Since its inception, the World Trade Organization’s (WTO) dispute settlement system (WTO DSS) has been hailed as the most “prolific of all the dispute settlement systems in the world”.
The WTO DSS is unique and has several distinctive features, which similar international tribunals, including the International Court of Justice, may not possess. The unique features include its appeal mechanism, compulsory jurisdiction and automatic dispute process.
The WTO and its dispute settlement system had a profound impact on India’s macroeconomic policy ever since it came into force in 1995. In the initial decade, India was subject to disputes relating to its quantitative restrictions on imports, its import-substitution policies relating to its automotive sector and its patents regime. India lost these cases, but also earned certain decisive victories, such as India’s successful challenge of U.S. import restrictions on India’s shrimp exports and a resounding win against the European Union on anti-dumping duties on certain textile items.
Currently, India is a complainant in the dispute relating to WTO-consistency of steel tariffs, imposed under Section 232 of the Trade Expansion Act, 1962 of the United States. Further, on the heels of India’s ambitious Jawaharlal Nehru Solar Mission being declared WTO-inconsistent, India has initiated a similar dispute against the U.S.’s renewable energy programmes. The option to have recourse to the WTO Dispute Settlement Board (DSB) has ensured that a violation of WTO- covered agreements carries serious consequences (beyond purely reputational costs) for WTO members and has contributed to making a rule-based multilateral system a reality.
In this context, the current stalemate regarding appointments to the Appellate Body (AB), the WTO’s apex tribunal, merits deeper study. This article seeks to simplify the legal controversy and chart out the consequences for India and the multilateral trading system.
The role of U.S. dominance
U.S. dominance is asphyxiating the Appellate Body. The WTO DSS is governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes. If a complaint is submitted by a member and consultations between the parties fail to reach a mutually agreed solution, an ad hoc panel can be constituted. The legal findings and interpretations, developed by the panel, are subject to review by the AB. The AB is a standing body of seven individuals with a demonstrated expertise in international trade law and diplomacy and broadly represents the WTO membership.
The U.S. has been fairly aggressive in using dispute settlement in order to pursue its market access goals. On the import side, the U.S. has imposed several duties through investigations against its trading partners, especially China. China has successfully challenged these duties before WTO panels and the U.S. was required to devise necessary compliance measures. It is, therefore, no surprise that the U.S. has been a vocal critic of the AB, especially when it has lost cases. This criticism has also resulted in the U.S. blocking the appointment of certain American AB members in 2011, 2013 and a foreign member in 2016.
Over the past year and a half, the U.S. has been finding fault with the AB’s functioning on various legal and technical grounds, grounds on which scholars over the years have criticised it in non-partisan ways. But the U.S.’s position becomes problematic as it has been refusing to support any appointments to the AB during the past two years. Since such appointments can only take place by consensus, the vacancies in the AB remain unfilled. After December 2019, the AB will have only one member, which will not allow it to form a quorum to hear fresh appeals. Respondent-states will still be able to formally appeal findings of panels, and pending appeal, such a report would not be enforceable. There is some possibility of using arbitration as a mechanism to resolve disputes, but it cannot be a substitute for appeals.
In order to resolve the impasse, 13 member-states (including EU, China and India) supported a reform proposal at the General Council meeting, held over 12-13 December 2018, which squarely addressed most of the U.S.’s concerns. The U.S. responded by merely reiterating that its concerns were not addressed – without putting forth its own reform proposal. Rather than playing a constructive role, it appears that the U.S. is determined to bring the dispute settlement system to a grinding halt.
There are factors which may provide the real reasons underlying the U.S.’s opposition to the AB. To understand this, it is important to place the AB crisis in the broader context of the multilateral trading system.
Consensus mechanism in limbo
WTO Members meet every two years at the Ministerial Conference to negotiate new rules for the multilateral trading system. The consensus mechanism of the WTO has failed to produce any new trade rules since the inception of the WTO in 1995, except the Agreement on Trade Facilitation, which came into force in 2017. This has greatly affected the WTO’s ability to devise new rules to govern the ‘new’ economic order. The paralysis of the ‘legislative wing’ has led to the AB acting in an institutional vacuum.
In view of the failure of the WTO to produce tangible gains in trade liberalisations, several countries are turning to mega-regional trade deals. The recently concluded Comprehensive and Progressive Agreement for the Trans-Pacific Partnership is one such agreement. Although the U.S. withdrew from this agreement, it has shifted its focus to negotiations for bilateral trade agreements with its trading partners, and on more favourable terms than those available in existing FTAs. Certain news reports suggest that current U.S. trade representative, Robert Lighthizer, brazenly commented that blocking appointments to the Appellate Body was the only way to ensure that members agree to negotiate new trade rules.
Another reason for the U.S. to pursue a brinkmanship policy in relation to the WTO DSS is the rise of China and its economic policies. The U.S. is concerned with the contested characterisation of China as a ‘market economy’, specifically in the context of anti-dumping and investigations into countervailing duties. In the negotiations on China’s accession to the WTO in 2001, China was bound to transition its centrally planned economy to a market economy. This was critical because the WTO-covered agreement assumes that domestic economies are working on free-market forces of demand and supply.
Sixteen years later, there is still no clarity (either in fact or law) on China’s status as a market economy. The U.S. contends that markets in China are under considerable economic and political influence of the state. On this ground, goods from China have been continuously subject to anti-dumping duties and countervailing measures, based on surrogate country prices and costs.
China has challenged the WTO-consistency of the EU regulation on trade remedies, which specifically names China as an economy with ‘significant distortions’. China has recently made a request for the suspension of the work of the WTO panel. This tends to give an indication that China might have lost some of the claims or the disputing parties might have reached a certain agreement on the outstanding issues. In any event, China’s non-market economy treatment will be a contentious issue for years to come.
The imposition of steel tariffs under Section 232 by the United States is sought to be justified on “national security” grounds. The matter is currently before the WTO panels. Predictably, several WTO members – including India and the EU – have filed disputes against the U.S. The U.S., in its statements at the DSB, has been opposing the constitution of the panel on grounds that the “security exception” is “self-judging” and not amenable to judicial decision. However, in a dispute between Russia and Ukraine, a WTO panel has held that panels can review whether “national security” measures are permissible under the relevant exception provisions. Therefore, the U.S. has an incentive to make the WTO DSS dysfunctional before enforceable rulings are pronounced on key issues such as security exception measures.
Consequences for India
What, therefore, are the implications for India’s position in the multilateral trading system?
India, as a developing country and an active user of the WTO DSS, has a strategic interest in the existence of the AB. India has utilised the WTO DSS to challenge trade-restrictive measures implemented by the EU and U.S. For instance, the EU and U.S. could condition imports on labour and environmental standards, which would exponentially increase the cost of business for Indian exporters. Even if a successful complaint is instituted by India, an appeal of a panel report would make it unenforceable. If the American unilateralism, currently on display, is a sign of things to come, American steel and agricultural markets will be increasingly inaccessible to Indian exporters.
India has been proactive in suggesting reforms, analysing implications of more than a dozen proposals tabled in the WTO and in generating consensus amongst developing countries. On 13-14 May 2019, India organised the New Delhi Mini-Ministerial to facilitate a free and frank discussion between developing countries on critical issues of the multilateral trading regime, including the crisis in the AB. While 17 developing countries reaffirmed their resolve to fill the vacancies at the AB as soon as possible, it is unlikely that the ongoing crisis will be resolved before December 2019 when the strength of the Appellate Body is likely to be reduced to a single member since the terms of the other two members will expire.
James J. Nedumpara is Professor and Head of Centre for International Trade and Investment Law (CTIL) established by the Government of India at the Indian Institute of Foreign Trade (IIFT).
Prakhar Bhardwaj is Senior Research Fellow at Centre for International Trade and Investment Law (CTIL).
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