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Published: Fri, 02 Feb 2018

WTO Dispute Settlement System and Developing Countries

The creation of just, acceptable and satisfactory solutions to arising problems and disputes are the things I always found most significant and appealing within the notion of jurisprudence. From my perspective, dispute settlement is one of the basic constituents when practicing law. The World Trade Organization (WTO) dispute settlement system is distinctively intriguing since the outcome strikes different countries in different ways.

The WTO dispute settlement system which in 1995 succeeded the system under GATT 1947 is one of the major developments in the international trade dispute settlement. It fosters a rule based dispute settlement system as opposed to a power based system. However, the system still has a weak enforcement mechanism. Some commentators say that this was an outcome of a compromise between the negotiators. On one hand, they wanted a strong dispute settlement system and on the other they wanted a weaker enforcement mechanism. This was to balance the interests of negotiators who were aware that their countries may be involved in WTO dispute settlement as both complainants and defendants, so they wanted to insulate themselves from both sides. As complainants, they wanted their case to be heard under a rule based system and as defendants they wanted to have the policy space not to implement the Dispute Settlement Body (DSB) rulings which are politically sensitive or which are against their interests.

Thus it should be clear from the onset that a weak enforcement mechanism was intended and was an outcome of a compromise. Although the enforcement system is weak, developed countries are able to use it against each other and against developing countries.

They can effectively use retaliation, or the threat of retaliation, in most cases. On the contrary, developing countries cannot effectively use retaliation against developed countries due to the fact that their economies are weak. The main problem therefore is that developing countries are left without any effective remedy in the WTO dispute settlement. This study seeks to explore the challenges which are faced by developing countries in enforcing DSB recommendations and rulings and to suggest for mechanisms which should be put in place to assist developing countries when their rights are breached by developed countries.

The second problem with the DSU is that the remedies provided by it are only prospective in nature. The current remedies only focus on inducing compliance instead of focusing on compensating for the loss which has been incurred by the complainant. Thus presently the compensation is quantified from the time when the reasonable period to implement DSB rulings lapses. It does not seek to compensate the injured party from the initial date of infringement. This in turn gives the responding parties an incentive to delay the dispute settlement proceedings as much as they can while benefiting from an infringement of WTO Agreements. This aspect of the DSU is unfair and trade restrictive and therefore needs to be amended in order to improve the implementation and enforcement of DSB rulings.

Aims of the Research

This Dissertation will:

  1. examine the process of implementation and enforcement of DSB recommendations and rulings.
  2. investigate the trend of non compliance with DSB recommendations and rulings where a complainant is a developing country.
  3. evaluate the effectiveness of the remedies available under Dispute Settlement System.
  4. seek to critically analyse proposals which have been tabled by Members for the reform of implementation and enforcement of DSB rulings during the ongoing DSU reform negotiations.
  5. make recommendations for the DSU reform in relation to the implementation and enforcement system of the DSB recommendations and rulings.

Significance of the Research

The significance of this study is based on the problems highlighted above. This research on the challenges faced by developing countries in the implementation and enforcement of the remedies available under Dispute Settlement System is important especially at this moment where more than two thirds of WTO Members are developing countries. It is important for negotiators and policy makers from developing countries to understand the challenges they are facing and accordingly suggest feasible improvements pertaining to the WTO dispute settlement system. With such an understanding, the participation of developing countries is likely to increase not only during the negotiation processes but ultimately in the dispute settlement process as well. This in turn ensures the security and predictability of the Dispute Settlement System, which is the cornerstone of the WTO dispute settlement system.

Research Hypothesis

This dissertation will argue that the DSB enforcement mechanism is not effective in ensuring compliance with recommendations and rulings especially when the complainant is a developing country. Remedies available under the DSU cannot be utilised effectively by developing countries. This aspect of the enforcement mechanism fails to take in to account the interests of developing countries thus calls for a reform of the system with a view to affording effective remedies to developing countries.

Scope

The subject of Dispute Settlement System is very vast. Due to limited space/word count this dissertation will mainly focus on compensation and retaliation provisions as remedies and critically discuss how these can be improved so that developing countries can also have effective legal redress under the WTO Dispute Settlement System. Thus this research will mainly focus on substantive issues rather than procedural issues, of implementation and enforcement of DSB recommendations and rulings.

Methodology and the Overview of the Chapters

This study shall basically be based on the analysis of the relevant available literature on the subject matter. The research shall rely on both primary and secondary sources of the WTO Law. Primary sources will be comprised of the WTO covered Agreements, WTO cases and WTO case statistics.

On secondary sources reference will be taken from various background papers, books, and academic or scholarly articles. Various internet sites will be consulted for relevant up to date data and information. In this pursuit, the current information available on the WTO website is imperative to keep track of the development within the area.

This dissertation is comprised of seven chapters. The first chapter gives an introduction to the topic; the second chapter gives an overview of the objectives and functions of the WTO and also explains, who are the developing countries in the WTO?; the third chapter focuses on the substantive issues relating to the implementation and enforcement of DSB rulings and recommendations, namely compensation and retaliation; the fourth chapter explores the problems with these remedies; chapter five discusses the inequalities in the WTO dispute settlement mechanism; chapter six discusses proposals for reform and is followed by recommendations and conclusion in chapter seven.

Chapter 2

The World Trade Organization (WTO) is the only body making global trade rules with binding effects on its Members. It is not only an institution, but also a set of agreements. The WTO regime is known as the rules based multilateral trading system. The history of the Organization dates back to 1947, when the General Agreement on Tariffs and Trade (GATT), was set up to reduce tariffs, remove trade barriers and facilitate trade in goods. Over the years, GATT evolved through eight rounds of multilateral trade negotiations, the last and most extensive being the Uruguay Round (1986 1994). The WTO came into being at Marrakesh on 1 January 1995, following the conclusion of the Uruguay Round. GATT then ceased to exist, and its legal texts were incorporated into the WTO as GATT 1994.

Objectives and functions of the WTO

(A) Objectives

The reasons for establishing the WTO and the policy objectives of this international organisation are set out in the Preamble to the WTO Agreement. According to the Preamble, the Parties to the WTO Agreement agreed to the terms of this agreement and the establishment of the WTO:

“Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development,

Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development.”

Thus the ultimate objectives of the WTO are:

the increase of standards of living;

the attainment of full employment;

the growth of real income and effective demand; and

the expansion of production of, and trade in, goods and services.

However, it is clear from the Preamble that in pursuing these objectives the WTO must take into account the need for the prevention of the environment and the needs of developing countries. The Preamble stresses the importance of the sustainable economic development. The Preamble also stresses the importance of the integration of developing countries, and in particular least developed countries, in the world trading system. Both of these aspects were absent from the Preamble of the GATT 1947.

The Preamble to the WTO also states that there are two main instruments, or means, to achieve the objectives of the WTO:

the reduction of trade barriers and other barriers to trade; and

the elimination of discriminatory treatment in international trade relations.

The reduction of the trade barriers and elimination of discrimination were also the two main instruments of the GATT 1947, but the WTO Agreement aims at constituting the basis of an integrated, more viable and more durable multilateral trading system.

(b) Functions

The primary function of the WTO is to:

“provide the common institutional framework for the conduct of the trade relations among its Members in matters related to the agreements and associated legal instruments included in the Annexes to [the WTO] Agreements.”

However, the WTO has been assigned six widely defined functions.

Article III of the WTO Agreement states:

The WTO shall facilitate the implementation, administration and operation, and further the objectives, of this Agreement and of the Multilateral Trade Agreements, and shall also provide the framework for the implementation, administration and operation of the Plurilateral Trade Agreements.

The WTO shall provide the forum for negotiations among its Members concerning their multilateral trade relations in matters dealt with under the agreements in the Annexes to this Agreement. The WTO may also provide a forum for further negotiations among its Members concerning their multilateral trade relations, and a framework for the implementation of the results of such negotiations, as may be decided by the Ministerial Conference.

The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement of Disputes (hereinafter referred to as the “Dispute Settlement Understanding” or “DSU”) in Annex 2 to this Agreement.

The WTO shall administer the Trade Policy Review Mechanism (hereinafter referred to as the “TPRM”) provided for in Annex 3 to this Agreement.

With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate, with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies.

In addition to the function of the WTO explicitly referred to in Article III of the WTO agreement, technical assistance to the developing country Members, to allow the later to integrate in to the world trading system, is, undisputedly, also an important function of the WTO.

Who Are the Developing Countries in the WTO?

Identifying which country is a developing country is always a difficult problem in the world trading system. Neither the WTO agreement nor GATT 1947 regime has made a precise legal definition for the term “developing country”. It is widely believed that the basic method of designating a developing country Member in the WTO is “self designation”. The WTO web page titled “Who are the developing countries in the WTO?” states:

There are no WTO definitions of ‘developed’ and ‘developing’ countries. Members announce for themselves whether they are ‘developed’ or ‘developing’ countries. However, other members can challenge the decision of a member to make use of provisions available to developing countries.”

In principle, any WTO Member can designate itself as a developing country Member. Actually, all countries have chosen to do this at least once, with the exception of the European Community (EC), the United States, Canada, Japan, Switzerland, Norway, Australia and New Zealand. Although “self designation” is considered to be the basic method of designating developing country Members, some other methods are also used, and are often used along with “self designation”, which attract less attention but are also important. In fact, the claim that “self designation” by “Special and Differential Treatment” (SDT) beneficiaries is the basic method of identifying developing country Members is quite misleading. In practice, SDT grantors have more power than grantees in identifying developing country Members, which derogates from the effect of SDT provisions. No matter which method is applied, certain quantitative criteria need to be used by both the Member claiming it is a developing country and other Members that challenge the claim to support their arguments.

Special and Differential Treatment and the Difficulty of Defining Developing Countries

(a) Special and Differential Treatment

The cornerstone of the GATT/WTO system is the most favoured nation (MFN) treatment. The spirit of MFN treatment is non discrimination: WTO Members have legal obligations to accord the equal benefit to all other WTO Members in principle. An important exception to the MFN principle is the SDT granted to developing countries. This exception has been enshrined by the Enabling Clause. The aim of SDT provisions is to better integrate developing countries into the world trading system and to facilitate development. Given the limited resources available to developing countries, they would be deterred from being involved into the process of trade liberalization without SDT. In order to fulfil the objective of SDT, however, it will be necessary to identify who should be given such treatment. There is a vast amount of literature discussing why SDT should be given.

Traditionally, the GATT was dubbed as “the rich men’s club”, and developing countries were very critical of the GATT. As more and more countries, mostly developing countries, join the GATT/WTO, developing countries now constitute a large majority of the WTO Membership. However, most developing countries have little influence on the world trading system. To attract developing countries to fully integrate themselves into the world trading system, certain SDT need to be given for the following reasons. For instance, poor countries have limited resources to train experts in complex WTO rules. Rich countries may send representatives to sit in all commissions, committees, councils and bodies in the WTO, but small, poor economies just cannot afford it. The lack of resources may also limit developing countries’ use of the Dispute Settlement Mechanism (DSM) of the WTO.

To compensate for such a disadvantage of developing countries, SDT provisions are important. The WTO Members can help developing countries to train professionals and build up their own trade regulation systems. SDT may also increase the benefits and decrease the costs for developing countries to be involved in the WTO, especially to help them make better use of the DSM.

(b) Difficulty of Defining Developing Country Members

As mentioned above, the WTO has no well defined definition of developing country Members. Some WTO Members have consistently proposed to give developing country Members an operational definition. However, a widely agreed definition has never come out. Why is it so difficult to make such a definition?

1. Heterogeneity of developing countries

Developing countries are different in many aspects. Some countries such as South Korea have GDP per capita close to USD 20,000, but other countries such as East Timor have only GDP per capita as low as USD 400.29 Some countries are growing very fast: Equatorial Guinea has long been treated as a developing country and its GDP per capita was still below USD 1000 in 1989, but by 2005, its GDP per capita had become USD 50,200, one of the richest in the world. Other countries such as Zimbabwe and Maldives have had negative growth rates. Some developing countries, such as Brazil, India, and China are very big in size while a number of developing countries are tiny. Developing countries are also different in their social and political aspects. While some developing countries have working democratic regimes, others have questionable sustainability with regard to their economic development, because, even though their economies are growing, their democracies are still very immature.

The significant heterogeneity of developing countries causes difficulty in defining developing country Members not only because it may be difficult to find consistent and sufficient technical criteria for the definition, but also because developing countries in different situations have different or even conflicting interests. When too many countries are treated as developing countries, the countries that really need SDT may not get enough preference to support their development.

2. Dynamic change of economic performance

Every country tends to experience ups and downs in its economic development. Sometimes these ups and downs can be so dramatic that a country such as Equatorial Guinea can be changed from one of the poorest countries into one of the richest countries within a period of time as short as 15 years. South Korea, Taiwan, Hong Kong and Singapore also metamorphosed from poor economies into rich economies in a relatively short period of time. South Korea still claims it is a developing country, at least in the agriculture sector, at the Doha Development Agenda negotiations, although its GDP per capita is almost USD 20,000. Some countries, although enjoying healthy growth in some period, may have negative growth in other times. If some threshold criteria of “developing country” are made, some countries may well move on and off the list from year to year.

3. The complexity of the concept of “development”

The concept of “development” is as elusive as the definition of “developing country”. It is commonly believed that some criteria, other than national income level, should be considered to define “development”, but which ones should be included is always a question. Even for national income level, different choices of measures may render different results.

4. Intrinsic conflict between MFN and SDT

MFN treatment, based on the principle of non discrimination, is easy to define without much ambiguity. Most exceptions to MFN treatment in WTO are well defined because they only shrink the coverage of MFN treatment without derogating from its principle. But SDT intrinsically conflicts with MFN treatment. EU holds the view that SDT should be based on the principle of “different needs, different responsibilities”. If one holds onto this principle tightly and classifies all the trading countries according to their different needs, and allows a country to grant treatments accordingly, the MFN principle will not be sustained. On the contrary, if all the developing countries, maybe 90% of WTO Members, were to claim that they are developing countries and should be treated equally, hence South Korea and Somalia are treated the same way, the countries that most need SDT will not benefit much from it, as few developed countries will be willing to grant preferential enough treatment to so many developing countries. Finding a middle way is a difficult and subtle job.

Conclusion

One of the stumbling blocks of WTO negotiations is the relationship between trade and development. Developing countries argue that the SDT should be “mandatory and legally binding through dispute settlement system of the WTO”.

To make SDT provisions legally binding rather than just “best endeavour” provisions, a clear, predictable definition of “developing country Members” should be made.

Although some relatively advanced developing country Members such as India, Brazil and China may not be happy with it, the classification of developing countries into several categories is necessary. Classification is compatible with the rationale of SDT. If relatively underdeveloped countries should be given more favourable treatment than developed countries, the most underdeveloped countries should be given the most favourable treatment.

Chapter 3

Dispute Settlement under the WTO

The WTO Dispute Settlement System which came into operation in 1995 was innovative. It is governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). Its prime objective is the settlement of disputes between WTO Members concerning their rights and obligations under the covered agreements. There are two important policy considerations referred in the DSU namely, protecting the security and predictability of the DSS and satisfactory settlement of disputes. Jackson (2004) argues that these two policy issues may conflict with each other as sometimes the need to reach a satisfactory settlement may compromise the security and predictability of the dispute settlement system.

Bossche (2008) noted the following new innovations in the dispute settlement system : First, the quasi automatic adoption of requests for the establishment of panels, of panel reports and of the request to authorise suspension of concessions. Secondly, the strict time frames for various stages of the dispute settlement process and lastly, the possibility of appellate review of panel reports.

The DSB plays an important role in the WTO dispute settlement system. It is made up of all the representatives of every WTO Member and it deals with disputes arising under any of the WTO Agreements, and it does so in accordance with the provisions of the DSU. The DSU confers compulsory jurisdiction on the DSB for the purpose of resolving disputes. The DSB establishes dispute settlement, adopts reports from panels and the Appellate Body, maintains surveillance of implementation of rulings and recommendations it adopts, and authorizes the suspension of concessions and other obligations under the covered agreements, if its rulings and recommendations are not acted upon timely. It also deserves mention at this juncture that WTO reports are adopted automatically unless there is a consensus to the contrary.

Implementation and Enforcement of the DSB Recommendations and Rulings

Although there are many procedural aspects on the implementation and enforcement of the DSB rulings, this section will primarily deal with remedies available when the DSB ruling is in favour of the complainant. The remedies available in the WTO dispute settlement system are provided for in the DSU. The primary and preferred remedy is the withdrawal or amendment of a WTO inconsistent measure. However, sometimes the respondent may not be able to comply promptly and the complainant may have one of the following temporary remedies namely compensation and suspension of concessions or other obligations.

Compensation and Retaliation in Practice

(a) Compensation

From a pure economic view, compensation as it is used within the WTO today, is simply trade liberalisation. When for example, tariffs are reduced, economic welfare will increase in the respondent country, in the complaining country, and even in third countries which export the products whose import barriers have been lowered. Third importing countries will lose from terms of trade deterioration, but the world as a whole will be better off economically according to standard gains from trade theories. From this point of view, compensation should be the most used remedy within WTO simply because trade liberalization is one of the basic ideas within the organization.

Since the introduction of the DSU in 1995, the concept of compensation has not been used very frequently. There are several possible reasons why compensation as a remedy is rarely used in practice. This chapter will examine these reasons. First, compensation is voluntary, and the disputing parties have to agree on the solution. Second, the compensation must be consistent with the covered agreements. Conformity with the covered agreements implies consistency with the most favoured nation (MFN) principle found in article I of the GATT. Third, the current system on compensation may not provide for effective reparation of damages suffered by the complaining party.

The Voluntary and Agreeing Part

The voluntary aspect of the remedy combined with the fact that the parties have to agree on, not only to compensate and to get compensated, but also on the specific amount thereof, makes the concept contentious to use. In practice this has been very difficult since there is no actual way to force the non complying member to compensate. Another aspect is, since the compensation is voluntary, the respondent can end it at the same moment it reforms its WTO inconsistent regime, awaiting the outcome of any further action by the complainant under article 21.5 of the DSU. Hereby, the respondent would gain greater control of how the entire procedure would continue. Article 22 of the DSU states that if no satisfactory compensation has been agreed upon within twenty days after the date of expiry of the reasonable period of time, the complainant may request for authorization to retaliate.

Consistency with Covered Agreements (MFN treatment obligation)

The MFN treatment obligation requires a WTO Member that grants certain favourable treatment to another country to grant the same favourable treatment to all other WTO Members. A WTO Member is not allowed to discriminate between its trading partners by, for example, giving the products imported from some countries more favourable treatment with respect to market access than the treatment it accords to the product of other Members.

The obligation of consistency with the most favoured nation (MFN) principle adds another difficulty to the practical use of compensation. Hereby, members other than the complainant would also benefit if compensation is offered, for example, in the form of a lower tariff. In the end this would probably lead to the complainant asking for a larger degree of access to the market when discussing the compensation than if access was able to be provided only concerning the complaining party. Even though the new openness on the market would increase economic welfare for the respondent, the political economy of trade policy is such that the political leadership of the country would lose from such unilateral reform. Otherwise there would have been no incentive to create the import barriers from the first place. The obligation to offer compensation to all WTO members will in practice result in raised prices for the respondent and no exclusive benefit for the complainant. This will make the remedy less attractive to both of the disputing parties.

Reparation of damages

A breach of an international obligation under general international law leads to responsibility generating certain legal consequences. The obligation to come to an end with the illegal measure is the first consequence under international law. To make an analogy, this remedy of cessation is equivalent to article 21 of the DSU, the withdrawal of the inconsistent measure. Further, the injured state has the right under general international law to claim full reparation in the form of:

(i) Restitution in kind;

(ii) Compensation;

(iii) Satisfaction; and

(iv) Assurances and Guarantees of non repetition.

Restitution means that the state responsible for the wrongful act is obliged to re establish the situation which existed before the wrongful act was committed, provided to the extent that restitution is not materially impossible or does not involve a burden out of proportion to the benefit deriving from restitution instead of compensation .

The erring party is obliged to compensate such damage that has not been made good for by restitution. The compensation shall cover any financially assessable damage including interest and, under certain circumstances, loss of profits. Note that this differs from article 22 of the DSU which does not explicitly provide for the compensation of damage suffered. So far, WTO remedies have concerned only prospective relief. Satisfaction may consist of an acknowledgement of the breach, an expression of regret, a formal apology, or another appropriate behaviour. Satisfaction shall not be out of proportion to the injury and may not take a form humiliating to the responsible state.

Article 3.2 of the DSU provides, in relevant part:

“The Member recognised that [the WTO dispute settlement system] serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law.”

The DSU thus explicitly refers to customary international law on treaty interpretation and makes this law applicable in the context of the WTO.

Question may arise if the rules laid down in the ILC apply when there is a breach of WTO law or if the remedies provided for in the DSU are the only ones available. Most of the WTO members seem to share the view that when creating a detailed set of rules aimed for handling breaches of the WTO law, the DSU has contracted out of the general economic law on State responsibility and, therefore, also the rules concerning compensation. The interpretation seems to be correct since states may actually deviate from customary international rules. The Vienna Convention on the Law of Treaties 1969 declares invalid only those treaties which contradict a peremptory norm of international law. According to the criterion set out in the ILC draft, the DSU must be considered lex specialis handling these kinds of q


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