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TWN Info Service on WTO and Trade Issues (May19/02)
6 May 2019
Third World Network


Dispute panels, AB must abide by principles of natural justice

Published in SUNS #8898 dated 2 May 2019

Geneva, 30 Apr (Chakravarthi Raghavan*) – In undertaking a complete review and reform of the 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 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 the various DSB meetings, the US has flagged some issues, without elaborating or engaging on them with other members, despite repeated prodding. It has even shown some disdain at the attempts of other members to try to meet the US objections, 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 time-lines for the conclusion of appellate proceedings and reports are exceeding the stipulated 90-day time period; “judicial activism” by the AB; and AB rulings cannot be binding precedents in subsequent disputes. (See SUNS #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 officials in the administration 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, citing the Anti-Dumping Agreement (ADA), against the US use of the “zeroing” methodology in investigations and determinations of the “dumping margin” on imports. These and some others are briefly set out and analysed below.

(The term “zeroing”, not found in the ADA, has been used in respect of cases where the US takes account of export prices of products of countries below the “normal value”, ignoring those at prices above the “normal” value.)

According to US media reports, in remarks on 18 September 2018 at the Center for Strategic and International Studies in Washington DC, the USTR, Ambassador Robert Lighthizer, voiced the administration’s unhappiness with the WTO’s dispute settlement process, pointing to numerous cases where he claimed dispute panels have overstepped their jurisdictions.

He claimed that there were a number of issues on which there was “pretty broad agreement” that the WTO Dispute Settlement Understanding (DSU) is “deficient”, such as on transparency issues and issues with the staff.

The USTR (who had been counsel to the US steel industry in his previous avatar) said there have been a lot of cases involving anti-dumping and countervailing duties where the (panel and AB) decisions have been “really indefensible.” He cited as an example, the AB ruling in February 2000 holding the US Foreign Sales Corporations (FSC) law (tax law) as WTO-illegal, in a dispute brought by the European Union against the US (DS108).

Lighthizer claimed the rulings had really 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 anti-dumping cases and the FSC law are analyzed below. Before doing so, it needs to be pointed out that in respect of all the US complaints set out in the earlier paragraphs, it was the US (in the early days of the WTO-DSU) that had “pioneered” and forced the WTO onto this path, and cheer-leaded the rulings that made these possible.

(When the WTO began, a US national headed the Legal division of the secretariat, that “serviced” panels; and the Appellate Body secretariat by a Canadian, a close US ally against the rest of the membership on trade issues in those days.)

This has been brought out in part 4 in this series (SUNS #8894 dated 25 April 2019) in the cases cited on the run of panel/AB rulings against key developing countries, where the US was the complainant (and in some disputes a third party), but with division benches having US nationals as members and/or US national AB members participating in the deliberations of all seven members, in appeals on points of law being heard by a division bench of three, under the AB’s rules of procedure on “collegiality”.

All these rulings were adopted by the DSB by negative consensus, 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” (the 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 and the dumping margins is WTO-illegal under the Anti-Dumping Agreement (ADA).

The latest ruling in an anti-dumping complaint, where a dispute panel has departed from this long line of AB rulings, claiming “cogent” reasons for ruling the US use of the “zeroing” methodology as valid, is in the dispute raised by Canada against the US (WT/DS534) on imports of softwood lumber. This ruling has been acclaimed in the US. Canada has however given notice of appeal against it to the Appellate Body.

In its report on this ruling (upholding the US use of “zeroing”), the US specialist newsletter, Inside US Trade (IUST) of 18 April, cites an unnamed US trade lawyer for the view that the US arguments against the AB rulings on “zeroing” centres on the wording in Art. 2.4 of the Anti-Dumping Agreement (ADA), for comparing export price and “normal value,” and that used in Art. 2.4.2 on how and in what circumstances a normal value “established on a weighted average basis” may be compared to prices of individual export transactions.

In the ruling over the US determination of “dumping” and “dumping margin” and levy of countervailing (CV) duties on imports of Canadian softwood lumber, the panel has claimed “cogent” reasons to hold the US use of zeroing valid. The US contentions in all such cases that its use of “zeroing” is valid has been on the basis that the Anti-Dumping Agreement (ADA) has not forbidden it. The AB has repeatedly ruled against the US on “zeroing” in a long run of cases.

At the outset in weighing the merits of the US complaints, it may be useful to consider briefly the relevant parts of the scheme of the Anti-Dumping Agreement in Annex IA of the WTO Agreement (pp 168-171 of Legal Texts), and how the issue was treated under GATT-1947.

Before the establishment of the WTO and its ADA, GATT-1947 had an Anti-Dumping Code after the Tokyo Round. In the Kennedy Round (unlike earlier GATT trade rounds), an attempt was made via a code approach to elaborate on some of the provisions of GATT-1947. This however did not get anywhere, since the US Congress had given the President authority only to negotiate tariff concessions. The Tokyo Round was the first time that Congress gave the President fast-track authority to negotiate non-tariff issues, binding itself only to vote “yes” or “no” but not attempt to modify it – a necessary pre-condition before other nations would agree to negotiate with the US on non-tariff trade issues.

Compared to the ADA, the Tokyo Round AD code could perhaps be best described as sketching out for the first time some ideas and concepts, without much details, and thus amenable to various interpretations.

Under GATT-1947, adoption of rulings could be, and was often, blocked by the two leading trading entities (the US and the EU). Under the WTO and DSU rules, this was no longer possible.

Under the WTO Anti-Dumping Agreement (ADA), Art. 1 of the ADA makes the application of its provisions conditional to the existence of the “circumstances” set out in Art. VI of the GATT-1994. The use of the term “shall be” in Article 1 makes this mandatory.

Art. 2.1 sets out how a product is to be considered “dumped” when exported by an exporter 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.

Moreover, 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 investigation in the importing country.

As set out in Art. 2.4.2, 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 transaction-to-transaction basis). It then allows also for comparison of a weighted-average normal value to 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 the 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 authority’s 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. (pp192-193 of Legal Texts).

While the Marrakesh Ministerial decision (p453 of Legal Texts) called for this Standard of Review to be reviewed after three years, and a decision taken whether it was capable of wider application, the membership decided against it (when the EU tried to get it made applicable to disputes under the Subsidies and Countervailing Measures (SCM) agreement.)

Canada, in response to the panel ruling (WT/DS534/R) on its AD complaint over softwood lumber, has given notice of appeal to the AB. If the AB (with its depleted membership) is able to function, hear and dispose off 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 the US “blackmail”. The AB will lose whatever credibility and legitimacy it has.

The US, which has been blocking the filling up of AB vacancies 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 IUST report, the US may lift its DSB blockage in filling AB vacancies, in return for an accord in revising the DSU to enable continued use by the US of the practice of “zeroing”.

On a careful reading of the panel ruling in this instance (WT/DS534/R), beyond use of the adjective “cogent”, it is difficult to see the logic in the panel’s reasoning to differ from the reasoning in a long line of rulings by the AB against “zeroing”. The only conclusion about the “cogent reasons” is perhaps the “invisible hand” of the secretariat in its role of “servicing” the panel, to meet the US demands to make “zeroing” valid in ADA disputes under the DSU.

The rest of the WTO membership, and more so the developing countries, the main US targets in AD 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, that 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 the US, like the sovereigns of Europe in the medieval era, is above the law and need not abide by it.

The USTR’s comment on the WTO-DSU ruling on the FSC tax law, ignores trade disputes on both the FSC law, and its predecessor the Domestic International Sales Corporations (DISC) law. Even under GATT-1947, a panel 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) members.

The panels, consisting of the same persons in both disputes, held the DISC law illegal, and also some tax provisions of the EEC member states equally illegal. Both sides blocked adoption of the panel rulings. In 1979, a subsidies code under the Tokyo Round was concluded. And in 1981, the two sides allowed the two earlier panel rulings to be adopted. As a part of the adoption of the rulings, there was also an understanding reached at the General Council.

In pursuance of all this, the US changed its DISC law and enacted the FSC laws. FSCs are offshore shell corporations (mostly incorporated in 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 laws, these offshore corporations, wholly owned by the US corporations, get more favourable tax treatment for products exported (in their name) and containing no more than 50 percent in value of (non-US) imports.

And unlike the “arms 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 to 30 percent 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 a 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 by the US tax authority.

Unlike in normal cases where the income earned by a foreign corporation controlled by a US corporation is taxed on repatriation, but requires the parent corporation or shareholder to include in gross income a pro-rata share of the undistributed foreign income, 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 percent of fair market value as imports.

The US, in its arguments before the WTO dispute panel and the Appellate Body, tried to inject into the WTO agreement, including the SCM Agreement (which for the first time defines a subsidy), the 1981 understanding in the GATT Council at the time of the adoption of the panel rulings on the DISC law and the EEC laws.

Both the panel and the Appellate Body turned down this attempt, and ruled that the FSC tax exemptions involve subsidies contingent upon export performance, thus a “prohibited subsidy” under Art. 3.1 (a) of the SCM Agreement.

The panel had 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, and thus subject to a reduction commitment in terms of Art. 9.1(d) of the 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 involve 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 accrues to the recipient when it complies with the statutory requirements of the FSC, 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 AoA in a manner that at the least “threatens to lead to circumvention”. In this light, the AB reversed the 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 threatens 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 heavy-weights as Microsoft Corp., leading aircraft maker Boeing Corp., and automotive giant General Motors. And 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.

In these instances of the past detailed by USTR Lighthizer, the analyses above show the hollowness of the US argument and grievance.

Nevertheless, in the DSU review, the complaints of developing countries and those of the US and any others, must be considered, and if found justifiable, changes agreed to for revising the DSU rules by consensus.

A few changes to the DSU rules are important to restore the negotiation and litigation balance at the WTO:

1. As mentioned at the outset, observance of the principles of natural justice by panels and the Appellate Body is fundamental. The most important of these, and 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” or “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 lawyers to confront the witnesses against him, to have a fair opportunity to challenge the evidence presented by the other party, to summon one’s own witnesses and to present evidence, and to have counsel, if necessary at public expense, in order to make one’s case properly.

This, as well as the other principle, “Nemo judex in causa sua” or “no one should be a judge in his own case”, have been commonly accepted and found in ancient Greek, Eastern systems (Dharma in Indian and Confucian in Chinese), 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 (UNGA) 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 (VCLT).

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 parties, 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. Panelists 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 DG) may be envisaged to help in drafting. It may even be worthwhile to set up a small unit, outside of the WTO secretariat (perhaps as part of the United Nations Commission on International Trade Law secretariat or even of the International Court of Justice), to “service” panels and the AB. Servicing panels and the AB could then be outsourced by the WTO to such a unit, and the costs borne on the WTO budget.

4. Both dispute panels and the Appellate Body 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, by use of their rule-making powers, empower themselves beyond their powers spelt out under the DSU. It follows that the AB practice of members of a division bench hearing an appeal, consulting at all stages the four other members who have not been part of the division bench, has to end.

5. In carrying out their mandates and responsibilities (Art. 11 of the DSU, p413-414 of Legal Texts), 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 covered 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. Unlike under GATT-1947 (brought into force by the protocol of provisional application) where it was the GATT Contracting Parties, acting jointly in terms of Article XXIII.2, that considered and adopted panel rulings, thus making them part of the GATT-acquis, 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 is the Law, until that court reverses itself or until the law and/or the Constitution are 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 settle a dispute, 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 or rules in the relevant agreement by the General Council, where voting, if no consensus decision is feasible, is possible.

8. And as Frieder Roessler had advocated (cited in part 4 of this series in SUNS #8894 dated 25 April 2019), the delicate balance in the WTO between the deliberation/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, provided in the monograph, Raghavan (2000), “The World Trade Organization and its Dispute Settlement System: Tilting the balance against the South” (https://www.twn.my/title/tilting.htm).

[* Chakravarthi Raghavan, Editor Emeritus of the SUNS, contributed this comment, as part 5 of the series. The first four parts were in SUNS #8873 dated 25 March 2019, #8882 dated 5 April 2019, #8892 dated 23 April 2019 and #8894 dated 25 April 2019. The author acknowledges that he has benefitted from the comments and suggestions on earlier drafts from some former trade officials and negotiators, and in particular Mr. Bhagirath Lal Das, formerly Indian Ambassador to the GATT, and Mr. B. K. Zutshi, also former Indian Ambassador to the GATT. Any errors of omission and commission are entirely those of the author.]

 


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