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  • Akaash Ramnath

Crisis And Reform: Unraveling The Challenges In The WTO's Dispute Resolution Mechanism

This article is authored by Akaash Ramnath, a third-year student at the Tamil Nadu National Law University.


The World Trade Organisation (WTO) is often regarded as a highly successful, if not the most successful, international court. For many individuals, the track record of this entity was remarkable and without any defects. The process of interpreting, applying, and enforcing rules established by the WTO occurs through a two-tiered system of dispute settlement. The mechanism involves the establishment of ad hoc panels to adjudicate on matters pertaining to disputes arising from member countries’ adherence to their rights and duties under the WTO. These judgements are afterwards subject to scrutiny by a permanent Appellate Body (AB), consisting of seven individuals serving as “judges.” The members of the AB have four-year tenures, which may be extended for an additional period. The orders passed by the Appellate Body hold conclusive and obligatory status, and are often accorded due deference by the parties involved in the dispute. The dispute resolution mechanism of the WTO, established in 1995, has effectively settled a significant quantity of trade disputes, garnering a widely recognised status as the preeminent component of the global trading system.

Presently, the dispute settlement mechanism is facing a state of crisis. The members of the World Trade Organisation (WTO) have encountered challenges in their attempts to engage in negotiations on the modernization of the institution's rulebook, which encompasses several aspects, including the rules pertaining to dispute settlement mechanisms. Consequently, the WTO AB is increasingly being called upon to issue rulings pertaining to WTO provisions that are either vague or incomplete. The United States and other nations have raised concerns regarding the interpretations of these provisions, arguing that the binding rulings of the AB, which set precedents for future cases, bypass the authority of member countries to amend the rulebook of the WTO and consequently undermine the national sovereignty of WTO members.

In recent years, United States officials have employed the strategy of impeding the selection of Appellate Body members as a means to compel WTO members to engage in negotiations aimed at formulating novel regulations that effectively address American apprehensions and curtail the potential for excessive judicial encroachment. According to Article 17.1 of the Dispute Settlement Understanding (DSU), appeals are required to be listed before a panel consisting of three members, technically called as the “division.” Therefore, the AB will be able to operate only when it has a minimum of three members.

The lack of a system for appellate review has resulted in an upsurge of inconsistent and nonsensical rulings and legal reasoning within the realm of international investment law. This results in a condition of volatility and unpredictability, hence engendering a chaotic environment for both nations and international investors.

In the absence of a solution to this issue, the Appellate Body would soon face a shortage of members, so impeding its ability to effectively evaluate cases and perhaps causing the renowned dispute settlement system of the WTO to come to a standstill.

In the event of such an occurrence, the WTO would have to forfeit its existing mechanism for appellate final review, thus diminishing the frequency with which its panel decisions attain binding status. Under the regulations set forth by the WTO, nations that feel wronged would thereafter forfeit their legal entitlements. The potential consequences of failing to address this issue include the reversion of the global trade system to a power-centric environment, where major economic powers would be able to assert their interests unilaterally and resort to retaliatory measures in order to achieve their desired outcomes.


DISPUTE SETTLEMENT MECHANISM: CURRENT CHALLENGES AND CRITICISM

The United States has seen a gradual build-up of frustrations over an extended period, stemming from several factors. The primary arguments are around the discernible pattern of decisions made by the AB, which do not consistently pertain to a specific case.

The primary concerns of the United States are centred around the perceived “excessive jurisdiction” of WTO panels and the AB. Addressing this matter necessitates the presence of political determination in order to reach a mutually agreeable resolution. On the other hand, technical difficulties that elicit objections from the United States are more amenable to being resolved. The United States has made efforts to address these issues by engaging in discussions and presenting many suggestions to alter the Dispute Settlement Understanding (DSU). However, the adoption of DSU changes has not occurred thus far, mostly due to the onerous consensus requirement.[i]

One aspect of concern pertains to procedural matters. The United States has consistently urged members of the World Trade Organisation (WTO), through the Dispute Settlement Body (DSB), to use their jurisdiction when the Appellate Body deviates from established norms. For example, the United States vehemently criticized the appellate body over the resignation of Hyun Chong Kim, without following the prescription under Rule 14(2). Rule 14(2) of the Appellate Body Working Procedure requires 90-day notice. In another instance, the appellate body appointed an appellate body member for a second term, which the United States criticized as it not as per the rules prescribed.[ii]

Certain members of the Appellate Body have made decisions on appeals even after their four-year tenure has ended, without specific authority from the Dispute Settlement Body (DSB). Rule 15 of the AB Working Procedures, provides that an Appellate Body member is permitted to finish their tasks related to a continuing appeal, provided that it is approved by the AB and communicated to the DSB.


Systemic Concerns

The current dilemma is rooted on two systemic flaws, namely, allegations of excessive interpretations and obiter dicta found in AB reports. The decisions made by the AB are considered to be conclusive and cannot be subject to appeal, unless there is a unanimous agreement among the members of the DSB.

To this date, no hurdles have been successfully overcome. The establishment of the AB was intended to rectify legal inaccuracies made by panels, rather than to generate novel rights and duties for members of the World Trade Organisation (WTO). The AB functions as a mechanism to oversee the judgements made by World Trade Organisation (WTO) panels. However, the United States has expressed concerns over the absence of an efficient means to scrutinise the rulings made by the AB. The exacerbation of the influence of “overreaching” AB rulings is further intensified by the establishment of a tradition of stare decisis within the jurisprudence of the World Trade Organisation. Consequently, it is uncommon for panels to deviate from prior rulings made by the AB regarding identical legal matters.

All this has resulted in the United States frequently criticising the appellate body for making its own rules.[iii] The AB has also deliberated upon matters that were not explicitly mentioned by the parties or were otherwise superfluous opinions, similar to what is referred to as obiter dictum in legal terminology.[iv] The United States has expressed its concerns with these excursions, asserting that they hinder the objective of expeditiously resolving disputes and exert an improper effect on future disputes when regarded as precedents by panels within the World Trade Organisation (WTO).


Global Initiatives: Advocacy for WTO Reform

The G20, seen as the global economic governance body, has consistently advocated for and endorsed the need for change within the World Trade Organisation, specifically emphasising the necessity for a comprehensive evaluation of the AB system. The matter has also been addressed in the declarations of the G20 Finance Ministers and Central Bank Governors, as well as the Trade Ministers, particularly since 2020 when the tenure of the final member of the AB concluded.[v]

Any reforms made to the dispute settlement body of the WTO, should broadly have ensure, firstly, the maintenance of an equitable, all-encompassing, and resilient mechanism for resolving disputes, which accommodates regulatory flexibility in light of evolving geopolitical changes. Secondly, the expeditious and amicable settlement of disagreements among World Trade Organisation members. Thirdly, ensuring the maintenance of both independence and impartiality within the appellate system.

The New Delhi Leaders’ declaration affirmed to pursue reforms and make the WTO dispute settlement body up and running by 2024.

In light of these objectives, it is imperative to implement a number of changes aimed at bolstering the credibility and efficacy of the AB.

Despite the provision in the DSU that restricts the duration of appellate review by the AB to a maximum of 90 days, this timeframe is seldom adhered to in reality. This challenge leads to a prolonged process of resolving conflicts and an increasing accumulation of pending appeals. The inability to adhere to established timelines might stem from insufficient members and financial resources allocated to the organization, or it could perhaps be attributed, as several World Trade Organisation (WTO) members speculate, to the Appellate Body (AB) exceeding its permitted scope in various respects.

Another pertinent issue is the continued involvement of former members in their designated cases beyond the expiration of their term. Despite the presence of explicit term restrictions under the DSU and the provision of for extending these terms to facilitate the completion of appellate reviews, the extended and flexible nature of these processes have led to a situation where the members often exceed their original tenure. In order to address this issue, it is recommended that the DSU and Working Procedures undergo modifications aimed at reducing the frequency of member tenure extensions, specifying the precise scope of such extensions, and implementing an oversight process overseen by the DSB.

The United States has consistently contended that the Appellate Body has made substantively erroneous interpretations of several articles under the World Trade Organisation (WTO) Agreements on multiple occasions.

Under specific conditions, the rulings have been regarded as legally binding precedents, therefore impacting the rights and responsibilities of the persons involved. But in some circumstances, previous decisions might offer valuable guidance in establishing the final decision, have been discarded. There is need to give more clarification on this regard.  

Ultimately, the system operated and serviced the globe trade system for more than 45 years, which in itself is an astonishing feat. Most significantly, unlike judicial rulings inside a national legal framework, the findings delivered by the Panels were not inherently binding as law, but rather required the unanimous adoption of all Contracting Parties. The motivation for the opposing party to protest to the adoption was evident, yet a significant majority of the Panel recommendations, amounting to 80%, were ultimately agreed upon. This left just a small fraction of reports, without any practical effect and serving merely as printed documents.


CONCLUSION

The Appellate Body’s quick development of significant authority is a one-of-a-kind instance in the realm of international politics. The development of the Appellate Body’s went through a progression from very little authority to moderate authority to vast authority. This represents a rapid leap in the legalization from very little authority under the General Agreement on Tariffs and Trade to remarkable authority under the present dispute settlement mechanism. Despite its broad jurisdiction the appellate body’s position remains precarious. Various cracks derail the body’s functioning to the intended level, the biggest being the United States blocking all appointments to the Appellate Body, the others include the judges exercising their authority to selectively favour certain members, the member countries have frequently raised various systemic concerns in the system. 

Substantial reform is the need of the hour, without which the AB would lose its relevance in the global trading system. Constructive dialogue and talks emerge as the optimal approach to address the ongoing situation. The imperative to participate in productive discourse, meanwhile, applies reciprocally. The World Trade Organization (WTO) Secretariat and its member states should increase their level of engagement with the United States, rather than reducing it. The Appellate Body and the Dispute Settlement Body (DSB) should commence the process of resolving the procedural issues raised by the United States by utilizing existing short-term remedies. Simultaneously, the United States should refrain from exacerbating the challenges faced by the institution in question.

The primary focus should be on reaching a consensus among WTO members about the establishment of updated protocols for the Appellate Body. These protocols would involve the submission of legal uncertainties that arise throughout the appeal process to the relevant WTO committees. This would facilitate further debate and negotiation among the members of the WTO.


ENDNOTES

[i] Gary Clyde Hufbauer, “WTO Judicial Appointments: Bad Omen for the Trading System,” PIIE RealTime Economic Issues Watch blog, June 13, 2011

[ii] Ibid.

[iii] Dispute Settlement Board, Minutes of the Meeting, April 3, 2002, WT/DSB/ M121, para. 35

[iv] Dispute Settlement Board, Minutes of the Meeting, June 27, 2012, WT/ DSB/M/315, paras 74 to 75.

[v] G20 Chair’s Summary and Outcome Document, First G20 Finance Ministers and Central Bank Governors Meeting, G20 Information Centre, University of Toronto.

 

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