When Reasonable Minds Differ
As we wrote in Calvinball, trade rules provide agreements between governments so traders can avoid engaging in Calvinball, a game where the rules are always changing. Rules and commitments in the World Trade Organization (WTO) cover a broad range of topics, from trade in goods and services to intellectual property protection to requirements for science-based health measures, among others. WTO members voluntarily negotiated and agreed to these rules to create a more secure and predictable trading environment for their traders. By and large, members comply with these rules so that others will as well. But when one member believes that another is not complying, the WTO has procedures for settling disputes over whether WTO rules and commitments have been followed.
Talk it Out or Take it to the Judge (Panel in this Case)
The WTO’s procedures, which members negotiated and agreed to, establish an arbitration process for deciding whether a violation has occurred and for authorizing penalties when a violation has not been remedied. Dispute settlement takes place in several stages. In the first stage, the countries involved are required to consult with each other to try to resolve the dispute. If, after a set period, there is no agreement, the complaining member can request that a dispute settlement panel hear arguments and decide whether a violation has occurred.
WTO panelists tend to be experts on the issue under dispute or they are practitioners who have relevant trade or judicial experience. The parties in the case attempt to agree on who will serve as panelists, but if they cannot agree, the head of the WTO selects panelists. The panel then presides over multiple rounds of briefing, hearings, and questions before making findings of whether a violation has occurred. Either party can then appeal issues it lost to a standing body of seven jurists known as the Appellate Body. From start to finish, the process is supposed to take 15 months, but this has stretched out as cases have grown more complex.
Compliance is in the Hands of the Loser, but the Winner has Recourse
As a formal matter, panel and Appellate Body decisions have no effect until the WTO members meet as a group known as the Dispute Settlement Body and adopt the decisions. This is virtually automatic; the decisions are adopted unless all members – including the winning party – decide not to. Once the decisions are adopted, the losing member has a “reasonable period of time” – either agreed upon or determined by a brief arbitration – to bring itself into compliance. The period has typically been under a year, and depends on the complexity of the domestic process the losing member must undertake to comply.
At the end of the reasonable period of time, if the winning member agrees that the losing member has complied, the dispute is resolved. If there is a disagreement, that question is again settled by the original panel and, if appealed, the Appellate Body. If their conclusion is that the losing member has not complied, the winning member may raise duties on the losing party’s goods or otherwise deny the losing party the benefit of WTO trade commitments. Alternatively, the winning party may receive compensation from the losing party in the form of additional trade concessions such as lower tariffs on the winning party’s exports. Compensation has been rare; more typically, a winning member will seek to retaliate. The amount is determined by arbitration, and is in general equivalent to the lost trade or benefits resulting from the violation.
While some countries directly apply WTO rules in their domestic law, the United States does not. Only the U.S. Congress can change U.S. legislation found in violation of WTO rules, and executive branch agencies likewise need to follow administrative procedures before deciding to change any WTO-inconsistent regulation or determination, and must consult with Congress.
Does it Work?
The effectiveness of the WTO dispute settlement system can be measured in part by how frequently it has been used, and by the level of compliance. Over 500 disputes have been brought, with over 350 rulings. The WTO has authorized retaliation in fewer than 20 cases.
The United States has been the heaviest user of the system, both offensively and defensively. Through March 2017 it has brought 114 disputes, while the European Union has brought 97 and Canada has brought 35. There have been 130 disputes brought against the United States, while 84 have been brought against the EU and 39 have been brought against China, which joined the WTO about 7 years after the U.S. and EU.
The process has proven to be an effective mechanism for containing trade disputes based on agreed-upon procedures, neutral application of WTO rules, and meaningful but defined penalties that avoid tit-for-tat retaliation and trade wars. Without such a process, WTO members would be unlikely to admit that they are violating the rules, or to accept another country’s retaliation without responding in kind.
Dispute Settlement Gateway on the WTO website
Electronic access to WTO Dispute Settlement Reports and Decisions
U.S. perspective on enforcement in the WTO (US Trade Representative website)
European Commission trade policy on dispute settlement
Bruce Hirsh is principal with Tailwind Global Strategies LLC. Over an 18-year government career, he served in various roles including Assistant U.S. Trade Representative for Japan, Korea and APEC, Chief International Trade Counsel on the Senate Finance Committee, lead U.S. negotiator for the WTO Trade Facilitation Agreement, and supervisor on dispute settlement matters in Washington and Geneva.