Has Dispute Settlement in Trade Fallen Silent?

Written by An Hertogen

 

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Since its creation in 1995, the World Trade Organisation (WTO)’s dispute settlement mechanism was its “crown jewel”. Contrary to the single-tiered system under the General Agreement on Tariffs and Trade (GATT), the WTO’s Dispute Settlement Body (DSB) would settle disputes through first-instance panels whose reports could be reviewed on legal grounds by the Appellate Body. Moreover, the “reverse consensus” requirement, by which the DSB adopts reports unless WTO Members agreed by consensus not to, stopped the losing party from singlehandedly blocking adoption. WTO Members took to the dispute settlement mechanism. Appeals were meant to be rare, yet happened to two-thirds of the panel reports circulated between 1995 and 2019.

That all came to a halt in 2019. For years, the US had refused to appoint Appellate Body members. On 11 December 2019, the full roster of nine dropped below the quorum of three until no members were left on 30 November 2020. Yet, the appeal provisions in the Dispute Settlement Understanding (DSU) have not been abolished. Parties can thus still appeal, and the DSB cannot adopt the Panel’s report until the appeals process is over – a challenge given the non-functioning Appellate Body. Therefore, a losing party can now upend the reverse consensus procedure by appealing “into the void”. When the Appellate Body’s quorum disappeared in 2019, seven pending cases ended up in the void. Since then, 25 more have been appealed, eight of which in 2023. Only one case escaped the void when the parties settled.

Considering this, has formal dispute settlement fallen silent? A few things are worth noting.

First, formal dispute settlement mechanisms are still included in recent free trade agreements (FTAs) and cover areas not previously subject to it, such as the environment. Moreover, these FTA mechanisms are increasingly used. Earlier this year, New Zealand successfully concluded its first FTA dispute over Canada’s dairy quota implementation. It was also the first dispute brought under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The pace of dispute settlement has also picked up under the US-Mexico-Canada Agreement (USMCA) compared to its predecessor, the North American Free Trade Agreement (NAFTA). This forum diversion may become a trend.

Second, based on the underused art 25 of the DSU, 53 WTO Members have concluded the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) to provide a stopgap for appeals. The first MPIA award, issued in late December 2022 in Colombia – Frozen Fries, was an important test case for procedural novelties. The award was issued within 74 days, and at 39 pages, it is mercifully short. Joost Pauwelyn, one of the arbitrators, explains how parties assisted by agreeing to limits on Article 11 DSU claims about an alleged lack of objective assessment of the facts and to strict word and time limits. Sensitive to allegations that the Appellate Body was too reliant on precedent, the MPIA award includes significantly fewer citations than Appellate Body reports. The successful completion of the case encouraged Japan to sign up for the MPIA.

Nevertheless, the broader picture is less rosy when we dig deeper into the WTO’s data on dispute settlement. Since 2020, there have been notably fewer requests for consultations – the first step in the WTO’s dispute settlement process. These are down to 7 on average per year from almost 24. Half of these consultation requests “graduated” to the next stage of requesting the establishment of a panel, compared to 60% pre-2020. There is a similar drop in how many panels are established, although in all cases where a panel was established post-2020, it was also composed by appointing panellists.

Moreover, panel reports are taking an increasingly long time. On average, the 27 reports circulated since 2020 took 28 months from the panel’s composition and agreement on its terms of reference. This is almost double the average time in the first 25 years (14.5 months), which is already more than double the six months set out in DSU. Currently, only one pending panel procedure is within the six-month timeframe, and some have been pending for over three years.

So, we have a significantly slower system that is also – perhaps for that reason – being used less by the parties. This suggests that the WTO’s formal dispute settlement mechanism is losing some shine. Furthermore, mutually agreed solutions are gaining in importance. Recent examples include some of the cases brought against the US tariffs on steel and aluminium (DS547, DS548, DS550, DS551, DS554) or Australia and China’s dispute on barley. Other cases are reported to be close to settlement. Last month, China and Australia communicated a formal pause in their wine case. We might be seeing a return to the diplomatic tradition during the GATT years and before.

What might explain this?

In general, upheaval in the trade landscape makes states apprehensive about any formal rules if the context in which these rules will operate is uncertain. They are possibly even more apprehensive about handing over the reins to international decision-makers such as DS bodies, especially when they are increasingly sensitive to domestic pressures. This may explain a preference for softer or negotiated solutions that can develop more holistic solutions than the case-based evolution formal dispute settlement can offer.

The broader systemic question is whether formal dispute settlement is always the answer, especially in cases involving national security claims. When it comes to the security exception in art XXI of the GATT, the WTO dispute settlement system has been anything but silent, which is all the starker considering how the exception lay dormant until 2019 when Russia successfully invoked it to defend its transit restrictions on goods from Ukraine to third states. The security exception has since been examined three more times: between Qatar and Saudi Arabia in a dispute involving the security exception in the Agreement on Trade-Related Aspects of Intellectual Property Rights, between the US and Hong Kong on origin marking, and in the four cases on the US steel and aluminium tariffs that had not yet been settled between the parties (DS544, DS552, DS556 and DS564). A few days after the US-Steel reports were issued, China requested consultations regarding the US trade restrictions on semiconductors, which the US has accepted subject to its standard disclaimer that these measures relate to national security and, therefore, cannot be reviewed in WTO dispute settlement.

The cases involving the US reflect its mantra that “economic security is national security”. They raise the question of whether actions to protect domestic industry resilience, and perhaps going beyond that to slow economic opponents, can be justified under the national security exception.

The US-Steel cases involved s232 of the Trade Expansion Act of 1962, which authorises import adjustment through tariffs and quota if certain imports threaten the United States’ national security. Former President Trump issued such tariffs and quota to protect the domestic steel and aluminium industry, which was experiencing excess capacity and rising imports. The domestic industry was argued to need this protection due to the importance of steel and aluminium to national security. The case between the US and Hong Kong raises another interesting invocation of “national security”. Following former President Trump’s “Executive Order on Hong Kong Normalization”, the US Customs and Border Protection argued that Hong Kong was no longer sufficiently autonomous from China and required goods produced in Hong Kong to be marked as originating from China.

The Panels in these cases held that the exception is not self-judging and that the measures were not justified. Unsurprisingly, the US appealed all into the void. These appeals reduce the effectiveness of dispute settlement in these individual cases and bring broader systemic issues to bear.

The road towards a restored Appellate Body has become even longer as a result, with the US reportedly conditioning reform on acceptance of its views about the non-reviewability of the national security claims. Understandably, this is not very palatable to other states who see this as a “get out of jail free” card that fundamentally undermines the compromises encapsulated in the WTO Agreements. But simply arguing that the US should return to the fold is unlikely to work. The US does not seem particularly sensitive to the argument that other states could equally invoke the exception against it –its sheer power presumably provides sufficient guardrails against this.

US-based scholars and commentators have proposed various solutions to accommodate national security exceptions. These range from rebalancing trade commitments through compensation similar to safeguards under the WTO, creating a variant of the nullification or impairment procedure of art XXIII of the GATT, soft-law best practices, or a national security committee. The details remain vague, and acceptability to other WTO Members is equally unclear. Moreover, the application of these alternatives could still lead to dispute settlement. So perhaps dispute settlement will not be silenced entirely, although at the moment, at least at the WTO and involving the US, it is muffled.

An Hertogen
An Hertogen
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Dr An Hertogen is a Senior Lecturer at the University of Auckland, New Zealand. She completed her undergraduate law degree at the KU Leuven in Belgium, before studying for her LLM at Columbia University and her PhD at the University of Auckland. Her research interests are in international law, with a particular emphasis on international economic law and on Aotearoa New Zealand's engagement with international law. She is the co-editor, with Anna Hood, of International Law in Aotearoa New Zealand (Thomson Reuters, 2021). In 2023-2024, she is ANZSIL Vice-President (NZ).

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