The World Trade Organisation Dispute Settlement

Article written by Olga Kyriakoudi

This article explores the specific problems that the Appellate Body (AB) has faced since 2018-2019 when the United States refused to approve judges for the appellate body, thereby impeding the function of the World Trade Organisation (WTO) -dispute settlement.

Introduction

In 1995 as a result of the Uruguay round of negotiations, the WTO was established. The successor of the General Agreement on Tariffs and Trade (GATT) emerged to serve as an international arena for negotiations of liberating and enabling trade, as well as administering and managing transnational trading deals. However, since 2019, the Dispute Settlement Mechanism (DSM) of WTO observed unprecedented procedural impasse, if not paralysis, of the Appellate Body (AB). Primarily, this issue can be traced to America’s tactical and systematic exercise of their veto power in the organisation.

Background of the conflict

The core of global trade governance is the WTO’s dispute settlement process, which was established under the Dispute Settlement Understanding (DSU). The Appellate Body, an impartial organisation, tasked with examining the legal conclusions reached by dispute settlement panels, is the system’s cornerstone. Seven individuals are appointed to the Appellate Body since 2018 to 2019, sparking an unprecedented crisis.

Since its creation, the dispute settlement system of WTO has been described as ‘the central pillar of the multilateral trading system’ as it helped settle over 570 trading disputes worldwide. In comparison to its predecessor, the GATT dispute settlement system, WTO handles the transnational disputes in a much more substantive manner. Under DSU, a member state’s dispute goes before a dispute settlement panel, tailored exclusively for each individual disagreement. And upon conclusion of the panel, the decision is then either adopted by the Dispute Settlement Body (DSB) or appealed to the Appellate Body. Similarly, the decisions reached on the appeals will also be adopted by DSB. It embodies representatives of all WTO member states and carries a legally binding effect on the parties to the dispute. Being the main political safeguard of the process, one of its crucial competencies is the selection and appointment of members for the Appellate Body. According to article 2(4), DSU makes their decisions by consensus of all member parties. Any reports are not legally binding until their adoption by the DSB. Thus, their legal effect depends on its decision.

Considering the appellate body now, although it is composed of seven independent experts, a formation of only three members is required for reviewing each case. According to article 17(2) DSU, new AB members must be appointed by the DSB once there is a vacancy. The centre of the AB crisis is contained in this clause. One member’s objection is sufficient to reject a nominee because the DSB can only reach a consensus. Systematic application of this veto power leads to an AB with progressively fewer and eventually no members. Given the decline in members of the appellate body, they have been struggling to meet prompt deadlines established by DSU in article 17.5. The article provides that, ‘as a general rule’, the Appellate Body should circulate its report within 60 days of the notice of appeal. If this is not possible, the Appellate Body is required to provide written reasons for the delay. In any event, the appeals process should take no longer than 90 days.’

Moreover, the Appellate Body has no power to scrutinise the panel’s factual conclusions nor examine new evidence. And without authorisation, the Appellate Body cannot refer cases back to the panel where factual issues remain open. As a result, with this narrow approach of reviewing each appeal, the AB is at times unable to finalise legal assessment where factual findings are a requirement. This issue was vividly observed in Guatemala and Peru (WT/DS457). In that case, due to lack of sufficient undisputed facts in the panel report, the Appellate Body could not reach a conclusion whether a certain measure was inconsistent with WTO rules.

Paradoxically, although these characteristics used to reinforce a rewarding legal framework for the WTO, they undoubtedly also contributed to the causes of the Appellate Body Crisis. Its demands for universal and compulsory participation in the agreements of the Dispute Settlement Body (DSB) implies its rigid implementation. Ergo, having a ‘take it or leave it’ framework, and the need for unanimity, halts any necessary reforms to the accumulation of procedural flaws in the system.

Hence, with the current absence of the system that WTO relied on to efficiently resolve international trade disputes, legal bindingness and the legal consequences for failure to comply are now merely non-existent. Leaving WTO without any form of legal enforcement system, resulting in any law produced becoming general guidance. And to quote Abraham Lincoln ‘law without enforcement is just good advice.’

Development of the issue

America has been criticising the practices of the Appellate Body for over a decade now, vetoing some appointments as early as 2016, And raising their concerns about the operation of the Appellate Body and some specific problematic aspects of the DSM and the WTO. But to say that the appellate body crisis started solely from Mr Obama’s government would not be entirely true.

The start of the Appellate Body crisis dated to 2017, when the Appellate Body members Ricardo Ramírez Hernández of Mexico and Peter Van Den Bossche of Belgium (appointed by the European Union) were approaching the end of their terms in December that year. During the re-appointment process, DSU ran into a problem on how to go about the re-appointment of both vacancies. After numerous rounds of negotiations, it became apparent that the EU pushed for both vacancies to be filled simultaneously, whilst the USA wished to delay the re-appointment of Peter Van Den Bossche of Belgium and deal with Mr Hernández first.

Although many member states sided with the European Union on this matter, on plentiful occasions they stated that they would be happy with proceeding either way. However, the USA was not willing to compromise, and in 2017, they finally voiced their reasoning behind their controversial actions; ‘given the ongoing transition in the United States’ political leadership and the very recent confirmation of a new US Trade Representative, the United States was not in a position to supporting the proposed decision to launch a process to fill a position on the Appellate Body that would only become vacant in December 2017…’ In retrospect, the US’s obstruction of the Van Den Bossche replacement process was merely a foreshadowing of its comprehensive obstruction of the appointment process beginning in August 2017.

To successfully comprehend the US Government’s motivations for the blockage of the appointments, US statements outside of DSB have to be considered. The Government gave their reasons for occluding re-appointments of the Appellate Body members, referencing various ‘systematic concerns’  in relation to the organisation. For instance, their extensive issue with the application of the Rule 15 which provides that, ‘A person who ceases to be a member of the Appellate Body may, with the authorization of the Appellate Body, and upon notification to the DSB, complete the disposition of any appeal to which that person was assigned while a member; and that person shall, for that purpose only, be deemed to continue to be a member of the Appellate Body’. The American Government did not have an issue with the substance of this rule but simply with the Appellate Body acting outside of their jurisdiction by administering the rule15 themselves. Yet, they failed to propose no solutions, ad-hoc authorization, DSU amendment, nor made any suggestions to DBS on how to settle the dispute.

In December 2017, United States Trade Representative (USTR), Robert Lighthizer voiced six critiques of the WTO, and later in 2018, his concerns were echoed by the President’s of March 2018 policy agenda, titled U.S. Concerns with WTO Dispute Settlement.’ It outlined six definite issues:

1. disregard for the 90-day deadline for appeals (Art.17.5 of the DSU);
2. continued service by persons who are no longer Appellate Body members (i.e., the Rule 15 issue);
3. issuing advisory opinions on issues not necessary to resolve a dispute;
4. appellate review of facts;
5. appellate review of a member’s municipal law;
6. treatment of Appellate Body reports as precedents.

Their first concern regarded Art. 17.5 of the DSU. The article provides that, ‘… the Appellate proceedings shall not exceed 60 days from the date a party to the dispute formally notifies its decision to appeal to the date the Appellate Body circulates its report … In no case shall the proceedings exceed 90 days’. From 1996 until the end of 2010, the Appellate Body complied with Art.17.5 of the DSU in more than 90 % of the cases. But due to the heavy workload and complexity of each case, some delays were observed, starting in 2011. In 2015, Mr Thomas R. Graham, a member of the Appellate Body appointed by the United States, highlighted that the workload of the Appellate Body increased significantly over the years. Although the Appellate Body failed to comply with Art. 17.5 of the DSU, the reasons for such failure were beyond their control. Yet, the American Government disregarded Mr Graham’s statement, and exploited the issue of delays as another justification for the blockage of the Appellate Body.

Secondly, according to Article 17.2 of the DSU, ‘the DSB shall appoint persons to serve on the Appellate Body for a four-year term, and each person may be reappointed once’. The US asserts that Rule 15 is in violation of this provision because Article 17.2 of the DSU gives the DSB the authority to appoint and reappoint Appellate Body members. Whilst the DSB is also the one which has the responsibility to determine whether a person whose term of appointment has expired should continue serving as if a member of the Appellate Body, and that ‘the Appellate Body simply did not have the authority to deem someone who was not an Appellate Body member to be a member. Rule 15 has been used eleven times in nine appeals before the 2017 appointment crisis. It gave powers to the Appellate Body to sustaining successful rotation of members and ensuring competent completion of each appeal. Thus, although USA’ interpretation of rule 15 in relation to article 17.2 highlights some ambiguity in its wording,  it does not serve sufficient grounds for the obstruction of re-appointment process of the Appellate Body.

Thirdly, in their statement of 2018, USA voiced their concerns in relation to the increasing prevalence of obiter dicta. They argued that provision of advisory opinions by the Appellate Body ‘breached WTO rule and consequently introduced unnecessary ambiguity to the resolution of WTO disputes. The case of China, Publications and EU – PET (Pakistan), where the Appellate Body issued recommendations that Pakistan did not ask for. Hence, it serves as one example of what the American Government deems as illegitimate obiter dicta. DSU remains torn on this issue as phrasing of each separate article of DSU appears to be slightly contradicting one another. Nevertheless, there is not enough evidence for the provision of obiter dicta to equate to a serious breach.

Followed by a DSB meeting in August 2018, where USA argued that ‘ In the WTO system, as in any international law dispute settlement system, the meaning of municipal law is an issue of fact.’ Under Art.17.6 of the DSU, the United States claimed that the Appellate Body has no jurisdiction to reassess the panel’s discoveries concerning the meaning of domestic, municipal or the national law of any WTO member state. To cite an example, in the case concerning Section 211 Appropriations Act 2002, US claims that the Appellate Body takes a broad perception of the matters that it can examine. Thus, AB arguably breaches Art. 17.6 of the DSU by reviewing national law on appeal. In addition, the United States criticised AB in reviewing factual findings of the disputed. In C – Hormones, USA asserted that AB breached Art. 17.6 of the DSU by entertaining a request to review factual findings. AB is strictly confined by Art. 17.6 as it does not permit them to review factual findings upon appeal. Due to the ambiguity in DSU writing, it is difficult to determine whether there was an actual judicial overreach or not. But what is for certain, the AB should not be held accountable for the ambiguity of the document that they are obliged to abide by. Moreover, when comparing AB alleged breach of Art 17.6 to USA’s clear breach of Art. 17.2 of the DSU, the disproportionality of their claim becomes apparent.

Finally, the doctrine of precedent is another concept of AB which the USA finds problematic. Precedential effect means that the judicial body is bound by the decisions reached in previous hearings, which has a horizontal and a vertical effect. For a number of reasons, the US has raised worry with the horizontal direct effect. First, it contends that such a binding effect would restrict the adaptability and independence of panels. The US is of the opinion that panels should not be strictly constrained by earlier decisions and should be able to independently evaluate the facts and circumstances of each case. This method enables the creation of customised solutions that consider the particulars of each dispute.

Second, the US questions whether past Appellate Body decisions may have contained mistakes or had weak legal reasoning, as seen in Japan – Alcoholic Beverages II (1996). Accepting horizontal direct influence could help false interpretations persist and make it more difficult to correct them. To ensure accuracy and fairness in the dispute resolution process, the US is apprehensive that reviewing the prospect of panels going back and revising earlier rulings would be beneficial. But the US’s absolutist stance on this matter did not provide any answer nor solutions to critical problems about the role of precedent in the WT. Hence, the issue of precedent in the Appellate Body remains unresolved.

By the end of 2018, USA was adamant that they would not unblock the appointment process unless its concerns were addressed, without though, making any specific proposals on how to address them. Consequently, later that year at the General Council meeting, many solutions were discussed to help relieve the concerns raised by the United States. However,  the American delegation rejected any proposed DSU amendments without providing any sufficient feedback as to why. The American Government then went on to refuse the routine re-appointment of Jennifer Hillman, with no explanation for its decision. And in 2017, Obama obstructed the re-appointment of South Korean Appellate Body Member Seung Wha Chang, contending Mr Chang actions within his mandate and scrutinising his performance in the Appellate Body and in the DSU. But to say that America’s issue with the Appellate Body solely stemmed from Obama’s government, would not be entirely true.

After Mr Trump took over the administration in 2017, although arguments against the Appellate Body remained somewhat the same, the politics behind them certainly did change. Mr Trump started at the office followed by the re-introduction of tariffs which the WTO and the GATT strove to reduce. As a result, the USA’s political system has departed from a multilateral trading system to a more mercantilist view. With the current circumstances in mind, it may be argued that perhaps US was not interested in resolving the conflict, and thereby would rather accomplish its presumed objective of further undermining the Appellate Body.

With no major developments since 2018, the last term of an Appellate Body member expired in 2020. And as it stands now, the Appellate Body has no current members. The deadlock has seriously hampered the ability of the Appellate Body to function due to a paucity of appointments. And as of 2023, the Appellate Body remains with zero appointed members.

Solutions

Over the past years, the WTO community consisting of legal advisors, ambassadors and member states have been attempting to navigate a way out of the Appellate Body impasse. David Walker, New Zealand’s WTO ambassador, was assigned to supervise the reform process in hope of resuscitating the organisation. Various reforms were proposed in relation to the legal texts and working procedures governing the appeal process. In hopes of introducing some clarity to the ambiguous rules prescribed by the Working Procedures and DSU, many academics have suggested introducing an express rule limiting the scope of Appellate Body reports to the questions raised on appeal. It would be done to prohibit the AB members from providing obiter dicta and comments on issues which are not directly pertinent to the appeal, making cases speedier and simpler to resolve. In addition to that, the creation of another rule, per USA’s proposal, to eliminate authoritative interpretations of law on matters unrelated to the appeal would facilitate generation of better Appellate Body reports. And  amending the wording of the Rule 15 to minimising the chances of extending member’s terms even after their membership ended would ensure smooth rotations of the AB member.

And to further settle the issues raised by the US,  WTO and its members would need to have productive discussions with the American Government to redressing the issues brought up by them. This conversation should clarify any apparent overreach by the Appellate Body and consider ways to improve how it operates. It might be possible to allay US worries about judicial activism and guarantee that the Appellate Body stays within its purview by establishing a process for routine assessment and evaluation of its performance. Concerns about deadlines and formalities may be reduced by enhancing openness and accountability measures within the Appellate Body’s procedures. Moreover, the selection process should be reviewed, in particular the usage of veto power. Whilst some propose the creation of a long-lasting standing Appellate Body for avoiding the issue of re-appointments, some suggest abolishing the veto power and implementing a fair simple majority voting procedure. And others, like Geraldo Vigidal consider ways to completely avoid the Appellate Body and do away with the appeals process. In any scenario, agreement among WTO countries is required for a reform that would revive the AB through a DSU revision. Article 25 of arbitration and agreements not to appeal are two interim measures which are advised to be pursued by many academics but also are considered unlikely to become mandatory or gain widespread acceptance.

Yet, successful application of article 25 can be observed in practice by Canada and the European Union. In order to hear appeals in disputes between the two parties when the Appellate Body does not have the necessary minimum of three members, the two parties have announced the establishment of an interim appeal arbitration system based on current WTO standards. By accepting this novel strategy, Canada and the EU have taken a step towards assuring a working and effective dispute settlement process throughout the problems facing the Appellate Body.

Conclusion

In conclusion, since 2018–2019, the WTO Appellate Body’s operation has been at a standstill due to the United States’ refusal to approve judges for the body, which has seriously jeopardised the efficiency of the multilateral trading system. Among the most pressing problems are the Appellate Body’s activities being paralysed, the backlog of appeals, ambiguity around legal interpretations, and the weakening of the rule of law. It is crucial to engage in a fruitful dialogue with the United States to comprehend and resolve its concerns about how the Appellate Body operates in order to address these difficulties. The steps towards breaking the impasse include revitalising the selection procedure, participating in broader WTO reform initiatives, and supporting other dispute settlement procedures. These steps can improve accountability and openness while addressing US concerns and re-establishing faith in the dispute resolution process. Collective action and a commitment to preserving the multilateral trading system’s norms are necessary to break the deadlock of the Appellate Body.