INTERNATIONAL TRADE LAW

Transcription

1 INTERNATIONAL TRADE LAW Second Edition ANDREW T. GUZMAN Professor of Law Berkeley Law School University of California, Berkeley JOOST H.B. PAUWELYN Professor of International Law Graduate Institute of International and Development Studies, Geneva, and Senior Advisor, King & Spalding LLP

2 Chapter 4 The WTO: History, Structure, and Future The WTO came into being on January 1, 1995, but its predecessor, the General Agreement on Tariffs and Trade (GATT), had been around since A great deal of how the trading system works today can be traced back to its earliest days, and understanding how the system works requires at least a general sense of the history of the organization. Crucially, in this respect, why is it that we have, and need, a trade agreement in the first place? Did the economic theory in Chapter 1 not tell us that countries should liberalize trade unilaterally, as it is in their own interest? Looked at from the perspective of what we saw in Chapter 3, in contrast, how is it that the GATT/WTO overcame the mainly political pressures for governments to enact trade restrictions? What is, in other words, the WTO s magic trick to achieve a modicum of free trade, notwithstanding the protectionist tendencies of many politicians? To evaluate how the WTO deals with these competing tensions between economics and politics, and to understand the mechanics underpinning the specifics of international trade law discussed in later chapters, it is also necessary to have a sense of how the institution is structured, how decisions are made, and what it is intended to do. These and other questions are addressed in this chapter. But this chapter does more than simply describe the WTO. It also points out how even in the fundamental structure of the institution, policy choices have necessarily been made that affect how the organization operates, and it considers what would happen under alternative structures. Several of the excerpts below are taken from the WTO itself. Needless to say, the WTO has a reason to present this information in a favorable light, and so it is fair to at times view the material with skepticism. But it is also true that the WTO has an interest in transparency and is better positioned than anyone else to comment on what it does. 83

3 84 Chapter 4. The WTO: History, Structure, and Future A. WHAT DOES THE WTO DO? UNDERSTANDING THE WTO, CHAPTER 1: BASICS 1 World Trade Organization 1. WHAT IS THE WORLD TRADE ORGANIZATION? Simply put: the World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level. But there is more to it than that.... There are a number of ways of looking at the WTO. It s an organization for liberalizing trade. It s a forum for governments to negotiate trade agreements. It s a place for them to settle trade disputes. It operates a system of trade rules. ABOVE ALL, IT S A NEGOTIATING FORUM... Essentially, the WTO is a place where member governments go, to try to sort out the trade problems they face with each other. The first step is to talk [indeed, in the past, the GATT was sometimes referred to as the General Agreement to Talk and Talk! EDS.]. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. The bulk of the WTO s current work comes from the negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT).... Where countries have faced trade barriers and wanted them lowered, the negotiations have helped to liberalize trade. But the WTO is not just about liberalizing trade, and in some circumstances its rules support maintaining trade barriers for example to protect consumers or prevent the spread of disease. IT S A SET OF RULES... At its heart are the WTO agreements, negotiated and signed by the bulk of the world s trading nations. These documents provide the legal ground-rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives. The system s overriding purpose is to help trade flow as freely as possible so long as there are no undesirable side-effects because this is important for economic development and well-being. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there 1. UNDERSTANDING THE WTO 1-21 (3d ed. 2007), available at thewto_e/whatis_e/tif_e/utw_chap1_e.pdf.

4 A. What Does the WTO Do? 85 will be no sudden changes of policy. In other words, the rules have to be transparent and predictable. AND IT HELPS TO SETTLE DISPUTES... This is a third important side to the WTO s work. Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written into the WTO agreements. BORN IN 1995, BUT NOT SO YOUNG. The WTO began life on 1 January 1995, but its trading system is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system.... The last and largest GATT round was the Uruguay Round, which lasted from 1986 to 1994 and led to the WTO s creation. Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property). Notes and Questions 1. The above excerpt states that the overriding purpose of the system is to help trade flow as freely as possible so long as there are no undesirable side-effects. Notice how much is contained in the phrase no undesirable side-effects. These might include health and safety issues, dislocation of domestic workers, national security, environmental concerns, and much more. Not only that, but the mere presence of undesirable side effects is not alone enough to undermine the desirability of trade. Trade should flow freely as long as those undesirable side effects are outweighed by the beneficial effects of trade. But which side effects are sufficiently harmful to undermine the case for trade either in principle or, more important, in the eyes of the negotiating states? It is that question that will determine the extent to which liberalized trade is embraced. 2. Notice how the importance of dispute settlement is described: Agreements, even those painstakingly negotiated in the WTO system, often need interpreting. The emphasis here is on clarifying the meaning of rules so that states acting in good faith can resolve their conflicts (the assumption being that states are not on purpose violating WTO rules; they are simply disagreeing as to the meaning of those rules). Nothing is said about the possibility that dispute resolution may also serve to enforce existing agreements meaning that it may be necessary in order

5 86 Chapter 4. The WTO: History, Structure, and Future to ensure compliance. It is understandable that the WTO cannot, in its own writings, point out that states may choose to violate the rules, but it is pretty clear that this does, indeed, happen at times, so deterrence is a relevant concern. B. A VERY BRIEF HISTORY OF THE GATT/ WTO SYSTEM THE GENESIS OF THE GATT 2 Douglas Irwin, Petros Mavroidis & Alan Sykes To understand the origins of the GATT, one must appreciate the traumatic events of the 1920s and 1930s. The period between World War I and World War II was a political and economic disaster, scarred by the Great Depression and the rise of fascism. A strong desire to avoid repeating this experience after World War II, along with the abandonment of isolationism by the United States in favor of a leadership role in world affairs, fostered support around the world for a new approach to international economic cooperation. The outbreak of World War I in 1914 interrupted what had been a period of growing worldwide economic prosperity with moderate tariffs and expanding world trade supported by a well-functioning international monetary system (the gold standard). After the shock of World War I, the international trade and payments system recovered very slowly during the 1920s. Most countries only gradually phased out wartime controls on trade, while tariff levels remained higher than before the war.... The gradual restoration of the world economy was interrupted by a worldwide recession starting in This economic downturn was met by greater protectionism, which in turn further reduced world trade. Although monetary and financial factors were primarily responsible for allowing the recession to turn into the Great Depression of the early 1930s, the spread of trade restrictions aggravated the problem. The commercial policies of the 1930s became characterized as beggar-thy-neighbor policies because many countries sought to insulate their own economy from the economic downturn by raising trade barriers. Blocking imports provided to be a futile method of increasing domestic employment because one country s imports were another country s exports. The combined effect of this inward turn of policy was a collapse of international trade and a deepening of the slump in the world economy.... The outcome of these protectionist and discriminatory trade policies was not just a contraction of world trade, but a severe breakdown in the multilateral trade and payments system that the world economy had enjoyed prior to World War I and had started to revive in the late 1920s. Official conferences and multilateral meetings, notably the World Economic Conference in 1933, , 12, (Cambridge U. Press 2008).

6 B. A Very Brief History of the GATT/WTO System 87 offered pronouncements to resist protectionism, but failed to stem the spread of inward-looking antitrade economic policies. The economic distress of the decade also had political consequences, undermining faith in democratic governments to manage their economies and hence abetting a turn to more authoritarian regimes in Germany and elsewhere.... However, having initiated the move toward more protectionism in the 1930s, the United States also became one of the first countries to try to reverse these detrimental developments. For the first time in its history, the United States began to take a serious and active role in reducing trade barriers and expanding world trade in cooperation with other countries. After the Republican party that was responsible for the Hawley-Smoot[] tariff in 1930 was swept from office in the 1932 election, the Democratic administration of President Franklin D. Roosevelt formulated a new approach to trade policy. Recognizing that it could not undertake a unilateral reduction in American tariffs in the midst of the depression, the Roosevelt administration sought to negotiate bilateral trade agreements to reduce tariffs in concert with others By the end of 1939, the United States had concluded trade agreements with 22 countries. While the impact of the tariff reductions in these agreements was modest, the provisions in these agreements formed the basis for a future multilateral accord [T]he GATT would not have come into existence without the leadership of the United States.... In addition, other countries played an important role in shaping the GATT. Britain was responsible for pushing the United States into thinking in terms of a multilateral approach rather than a bilateral one. THE WORLD TRADE ORGANIZATION: A BRIEF INTRODUCTION 3 William Davey I. INTRODUCTION TO THE WTO/GATT SYSTEM A. THE GENERAL AGREEMENT ON TARIFFS AND TRADE 1. A Brief History of GATT The General Agreement on Tariffs and Trade was signed in 1947 during the course of broader negotiations aimed at the establishment of the International Trade Organization (ITO). The ITO was to be the third leg of an international economic triad consisting of the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF). These organizations were intended to promote economic development, the reconstruction of Europe and the expansion of world trade. In particular, the IMF was to provide liquidity to countries running trade deficits so as to enable the ITO to work for the reduction of tariffs and other trade barriers (manuscript 2003) (some citations omitted).

7 88 Chapter 4. The WTO: History, Structure, and Future The General Agreement was intended to implement and protect the results of tariff reductions that had been agreed upon during the ITO negotiations. It was expected that the General Agreement would promptly be subsumed under the mantle of the ITO once the ITO came into existence. Unfortunately, it never did. An ITO charter, known as the Havana Charter, was agreed upon, but the U.S. Congress failed to ratify it, even though the United States had been a prime mover in the negotiations. Consequently, GATT was orphaned at the very beginning of its existence. Because the General Agreement was intended to protect the integrity of tariff reduction commitments, it included most of the trade-related provisions of the Havana Charter. Although no organization or secretariat was provided for in the General Agreement, there were some general governance provisions that enabled the GATT contracting parties to cobble together a workable, even if shaky, governance structure. Thus, GATT was able to play the role that was thrust upon it as the only significant multilateral trade agreement, even though it had these constitutional infirmities.... The General Agreement was negotiated against the background of the Great Depression and World War II. Many of those involved in the GATT negotiations believed that the trade wars of the 1930 s, provoked in part by the adoption of the Smoot-Hawley tariff in the United States, had prolonged the depression, thereby creating an atmosphere favorable to the outbreak of World War II. According to one U.S. official: Nations have more often than not undertaken economic discriminations and raised up trade barriers with complete disregard for the damaging effects on the trade and livelihoods of other peoples, and, ironically enough, with similar disregard for the harmful resultant effects upon their own export trade.... The resultant misery, bewilderment, and resentment, together with other equally pernicious causes, paved the way for the rise of those very dictatorships which have plunged almost the entire world into war. 11 One hope of the negotiators was that an agreement promoting freer trade and restricting the use of trade restrictions would encourage better relations among nations, thereby promoting world peace. Of course, another hope was that freer international trade would promote economic well being. As Nobel prize-winning economist Paul Samuelson once wrote: [T]here is essentially only one argument for free trade or freer trade, but it is an exceedingly powerful one, namely: Free trade promotes a mutually profitable division of labor, greatly enhances the potential real national product of all nations, and makes possible higher standards of living all over the globe. 12 Both of these goals find expression in the objectives that are set out in the brief preamble to the General Agreement. According to the preamble, GATT seeks to increase economic well being throughout the world and increase international trade by (i) substantially reducing tariffs and other trade barriers and (ii) eliminating discriminatory treatment in international commerce. 11. Speech by Under Secretary of State Wells, U.S. Dept. of State, Commercial Policy Series No. 71 (Pub. No. 1660, 1941). 12. Paul Samuelson, Economics 692 (9th ed. 1973).

8 B. A Very Brief History of the GATT/WTO System Successes and Shortcomings From 1948 until the advent of the WTO, the General Agreement was the principal international agreement regulating trade between nations. The General Agreement and its related side agreements covered almost all aspects of trade in goods, and the GATT system significantly promoted trade liberalization through its sponsorship of eight rounds of trade negotiations and its provision of a mechanism for settling trade disputes between its contracting parties. Initially, the negotiating rounds focused on tariff reductions and they achieved noteworthy success. In the case of the major industrialized countries, average tariffs fell from around 40% at the end of World War II to less than 5% today. GATT has been credited with considerable success in removing barriers to trade in goods, as evidenced by the fact that the annual growth rate of world merchandise trade has typically exceeded, by significant amounts, the growth in the output of national economies. Yet, there were aspects of GATT s operation that were viewed as deficient. One problem was that GATT s unusual beginning meant that there was no formal organizational structure under which it could conduct its affairs. Although the GATT contracting parties managed to create an informal structure in which it could operate, the lack of a formal structure was viewed as a shortcoming. Second, during the course of the Tokyo Round of trade negotiations ( ), a number of side agreements had been negotiated on specific topics (e.g., customs valuation, dumping, subsidies, civil aircraft, standards, government procurement, import licensing, dairy and meat), but only some, mainly industrialized, contracting parties accepted those agreements. Thus, there was a sort of GATT à la carte, where there was considerable variation in the obligations undertaken by the various contracting parties. Another aspect of this problem was that many, particularly developing country, contracting parties had bound (i.e., agreed to limits on) relatively few of their tariff lines. Thus, there was in fact limited applicability of the agreed-upon rules. Third, although GATT rules in principle applied to trade in all products, over time two major areas of trade agriculture, and clothing and textiles had effectively escaped GATT disciplines. Similarly, although GATT rules provided for the possibility of imposing safeguard measures to protect industries injured by imports in defined circumstances, those rules were largely ignored and parties accomplished safeguard goals through the use of voluntary export restraints, that were of questionable legality under GATT rules, although largely tolerated by those concerned. This breakdown in the application of the agreed-upon rules was viewed as undermining the idea of GATT as a rule-based multilateral-trading system. Fourth, GATT rules applied mainly to trade in goods and yet the service sector had become the predominant part of most parties economies and trade in services was becoming more and more important. The absence of coverage for this fast-growing aspect of international trade

9 90 Chapter 4. The WTO: History, Structure, and Future seemed an anomaly, given the role that GATT was expected to play in regulating international trade.... Finally, although GATT s dispute settlement system had operated relatively well, especially when compared to other forms of state-to-state dispute settlement, there were problems apparent in its functioning. In some cases, there were considerable delays in various parts of the process. More significantly, the practice of consensus decision-making in GATT had led to the odd situation where a losing party in a dispute settlement proceeding could prevent the adoption by GATT of the relevant dispute settlement report and thereby avoid losing. There were other problems that could be cited as well, but the foregoing list highlights that GATT s overall success in lowering trade barriers and expanding international trade was not unqualified. The eighth round of GATT trade negotiations the Uruguay Round ( ) eventually came to address all of these problems and while doing so also created a new organization with a much broader scope of action the World Trade Organization. C. WHY DOES THE WTO EXIST? This may seem like a superfluous question. Yet, with Chapters 1, 2, and 3 in mind, it is far from obvious: Why was there a need for countries to conclude trade agreements (in the face of overwhelming economic evidence in favor of unilateral trade liberalization, discussed in Chapters 1 and 2)? Looked at from the other extreme, how did countries manage to agree at the GATT/WTO to reduce their barriers to trade (in the face of, especially, political pressure to protect domestic industries, discussed in Chapter 3)? In The Genesis of the GATT, excerpted below, Irwin, Mavroidis, and Sykes come to the following conclusions: THE GENESIS OF THE GATT 4 Douglas Irwin, Petros Mavroidis & Alan Sykes This brief chapter has considered three approaches that explain the rationale for a trade agreement such as the GATT: to avoid terms of trade losses [that is, to avoid especially large countries imposing optimal tariffs that may, by reducing import prices, improve their terms of trade but worsen the terms of trade of other countries], to establish a commitment (both economic and political) against domestic interests, and to pursue foreign policy objectives related to peace and security. The evidence that we presented... provides some support for all three explanations for trade agreements, although, the case for (Cambridge U. Press 2008).

10 100 Chapter 4. The WTO: History, Structure, and Future F. MEMBERSHIP As of the middle of 2011, the WTO has 153 members. This includes almost every important trading country in the world. The most conspicuous exception is Russia, which is not yet a member but is engaged in negotiations to join the WTO. The most important recent entrant is China, which joined in The number of members continues to grow as the states outside the system seek to be admitted. Note that one does not need to be a state to become a WTO member. Article XII:1 of the WTO Agreement provides that the WTO is open to [a]ny state or separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement and the Multilateral Trade Agreements [annexed thereto]. Good examples of WTO members that are not states are the European Union (a separate customs territory currently comprising 27 European states, which are also WTO members in their own right) and Macau or Hong Kong (politically speaking, parts of China, but in economic terms, separate customs territories). All parties to the GATT became members of the WTO when the later institution was born in 1995 (with the exception of Yugoslavia). Other states have joined (and will join in the future) through the accession process. To do so, a state must agree on a set of terms negotiated between itself and the WTO. This includes a set of commitments to be made by the entering state with respect to tariff rates, market access, and so on. Hammering out the terms of WTO accession can be a protracted process. It took China more than 15 years. Based on this agreement, the state enters the WTO upon approval by the General Council or Ministerial Conference (and after any domestic legal requirements within the state are satisfied). Formally speaking, accession of a new member is decided upon by two-thirds majority of existing members (Article XII:2, WTO Agreement). Yet, in practice, as with all WTO decisions (other than dispute settlement, discussed in Chapter 5), accession occurs by consensus so that every existing WTO member can block the accession of any newcomer. This has led to some tensions, for example, as to the order of accession of China versus Taiwan (both of which are now WTO members), or Ukraine and Georgia joining the WTO before Russia. G. NAVIGATING THE WTO AGREEMENTS The WTO Agreement discussed above establishes the structure of the organization, but the key substantive rules of the WTO are contained in the four annexes to that agreement. Pursuant to Article II:2 of the WTO Agreement, these annexes are integral parts of the WTO Agreement and binding on all Members. Within these annexes are additional agreements addressing goods, services, and intellectual property issues, as well as provisions for dispute resolution.

11 G. Navigating the WTO Agreements 101 Thus the entire structure of rules is sometimes referred to as the WTO Agreements by which is meant the WTO Agreement itself and all the associated agreements and commitments contained in the annexes. The structure of these rules is most easily seen by looking at the Table of Contents of the WTO Agreement: AGREEMENT ESTABLISHING THE WORLD TRADE ORGANIZATION ANNEX 1 Annex 1A: Multilateral Agreements on Trade in Goods General Agreement on Tariffs and Trade 1994 Understanding on Article II:1(b) Understanding on Article XVII Understanding on Balance of Payments Provisions Understanding on Article XXIV Understanding in respect of Waivers Understanding on Article XXVIII Marrakesh Protocol Agreement on Agriculture Agreement on the Application of Sanitary and Phytosanitary Measures [Agreement on Textiles and Clothing] Agreement on Technical Barriers to Trade Agreement on Trade-Related Investment Measures Agreement on Implementation of Article VI Agreement on Implementation of Article VII Agreement on Preshipment Inspection Agreement on Rules of Origin Agreement on Import Licensing Procedures Agreement on Subsidies and Countervailing Measures Agreement on Safeguards Annex 1B: General Agreement on Trade in Services and Annexes Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights Annex 2: Understanding on Rules and Procedures Governing the Settlement of Disputes Annex 3: Trade Policy Review Mechanism Annex 4: Plurilateral Trade Agreements Agreement on Trade in Civil Aircraft Agreement on Government Procurement [International Dairy Agreement] [International Bovine Meat Agreement]

12 102 Chapter 4. The WTO: History, Structure, and Future Although formally speaking only the General Agreement on Tariffs and Trade 1994 (GATT 1994) is part of the WTO Agreement, this GATT 1994 is only a couple of pages long, with its main provision simply incorporating the GATT GATT 1947 is the original GATT agreement entered into in 1947 at the time of the original formation of the GATT. It contains the bulk of the rules governing trade in goods and has been left largely unchanged since In addition to incorporating GATT 1947, GATT 1994 also incorporates a number of decisions and protocols enacted by GATT contracting parties between 1947 and 1994, as well as a number of understandings concluded in 1994 elaborating on some GATT 1947 provisions. The result is that, as a practical matter, the relevant rules are provided by GATT 1947, supplemented by the understandings from GATT Crucially, whenever you read or apply GATT provisions, you should realize that there is an Annex 1 to GATT This Annex 1 includes Notes and Supplementary Provisions that further explain certain main GATT provisions, also referred to as the Ad Notes to GATT. These Ad Notes have played an important role in the interpretation of GATT. Note also that within Annex 1A, the Agreement on Textiles and Clothing (ATC) and all restrictions thereunder terminated on January 1, The expiry of the ten-year transition period of ATC implementation means that trade in textile and clothing products is no longer subject to quotas under a special regime outside normal WTO/GATT rules but is now governed by the general rules and disciplines embodied in the multilateral trading system. In addition to the above agreements, the WTO Agreement also includes thousands of pages of country-specific tariff commitments (the tariff schedules, see Chapter 7) and commitments liberalizing trade in services (see Chapter 20). For new entrants, such as China, the accession protocol may also include additional (or WTO-plus ) commitments that only apply to the acceding country and not to other WTO members. A good example is an obligation on China to eliminate export duties except for products explicitly listed in an annex to China s accession protocol (Paragraph 11.3 of China s Protocol of Accession). Other WTO members do not have such obligation as GATT Article XI only forbids quantitative export restrictions (and not export duties). When a state joins the WTO it is required to accept all of the above agreements and obligations, with the exception of the plurilateral agreements. These four agreements were optional for states joining the WTO. Two of them the Dairy and Bovine Agreement have since been terminated, so only two plurilateral agreements remain (one on government procurement; the other on trade in civil aircraft). Given the difficulty of negotiating new universal commitments, however, it is possible that the members of the WTO will opt to use more plurilateral agreements in the future. The WTO describes the set of agreements in the following excerpt.

13 G. Navigating the WTO Agreements 103 UNDERSTANDING THE WTO, CHAPTER 2: THE AGREEMENTS 7 World Trade Organization The table of contents of The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts is a daunting list of about 60 agreements, annexes, decisions and understandings. In fact, the agreements fall into a simple structure with six main parts: an umbrella agreement (the Agreement Establishing the WTO); agreements for each of the three broad areas of trade that the WTO covers (goods, services and intellectual property); dispute settlement; and reviews of governments trade policies. The agreements for the two largest areas goods and services share a common three-part outline, even though the detail is sometimes quite different. They start with broad principles: the General Agreement on Tariffs and Trade (GATT) (for goods), and the General Agreement on Trade in Services (GATS). (The third area, Trade-Related Aspects of Intellectual Property Rights (TRIPS), also falls into this category although at present it has no additional parts.) Then come extra agreements and annexes dealing with the special requirements of specific sectors or issues. Finally, there are the detailed and lengthy schedules (or lists) of commitments made by individual countries allowing specific foreign products or service providers access to their markets. For GATT, these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some agricultural goods. For GATS, the commitments state how much access foreign service providers are allowed for specific sectors, and they include lists of types of services where individual countries say they are not applying the most-favoured-nation principle of non-discrimination. Underpinning these are dispute settlement, which is based on the agreements and commitments, and trade policy reviews, an exercise in transparency.... Another group of agreements... is also important: the two plurilateral agreements not signed by all members: civil aircraft and government procurement. Notes and Questions 1. Why can countries not simply sign all WTO Agreements and become members? Why must they pay an additional entry fee (in terms of specific tariff and other commitments) for joining the WTO club and why does it usually take years to agree on this entry fee? 7. UNDERSTANDING THE WTO (3d ed. 2007), available at thewto_e/whatis_e/tif_e/utw_chap2_e.pdf.

14 104 Chapter 4. The WTO: History, Structure, and Future 2. What is the importance of making the agreement a single undertaking in which states must accept the entire package or nothing at all? How might the set of obligations have changed if states had been left free to enter into whichever of the agreements they wanted while avoiding the others? 3. The WTO was ushered in with a dramatic increase in the number of agreements and obligations for states. Since 1995, the dispute settlement process has generated a large volume of jurisprudence that is also relevant to the obligations of states. What impact would you expect this to have on the ability of small states or poor states to keep abreast of their obligations and those of their trading partners? Does this create advantages for the larger and richer states, and if so, how is this advantage likely to manifest itself? 4. The multitude of WTO legal instruments has created the risk of overlapping and, at times, conflicting agreements. To figure out the rights and obligations of a specific WTO member and, even more so, to litigate a dispute before the WTO, a recurring problem is that of finding an order or hierarchy between WTO legal instruments. The first thing to do in this respect is to assemble all possible legal instruments that may bear on the matter. This may include diverse WTO Agreements, but also country-specific schedules of tariff concessions, GATT decisions taken before 1994 (and now part of GATT 1994) and post-1994 Protocols of Accession which, in turn, may incorporate Working Party reports on the accession of the particular countries in question. Once the legal landscape is laid out in this way, the next step is to see how these legal instruments interrelate. Below are a number of important conflict rules to keep in mind: Where there is a conflict between the WTO Agreement and any of the multilateral trade agreements in Annexes 1, 2, or 3, the WTO Agreement prevails (Article XVI:2 of the WTO Agreement). Protocols of accession traditionally incorporate specific paragraphs of the Working Party report that led to the accession and provide that the Protocol constitutes an integral part of the WTO Agreement. 8 In the event of conflict between GATT 1994 and another agreement in Annex 1A (multilateral agreements on trade in goods such as, for example, the Agreement on Technical Barriers to Trade (TBT)), the other agreement (in our example, the TBT Agreement) prevails to the extent of the conflict (General interpretative note to Annex 1A). GATT 1994 and other agreements in Annex 1A shall apply subject to the provisions of [the] Agreement [on Agriculture] (Article 21 of the Agreement on Agriculture). The Agreement on Technical Barriers to Trade (TBT) does not apply to measures subject to the Agreement on Sanitary and Phytosanitary 8. See, e.g., Paragraph 1.2 of China s Protocol of Accession: This Protocol, which shall include the commitments referred to in paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement (WT/L/432, 23 Nov. 2001).

15 H. What Does the WTO Do, and What Does It Not Do? 105 Measures (SPS) so that, to this extent, the SPS Agreement has priority over the TBT Agreement (Article 1.5 of the TBT Agreement and Article 1.4 of the SPS Agreement). The WTO Agreement is silent on overlaps between the three core pillars of the WTO, namely GATT 1994 (and other agreements in Annex 1A), GATS (Annex 1B), and TRIPS (Annex 1C). In a crucial ruling, the Appellate Body in EC Bananas III held that GATT and GATS are not mutually exclusive, that some measures fall exclusively under GATT or GATS, but that others can be subject to both GATT and GATS. 9 No pronouncement has been made yet on what to do when a measure is subject to both GATT and GATS and there is a conflict between the two agreements. In the event of conflict between a WTO Agreement and a memberspecific schedule of concessions, no explicit conflict rule is provided for, but case law indicates that the WTO Agreement prevails. The Appellate Body in EC Sugar found, for example, that... GATT and WTO jurisprudence indicate that WTO Members may use entries in their schedules of concession to clarify and qualify the concessions they individually agree to assume in their Schedules but not to reduce or conflict with the obligations they have assumed under the GATT or the WTO Agreement, including the Agreement on Agriculture. 10 H. WHAT DOES THE WTO DO, AND WHAT DOES IT NOT DO? The WTO is a controversial organization. It attracts protest and criticism from many quarters. Some of the concerns and criticisms leveled at the organization are well deserved, while others are the product of a misunderstanding about what the organization is and how it works. Throughout this book there are frequent opportunities to question or challenge the way in which the WTO behaves. But before going further, it is helpful to note a few of the criticisms or concerns and the WTO s own responses. The list below is taken from the WTO itself. It is not a comprehensive list of grievances, but it gives you a sense of the concerns that the WTO itself feels require some response. As you read, consider how satisfactory the institution s responses to the concerns are, and what concerns may remain. 9. Para Appellate Body Report, European Communities Export Subsidies on Sugar, WT/DS 265, 266, 283/AB/R (adopted May 19, 2005), 212 (hereinafter EC Sugar).

16 Chapter 5 WTO Dispute Settlement One of the most remarkable and successful aspects of the WTO is its automatic and compulsory dispute settlement system. It is one thing for countries to agree to a treaty and quite another to enforce compliance with that treaty. Under international law, states can only be brought before an international court or tribunal if they have consented to the jurisdiction of that court or tribunal. In many cases, this implies that breach of a treaty cannot be challenged in third-party adjudication, or that when a dispute arises it can be settled in a judicial fashion only with the explicit consent of both parties. In the WTO, the situation is dramatically different. Whenever a WTO member has a complaint against another WTO member for any matter falling under any WTO covered agreement (as defined in DSU Article 1), it can invoke the WTO s dispute settlement system, without needing the approval of the defending party. This remains the case even if the matter raised not only involves trade but also more sensitive questions such as health or environmental protection, public morals, or national security. As compared to most other international adjudication regimes, WTO dispute settlement has detailed procedural rules, an appellate process, and back-up arbitration mechanisms to deal with non-implementation and the calculation of trade sanctions in response to continued non-compliance. Most important, WTO members have frequently used the dispute settlement system (between 1995 and April 2011, 424 disputes have been filed) and in the large majority of cases (with some notable exceptions) the system has managed to resolve the dispute. A better understanding of the WTO dispute settlement system not only allows one to formulate and guide complaints through the multiple stages of enforcing trade agreements at the WTO, be it in pursuit of government or private client interests, but it also offers a fascinating study of state-to-state adjudication and international law enforcement more broadly. Key Legal Provisions GATT XXII:1 GATT XXIII:1 DSU 4.3, 4.7, 6.1, 16.4, 17.5, 17.6, 17.13, 17.14, 21.3, 21.5, 22.4,

17 128 Chapter 5. WTO Dispute Settlement A. UNDERSTANDING THE WTO DISPUTE SETTLEMENT SYSTEM Compared to what existed under the GATT system, the WTO introduced a more structured and formal system for resolving disputes. The WTO system arose to a significant degree out of dissatisfaction with certain aspects of the GATT procedures, and so it is useful to understand something about how the former system worked before examining the current system. The excerpt below provides a sketch of dispute resolution under the pre-wto GATT, including some of the criticisms it faced, and then describes the current WTO system for dispute resolution. As you read it you should also note that the WTO system has not divorced itself from the formal rules in the GATT Agreement (especially GATT Articles XXII and XXIII). Those rules remain an important part of the dispute settlement system. THE WTO DISPUTE SETTLEMENT MECHANISM 1 William Davey The WTO agreements provide extensive rights and impose many duties on its Members and their conduct of international trade. A key issue is how the WTO enforces those rights and duties. A critical part of any enforcement mechanism is an effective system to resolve disputes over what the rules mean and whether they have been broken in a specific case. This is essential to promote compliance with those rules. Without such a system, an elaborate structure of rights and duties means little.... B. THE GATT DISPUTE SETTLEMENT SYSTEM 1. GATT ARTICLE XXIII Generally speaking, dispute settlement under the WTO Agreement, including dispute settlement under GATS, TRIPS and the side agreements to the General Agreement, is based on the principles of GATT Article XXIII. Article XXIII is the General Agreement s basic dispute settlement mechanism. Article XXIII:1 provides that the dispute settlement process may be invoked when one party claims that a benefit accruing to it under the General Agreement has been nullified or impaired by another party or that the attainment of any objective of the General Agreement is being impeded as a result of (a) the failure of another contracting party to carry out its obligations under [the General] Agreement, or 1. Ill. Pub. Law & Legal Theory Research Papers Series, Research Paper No , June 25, 2003, available at

18 A. Understanding the WTO Dispute Settlement System 129 (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of [the General] Agreement, or (c) the existence of any other situation. The vast majority of complaints brought under Article XXIII have alleged a violation of the General Agreement (paragraph (a)), but there have been a few cases based on paragraph (b), which are known as non-violation cases. No successful cases have been based on paragraph (c).... It is important to note that proof of a violation is not sufficient to state a cause of action under Article XXIII. It is also necessary to show that benefits have been nullified or impaired or the attainment of objectives of the agreement has been impeded. In practice, there has not been a finding of the latter condition. All successful cases have claimed that the violation or measure at issue nullified or impaired benefits. In fact, over time in GATT practice, it became the case that if a violation were established, then nullification or impair[ment] would be presumed and no party has ever rebutted that presumption. The presumption has been made explicit in the DSU [Article 3.8]. [Although the GATT does not provide any particular process for consideration of complaints, there evolved a practice of having panels of three to five people hear disputes and issue a report.]... b. Shortcomings of GATT Dispute Settlement The principal criticisms leveled at the GATT dispute settlement system arose from the GATT practice of consensus decision-making. The practice meant that the target of a complaint could delay or block the operation of the dispute settlement process at several distinct stages. For example, it could refuse to agree to refer the matter to a panel in the first place. Even if such a reference were made, it could delay or block agreement on the identity of the panelists and the panel s terms of reference. If it were not satisfied with the results in the panel s report, it could refuse to join a consensus to adopt the panel s report, thereby leaving the report in limbo. Finally, even if it permitted the adoption of the report, it could refuse to implement the recommendations and not suffer any consequences under GATT rules since it could block authorization of sanctions against it. While it appears that persistent complainants were generally able to get panel[s] established and composed, the problem of blockage of adoption of panel reports became more serious over time.... Indeed, only about one-half of the panel reports issued in the 1990 s were adopted by the GATT contracting parties. As a consequence, the GATT dispute settlement system became perceived as being incapable of handling controversial cases, since it was assumed that one of the parties would block adoption of the panel report. This meant that disputes that should have [been] considered in the system were not brought to it because of a belief that no positive results could be obtained. As a consequence, one of the major concerns in the Uruguay Round was to correct these problems of delay and blockage, and as will be seen, the DSU addresses both problems, providing for strict time limits and what is referred to as automaticity, which effectively removes the power of a party to block the process....

19 130 Chapter 5. WTO Dispute Settlement C. THE WTO DISPUTE SETTLEMENT SYSTEM As noted above, an effective dispute settlement system is critical to the operation of the World Trade Organization. It would make little sense to spend years negotiating detailed rules in international trade agreements if those rules could be ignored. Therefore, a system of rule enforcement is necessary. In the WTO that function is performed by the Understanding on Rules and Procedures Governing the Settlement of Disputes (usually called the Dispute Settlement Understanding or simply the DSU ). As stated in Article 3.2 of the DSU, [t]he dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. In the commercial world, such security and predictability are viewed as fundamental prerequisites to conducting business internationally. The DSU is effectively an interpretation and elaboration of GATT Articles XXII and XXIII, which were not modified in the Uruguay Round. As noted above, these articles were the basis for dispute settlement in the GATT system, and since all of the agreements annexed to the Marrakesh Agreement Establishing the World Trade Organization rely on GATT Articles XXII and XXIII or very similar provisions as a basis for dispute settlement, they are the basis for dispute in the WTO system as well. Article XXII provides that one WTO Member may request another Member to consult with respect to any matter affecting the operation of the agreement. Generally speaking, Article XXIII provides for consultations and dispute settlement procedures where one Member considers that another Member is failing to carry out its obligations under the agreement. There are essentially four phases in the WTO dispute settlement process: consultations, the panel process, the appellate process and surveillance of implementation. After outlining some of the more important general provisions of the DSU, each of these four phases is discussed in turn. 1. GENERAL DSU PROVISIONS a. Applicability of the DSU to Covered Agreements The WTO Dispute Settlement Understanding applies to the covered agreements, which are listed in its Appendix 1. The covered agreements consist of all of the Multilateral Trade Agreements, plus the plurilateral Agreement on Government Procurement. The Agreement on Trade in Civil Aircraft is not subject to the DSU rules. There are special or additional provisions on dispute settlement in a number of the covered agreements that are identified in DSU Appendix 2 and those provisions apply to the extent that there is a difference between them and the provisions of the DSU. In disputes under more one agreement, if there is a conflict between the applicable special/additional provisions, the chairman of the DSB (see below) is authorized to resolve the conflict if the parties cannot. b. The Dispute Settlement Body (DSB) The DSU is administered by the Dispute Settlement Body (DSB), which is the WTO s General Council meeting to discharge the responsibilities of the

20 A. Understanding the WTO Dispute Settlement System 131 DSB under the DSU. As such, all WTO Members are members and may participate in the DSB. Under the WTO Agreement, the DSB is authorized to elect its own chair (as opposed to having the General Council chair preside) and has done so to date. In particular, and as is discussed in more detail below, the DSB has the authority to establish panels, adopt panel and Appellate Body reports, maintain surveillance of implementation of its recommendations and rulings, and authorize suspension of concessions. The DSU provides that the DSB shall take decisions provided for in the DSU by consensus. As we will see, this consensus requirement is sometimes a reverse consensus requirement in that the DSB is deemed to take a decision unless there is a consensus not to take the decision CONSULTATIONS Under the procedures of the WTO dispute settlement system, the first step in the process is consultations. A Member may ask for consultations with another WTO Member if the complaining Member believes that the other Member has violated a WTO agreement or otherwise nullified or impaired benefits accruing to it. The goal of the consultation stage is to enable the disputing parties to understand better the factual situation and the legal claims in respect of the dispute and to resolve the matter without further proceedings. As noted above, the DSU provides that [t]he aim of the dispute settlement mechanism is to secure a positive solution to a dispute. A solution mutually acceptable to the parties to a dispute and consistent with the [WTO] agreements is clearly to be preferred. At this stage, as well as at later stages in the process, there is a possibility of utilizing the good offices of the WTO Director-General or mediation to settle a dispute. [Formally, consultations can be requested under either Article XXII or XXIII of the GATT 1994 (or the equivalent provisions of other WTO agreements). The only difference is that] under Article XXII... WTO Members with a substantial trade interest may request to be joined in the consultations as third parties. If the Member asked to consult agrees that the claim of substantial interest is well-founded, the request to join will be honored. If, however, consultations are requested under Article XXIII [nullification or impairment] (or its equivalent), there is no provision for third parties to join in the consultations [see Article 4.11 of the DSU on third parties in consultations, which is limited to consultations being held pursuant to paragraph 1 of Article XXII of GATT or the corresponding provisions in other covered agreements ]. The manner in which the consultations are conducted is up to the parties. The DSU has no rules on consultations beyond that they are to be entered into in good faith and are to be held with[in] 30 days of a request. Typically, they are held in Geneva and involve capital-based officials, as well as the local WTO delegates of the parties. During the consultations, both parties are likely to try and learn more about the facts and the legal arguments of the other party. Written questions may be exchanged and written answers requested. Despite the fact that the structure of consultations is undefined and there are no rules for conducting them, consultations lead to settlements (or at least the apparent abandonment of a case) in respect of a significant number of consultation requests....