Referencing a popular fantasy series, the Norwegian representative to the World Trade Organization (WTO) recently warned the member-states of the crisis facing the appellate body (AB) with the phrase “winter is coming”.
On December 10, two of the remaining three members of the AB are set to retire, rendering the supreme court of trade, which requires a minimum of three members to hear a case, unable to continue. This predicament is the result of the United States’ gambit of blocking appointments to the AB with a view to rein in what it perceives to be an activist court, “adding to or diminishing from” agreed rights and obligations between the members.
In view of the US veto, the AB appears set to be met with an untimely demise.
Long extolled as the “crown jewel” of the WTO, the creation of the AB changed the face of trade disputes adjudication. Before the establishment of the WTO, under the dispute resolution provisions of the General Agreement on Tariffs and Trade (GATT), ad hoc panels, composed to hear disputes between contracting states, would issue reports.
Positive consensus rule
In order for such reports, however, to bind the contracting states, they would be required to be adopted by the states using the positive consensus rule. In other words, unless each contracting state agreed to favour the adoption of a particular report, the report could not be adopted.
Not surprisingly, respondent states often blocked the adoption of any unfavourable report. The risk of such blockage further discouraged states to initiate disputes. Even where complaints were filed, the panel, mindful of the risk of non-adoption, tended to issue more circumspect rulings. All this significantly weakened the effectiveness of the dispute resolution mechanism under the GATT.
With the establishment of the WTO, the membership realised the need to address their Achilles’ heel. However the possibility of erroneous panel reports remained. As a compromise, the membership agreed to the establishment of standing body composed of seven members to hear appeals, in divisions of three, on panel reports with the intended objective of weeding out “bad” reports.
In place of the positive consensus rule for the adoption of reports, the reverse consensus rule was adopted. In other words, unless each member objected to the adoption of a report, it would be adopted. In cases where an appeal was preferred, the process of adoption was postponed until after the conclusion of the hearing by the AB.
Although established with the intention to weed out bad reports, over time the AB developed secondary functions of ensuring consistency in jurisprudence and further development and refinement of the rules. With further negotiation stalled at the WTO, these developments, albeit useful, proved controversial.
In particular, the US found itself on the wrong side of these developments on a few occasions. A controversial series of rulings on the practice of “zeroing” — a controversial US methodology to calculate anti-dumping duties against foreign products — saw the AB successively overruling the panels with respect to the WTO consistency of US measures.
Another ruling concerned the AB interpretation of the term “public body” in reference to Chinese state-owned enterprises, which the US objected to. Despite raising these issues among the members, the US was unable to gather consensus on reforming the rules. The Obama administration, hoping to raise attention to these issues, began blocking the nomination of members to the AB. This strategy was intensified under the Trump administration, leading to the situation today. Although attempts to engage with the US have been made, these have not yielded any results.
The demise of the AB is not without consequence for the WTO dispute-resolution system. In the absence of a functioning AB, panel rulings, if appealed against, cannot be heard. The losing party could simply avoid compliance with an unfavourable panel report by filing an appeal and avoiding its adoption.
It is important to bear in mind that an effective dispute resolution mechanism is at the heart of a well-functioning multilateral trading system. Despite its shortcomings, the two-tier mechanism proved to be the most successful means of inter-state dispute resolution. The system was seen as a successful model that could be adopted to investor-state disputes.
However with the imminent demise of the AB on December 10, “winter will be here”.
Although it is unlikely that the demise of the AB will be averted, some members have adopted ad-hoc solutions. Indonesia and Vietnam have agreed in advance not to appeal against the ruling of the panel in their dispute. The European Union. Norway and Canada have agreed on an interim appeal system for resolving any disputes through arbitration in a process mirroring the AB. However, the overall success of such solutions is uncertain. With the end of the AB, expect governments to increasingly pander to domestic interests and adopt protectionist policies. After all, as the adage goes, “when the cat’s away, the mice will play”.
Jay Manoj Sanklecha is a lawyer, who has specialised in international law. HINDUSTAN TIMES