Arbitrating WTO Disputes: A Temporary Solution to the Appellate Body Quagmire

[By Ashuthosh V]

The author is a student at the Institute of Law, Nirma University.

Introduction

The Dispute Settlement Body (‘DSB’) is a forum that resolves disputes between the World Trade Organization (‘WTO’) members. Such disputes must be a subject matter under any WTO agreement arising out of the Final Act of the Uruguay Round. The Dispute Settlement Understanding (‘DSU’), a WTO agreement, lays down a specific set of rules and procedures that govern the functioning of the current Dispute Settlement System (‘DSS’). It ensures that obligations are enforced against the signatories when they fail to comply with such obligations.

It is considered one of the most successful international dispute resolution systems. The Appellate Body (‘AB’) is a part of the DSS that reviews an appeal against the proceedings conducted by a panel established by the DSB. The AB reviews only legal questions surrounding trade conflicts between the Member States. The AB consists of seven members and requires a minimum quorum of three members to hear an appeal. On December 11, 2019, the terms of two of the last three members expired and the United States (US) has been blocking the appointment of new members to the AB. With only one judge left, the AB cannot adjudicate upon any appeal pending in the WTO. This has led the WTO-DSS to a grinding halt and created an AB crisis within the WTO framework.

The author in this article shall analyze arbitration under Article 25 of DSU as a potential alternative to AB proceedings till the crisis remains. The author shall also explain how the ad-hoc arbitration mechanism under the WTO framework is not a permanent option to the WTO Members.

The Appellate Body Crisis

The US has criticized the AB for undermining US sovereignty by engaging in judicial activism. Further, the AB was claimed to have other issues such as long delays, reversing factual findings of the panel report, and creating new obligations in an existing dispute that has not been approved by the Members. The AB ignores existing rules and adds new rules which undermine WTO as a forum for negotiation. It is perceived by other WTO members such as India, Canada, Australia, China, and European Union, that the AB passes decisions that amount to judicial overreach, thus, rendering trade remedies less effective at addressing several issues such as unfair dumping, the imposition of tariffs, unfair subsidies, and restriction of trade.

The current status of the AB is that there is one judge left and the US is using its veto power to block the appointment or reappointment of new members to the AB. Until such vacancies are filled, ongoing trade disputes and future disputes would be left pending, as a result of which, countries would have to rely on an alternative mechanism outside the WTO framework to adjudicate the matter between them and seek a remedy.

According to the DSU rules, the DSB cannot adopt a panel report before its appeal is resolved. Since the AB is not able to hear any appeal due to non-fulfillment of the quorum, any WTO member could use this loophole to block the enforcement of a panel report by appealing against such findings under DSU rules. It is imperative to understand that the AB is not able to hear any appeal but the WTO rules do not restrict any member from filing such an appeal before the AB. Therefore, the ability of WTO to enforce binding decisions on parties has been temporarily paralyzed subject to the appointment of members.

Arbitration Mechanism under Article 25 of DSU: An Analysis

Arbitrating trade disputes within the WTO framework was widely considered by several member states. Article 25 of DSU provides for an option to settle the dispute through arbitration. This clause could be invoked even at the stage of appeal against a panel report. The effect under Article 25 is that the award passed by the arbitrator is binding and enforceable against the disputed parties similar to the Panel and AB decisions that are adopted by DSB and further implemented.

The parties mutually agree to the process, and there is no influence or involvement of any outside party unless permitted by the disputing parties. The US will be prevented from blocking the functioning of the Arbitration panel because it is not allowed to interfere with its proceedings involving other Members. The Arbitration panel would apply both substantial and procedural rules of WTO agreements to resolve a dispute, thereby enforcing obligations under multilateral agreements between the Member States.

To ensure that Article 25 is effective to be considered as an alternative to the AB, member states must mutually agree on drafting a plurilateral general arbitration agreement that shall lay down the procedures of arbitration, the scope of subject-matter of arbitration, and ensure that the rulings are binding on the parties. On April 2, 2020, the European Union along with 15 other WTO Members entered into a Multi-Party Interim Arbitration Agreement (MPIA). The objective of the agreement was to strengthen arbitration under Article 25 to replace the AB for WTO members till it is inoperative.

The agreement proposed reviewing panel decisions through arbitration with the mutual consent of the parties under Article 25.2 of DSU. It also provided for certain agreed procedures to facilitate arbitration under Article 25. The objective of the agreement is to enable Arbitration as an alternative within the WTO framework to resolve existing trade disputes until the AB is inoperative. Therefore, once the minimum quorum of the AB is established, i.e, three members are present, the AB would be able to hear appeals against the panel findings.

In 2001, the US and European Union in the United States- Section 110(5) of the US Copyright Act agreed to apply Article 25 to use arbitration to determine the level of benefits impaired to the European Union. Arbitration was used as the parties could not agree on the level of benefits within a reasonable period to implement the panel report. Thus, Article 25 can be used as an alternative to resolving trade-related disputes. Moreover, it is within the WTO framework and follows a similar procedure.

However, arbitration proceedings can be subject to the scrutiny of the DSB under Article 21 and 22. In United States- Certain EC Products, the Panel noted that Article 25.4 provides for the applicability of Article 21 and 22 which makes Arbitration under Article 25 a means of adjudicating WTO disputes only for certain specific issues.

Former AB Member Jennifer Hillman stated in her article that arbitration under Article 25 instead of appeals to the AB is a bad approach to solve the AB crisis. The reason being that if the Arbitration mechanism is adopted, it would be highly unlikely that WTO Member States would restore the AB. This would mean “giving up on the AB” until the arbitration mechanism becomes costly or cumbersome to the majority of WTO Member States.

This does not make Arbitration a highly effective and long-term solution to address the AB crisis. It could, at best, be considered a potential interim solution. The AB in Canada- Continued Suspension, distinguished the term alternative means of dispute resolution provided in Article 25 from the adjudication of WTO disputes through panel proceedings.

The Issue of Forum Shopping

There is no incentive for members to bind themselves to arbitration if they anticipate an unfavourable decision. Therefore, if arbitration is not favourable to a party, such party may approach another forum outside the WTO framework. This shall promote forum shopping as the parties would approach before an international tribunal or court according to their anticipation of a favourable outcome.

There are multiple international tribunals and courts outside the WTO framework such as the International Court of Justice (ICJ), Permanent Court of Arbitration (PCA), etc. which the parties may approach to resolve their disputes. It was a sign of development at first because it was believed that competition among tribunals may improve the quality of rulings and enable one to supervise the other. But multiple forums would promote parallel proceedings which may increase the cost of litigation and alter the outcome of a dispute. The right forum needs to be used rather than a beneficial forum.

The biggest concern of forum shopping is inconsistent rulings because they leave a dispute unresolved and they may also hamper the stability and credibility of the tribunals. Certain international tribunals such as WTO have compulsory jurisdiction to mitigate the practice of forum shopping, and thereby, reduce the concern of inconsistent rulings. In Mexico- Taxes on Soft Drinks, both the Panel and AB found that WTO would have exclusive jurisdiction over trade-related disputes that arise out of WTO agreements.

The Way Forward

Arbitration under Article 25 is considered as a temporary solution because it would bypass the concern the US has with the current AB system and it would avoid the obstruction the US has imposed on the further appointment of AB Members. Further, if arbitration is not favourable to a party, it would promote forum-shopping outside WTO which is not the best solution for all Members as they are primarily bound by WTO laws and should be governed under a single WTO forum. Arbitration is ad-hoc in nature which would give the US the option to refuse to arbitrate a dispute. A WTO framework without the US would not be effective in resolving trade conflicts.

If the US refuses to enter into arbitration, it may adopt other dispute resolution systems that would provide a favourable ruling. This would promote the practice of forum shopping, thereby creating uncertainty in the global economy as there is no single adjudication mechanism to adopt and enforce rulings on trade-related disputes. An even worse situation would be where parties would entirely abandon settling disputes through a system and impose unilateral tariffs or other measures.

Lastly, circumventing the US would not address the core issues with the current structure of the defunct AB system. The need of the hour is to reform the AB system by improving its structure rather than replace it permanently. A proper WTO dispute resolution system would enforce Panel rulings by applying substantive rules under WTO agreements instead of the economic power of a country. It would also enable disputes to be resolved in a timely and procedural manner.

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