The WTO’s appellate body crisis: Implication for trade rules and multilateralism

On 11 December 2019, the term of two of the remaining three members of the World Trade Organization’s (WTO) Appellate Body (AB), Mr. Ujal Singh Bhatia (India) and Mr. Thomas R. Graham (US) came to an end. With only one member left, the AB can no longer meet the 3-member quorum required to review appeals. This not only brings the WTO’s dispute resolution mechanism to a grinding halt, but also challenges the rules-based trading system, and raises questions regarding the relevance of multilateral institutions in the current geopolitical environment.

The WTO’s dispute settlement system (DSS) is the most extensively used international adjudicatory mechanism, having received nearly 600 complaints since its establishment in the year 1995. The process comprises three phases, i.e. consultations, adjudication (panel and appellate body proceedings) and implementation (including countermeasures). The AB, established under Article 17 of WTO’s Dispute Settlement Understanding, is the second leg of the adjudicative process and reviews appeals from panel proceedings. Appellate reviews are governed by a limited mandate where AB members only review legal questions, and not look at new facts and evidence.

For long, the US has raised concerns about several issues regarding the appellate process, such as long delays and the appropriate standards of appellate review. Notably, it has criticized the AB for straying from its original mandate by issuing decisions that add or diminish rights and obligations of member states, and hence amounts to judicial overreach. Washington’s modus operandi to express its discontent with the AB was to veto the appointment of new members, thereby steadily dwindling the roster of members.

To an extent, US’ concerns have been shared by other WTO member states as well. However, their response has been fairly less subversive; around twenty member states – individually or in groups – have made proposals to reform the appellate review procedure and resolve outstanding issues with the AB. India, for its part, has co-sponsored such proposals along with other states, including Canada, Australia, China, Singapore and the European Union. Moreover, in relation to Washington’s unilateral decision to block appointments, no less than 75 WTO members have repeatedly submitted joint proposals urging members to fill vacancies without delay.

There are currently 14 appeals pending in the WTO (including two involving India), and it is likely that more will be added to the dossier since 67% of all panel reports are appealed. Until the AB vacancies are filled, ongoing trade disputes may be left pending indefinitely. For countries seeking an early resolution, an option would be to meet bilaterally outside the WTO to iron out their differences.

However, it is pertinent to note that negotiations are the first step of the DSS in the form of consultations between parties to reach a “mutually agreed solution.” If no solution is reached, the matter is sent to a panel for adjudication, as it happens with 60% of all consultations. Since many of these disputes involve complex factual and legal questions, there is merit in sending them for impartial adjudication to a body of trade experts comprising university professors, practicing lawyers, past government officials and senior judges.

An example of a complex trade dispute would be the adoption of trade restrictive measures to conserve marine life, such as- prohibiting shrimp imports from countries which use nets that harm turtles, or a ban on tuna imports to protect dolphins. Such disputes require a careful examination of facts and an analytical understanding of trade rules, and thus, may be difficult to resolve bilaterally. The two complaints mentioned above were filed against the US; in both, the AB decided that the measures were inconsistent with trade obligations. However, contrary to what the US may call judicial overreach, the AB’s decision was squarely compliant with its limited mandate. The decision restricted itself to disciplining the use of policy instruments that, in this case, were either trade distortive or discriminatory against certain countries. It did not criticize the policy objective in itself (i.e. to conserve certain species of marine life) and retained the US’ regulatory autonomy to pursue such objectives through non-discriminatory measures in the future.

Furthermore, differing interpretations of WTO agreements can also lead to disagreements between countries, which may require impartial adjudication. The WTO oversees over 60 trade agreements, annexes, decisions and understandings, which deal with highly technical provisions such as anti-dumping, subsidies, countervailing measures and safeguards. Agreements themselves contain lengthy and complex provisions; for instance, the provision to determine whether a product is being dumped or not is around 1400 words long (Article 2, Anti-Dumping Agreement). In such cases, impartial adjudication can be beneficial in clarifying the correct interpretation of agreements.

The dispute resolution mechanism has also helped serve a surprising number of other purposes, which may no longer be available to member states outside the WTO system. Since domestic trade regulations can be opaque and inaccessible, consultations (the first stage of the DSS) helps enable information discovery and leads to a better understanding of trade law and policy to exporters of other states. Another benefit, particularly to developing and least developed countries (LDCs), comes in the form third party submissions to a dispute. When a country has a substantial interest in the dispute, it can participate as a third party and are given limited legal rights. This is a boon for developing countries, since it allows them to have a say in a dispute without incurring the high costs of bringing a complaint. India has actively participated as a third party in over 160 disputes at the WTO.

However, the current crisis freezes the dispute resolution mechanism and directly threatens the existence of the WTO. This has also raised broader questions regarding the relevance of the multilateral system and the spirit of international economic cooperation. Recent domestic and international developments have resulted in what many are calling the end of multilateralism. The Doha round of trade negotiations has been pending for 14 years; the outcomes of the G20 and G7 summits have been muted at best; and the US’ disengagement with global politics is evinced from its withdrawal from the Paris Agreement and its criticism of the United Nations. The tradition of a group of countries coming together to debate, discuss, disagree and finally arrive at a robust solution for global problems has been steadily disappearing. Extraordinary focus on protectionism, nationalism and sovereignty has resulted in poorly planned unilateral decisions — a trend that does not bode well for smaller states, middle powers and emerging countries, like India.

In order to resolve its trade differences, Washington has initiating negotiations with China and India to arrive at bilateral deals. It is hypothesized that this is what may come to replace the WTO, i.e. a combination of bilateral deals, power and unenforceable norms. The US, EU and China will emerge as the biggest power centers, and other nations may have to enter into asymmetric trade deals with them, thereby splintering the trading system into three blocks. This will result in a highly fragmented and uneven trading regime, which could exponentially increase transaction costs in today’s interconnected world. In such a scenario, international law will be undermined since trade dispute resolution will be influenced by power asymmetries, leading to uncertainty in trade rules and regulations.

The WTO and the DSS have given security and stability to global trade. Rules are uniform, transparent and binding, and are backed with a robust dispute resolution mechanism. The system is not free from flaws; an outgoing AB member acknowledged this and stated that the AB has never proclaimed to be “infallible”. However, this calls for review and reform of the process, as opposed to a complete abandonment of the existing multilateral rules-based trading regime. At this juncture, it is imperative for member states to evaluate the political and economic consequences of the collapse of the WTO, and consider whether this would be beneficial – if at all – for peace and prosperity at home and abroad.

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