International Trade News

INSIGHT: Real WTO Reform Now Possible With Demise of Appellate Body

Dec. 20, 2019, 9:01 AM

The World Trade Organization Appellate Body is now officially defunct. With a Dec. 11 deadline passing without action, it has been reported that the head of the WTO is looking to a summer 2020 meeting as the deadline for making progress on a fix. Any “fix,” however, must bring the institution back to its original purpose as a forum to negotiate resolution of trade disputes.

Almost since its inception, real concerns have been raised regarding the overreach of the dispute settlement system, including the Appellate Body. Now, three consecutive administrations have voiced serious concerns regarding the Appellate Body’s overreach.

While most WTO members recognize the system is broken, some members like the EU prefer maintaining some type of super-national global trade court to resolve disputes. This misses the point entirely. It is the existing binding dispute resolution system currently embodied in the Appellate Body that largely undermines the WTO’s ability to achieve its principal purpose—negotiated agreements.

Rather than negotiating reforms for addressing the distortive effects of China’s state-directed economy or reforms for regulating e-commerce, which may necessitate a single undertaking whereby parties trade-off between sectors as necessary lubricants for a deal, members choose to litigate outcomes to gain additional rights and obligations that do not exist in the agreement.

Thus, rather than furthering the stated aims of the organization by reducing trade barriers through negotiation, it is little more than an unconstrained litigation forum enriching lawyers and creating a self-sustaining, Geneva bureaucracy with no effective oversight. As such, the utility of the entire dispute settlement system as currently constructed must be questioned.

Back to Original Intent

Contrary to the gnashing of teeth with the impending demise of the WTO’s Appellate Body, a reversion to nonbinding dispute settlement without an Appellate Body would return the WTO to its original intent—an organization to further negotiated reductions in trade barriers.

The discussion around the impending demise of the Appellate Body has been driven principally by feeling, rather than empirical analysis. The end of the Appellate Body, however, does not mean an end to a rules-based trading system. To the contrary, the Bretton Woods trading system functioned without binding dispute settlement. Nonbinding dispute settlement forced parties to negotiate a resolution to disputes.

By contrast, the current system has stymied nearly all negotiation and instead allows countries to utilize the Appellate Body to create new obligations in the WTO Agreement that were not negotiated or agreed to. As a result, there is no incentive for parties to negotiate.

Instead of taking as gospel that binding dispute settlement has positive effects on trade flows, recent analyzes tell a very different story. Work by researchers at the University of Arizona the University of California, Davis challenges these preconceived notions. Their research is in its early stages and covers the first 400 disputes, but what they are finding so far is surprising.

Preliminary analysis suggests that resolving disputes does not actually increase trade flows. This undermines the very premise that binding dispute settlement leads to a removal of trade barriers. The researchers point out that there could be many explanations. For example, they are measuring aggregate trade flows, and thus trade between the litigants may be increasing while trade with other parties declines.

The research also shows that compliance with WTO decisions, in the aggregate, began to drop around the time of the 160th dispute. This decline appears to be related to the issuance of the first of the infamous “zeroing” decisions. This decision is a prime example of WTO members refusing to abandon “zeroing” in antidumping calculations when negotiating the agreement, only to have the Appellate Body create rights and obligations that are not found in the agreement.

This type of impermissible gap filling outside of negotiations was the beginning of the long-slow erosion of the institution. If members could seek additional rights through litigation instead of negotiation, noncompliance becomes the only recourse.

WTO Has Struggled to Conclude Trade Agreements

The WTO has struggled to do that which it was created to do: conclude trade agreements. The atrophy of the negotiating arm of the WTO is not surprising when placed in the context of the Appellate Body’s overreach. What incentives do members have to reach agreements in a world where the Appellate Body is going to fill-gaps, regardless of what members did or did not agree to?

The rules that govern the Appellate Body were meant to forestall just this outcome. Those rules provide that the dispute settlement system “cannot add to nor diminish the rights and obligations” agreed by the members. By respecting these negotiated outcomes, the dispute settlement system is a “central element in providing security and predictability in the multilateral trading system.” By departing from these rules, the Appellate Body has sowed the seeds of instability and insecurity.

There are calls for new rules to solve the problem, but if the Appellate Body considers itself above the rules to begin with, then it is difficult to imagine how a new suite of rules would change that fundamental issue. New rules, just like the old rules, can be ignored.

The dispute settlement regime that prevailed under the General Agreement on Tariffs and Trade was not perfect, but it was not the law of the jungle. That regime valued negotiations and diplomacy above litigiousness and hostility.

WTO members have a clear understanding of the corrosive effects of the Appellate Body. The head of the WTO speaks about a summer 2020 meeting as the deadline for achieving progress on a “fix.” Replacing the Appellate Body with another super-national trade court, however, does not “fix” the problem.

Perhaps the best “fix” is for the Appellate Body to cease to exist. Only then can we return to a common-sense system based on diplomacy and negotiation.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Alan H. Price is chair of Wiley Rein’s International Trade Practice with over 30 years of experience in international trade disputes.

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