The effective functioning of the dispute settlement system of the WTO is essential for rules-based multilateral trade. It provides certainty and predictability and prevents power-based behaviour.

The Dispute Settlement Understanding (DSU) of the WTO was adopted as part of the Uruguay Round’s “single undertaking”. It ensures that trade disputes are resolved in terms of mutually agreed rules and procedures. Decisions are binding. This has been an effective safety valve for the last 23 years, while its workload has increased, and very complex issues are being referred to the DSU for settlement.[1] The rules also prescribe timeframes to ensure disputes are settled expeditiously.

The DSU sets out procedures for settling disputes about the application and interpretation of WTO obligations. If consultations among disputing WTO members fail to resolve a problem, the case is brought before an ad hoc panel whose decisions are binding unless appealed. Appeals are heard by the Appellate Body (AB). Appellate review is limited to issues of law raised in the relevant panel report. The AB should not add to or diminish the rights and obligations of WTO members.

The global system needs this arrangement even more right now. Without the DSU’s rules and procedures, the tit-for-tat escalation of tariffs on goods in the conflict between the US and China could become a proper trade war. However, the WTO’s dispute settlement mechanism finds itself in a crisis. From the end of September 2018, the AB (designed to have seven members) will have only three, after the US objected in late August to the reappointment of a current AB member for a second term. What lies behind Washington’s actions?

The United States’ criticism (which predates the Trump administration) are about procedural as well as substantive aspects of the work and decisions of the DSU. Its main concern is about the alleged “overreach” of WTO panels and the AB. It cites Article 3.2 of the DSU and claims that WTO adjudicating bodies must interpret WTO law and refrain from law-making. This provision reads:

The dispute settlement system of the WTO… serves to preserve the rights and obligations of Members… and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.

The cases cited by the US involve controversial matters such as “zeroing” in antidumping cases, market economy status of China in light of its WTO Accession Protocol, application of WTO rules to state-dominated segments of the Chinese economy and security exceptions under Article XXI of the GATT.

The argument goes that the WTO membership should agree on an authoritative interpretation of the applicable legal norms, which are often ambiguous. So far, however, WTO members have failed to do so. Under present conditions consensus about these issues is unlikely. And President Trump’s public statements are not helpful: When speaking at the United Nations General Assembly on 25 September 2018 he urged other nations “to reject globalism and embrace patriotism”.[2] He argued that national sovereignty should be the dominant feature of inter-state relations.[3] He has also threatened that the US might leave the WTO, unless it implements the anticipated reforms. Others call this “hostage taking”.

The present US administration also claims that the remedies allowed for under WTO law do not go far enough. They do not protect intellectual property rights (such as patents, trade secrets or industrial designs) and technological innovation sufficiently. These are rights of private parties. WTO Agreements prohibit, as a general principle, unfair trade practices. However, not all loopholes are plugged. China and Chinese firms are accused of plundering foreigners’ inventions and discoveries.[4]

The argument in favour of strengthening the WTO and the adoption of more effective surveillance and compliance mechanisms is a strong one. In the words of a recent editorial in The Economist:

The genius of the rules-based system is that it has torn down barriers by persuading producers that the prize of access to foreign markets is worth the accompanying global competition. When that competition is deemed lawless, political support for free trade withers. A world in which China is pursued by its critics through the WTO, and faces proportionate retaliation when necessary, is far preferable to one in which a tit-for-tat trade war can escalate without limit.[5]

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[1] Six new appeals were filed in 2017, and another 2 in the first months of 2018. Recent Appellate Body (AB) cases include disputes about accession to the WTO, the SPS Agreement, the Anti‑Dumping Agreement, the SCM Agreement, the Import Licensing Agreement, the GATT 1994, the DSU and the Airbus and Boeing cases. Report by the Appellate Body Chair on 3 May 2018. https://www.wto.org/english/news_e/news18_e/ab_07may18_e.htm

[2] https://www.theguardian.com/us-news/2018/sep/25/trump-united-nations-general-assembly-speech-globalism-america

[3] Ibid.

[4] It is claimed that foreign companies partnering with Chinese firms are forced to share their intellectual property such as trade secrets or industrial designs. https://www.hudson.org/research/14570-feeding-the-fire-of-genius-intellectual-property-and-america-s-high-tech-future

[5] How to rescue the WTO. The Economist, 19 July 2018. https://www.economist.com/leaders/2018/07/19/how-to-rescue-the-wto