Dispute Settlement System of the WTO: Challenges and Solutions – Explained, pointwise

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Introduction

The Dispute Settlement System of the WTO (World Trade Organization) has been stalled for long. The US has not allowed the appointment of experts to the Appellate Board. The Mechanism has been rendered non-functional since 2019 due to lack of quorum of adjudicators needed to hear appeals. It has deep implications for the functioning and effectiveness of the WTO. At the recent G20 nations’ trade, investment, and industry ministerial meeting, trade ministers discussed ways to strengthen the World Trade Organisation’s (WTO) dispute settlement mechanism and make it more “accessible and efficient”. The World Trade Organization (WTO) has been the cornerstone of the multilateral rules-based global trading system since its inception in 1995. Presently, all three of the organization’s functions: providing a negotiation forum to liberalize trade and establish new rules, monitoring trade policies, and resolving disputes between its 164 members, face challenges. In the current logjam at the dispute resolution mechanism, the WTO faces a make-or-break moment.

What is the Dispute Settlement System of the WTO?

Origin and Purpose: The Dispute Settlement System (DSS) has been termed as the ‘crown jewel’ of the WTO. The DSS came into existence in 1994. It came into existence through the 8 year long Uruguay Round negotiations (1986-1994) to govern trade disputes between member states of the WTO.

The purpose of the Dispute Settlement System is to provide “stability and predictability to the multilateral trading system” and to establish a “fast, efficient, dependable and rule-oriented system to resolve disputes”.

The DSS provides a forum for an aggrieved country to ensure its rights. It also enables a respondent country to defend its claims. The DSS enables interpretation, clarification and correct application of the rights and obligations provided under the WTO agreements.

Jurisdiction and Applicability: The WTO’s jurisdiction over disputes is compulsory and all members are subject to it by virtue of having signed and ratified the agreement. A dispute arises when a member state adopts a trade policy that one or more members consider to be inconsistent with the obligations under the WTO trade agreements. In such a case, a member state is entitled to challenge the policy measure by invoking the procedure of the dispute settlement system.

Structure: The General Council (WTO’s highest decision-making body) comprises representation from member states and also meets as the Dispute Settlement Body (DSB). Settling disputes is the responsibility of the DSB. The Dispute Settlement Body has the sole authority to: (a) Establish panels of experts to consider the case; (b) Accept or reject the panels’ findings or the results of an appeal; (c) Monitor the implementation of the rulings and recommendations; (d) Authorise retaliation when a country does not comply with a ruling. The DSB thus administers the rules and procedures of the DSS.

The DSB’s decision with respect to establishing panels, adopting panel and appellate body reports, and authorising retaliation, is taken by the ‘negative’ or ‘reverse consensus’ method. All other decisions, such as the appointment of panel or appellate body (AB) members, are taken through the positive consensus mechanism.

Reverse Consensus

It means that the DSB must automatically decide to take the action ahead, unless there is a consensus not to do so. This means that one sole Member can always prevent this reverse consensus, i.e. it can avoid the blocking of the decision (being taken). If one member votes that the decision be adopted, it shall be adopted.

Appellate Body (AB): The AB is a permanent body of 7 members who are appointed by the DSB for 4-year terms. A panel for appeals comprises three from the seven-member AB. The Appellate Body members are persons with demonstrated expertise in law, international trade and the subject matter of the WTO agreements. Most AB members have been university professors, practicing lawyers, past government officials and senior judges.

Process: The DSS process comprises three stages: (1) Consultations between parties; (2) Adjudication by panels, or the Appellate Body (if appealed); (3) Implementation of the ruling, including the possibility of countermeasures if the losing party does not implement the ruling.

Dispute Settlement System (DSS) Process at the WTO UPSC

Source: ORF

What are the challenges and associated solutions with regards to the Dispute Settlement System?
Appointments and Extensions of Appellate Board Members
IssueProposed Solution
1An appointment of AB member  takes place through consensus, i.e., all member states need to agree upon the appointment.

Since 2018 ,the appellate body has been defunct because the United States has blocked the appointment of new judges.

Appointment by majority voting, instead of consensus will provide a speedy resolution to the stalemate.

Additional reforms to mitigate this crisis: (a) Increasing the number of AB members; (b) Changing the term of AB members from a 4-year renewable term, to a single term of 6-8 years; (c) Automatic launch of AB selection process before the expiry of term of office.

Procedural Issues
IssueProposed Solution
1AB’s jurisdiction is limited to reviewing “issues of law” and “legal interpretations developed by the panel”.

But sometimes it goes into factual questions and exceeds its judicial mandate. It makes remarks and statements that are unnecessary to the resolution of the dispute. This has been criticized.

Mandatory judicial economy: AB should exercise “judicial economy” and limit itself to issues raised by parties. Under no circumstance it should pronounce on issues not raised by parties to dispute.

An external review mechanism has been proposed by some countries to consider whether the AB has overstepped its mandate.

2DSB decision on adoption of panel and AB reports is taken through ‘negative consensus mechanism‘.

The decision is adopted unless there is consensus against it. This guarantees its quasi-automatic nature.

US proposal to increase flexibility and member state control: Mechanism for member states to review AB decisions, delete parts of a decision through mutual agreement, or only partially adopt a decision.

Proposal of a blocking minority: If at least 1/3rd of member states, representing at least 1/4th of the total trade among WTO members, register opposition to a decision, it shall be set aside or blocked.

Systemic Issues
IssueProposed Solution
1Despite overall decrease in DSS workload, the average time taken to resolve disputes has steadily increased.Various steps can be taken: (a) Hiring more secretariat lawyers; (b) Streamlining translation process; (c) Limiting the time given to parties for their submissions.
2The DSS has overall witnessed lesser participation from developing countries and the least developed countries( LDCs).There is a need to give assistance to developing countries and LDCs in the negotiation stage.

The Africa Group has proposed the setting up of fund, out of regular WTO budget for developing countries and LDCs.

3No formal mechanism for regular dialogue between members and adjudicative bodies of the DSB.

There is no available forum for member states to raise concerns and discuss new issues in the DSS.

A formal mechanism will provide a channel of communication, where concerns regarding AB approaches, systemic issues or trends in jurisprudence can be voiced.

Annual meetings can be scheduled with the DSB and AB.

What are the impacts of non-functional Dispute Settlement System on WTO?

First, There is a real concern that if the Dispute Settlement System of WTO is not restored soon, it may not come back. The dispute settlement mechanism has been vital to the functionality of the WTO as it provided an amenable platform to the member states to settle their disputes. In its absence, the disputes will persist and the relevance of the WTO as a multilateral organisation will be lost. Member states will look for alternate plurilateral arrangements.

Second, If the DSS is demolished, it will be difficult for smaller countries to hold larger countries accountable to their trade obligations. Moreover, the rules-based multilateral trading system will collapse with no institutional mechanism available to enforce it. .

Third, Uncertainty in resolution of trade disputes will lead to uncertainty in trade policy which will directly impact farmers, manufacturers, industries and businesses.

Fourth, Because of the challenges of concluding multilateral negotiations, countries have increasingly turned to bilateral or regional free-trade agreements (FTAs). More than 300 bilateral and regional free-trade agreements are currently in force, compared with fewer than 60 in 1995. All WTO members have a least one bilateral or regional free-trade agreement. Regional FTAs tend to be detrimental to the interests of the developing countries/LDCs as they lack negotiating powers.

Fifth, The expansion of bilateral and regional free trade agreement into new areas not covered by multilateral rules increase the risk of regulatory inconsistency.

What should be the approach going ahead?

First, To truly reform the WTO, its trade rules need to be modernised to reflect shifts in global economic power and technological transformations. Moreover, new rules are needed because trade barriers are no longer primarily about tariffs but increasingly concern regulations and standards.

Second, There is need to strengthen the WTO’s notification process for bilateral and regional free-trade agreements and improve the database in which they are recorded, for increased transparency.

Third, the negotiations under bilateral or regional free-trade agreements can be used to advance talks on topics not currently on the WTO. However, the interests of the developing countries and LDCs must be protected and decisions should be based on their consensus.

Fourth, There is need to reform the WTO dispute settlement system and to end the Appellate Body crisis. This would help to maintain the pre-eminence of the WTO’s dispute settlement mechanism over the plethora of other dispute settlement mechanisms that operate under free-trade agreements

Conclusion

The WTO’s functions of administering and monitoring the application of trade rules and settling trade disputes depend largely on whether rules exist and are fit for purpose. Reform will therefore require updating the rulebook to address the needs of global trade in the 21st century. India, as a responsible member state, should help initiate the process of disputes settlement system (DSS) reforms through negotiations, diplomacy and engagement with all stakeholders. At the same time, it should ensure that the interests of developing countries and least developed countries (LDCs) are not compromised and the DSS as an institution retains its original purpose, which is to provide stability and security to the multilateral trading system.

Syllabus: GS II, Important International institutions, agencies and fora their structure, mandate; Effect of policies and politics of developed and developing countries on India’s interests; Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Source: Business Standard, ORF, WTO

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