WTO Dispute Settlement Mechanism Issue: Reasons & Implications

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This year, over 20 developing nations had met in New Delhi to look into ways to prevent the World Trade Organisation’s dispute resolution system from becoming defunct. The WTO dispute settlement mechanism is currently going through a crisis as the body is struggling to appoint new members to its highly understaffed Appellate Body. If this is not addressed soon, the Appellate Body may become redundant in the future.

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What is WTO’s Appellate body?

  • The Appellate Body was established in 1995 under Article 17 of the Rule and Procedures Governing the Settlement of Disputes (commonly known as Dispute Settlement Understanding).
  • It is a standing body of 7 members that hears appeals from reports issued by panels on dispute brought by WTO members.

What is the issue?

  • Since its inception in 1995, the WTO’s dispute settlement mechanism has resolved an impressive number of trade disputes and has earned a reputation as the “crown jewel” of the global trading system.
  • Currently, it is facing a crisis.
  • The Dispute Settlement Understanding requires a minimum of 3 members to serve on a case, selected by rotation.
  • However, the US has been blocking appointments and reappointments for over a year and a half now.
  • Thus, the US’ move is killing the organisation from the inside.
  • Currently, only 3 members are serving, with 2 of them due to retire from their second term on December 10, 2019. The last member’s term ends in November 2020.
  • Hence, the Appellate Body will be practically rendered incapable of hearing appeals post December this year.

What is the reason for this crisis?

  • For the past few years, the US has blocked the appointments of the Appellate Body members to force WTO members to negotiate new rules that address the US’ concerns and limit the scope for judicial outreach.
  • The major reason for blocking the appellate body appointments by the US roots back to the dissatisfaction of the US with the way the body had been functioning for the last decade or so.
  • The cause for the US’ discontent includes procedural and systemic concerns.
  • One of the procedural concerns, for example, includes some Appellate Body members deciding appeals after the expiration of their 4-year term.
  • Another is the unwritten tradition of the quasi-automatic reappointment of the Appellate Body member for a second term.
  • The US has challenged this procedure several times since 2011 in many ways, one of which was blocking the reappointment of its own nominee.
  • The Systematic concern at the core of the current crisis is the alleged “Judicial Overreach”.
  • The basis for this criticism lies in Articles 3.2 and 19.2 of the DSU.
  • These Articles obligates the Appellate Body to refrain from creating or abolishing rights or obligations of the WTO members (in accordance with the member-driven approach embedded in all WTO mechanisms).
  • However, the instances of accusations of the Appellate body having overstepped its authority that was supposed to be limited to rectifying legal errors in panel reports are not few.

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What are the implications of this crisis?

  • The Appellate Body, in the current times, is highly understaffed. Thus, it is unable to stick to its 2-3 months deadline for appeals filed in the last few years.
  • This backlog of cases has prevented this body from initiating processes on appeals that have been filed the previous year.
  • The three members have been dealing with all the proceedings of the Appellate Body since October 2018.
  • Unless this issue is dealt with, there is going to be serious implications for the Appellate Body
  • The most obvious immediate implication of this crisis will be an immediate break-down of the two-tier dispute settlement mechanism in the WTO.
  • This is because, without a functioning Appellate Body, it will be impossible to retain the accountability of the existing system if there is no one to maintain checks and balances and rectify or look into the legal errors in the panel reports
  • Furthermore, the break-down of the second leg might also thrash a blow to the first one, essentially because any member of the WTO can practically block the adoption of a panel report by filing an appeal that will probably never be heard.
  • Indeed, the appeal filed by the US against a panel report that held America’s domestic content requirements and subsidies in solar sector as violation of global trade norms in a case filed by India, is a perfect example of how a member can take advantage of the crisis in its favour by blocking reports that obligate it to comply with the WTO rules.
  • This crisis not only threatens the functioning of the “crown jewel” of the WTO but also threatens the global faith in the organisation itself.
  • The latter because there is no point in having agreements that obligate members to trade fairly if there is no reliable system in place to enforce these agreements.

How is this crisis currently affecting India?

  • India has so far been a direct participant in 54 disputes.
  • It has also been involved in 158 cases as a third party.
  • It should be noted that the US is directly involved in more disputes than other WTO members.
  • In February 2019, the appellate body had said that it is unable to staff an appeal in the dispute between Japan and India.
  • This dispute is over certain protective measures that India has imposed on imports of iron and steel goods.
  • The panel concluded that India has acted ‘inconsistently’ with some WTO agreements.
  • As a result, India had notified the Dispute Settlement Body of its decision to appeal certain issued on law and legal interpretations.
  • However, until now, it has not been able to review even 10 appeals that have been filed since July 2018.

What can be the way forward?

  • Many WTO members have suggested several proposals in an attempt to save the organization from becoming defunct.
  • The short-term solutions proposed by these nations ranging from launching a new selection process for vacancies and bringing those appointments to immediate effect, to extending the terms from a period of 4 years to 6 or 8 years. This means the removal of reappointment alternatives to ensure more independent functioning without any political pressure.
  • The permanent long-term solutions based on reformative approach include having a transitional rule for the outgoing members, allowing them to completely dispose the pending appeals even after the expiry of their terms and limiting the Appellate body’s interpretation to the meaning of consented national laws without stepping over the policy space, so as to preserve sovereignty of the nations.
  • The other long-term solutions include regular meetings of the WTO members with the Appellate body to ensure effective communication and immediate redressal mechanism.
  • Though solutions were tabled at the WTO, none was agreed upon. The WTO members must take a step to ensure that their differences are put aside to address the immediate crisis faced by the Appellate Body.
  • The appointments of the Appellate Body are usually made by a consensus of WTO members.
  • However, there is also a provision for voting when consensus is not possible. This should be taken into consideration by the WTO members.
  • The group of 17 least developed and developing nations, including India, that have committed to ending the Appellate Body crisis can submit or support a favourable proposal to this effect, while also trying to get support for members of the Appellate Body by a majority vote.
  • However, this can only be considered as a last resort, as all nations are wary of US’ unilateral action in case of directly opposing its veto.
  • Thus, all the nations must come together to bring in a common ground to address this present crisis so as to not be faced with the worst-case scenario.
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