Since the end of 2019, the dispute settlement system of the World Trade Organization (WTO) can no longer function as designed. This system was created as part of the WTO Agreement during the Uruguay Round. It is embodied in the Understanding on Rules and Procedures Governing the Settlement of Disputes, referred to as the Dispute Settlement Understanding (DSU). The United States continues to block appointments to the Appellate Body (AB), which normally consists of seven members. Three are required to hear and decide appeals and only one is still serving.[1] The present paralysis also means that 10 pending appeals are suspended until the AB resumes functioning and that 33 pending panel disputes are facing a potential legal limbo should the paralysis continue.[2]

What are the concerns of the US? At a meeting of the WTO’s Dispute Settlement Body (DSB) on 27 January 2020 the US repeated is complaints (which predate the Trump administration) that “systemic concerns” remain unaddressed. It argues that the “fundamental problem is that the Appellate Body is not respecting the current, clear language of the DSU and members cannot find meaningful solutions to this problem without understanding how we arrived at this point.”[3] The US believes the AB has gone beyond its mandate, by creating new obligations or reinterpreting existing ones without sanction by the members of the WTO. This has made, so the US claims, trade remedies against dumping and subsidies less effective. The US has also criticized the AB’s frequent failure to produce reports within the required 90-day period and it is unhappy about the fact that AB members are allowed to finish working on cases even after the expiration of their terms without prior permission from the WTO membership. The irony is that the US has been the most prolific user of the WTO’s dispute settlement system and receives favourable rulings on a majority of complaints.[4]

This development undermines the WTO as a rules-based system where disputes are guaranteed to be resolved through adjudication. Under WTO rules, the Dispute Settlement Body (DSB), which represents the entire WTO membership, cannot formally adopt a panel report before an appeal is resolved. If the AB no longer has a quorum, any member could block the enforcement of a panel report simply by filing an appeal. The long-term danger is that countries might abandon the multilateral system and resort to unilateral retaliatory measures to settle trade disputes.

The European Union (EU) and 16 other WTO members have now agreed to develop a multi-party interim appeal arrangement.[5] It will be based on Article 25 of the DSU. The arrangement, announced on the side lines of the World Economic Forum (WEF) annual meeting, will allow the participating WTO members (and only them) to resort to an ad hoc two-step dispute settlement system which will be linked to a DSU provision but which will not resemble the scheme of things provided for in the DSU. This will be a significant development but could lead to long-term changes in the overall functioning of the WTO.

This new arrangement must still be worked out. Article 25 (not widely used[6]) of the DSU allows for “expeditious arbitration within the WTO as an alternative means of dispute settlement... of certain disputes that concern issues that are clearly defined by both parties... which shall agree on the procedures to be followed.” The EU and its supporters believe a multiparty appeal arbitration arrangement will guarantee that the participating WTO members continue to have access to a binding, impartial and high-quality dispute settlement system among them. This would be in place only and until a reformed WTO Appellate Body becomes fully operational. The arrangement will be open to any WTO Member willing to join it.

Critics of an ad hoc arbitration approach point out that if the US refuses to take part in the new arbitration system (as is likely) trade conflicts involving the world’s largest economy would not be settled. A WTO enforcement regime excluding the US would have limited value. They also say that a deviation from existing WTO procedures is likely to cause uncertainty about how trade disputes will be resolved in the future. Some argue that the Article 25 procedure could undermine efforts to find binding solutions about the structural issues identified by the US.[7] And there is a bigger picture; the US (and others) are pushing for a discussion on comprehensive WTO reform which will, by implication, focus on Chinese trade practices and compliance with essential WTO rules. The real crisis in the WTO will not be addressed through the use of an interim arbitration procedure recently announced by seventeen WTO members.

[1] She is Hong Zhao from China; whose term ends in November 2020.

[2]https://www.wto.org/english/news_e/news20_e/dsb_27jan20_e.htm

[3] Ibid.

[4] https://www.csis.org/analysis/article-25-effective-way-avert-wto-crisis

[5] The participating WTO members are Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, the European Union, Guatemala, Republic of Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland, and Uruguay.

[6] https://www.questia.com/library/journal/1G1-200187966/the-integration-of-article-25-arbitration-in-wto-dispute

[7] https://www.csis.org/analysis/article-25-effective-way-avert-wto-crisis