of the multilateral trading system. We hereunder highlight four issues that should give pause for thought.
- The first issue: major trading powers are not parties to the MPIA. Indeed, to the obvious non-participation of the United States, we can add the absence of India and even of historical allies of the European Union such as Japan. Prof. Bashar H. Malkawi explains this reluctance to join by a “wait and see” strategy where some countries might commit to the arrangement if the MPIA proves to be a successful experience. Other countries – such as India – that are facing delicate disputes on sugar subsidies and tariffs on Information Technology goods are rather keen on preserving the dysfunctional status quo. All in all, this limited scope undoubtedly hinders the effectiveness of the alternative.
- The second issue: the legality of the MPIA may be called into question. This is because a literal reading of article 25 of the DSU suggests that arbitration can only be agreed upon by disputing parties with regards to a specific dispute. On the contrary, it is unclear whether article 25 may be read in such a way that it allows for the establishment of a plurilateral arrangement like the MPIA.
- The third issue: this alternative does not address the main criticisms levied against the WTO system such as the self-election principle and the developing country category, not to mention the Appellate Body’s overreaching interpretations. On one hand, the MPIA will leave major WTO members such as the United States or India with even more frustration. On the 6th of June 2020, the United States, in a letter to the WTO Director-General, explicitly rejected the MPIA. On the other hand, developing countries will be torn between joining the MPIA or not. All this may lead to a permanent deadlock of the institution’s functioning.
- The fourth issue: for Prof. Malkawi, the MPIA has also its fair share of unclear terms. Pursuant to paragraph 15 of Annex 1 of the MPIA, the arbitration award is only notified – but not adopted – by the Dispute Settlement Body. This terminology could cast doubt on the persuasive authority of these decisions as a precedent for future WTO disputes. Indeed, any MPIA report,no matter how important it is, will be deprived of precedential value since the report will not be adopted by the Dispute Settlement Body based on article 17.14 of the DSU. In other words, the MPIA arbitrators are bound by WTO agreements but not by previous Appellate Body decisions, nor by past MPIA cases.
The objective of the MPIA is twofold. First, it offers a temporary alternative to the current dysfunctional two-tier adjudication system of the WTO. Indeed, the arrangement can represent a functional a gap filler whilst members can try to move ahead in search for a long-term solution. Second, the MPIA may be seen as an experimentation to various reform proposals. As a matter of fact, the parties to the MPIA opted to incorporate in the agreement a number of hotly-debated reforms such as no dicta opinions, a strict a time limit with no extension without prior consent of the parties, the fact that arbitrators will only address those issues that are necessary for the resolution of the dispute and, finally, the duty bestowed upon arbitrators to exercise their functions with a highly desired judicial economy. Therefore, the MPIA stands as a unique opportunity to test the different reform proposals that could one day be incorporated into the WTO legal landscape if its Appellate Body becomes operational again.
However, it remains that, in light of the 4 elements we discussed above, (limited membership of the MPIA, its disputed legality, the many contentious issues left untackled and the obscure terminology of the arrangement), one can be certain that the WTO crisis is far from being settled with this alternative.
The author would like to express his gratitude to Prof. Geert Van Calster (KU Leuven) for his comments on an earlier draft of this post.