INTERNATIONAL TRADE LAW

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

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 1947. 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

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 1986 94 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 http://www.wto.org/english/ thewto_e/whatis_e/tif_e/utw_chap1_e.pdf.

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

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 1929. 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, 2. 5-8, 12, 96-97 (Cambridge U. Press 2008).

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. 3. 1-13 (manuscript 2003) (some citations omitted).

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).

B. A Very Brief History of the GATT/WTO System 89 2. 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 (1973-1979), 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

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 (1986-1994) 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 4. 197-200 (Cambridge U. Press 2008).

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 2001. 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.

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]

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 1947. 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 1947. 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 1994. Crucially, whenever you read or apply GATT provisions, you should realize that there is an Annex 1 to GATT 1947. 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, 2005. 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.

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 23-53 (3d ed. 2007), available at http://www.wto.org/english/ thewto_e/whatis_e/tif_e/utw_chap2_e.pdf.

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).

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. 221. 10. Appellate Body Report, European Communities Export Subsidies on Sugar, WT/DS 265, 266, 283/AB/R (adopted May 19, 2005), 212 (hereinafter EC Sugar).

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, 22.6 127

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. 03-08, June 25, 2003, available at http://ssrn.com/abstract=419943.

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....

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

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.... 2. 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 1994... 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....

132 Chapter 5. WTO Dispute Settlement 3. THE PANEL PROCESS a. Panel Establishment If consultations fail to resolve the dispute within 60 days of the request for consultations, the complaining WTO Member may request the DSB to establish a panel to rule on the dispute. Pursuant to the DSU, if requested, the DSB is required to establish a panel no later than the second meeting at which the request for a panel appears on the agenda, unless there is a consensus in the DSB to the contrary. Thus, unless the Member requesting the establishment of a panel consents to delay, a panel will be established within approximately 90 days of the initial request for consultations. It should be stressed, however, that parties are not required to request a panel at any particular point in time and that in most cases, a panel is not requested until considerably more than 60 days after the start of consultations. b. Panelist Selection After the panel is established by the DSB, it is necessary to select the three individuals who will serve as panelists. The DSU provides that panels shall be composed of well-qualified governmental and/or non-governmental individuals, including persons who have served on or presented a case to a panel, served as a representative of a Member or of a contracting party to GATT 1947 or as a representative to the Council or Committee of any covered agreement or its predecessor agreement, or in the Secretariat, taught or published on international trade law or policy, or served as a senior trade policy official of a Member. These criteria could be roughly summarized as establishing three categories of panelists: government officials (current or former), former Secretariat officials, and trade academics or lawyers. It is specifically provided that panelists shall not be nationals of parties or third parties, absent agreement of the parties. It is also specified that in a case involving a developing country, one panelist must be from a developing country (if requested). The DSU provides for the creation of an indicative list of individuals qualified for panel service. Members have followed varying practices in respect of nominations to the list most nominate non-governmental individuals, but many also nominate non-geneva governmental individuals and some even nominate Geneva-based officials. Most Members do not nominate anyone. Pursuant to the DSU, the WTO Secretariat suggests the names of possible panelists to the disputing parties. The names may, but often do not, come from the indicative list. The DSU allows the parties to reject a Secretariat proposal only for compelling reasons, but in practice the parties have rather free rein to object since their agreement to the composition of the panel is necessary, unless the Director-General of the WTO is requested to appoint the panel. The practice of frequent objections means that the panel selection process is often rather slow and often takes one or two months and even longer in some cases.

A. Understanding the WTO Dispute Settlement System 133 If the parties cannot agree on the identity of the panelists within 20 days of the panel s establishment, any party to the dispute may request the WTO Director-General to appoint the panel, which he is required to do within ten days of the request. Over time, it has become more common for the Director- General to appoint panels. In 2002, he appointed over one-half of the panels. It should be noted, however, that it is common for the parties to have agreed upon one or two of the panelists on the panels appointed by the Director- General. In considering the characteristics of the individuals actually chosen for panel service, it appears that the vast majority of panelists are current or former government officials. Panelists have come from a wide range of Members (around 40). Interestingly, most panelists are not on the indicative list when they are first selected. As of the end of 2001, in terms of experience, it appears that more than one-half of the WTO panelists selected to date had served on a previous GATT or WTO panel at the time of their selection. c. Rules of Conduct for Panelists and Secretariat Staff The DSU provides that panelists serve in their individual capacities and that Members should not give them instructions or seek to influence them. In addition, in December 1996, the DSB adopted rules of conduct applicable to participants in the WTO dispute settlement system. There were no such rules in the past. The rules require that Appellate Body members, panelists, arbitrators, experts and Secretariat staff assigned to assist in the dispute settlement process shall be independent and impartial, shall avoid direct or indirect conflicts of interest and shall respect the confidentiality of proceedings. To ensure compliance with the rules, such persons are to disclose the existence or development of any interest, relationship or matter that person could reasonably be expected to know and that [is] likely to affect, or give rise to justifiable doubts as to, that person s independence or impartiality. Disputing parties have the right to raise an alleged material violation of the rules, which if upheld, would lead to the replacement of the challenged individual. d. The Panel s Functions and Terms of Reference Unless the parties agree upon special terms of reference, which rarely occurs, a panel s terms of reference are determined by the complaining party s request for a panel. The DSU requires that such a request be in writing and identify the specific measures at issue and provide a brief summary of the legal basis of the complaint. The standard terms of reference provided for in the DSU state that the panel shall examine, in light of the relevant WTO agreements, the matter referred to the DSB by the complainant and make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements. More generally, DSU Article 11 provides that a panel shall make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant WTO agreements.

134 Chapter 5. WTO Dispute Settlement e. Panel Proceedings A panel normally meets with the parties shortly after its selection to set its working procedures and time schedule. The standard proposed timetable for panels makes provision for two meetings between the panel and the parties to discuss the substantive issues in the case. Each meeting is preceded by the filing of written submissions. In the case of the first meeting, the complainant files first and the respondent is expected to file two or three weeks thereafter. Rebuttal submissions filed after the first meeting are typically filed simultaneously. f. Evidentiary Issues To evaluate a complaint, panels must follow certain basic evidentiary rules. The most basic rule concerns the assignment of the burden of proof. Generally speaking, the decisions of the Appellate Body have held that the burden of proof rests upon the party who asserts the affirmative of a particular claim or defense. If that party adduces sufficient evidence to raise a presumption that what is claimed is true, then the burden shifts to the other party to rebut the presumption. The Appellate Body has also spoken in terms of the need for a claimant to establish a prima facie case. In GATT dispute settlement, it was often the case that factual issues were not that important. The basic issue was typically whether a particular governmental measure violated GATT rules and, as noted above, if it was found to do so, nullification or impairment of benefits was presumed. To date, comparatively more WTO disputes have involved disputed factual issues. In order to establish facts, panels normally ask oral and written questions to which the parties are expected to respond. The parties often bring government experts versed in the relevant field to panel meetings. Some parties have submitted affidavit evidence to establish facts. By and large, the fact-finding procedures of panels are relatively less sophisticated than those of national courts, although it can be expected that more sophisticated fact-finding techniques will develop as the need for fact-finding becomes more acute.... i. The Final Report Several aspects of panel reports merit mention. First, it has become common in WTO dispute settlement cases for the complaining party to assert a broad range of violations, often under several WTO agreements. Considering that the purpose of WTO dispute settlement is to resolve disputes and not make law, panels often exercise what is referred to as judicial economy. That is to say, they often decide fewer than all of the issues raised by a complainant. This practice has been approved by the Appellate Body, so long as the panel resolves the dispute before it. Second, as noted above, if a panel finds that a WTO rule has been violated, it typically cites the DSU presumption that there has been a nullification or impairment of benefits. Third, the standard practice of panels, which is specifically provided for in the DSU, is to recommend that any measure found to be in violation of WTO rules be brought into conformity with those rules. Panels are authorized to make suggestions on how that recommendation could be implemented, but panels tend not do so. Typically, the responding

A. Understanding the WTO Dispute Settlement System 135 party opposes requests for suggestions and argues that it should be allowed to exercise freely its own discretion in deciding how to bring an inconsistent measure into conformity with the relevant agreement(s). j. Adoption of the Panel Report After its circulation to WTO Members, the final report is referred to the DSB for formal adoption, which is to take place within 60 days unless there is a consensus not to adopt the report or an appeal of the report to the WTO Appellate Body. This negative consensus rule is a fundamental change from the GATT dispute settlement system where a positive consensus was needed to adopt a panel report, thus permitting a dissatisfied losing party to block any action on the report. Now, as long as one Member wants the report adopted, it will be adopted. However, while the losing party cannot block adoption of a report, it has a right of appeal. If a panel report is appealed, after completion of the appeal, it is adopted as affirmed, modified or reversed by the Appellate Body.... 4. THE APPELLATE PROCESS a. The Structure of the Appellate Body The possibility of an appeal is a new feature of the WTO dispute settlement system. The Appellate Body consists of seven individuals, appointed by the DSB for four-year terms.... Only one reappointment is permitted. The Appellate Body is authorized to draw up its own working procedures, in consultation with the Chairman of the DSB and the Director-General. These procedures regulate the operation of the Appellate Body and process by which appeals are made and considered. The Appellate Body hears appeals of panel reports in divisions of three, although its rules provide for the division hearing a case to exchange views with the other four Appellate Body members before the division finalizes its report. The members of the division that hears a particular appeal are selected by a secret procedure that is based on randomness, unpredictability and the opportunity for all members to serve without regard to national origin. The Appellate Body is required to issue its report within 60 (at most 90) days from the date of the appeal, and its report is to be adopted automatically by the DSB within 30 days, absent consensus to the contrary. b. The Role and Effect of the Appellate Body The Appellate Body s review is limited to issues of law and legal interpretation developed by the panel. However, the Appellate Body has taken a broad view of its power to review panel decisions. It has the express power to reverse, modify or affirm panel decisions, but the DSU does not discuss the possibility of a remand to a panel. Partly as a consequence, the Appellate Body has adopted the practice, where possible, of completing the analysis of particular issues in order to resolve cases where it has significantly modified a panel s reasoning. This avoids requiring a party to start the whole proceeding over as a result of those modifications....

136 Chapter 5. WTO Dispute Settlement Overall, to date there seems to be general satisfaction with the overall performance of the Appellate Body and none of the proposals for reform of the DSU... propose any fundamental change to the Appellate Body or the way it would work, except for the possibility of extending the scope of its review powers and permitting it to remand cases to the original panel for reconsideration in light of its decision. 5. SURVEILLANCE OF IMPLEMENTATION The final phase of the WTO dispute settlement process is the surveillance stage. This is designed to ensure that DSB recommendations (based on adopted panel/appellate Body reports) are implemented. As noted above, if a panel finds that an agreement has been violated, it typically recommends that the Member concerned bring the offending measure into conforming with its WTO obligations. While a panel may suggest ways of implementation, it is ultimately left to [the] Member to determine how to implement. Under the surveillance function, the offending Member is required to state its intentions with respect to implementation within 30 days of the adoption of the applicable report(s) by the DSB. If immediate implementation is impractical, a Member is to be afforded a reasonable period of time for implementation. Absent agreement, that period of time may be set by arbitration. The DSU provides that, as a guideline for the arbitrator, the period should not exceed 15 months. In the first six cases, the reasonable periods of time, whether set by arbitration or agreement, happened to be 15 months. Overall, in non-export subsidy cases, the median time has been 9 months. Starting six months after the determination of the reasonable period of time, the offending Member is required to report to each regular DSB meeting as to its progress in implementation. If a party fails to implement the report within the reasonable period of time, the prevailing party may request compensation. If that is not forthcoming, it may request the DSB to authorize it to suspend concessions (i.e. take retaliatory action) owed to the non-implementing party. DSB authorization is automatic, absent consensus to the contrary, subject to arbitration of the level of suspension if requested by the non-implementing Member. To date, suspension of concessions has been implemented in only three cases by the United States vis a vis the European Community in respect of the Bananas case; by Canada and the United States vis a vis the European Community in respect of the Hormones case. However, there have been four other completed arbitral proceedings to determine the level of suspension (Brazil Aircraft; Canada Aircraft 21.5; EC-Bananas (by Ecuador); and United States FSC) and three others started (Canada Dairy; United States 1916 Act; United States Copyright). Suspension of concessions is viewed as a last resort and the preference is for the non-implementing Member to bring its measure into conformity with its obligations. The above-described rules on suspension of concessions work without problem when it is agreed that there has been no implementation. However, if there is a disagreement over whether there has been satisfactory implementation, the provisions of the DSU do not work harmoniously. On the one hand, Article 21.5 of the DSU provides that such a disagreement shall be referred to the original panel, where available, which shall issue its report in 90 days....

A. Understanding the WTO Dispute Settlement System 137 At the same time, Article 22.2 of the DSU provides that if a Member fails to bring its nonconforming measure into compliance, the DSB must authorize (if requested and absent consensus to the contrary) the suspension of concessions within 30 days of the expiration of the reasonable period of time. An Article 21.5 proceeding would normally not be completed within 30 days of the expiration of the reasonable period of time. As a consequence, a number of questions arise. Can the procedures be followed simultaneously or must the Article 21.5 procedure precede the Article 22 procedure? Can the deadline for DSB authorization of suspension pursuant to the negative consensus rule be suspended until completion of an Article 21.5 proceeding? Would the right to a decision absent negative consensus still apply? These issues are not clearly dealt with in the DSU and became quite controversial in the Bananas case. As a result... the 1998-1999 review of the DSU focused on these issues. 6. ADDITIONAL DSU PROVISIONS a. General Rules on Timeframes The DSU establishes a number of benchmarks for completion of various stages of the dispute settlement process. These are designed to prevent the delays that had led to criticism of the GATT system. For panels, the DSU sets as a goal that the final report should be issued to the parties within six months of the panel s composition and that, at the latest, the report should be circulated to all Members within nine months of the panel s establishment. In fact, most panel reports are not circulated within that nine-month period. While failures to meet the nine-month target have often involved cases where the panel felt it necessary to have recourse to outside experts, where there were translation delays and where the cases were extraordinarily complex, the frequency with which the target is missed suggests that inadequate resources are devoted to the dispute settlement system.... As noted above, the Appellate Body report is to be circulated within at most 90 days of an appeal. To date, the Appellate Body has usually issued its report on the 90th day; it has missed that deadline only in a couple of cases. There are also timeframes set for the time by which panel and Appellate Reports are to be adopted and the time by which the reasonable period of time for implementation is to be set. To the extent that panels do not meet the goals mentioned above, these other timeframes will also not likely be met. For some types of cases notably cases involving subsidies and government procurement there are expedited dispute settlement procedures provided for. b. Non-Violation and Situation Complaints [Recall that although most cases involve allegations of violation of WTO rules, nullification or impairment of member benefits can be associated with measures that do not, in and of themselves, violate WTO rules. These are referred to as non-violation complaints, set out in GATT Article XXIII:1(b).] The DSU contains special rules for non-violation and situation complaints. For non-violation cases, complaining parties are required to present a detailed

138 Chapter 5. WTO Dispute Settlement justification in support of their complaint. In the Japan Film case, the panel ruled that this does not establish a higher evidentiary standard. Also, since the measure at issue in a non-violation case does not violate WTO rules, there is no obligation to withdraw. Rather, a panel recommends that the Member concerned make a satisfactory adjustment. As a consequence, it is provided that compensation may be a final settlement of the dispute. There have not been many non-violations cases initiated and only a few examples of successful cases. In the last 40 years, there has been only one successful case, which involved the US complaint that EC subsidies on oilseeds production nullified and impaired the zero tariff-binding that the US had negotiated with the EC on oilseeds.... The very concept of non-violation cases remains controversial. Why should a Member be held to provide compensation for doing something that is WTOlegal? In general, however, it is probably useful to have such a mechanism to protect against flagrant evasions of commitments. Situation complaints, which are based on GATT Article XXIII:1(c), are given very special treatment in the DSU. There has never been a case successfully brought on such grounds, and it seems likely that there will never be such a case. The DSU rules provide that pre-dsu rules apply with respect to the adoption of the report, i.e., it may be blocked by the losing party. Notes and Questions 1. Compare the dispute settlement procedures under the GATT and the WTO. What are the major differences? What is the nature of WTO dispute settlement: is it judicial, political, or more like arbitration? 2. What are the major stages in WTO dispute settlement? Do you see parallels in any of the stages to domestic legal proceedings with which you are more familiar? 3. Why do you think consultations are required before a panel request? 4. According to what decision-making rule are panels established? What about the adoption of panel or Appellate Body reports? 5. Why do you think WTO members created a strong dispute settlement system in the Uruguay Round? Does it seem contradictory to you that adoption of panel and Appellate Body reports is automatic in the absence of unanimous objection from members but that changes to the substantive WTO rules require positive unanimity? Consider the following analysis from Pauwelyn: The consensus rule in the political process [for new substantive rules]... was and remains the crucial factor: the price to be paid for an automatic and compulsory DSU. Without the consensus rule and other reinforcements of politics, WTO members could not have accepted and digested the dramatically more legalized WTO. In this light, the WTO s hard law combined with its hard lawmaking process or, as most put it these days, the combination of a highly efficient dispute process and a consensus-based, inefficient rulemaking procedure, should no longer strike us as an institutional paradox. To the contrary,

A. Understanding the WTO Dispute Settlement System 139 this asymmetry can now be explained as a perfectly logical although not necessarily optimal balance between high discipline or law and high participation or politics. In addition, contrary to common perception, the thicker normative structure of the trade system, although undoubtedly strengthening the WTO, did not come at the expense of individual members. On the contrary, through the consensus rule and related veto, the power of individual members was strengthened. Legalization only materialized because of more not less politics (including consensus decision-making). Similarly, further legalization required and could only be maintained with more not less politics. 2 An alternative analysis, however, regards the combination of the WTO s political process (decision making by consensus only) and the WTO s judicial branch (automatic establishment and adoption of panels) as an imbalance or constitutional flaw. For example, Claude Barfield of the American Enterprise Institute (a conservative think tank) sees the DSU as politically unsustainable... because the imbalance between ineffective rule-making procedures and highly efficient judicial mechanisms will increasingly pressure the panels and the Appellate Board to create law, raising intractable questions of democratic legitimacy. 3 To correct the asymmetry, which Barfield considers to be both an imbalance and a constitutional flaw, he recommends alternatives that would reintroduce some of the former elements of diplomatic flexibility that characterized the earlier GATT regime. In Barfield s view, for example, if a substantial minority of WTO members clearly opposes a panel decision, a blocking mechanism should be used to set aside that decision until further negotiations produce a consensus. Yet another assessment is that the WTO s political and judicial branches are, indeed, in imbalance, but that the solution is not to soften the WTO dispute settlement system (as Barfield proposes), but to facilitate the WTO s political process by deviating from the consensus practice. Debra Steger explains her position thus: If the system is working very well in one aspect [dispute settlement] and poorly in another aspect [decision making], should the effective part be changed to make it less effective, or should the ineffective part be improved to make it stronger and more effective? Simple logic dictates that Members should fix the part that does not work, and leave the wellfunctioning part alone. 4 Along the same lines, Claus-Dieter Ehlermann, a former Appellate Body member, argues that the ideal solution is, of course, to facilitate 2. Joost Pauwelyn, The Transformation of World Trade, 104 MICH. L. REV. 1 (2005). 3. CLAUDE BARFIELD, FREE TRADE, SOVEREIGNTY, DEMOCRACY: THE FUTURE OF THE WORLD TRADE ORGANIZATION 7 (2001). 4. Debra Steger, Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization, 5 J. INT L ECON. L. 565 (2002) (reviewing BARFIELD, FREE TRADE, SOVEREIGNTY, DEMOCRACY: THE FUTURE OF THE WORLD TRADE ORGANIZATION (2001)).

140 Chapter 5. WTO Dispute Settlement and thus unblock the political decision-making process. 5 Elsewhere, he adds that [c]onsensus... inherently favours the status quo and... does not provide for equality... it is questionable whether it is also more democratic than the majority rule. 6 To return to Pauwelyn, his prescription for reform would work on both the judicial and the political branches of the WTO: [C]urrent proposals for WTO reform are focused exclusively on either the politics pole, for example getting rid of the consensus rule, or the law pole such as reverting to old GATT practices or, in contrast, further legalization/ de-politicization. Conventional suggestions for reform do not take sufficient account of the interaction between law and politics, in particular, the fact that any change on one side calls for a reaction on the other.... Rather than decrease politics and participation as some have suggested, for example, by getting rid of the WTO consensus rule or de-politicizing WTO affairs I suggest to broaden the space for political debate and contestation. For the world trade system to be legitimate and sustainable, especially with a strong normative structure, more, not less, politics are needed.... The increase in politics, voice and participation of both state and non-state actors... ought to offer a more solid basis of support for a strong WTO normative regime. Yet, to facilitate this messy voice mechanism in particular, consensus building and the varied avenues for input from non-state actors and to prevent deadlock in the political, decision-making process, it is important to keep certain exit options open [such as the possibility to impose safeguards or anti-dumping measures, to unilaterally withdraw certain concessions subject to compensation, not to impose punitive sanctions in response to non-compliance or the possibility to contract out from WTO obligations in, for example, environmental treaties] and not to overlegalize the system [through, for example, a strict rule of stare decisis]. With the assurance of exit in the worst-case scenario, WTO members will more easily join a political consensus to create new rules. Crucially, limited exit options and slightly lower levels of discipline may offer important democratic safety valves and thereby respond to criticisms of a WTO constitution-type construct that imposes free trade over and above anything else. Which of the above three assessments of the current system do you find most convincing? 6. What remedies does the WTO offer? What happens if a WTO member refuses to implement a WTO ruling? Can WTO members obtain monetary or other types of compensation for harm caused before a WTO ruling? 7. Would you expect the WTO s dispute settlement process to be abused for political (or other) purposes? Interestingly, it appears that frivolous claims (at least among those pursued all the way to a panel report) are rare. Bruce Wilson found that through March 1, 2007, nearly 90 percent 5. Claus-Dieter Ehlermann, Tensions Between the Dispute Settlement Process and the Diplomatic and Treaty-Making Activities of the WTO, 1 WORLD TRADE REV. 301, 305 (2002); Claus-Dieter Ehlermann & Lothar Ehring, Decision-Making in the WTO: Is the Consensus Practice of the WTO Adequate for Making, Revising and Implementing Rules on International Trade?, 8 J. INT L ECON. L. 51 (2005). 6. See also Ehlermann & Ehring, supra note 5, at 51.

A. Understanding the WTO Dispute Settlement System 141 of adopted panel and Appellate Body reports (excluding Article 21.5 complaints) had found WTO violations. 8. Many countries have participated in complaints under the DSU, though the United States and EU represent a large share of the total. The following figures (updated in June 2011) show the frequency with which various countries have participated as respondents and complainants. Who Are the Complainants? Who Are the Respondents?

142 Chapter 5. WTO Dispute Settlement 9. If compliance with adverse rulings is one factor in evaluating the success of a dispute settlement process, then the WTO s system seems very effective: As has been widely acknowledged by WTO Members themselves, the overall compliance record of WTO Members with adverse WTO dispute settlement rulings has generally been quite good in the cases to date in which WTO violations have been found. In virtually every one of these cases, the WTO Member found in violation of its WTO obligations has indicated its intention to bring itself into compliance and in most cases has already done so. The record has also shown that compliance has usually been more rapid where WTO violations could be corrected through administrative action under the control of the Executive as opposed to legislative action. This outcome is not surprising since legislative action involves more complicated political processes; the enactment of corrective remedies through changes to national statutes usually takes a longer period of time in most national systems. The use of compensation as a transitional remedy until full compliance could be achieved has only occurred in one case [mainly because compensation is voluntary, pursuant to Article 22.1 of the DSU, and thus requires the consent of both parties]. Thus, the WTO dispute settlement model in practice has been a compliance-retaliation model rather than a compliance-compensation-retaliation model. As for the resort to retaliation [permissible trade sanctions in response to continued non-compliance], out of the 109 cases where a panel or panel/ Appellate Body report was adopted, retaliation has been requested in only 18 instances of which 9 have gone through the arbitration process under Article 22.6 of the DSU to establish the proper level of retaliation. The DSB granted authorization to retaliate in only eight cases.... In only five out of the[se] eight cases... have retaliatory measures actually been imposed by some WTO Members against the trade of other WTO Members. 7 Does the level of compliance suggested by these results surprise you? Given that the only formal remedy of last resort is trade suspension equivalent to the nullification caused by the original violation (DSU Article 22.4), that is, a mere tit-for-tat, how do you explain this high compliance rate? Does this high compliance rate with WTO rulings necessarily mean that the DSU is an effective dispute settlement mechanism? 10. Which nations, if any, would you expect to receive more adverse rulings under the WTO s dispute settlement procedures? Do the following results surprise you: Only 17 WTO Members... have ever been the object of adverse or partially adverse rulings by WTO panels and/or the Appellate Body for which compliance was required. Seven of these 17 WTO Members have 7. Bruce Wilson, Compliance by WTO Members with Adverse WTO Dispute Settlement Rulings: The Record to Date, 10 J. INT L ECON. L. 397 (2007).

A. Understanding the WTO Dispute Settlement System 143 been the object of only one adverse or partially adverse ruling. These seven Members are Brazil, the Dominican Republic, Egypt, Guatemala, Indonesia, Thailand, and Turkey. Ten WTO Members have had multiple adverse or partially adverse rulings in WTO litigation proceedings. These 10 Members are (with the number of cases in which violations against them were found in parentheses) the United States (33), European Communities (16), Canada (8), Argentina (6), India (4), Mexico (4), Korea (5), Japan (4), Chile (2), and Australia (2). 8 11. What is a non-violation complaint? Why was it included in the GATT? Is it still needed in light of changes made under the WTO? According to the Appellate Body in EC Asbestos, [t]he purpose of this rather unusual remedy [non-violation complaints under Article XXIII:1(b) of GATT] was described by the panel in... EEC Oilseeds... in the following terms: [T]he improved competitive opportunities that can legitimately be expected from a tariff concession can be frustrated not only by measures proscribed by the General Agreement but also by measures consistent with that Agreement. In order to encourage contracting parties to make tariff concessions they must therefore be given a right of redress when a reciprocal concession is impaired by another contracting party as a result of the application of any measure, whether or not it conflicts with the General Agreement (emphasis added). 9 A good example can be found in the 1950 report of the Working Party on The Australian Subsidy on Ammonium Sulphate. 10 In this dispute, Chile had negotiated a duty-free tariff binding on its exports of sodium nitrate to Australia. At the time of this tariff concession, Australia had in place a wartime subsidy on both sodium nitrate fertilizer and ammonium sulphate fertilizer. Subsequent to making the concession, however, Australia removed the subsidy on sodium nitrate but maintained it for ammonium sulphate. Although the subsidy was GATT-consistent, the Working Party found that the Australian conduct amounted to a nonviolation case since it upset the competitive relationship between sodium nitrate (from Chile, no longer subsidized) and ammonium sulphate (from Australia or elsewhere, still subsidized) in a way that could not have been anticipated by Chile since Chile had reason to assume that the subsidy for sodium nitrate would not be removed before it was removed for ammonium sulphate. The panel on Japan Film also confronted the issue of non-violation complaints and described the three conditions for a successful complaint of this sort: 8. Id. 9. Appellate Body Report, EC Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R (adopted Apr. 5, 2001), 185 [hereinafter EC Asbestos] (quoting Report of the Panel, EEC Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal- Feed Proteins (adopted Jan. 25, 1990)). 10. GATT/CP.4/39, II/188, 12 (adopted Apr. 3, 1950).

144 Chapter 5. WTO Dispute Settlement The text of Article XXIII:1(b) establishes three elements that a complaining party must demonstrate in order to make out a cognizable claim under Article XXIII:1(b): (1) application of a measure by a WTO Member; (2) a benefit accruing under the relevant agreement; and (3) nullification or impairment of the benefit as the result of the application of the measure.... In all but one of the past GATT cases dealing with Article XXIII:1(b) claims, the claimed benefit has been that of legitimate expectations of improved market-access opportunities arising out of relevant tariff concessions. This same set of GATT precedents suggests that for expectations to be legitimate, they must take into account all measures of the party making the concession that could have been reasonably anticipated at the time of the concession. Of course, as with the first element (application of a measure), the complaining party has the burden of demonstrating the benefit accruing. 11 Would the following amount to a non-violation case? China joined the WTO in 2001 and at that time made tariff concessions on, among other things, imported computers and agricultural products. Subsequent to 2001, China engaged in major infrastructure works such as building highways, bridges, ports, etc. Although these works are not in violation of WTO rules, could another WTO member claim that they upset the competitive opportunities of Chinese goods as compared to imported goods, since the new infrastructure will make it much cheaper for computers and agricultural products produced in China to be transported and marketed than was the case when the tariff concessions were negotiated? 12. To what extent would you expect to find respect for precedent in the WTO? Consider the following quote from the Appellate Body, in a report where it reviewed a panel decision that openly disagreed with an earlier Appellate Body ruling on the same question: 158. It is well settled that Appellate Body reports are not binding, except with respect to resolving the particular dispute between the parties. This, however, does not mean that subsequent panels are free to disregard the legal interpretations and the ratio decidendi contained in previous Appellate Body reports that have been adopted by the DSB. In Japan Alcoholic Beverages II, the Appellate Body found that: [a]dopted panel reports are an important part of the GATT acquis. They are often considered by subsequent panels. They create legitimate expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute. 159. In US Shrimp (Article 21.5 Malaysia), the Appellate Body clarified that this reasoning applies to adopted Appellate Body reports as well. In US Oil Country Tubular Goods Sunset Reviews, the Appellate Body held that following the Appellate Body s conclusions in earlier disputes is not 11. Japan Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R (adopted Apr. 22, 1998), 10.41, 10.61.

A. Understanding the WTO Dispute Settlement System 145 only appropriate, but is what would be expected from panels, especially where the issues are the same. 12 160. Dispute settlement practice demonstrates that WTO Members attach significance to reasoning provided in previous panel and Appellate Body reports. Adopted panel and Appellate Body reports are often cited by parties in support of legal arguments in dispute settlement proceedings, and are relied upon by panels and the Appellate Body in subsequent disputes. In addition, when enacting or modifying laws and national regulations pertaining to international trade matters, WTO Members take into account the legal interpretation of the covered agreements developed in adopted panel and Appellate Body reports. Thus, the legal interpretation embodied in adopted panel and Appellate Body reports becomes part and parcel of the acquis of the WTO dispute settlement system. Ensuring security and predictability in the dispute settlement system, as contemplated in Article 3.2 of the DSU, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case. 161.... The creation of the Appellate Body by WTO Members to review legal interpretations developed by panels shows that Members recognized the importance of consistency and stability in the interpretation of their rights and obligations under the covered agreements. This is essential to promote security and predictability in the dispute settlement system, and to ensure the prompt settlement of disputes. The Panel s failure to follow previously adopted Appellate Body reports addressing the same issues undermines the development of a coherent and predictable body of jurisprudence clarifying Members rights and obligations under the covered agreements as contemplated under the DSU.... While the application of a provision may be regarded as confined to the context in which it takes place, the relevance of clarification contained in adopted Appellate Body reports is not limited to the application of a particular provision in a specific case. 162. We are deeply concerned about the Panel s decision to depart from well-established Appellate Body jurisprudence clarifying the interpretation of the same legal issues. The Panel s approach has serious implications for the proper functioning of the WTO dispute settlement system.... On what legal basis is the Appellate Body giving at least some precedential value to its own rulings? Does the same apply in respect of unappealed panel reports that have been adopted by the DSB? Is this judicial activism and/or self-promotion by the Appellate Body, or a position justified in the DSU or on other normative grounds? Is such precedential effect for Appellate Body rulings something that WTO governments are likely to happily accept? Does it come with risks, especially given how the WTO judicial branch interacts with the WTO political branch? 12. United States Final Anti-Dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R (adopted May 20, 2008), 158-162.

146 Chapter 5. WTO Dispute Settlement B. FLOWCHART OF THE DSU PROCESS AND TIMELINES To further illustrate the different stages and timeframes in WTO dispute settlement, the chart on the following page tracks the steps and timing in a specific WTO dispute, namely, the complaint by Antigua and Barbuda (hereafter Antigua) against the United States regarding a U.S. ban on online gambling. We discuss the substance of this case in the services chapter (Chapter 20) below. We chose this dispute because it is one of only about ten disputes that went through all stages of dispute settlement under the WTO system from a request for consultations to arbitration on the equivalent level of WTO suspension, the ultimate formal remedy in this process. The timelines in this dispute are fairly standard, though slightly above average. Worldtradelaw.net has calculated, for example, that the average number of days between panel establishment and adoption of reports in cases with appeal is 550.8 days (in our example, United States Gambling, it was 639 days). Note also that many of the timelines in the DSU are minimum timeframes (e.g., there must normally be a minimum period of 60 days between a request for consultations and a request for a panel). This means that the dispute can be prolonged not only by the defendant but also by the complainant (who may, for example, decide to prolong consultations beyond the 60-day minimum period). WTO dispute settlement Dispute Settlement Summary is compulsory and automatic (with the move from GATT to WTO, countries dropped their veto to block the process) can only be initiated by a WTO member against acts of another WTO member (state-to-state dispute settlement) is uniform across all WTO agreements (governed by the DSU albeit sometimes with special, overriding rules in other, substantive WTO agreements) consists of four broad steps: (i) consultations, (ii) panel process, (iii) Appellate Body (optional), (iv) implementation stage (possibly including arbitration on reasonable period of time ; compliance panel; and/or arbitration on retaliation) offers prospective remedies only (namely, compliance or settlement, and voluntary compensation or equivalent retaliation for time that violation continues) covers both violation and non-violation complaints does not have a formal rule of precedent, yet adopted reports become part of the WTO acquis.

B. Flowchart of the DSU Process and Timelines 147

148 Chapter 5. WTO Dispute Settlement C. PROBLEM: ANTIGUA GAMBLING Assume that you are the CEO of an online gambling company, called Antigua Gambling Enterprise (AGE), based in Antigua. A lawyer friend told you about the WTO and GATS (General Agreement on Trade in Services), which could help your company gain access to the multi-billion dollar online gambling market in the United States. Based on what you now know about the DSU process, and assuming that there is at least a credible argument that a U.S. measure violates GATS with respect to online gambling regulation, consider the following questions. 1. Can AGE file a complaint for breach of WTO rules at the WTO in Geneva? If not, how can AGE obtain compliance by the United States with the GATS agreement? 2. Assuming that Antigua s complaint raises legitimate issues under the GATS and other WTO agreements, must Antigua (now engaged on your behalf) invoke different dispute settlement systems under each of these agreements? Must Antigua file separate requests for consultations? 3. In response to Antigua s request for consultations, the United States indicates that it is not interested in meeting, let alone consulting. What can Antigua do in response? 4. At the DSB meeting where your request for establishment of a panel is first put on the agenda, the United States insists that the panel not be established. What can Antigua do? What can it do if the United States takes the same position at the next DSB meeting? 5. After the formal establishment of a panel, the WTO Secretariat proposes possible names of people that can be appointed as panel members. The United States objects to each of these names, and continues to do so for over a month. What can Antigua do to unblock the process? 6. A panel, and eventually the Appellate Body, accepts the claim that the U.S. online gambling ban violates the GATS. At the DSB meeting where these reports are to be adopted, however, the United States vehemently objects to the adoption of the reports. What can Antigua do? 7. After adoption of the reports by the DSB, the United States announces that it is politically impossible for the United States to change its legislation. What are the different steps available to Antigua to nonetheless obtain redress? 8. After winning a WTO/GATS complaint against the United States, your company (AGE) faces a very similar regulatory ban by another WTO member, say, Indonesia. Can Antigua simply rely on the earlier WTO ruling against the United States to win your case? Is there formal stare decisis in the WTO?

C. Problem: Antigua Gambling 149 MEMBERS OF THE APPELLATE BODY IN 2011 From left to right: Ricardo Ramírez-Hernández (Mexico), David Unterhalter (South Africa), Yuejiao Zhang (China), Shotaro Oshima (Japan), Jennifer Hillman (USA, member until December 2011), Ujal Singh Bhatia (India, member as of December 2011), Lilia R Bautista (Philippines, member untill December 2011), Peter Van den Bossche (Belgium) and Thomas R. Graham (USA, member as of December 2011).

Chapter 7 Tariffs With this chapter, we finally reach the substantive disciplines of international trade law. You might ask yourself why it took us so long. We are convinced, however, that the economic background in Chapters 1 and 2, the domestic politics insights in Chapter 3, and the institutional machinery set out in Chapters 4, 5, and 6 were necessary context for anyone to understand substantive WTO rules. With those materials under your belt, you will find the materials that follow easier to think about and to understand. We begin our journey with the oldest rules of trade law, namely, those addressing customs duties and other charges that countries traditionally impose on imported goods (referred to as tariffs ). Such import tariffs are the most common and obvious way to restrict trade. They amount to a tax on imports, collected by the importing country, and paid for by foreign exporters or domestic importers, but ultimately, at least partly, carried forward into higher consumer prices in the importing country itself. Let it be clear from the start: the WTO treaty does not prohibit the imposition of tariffs (remember: the WTO is about trade liberalization, not complete free trade). Quite the contrary, of all possible trade instruments, the WTO actually prefers tariffs over most other trade restrictive policies (as discussed later, tariffs are transparent and maintain a link between the domestic market and world prices). Instead of banning all tariffs, the WTO, starting with the GATT in 1947, engaged in a process of gradual reduction of tariffs on a country-by-country, product-by-product basis. In their tariff schedules, WTO members commit to certain maximum tariff ceilings. GATT Article II binds WTO members to those ceilings. The 1994 Understanding on the Interpretation of GATT Article II:1(b) elaborates on the rules governing other duties or charges on imports that are not ordinary customs duties. GATT Article VIII, in turn, limits service fees or charges imposed on imports or exports to the approximate cost of services rendered. Several other provisions are relevant to the rules on tariffs, including Article XXVIII of GATT on how WTO members can modify their schedule of concessions post-1994 (and the 1994 Understanding in respect of Article XXVIII), and Article XXVIIIbis on further tariff negotiations. Tariffs on agricultural products are bound in special schedules of concessions under the Agreement on Agriculture discussed later in this chapter. Finally, one instance where customs duties are prohibited is in respect of goods in transit. GATT Article V:3, entitled Freedom of Transit, provides that traffic in transit coming from or going to the territory of other [WTO members]... shall be exempt from customs duties and from all transit duties or other charges imposed in 181

182 Chapter 7. Tariffs respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered. Key Legal Provisions GATT II:1(a, b), 2, VIII:1(a), XXVIII, XXXVI:8 A. BACKGROUND TO TARIFF NEGOTIATIONS AND TARIFF BINDINGS 1. Tariffs, Tariff Negotiations, and Tariff Bindings Obstacles to international trade can take many forms. If you are a company that wants to export goods abroad, you will most likely need to pay customs duties or tariffs to gain access to the market of the foreign country in question. These tariff barriers, and GATT/WTO efforts to reduce them, are addressed in GATT Article II. Besides tariff barriers, countries may also restrict imports through non-tariff barriers such as import bans or quotas. These are, in principle (and with notable exceptions), prohibited under GATT Article XI (discussed below in Chapter 8). Taken together, tariff and non-tariff barriers imposed on imports are also referred to as market access restrictions. The GATT/WTO does not prohibit the imposition of tariffs or customs duties (the two terms are used interchangeably). In fact, to the extent that WTO members want to protect domestic industries, the GATT attempts to guide them toward the more transparent and economically efficient instrument of tariff measures rather than more opaque and inefficient quantitative restrictions. At the same time, the WTO seeks to reduce such tariffs through gradual and reciprocal tariff negotiations reflected as tariff concessions in member-specific schedules of concessions attached to the GATT pursuant to GATT Article II. Tariffs on imports vary, therefore, on a country-by-country basis (e.g., the EC tariff on imports of chocolate is different from the U.S. tariff on imports of chocolate) and within each country customs duties vary on a product-byproduct basis (e.g., the EC tariff on chocolate is different from the EC tariff on passenger cars). Where the tariffs end up depends on the outcome of tariff negotiations that have so far been conducted in the eight separate rounds of trade negotiations from 1947 to 1994. For traders to determine the tariff that they will need to pay at customs, two documents matter. First, and most important, is the domestic or national tariff laws of the importing country (e.g., the Harmonized Tariff Schedule of the United States, excerpted below), which is a piece of domestic legislation specifying the customs duty that must actually be paid, that is, the applied tariff rate. Second is the WTO schedule of tariff concessions submitted by the importing country to the WTO and agreed upon by all WTO members (e.g.,

Chapter 8 Quantitative Restrictions Countries can use border measures to limit or restrict the importation of goods in two ways. First, countries can increase the price of imports by levying duties or charges on imports (thereby raising government revenue and offering protection to domestic producers against import competition). This is what we dealt with in Chapter 7 (tariffs). Second, countries can limit the quantity of imports by imposing import quotas or other quantitative restrictions on importation. These quantitative restrictions, also referred to as non-tariff barriers, are discussed in this chapter and include both import and export restrictions (GATT Article II on tariffs, in contrast, is generally limited to import duties; export duties are not specifically regulated under GATT). Starting in the next chapter, we turn to trade restrictions that countries can impose behind the border, that is, once imported goods have cleared customs, also referred to as internal measures (as opposed to border measures). These behind-the-border measures include internal taxes (Chapter 9) and internal regulations (Chapter 10). The WTO s general approach to quantitative restrictions on importation and exportation is to prohibit them (with noted exceptions). This general rule is set out in GATT Article XI:1, which provides as follows: No prohibitions or restrictions other than duties, taxes or other charges [dealt with mainly in GATT Article II, discussed in the previous chapter], whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. 1 The main exceptions to, or carve-outs from, this general prohibition are set out in (i) GATT Article XI:2 permitting, for example, export restrictions to deal with critical shortages of food or import restrictions of agricultural or fisheries products to remove a temporary surplus; (ii) GATT Article XII allowing quantitative import restrictions to safeguard a country s balance of payments, for example, to stop a serious decline in its monetary reserves; 2 (iii) GATT Article 1. Note that Ad Articles XI, XII, XIII, XIV, and XVIII (which can be found in Annex 1 to GATT 1947 setting out Notes and Supplementary Provisions related to specific GATT articles) explain that throughout these GATT articles, the terms import restrictions or export restrictions include restrictions made effective through state-trading operations. 2. Note, however, that although GATT Article XII explicitly permits quantitative restrictions to deal with balance of payments problems, the Understanding on the Balance-of-Payments Provisions of GATT 1994 expresses a clear preference for price-based measures (such as additional duties or import surcharges) over quantitative restrictions, on the ground that price-based measures have the least disruptive effect on trade (Understanding, 2), as further explained in section B of this chapter. 217

218 Chapter 8. Quantitative Restrictions XVIII permitting governmental assistance to economic development including certain quantitative restrictions to deal with balance of payments problems or to protect certain infant industries; (iv) GATT Article IX allowing for laws and regulations relating to marks of origin; and (v) GATT Article XIX permitting temporary safeguards, including import quotas subject to the conditions elaborated in Articles 5 and 11 of the Safeguards Agreement. Any quantitative restriction thus imposed must, however, comply with the non-discrimination provisions of GATT Article XIII. The Agreement on Safeguards expands the general prohibition in GATT Article XI:1 as follows in its Article 11:1(b):... a Member shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side... [footnote 4: Examples of similar measures include export moderation, export-price or import-price monitoring systems, export or import surveillance, compulsory import cartels and discretionary export or import licensing schemes, any of which afford protection]. The Agreement on Trade-Related Investment Measures (TRIMs) elaborates on the application of GATT Article XI to investment measures related to trade in goods. The TRIMS Agreement confirms, for example, that measures that restrict imports by an enterprise, to an amount related to what that enterprise exports, violate GATT Article XI. GATT Article V on Freedom of Transit, in turn, provides that [t]here shall be freedom of transit through the territory of each [WTO member], via the routes most convenient for international transit, for traffic in transit to or from the territory of other [WTO members] and that traffic in transit shall not be subject to any unnecessary delays or restrictions. Note that traditionally many quotas or quantitative restrictions were maintained and tolerated in the sectors of textiles and agriculture. In the previous chapter, we explained how the 1994 Agreement on Agriculture obliged WTO members to convert their quantitative restrictions on agricultural imports into ordinary customs duties (the tariffication process set out in Articles 4 and 5 of the Agreement on Agriculture). The 1994 Agreement on Textiles and Clothing, in turn, brought about an equally important change. It gradually phased out all quantitative restrictions on the importation of textiles and clothing. The Agreement on Textiles and Clothing expired on January 1, 2005, the date at which import restrictions on textiles and clothing became covered under general GATT rules (including the general prohibition on quantitative restrictions in GATT Article XI). As of 2005, special rules on textiles and clothing ceased to exist. January 2005 was, in particular, the time at which textile exports from China experienced a major boost in developed countries such as the United States and the EC, bringing China to the forefront of international trade policy. Key Legal Provisions GATT XI:1-2(a), XIII Agreement on Safeguards 11.1(b), 3

Chapter 9 National Treatment Internal Taxation In the previous two chapters we dealt with what we called border measures, more specifically, import tariffs (Chapter 7) and quantitative restrictions (or non-tariff barriers) on imports as well as exports (Chapter 8). One approach that GATT/WTO drafters could have adopted is to stop here: if we bind and gradually reduce import tariffs and generally prohibit quantitative restrictions on imports would we not sufficiently liberalize trade? The reason why drafters went further is clear: whatever countries give with one hand in terms of reduced border measures, they could take away with the other hand by imposing stricter behind-the-border or internal measures targeting imports once these imports have cleared customs. For example, the United States may well agree not to impose any tariffs on imports of computer makers, only to impose a heavier sales tax or stricter technical specifications on imported computers as opposed to domestic U.S. computers once the computers clear customs. The outcome may protect U.S. computers all the same. Hence, the WTO treaty, largely to avoid circumvention or disguised protectionism by means of internal measures that restrict imports, restricts not only with what countries do at their borders but also what countries do in terms of domestic taxation and regulation. As will be readily apparent, this does not make the WTO s job easier, as interference with domestic taxation and regulation makes the entire exercise far more politically sensitive. GATT Article III:2 addresses internal taxation (discussed in this chapter). GATT Article III:4 deals with internal regulation (discussed in the next chapter). In both fields the disciplining rule is national treatment, that is, imports cannot be treated less favorably than domestic products. In Chapters 18 and 19, we discuss the additional obligations imposed by the WTO treaty, obligations that go beyond non-discrimination, in the field of health and technical barriers to trade (covered in the SPS and TBT agreements). Key Legal Provisions GATT III:1, 2 Ad Note to GATT III:2 245

Chapter 10 National Treatment Internal Regulations This chapter continues the discussion started in the previous chapter, namely, the GATT discipline on internal or behind-the-border measures set out in GATT Article III. Article III:2 addresses internal taxation and was covered in the previous chapter. GATT Article III:4 addresses internal regulations (other than taxation) and is dealt with in this chapter. GATT Article III:4 provides as follows: The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. We will deal with exceptions to this rule of national treatment in Chapters 13 and 14 (addressing the general exceptions in GATT Article XX). What should be pointed out at this stage, however, is that, pursuant to GATT Article III:8(a), the rule of national treatment does not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale. As noted earlier, government procurement in goods and services (think of Buy American provisions in the 2009 U.S. stimulus package) is covered in one of the so-called plurilateral agreements on Government Procurement. Article III of that agreement does, however, impose an obligation of national treatment for those WTO members bound by the agreement (only 38 WTO members at the time of writing; government procurement is further discussed at the end of Chapter 11 on MFN). Moreover, GATT Article III:8(b) explicitly permits certain production subsidies exclusively to domestic producers (now covered also by the Subsidies Agreement discussed in Chapter 15) and GATT Article IV allows for screen quotas for cinematographic films of national origin subject to certain conditions. Key Legal Provision GATT III; Ad Note to GATT III 275

Chapter 11 Most-Favored-Nation Treatment One of the core attractions and disciplines of the WTO treaty is the mostfavored-nation (MFN) principle: the obligation to offer imports from (and exports to) any WTO member the best-available treatment offered to any other country. The MFN principle is set out in the very first article of the GATT. It was one of the major demands of the United States when the GATT was negotiated in the 1940s with a view to rid the world of colonial preferences instituted by European countries, often to the detriment of U.S. trade. We have waited to cover Article I until we reached this stage for several reasons. First, to fully grasp the impact of the MFN obligation which applies to both border measures (tariffs and quotas) and behind-the-border measures (taxes and regulations) we consider it important to first explain these different types of trade instruments and the disciplines imposed on them in the GATT (this is what we did in Chapters 7 to 10). Second, non-discrimination in the WTO treaty has two faces: one internal (the obligation to offer national treatment to imports); the other external (the obligation to offer MFN treatment to imports). In both of these fields of non-discrimination similar issues arise, especially the question of like products. Since the case law on like products and national treatment is far more developed than that on like products and MFN, we decided to first address national treatment (GATT Article III) and only thereafter MFN (GATT Article I). Note that the MFN obligation in GATT Article I is repeated in one form or another in several other, more specific GATT provisions (in particular, MFN in respect of transit under GATT Article V:5; MFN in respect of marks of origin requirements in GATT Article IX:1; MFN in respect of quantitative restrictions in GATT Article XIII; and non-discrimination principles imposed on state trading enterprises in GATT Article XVII) as well as in the two other pillars of the WTO (GATS and TRIPS). Key Legal Provisions GATT I:1, XIII:1, 2, 5 303

Chapter 12 Preferential Trade Agreements We have now reached the stage where the core rules of WTO law have been covered (tariff bindings, quantitative border restrictions, national treatment, and most favored nation (MFN)). With these basic rules in mind, we can now turn to the exceptions to these basic rules. These exceptions can be broadly divided into two groups: first, exceptions to address special economic situations; second, exceptions where certain trade restrictions or deviations from the rules are permitted on non-economic grounds. In this chapter we address one of the most important economic exceptions included in the GATT. It is an exception that follows nicely on the topic addressed in the previous chapter (MFN). namely, GATT Article XXIV permits preferential trade agreements to deviate (mainly) from the MFN principle set out in GATT Article I. Other economic exceptions are preferential treatment for developing countries (pursuant to, inter alia, the Enabling Clause, covered in Chapter 22), restrictions permitted to address balance of payments problems (GATT Article XII), restrictions to allow certain forms of governmental assistance to economic development (GATT Article XVIII), and duties or other restrictions imposed in the field of trade remedies (countervailing duties, anti-dumping duties, and safeguards, covered in Chapters 15, 16, and 17). Non-economic exceptions allowing trade restrictions to address, for example, human health, environmental protection, or national security are dealt with in GATT Articles XX and XXI and covered in the next two chapters (Chapters 13 and 14). Key Legal Provisions GATT XXIV:4, 5(a-c), 6, 8(a)(i-ii), 8(b), 10 Enabling Clause 1, 2(c-d) GATS V:1(a-b(i-ii)), 3(a) A. THE BASICS OF PREFERENTIAL TRADING ARRANGEMENTS The gist of the GATT/WTO s approach to regional or preferential trading arrangements (PTAs) is encapsulated in the following, general statement contained in GATT Article XXIV:4: [WTO members] recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the 331

Chapter 13 General Exceptions: GATT Article XX In this chapter we turn to one of the most intricate and important debates in international trade law, namely, to what extent WTO obligations to liberalize trade can be trumped by non-economic objectives such as the protection of health or the environment. In earlier chapters, we have seen that such non-economic objectives may already lead to the conclusion that there is no WTO violation in the first place. In EC Asbestos, for example, the health risks inherent in asbestos meant that products containing asbestos were judged to not be like products used for similar purposes that did not contain asbestos. As a result, Canada s national treatment defense failed (see Chapter 10). In other cases, non-economic objectives may lead to the conclusion that a tax or regulation is not applied so as to afford protection or that any difference made between like products is not based on national origin. In all of these cases since there is no breach of the basic rules, we do not even need to turn to or rely on exceptions. That said, even where a violation of one of the basic GATT rules is established, the challenged measure has a second chance of survival under the general exceptions of GATT Article XX. Hence, even where a measure discriminates in violation of GATT Article I, III, or XIII or is prohibited under GATT Article II or XI, that measure can still be justified under one of the general exceptions set out in GATT Article XX. In relevant parts, this provision states the following: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health; (c)... (d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement... (e)... (f)... (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. (h), (i), (j)... 357

358 Chapter 13. General Exceptions: GATT Article XX There is one other crucial GATT provision that offers an exception in pursuit of non-economic objectives: GATT Article XXI on security exceptions. Have a careful look at this provision to decide for yourself whether it is broadly or rather narrowly defined. GATT Article XXI, inter alia, allows WTO members to take any action which it considers necessary for the protection of its essential security interests... taken in time of war or other emergency in international relations (GATT Article XXI(b)(iii)). GATT Article XXI(c), in turn, permits the imposition of trade restrictions in pursuance of [a WTO member s] obligations under the United Nations Charter for the maintenance of international peace and security. In other words, trade sanctions imposed by the UN Security Council under Chapter VII of the UN Charter trump any GATT obligations. Since there is no GATT/WTO case law on Article XXI (some countries, like the United States, argue even that Article XXI is self-judging and, therefore, effectively outside of WTO dispute settlement, a view that is contested by most commentators), we do not further address national security in this book. Key Legal Provisions GATT XX GATT XXI A. REQUIREMENTS OF ARTICLE XX: A TWO-STEP ANALYSIS Article XX of the GATT provides a list of General Exceptions that, under certain circumstances, permit states to behave in ways that would otherwise be violations of their WTO obligations. The text of Article XX can be divided into two sections: (i) the specific exceptions listed in paragraphs (a) to (j); and (ii) the introductory paragraph (called the chapeau ). This chapter examines only the specific exceptions, and in particular the most significant ones, (a), (b), (d), and (g). The chapeau and its related jurisprudence are taken up in the next chapter. To qualify for an exception it is necessary to satisfy both the specific exceptions and the chapeau. A clear statement of this two-part requirement is provided in the United States Gasoline panel report. 1 That was an Article XX(b) case, but the overall structure of the analysis is similar for all Article XX exception cases: The Panel noted that as the party invoking an exception the United States bore the burden of proof in demonstrating that the inconsistent measures came within its scope. The Panel observed that the United States therefore had to establish the following elements: 1. Panel Report, United States Standards for Reformulated and Conventional Gasoline, WT/DS2/R (adopted Jan. 29, 1996).

B. The Meaning of Necessary 359 (1) that the policy in respect of the measures for which the provision was invoked fell within the range of policies designed to protect human, animal or plant life or health; (2) that the inconsistent measures for which the exception was being invoked were necessary to fulfil the policy objective; and (3) that the measures were applied in conformity with the requirements of the introductory clause of Article XX. In order to justify the application of Article XX(b), all the above elements had to be satisfied. 2 The first two elements correspond to the specific exception invoked XX(b) in this case. The third element requires satisfaction of the chapeau of Article XX as well. Following the guidance provided by United States Gasoline, we first examine the individual elements of the specific Article XX exceptions. For convenience, we start with the meaning of the term necessary, as used in XX(a), XX(b), and XX(d). We will then consider the policy concerns covered by exceptions XX(a), XX(b), and XX(d). Finally, we consider XX(g), the meaning of relating to, and the other requirements of that natural resources exception. As already mentioned, the chapeau of Article XX the second step in the exception analysis will be discussed in the next chapter. B. THE MEANING OF NECESSARY Three of the Article XX exceptions are available to states only if the measure at issue is necessary to achieve some specified objective. In XX(a) it must be necessary to protect public morals, in XX(b) it must be necessary to protect human, animal, or plant life or health, and in XX(d) it must be necessary to secure compliance with domestic regulations. The meaning of necessary has been interpreted in several cases, including the two presented below, Brazil Tyres and EC Asbestos. 1. Brazil Tyres Brazil adopted a ban on the importation of retreaded tires. These are tires produced by reconditioning used tires by stripping the worn tread and replacing it with new material. The European Communities complained that these Brazilian measures violated a number of GATT obligations, including the most-favored-nation (Article I), national treatment (Article III), and quantitative restrictions (Article XI) obligations. Brazil did not contest that its measures were inconsistent with these provisions. It argued instead that its measures were justified under Article XX(b) as measures to protect human and animal life or health. 2. Id., 6.20.

Chapter 14 General Exceptions: The Chapeau of GATT Article XX The previous chapter examined the specific exceptions contained within Article XX of the GATT. These include exceptions for public morals (GATT XX(a)), life or health (GATT XX(b)), domestic laws or regulations (GATT XX(d)), and natural resources (GATT XX(g)). To qualify as an exception under Article XX, however, a measure must do more than satisfy one of the specific provisions. It must also satisfy the Article XX chapeau, which provides as follows: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:... Key Legal Provision GATT XX A. INTRODUCTION TO THE CHAPEAU Three requirements contained in the chapeau are apparent from its text. Specifically, the measure at issue must not: 1. Be applied in a manner which would constitute a means of arbitrary discrimination between countries where the same conditions prevail; 2. Be applied in a manner which would constitute a means of unjustifiable discrimination between countries where the same conditions prevail; or 3. Be a disguised restriction on international trade. The chapeau to Article XX was discussed by the Appellate Body in its first ever decision: United States Gasoline. Though less important to our understanding of the chapeau than the United States Shrimp case excerpted later in this chapter, the United States Gasoline case is a good starting point. 391

Chapter 15 Subsidies and Countervailing Duties Up until this point in the book, we have reviewed many of the basic rules governing international trade, including the four key principles of the WTO system: (i) the binding of tariffs; (ii) the prohibition of quantitative restrictions; (iii) the national treatment principle; and (iv) the most-favored-nation principle. We have also examined some of the exceptions to these rules, including those for preferential trading arrangements and those provided in Article XX of the GATT. There is an additional broad class of deviations from WTO obligations that are extremely important to the functioning of the trading system and the policy decisions of states. This group of trade measures is often called trade remedies. The term trade remedies refers to three kinds of trade measures that countries can justifiably use to restrict imports: countervailing duties, anti-dumping duties, and safeguards. In brief, countervailing measures, examined in this chapter, are import duties imposed in response to certain subsidies provided to exporters by their governments, when the latter cause or threaten material injury to industries in the importing state. Anti-dumping duties are import duties imposed in response to pricing practices of private firms that are deemed to be unfair and that cause or threaten material injury to an industry in the importing state. Finally, safeguards are import measures (usually tariffs or quotas) imposed in response to a surge in imports that causes or threatens serious injury to a domestic industry. We examine these measures and the rules that govern them in the following three chapters, beginning with this chapter on countervailing duties. As mentioned above, countervailing duties (CVDs) are permitted, under certain conditions, in response to a subsidy provided by an exporting state. CVDs, however, are only one possible response to a subsidy the other is a complaint through the DSU. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) uses what many refer to as a three-pronged traffic-light system : (1) Export subsidies and subsidies contingent on the use of domestic products (SCM Article 3) are prohibited; these are prohibited subsidies or red light subsidies (which can be challenged directly at the DSU or be subject to CVDs where the conditions for CVDs are met); (2) Subsidies that are not specific or that offer specific forms of assistance for research activities, disadvantaged regions or adaptation to 425

426 Chapter 15. Subsidies and Countervailing Duties new environmental requirements (SCM Article 8) are explicitly permitted and cannot be challenged at the DSU, nor can they lead to countervailing measures; these are non-actionable subsidies or green light subsidies; (3) All other subsidies are not as such prohibited but can be countervailed or challenged directly at the DSU when the applicable conditions are met (SCM Article 5, e.g., when they are specific and have adverse effects on other WTO members); these are actionable subsidies or orange light subsidies. Crucially, however, as of January 1, 2000, the class of non-actionable (or green light ) subsidies has lapsed (pursuant to SCM Article 31). All of these subsidies are now technically also actionable and, if and when the conditions are met, could lead to countervailing duties or successful DSU challenges. In this chapter, we further discuss prohibited subsidies in section C, and actionable subsidies in section D. Given that the class of non-actionable subsidies no longer exists, we do not further elaborate on it in this chapter, although the obvious question remains: should WTO negotiators create a new green box and if so, which subsidies should be put into it? When considering this question, note that the SCM Agreement does not have a GATT Article XX-type exception. Some have, however, argued that GATT Article XX might justify also violations of the SCM Agreement, an issue that remains undecided. Key Legal Provisions SCM 1.1(a)(1)(i-iii), (b), 1.2 2.1(a-c), 2.2, 2.3, 3.1(a-b), 5(a-c), 6.3, 10, 15.1-15.5 GATT VI:3, 6(a) A. DEFINING AND REGULATING SUBSIDIES To legally impose CVDs or to successfully pursue a case at the WTO requires that there be a subsidy, and so that is where we begin our examination of the relevant legal provisions. The key legal language is found in the Agreement on Subsidies and Countervailing Measures. The first thing to note about subsidies is that they are generally permitted under the GATT. One might think that a subsidy that is reserved only to domestic production would be a violation of the national treatment provisions (in that it discriminates imports), but Article III.8(b) provides explicitly that Article III shall not prevent the payment of subsidies exclusively to domestic producers. 1 During the Uruguay Round, however, the member 1. Article XVI of the GATT provides some rules governing subsidies, but it is neither clear nor comprehensive and the SCM Agreement has effectively supplanted those provisions.

Chapter 18 Agreement on Sanitary and Phytosanitary Measures In earlier chapters of this book, we addressed the core rules on trade in goods (tariff bindings, national treatment, MFN, etc.) as well as the core exceptions to those rules (regionalism, environment, national security, etc.) as they are set out in the GATT. As we discussed earlier, with the creation of the WTO in 1994, these core GATT provisions were supplemented with more detailed rules on trade in goods in specific sectors. We already referred in previous chapters to some of the basic principles set out in some of these specific agreements (such as the Agreement on Agriculture, Chapters 7 and 8, the now defunct Agreement on Textiles and Clothing and, of course, the special agreements on trade remedies). In this chapter and the next we devote special attention to two crucial and highly sensitive WTO agreements that address non-tariff barriers: the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), focused on restrictions to protect human, animal, or plant life or health against food-borne risks or pests or diseases, addressed in this chapter; and the Agreement on Technical Barriers to Trade (TBT), addressing all other technical regulations, standards, and procedures allegedly imposed with a non-trade objective in mind (be it national security, safety, preventing deceptive practices, or environmental protection), discussed in the next chapter. The core feature of both the SPS and TBT Agreement is that each imposes limits on non-tariff barriers to trade that go beyond non-discrimination (e.g., the science-based requirements in the SPS Agreement; the not-more-trade-restrictive-than-necessary test in the TBT Agreement). Key Legal Provisions SPS 2.1-2.4, 3.1-3.3, 5.1-5.7, SPS Annex A.1(a-d), A.3(a-d), A.4 A. THE HISTORY AND SCOPE OF THE SPS AGREEMENT Though the SPS Agreement has led to controversy, there is no disagreement about the basic need for an exception that allows states to exclude from their 531

Chapter 19 Agreement on Technical Barriers to Trade In the previous chapter, we addressed sanitary and phytosanitary measures and the SPS Agreement that attempts to discipline their use. SPS measures can be seen as a special class of NTBs, imposed to protect life or health and generally speaking to be based on science. The TBT Agreement covers a broader group of NTBs including safety standards, labelling requirements, etc. Notice in this respect TBT Article 1.5, which provides that the TBT Agreement does not apply to sanitary and phytosanitary measures as defined in Annex A of the Agreement on the Application of Sanitary and Phytosanitary Measures. Modern states impose a blizzard of requirements relating to how products are made or the characteristics they must possess. Such requirements may be established to protect the environment, to protect human health and safety, to improve national security, to provide consumers with information, and so on. Examples of measures that would be considered technical regulations or standards (and so are subject to the TBT Agreement) include certain kinds of labelling requirements, requirements regarding the voltage of electrical products, safety requirements for cars, and recycling requirements on packaging. This broad range of technical regulations and standards forces the definitions used in the TBT Agreement to be somewhat abstract. As defined in Annex 1, a technical regulation lays down mandatory product characteristics or their related process and production methods. In contrast to a regulation, a standard, as that term is used in the TBT Agreement, is voluntary. The TBT Agreement also applies to so-called conformity assessment procedures to determine whether technical regulations or standards are met. In this chapter, we focus on TBT obligations with respect to technical regulations (subject, in particular, to TBT Article 2). Standards are subject to the weaker formulated TBT Article 4 which, in turn, refers to a Code of Good Practice (annexed to the TBT Agreement) which is open to acceptance by any standardizing body within the territory of a Member of the WTO, whether a central government body, a local government body, or a non-governmental body. In addition to understanding the definition of a technical regulation, it is necessary to get a sense of how the TBT s key substantive provisions are applied. These include National Treatment and MFN obligations (Article 2.1) and the obligation that technical regulations not be more trade-restrictive than necessary to fulfil a legitimate objective (Article 2.2) and use international standards as a basis (Article 2.4). Key Legal Provisions TBT 1.5, 2.1, 2.2, 2.4 TBT Annex 1.1, 1.2

Chapter 20 Trade in Services As you have no doubt noted, the historic focus of international trade law has been on goods, rather than services. Interest in liberalizing trade in services (think of, for example, banking, telecommunication, or insurance services) began to grow in the late 1980s. This interest culminated in the General Agreement on Trade in Services (GATS) at the establishment of the WTO in 1994. Combined with the equally new Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), discussed in the next chapter, the old GATT, which dealt exclusively with trade in goods, was thereby transformed into a new WTO composed of three core pillars: goods, services, and intellectual property rights. This chapter begins with some background information about trade in services and the impact of liberalization. It then moves to a description of the GATS, followed by a discussion of the (limited) WTO case law regarding services. Key Legal Provisions GATS I:1, 2, II:1, 2, III:1, XIV (General Exceptions), XVI, XVII A. BACKGROUND TO THE SERVICES INDUSTRY AND TRADE IN SERVICES PROTECTION AND TRADE IN SERVICES: A SURVEY 1 Bernard Hoekman & Carlos A. Primo Braga Until recently, trade in services was mostly ignored by international economists, reflecting a perception that services were nontradable. This has never been accurate: transportation and travel, for example, have always been important economic activities. Since the early 1980s, however, international service transactions expanded rapidly as new modes of supply have materialized, as 1. World Bank: Policy Research Working Paper No. 1747 (March 1997), at pp. 25-26, available at http://www.worldbank.org/html/dec/publications/workpapers/wps1700series/wps1747/ wps1747.pdf. 593

Chapter 21 Trade-Related Aspects of Intellectual Property Rights As announced in the introduction to the previous chapter on trade in services (GATS), with the creation of the WTO in 1994, the scope of the multilateral trading system expanded from trade in goods to a system built on three pillars: trade in goods (the bulk of WTO rules, as well as of this book), trade in services (covered in the previous chapter), and the protection of intellectual property (IP) rights. The inclusion of IP standards in the WTO treaty was heavily pushed by countries such as the United States, Japan, the EC, and Switzerland. Developing countries, on the other hand, originally objected to such expansion (they viewed it as an agreement that essentially involves money flows from poor countries to rich countries). Ultimately, it was included as part of the single undertaking of the Uruguay Round. We start this chapter with a general background on IP and how it was included in the WTO treaty. We then turn to a basic explanation of the TRIPS Agreement and provide an overview of the limited case law decided under the TRIPS Agreement to date (nine panel reports, only three of which reached the Appellate Body 1 ). Next, we delve into what is no doubt the most controversial TRIPS topic so far, namely, patent protection and access to essential medicines in developing countries. We end with a short section on the protection of traditional knowledge and the TRIPS Agreement to illustrate the many open questions under, and sensitive nature of, the TRIPS Agreement. Key Legal Provisions TRIPS 1.1, 3.1, 4, 9.2, 12, 13, 15.1, 15.3, 16.1, 17, 18, 22.1, 27.1, 30, 31, 41.1 Declaration on the TRIPS Agreement and Public Health TRIPS Waiver of 2003 Amendment of the TRIPS Agreement, Article 31bis * 1. Indonesia Autos, India Patent (US) (with appeal), India Patent (EC), Canada Pharmaceutical Patents, United States Copyright, Canada Patent Term (with appeal), United States Havana Club (with appeal), EC Trademarks/GIs, and China IP Rights. * All of these TRIPS-related documents are included in this book s documents supplement. 631