he Decision on the Application and Review of the Understanding on Rules and Procedures Governing the Settlement of Disputes, adopted in April 1994, called on World Trade Organization (WTO) members to undertake a complete review of the dispute settlement rules and procedures and to decide, by January 1999, whether to continue, modify or terminate them. By that time, it would have become clear whether the rules were fit for purpose or, instead, needed adjustment or a wholesale rewrite. Discussions on potential reforms began in 1998 and have continued on and off for more than 20 years as various deadlines came and went.
Despite extensive discussions covering every step in the dispute settlement process, not one of the hundreds of proposed amendments has ever been adopted. The technical reason is that it has not been possible for members to arrive at a consensus decision to do so. The practical reason is that the system had been working reasonably well and that specific problems — such as the proper sequencing between Dispute Settlement Understanding (DSU)1 article 21 and article 22 — were often addressed through informal arrangements as agreed between affected members.2
Current Efforts to Reform the WTO Dispute Settlement Mechanism
The current efforts to modify the DSU, however, are of a different nature than previous reform exercises. First, they are being conducted in the shadow of the Appellate Body (AB) crisis (namely, the inability since December 11, 2019, of the AB to hear appeals because there is only one sitting AB member and there must be three to hear an appeal). This situation has come about because the United States has refused, since early 2017, to join a consensus to start the process of selecting AB members to replace those who were finishing their terms of service. The United States’ action is in response to its long-time dissatisfaction with what it describes as the failure of the AB to carry out its functions in conformity with the rules set forth for it by WTO members.
It has been argued that this focus is misplaced because it detracts from much-needed efforts to reform other areas of the dispute settlement mechanism.
Second, the discussions are narrower: rather than covering all steps of a dispute, they are focused on modifications to appellate review. It has been argued that this focus is misplaced because it detracts from much-needed efforts to reform other areas of the dispute settlement mechanism (as well as reform of other areas of WTO work). While it is true that appellate reform is occupying much, if not most, of the “reform space,” a properly functioning dispute settlement mechanism is fundamental to a well-functioning WTO more generally, and the future of the AB is a central question in addressing this issue.
Third, the reform efforts are more urgent: WTO members continue to bring new disputes, yet one of the main steps in the process is inoperative. Finally, and most significantly as a measure of their importance to the WTO more generally, the efforts are currently being led by the WTO director-general himself. Whether these distinctions from the previous set of circumstances surrounding DSU reform efforts will make a difference such that modernization of the DSU will finally be achieved is difficult to predict. In the meantime, members have had to be creative in coming up with workarounds to cope with the absence of the AB.
Several members have worked to find alternatives to “appeals into the void” once the AB would shut down. An appeal into the void would occur where a member who loses a dispute avoids having to comply with the panel report by filing an appeal under DSU article 16, with the result that the panel report “shall not be considered for adoption by the DSB until after completion of the appeal.”3 This effectively blocks the member that has challenged a measure and won the dispute from acting on its victory for as long as the AB does not have sufficient members to hear appeals. (The first appeal into the void occurred on December 18, 2019, when the United States appealed the compliance panel report in United States–Carbon Steel (India)).
One such workaround is the no-appeal agreement. Under such agreements, disputing members agree prior to receiving a panel report that neither of them will appeal the report. Indonesia and Chinese Taipei signed such an agreement in their compliance dispute Indonesia–Safeguard on Certain Iron or Steel Products, as did Indonesia and Vietnam for their compliance dispute Indonesia–Safeguard on Certain Iron or Steel Products.
It is unlikely that no-appeal agreements will be used very often because there is little incentive for a defending party to enter into one. This is because if a panel finds that there is no violation, the defendant’s measure will remain in place regardless of whether the complainant files an appeal into the void or refrains from doing so under an agreement. If, on the other hand, the panel finds that there is a violation, a no-appeal agreement prohibits the defendant from appealing into the void and depriving the complainant of its victory.
Interim Appeal Arbitration
Another workaround approach put in place by several WTO members is the interim appeal arbitration procedure. This initiative was spearheaded by the European Union as an interim arrangement to replicate as closely as possible the current WTO appellate process. Under the interim procedure, appeals would be conducted under DSU article 25.
Article 25 provides for “expeditious arbitration” as an alternative to the usual panel and AB processes, provided that both disputing parties agree to use that procedure. In addition, the provision permits disputing parties to develop their own rules and procedures, including with respect to the selection of arbitrators. Parties agree to abide by the arbitration award, which is notified to the Dispute Settlement Body (DSB), but unlike panel and AB reports, no mention is made of the need for adoption by the DSB.
On July 25, 2019, Canada and the European Union entered into an agreement (amended slightly on October 22, 2019) to resort to article 25 as an interim appeal arbitration procedure for any future disputes between the two members, should the AB not have sufficient members to hear the appeal. Norway and the European Union entered into a similar agreement on October 21, 2019. Fourteen additional members agreed on January 24, 2020, to put in place similar arrangements, noting that any WTO member can do the same.
DSU article 25 has been resorted to only once in the 25-year history of the WTO. In United States–Section 110(5) of US Copyright Act, the United States and the European Union used article 25 at a late phase of the dispute for the determination of the level of nullification or impairment to the European Union caused by the WTO-inconsistent US legislation. The reasons members have not used article 25 more often are not entirely clear, but might include the inability of parties to agree on using a mostly untested procedure, as well as concerns that any decision of an article 25 arbitration panel may not carry the same legal weight as a regular panel or AB report since it would not be adopted by the DSB. Neither of these elements will be present in connection with possible use of article 25 under the new procedure put in place by Canada and 16 other WTO members, or any other WTO members that might sign on to this process, because agreement to use the procedure is already in place and any ruling could not readily be judged as legally weaker because the AB is not able to issue rulings.
Some members and WTO experts4 questioned the wisdom of entering into these arbitration agreements. In their view, establishing an alternative to appeals before the AB would undermine the possibility of restoring the AB itself and would operate not as an interim fix but rather as a permanent solution. Other critics questioned the practical utility of this alternative approach, given that Canada, the European Union and Norway — the only participants until recently — have not been involved in many disputes with each other. Both positions have merit. Nevertheless, this is an important development. The initiative is clearly described as a temporary alternative to WTO appellate review, and participants have signalled a strong desire to restore and return to using the AB. Moreover, the now 17 WTO members participating in this procedure include some of the most active participants in WTO dispute settlement, namely Australia, Brazil, Canada, China, the European Union, South Korea and Mexico. The likelihood of this alternative mechanism being used has increased considerably and, as a consequence, the United States may have lost some of its leverage in its effort to keep the AB in limbo for a long period of time. It cannot be overlooked, however, that some of the most active members in WTO dispute settlement are missing from the list. These include Argentina, India, Japan, Russia and, most importantly, the United States. If, how and by whom the alternative mechanism is relied upon in the next several months will determine whether its proponents will be able to restore a measure of confidence about the future of WTO dispute settlement. These will also be important indicators of how close or far WTO members are from returning to appellate review under article 17 of the DSU, which governs appeals to the AB.
DSU article 25 has been resorted to only once in the 25-year history of the WTO.
Resort to Dispute Settlement Mechanisms under Free Trade Agreements
Another possible workaround to the current paralysis of the WTO AB is to avoid the WTO dispute settlement mechanism altogether and bring cases instead under dispute settlement mechanisms found in existing free trade agreements (FTAs). Although it has been suggested from time to time that resort to dispute settlement at the WTO would eventually wane in favour of FTA mechanisms, so far, this has not been the case, and FTA mechanisms have, for the most part, seen relatively little use. However, this may be changing, and the AB shutdown could further this trend.
The European Union recently launched disputes under its FTAs with the South African Customs Union (SACU), South Korea and Ukraine. This is not necessarily as a result of the current situation in the WTO. The dispute with South Korea concerns the country’s obligations related to labour standards, which are not found in the WTO agreements. Therefore, the WTO is not the right forum to pursue such a dispute. However, the disputes against Ukraine and SACU deal with a temporary export ban and a safeguard measure on frozen chicken, respectively. These matters may well fall under WTO obligations and thereby could be subject to challenge in the WTO.
Another reason the European Union may appear more active in FTA dispute settlement going forward is that the European Commission determined in February 2018 that it would step up its use of dispute settlement procedures in FTAs, especially in connection with trade and sustainable development obligations. This was in response to calls for more assertive enforcement of commitments under FTA trade and sustainable development chapters and criticism that dispute settlement mechanisms in FTAs had not been triggered for this purpose.
It is possible that Canada, the United States and Mexico may resort to the dispute settlement mechanism under the recently concluded Canada-United States-Mexico Agreement (CUSMA) once it comes into force later this year. All three countries are frequent users of the WTO dispute settlement system, including for disputes among themselves. The WTO has been a much-preferred venue for dispute resolution to the state-to-state dispute settlement procedure under chapter 20 of the North American Free Trade Agreement (NAFTA); the latter has not been used once in the last 20 years. This is due, at least in part, to the fact that the NAFTA dispute settlement mechanism is flawed: the panel selection procedures operate in such a way as to enable a party to block the establishment of a NAFTA panel to resolve disputes. The dispute settlement mechanism under CUSMA does not include the procedural flaw found in NAFTA, thus opening the door to reliable dispute settlement under that agreement.
It cannot be overlooked, however, that some of the most active members in WTO dispute settlement are missing from the list.
It remains to be seen whether dispute settlement mechanisms under FTAs will enjoy increased usage as WTO members continue to grapple with the AB impasse. It is far from clear, however, if WTO members will give up their much-preferred dispute settlement mechanism easily. It cannot be ignored that no FTA dispute settlement mechanism will be able to offer all of the features found in the WTO system, some of which are, no doubt, responsible for the considerable success enjoyed by the system for much of the past 25 years. These features include the ability of every WTO member to participate as a third party in a dispute, which can benefit not only the third-party participant but also the disputing parties who may benefit from significant third-party support for their position; monthly surveillance of implementation by the entire WTO membership at meetings of the DSB, which explains, at least in part, the very high level of compliance in WTO dispute settlement; and a highly experienced Secretariat staff that has been assisting disputing parties and adjudicators for 25 years with close to 600 disputes.
The shutdown of the WTO AB in December 2019 was long foreseen by WTO members, yet they continued to bring disputes (20 new ones in 2019) to the WTO for resolution. This demonstrates members’ continued faith in the system to resolve trade irritants in a fair and impartial manner. Nevertheless, members have also long recognized the need to adjust the dispute settlement mechanism to fill lacunae (for example, sequencing between DSU article 21 and article 22) or respond to other concerns (such as calls for increased transparency, enhanced rights for third parties, streamlining procedures and member control). Previous efforts at reform failed because the system was working reasonably well and there seemed to be no urgency to make changes. With the closure of the AB, modernization of the DSU has now become urgent, which might be just what the membership needs to push it toward the ever-elusive consensus required to bring about change.