Until the past few years, for many there was widespread complacency over the existence and state of the liberal world trading system. If progress was needed that could not be achieved at the WTO, it could be achieved through regional and bilateral agreements. Times have changed. It turns out that a well-functioning multilateral trading system is essential to all Member countries and to all who trade, as well as to the world economy more generally.

Reform of the world trading system and the WTO are now issues taken up at the highest levels due to the current disruptions and grave challenges to the system. Recognition is growing that the system needs to be updated to address current realities and to renew the general commitment to rules-based trade. This effort will not be possible unless all stakeholders have confidence in the WTO as an efficient and fair forum for the settlement of disputes. A functional dispute settlement is indispensable to the negotiation of new, and adherence to existing, rules.

Unless a breakthrough can be achieved, the WTO appellate function will almost surely cease to exist. The United States refuses to consent to the appointment of new Appellate Body (“AB”) members, arguing that systemic reform is needed before it can consider filling vacancies. The appellate process thus could be paralyzed by the end of 2019, if not earlier. Serious risks arise if parties to disputes do not exercise self-restraint, accept dispute settlement outcomes without appeal being possible and opt instead to begin a cycle of retaliation and counter-retaliation outside of dispute settlement – in short, a trade war. Clearly a solution must be found.

Progress toward a solution is uncertain. The U.S. has listed at considerable length the problems that it sees – with the AB’s conduct, decisions and processes. The first step is to recognize the nature of the underlying problem clearly if attempts to find a solution are to have a chance of success.

U.S. complaints are not new, having been stated over several administrations, Democratic and Republican. The U.S. asserts that the AB has overreached, acted beyond its authority, and in so doing has destroyed the bargain upon which binding WTO dispute settlement was in its view based: acceptance of binding dispute settlement in return for an iron-clad commitment that dispute settlement would neither add to nor subtract from the rights and obligations of the parties, particularly with respect to trade remedies. The U.S. considers that AB interpretations narrow the scope for use of trade remedies and that this has progressively eviscerated that bargain.

Most WTO Members, while having some criticisms of the operation of the Appellate Body, appear to be content with the resulting decisions and call for the appointment of members to fill current vacancies. The impasse stems from deeply divided views about the appropriate mandate of the AB and the nature of the WTO dispute settlement system: is the system one similar to “a court or tribunal of judges”, or is the goal of the WTO dispute settlement system more narrowly to settle disagreements and disputes, where third party adjudication is one of several means to reconcile parties’ differences. While a greater mutual understanding of respective legal interpretations might have aided a resolution at an earlier point, there now appears to be an unbridgeable gulf among WTO Members on this point.

It may not be necessary to reconcile those different conceptions so long as the red lines of both approaches are respected, although this would present considerable conceptual and practical challenges. That said, pragmatism and creativity characterized the establishment of the WTO in the first place, including the dispute settlement system. Dispute settlement was and is an integral part of an effective world trading system. There must be enforcement of rules and an agreed means to achieve that end. This can occur again. Technical fixes aimed at increasing the clarity and efficiency of AB procedures are useful, but in the end a political resolution will most likely be required to reach a successful resolution of the current impasse.

The outcome of current efforts is unpredictable. Serious engagement between the United States and other Members will ultimately be indispensable if there is to be a resolution. Pragmatism, creativity and agility, if applied to this issue, can restore a WTO appellate function that all Members will support as legitimate. It is a key to maintaining and improving the rules-based multilateral trading system.