REUTERS | Denis Balibouse

WTO appellate body: can arbitration break the current deadlock?

The dispute settlement system of the World Trade Organisation (WTO) is often referred to as the crown jewel of the multilateral trading system established by that institution. Over 500 disputes have been brought to the WTO since its beginning in 1995. Key to this success is the role played by the Appellate Body, a permanent body composed of seven members, appointed by the WTO membership. As explained below, the Appellate Body essentially acts as an appellate court for disputes arising among WTO members in relation to WTO agreements. Recent political developments threaten the functioning of the Appellate Body and, by extension, the multilateral trading system as a whole.

Disputes in the WTO are governed by the rules detailed in the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). The DSU applies to disputes among WTO members in relation to WTO agreements. Importantly, no dispute can be brought to the WTO by a private entity. Moreover, as per the DSU, the WTO membership as a whole plays an important role in settling disputes: the members of the WTO, acting collectively as the Dispute Settlement Body (DSB), are tasked with administering disputes. This is one of the key features of the standard dispute settlement procedure set out in the DSU.

In terms of procedural steps, the standard dispute settlement procedure first requires parties to attempt to resolve their dispute amicably through “consultations”. Failing any settlement of the dispute within 60 days following a request for consultation, the complaining party may request that a panel of (usually three) independent experts be established by the DSB to decide the dispute. The findings of a panel are set out in a report, which is first circulated in preliminary form to the parties for their comments. A final version of the report is later made public. Importantly, a panel report becomes binding only once it is adopted by the DSB. Such adoption is, however, quasi-automatic: a panel report is adopted by the DSB unless a party to the dispute gives notification of its decision to appeal or the DSB decides unanimously not to adopt the report.

Either party to a dispute has the right to appeal the panel report to the Appellate Body. As noted above, the Appellate Body is a standing body of the WTO, composed of seven members. Appellate body members are appointed by the WTO membership for a mandate of four years. Membership can only be renewed once. As per the DSU, the Appellate Body members shall be persons of recognised authority, with demonstrated expertise in law, international trade and the subject matter of the WTO agreements. They must also be unaffiliated with any government. Moreover, the Appellate Body membership must be broadly representative of the WTO membership.

Appeals are heard by a division of three members, selected randomly. The review of a panel report is limited to issues of law and the legal interpretation developed by the panel. In addition, the Appellate Body may only uphold, reverse, or modify the panel’s conclusions under appeal. It has no remand authority. Once the Appellate Body issues its report, the latter is adopted by the DSB and unconditionally accepted by the parties to the dispute, unless the DSB decides by consensus not to adopt that report.

Upon adoption of the reports, the WTO member found to be in violation of one of its obligations under a WTO agreement has to comply immediately with the recommendations and rulings of the DSB. Alternatively, said WTO member may request a “reasonable period of time” to comply. The DSB is then kept appraised of the measures taken for compliance by way of status reports submitted by the relevant WTO member.

Over the years, the United States has expressed dissatisfaction with the dispute settlement system, and, more particularly, with the Appellate Body. In its view, the Appellate Body sometimes commits judicial overreach, by making law. More recently, the current US trade representative, Mr Robert Lighthizer, declared: “[t]he United States sees numerous examples where the dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to.” The US has also recently voiced criticism regarding the rule allowing former Appellate Body members to continue to hear appeals that were lodged before the end of their term and to which they were assigned. The US now opposes the launching of the selection process of new Appellate Body members. While other members are showing their support to the Appellate Body, the US can effectively veto the appointment of any new Appellate Body members. This is because, under the DSU, the appointment of new Appellate Body members requires the unanimous decision of the DSB.

As things currently stand, there are only four Appellate Body members remaining, namely, Mr Shree Baboo Chekitan Sarvansing from Mauritius, Ms Hong Zhao from China, Mr Ujal Singh Bhatia from India, and Mr Thomas R. Graham from the US (although Professor Peter Van den Bossche from the European Union continues to serve on the cases assigned to him prior to the end of his term). Unless the current deadlock is resolved, the Appellate Body will technically be down to three members as of 30 September 2018. If new members are not appointed, there is a risk that the Appellate Body will eventually be paralysed.

One option to solve the current deadlock would be for WTO members to use another, lesser-known dispute settlement mechanism of the DSU, namely Article 25 of the DSU, which provides for ad hoc arbitration as an alternative means of dispute settlement.

Under Article 25, resort to arbitration shall be subject to mutual agreement of the parties. The parties shall also agree on the procedures to be followed. The DSB is thus not involved in the establishment of the arbitral tribunal, and the applicable procedural rules are left to the discretion of the parties. Moreover, unlike panel and Appellate Body reports, arbitral awards under Article 25 are binding on the parties without having to go through the DSB adoption process. The wording of Article 25 seems sufficiently broad so as to allow WTO members to resort to arbitration either (i) instead of the standard dispute settlement procedure or (ii) as an alternative appeal mechanism. If arbitration is to be used as an alternative appeal mechanism against panel reports, a specific agreement to that effect would ideally need to be found at the beginning of the panel proceedings. Otherwise, there is a risk that the party that prevailed at the panel stage may preclude the other party from appealing by refusing to enter into an arbitration agreement.

In conclusion, resorting to arbitration could allow WTO members to preserve the status quo until the membership agrees on the appointment of new Appellate Body members. Importantly, the flexibility inherent to arbitration under Article 25 of the DSU could allow WTO members to preserve the specific features of the current appeal proceedings, should they wish to do so.

Schellenberg Wittmer Sebastiano Nessi Simon Demaurex

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