WTO's dispute settlement system and the proposed Centre on WTO Law

Recourse to the WTO's dispute settlement system could be beyond the means of developing and transition economies, and its provisions inadequate in protecting their interests. The following commentary explores the need for an independent legal centre to provide counsel for these disadvantaged members of the multilateral trading system.

The WTO has introduced a more legalistic approach to trade dispute settlement than its predecessor GATT. In GATT, because of the absence of a proper machinery for dispute settlement, disputes took long to clear. This also meant, however, that GATT required more diplomacy than law to settle disputes. This at least ensured that all concerns were fully ventilated before a settlement could be reached. The price for ensuring justice was delay and often non-implementation of the agreements reached.

The WTO has changed all that. It has introduced a remarkably efficient and predictable legal system of dispute settlement with a built-in mechanism for sanctions and procedures for cross-sectoral retaliation. This is regarded generally as one of the more positive aspects of the WTO system. Disputes can, in theory, be brought to WTO panels for (relatively) speedy dispensation of settlement.

Problems in dispute settlement

In theory. In practice, the WTO has experienced two problems. One is in relation to disputes between parties of equal or almost equal strength. When, for example, the United States and the European Union have found themselves on opposite sides of a dispute, they can block each other's actions through spurious legalistic wrangling and obfuscation that can prolong the disputes. In recent years, this has been the case with both the banana and the hormone-beef disputes between the US and the EC. When this happens, the old-style diplomacy and bargaining enters the fray. After long and tiresome debates, the WTO panels put out their decisions, but when it comes to implementation, the parties use their relative power base in the global trading system to work out trade-offs and face-saving formulae before matters come to a rest. Nonetheless, this aspect of the WTO is an improvement on the GATT system.

The second problem the WTO system faces is in relation to weaker or poorer members of the organization, especially the developing countries (DCs) and the economies in transition (ETs). Here the WTO system, if anything, has WORSENED matters for them. Why? For two reasons. One is that they cannot afford the high cost of litigation. International law firms charge anything from US$250 to $1,000 per hour in fees for WTO cases. Few DCs and ETs can afford the fees. The result is that whilst there are potentially hundreds of cases that they could bring to the WTO on non-implementation by the developed countries of their obligations to the DCs and the ETs, they cannot afford to use the dispute settlement system of the WTO. Thus the rich get off the hook simply because the poor cannot afford the cost of litigation. In the first five years of the WTO, out of more than 100 DCs and ETs, only 20 have participated as party and 16 as third party in 24 dispute settlement panels. To make matters worse, they can be hauled before the WTO panels and be forced to defend their rights only to find that matters are so complex and legalistic that in order to defend these they have to hire American or European lawyers whose fees are forbiddingly high. So they face the prospect of losing cases through default.

A second reason why the system has become more onerous and iniquitous for the weaker members of the WTO than under GATT is that they are now subject to a legalistic system to which they are a party and from which they cannot escape. Under GATT, they could escape sanctions because of the laxity of its system. Now they are authors of the WTO system, and hence bound by the decisions of its panels. If the system is unfair to them, tough luck, for they are signatories of the Treaty; they are, as it were, authors of their own misery. They have created their own hole into which to fall. Given that dispute settlement is becoming increasingly legalistic, the WTO dispute settlement system is becoming an albatross around their necks.

This glaring injustice of the system is not lost on the general membership of the WTO. Everybody knows. In October 1998, some concerned members constituted themselves into a Working Group to propose the setting up of what they called an "Advisory Centre on WTO Law". The ACWL would provide legal counselling to primarily DCs and ETs on a reduced-cost basis, depending on their ability to pay and status of membership. The Centre would be staffed by legal experts and funded out of an endowment fund and user charges.

This is an excellent idea. It not only offers a possible way out for the poorer members of this rather expensive and exclusive "club", but it also helps to build the WTO's credibility. A club is hardly worth the loyalty of the majority if its rules favour only the few richest members. The Centre is not a complete solution, but it is a move in the right direction.

Need for change

Beyond the idea of the Centre, there are many aspects of the WTO Dispute Settlement Understanding (DSU) that need to be reviewed and, if possible, changed. For example, if a WTO panel finds in favour of a DC, then all the latter gets out of it is that the other party removes the offending measure. This is not good enough. The offending country should, in addition, provide adequate retroactive compensation to the DC for the loss incurred between the start of the case and the implementation of the panel decision. The principle of equity demands this.

Furthermore, in cases where a DC is either a complainant or a defendant and the other side is a developed country, and the finding is in favour of the DC, then it is only fair that, given the high cost of litigation, the developed country should pay adequate financial compensation towards the cost incurred by the developing country. Otherwise, even being on the right side of the law can put a poor country into financial hardship on account of being forced to defend its rights.

Thirdly, under the DSU, if a country that has lost a case before a WTO panel does not take corrective measures within the agreed time limit, then the complaining country can take retaliatory action against the offending state. But this kind of "retaliation" is difficult if the complaining country is poor and has no means to effect retaliatory action, or is afraid to retaliate in case the stronger adversary takes further harsh measures against it. In such cases, it is necessary and only fair that the WTO should have a provision, much as in the UN Security Council, to take collective action against the offending party.

It is hoped that if and when the Centre on WTO Law is set up, it would also look into these anomalies of the system in addition to providing counselling to the DCs and the ETs.

Little enthusiasm

If and when. In the rich countries there appears not much enthusiasm for setting up the Centre. In the light of the fact that two of its original proponents are EU members - namely, the Netherlands and the UK - it is surprising that the European Commission has come out in opposition to the idea. It argues that there is no need for an independent Centre. If the WTO presently lacks the technical capacity to provide legal services to its members, then its capacity should be increased. Let it recruit more legal counsellors, but let the provision of these services remain within the WTO under Article 27.2 of the DSU.

What the EC seems to have forgotten is that lack of technical capacity within the WTO is not the only issue, nor indeed that important an issue. Even more fundamental is the issue of the WTO's neutrality, and its INHERENT incapacity to offer advice that is truly meaningful to the DCs and the ETs. The WTO cannot counsel one of its members in the manner a lawyer would his/her client. The WTO's neutrality would be severely impaired were it to do so. Furthermore, the WTO still has to establish its credibility in the eyes of its weaker members. There is a general feeling that the WTO Secretariat is too weak to resist pressures from its more powerful members, especially the United States and the European Union. In a dispute involving a powerful and a weak member state, the WTO's advice may be tempered by considerations of realpolitik which is always lurking in the background of all negotiations at the WTO.

The EC should know this. If it does, then its opposition to the idea of an independent Centre, to say the least, is mischievous. As the London Financial Times says: "Brussels' ploy looks suspiciously like a sabotage mission." Therefore, the more progressive members of the EU should put pressure on the Commission (when it is reconstituted again) to withdraw its opposition to the idea of an independent legal Centre. Only a Centre that is outside the control of the WTO and its more powerful members will have credibility, and this is necessary for a full participation of DCs and ETs in the dispute settlement mechanism of the organization.

Furthermore, it is in the interest of the DCs to join the Centre as its "founding members". To achieve this status, they need to make a one-time contribution to the endowment fund of US$300,000, US$100,000 or US$50,000, depending on their share in world trade and income level. The LDCs can join for free. But for a country such as Kenya, Zimbabwe or Mauritius, a joining fee of US$50,000 is a bargain. As founding members, they would enjoy special status and hence lower counselling fees. Whether they like it or not, some day they would be hauled before a WTO panel, and therefore it behoves them to be prepared for it.

The sooner such a Centre is established, the better for their future and the future of a rule-based system. Justice must be done, and it must be seen to be done. The Centre is an application of that principle. The ACWL would be the right kind of institutional evolution without which the WTO system, in the long run, would atrophy and die. (Third World Economics No. 212, 1-15 July 1999)

The above first appeared as the Director's Comment in the SEATINI Bulletin (Vol. 2, No. 7) and is reproduced here with the kind permission of its editors.