TWN Info Service on WTO and Trade Issues (Jul18/01)
2 July 2018
Third World Network

Dispute settlement system facing terminal existential crisis
Published in SUNS #8708 dated 26 June 2018

Geneva, 25 Jun (D. Ravi Kanth) - The chair for the World Trade Organization Appellate Body (AB) Ujal Singh Bhatia on Friday cautioned members that the dispute settlement system is facing a terminal existential crisis following "the year-long impasse on the process for appointing the AB members," and "its reduced strength" is now threatening its "legitimacy".

"Unless WTO members take swift and robust action to remedy this situation, there may soon come a time when appellate proceedings are paralysed if fewer than three AB members are available", the chair warned.

By December 2019, the AB will be reduced to just one member if the current three vacancies are not filled and the second term for a sitting member Shree Babu Chekitan Servansing is not extended by end-September.

"If rules cannot be enforced, is there a point to negotiating them," the AB chair pointedly asked, after succinctly nailing the arguments advanced by the United States that the highest adjudicating body for global trade disputes failed to circulate its reports within the 90-day deadline since 2011.

Bhatia cautioned members that the AB is now facing the terminal existential crisis because of the continued attempts to block the selection process for filling vacancies and terminate the principle of negative consensus under Article 1 7.14 of the Dispute Settlement Understanding (DSU).

The AB chair urged members to enter into an urgent "political dialogue" to address two fundamental challenges facing the WTO dispute settlement system - "the burgeoning pressure of increasingly complex disputes at various stages " and "the way the DSU should be used to resolve disputes" - failing which "these challenges can cripple, paralyze, or even extinguish the system."

Without naming the US, the AB chair made his comments a few hours after the US trade envoy to the WTO, Ambassador Dennis Shea, launched a searing critique of the AB's failures to circulate its reports within the 90-day deadline under Article 17.5 of the DSU since the last eight years.

The US trade envoy also threatened that any report or rulings issued by the AB after the 90-day deadline should not be adopted under the principle of negative consensus which requires WTO members to implement Dispute Settlement Body recommendations based on AB reports to be implemented unconditionally unless there is complete consensus among members to reject the AB's rulings.

Several members sharply disagreed with the US trade envoy's assessment on Article 17.5 of the 90-day deadline as well as the negative consensus framework.

"We find it striking (for the US) to criticize the Appellate Body for delays, while at the same time not allowing the new appointments to take place," the European Union said pointedly.

The EU also squashed the US proposal for not adopting the negative consensus principle if the AB reports are delayed beyond 90 days. The EU argued the principle of negative consensus is "absolute" and valid for both "late" and "timely" AB reports.

At an unusual Dispute Settlement Body meeting on Friday, the US again blocked a proposal from more than 66 countries for establishing an expeditious selection process for filling the three vacancies at the AB.

Prior to blocking the proposal for an expeditious selection process, the US trade envoy launched a scathing attack on the AB for failing to respect Article 1 7.5 of the Dispute Settlement Understanding and "the mandatory requirement to complete appeals in no more than 90 days, with no exceptions."

Ambassador Shea said the AB had respected this rule prior to 2011 and "when there were deviations, it was only with the agreement of the parties."

But since 2011, the AB resorted to "inexplicable" practices, with the "appeals taking longer and longer".

The US envoy said "there are serious consequences for the WTO dispute settlement system of the AB's repeated, flagrant breach of Article 17.5."

Ambassador Shea, however, remained silent on the US failure to implement the WTO dispute settlement recommendations and the AB rulings in several cases for more than 16 years.

He offered a detailed explanation of the provisions of Article 17.5 of the DSU, saying it "does not accord discretion to the Appellate Body to issue reports beyond the 90-day deadline."

Ambassador Shea said "if any Member considers today that Article 17.5 does not mean exactly what it says, we would simply point out that, some 20 years ago, the Appellate Body understood Article 17.5 to mean exactly what it says."

The US trade envoy gave several examples of pre-2011 when members cooperated to facilitate the ability of the AB to meet the 90-day deadline.

"At the request of the parties to the dispute, the DSB several times agreed to take DSB decisions to extend the time period for adoption or appeal of panel reports so that the appeal could be considered at a time when the Appellate Body would be better placed to issue its report within 90 days," he argued.

From 2011, the AB began ignoring the 90-day requirement, he said. "Some WTO members had expressed significant concerns," the US envoy said, suggesting that "starting with the appeal in US-Tyres (China), the Appellate Body, without explanation, departed from the long-established practice of consulting and obtaining parties' consent where it considered it could not meet the 90-day requirement."

During the last eight years, the AB "has frequently and increasingly breached its 90 days obligation," said Ambassador Shea.

"This problem may also relate to other systemic concerns Members [the systemic concerns have been largely raised by the US] have expressed. For example, an appeal will take longer where the Appellate Body spends valuable time addressing issues that [are] not necessary to resolve a dispute."

The US repeatedly said the AB deviated from the covered agreements even though the complexity of the disputes required a thorough examination of all issues coming under the purview of the dispute.

The US envoy said "the AB creates reasons for breaching the rule rather than changing its behavior to ensure compliance with the rule," thereby, the AB "diminishes the rights of WTO Members contrary to DSU Article 3.2 and undermines confidence in the WTO as a whole."

Therefore, "it is past time for WTO Members to meet their responsibility to administer the WTO rules-based system according to the rules," Ambassador Shea argued.

Because of the AB's flagrant violation of Article 17.5 of the DSU, any report issued by the AB after 90 days "would be that this report no longer qualifies as an Appellate Body report for purposes of the exceptional negative consensus adoption procedure of Article 17.14 of the DSU."

"No party should bear uncertainty as to the adoption of a report due to the adjudicator's unwillingness to follow the rules or obtain the DSB's agreement to deviate from those rules," the US envoy said.

Unsurprisingly, the US did not address the growing complexity of trade disputes as mentioned by several members during the meeting.

A few hours after the US envoy delivered the scathing attack on the AB, the chair of the AB, Ujal Singh Bhatia, delivered the annual report for 2017.

Bhatia began by saying "these are extraordinary times" for the WTO's dispute settlement system which is now facing two "contrasting and yet related challenges that threaten its legitimacy as well as its existence."

The two challenges, according to Bhatia, are: "On the one hand, the dispute settlement system, which has for two decades established its credentials as an efficient and impartial mechanism, faces the burgeoning pressure of increasingly complex disputes at various stages."

"On the other, some recent critiques have raised fundamental questions about the way the DSU should be used to resolve disputes."

It is an open secret that the US has been arguing for the past one year that WTO members should revert to the pre-1995 phase of resolving trade disputes by negotiating the findings issued by panels. The US has also argued against the negative consensus of the DSU.

The AB chair urged members to address the twin challenges as they are "clearly beyond the capacity of the dispute settlement system itself to resolve, and they call for determined political dialogue among WTO Members."

"Left unaddressed," he warned, "these challenges can cripple, paralyse, or even extinguish the system."

The AB chair maintained that 551 disputes have been initiated by WTO Members, resulting in 230 circulated panel reports and 136 circulated AB reports.

"Aside from the sheer number of disputes that Members have submitted to dispute settlement - which is a sign of empirical legitimacy - it is worth mentioning the almost total absence of instances where Members have chosen not to implement a ruling upon losing it," he said.

The AB chair's assessment on the implementation of the disputes by members is incorrect as the US had not implemented several rulings for the past 16 years, said a trade envoy, who asked not to be quoted.

Without naming the United States, Bhatia said "while losing parties have criticized individual rulings, "these critiques have rarely challenged the overall authority or legitimacy of the WTO judicial mechanism."

He said "given the number, size, and complexity of appeals, coupled with the resources provided to it, the AB cannot be realistically expected to deliver high-quality reports within the timeframes prescribed in the DSU."

"Long delays in filling vacancies in the AB obviously do not help either," he said.

"Given the daunting mismatch between its workload and resources, the AB has undertaken several initiatives to simplify and streamline the content of it s reports and its legal analysis," he said.

Bhatia said "the growing incongruence between the disputes being referred to the WTO dispute settlement system, the resources allocated to it, and the rules and procedures governing it are together leading to very significant delays."

The AB chair offered a detailed explanation as to what the highest adjudicating body is required to do under its mandate set out in Article 3.2 of the DSU.

Given the "constructive ambiguity" in rules, he said it is imperative for the AB to strictly follow the "customary rules of interpretation of public international law" as codified in the Vienna Convention on the law of treaties.

The AB chair said that "while many provisions of international treaties are agreed upon in clear and detailed language, certain provisions may be couched in what international lawyers call "constructive ambiguity," where consensus on precise language could not be reached during negotiations."

"In the WTO context, when a dispute arises in relation to such an unclear or ambiguous provision, adjudicators are to examine that provision in accordance with customary rules of interpretation and to apply them to the particular case," he said.

Without naming the US, Bhatia said, "some [members] argue that where adjudicators encounter such ambiguity or lack of clarity, they should refrain from examining it and instead leave it for WTO Members to deal with."

"Others support the need for resolving the interpretative issue so as to make sure that disputes are not left unresolved," he said.

"When adjudicators, having applied these interpretative tools, conclude that certain conduct is outside the scope of application of the treaty obligation invoked, they should have no hesitation in ending their analysis there," he said, suggesting that "if an issue is not regulated in WTO law, WTO Members are entitled to act as they please."

He gave the example of Havana rum trademark dispute, saying the AB "agreed with the panel that this definition has been left to the legislative discretion of individual countries."

The AB chair said "Article 3.2 provides that the dispute settlement system serves to clarify WTO provisions in accordance with customary rules of interpretation."

He then asked "how far should the dispute settlement system go in "clarifying" ambiguous provisions, and where are the limits?"

Again without naming the US, Bhatia said "there appears to be a tension between the minimalistic approaches favoured by some and the requirements under Article 11 of the DSU for panels to make "an objective assessment of ... the applicability of and conformity with the relevant covered agreements" and under Article 1 7.12 for the Appellate Body to "address" each issue of law and legal interpretation covered in the panel report that is raised during an appellate proceeding.

"When we sit in judgement of specific cases, these issues are not always easy to resolve," he argued.

The AB chair raised several questions whether "DSU provisions provide WTO adjudicators with the discretion to deny clarifying WTO provisions where such clarification is necessary to resolve the dispute? Do they permit adjudicators to deny exercising jurisdiction to resolve the dispute when it has been properly established?"

He said "it is important to note that a decision not to fully address an issue could, in effect, be a decision in favour of one of the participants, possibly altering the rights and obligations of WTO Members."

"There are also cases in which Members raise an issue on appeal concerning a "legal interpretation developed by the panel", as contemplated by Article 1 7.6, without challenging the ultimate conclusion that the panel reached," he said.

Bhatia said "the issue of consistency of rulings in WTO dispute settlement is closely connected to the mandated requirement for "security and predictability"."

"As is well known, one reason for creating the Appellate Body was to provide greater guarantees to WTO Members that panel reports would be subject to review, in the context of the adoption of the reverse consensus principle. The Appellate Body has taken the view that ensuring "predictability and security" implies that, absent cogent reasons, an adjudicator will resolve the same legal question in the same way in a subsequent case," he maintained.

The AB chair said "each case has to be considered on its own merits, and cases or issues that appear to be similar may be decided differently when they can be distinguished from earlier cases or when factual scenarios are different."

In a riposte to the US charge that the AB deviates from the covered agreements, Bhatia said that a tabula rasa approach, which consciously sweeps aside the past, could not meet the requirements of "security and predictability" as outlined in the DSU.

He cited the rulings issued by the international investment arbitration that caused more difficulties to parties because of the "lack of consistency in first-instance arbitration rulings, as an immediate counterfactual of a system without a review mechanism for ensuring coherence and predictability."

"Given the urgency for decisions regarding the AB, inaction is no longer an option," he said, arguing that "the year-long impasse on the process for appointing AB Members is debilitating the Body."

The AB's "reduced strength is undermining the collegiality of our deliberations, and the lack of proper geographical representation threatens its legitimacy."

"I need not point out that the reduction in our numbers will cause further delays in appellate proceedings," he warned.

"Unless WTO Members take swift and robust action to remedy this situation, there may soon come a time when appellate proceedings are paralysed if fewer than three AB Members are available", Bhatia cautioned.

"Such a paralysis would have profound implications on panel proceedings," he said, arguing that "the Appellate Body and panels are part of one dispute settlement mechanism, and one cannot properly function without the other."

"Where a panel report is appealed, but an Appellate Division cannot be formed to hear that appeal, the adoption of the panel report is suspended until the Appellate Body can complete its proceedings," he cautioned.

"This would lead to the de facto demise of the negative consensus rule that has characterized the WTO dispute settlement system since 1995," Bhatia warned.

"Any losing party would be able to prevent the adoption of the panel report by appealing it to a paralysed Appellate Body," he said. "If rules cannot be enforced, is there a point to negotiating them?" he asked.

The chair said "while the WTO dispute settlement system has to enforce existing international obligations, it also has to respect the limits of those rules and identify areas where national sovereignty is not constrained".

"But WTO Members also need to bear in mind the consequences of their actions on the effectiveness of the international system. In an interdependent world, global problems demand global solutions, and even national problems often require international cooperation," he said.

In conclusion, the AB chair's assessment points to a grim situation that could lead to the demise of the AB by end-2019, unless the WTO members act on a war footing to strengthen the highest adjudicating body.