Settlements of Dispute under WTO

The WTO’s procedure is a mechanism which is used to settle trade dispute under the Dispute Settlement Understanding. A dispute arises when a member government believes that another member government is violating an agreement which has been made in the WTO. However, these agreements are consequential to dialogues between the member States and hence they are the writers of such agreement. In case any dispute arises, the ultimate duty to settle it lies in the hands of member government through Dispute Settlement Body. This system already achieved a great deal and providing some of the necessary attributes of security and predictability which trader and other market participants need and which is called for in the Dispute Settlement Understanding under Article 3.

The WTO’s Dispute Settlement Understanding (DSU) advanced out of the ineffective means used under the GATT for settling disagreements among members. Under the GATT, procedures for settling disputes were ineffective and time consuming since a single nation, including the nation whose actions was the subject of complaint could effectively block or delay every stage of the dispute resolution process. It remains to be seen whether countries will comply with the new WTO dispute settlement mechanism, but thus far the process has met with relative success.

During the phase of 1980’s many new interest groups were fascinated by the GATT’s procedures which were held as model, and it was used by them for the purpose of accomplishing their goals. However, service sectors and intellectual property sectors who wanted to engage in multilateral agreements through GATT’s Uruguay round conference were influenced due to the success dispute settlement procedures and in role in augmenting the treaty rule compliance.

The DSU was designed to deal with the difficulty of reducing and eliminating non-tariff barriers to trade. A non-tariff trade barrier can be almost any government policy or regulation that has the effect of making it more difficult or costly for foreign competitors to do business in a country. In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade-liberalization. Frequently, such non-tariff trade barriers are the inadvertent consequence of well-meaning attempts to regulate to ensure safety or protection for the environment, or other public policy goals. In other cases, countries have been suspected of deliberately creating such regulations under the guise of regulatory intent, but which have the effect of protecting domestic industries from open international competition, to the detriment of the international free-trade regime.

Background

From its inception in 1947, the General Agreement on Tariffs and Trade (GATT), signed by the United States and ultimately by a total of 128 countries, provided for consultations and dispute resolution, allowing a GATT Party to invoke GATT dispute settlement articles if it believes that another Party’s measure, whether violative of the GATT or not, caused it trade injury. Because the GATT did not set out a dispute procedure with great specificity, GATT Parties developed a more detailed process including ad hoc panels and other practices. The procedure was perceived to have certain deficiencies, however, among them a lack of deadlines, a consensus decision-making process that allowed a GATT Party against whom a dispute was filed to block the establishment of a dispute panel and the adoption of a panel report by the GATT Parties as a whole, and laxity in surveillance and implementation of panel reports even when reports were adopted and had the status of an official GATT decision.

Congress made reform of the GATT dispute process a principal U.S. goal in the GATT Uruguay Round of Multilateral Trade Negotiations, begun in 1986 and concluded in 1994 with the signing of the Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement). The WTO Agreement requires any country that wishes to be a WTO Member to accept all of the multilateral trade agreements negotiated during the Round, including the General Agreement on Tariffs and Trade 1994, an updated version of the GATT adopted in 1947, as well as the Understanding on Rules and Procedures Governing the Settlement of Disputes, applicable to disputes arising under virtually all WTO agreements.

The Uruguay Round package of agreements not only carries forward original GATT obligations, such as according goods of other parties non-discriminatory treatment, not placing tariffs on goods that exceed negotiated or “bound” rates, generally refraining from imposing quantitative restrictions such as quotas and embargoes on imports and exports, and avoiding injurious subsidies, but also expands on these obligations in new agreements such as the Agreement on Agriculture, the Agreement on the Application of Sanitary and Phytosanitary Measures, the Agreement on Antidumping, and the Agreement on Subsidies and Countervailing Measures. Congress approved and implemented the WTO Agreement and the other agreements negotiated in the Uruguay Round in the Uruguay Round Agreement Act, P.L. 103-465. The agreement entered into force on January 1, 1995.

OUTLINE OF THE DISPUTE SETTLEMENT UNDERSTANDING

The Dispute Settlement Understanding (DSU) officially known on rules and procedure Governing the Settlement of Disputes, establishes rules and procedures that manage various disputes arising under the Covered Agreements of the Final Act of the Uruguay Round. There had been total 314 complaints brought by the member of WTO. All WTO member nation-states are subject to it and are the only legal entities that may bring and file cases to the WTO. The DSU created the Dispute Settlement Body (DSB), consisting of all WTO members, which administers dispute settlement procedures.

 It provides strict time frames for the dispute settlement process and establishes an appeals system to standardize the interpretation of specific clauses of the agreements. It also provides for the automatic establishment of a panel and automatic adoption of a panel report to prevent nations from stopping action by simply ignoring complaints. Strengthened rules and procedures with strict time limits for the dispute settlement process aim at providing “security and predictability to the multilateral trading system” and achieving “[a] solution mutually acceptable to the parties to a dispute and consistent with the covered agreements.” The basic stages of dispute resolution covered in the understanding include consultation, good offices, conciliation and mediation, a panel phase, Appellate Body review, and remedies.

STAGES IN WTO

Consultations (Article 4)

The DSU permits a WTO Member to consult with another Member regarding “measures affecting the operation of any covered agreement taken within the territory” of the latter. If a WTO Member requests consultations with another Member under a WTO agreement, the latter Member must enter into consultations with the former within 30 days.

If the dispute is not resolved within 60 days, the complaining party may request a panel. The complainant may request a panel before this period ends if the other Member has failed to enter into consultations or if the disputants agree that consultations have been unsuccessful.

Establishing a Dispute Panel (Articles 6, 8)

A panel request, which must be made in writing, must “identify the specific measures at issue and provide a brief summary of the legal basis for the complaint sufficient to present the problem clearly” (Art. 6.2). Under GATT and now WTO dispute settlement practice, a Member may challenge a measure of another Member “as such,” “as applied,” or both. An “as such” claim challenges the measure independent of its application in a specific situation and, as described by the WTO Appellate Body, seeks to prevent the defending Member from engaging in identified conduct before the fact.

If a panel is requested, the DSB must establish it at the second DSB meeting at which the request appears as an agenda item, unless it decides by consensus not to do so. Thus, while a defending Member may block the establishment of a panel the first time the complaining Member makes its request at a DSB meeting, the panel will be established, virtually automatically, the second time such a request is placed on the DSB’s agenda. While DSB ordinarily meets once a month, the complaining Member may request that the DSB convene for the sole purpose of considering the panel request. Any such meeting must be held within 15 days after the complaining Member requests that the meeting be held.

The panel is ordinarily composed of three persons. The WTO Secretariat proposes the names of panelists to the disputing parties, who may not oppose them except for “compelling reasons” (Art. 8.6). If there is no agreement on panelists within 20 days from the date that the panel is established, either disputing party may request the WTO Director-General to appoint the panel members.

Good Offices, Conciliation and Mediation

Unlike consultation in which “a complainant has the power to force a respondent to reply and consult or face a panel,” good offices, conciliation and mediation “are undertaken voluntarily if the parties to the dispute so agree.” No requirements on form, time, or procedure for them exist. Any party may initiate or terminate them at any time. The complaining party may request the formation of panel,” if the parties to the dispute jointly consider that the good offices, conciliation or mediation process has failed to settle the dispute.” Thus the DSU recognized that what was important was that the nations involved in a dispute come to a workable understanding on how to proceed, and that sometimes the formal WTO dispute resolution process would not be the best way to find such an accord. Still, no nation could simply ignore its obligations under international trade agreements without taking the risk that a WTO panel would take note of its behaviour.

Panel Proceedings (Articles 12, 15, Appendix 3)

After considering written and oral arguments, the panel issues the descriptive part of its report (facts and argument) to the disputing parties. After considering any comments, the panel submits this portion along with its findings and conclusions to the disputants as an interim report.

Following a review period, a final report is issued to the disputing parties and later circulated to all WTO Members. A panel must generally provide its final report to disputants within six months after the panel is composed, but may take longer if needed; extensions are usual in complex cases. The period from panel establishment to circulation of a panel report to WTO Members should not exceed nine months. In practice, panels have been found to take more than 13 months on average to publicly circulate reports.

Appellate Body Review

The DSB establishes a standing Appellate Body that will hear the appeals from panel cases. The Appellate Body “shall be composed of seven persons, three of whom shall serve on any one case.” Those persons serving on the Appellate Body are to be “persons of recognized authority, with demonstrated expertise in law, international trade and the subject matter of the Covered Agreements generally.” The Body shall consider only “issues of law covered in the panel report and legal interpretations developed by the panel.” Its proceedings shall be confidential, and its reports anonymous.

 This provision is important because, unlike judges in the United States, the members of the appellate panel do not serve for life. This means that if their decisions were public, they would be subject to personal retaliation by governments unhappy with decisions, thus corrupting the fairness of the process. Decisions made by the Appellate Body “may uphold, modify, or reverse the legal findings and conclusions of the panel.” The DSB and the parties shall accept the report by the Appellate Body without amendments “unless the DSB decides by consensus not to adopt the Appellate Body report within thirty days following its circulation to the members.”

Adoption of Panel Reports/Appellate Review (Articles 16, 17, 20)

Within 60 days after a panel report is circulated to WTO Members, the report is to be adopted at a DSB meeting unless a disputing party appeals it or the DSB decides by consensus not to adopt it. Within 60 days of being notified of an appeal (extendable to 90 days), the Appellate Body (AB) must issue a report that upholds, reverses, or modifies the panel report. The AB report is to be adopted by the DSB, and unconditionally accepted by the disputing parties, unless the DSB decides by consensus not to adopt it within 30 days after circulation to Members. The period of time from the date the panel is established to the date the DSB considers the panel report for adoption is not to exceed nine months (12 months where the report is appealed) unless otherwise agreed by the disputing parties.

Implementation of Panel and Appellate Body Reports (Article 21)

In the event that the WTO decision finds the defending Member has violated an obligation under a WTO agreement, the Member must inform the DSB of its implementation plans within 30 days after the panel report and any AB report are adopted. If it is “impracticable” for the Member to comply immediately, the Member will have a “reasonable period of time” to do so. The Member is expected to implement the WTO decision fully by the end of this period and to act consistently with the decision after the period expires.10 Compliance may be achieved by withdrawing the WTO-inconsistent measure or, alternatively, by issuing a revised measure that modifies or replaces it.

 Under the DSU, the “reasonable period of time” is: (1) that proposed by the Member and approved by the DSB; (2) absent approval, the period mutually agreed by the disputants within 45days after the report or reports are adopted by the DSB; or (3) failing agreement, the period determined by binding arbitration. Arbitration is to be completed within 90 days after adoption of the reports. To aid the arbitrator in determining the length of the compliance period, the DSU provides a non-binding guideline of 15 months from the date of adoption. Arbitrated compliance periods have ranged from six months to 15 months and one week. The DSU envisions that a maximum 18 months will elapse from the date a panel is established until the reasonable period of time is determined.

Compliance Panels (Article 21.5)

Where there is disagreement as to whether a Member has complied—i.e., whether a compliance measure exists, or whether a measure that has been taken is consistent with the WTO decision in the case—either disputing party may request that a compliance panel be convened under Article 21.5. A compliance panel is expected to issue its report within 90 days after the dispute is referred to it, but it may extend this time period if needed. Compliance panel reports may be appealed to the WTO Appellate Body and both reports are subject to adoption by the DSB.12 Compensation and Suspension of Concessions (Article 22)

If the defending Member fails to comply with the WTO decision within the established compliance period, the prevailing Member may request that the defending Member negotiate a compensation agreement. If such a request is made and agreement is not reached within 20 day.

Remedies

There are consequences for the member whose measure or trade practice is found to violate the Covered Agreements by a panel or Appellate Body. The dispute panel issues recommendations with suggestions of how a nation is to come into compliance with the trade agreements. If the member fails to do so within the determined “reasonable period of time,” the complainant may request negotiations for compensation. Within twenty days after the expiration of the reasonable period of time, if satisfactory compensation is not agreed, the complaining party “may request authorization from the DSB to suspend the application to the member concerned of concessions or other obligations under the Covered Agreements.”

Retaliation shall be first limited to the same sector(s). If the complaining party considers the retaliation insufficient, it may seek retaliation across sectors. The DSB shall grant authorization to suspend concessions or other obligations within thirty days of the expiry of the reasonable time unless the DSB decides by consensus to reject the request. The defendant may object to the level of suspension proposed. The original panel, if members are available, or an arbitrator appointed by the director-general” may conduct arbitration.

Arbitration

Members may seek arbitration within the WTO as an alternative means of dispute settlement “to facilitate the solution of certain disputes that concern issues that are clearly defined by both parties.” Those parties must reach mutual agreement to arbitration and the procedures to be followed. Agreed arbitration must be notified to all members prior to the beginning of the arbitration process. Third parties may become party to the arbitration “only upon the agreement of the parties that have agreed to have recourse to arbitration.” The parties to the proceeding must agree to abide by the arbitration award. “Arbitration awards shall be notified to the DSB and the Council or Committee of any relevant agreement where any member may raise any point relating thereto.”

WTO DISPUTE PANELS AND THE BALANCE BETWEEN TRADES

Agreements and National Policy

Since the various agreements that constitute the WTO cover such a wide range of topics, dispute settlement panelists find that a number of subjects come under their authority. This places WTO dispute panels in a delicate position. On the one hand they must identify cases where nations are failing to comply with international trade agreements; on the other, they must be cautious when making recommendations that reverse the preferences of national governments.

Thus far, in the decisions of the panels and the Appellate Body, there has been a tendency to write decisions in a way that minimizes the burden on nations to change their regulations and laws in order to comply with their WTO trade obligations. This does not mean that dispute settlement panels have not found nations in violation of the trade agreements. When they have, however, they have left national governments with a variety of options in order to come into compliance.

Two cases in which panel reports were adopted reflect the WTO’s tendency to avoid becoming overly involved in the internal regulatory affairs of nations. These cases have been selected as examples because they have received a lot of attention, but the trend described can be found in each case where a panel report has been issued. Both examples are complaints by the United States, one against the European Union (EU) regarding restrictions on import of hormone treated meat, and the other against Japan regarding the photographic film industry. In the first case the United States won the concessions it sought; in the second case the panel found no evidence of violation of the trade agreements.

European Hormone Case

In the European Hormone Case the panel found the scientific evidence for the import restrictions on beef treated with growth hormones to be insufficient to justify the restriction on trade, but, in effect, left open a wide variety of ways for the EU to comply. The EU is conducting further studies in the hopes of justifying the ban. This was a case where the WTO panel clearly confronted the democratic will of the people, as expressed through their national legislatures and the European Parliament, since the hormone restrictions were initially adopted under intense public pressure. The panel sided with the United States by finding that the provisions were arbitrary and had the effect of restricting trade, but left options for the EU as well by suggesting that more complete scientific evidence would justify the ban. Alternatively, the panel indicated that technical changes in the way the policy is implemented could reduce the policy’s negative impact on trade. Still, the panel was firm in ruling that the current policy is inconsistent with the SPS Agreement, and the EU will have to make substantive changes to come into compliance. If it does not, the EU will be required to offer other trading concessions to compensate for losses, some $200 million per year according to the United States. The EU has until 1999 to comply.

Japan Alcohol Case

A U.S. complaint against Japan that resulted in a dispute settlement panel decision adopted in July of 1996 will require a 40 per cent reduction of the Japanese tax on alcohol imports, which will add tens of millions of dollars in exports to U.S. producers. The panel agreed with U.S. claims that the Japanese Liquor Tax Law that provided for lower taxes on a Japanese produced liquor called shochu, versus a higher one on whiskey, cognac and wine spirits, was a violation of the GATT Article III, Section 2, national treatment provisions.

WTO DISPUTE SETTLEMENT AND U.S. LAW

Legal Effect of WTO Decisions

The adoption by the WTO Dispute Settlement Body of a panel or Appellate Body report finding that a U.S. law, regulation, or practice violates a WTO agreement does not give the report direct legal effect in this country. Thus, federal law is not affected until Congress or the executive branch, as the case may be, changes the law or administrative measure at issue.22 Procedures for executive branch compliance with adverse decisions are set out in §§ 123(g) and 129 of the Uruguay Round Agreements Act, P.L. 103-465, 19 U.S.C. §§ 3533(g), 3538. Only the federal government may bring suit against a state or locality to declare a state or local law invalid because of inconsistency with a WTO agreement; private remedies based on WTO obligations are also precluded.23 Federal courts have held that WTO panel and Appellate Body reports are not binding on the judiciary24 and have treated determinations involving “whether, when, and how” to

comply with a WTO decision as falling within the province of the executive rather than the judicial branch.

Section 301: Unilateral Sanctions and the Japan Auto Dispute

The second argument that raised vis a vis the WTO dispute settlement mechanism and U.S. sovereignty regards the question of whether or not the United States can employ unilateral sanctions to punish trading partners who do not cooperate with U.S. wishes. In the Japan auto parts dispute, the United States insisted that the WTO does not cover the anti-competitive policy issue, therefore unilateral action was permissible. However, the language of the DSU implies that unilateral sanctions without authorization by the WTO violate WTO rules. For example, Article III and Article XXII of the DSU, which emphasize multilateral dispute settlement; and Article I of the GATT, which addresses MFN status, as well as Article II of the GATT, which deals with excessive tariffs, can all be interpreted as prohibiting unilateral punitive sanctions.(99) Other WTO member-states also opposed the United States’ unilateral action, with the European Union and Canada going so far as to reserve their third party rights in the dispute because of this issue.

The DSU does not affect application of Section 301 if it is used against non-WTO members, however. The DSU does not demand any significant modification in Section 301 investigations if those investigations include alleged breaches of Uruguay Round Agreements or the impairment of U.S. benefits under the Agreements. The United States could always decide to use Section 301 trade sanctions without WTO authorization against a fellow member-state. In this case, the member-country subjected to the use of Section 301 may seek counter-retaliation against the United States by arguing that the United States has violated its obligations under the DSU. While the United States clearly retains the practical ability to apply Section 301, doing so would probably undo the delicate world trade regime that the United States has sought to promote.

Since the United States and Japan settled the auto-parts dispute before a WTO panel was formed, the issue of the legality of unilateral sanctions was not formally decided by the WTO. Both the threat of sanctions by the United States and the existence of the possibility of a binding settlement by the DSU panel brought pressure on the parties to come to a negotiated settlement. Since the issue was not formerly resolved, the United States has quietly maintained the legal position that it could use unilateral sanctions in the future, even before a panel found that a U.S. complaint was justified. The Clinton Administration has not chosen to force the issue.

On balance, the record of the first three years suggests that the WTO’s dispute settlement provisions are not a significant threat to the sovereignty of the United States. Instead, the United States maintains enough practical power to move issues out of the venue of the WTO when it sees fit, as illustrated by Helms Burton case and the Japan auto parts conflict. Since dispute settlement panels are only authorized to consider whether laws and regulations are consistent with trade agreements, there is a tendency for their decisions to place a preponderance of importance on trade issues. Ultimately, the United States may face the need to exercise its sovereignty by violating a WTO recommendation on environmental, health and safety, and/or national security grounds. The United States, or any other member-country, should carefully consider the consequences of such an action for long-term trade stability before doing so. The option to maintain the controversial regulation always remains, while compensating trading partners in another realm.

The existence of the WTO regime offers the United States a valuable opportunity to extend its global influence. Through minor adjustments in policy, the United States has demonstrated its willingness to abide by the dispute settlement process. By setting an example of compliance, the United States further promotes its vision of a stable, law-based international trading system.