Dispute Settlement System of World Trade Organization: Development and Functionality

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The quest for peace and security after the ramifications of the Second World War, led to the birth of a global economic collaboration to facilitate international trade. The World Trade Organization (WTO) came about as the successor to General Agreement on Tariffs and Trade (GATT), integrating 164 member countries to deal with the regulation of efficacious trade between the nations.

The purpose of the WTO has been primarily based on offering a system of international commerce, ensuring smooth and free international trade.  It was institutionalized as the world’s foremost global trading body in 1995, thereby taking over the position of GATT. The current set of directives are rooted in the Uruguay Round of GATT negotiations, which took place from 1986 to 1994.

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The Dispute Settlement System of the World Trade Organization (WTO) has been renowned as the “Jewel in the Crown” of the WTO. It provides for a mechanism that has led to binding third-party adjudication of disputes. The institution performs at the same level as a court of international trade, and has handled close to 600 cases in all these years of its existence.

It provides for its own rule of law, practices a compulsory jurisdiction, and parties to the settlement are bound by its decisions. It further allows every Member State of the World Trade Organization to actively raise complaints against measures violating the WTO Agreement. However, private individuals and companies cannot be a party to any dispute under the same.

Historical Perspective

In 1955, Director-General of GATT, Eric Wyndham-White influenced a shift in the procedural rules of dispute settlement.  Disputes were now referred to a panel of three to five experts acting as individuals, rather than to a working party composed of government representatives.

A perceptible move saw the transition from a negotiating atmosphere of multilateral diplomacy to a more arbitrational procedure constituted to yield the true sense of facts, and the best interpretation of law.

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The institutional weakness of GATT led to the Tokyo Round of multilateral trade negotiations between 1973 and 1979. The inherent problems in the dispute settlement system under GATT left the contracting parties struggling with a system that was in dire need for consequential change. As a result of the same, 102 nation states carried out what was known to be the most comprehensive round of negotiations within GATT since its inception in 1948.

The signing of Marrakesh Agreement in 1994 was a conclusive effect of the Uruguay Round of negotiations successfully coming to an end. It marked the end of a fifty year long run for GATT, and a significantly robust dispute settlement system came forth with the establishment of the World Trade Organization.

The mechanism provided a structured procedure for every stage of a dispute, including specified time-frames and an integrated framework to prevent individual parties from blocking the establishment of panels or adoption of a report as a statutory right.

The Dispute Settlement Mechanism consists of two tiers:

  • Tier one mandates for the disputes to be adjudicated by ad-hoc panels, primarily those dealing with a particular issue.
  • Tier two is WTO’s appellate mechanism, also known as the ‘Appellate Body’. A decision formulated by the Appellate Body is binding on all Members Party to the dispute.

Functions of WTO Dispute Settlement System

The Dispute Settlement Understanding (DSU) is the legal basis of WTO Dispute Settlement System, and it modifies and elaborates upon the previous rules as provided under GATT, 1947.

A procedure for settlement of disputes existed under the same, with Article XXII dealing with consultation as a pre-requisite for invoking procedure and Article XXIII dealing with nullification or impairment. DSU has effectively improved upon the existing system to make it quasi-judicial in nature.

  1. Prompt Settlement of Disputes under the Dispute Settlement Understanding         

A pivotal feature of the WTO dispute settlement system is the short time frame within which the proceedings of both panels and Appellate Body are bound to be completed.

The time frame for consultations and implementation are strictly regulated. The panel proceedings are to be discharged within nine months, which is the specified time frame provided under Article 12.9 of the DSU.

  • The primary objective of the system is not to make rulings.

Adjudication is to be used only when the parties cannot work out a solution. Instead, the dispute settlement mechanism aims for mutually accepted solutions. To promote the same, the system requires formal consultations as the first stage of any dispute.

  • Dispute Settlement Body (DSB) is a Crucial ‘Voice’ Mechanism

It provides a centralized forum for members of the World Trade Organization to express any discontent with the operation of the dispute settlement system, and, specifically the decisions of the adjudicators.

Furthermore, panels have discretionary authority either to accept and consider or to reject unsolicited information from non-governmental sources, subject to not unduly delaying the panel process.

  • Compliance-Monitoring Mechanism

Article 21.6 of the Dispute Settlement Understanding (DSU) lays down the foundation for a tool to impose surveillance and implementation of adopted recommendations or rulings.

The compliance-monitoring function is a distinctive feature of the dispute settlement mechanism as compared to many other international courts and tribunals, where there is no centralized mechanism for monitoring compliance after a final judgment is given.

By default, the rule provides for the issue of implementation of recommendations or rulings to be placed on the agenda of the Dispute Settlement Body six months after the reasonable period of time for compliance is established. The issue continues to remain on the agenda at each meeting until the issue of implementation is resolved thereby.

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  • Socializing Mechanism

The Dispute Settlement Body carries out an important function of socializing members into the process of dispute settlement, by holding regular meetings and internalizing norms and practices of the World Trade Organization in general. Socialization is, most basically, the ‘process of inducting actors into the norms and rules of a given community’.

  • Legal Assistance

The Dispute Settlement Understanding (DSU) recognizes the need to provide additional legal advice and directions to Developing Country Members. Article 27.2 of the DSU requires that WTO secretariat make qualified legal experts available to help any Developing Country Member that so requests.

For instance, the Appellate Body Ruling in EC-Bananas III case held clearly that the WTO Members can be provided with assistance by private counsel in dispute settlement proceedings.

The Appellate Body iterated in its ruling, that representation by a counsel of a Government’s own choice is of significance to developing country members so as to enable them to participate extensively in dispute settlement proceedings.

In a recent contemporary development, China alleged that US violated the provision of most-favored treatment set out under the rules of the World Trade Organization, wherein it had failed to provide the same tariff treatment in terms of trade between all member nations.

The US Government reiterated upon the widespread violations of intellectual property rights and transfer policies on the part of the Chinese government as a force behind the decision. However, a panel consisting of three trade experts under the dispute settlement body of the World Trade Organization have now held that US indeed violated international rules.

In conclusion…

The defects of GATT 1947, such as absence of an institutional machinery and its pragmatic approach towards settlement of disputes undermined the whole system. GATT enabled parties to block decisions with which they disagreed, and implementation of the decision was impeded by a “political filtering” process. Constant political legitimization of the end result operated as a check against the process of effective dispute settlement.

But today, the changes brought about including establishment of panels, and Appellate Body reports, monitoring implementation of rulings, and authorizing the suspension of concessions, have impacted the arena of dispute settlement positively under the WTO.

Its quasi-judicial and quasi-automatic character enables it to handle more difficult cases, with half the cases being settled even before they reached a panel. It deserves high marks for the quality of its jurisprudence, and for successfully attaining what it had set out to achieve.

Furthermore, while many scholars continue to put forth that the system is being faced with an existential crisis, developing countries like India are working towards a global presence in international trade.

The current scenario is now challenging the member countries in terms of arbitrary exercise of restrictions, which have been the driving force behind the toppling of the World Trade Organization lately. The Trump administration blocked new appointments to the appellate body, holding that it had overstepped its mandate.

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The US also threatened to block the WTO’s budget, accusing the same of being unfair towards US in particular. However, most recently, BRICS Foreign Ministers (a bloc comprising Brazil, Russia, India, China and South Africa) have emphasized upon the restoration of World Trade Organization’s Dispute Settlement System to reaffirm a transparent and strengthened multilateral trading system.

Author: Deepanshu Verma, Law Student.

Editor: Astha Garg, Junior Editor, LexLife India.

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