Unfolding the Quarrels - An Assessment of the Structural Background behind WTO Disputes

Table of Contents

1. Introduction

2. The Dispute Settlement Understanding: The Backbone of the trading system?
2.1 General Overview
2.1.1 A Brief History
2.1.2 The Dispute Settlement Procedure in Brief
2.2 The ups and downs of the DSU
2.2.1 Positive Changes and Progress
2.2.2 Criticism and Weaknesses

3. The Structural Background of Dispute Settlement: What makes Members request Consultations?
3.1 Possible questions and approaches to Dispute Settlement
3.2 Subjective and Objective Elements
3.3 A Simple Model
3.3.1 Country Selection Criteria
3.3.2 Variables and Model Specification
3.4 Findings
3.4.1 First Findings and Econometric Problem Discussion
3.4.2. Second Findings after Adjustments
3.5 Preliminary Conclusions

4. The Aftermath of Dispute Settlement: Winners and Losers ?
4.1 DSP: The Tip of the Iceberg
4.2 A Measurement of Success in Dispute Settlement

5. Conclusion

6. Bibliography

7. Appendix

Index of Tables and Figures

Table 1. Functions of the Dispute Settlement Body

Table 2.Model Results

Figure 1. Stages of DSP for a case that is taken until the last measure

Figure 2. Member Involvement in Disputes according to position

Figure 3. Dispute Settlement Analysis

Figure 4. Country Selection Criteria

Figure 5. Measuring Success in Dispute Settlement

Abbreviations

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Unfolding the Quarrels:

An Assessment of the Structural Background behind WTO Disputes

"The dispute settlement system (...) Represents the legal guarantee for All WTO Members that the rights and Obligations laid down in the Uruguay Round Agreements will be respected And that the benefits that Members Derive from these agreements Will be undermined"Pascal Lamy¹

1. Introduction

Leaving trade disputes to their faith without an international organization capable of settling them is not a trait of a stable and credible system. The WTO's effort to counteract this has been realized by developing the foundations of Dispute Settlement under GATT. This change was institutionalized as the Dispute Settlement Body in January 1 of 1995. Some have called it the "backbone of the trading system" (Fehrs, 2006, 9) or the "WTO's unique contribution to the stability of the global economy" (WTO, 2009, 1), but others a "step backwards towards cooperation" (Setear, 1997). In a world where trade is a driving force of global changes with developing regions growing three times faster than their developed equals, trade disputes will always appear (WTO, 2008, 27). This signals the necessity of settling them for a more transparent and efficient system.

While the GATT dispute settlement system only ruled on 295 disputes in over 40 years, the DSB had already reached 335 in its first ten years. One could ask if this is due to the duplication of trade in the past two decades (Hoekman and Kostecki, 2001, 2), or perhaps to a more alluring system that encourages a now bigger number of WTO members to use it. These and other approaches demand a more profound understanding of what determines the number of dispute cases at the DSB. Does the considerable size of an economy explain more involvement, or perhaps the dependence on exports? On the other hand, it is also important to ask whether filing members have been successful at all when using the DSB. Do developing countries benefit more or less than OECD members? How can one assess this level of success?

The first set of questions is linked to what we will call the structural background of dispute settlement, i.e. the set of economic conditions and policy measures that differentiate WTO members. This background encompasses macroeconomic indicators such as the GDP and the total imports and exports of a country². Why would a powerful member like the US be involved in 271 disputes and a small one like Costa Rica in 13? Is it the size of the economy (GDP) or the size of the market (Population) that explains this at best? It is by no means an integral approach to dispute settlement. One must also consider the complex set of strategic considerations that are involved in the decision making process for any member (Rosendorff, 2005). They seem essential to explaining the complexity of the problem, but a separate analysis of structural conditions will also shed light on the situation in which these strategies are carried out.

The objective of this paper is twofold. First, it will study the structural background variables and assess their influence in the number of disputes filed until 2007. These variables should serve as fulcrum for further research that uses game theory. For example, one cannot assume that exports and imports will have the same significance in a model in game theory, making our undertaking necessary. Second, it will develop a simple index for comparing procedural success in dispute settlement. This is limited only to procedural success (winning or losing the case), i.e. only a part of the general utility derived from gaining benefits in dispute settlement. This index can then be integrated into more a complex analysis of dispute settlement.

The text is organized in the following way. Chapter 2 will give a brief historical and institutional overview of the DSB, mentioning the stages of dispute settlement and then revisiting what scholars admire and criticize of the system. Chapter 3 will present our model in two phases. First, an unrestricted model with econometric complications will be discussed, and then our final restricted model will be presented in two versions. Chapter 4 then turns to our procedural success index, using six WTO members as a first sample with interesting conclusions. Chapter 5 then concludes with implications for further research.

2. The Dispute Settlement Understanding: The Backbone of the Trading System?

2.1. General Overview

Former Director General of the WTO Mike Moore honored the DSB for fostering stability and transparency in trade relations, calling it the backbone of the trading system (Fehrs, 2006, 9). The WTO (2009, 1.2) states that the DSB "helps to prevent the detrimental effects of unresolved international trade conflicts and to mitigate the imbalances between strong and weaker players by having their disputes settled on the basis of rules rather than having power determine the outcome". Annex 2 of the WTO Agreement, i.e. the DSU, ascribes eight major functions or characteristics to the Dispute Settlement Body. These are summarized below.

Table 1. Functions of the Dispute Settlement Body

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2.1.1. A Brief History

The DSU has its roots in Articles 22 and 23 of GATT, after which trade related conflicts were settled. The Chairman of the GATT council could determine the establishment of working parties. A report was then approved only by consensus, meaning that a respondent could easily block any decision (positive consensus). Respondents even had the chance to block the adoption and authorization of countermeasures against them (WTO, 2009, 2). In almost 48 years, 295 disputes took place under the GATT (Reinhardt, 1996, A.4.1). After several decisions made during the 80s³ and the Uruguay Round in 1986, this context changed considerably. The DSB came into force in January 1, 1995. Under the new mandates of the Annex 2 of the WTO Agreement and other amendments, consensus must also be achieved but only for blocking, not for approving decisions (negative consensus). Deadlines are now more strictly foreseen in accordance with Art.3.3 of the DSU, and a new set of "judicial" bodies also works together with more independence from the Director General. (WTO, 2009, 3.1-3.5).

2.1.2 The Dispute Settlement Procedure in Brief

The DSU is a tool for counteracting "nullification and impairment of benefits" in trade relations. It foresees three types of complaints. Violation Complaints pertain to the lack of fulfillment of trade commitments stipulated in GATT 1994, e.g. tariffs or subsidies. Non-Violation Complaints originate nullification and impairment likewise, although they do not constitute a violation of the GATT 1994. Situation Complaints are a broad denomination for any given situation that results in the same nullification or impairment of benefits (Art.23. §1a-c). The latter has not involved panel establishments until now⁴ (WTO, 2009, 4.2).

If a member considers one of these three situations to have taken place, it can file a request for consultations with the member committing the offense. Only governments participate in the proceedings, even if private actors are at the center of the problem⁵. Third parties can express their interest in the dispute and partake in the proceedings. Mutual agreements are possible at every stage of the DSP, making arbitration a constant option along the procedure. If no agreement has been reached, a panel of experts is appointed. This panel issues a report that can be contested by the parties making use of the Appellate Body. This instance can uphold or reject the panel's findings, and it can be invoked more than once if the dispute continues. Should the implementation of the decisions fail, the DSB authorizes the affected party to retaliate proportionally by suspending concessions and obligations temporarily. For a detailed explanation, refer to the next figure.

Figure 1.Stages of DSP for a case that is taken until the last measure.

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*Adapted from Zimmermann (2007, 151) and WTO (2009, 6.0).

2.2 The ups and downs of the DSU

2.2.1 Positive Changes and Progress

A noteworthy benefit that has contributed to the "reasonably well established" credibility of the DSU (Jackson, 2005) is the possibility that developing countries have to participate in dispute settlement. If one were to resolve trade conflicts through bare power relations, developing countries would lack mechanisms to defend their interests, having in mind that their share in world trade only attains 15% (Hoekman and Kostecki, 2001, 10). Developing countries can also access the DSB incurring lower costs as third parties⁶, thus "pooling their economic bargaining strength" and constraining powerful members (Fehrs, 2005, 14). The following figure shows how third party participation has succeeded in the WTO for a sample of 25 countries.

Figure 2. Member Involvement in Disputes according to position.

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Source: WTO (2009). Dispute Settlement Map. Online at www.wto.org

Developing countries appear to have much more activity as third parties than as regular complainants or defendants.

This is consistent with Fehr's "piling on" argument that these countries benefit as third parties.

If one were to follow Professor John Jackson (2005) in saying that the DSB "is probably the most powerful international juridical institution (or tribunal) that exists at the international level", other positive aspects like enforcement, credibility, and stability of the system could be mentioned. Yet the latter can be more complex, since legal rigidity does not imply a systemic stability that is needed to promote legitimacy. The DSU has fostered stability through its flexible regime (Rosendorff, 2005, 389), granting opting out chances⁷ instead of giving incentives to powerful members to make unilateral moves and endanger the system. This is why the DSP has been perceived as a cooperative equilibrium (Garrett and Smith, 2002, 2), and not as an international court procedure for "trade crimes".

Others also argue that it has contributed to more trade liberalization by underpinning WTO goals (Bown, 2001 in Perdikis and Read, 2005, 7)⁸. By solving disputes and supporting cooperation, it has a crucial role of legitimizing the system that follows a free trade philosophy. Furthermore, the DSP can be seen as an information resource⁹ (Maggi, 1999). Filed requests give account of impairments that would otherwise need other (slower?) mechanisms to come to light. It is indeed only the tip of the iceberg (Fehrs, 2005, 12), yet this apex is far more beneficial than its dearth. One must have in mind that the system is young and that criticism is sometimes based on utopic expectations that the DSB is a panacea for trade conficts¹⁰. The domestic legal background that would need to be changed is oftentimes so embedded that reforms seem a bit like mission impossible and compensation ends up being a better solution (Rosendorff, 2005, 390). And still, the DSB has come to change many measures (e.g. DS214, DS89 or DS79).

The DSP has also made considerable progress in spite of its youth. Former President Clinton said once that he "propose[d] that the WTO provide the opportunity for stakeholders to convey their views, such as the ability to file amicus briefs" (In Ragosta, 2000, 7). Consistent with Articles 12.1 and 13 of the DSU, this indirect participation is already foreseen. Further, even if powerful members have constrained themselves in some cases (DS26), this doesn't have to point necessarily to a structural weakness. These members could make use of their power to easily undermine the system, but they refrain from doing it in their own interest. They thus legitimize the system and bestow it with more credibility by abiding by the rules (Garret and Smith, 2002).

2.2.2 Criticism and Weaknesses

The DSU is not a happy inspiration for everybody. Setear (1997) calls it a "step backwards (...) towards cooperation" and Reinhardt (1999) claims that its frequent use "is not evidence of success, but marks potential challenges to the system"¹¹. Criticism stems from many perspectives. One points to disadvantaging developing countries through the DSP, given the way international courts exacerbate more conflict than their domestic equals (Alter, 2003). Developing countries also have economic problems when settling disputes, considering the costs of delegations, technical studies, etc. This can explain the increased use of third party participation by developing countries.

Other perspectives, biased with a touch of legalism, criticize the DSU in substance and procedure. Basing his discussion on the historical tension between the diplomatic and the juridical model, Ragosta (2000, 2-10) points out the following shortcomings of the DSU. 1) Panelists and AB judges risk impartiality, such as has been observed in some cases¹². The fact that the Secretariat is closely linked to the DSB also contributes to this risk. 2). Substantive norms are unclear. This leads to a wide scope of possible interpretations possibly biased by politics. 3). There are no democratic controls (No detailed codes, no standards for panels, no blocking alternative for developing countries and no semblance of the due process). 4). Real parties of interest are only indirectly involved; the hearings are not open to the public, etc.

Another perspective deals with the systemic stability of the DSB. Not only does the WTO depend financially on the "trade titans"¹³ (Garret and Smith, 2002), but they also maintain its legitimacy. Garret and Smith (2002, 13) argue that they fear a "Pyrrhic victory that could cause collateral damage to the WTO". This implies that their will can shake the system, and sometimes bias it heavily. Consider the Dutch proposition for creating the advisory center. The EC "insisted that if it provides funds an Advisory Center would not be permitted to assist LDCs in prosecuting their rights but only in defending them" (Ragosta, 2000, 9). This partial conditioning undermines a system that is based on democratic principles, although the actual outcome did not favor this conduct of the EC¹⁴.

[...]

¹ Director General of the WTO, in Sacerdoti, Giorgio, et al. The WTO at ten: The Contribution of the Dispute Settlement System. Cambridge University Press. Cambridge. p.xxv.

² This paper deals with indicators that are believed to be linked to trade more directly. Therefore, others like inflation, interest rates have not been included.

³ Decision on Dispute Settlement (29 of November, 1982) at the Ministerial Conference, and Decision on Dispute Settlement (30 of November, 1984).

⁴ "Given the admissibility of "non-violation"and situation complaints, the scope of the WTO Dispute Settlement Sysem is broader than that of the other international Dispute Settlement Systems which are confined to adjudicating only violations of agreements (...) but it is also narrower because violation must result in nullification." (WTO, 2009, 4.2)

⁵ "In practice, things are not always so clear cut, and there have been several disputes involving private actors having some governmental connection" (WTO, 2009, 5.3). An example is the film paper dispute between Japan and the US in 1996. (DS44).

⁷ There is a rich variety of escape valves for WTO members. Take for instance Articles 6, 12, 19, 20 and 24 of GATT-94. Article 20, for example, allows exceptions in policymaking for the benefit of health and fauna protection. Also the AD and CVD codes have allowed member states to impose duties as retaliation against subsidies or dumping. Rosendorff (2005, 392) claims that these resources have been increasingly applied over the last years.

⁸ Director General Lamy summarized these goals in his speech to the Peterson Institute of International Economics in Washington (April 24, 2009). There he claimed that: "the key lies in the 'if'. More open trade is essential but it is not enough. We need better worker training, greater mobility in labour markets, more expansive social safety nets. We need investing in critical areas such as health care, education and clean energy" (WTO, 2009b)

⁹ "It establishes the facts, adjudicates on a violation, estimates the damages and reports a successful completion of the process. It is this informational role of the DSP that determines its effectiveness" (Rosendorff, 2005, 391).

¹⁰ Fehrs (2005, 12) argues that "while some see [the DSP] as a great failing, it also shows that expectations for the body must be quite high if people expect it to change popular domestic laws"

¹¹ In Rosendorff, 2005, 389-390.

¹² The author stated in 2000 that "a current member of the WTO Appellate Body was simultaneously serving on a government advisory body that was making recommendations to the litigant government on strategy in this case (...) This individual, unless recused, would have played a role in any appeal of the dispute if it had been appealed"(Ragosta, 2000, 10).

¹³ EC and the USA.

¹⁴ "[The Advisory Centre] was established by an international agreement signed by 29 Members of the WTO in Seattle on 1 December 1999, the 'Agreement Establishing the Advisory Centre on WTO Law'. This Agreement entered into force on 15 June 2001 and the official opening of the Advisory Centre took place on 5 October 2001(...)Every WTO Member, whether a developing country or not, as well as countries and independent customs territories in the process of accession to the WTO, can become members of the Advisory Centre." (WTO, 2009, 11.2)