Dispute panels, AB must abide by principles of natural justice
Chakravarthi Raghavan sets out proposals for reform of a WTO dispute settlement system that has been the subject of concerns raised by developing countries and, more recently, the US.
GENEVA: In undertaking a complete review and reform of the WTO’s Dispute Settlement Understanding (DSU), a cardinal principle to be borne in mind and implemented is that strict adherence to the principles of natural justice is fundamental and fully applicable to dispute panels and the Appellate Body (AB).
This is dealt with in detail below, after a discussion of some US complaints against the functioning of the DSU.
In voicing complaints against the AB at meetings of the WTO’s Dispute Settlement Body (DSB), the US has flagged some issues but without elaborating or engaging on them with other member states, despite repeated prodding. It has even shown some disdain at the attempts of other members to address the US complaints by proposing changes to the DSU rules.
Among the complaints voiced by the US are that: the WTO is becoming a forum for litigation and not negotiation; the timelines for the conclusion of appellate proceedings and reports are exceeding the stipulated 90-day period; the AB is practising “judicial activism”; and AB rulings cannot be binding precedents in subsequent disputes. [See South-North Development Monitor (SUNS), Nos. 8536 dated 21 September 2017, 8831 dated 24 January 2019, and 8841 dated 7 February 2019.]
In the US itself, the US Trade Representative (USTR) and other administration officials have been speaking in greater detail about the US grievances. A prominent US complaint voiced there is over the AB rulings in disputes raised by other members against US use of the “zeroing” methodology in anti-dumping investigations. These and some others are briefly set out and analyzed below.
According to US media reports, in remarks on 18 September 2018 in Washington DC, the USTR Robert Lighthizer expressed the administration’s unhappiness with the WTO’s dispute settlement process, pointing to numerous cases where he claimed dispute panels had overstepped their jurisdictions. He claimed that there were a number of issues on which there was “pretty broad agreement” that the DSU was “deficient”, such as transparency issues and issues with the staff.
The USTR (who had been counsel to the US steel industry in his previous avatar) said there were many cases involving anti-dumping and countervailing duties where the (panel and AB) decisions had been “really indefensible.” He also cited as an example the AB decision in February 2000 holding the US Foreign Sales Corporations (FSC) law as WTO-illegal. Lighthizer claimed the rulings had diminished what the US had bargained for or had imposed obligations that the US did not believe it had agreed to.
The US complaints on the anti-dumping and FSC cases are analyzed below. Before doing so, it needs to be pointed out that in respect of all the US complaints set out above, it was the US itself (in the early days of the WTO-DSU) that had “pioneered” and forced the WTO onto this path and cheerleaded the rulings that made these possible.
(When the WTO came into being, the legal division of the secretariat, which “serviced” dispute panels, was headed by a US national, and the AB secretariat by a national of Canada, a close US ally against the rest of the membership on trade issues in those days.)
This has been brought out in a previous article (“The WTO, its secretariat and bias against the South”, TWE No. 680/81) which cited a run of panel/AB rulings against key developing countries. The US was a party or third party in these disputes, but either the three-member division benches hearing them included US nationals, or US nationals who were AB members participated in the deliberations of all seven AB members on the appeals under the AB’s procedural rules on “collegiality”.
All these rulings were adopted by the DSB and frequently cited in pleadings on subsequent disputes by the US itself as a party or third party, and even more by the AB in its own opinions, applying the stare decisis (principle of precedent) doctrine for its rulings.
Now for some specific complaints voiced by the USTR or his officials and reflected in some pro-USTR media.
The complaints relate to the consistent AB rulings till now that the US use of the “zeroing” methodology to determine dumping is illegal under the WTO’s Anti-Dumping Agreement (ADA).
(The term “zeroing”, not found in the ADA itself, has been used in respect of cases where the US takes account of export prices which are below the “normal value” but ignores those above the normal value.)
However, the latest ruling on an anti-dumping dispute has seen a dispute panel depart from the long line of AB rulings against “zeroing”, claiming “cogent” reasons for deeming the US use of “zeroing” valid. This ruling, issued in a dispute raised by Canada against the US on imports of softwood lumber, has been acclaimed in the US. Canada has however given notice of appeal against it to the AB.
In its report on this ruling, the Inside US Trade newsletter of 18 April cited an unnamed US trade lawyer for the view that the US arguments against the previous AB rulings on “zeroing” centre on the wording in Article 2.4 of the ADA on comparing export price and normal value, and in Art. 2.4.2 on how and in what circumstances a normal value “established on a weighted average basis” may be compared against prices of individual export transactions. The US contention has been that the ADA has not forbidden “zeroing”.
In weighing the merits of the US complaints, it may be useful to first consider briefly the relevant parts of the scheme of the ADA in the family of WTO agreements and how the anti-dumping issue had previously been treated under GATT 1947.
Before the establishment of the WTO (and the ADA), GATT 1947 had an anti-dumping code after the Tokyo Round negotiations. Prior to that, in the Kennedy Round talks, an attempt had been made via a code approach to elaborate on some of the provisions of GATT 1947, but this did not get anywhere since the US Congress had given the US President authority only to negotiate tariff concessions. The Tokyo Round marked the first time that Congress gave the President “fast track” authority to negotiate non-tariff issues, binding itself to only vote either “yes” or “no” to any negotiating outcome and not attempt to modify it – a necessary precondition before other nations would agree to negotiate with the US on non-tariff trade issues.
Compared with the ADA, the Tokyo Round anti-dumping code could perhaps best be described as sketching out for the first time some ideas and concepts without much detail and which were thus amenable to various interpretations.
Subsequently, under the ADA, Art. 1 makes the application of its provisions conditional on the existence of the “circumstances” set out in Art. VI of GATT 1994. The use of the term “shall be” in Art. 1 makes this mandatory.
Art. 2.1 sets out how a product is to be considered “dumped” when exported and introduced into the commerce of another country. The subsequent provisions in Articles 2.2, 2.3, 2.4 and 2.5 set out conditions under which the provisions of Art. 2.1 need not be used, and the alternative ways that can be used to determine “normal value”, “dumping” and “dumping margins.” As such, these are exceptions to the provisions in Art. 2.1.
In outlining various methodologies that can be used, Art. 2.4 makes clear that under any methodology there has to be “fair comparison.” Art. 2.4.2 details, in a kind of descending hierarchy, several methodologies that may be used for comparison and determination during an anti-dumping investigation in the importing country. These are: W-to-W (weighted-average-normal-value with weighted-average-of-prices-of-all-comparable-export-transactions) or T-to-T (comparison of normal value and export prices on a transaction-to-transaction basis). Art. 2.4.2 allows also for comparison of a weighted average normal value with prices of individual export transactions “if the authorities find a pattern of export prices which differ significantly among different purchasers, regions or time periods, and if an explanation is provided as to why such differences cannot be taken into account appropriately by the use of [W-to-W or T-to-T] comparison”.
The burden of proof in invoking Articles 2.2, 2.3, 2.4 and 2.5 rests on the party invoking them. As such, it is difficult to accept the US argument that “zeroing” can be used since it is not prohibited.
Moreover, at each stage, the ADA makes clear that the investigating authorities’ decision has to be based on facts and the evidence, and not surmises.
Thus, Art. 17.6(i) of the ADA stipulates that a dispute panel, in a dispute involving the ADA, “shall determine” whether the establishment of facts was proper and the evaluation of those facts was unbiased and objective. Under Art. 17.6(ii) (commonly known as the “standard of review” provision), where provisions of the agreement permit more than one permissible interpretation, the panel shall find the investigating authorities’ measure to be valid if it rests upon one of those permissible interpretations.
[While a Marrakesh Ministerial decision called for this standard of review to be reviewed after three years and a decision taken whether it was capable of wider application, the WTO membership decided against it (when the EU tried to get it made applicable to disputes under the Agreement on Subsidies and Countervailing Measures [SCM]).]
The US, which has been blocking the filling up of vacancies in the AB since 2017, is alone in its argument that its use of “zeroing”, despite consistent AB rulings against it, is valid, since it is not forbidden! According to the Inside US Trade report, the US may lift its blockage of AB appointments in return for an accord in revising the DSU to enable continued use by the US of “zeroing”.
In response to the panel ruling on the softwood lumber dispute, Canada has given notice of appeal to the AB. If the AB (with its currently depleted membership) is able to function, hear and dispose of this appeal (giving priority to it over other pending appeals), and reverses itself on the use of “zeroing”, it will be seen as a case of yielding to US “blackmail”. The AB would lose whatever credibility and legitimacy it has.
On a careful reading of the panel ruling, beyond use of the adjective “cogent”, it is difficult to see the logic in the panel’s reasoning to differ from the reasoning in the long line of AB rulings against “zeroing”. Perhaps the “cogent reasons” cited could have a connection to the possible “invisible hand” of the WTO secretariat in its role of “servicing” the panel, to meet the US demand to make “zeroing” valid.
The rest of the WTO membership, particularly the developing countries, the main targets of the US in its anti-dumping investigations, might as well wind up the WTO rather than yield to the US on this.
Behind this US demand is an issue pending accord in the ongoing US-China trade talks which the “luminaries” in the Trump administration (USTR Lighthizer, National Security Advisor John Bolton et al.) have made clear they will thereafter try to import into the DSU, namely, that everyone in the WTO must abide by the WTO rules and DSB recommendations, but that the US, like the sovereigns of Europe in the medieval era, is above the law and need not abide by it.
On the issue of the FSC law, the USTR’s comment on the relevant DSU ruling ignores trade disputes on both the FSC law and its predecessor, the Domestic International Sales Corporations (DISC) law. Even under GATT 1947, a panel had ruled against the DISC law for providing tax credits and benefits to US corporations using at least 50% of US inputs in their foreign sales. In turn, the US had at that time challenged the laws and practices of four European Economic Community (EEC) member states.
The panels, consisting of the same persons in both disputes, held the DISC law illegal, and some tax provisions of the EEC members equally illegal. Both sides blocked adoption of the panel rulings. (Under GATT 1947, unlike in the WTO, adoption of rulings could be, and was often, blocked by the two leading trading entities, the US and Europe.) In 1979, a subsidies code under the Tokyo Round was concluded. And in 1981, the two sides allowed the two panel rulings to be adopted. As part of the adoption of the rulings, there was also an understanding reached at the GATT Council.
In pursuance of all this, the US changed its DISC law and enacted the FSC law. FSCs are offshore shell corporations (mostly incorporated in the Virgin Islands, Guam and Barbados) with little or no economic activity at location but at best a room and a fax machine to receive and send out messages.
Under the FSC law, these offshore corporations, wholly owned by US corporations, get more favourable tax treatment for products exported (in their name) and containing no more than 50% in value of (non-US) imports. And unlike the “arm’s length” relationship required for such parent-subsidiary transactions under the US tax code, the FSC law enables administrative pricing.
The favourable tax treatments give benefits of between 15-30% of the foreign trade income to the parent. The FSC law divides the foreign source income of an FSC into “foreign trade income” and all other foreign source income, including investment income and income from patents, licensing etc. The foreign trade income of an FSC is divided into exempt and non-exempt foreign trade income.
In the US, the foreign source income of a foreign corporation is taxable to the extent of it being effectively connected to trade or business conducted in the US, to be ascertained by a factual inquiry by the US tax authorities. In the case of an FSC, the exempt portion is set by the law, and thus not subject to any factual inquiry.
In normal cases where the income earned by a foreign corporation controlled by a US corporation is taxed on repatriation, the parent corporation or shareholder is required to include in gross income a pro-rata share of the undistributed foreign income. In contrast, the parent of an FSC is not required to declare its pro-rata share.
The dividends received by the parent US corporation from foreign corporations and from an FSC are also treated differently. Under the FSC law, the US parent corporation is generally not taxed on dividends received that are derived from the foreign trade income of the FSC. All these benefits are dependent on exports and the exported products having no more than 50% of fair market value as imports.
The US, in its arguments before the WTO dispute panel and the AB, had tried to inject into the WTO rules, including the SCM Agreement (which for the first time defined a subsidy), the 1981 understanding in the GATT Council reached at the time of the adoption of the panel rulings on the DISC law and the EEC laws.
Both the panel and the AB turned down this attempt, and ruled that the FSC tax exemptions involved subsidies contingent upon export performance and thus constituted a “prohibited subsidy” under Art. 3.1(a) of the SCM Agreement.
The panel held that the tax credits or exemptions under the US tax regime (but for the FSC law) also provided a marketing subsidy for marketing agricultural products. As such, they were subject to a reduction commitment in terms of Art. 9.1(d) of the WTO Agreement on Agriculture (AoA), and thus violative of Art. 3.3 of the AoA (which provides for a ceiling on export subsidies and subjects them to a reduction).
The AB agreed that the FSC measures involved a subsidy contingent upon exports, in terms of the SCM Agreement. It also agreed that it was a subsidy contingent upon export performance under the AoA.
It held that the FSC measure created a legal entitlement for the recipients to receive export subsidies, not listed in Art. 9.1 of the AoA, on agricultural products – both those scheduled and those not scheduled in the US schedule of commitments. The legal entitlement accrued to the recipient when it complied with the statutory requirements of the FSC law, and at that point the US government must grant the FSC a tax exemption, with no discretionary element vested with the government.
The AB also held that the FSC law involved application of export subsidies, not listed in Art. 9.1 of the AoA, in a manner that at the least “threatens to lead to circumvention”. In this light, the AB reversed the relevant panel finding and held that the US had acted inconsistently with its obligations under Art. 10.1 of the AoA by applying export subsidies, with respect to both scheduled and unscheduled agricultural products, in a manner that at the very least threatened to circumvent its export subsidy commitments under Art. 3.3 of the AoA. And by providing export subsidies inconsistent with Art. 10.1 of the AoA, the US had acted inconsistently with its obligations under Art. 8 of the AoA.
The FSC scheme’s main beneficiaries at that time included such political heavyweights as Microsoft, leading aircraft maker Boeing and automotive giant General Motors. The tax breaks for these companies over the next five years was then estimated to be worth some $15 billion, according to the Congressional research office.
DSU review proposals
In these instances of the past detailed by USTR Lighthizer, the analyses above show the hollowness of the US grievances.
Nevertheless, in the DSU review, the complaints of the US must be considered along with those of developing countries and any others. If they are found to be justified, the relevant DSU rules should be revised by consensus.
A few changes to the DSU rules are important to restore the negotiation-litigation balance at the WTO:
1. As mentioned at the outset, observance of the principles of natural justice by panels and the AB is fundamental. The most important of these principles, commonly voiced in judicial, quasi-judicial or administrative proceedings, are best summed up in the two Latin phrases “Audi alteram partem” and “Nemo judex in causa sua”.
“Audi alteram partem” (“let the other side be heard as well”) is considered to be a principle of fundamental justice or equity in most legal systems. It is the principle that no person should be judged without a fair hearing in which each party is given the opportunity to respond to the evidence against them. In modern times, this includes the rights of a party or his/her lawyers to confront the witnesses against him/her, to have a fair opportunity to challenge the evidence presented by the other party, to summon his/her own witnesses and to present evidence, and to have counsel, if necessary at public expense, in order to make his/her case properly.
This, as well as the other principle, “Nemo judex in causa sua” (“no one should be a judge in his own case”), has been commonly accepted and found in ancient Greek and Eastern systems (Dharma in India and Confucian in China), in Anglo-Saxon and Continental jurisprudence, and in the Islamic Hadith. It is part of public international law and, as per the UN General Assembly mandate to draw upon all systems of law, was codified by the International Law Commission and adopted by the UN General Assembly as the Vienna Convention on the Law of Treaties.
2. In accord with the above, the WTO secretariat should not be allowed to brief (and guide) panels and the AB behind the backs of the parties to a dispute under the guise of “servicing” the panels and AB. Any briefs or notes provided to panels should be made available simultaneously to the parties (complainant, respondent and third parties) to enable them to respond.
3. Panellists named to a dispute panel and the AB division bench members hearing an appeal must reach conclusions on their own and draft their own reports. At best, a small secretariat of legal officers (not under the WTO Director-General) may be envisaged to help in the drafting. It may even be worthwhile to set up a small unit outside of the WTO secretariat (perhaps as part of the UN Commission on International Trade Law secretariat or even of the International Court of Justice) to “service” panels and the AB. This servicing could be outsourced to such a unit by the WTO, with the costs borne on the WTO budget.
4. Both dispute panels and the AB are creatures of the DSU in terms of the relevant rules on these; as such, they have no independent or inherent residuary powers, only those vested in them by the DSU rules. Nor can panels or the AB empower themselves beyond what is spelt out under the DSU. It follows that the AB practice where members of a division bench hearing an appeal consult the other AB members who are not part of the division bench, has to end.
5. In carrying out their mandates and responsibilities (Art. 11 of the DSU), panels are obliged to make an objective assessment of matters before them, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant WTO agreements. It is not clear whether panels can exercise “judicial economy” in not providing clear findings and rulings on all the matters before them. However, it is clear that Art. 17.12 of the DSU, read with Art. 17.6, gives no scope for the AB to exercise “judicial economy” and refrain from ruling on all points of law raised in appeal.
6. Under GATT 1947, it was the GATT Contracting Parties, acting jointly in terms of Art. XXIII.2, that considered and adopted panel rulings, thus making them part of the GATT acquis. In contrast, WTO rulings adopted by “negative consensus” have no such basis for application of the stare decisis doctrine. That doctrine does not apply in any event under international law, but only in national jurisdictions, in particular among those following Anglo-Saxon jurisprudence, where the country’s superior court is a court of record and decisions of that court are the law, until that court reverses itself or until the law and/or the Constitution is changed according to prescribed provisions and procedures.
7. Nevertheless, adoption of rulings by negative consensus is essential to settle particular disputes. However, for a WTO ruling adopted by negative consensus to constitute any basis or precedent to be followed to avoid future disputes and bring some certainty, it must be considered (separated from the facts of the particular case) and adopted by positive consensus at the DSB, perhaps excluding the parties to the particular dispute in this instance of decision-making. Better still would be its consideration and formulation as an “authoritative interpretation” of the relevant rule(s) in the relevant agreement by the WTO General Council, where voting, if no consensus decision is feasible, is possible.
8. As former GATT law official Frieder Roessler had advocated (cited in “The WTO, its secretariat and bias against the South”, TWE No. 680/81), the delicate balance in the WTO between the deliberative/legislative remit of the WTO bodies and the adjudicatory role of the DSU to prevent abuse needs to be respected and restored.
9. Developing countries would also do well, in the DSU review, to take up the several suggestions and recommendations for revision of the DSU that are still valid and relevant from the monograph “The World Trade Organization and Its Dispute Settlement System: Tilting the balance against the South” (C. Raghavan, 2000, https://www.twn.my/title/tilting.htm). (SUNS8898)
This article is the last in a five-part series on the current AB impasse and other issues related to the WTO dispute settlement system. The first four parts were published in TWE Nos. 676, 677, 678/79 and 680/81. The author acknowledges that he has benefitted from comments and suggestions on earlier drafts from some former trade officials and negotiators, in particular Bhagirath Lal Das and B.K. Zutshi, former Indian Ambassadors to the GATT. Any errors of omission or commission are entirely those of the author.
Third World Economics, Issue No. 682, 1-15 February 2019, pp2-5