hanks to several procedural innovations introduced by the Dispute Settlement Understanding (DSU) in 1995 (as compared to the previous non-binding, conciliatory General Agreement on Tariffs and Trade [GATT] framework), the dispute settlement system (DSS) of the World Trade Organization (WTO) is compulsory, exclusive, law-based and binding in its outcomes. The respondent party can neither block the establishment of a panel nor avoid the finality of the panel’s recommendations to withdraw or amend the measure challenged in the dispute and found in breach of the respondent’s WTO obligations. This is due to the “reverse consensus” by which the Dispute Settlement Body (DSB) adopts panel and Appellate Body (AB) reports, thus rendering adoption in practice automatic. An important aspect is the multilateral framework of the dispute settlement system, since any WTO member can participate as third party to any dispute.
Another key innovation has been the establishment of an “appellate review” of decisions contained in panel reports by a permanent AB (in substance, an adjudicatory court). This is a small body (just seven members), appointed for a short term (four years, renewable just once) by the DSB by consensus and to reflect a geographical balance, among qualified independent experts proposed by WTO members. The AB is entrusted with the tasks of addressing in appeal the legal findings and conclusions of panels, and of upholding, modifying or reversing them as needed.
Shortly after the WTO agreements entered into force, recourse to the DSS became systematic and massive. Contrary to the expectations of the drafters, who thought appeal would be occasional,1 about two-thirds of the panel reports have been appealed. At the end of 2019, 593 cases had been registered, resulting in 258 panel reports and 145 AB reports issued. Thirty-four cases were pending at the panel stage at the end of 2019.2
The AB’s development of a consistent case law has been key in contributing to the purpose of the DSS — that of being “a central element in providing security and predictability to the multilateral trading system.”3 Contrary to the US accusation of “judicial activism,”4 the AB’s jurisprudence has been characterized by a great care in applying the principles of interpretation of public international law almost maniacally: text (ordinary meaning); immediate and broader context (other WTO agreements); and object and purpose, with rare references to other non-WTO sources.
The DSS has been, in a certain sense, a victim of its own success.
The DSS has been, in a certain sense, a victim of its own success, compared with the failure of multilateral negotiations in the ambitious Doha Development Round (2001–2016). Recourse to the settlement system is not an alternative to elaborating new rules or revising existing ones through negotiations. In any case, it has been used or resorted to by all sorts of economies, large and small, developed and developing, giving rise to a number of complex disputes involving challenges under a growing number of WTO provisions.
This development has put strain on the system. Notably, panels and the AB have not been able to respect the short time limits laid down in the DSU to issue reports, leading to frustration and criticism from WTO members rightly seeking the prompt settlement of disputes (but mostly unwilling to provide the necessary additional resources). Delays have been more substantial at the panel level (the process taking an average of 511 days versus the 180- day DSU deadline) than at the appellate stage (112 days versus 90).
The DSS without an Operational AB
Let’s come now to the US criticism of the AB, which has led the United States to the unprecedented step of forcefully intervening in the selection process (in 2017) and eventually blocking it altogether (in 2018–2019), availing itself of the de facto veto right afforded by the positive consensus required to select and appoint AB members. Besides claiming that the AB has improperly engaged in “judicial activism” (whatever this may mean, considering that the AB decides only cases which are appealed to it, resolving the claims submitted by the parties), the United States has accused it (sometimes in unusually harsh terms) of improper “gap-filling” of provisions left vague by negotiators, and of “over-reach” by exercising functions beyond its mandate,5 notwithstanding that the self-imposed interpretive restraint of the AB mentioned above is generally recognized to be the contrary.
The United States has also objected to the AB’s lack of respect for the 90-day limit to issue its reports (although delays have been due to the complexity of many cases and the limited human resources available in the AB), and to individual AB members’ remaining in office beyond their terms to complete appeals entrusted to them (although such extensions are provided for under rule 15 of the AB Working Procedures, and have been practised for more than 20 years). The United States has advocated for the use of more judicial economy to avoid decisions of issues raised in appeal but not strictly necessary to resolve the dispute (which the United States has labelled “obiter dicta” and “advisory opinions”6). The United States has denied that panels must — or perhaps more accurately, are expected to — follow the precedents of the AB “absent cogent reasons,” as the AB has stated. The role of past decisions of the AB as guidelines for the panels is, however, the natural consequence of the review and clarification functions entrusted to the AB, also keeping with the objective of stability and predictability in the application and interpretation of the rules spelled out in the DSU.
It is significant that the US criticisms are not addressed to key aspects such as the independence, impartiality and competence of the AB (which, if they had been, would be worrisome). Rather, they address operational features that do not hamper the AB functioning. The practices of the AB that the United States criticizes have, on the contrary, helped the smooth operation of the AB. Most WTO members do not share these criticisms and have objected to the blocking of the appointments by the United States for these reasons. They have, however, refrained from labelling the US attitude as abusive and contrary to good faith (as it is) — a cardinal principle underlying dispute settlement that is spelled out in article 3.10 of the DSU. They have preferred, understandably, to deal with the US position in diplomatic negotiating terms rather than by confronting the United States. At the end of 2018, various groups of WTO members tabled at least 18 proposals7 to address the issues raised by the United States with a view to finding solutions and unblocking the appointment process before the disappearance of an operative AB at the end of 2019.
The United States has refused to engage on those proposals and has refrained from tabling its own proposal of reforms, notwithstanding the repeated invitations of other members to do so. The United States claims that the WTO membership must first clarify “why” the AB “has felt free to disregard the rules of the DSU,” exceeding its authority and “straying from the role agreed for it by the WTO Members.”8 This is a hefty, unsupported accusation directed at more than 25 distinguished lawyers, diplomats, judges, academics and national senior trade experts from 16 different countries whom the WTO members have chosen by consensus over 20 years to settle their disputes (and who did so with general satisfaction!).
In order to try to reach an agreement, the General Council at the end of 2018 appointed the senior New Zealand ambassador David Walker (currently chairman of the DSB) as a facilitator. His confidential report (October 2019) includes compromise proposals that address the concerns raised by the United States and would tackle them without impairing the operations of the AB.9
What If the Current Situation Consolidates and the United States Succeeds in Its Exceptionalism?
Even these modest “quick-fix” proposals have not been considered by the United States as a meaningful basis for starting negotiations. Due to the protracted lack of appointments to the AB as a consequence of the blockage of the selection process by the United States, the demise of the AB, a cataclysmic event — unprecedented in any international organization — materialized on December 11, 2019, with just one AB member remaining in office. Ten appeals have been left pending without any clear perspective of how, when and by whom they would be decided in order to bring the underlying disputes to conclusion.
Disputes would (and will) remain unresolved and breaches would not be sanctioned.
Furthermore, the United States blocked the approval of the WTO 2020 budget until it had obtained the suppression of almost all the AB allocation. The stranglehold on the AB is liable in turn to paralyze the panel phase as well, since panel reports appealed “in the void” can neither be adopted by the DSB nor finally decided at the appellate stage. Disputes would (and will) remain unresolved and breaches would not be sanctioned. The whole WTO system of reciprocal rights and duties risks becoming unenforceable. Such paralysis of the binding WTO rule-based DSS appears to be coherent with the trade policy objectives of the current US administration. It is well known that its preference goes to unilateral protectionist measures and to bilateral deals, often obtained by bullying the other parties and threatening to foreclose them from the US market. In the present situation, no authority will be able to review and sanction any such WTO non-compliant measures.
In order to avoid not only the paralysis of the appellate process but also the consequent paralysis of effective panel proceedings and indeed of the whole DSS, the European Union announced in June 2019 the launch of an “interim solution” to cope with the absence of the AB. The proposal suggests that parties to a dispute would agree beforehand, on a reciprocal bilateral or plurilateral basis, on an alternative “appeal arbitration” under article 25 of the DSU, to be resorted to as long as the AB is inoperative. Canada joined first, then Norway, and the initiative continues to gain momentum. In January 2020, at the margins of Davos, the European Union announced that it had reached agreement with 14 additional WTO members, including China, Brazil, South Korea and Mexico, for the interim alternative appeal arbitration.10 However, even if accepted by many WTO members, this alternative has several shortcomings and would not be applicable to the United States. It would lead to a bifurcated regime within the WTO, with some countries remaining subject to a binding dispute settlement system, and others escaping effective enforcement of its rules.
Even with the EU solution in place, a situation where any major player is not bound by compulsory rule-based dispute settlement risks making the whole WTO framework a sham of what was intended in 1995, without any shared reason to debilitate the system. Renouncing independent rule-based adjudication and going back to the GATT system, where ad hoc panel reports did not establish a consistent jurisprudence and were little more than advisory opinions or non-binding conciliation proposals, would not be effective within a multilateral system. Nor would such an approach be consistent with the carrying out of international trade under a legally predictable framework, as demonstrated in the current “trade wars.”
The first reality check will be the destiny of pending appeals: Will appellants renounce them, possibly against some negotiated compensation with the winning party? Will the parties agree on arbitration, or will they wait to see whether the AB stalemate will be resolved? Or will they follow the United States, which, in appealing a panel report in a dispute with India11 just after the demise of the AB, made the announcement that the United States “will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process”? India appears to have accepted in part the US position, since both parties announced shortly thereafter that they would keep any appeal and cross-appeal on hold until “an Appellate Body Division can be established to hear and complete any appeal.”12
Would a Debilitated Appellate Review Be an Acceptable Reform?
Changes — even substantial ones — of the DSU, which governs the DSS, are possible without a need to formally amend the WTO agreements, and without cumbersome domestic parliamentary ratification. There are two avenues to this end, but both require political will. First, minor changes to any WTO agreement (including the DSU) are possible through majority-adopted “authoritative” binding interpretations by the Ministerial Conference and the General Council under article IX(2) of the WTO Agreement. This could be a proper instrument to adopt Ambassador Walker’s proposals, as possibly revised, preferably by consensus. Second, the DSU itself could be amended through a facilitated procedure set forth in a Ministerial Decision taken within the Uruguay Round negotiations in 1993, which allows DSU modifications by the WTO Ministerial Conference.
The real issue, of course, is substance. Why should the WTO members abolish the appellate review and accept living with possibly contradictory panel decisions, as was the case under the GATT? Would such a situation (which would be similar to the much-criticized investment arbitration system under bilateral investment treaties) make sense within a multilateral treaty such as the WTO? Can one envisage replacing the AB and its rule-based adjudicatory function by a looser form of non-binding review, such as by a committee of non-independent ambassadors or experts? These approaches would throw the baby out with the bathwater (in a context where the bathwater is not really dirty), just to please and keep the United States on board.
Any reform to the WTO DSS should preserve the system’s compulsory, impartial, rule-based, enforceable nature, of which the appellate review is an integral element.
One wonders whether a solution may possibly emerge in parallel with the reform of some substantive provisions of the Agreement on Subsidies and Countervailing Measures (ASCM) advocated in a joint statement of the United States, the European Union and Japan in January 2020.13 The proposals include broadening the concept of state-owned enterprises, sidelining the current AB restrictive interpretation of the term “public body” in the ASCM — another possible reason for the United States to block the AB.