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  • Palash Varyani

Unravelling The Appellate Body Crisis and the USA's Role in the WTO's Dispute Resolution Mechanism

Updated: Oct 22, 2023

This article is authored by Palash Varyani, a 3rd-year B.A., LL.B. (Hons.) student at the Institute of Law, Nirma University, Ahmedabad.


Introduction

The World Trade Organisation (WTO) governs and regulates international trade relations among nations. The primary purpose of the WTO is to facilitate a platform for nations to engage in trade negotiations and settle trade-related conflicts. It possesses a mechanism for resolving disputes that entails the establishment of a panel to scrutinize a complaint and furnish suggestions aimed at resolving the dispute. In the event of dissatisfaction with the panel’s decision, either party may seek recourse to the Appellate Body (AB), which is tasked with reviewing and rendering the ultimate verdict on the matter in dispute.

The Appellate Body is a critical component of the WTO’s dispute settlement process, providing a final and binding review of panel decisions. However, since December 2019, the Appellate Body has been unable to function due to the United States’ blocking the appointment of new judges. This has resulted in a backlog of unresolved cases, and it has raised concerns about the effectiveness of the WTO’s dispute settlement process. The Appellate Body Crisis has been one of the most significant challenges facing the World Trade Organization (WTO) in recent years, and it has highlighted broader tensions within the global trading system.


Understanding the Appellate Body Crisis and its Relevance

The Appellate Body is comprised of seven members who are appointed by consensus among WTO members for a four-year term. However, since 2016, the United States has raised concerns about the Appellate Body's decision-making process and has blocked new appointments to the body. By December 2019, the Appellate Body had only three members, the minimum required to hear an appeal. However, one of the members retired in December 2019, leaving only two members. This meant that the Appellate Body was no longer able to hear new appeals or review existing cases and became dysfunctional, this is widely regarded as “The Appellate Body Crisis”.

This issue holds significance because the WTO's dispute resolution procedure is a vital element of the world trading system, and the inability to resolve disputes through this process could have significant implications for international trade. Thus, understanding the causes and implications of the Appellate Body Crisis and exploring potential solutions to this challenge is essential for policymakers, scholars, and the broader international community. Other countries have accused the USA of undermining the multilateral trading system and acting unilaterally to pursue its interests. As a result, the Appellate Body Crisis has become a critical issue as scholars and policymakers seek to understand its causes and implications and explore potential solutions to this challenge.


Role of the USA in the Crisis

The crisis surrounding the Appellate Body has given rise to wider apprehensions regarding the efficacy and credibility of the World Trade Organisation. Several members of the World Trade Organisation (WTO) have levied allegations against the United States, claiming that it is impeding the multilateral trading system and engaging in unilateral actions to advance its own interests.

The US has been a major player in the WTO's dispute settlement system since its inception and has been involved in many of the system's most high-profile cases. However, in recent years, the US has become increasingly critical of the WTO and its dispute settlement system and has taken several actions that have undermined the system's effectiveness. One of the key actions taken by the US is its blocking of new appointments to the WTO's Appellate Body, effectively paralyzing it and preventing it from functioning properly. The US's actions have serious implications for the effectiveness and legitimacy of the WTO's dispute settlement system. Without a functioning Appellate Body, it is more difficult for member countries to resolve trade disputes, which could lead to an increase in trade tensions and even a breakdown of the multilateral trading system.

In addition to its actions regarding the Appellate Body, the US has also been criticized for its use of unilateral measures in trade disputes. It has imposed tariffs on a wide range of products, including steel, aluminium, and Chinese goods, in an attempt to protect domestic industries and address what it sees as unfair trade practices by other countries. While the US has argued that these measures are necessary to protect its national interests, scholars argue that they are undermining the credibility and legitimacy of the WTO's dispute settlement system. By taking unilateral action, the US is bypassing the WTO's rules and procedures and potentially setting a dangerous precedent for other member countries to follow. While the US has legitimate concerns about the fairness of the system and the need for reform, the actions it takes run the danger of weakening the very system it played a significant role in constructing and from which it has gained substantial advantages throughout its history.

Scholars argue that one of the key factors contributing to the crisis is the rise of protectionism, particularly in the United States under the Trump administration. The US had imposed tariffs on a wide range of products and had engaged in a trade war with China, which caused significant disruptions to global trade flows. The erosion of multilateralism is also a contributing factor to the crisis The Trump administration has taken a more unilateral approach to trade policy, withdrawing from the Trans-Pacific Partnership (TPP) and threatening to withdraw from the North American Free Trade Agreement (NAFTA). Additionally, other countries, such as China have been engaging in more bilateral or regional trade agreements, further undermining the multilateral trade system.


Trade War between the USA & China and its impact on the WTO

The World Trade Organization has been significantly affected by the trade war between the United States and China. The trade war between the two largest global economies commenced in the middle of 2018, when the United States implemented tariffs on China with the intention of compelling the latter to rectify its unfair trade practices. The United States claims that China's intellectual property theft leads to an estimated annual financial loss of around $300 to $600 billion for the US. China asserts that its dominance in specific technological domains stems from substantial investments in research and development. It perceives that the United States is attempting to impede its ascent as a worldwide hegemon. The ongoing trade conflict has had adverse effects on the economies of both nations, resulting in increased costs for American consumers and contributing to a slowdown in China's economic expansion.

The US-China trade war has had significant implications for the World Trade Organization (WTO). One major impact of the trade war has been a decline in support for the multilateral trading system. Both the US and China have taken unilateral actions outside of the WTO framework, such as imposing tariffs and other trade barriers on each other's goods. This has weakened the WTO's authority as a forum for resolving trade disputes and coordinating international trade policies.

In 2018, China initiated a legal proceeding with the World Trade Organization's Dispute Settlement Understanding (DSU) regarding the issue. The verdict determined that the tariffs imposed by the United States, which resulted in an escalation of tensions between the two nations, were not in accordance with international trade regulations. This was due to the United States' inability to provide sufficient justification for the alleged technology theft. According to the panel, the United States failed to furnish evidence demonstrating the manner in which the Chinese goods and services impacted by the tariffs were advantaged by the alleged unjust practices. Consequently, the US failed to fulfil its responsibility of providing evidence to support the validity of the tariffs.

The trade war has highlighted the limitations of the WTO's dispute settlement mechanism. The panel failed to resolve the issue, and the Appellate Body has been rendered dysfunctional due to the US's refusal to appoint new judges. This has left some countries with unresolved disputes and no recourse for resolution. Hence, the US-China trade war has brought to the forefront a number of challenges facing the WTO and has underscored the need for reforms to ensure the organization remains relevant in the rapidly changing global trade landscape.


Suggestions

The World Trade Organization (WTO) is currently experiencing a growing level of dysfunctionality, which has resulted in its decreased prominence in the minds of officials and lower prioritization on departmental lists. Therefore, a comprehensive revamp of the World Trade Organization's mechanism for resolving disputes is necessary to effectively tackle the contentions of all members.

To overcome the current situation, the World Trade Organization (WTO) must prioritize four key areas: reform, relevance, reputation, and resilience. Firstly, significant reforms are needed to make the WTO more flexible and adaptable to the changing nature of global trade, including embracing new negotiation approaches and ensuring inclusivity for developing countries. The dispute settlement mechanism also requires attention to restore its effective functioning. Secondly, the WTO should focus on addressing emerging issues such as digital trade, e-commerce, and the environment to remain relevant in today's world and enable members to benefit from new technologies while promoting sustainable practices. Thirdly, improving the WTO's reputation is essential, emphasizing how its work benefits citizens in terms of job creation and economic growth. Engaging with civil society organizations is crucial for addressing their concerns. Lastly, the WTO needs to exhibit resilience by proactively addressing challenges like the COVID-19 pandemic and rising protectionism, supporting members in dealing with economic fallout, and taking a strong stance against protectionist measures. By prioritizing these areas, the WTO can navigate the crisis and ensure its continued effectiveness in promoting global trade.


Concluding Remarks

The crisis surrounding the Appellate Body holds noteworthy ramifications for the dispute resolution mechanism of the World Trade Organisation and the wider domain of global trade. The failure to effectively address conflicts through this mechanism may result in the disintegration of the multilateral trade framework and the emergence of unilateral approaches. Members of the World Trade Organisation have endeavoured to explore alternative mechanisms for resolving disputes, including interim arbitration arrangements. However, these mechanisms are perceived as a provisional measure and are not considered a permanent substitute for the Appellate Body.

All these factors have underscored the necessity for reformation of the World Trade Organization and its mechanism for resolving disputes in order to effectively tackle the contentions of all the members. Furthermore, it is probable that the United States will persist in utilizing its available trade mechanisms for the purpose of retaliation while simultaneously resisting any trade regulations that may impede its capacity to do so. The current crisis can be attributed to the escalation of geopolitical tensions, increasing philosophical differences on a global scale, and the emergence of populist movements. Decision-makers must conduct an objective evaluation of the system and the reasons for its endangerment. The WTO must uphold its fundamental role in promoting transparency and decision-making through consensus-building to overcome the current situation and safeguard the multilateral trade system.

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