The operations of WTO’s Appellate Body, which is an integral part of the WTO’s Dispute settlement mechanism, are to be suspended in December as the term of another two of its members runs out and no replacement of them is in sight. Stephenson Harwood’s international trade group member, Michael Papadakis, reports on this issue.

Background

The role of the WTO’s dispute settlement mechanism since 1995 has been to resolve trade disputes between WTO members.

The Appellate Body consists of seven members; they are appointed by consensus among all WTO members for four-year terms.

The WTO Dispute Settlement Body (DSB), which takes decisions on trade disputes between members, consists of all the representatives of WTO member governments and has the authority to establish panels of experts to resolve disputes where the parties have failed to reach an understanding. Yet, the final panel report is binding only if no disputing party appeals the ruling.

If a losing party decides to appeal, the WTO panel report remains unenforceable until the Appellate Body’s review of the panel’s decision is completed. Once filed, each review is conducted by three members of the Appellate Body, usually referred to as the “division”. The role of the Appellate Body is therefore crucial for the functioning of the WTO’s dispute settlement mechanism but the Appellate Body cannot operate if it lacks the necessary judges to carry out an appeal review.

The present crisis

The problem started back in June 2017 when the WTO members failed to agree the replacement of retiring Appellate Body member. Since then the terms of another three members have expired and another member has resigned. In December 2019, the term of appointment of another two members will come to an end as two more members will complete their terms; if no replacement can be agreed then the WTO’s dispute settlement mechanism faces the risk of a paralysis as the Appellate Body would: (a) lack the minimum quorum required for its functioning, and/or (b) even if this did not happen, still the Body’s operations would be at risk when a member of the Body cannot sit due to reasons of a potential conflict of interest.

There is wide agreement that this situation has been mainly caused by the US administration, which, under the President Trump directions, has been blocking of new appointments to the Appellate Body. The US justification of this non-constructive approach was to put pressure on other WTO member states to accept a reform of the WTO dispute settlement system, which the US considers inefficient and unfavourable to the US.

This has been widely criticised as a reckless strategy as it carries the risk of undermining the functioning of the WTO as a whole. If the WTO collapses then the centralised system of multilateral trade rules and regulations would disappear and would most likely be replaced by a power-based economic relations; this US ambition is oblivious to its potential ramifications on the international trade system. Whilst the US has submitted reform proposals, it appears that the US is more concerned with capitalising on its position of supremacy rather than reforming the multilateral trading system and the WTO. Naturally, the WTO’s judicial mechanisms are a major obstacle to the US’s policy of imposing new trade barriers, sanctions, etc.; all these risk running into DSB’s rulings and legal challenges.

There is broad consensus among its members that the WTO’s dispute resolution mechanism requires revisiting; however the WTO members have so far failed to reach consensus on how to address these issues. Concrete proposals include an increase in the number of Appellate Body members – from 7 to 9; the increase of term in office of each member from 4 years to 6 or 8 years terms. Other proposals relate to the limitation of the members of the Body unfettered discretion. The Dispute Settlement Understanding (DSU)’s reform proposals also entail a prohibition to make findings on issues not necessary to resolve a dispute and a restriction in interpreting WTO member states’ domestic legislation. Lastly, by enhancing transparency and consultation mechanisms within the Appellate Body, the 90-day term limit to submit appeal rulings may be prolonged.

Against this backdrop, it is increasingly necessary to start thinking about alternative mechanisms to settle disputes within the WTO. One option could be under Article 25 of the DSU rules which allows for arbitration as an alternative means of dispute settlement. However, the use of arbitration is limited in scope since it can only facilitate the resolution of disputes that concern legal issues clearly defined ex post by both parties and not every possible future disagreement. An arbitration mechanism also requires the mutual agreement of the parties; member states are unlikely to submit to arbitration, if they foresee a negative outcome.

The multilateral trading system is therefore facing some daunting challenges. A collapse, or paralysis in the system would translate into a 20-year step backwards for global trade rules, undermining the predictability, relative stability and fairness of multilateral trade relations. This represents a serious, and perhaps even existential, threat for those economic systems which are deeply integrated into global value chains, such as the European Union and its members.