Dispute Settlement Mechanism WTO Developing Countries

Introduction

This brief examines the WTO dispute settlement mechanism and developing countries. The brief starts by examining the WTO dispute settlement mechanism in general and the extent to which developing countries have participated in the system. Statistical comparisons will be between the participation of developed and developed countries in the WTO dispute settlement mechanism will be analysed. This will help to understand the level of participation by developing countries in the WTO dispute settlement mechanism. The brief will argue that developing countries do not participate fully in the WTO dispute settlement mechanism. Having identified the level of participation, the brief examines why developing countries not participate in the WTO dispute settlement mechanism. This examination is important because it will help to under the reasons which affect the participation of the developing countries in the WTO dispute settlement mechanism. Also, it will help to formulate solutions for the problems indentified.

Having identified the reasons, the brief examines the United States – Cotton Yarn [1] as a case study. Being a developing country, Pakistan participated in the mechanism and ultimately won the case. The brief will look at the Pakistan’s experience in the WTO dispute settlement mechanism. The objective of this case study is not only to describe the events which happened in this case but to highlight the various obstacles which Pakistan, as a developing country, faced in pursuing the case through the WTO dispute resolution regime. This case study will shed some lights why developing countries hold back in participating in the WTO dispute settlement mechanism. Finally, the brief looks at how can the WTO dispute settlement mechanism be improved to provide a mutually effective legal framework for developing and developed countries alike.

WTO dispute settlement mechanism and developing countries

The WTO was established in 1995 as new international organisation to replace the less structured system of GATT. [2] The WTO is vested with powers and functions designed to promote and regulate international trade at global level. One of the strengths of the WTO is its dispute settlement mechanism. The WTO dispute settlement mechanism is built on the pre-existing GATT regime, and came into operation on 1 January 1995. The mechanism is the result of 40 years of experience and the evolution of dispute settlement under the GATT 1947 regime. The mechanism is established by the Uruguay Round Understanding on Rules and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding or DSU). [3] The WTO dispute settlement mechanism is intended to secure a positive solution to a dispute. [4] Through this mechanism, the WTO seeks to provide legal certainty to producers and exporters across the world that foreign markets remain open. This certainty has been provided by creating a rule-based, fully-fledged international organisation and an effective dispute settlement mechanism.

There are three institutions which administer the WTO dispute settlement mechanism, namely the Dispute Settlement Body (DSB), panels and the Appellate Body. The DSB is a political body which comprises representations from all WTO members. [5] The WTO General Council serves as the DSB, but the DSB has its own chairman and follow separate procedures from those of the General Council. [6] The DSB is charged with administering the dispute settlement mechanism. [7] In the event of a dispute between WTO members, one member may request the other to enter into consultations and should notify the DSB of this request. [8] If such consultations fail, the complaining party may request the DSB to establish a panel. [9] In addition, each party may propose to employ other dispute settlement procedures such as, good offices, conciliation or mediation. [10]

Generally, panel are composed of three “well qualified governmental and/or non-governmental individuals” selected from a roster of persons suggested by the WTO members. [11] Serving in their individual capacities, panels conduct hearing on the dispute referred to them, and issue a report and recommendations on the merit of the case. A panel’s recommendations do not bind on the parties until they are adopted by the DSB. However, since adoption is automatic, a panel report is adopted unless a party to the case notifies the DSB of its intention to appeal and the DSB decides, on consensus, not to adopt the report. [12]

A panel report may be appealed, on legal grounds, before the Appellate Body, [13] which comprise of members with extensive experience and expertise in law and international trade and who are not affiliated with any government. The Appellate Body may uphold, modify or reserve the panel’s legal findings. Like panel reports, the Appellate Body reports have no binding effects until they are adopted by the DSB. Again, the reverse consensus rule applies, so that the Appellate Body reports will be adopted unless the DSB decides otherwise by consensus. The DSU also contain provisions for surveillance of implementation of DSB recommendations and rulings. WTO members are required to report to the DSB their intentions with regard to implementation. Procedures also exist for resolution of implementing related disputes. [14] Further, [15] the DSU provides for arbitration in the event of a dispute as to the appropriate level in response to non-implementation of DSB recommendations and rulings.

The WTO has become one of the most international organisations within a relatively short period of time. [16] Its dispute settlement system has been busy since the organisation was established. [17] For example, by the end of July 2009, 397 requests for consultations had been initiated before the DSB, involving more than 300 distinct matters. [18] More than 150 panel reports have been adopted, including more than 20 reports on DSU Article 21.5 requests relating to compliance. [19] The Appellate Body has issued 97 reports, including 20 on appeals relating to panel reports under DSU Article 21.5. [20] Some of the cases decided by the DSB have had far reaching implications, involving billions of dollars, and received prominent treatment in the media. [21] Arbitral awards have also been issued in more than 20 under DSU Article 21.3(c) arbitrations and 17 under DSU Article 22.6 arbitrations. [22] Whilst the panel and Appellate Body’s caseload remain high, large numbers of trade disputes are settled through consultations under the DSU or other means. [23]

However, the WTO dispute settlement mechanism is not a perfect system by any means because it has its own problems. [24] Some commentators argue that the DSB is ineffective, particularly when it comes to enforcing its recommendations and rulings against developed countries. [25] In 2005, the WTO issued a document showing that there had been 335 requests for consultations. [26] Developing countries had requested 125 consultations in which more than 50 of the requests were made against other developing countries. [27] By the end of 2005, developing countries had participated in 68 disputes out of the 96 heard by panels. [28] Developing initiated 40 cases and defended 28 cases. Of the total 99 members which appeared at the Appellate Body, 37 were developing countries and 62 developing countries. [29] Basing on this statistic, one could argue that developing countries have been participating fully in the WTO dispute settlement mechanism.

However, two things need examination, namely the meanings of “developing countries” and “participation”. Majority of WTO members consists of developing countries. However, the precise number of developing country members is unclear because there is no definition of a “developing country” in the WTO. [30] The term is used extensively, but is neither defined in the WTO Agreements nor was it defined under the GATT regime. Normally, such definition is made on ad hoc basis and members can announce, case-by-case, whether they consider themselves developed or developing countries. [31] However, other members can challenge the decision of a member to make use of provisions available to developing countries. Accordingly, status of certain members has been controversial especially in the recourse to BoP measures under Article XVII of the GATT and in accession of China which wanted a developing status. [32] Neither a panel nor the Appellate Body has to date ever found itself in a situation in which it was necessary to define the term and to apply it to a specific case. [33]

Basing on the World Bank classification system of differentiating between countries based in income, it could generally be argued that African countries are developing countries. Countries such as, Mexico, Turkey, Hong Kong, Singapore, Malaysia, South Korea, Brazil and OECD members are advanced and actively in international trade and it would not be right to categorise them as developing countries in the WTO. [34] Participation in the WTO dispute settlement can cover a lot of activities. Some of these activities such as, requested to be joined as a third party in a case are easier, whilst other activities such as, pursuing a case at the panel or Appellate Body are difficult especially when acting as a complainant. Most active participants in the WTO dispute mechanism have been the United States, European Union, Brazil, India, Mexico, South Korea, Japan, Thailand, Chile and Argentina. [35] Only five developing countries (Brazil, India, Thailand, Chile and Argentina) account for 60% of the disputes. [36] This shows that majority of developing countries especially the LDCs do not participate in the WTO dispute settlement mechanism. [37]

Since the majority of the WTO members are developing countries, one would have expected that in the majority of WTO disputes, the complainants to be a developing country member. However, so far the complainants and respondents have been developed country members in the majority of WTO disputes. [38] According to the WTO, in one third of all disputes initiated since 1995, complainants have been developing countries. [39] Also, around two fifths of all cases, the complainants have been developing countries. [40] Taking African countries, for example, out of 54 countries, more than 41 are WTO members. However, in the first decade of the WTO, only South Africa and Egypt had received requests for consultations at the DSU. The consultations were requested by India and Turkey against South Africa and United States against Egypt. During the same period, no consultations were requested at the DSB by an African country. Egypt was the only African country to have initiated and requested the establishment of a panel. [41] The request was in respect of Definitive Anti-dumping Measures on Steel Rebar from Turkey case. [42]

Within the same period, no African country had participated at the Appellate Body either as a complainant or a respondent, save for Nigeria and African Caribbean Pacific Countries Group (ACP) which participated as third parties in the United States’ Shrimp dispute and in EU Banana and Sugar disputes respectively. Other African countries such as Zimbabwe, Senegal, Cameroon and the Republic of Cote d’Ivoire have all participated in third party capacity. [43] Taking into consideration that developing countries form the majority of WTO members, one could argue that developing countries do not participate fully in the WTO dispute settlement mechanism.

Developing countries and non-participation in the WTO dispute settlement mechanism

There are a number of reasons why developing countries do not participate in the WTO dispute settlement mechanism. According to the WTO, developing countries wants to participate in its dispute settlement mechanism but they face considerable burdens. However, unlike developed countries, these developing countries do not have enough human resources with expertise in the WTO substantive and procedural law relating to dispute settlement. [44] The lack of persons with expertise in WTO law is compounded by the growing body of WTO law developed by the panels and the Appellate Body, which makes it difficult even for trade law experts across the world to have a firm understanding of the WTO law including latest developments in this area. [45] The WTO states that a single dispute could take up to two years to complete.

Also, the WTO argues that many developing countries have a small trade administration to assign their few officials a dispute. These may also create a burden for a developing country to undergo economic harm for the entire period of the dispute settlement proceedings due to a trade barrier taken by another WTO member. [46] If the trade barrier affects the developing country’s exports opportunities it cannot be withdrawn until after two or three years of filling a complaint. [47] Although the WTO acknowledges that developed countries are the majority of complainants and respondents in the WTO dispute settlement mechanism, the organisation argues that this is so because these developed countries account for the most of the world trade. [48] Their trade relationships also are broad and deep which increases the probability of disputes due to trade barriers.

In the academic literature, lack of capacity and power have been discussed and analysed as reasons causing developing countries not to participate fully in the WTO dispute settlement mechanism. Whilst the capacity constraints include shortage of people with expertise in the WTO law or lack of finance to employ foreign legal expertise, the power constraints cover the impact of retaliation action by WTO major players if their measures are challenged. [49] Linguistic constraint has also been added as reason due to the fact that English is the mostly used language in both panel and Appellate Body’s hearings. [50] In their empirical study, Guzman and Simmons [51] evaluated power and capacity as reasons holding back developing countries to participate in the WTO dispute settlement mechanism. Their study found a considerable support for the capacity constraint. No support was found for the power constraint.

However, there may be a problem with their findings because the data they used in their study comprised only consultations requested between 1995 to the 2004. Retaliation is likely to happen more at the stage where the panel and Appellate Body are involved than at the consultation stage. The DSU allow retaliation through suspension of trade concessions and countermeasures. [52] Several WTO members especially the United States, European Union, and Japan have adopted national laws permitting retaliation in response to foreign measures that nullify or impair their rights under international trade law. Retaliation is more readily suitable in an economic and political sense in developed countries. In those countries, there may be significant alternative domestic supplies, alternative international sources of supply and a greater range of traded products on which to consider selective targeting. The threat for sanctions is far more significant when it comes from a major trading country than from a small country. Retaliation as the ultimate sanction is less valuable in developing countries. A developing country with limited domestic market is unable to impose losses to a developed country to induce compliance. [53] Some are unwilling to do so for far that preferential market access and other development assistance may be curtailed. Imports to developing countries are often necessary for development purposes and are not simply undertaken to satisfy discretionary customer demand. Any retaliation would therefore have a negative multiplier effect. Accordingly, developing countries may hold back from filling complaints against developed countries for fear of retaliation or sanction.

There are other reasons within the WTO system which may hold back developing countries to participate fully in the WTO dispute settlement mechanism in one way or another. Firstly, the DSB’s biases on trade-liberalisation when considering cases referred to it. Because DSB is part and parcel of the WTO structure designed to promote trade liberalisation, it seem pretty natural for it to have this bias. In deed, the DSB is supposed to apply and interpret WTO law which is pro-trade liberalisation. This inherent limitation of the DSB is not conducive to making it a body capable of balancing trade concerns with other legitimate concerns required in the promotion of international justice. [54]

Secondly, at the end of the day, the effective of the DSB depends on the remedy actually received by the aggrieved party. There are doubts as to the effectiveness of the WTO rulings and recommendations because some of the powerful members have not internalised the WTO framework. [55] There are difficulties in implementing certain panel and Appellate Body’s rulings and recommendations and in bringing the law of such powerful members into conformity with WTO rules, especially if it involves enacting new legislation in order to comply with the a WTO ruling or recommendations. The risk here is that some of the powerful States use the WTO when it suits them and disregard it when their own interests are at stake. [56]

Thirdly, although there is some settled case law, the WTO adjudicating bodies are continuing to struggle with inconsistencies, some being more troublesome than the others. There is a continuing misunderstanding as to the content and relevance of the travaux preparatoires. [57] The WTO settlement bodies identify but rarely classify. Only few occasions WTO adjudicating bodies have explicitly stated the heading under which they have examined the various interpretive elements which they have used. The covered agreements have always been discussed under the ordinary sense of the term featuring in Article 31:1 VCLT; travaux preparatoires of the covered agreements have consistently discussed under Article 32 VCLT. [58] For example, in Korea – Diary, [59] the Appellate Body discussed a GATT adopted panel report to support its implementation of the term “unforeseen developments”. However, the Appellate Body did not classify the GATT panel report under the heading of the VCLT. Similarly, in Chile – Price Band, [60] the Appellate body referred to a series of its previous reports when discussing the term “so as to afford protection”, appearing in Article III:2 GATT. However, the Appellate Body did not mention what was the VCLT – relevance of the reports. Also, in US – Gasoline, [61] the Appellate Body called for no derivations from VCLT, but failed to commit itself as to which interpretative element came under which heading.

Fourthly, the DSB adopts the international law approach of persuasion designed to encourage WTO members to participate in the regime created rather than award huge amount of compensation to the members which are victims of violation of WTO law. This works well if the impact of the dispute is limited to the Member State as a collective entity. However, when individual interests are involved, the mere promise by a losing party that it will comply with the WTO obligations in the future may not be satisfactory for the individual business parties who may have suffered huge financial loss as a result of the non-compliance with the WTO law in the first place. [62]

Fifthly, the DSB has no power to go beyond the WTO law that already exists. This is despite the fact that the significant proportion of international trade in developing countries is conducted under rules not part of the WTO regime. [63] The WTO Agreement mentions in various places two different sources of law namely, the covered agreements [64] and international agreements reflected in the covered agreements. [65] The covered agreements constitute the prime impute for the work of the WTO adjudicating organs. [66] The Appellate Body has warned against the dangers of construing the WTO Agreement in clinical isolation of the rest of public international law. Instead of applying this view in practice, the adjudicating bodies have continued to resort to unclear statements on the status of public international law under the WTO system which may only provide further uncertainty and delay inevitable decisions. [67] In addition, the DSU Article 3.2 specifies that the purpose of dispute settlement is to clarify the WTO Agreement provisions “in accordance with customary rules of interpretation of public international law.” In Korea – Procurement, [68] the panel suggested that general customary international law is always relevant for the interpretation of the WTO law. However, such statements have never been repeated in subsequent case law. [69] Moreover, the panel report was not made with respect to an autonomous source of law, but with respect to a general principle which has attained the status of customary international law. However, general principles are not autonomous source of law. [70]

Pakistan experience: The United States – Cotton Yarn case

The United States – Cotton Yarn [71] involved a dispute between Pakistan and the United States over the former’s exports of Combed Cotton Yarn to the later. The dispute started in 1998 when Pakistan received a consultation request from the United States. The consultation related to the imposition of quota restrictions on Pakistan’s exports of Combed Cotton Yarn to the United States. According to the United States, Pakistan’s cotton Yarn exports were causing harm to the United States’ textile sector. The consultations failed and Pakistan decided to refer the dispute to the Textile Monitoring Board (TMB) and later to the DSB. Due to lack of local experts on trade law and particularly the WTO law, Pakistan had to hire foreign legal experts even during the bilateral negotiations and consultations stages. [72] Ironically, the foreign experts were hired from the International Development Systems (IDS), a consultancy firm based at Washington in the United States. However, when the dispute was referred to the DSB, Pakistan decided to hire legal experts based at Geneva in Switzerland to save money. [73]

After the failure of bilateral negotiations, the United States decided to impose quota restraints on Pakistan for three years. The dispute was taken to the Textile Monitoring Body (TMB) and became one of the TMB’s longest disputes, taking about 6 days to be completed. [74] Pakistan was worried about the nature and outcome of the dispute, bearing in mind that this was the first time the country had to appear before the TMB. Pakistan’s anxiety was compound by the presence of top American government officials, and textile and trade law experts, including the American Chief Textile Negotiator, who is normally non-attendee in such reviews. [75] Pakistan lacked relevant experience and effective institutional structures capable handling disputes of this nature. Neither was there a set of rules when it came to paying the high fees to the foreign experts it employed. [76] These resulted in five months delay in the payments of fee to its legal experts who were charging a premium of 1.5% per month for late payment. [77]<