WTO Dispute Settlement

WTO panel decision in United States – Tariff Measures on Certain Goods from China increases the need for comprehensive WTO reform

On September 15, 2020, the WTO panel considering China’s challenge to certain additional duties on its products imposed by the United States flowing from an investigation under Section 301 of the Trade Act of 1974, as amended, released its report and concluded that the U.S. action was inconsistent with most favored nation (MFN) obligations under GATT 1994 Art. I and U.S. tariff bindings under GATT 1994 Art. II(a) and (b) and was not justified under GATT 1994 Art. XX(a) as action to protect public morals.

The U.S. Trade Representative issued a press release which is copied below.

WTO Report on US Action Against China Shows Necessity for Reform

“09/15/2020

“Washington, DC – U.S. Trade Representative (USTR) Robert Lighthizer today criticized a World Trade Organization (WTO) panel report that stated that actions taken by the U.S. to combat China’s widespread and damaging theft of American technology and intellectual property were inconsistent with WTO rules.

“’This panel report confirms what the Trump Administration has been saying for four years: The WTO is completely inadequate to stop China’s harmful technology practices,’ said Ambassador Lighthizer. ‘Although the panel did not dispute the extensive evidence submitted by the United States of intellectual property theft by China, its decision shows that the WTO provides no remedy for such misconduct. The United States must be allowed to defend itself against unfair trade practices, and the Trump Administration will not let China use the WTO to take advantage of American workers, businesses, farmers, and ranchers. It is important to note that this report has no effect on the historic Phase One Agreement between the United States and China, which includes new, enforceable commitments by China to prevent the theft of American technology.’

“USTR issued a Section 301 report in 2018 documenting how China had engaged in unfair forced technology transfer practices, such as exploiting its foreign ownership and administrative requirements to extort U.S. intellectual property rights or supporting commercial cyber theft from U.S. entities. The report cited hundreds of sources and thousands of pieces of evidence, including reports from governments, firms, business associations, think tanks and researchers, and others. These unfair trade practices and other actions by China have cost U.S. innovators, workers, and businesses
billions of dollars every year.

“The actions USTR took in response to these practices led earlier this year to the historic Economic and Trade Agreement Between the United States of America and the People’s Republic of China (the ‘Phase One’ Agreement).

“Background: China initiated this WTO dispute – United States-Tariff Measures on Certain Goods from China (DS543) – in April 2018, and subsequently amended its request for consultations. In January 2019, the WTO established a panel at China’s request. The dispute covers two of the trade actions in the Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation: the $34 billion trade action announced in June 2018, and the $200 billion trade action announced in September 2018.”

The Panel Report, WT/DS543/R

The panel report is relatively short (56 pages plus table of contents and list of disputes cited). The panel rejected two preliminary U.S. arguments and then addressed the core issues.

The U.S. had argued that the U.S. and China were engaged in negotiations and were handling the matter outside of the WTO and had reached a Phase I Agreement all of which meant the panel should not issue a report. That argument was rejected as China’s position was that no mutually satisfactory solution had been reached. Similarly, the U.S. effort to restrict the Chinese claim on the second action by the U.S. to 10% on $200 billion of trade and not the later increase to 25% was rejected.

On the two main challenges by China, that the tariffs imposed were inconsistent with most favored nation treatment under GATT Art. I and that the additional tariffs violated U.S. tariff bindings, the United States did not present argument. Thus, the panel reviewed whether China presented a prima facie case of violation and, when it so concluded then found U.S. actions to be inconsistent with those provisions.

The United States argument was limited to its right to deviate from other WTO obligations because of GATT 1994 Art. XX(a), actions taken necessary to protect public morals.

As reviewed in the panel report (para. 7.100), “The United States asserts that any inconsistency of the measures at issue with provisions of the GATT 1994 is justified as necessary to protect US public morals pursuant to Article XX(a) of the GATT 1994. This is because, according to the United States, China’s acts, policies, and practices addressed in the relevant Section 301 Report amount to ‘state-sanctioned theft and misappropriation of U.S. technology, intellectual property, and commercial secrets’182 which violates
the public morals prevailing in the United States.183″ [footnotes omitted]

“7.113. The United States asserts that the measures at issue protect public morals within the meaning of Article XX(a) because they have been adopted to ‘”‘obtain the elimination” of conduct that violates U.S. standards of rights and wrong, namely China’s unfair trade acts, policies, and practices’.201 In support of its argument, the United States has submitted evidence of several
domestic instruments that reflect prevailing US ‘standards of right and wrong’ and outlaw some (although not all) of the Chinese practices documented in the Section 301 Report.202 The United States contends that acts, policies, and practices of China referred to in the Section 301 Report violate US ‘standards of right and wrong’, in particular the prohibition of theft, extortion, cyber-enabled theft and cyber-hacking, economic espionage and the misappropriation of trade secrets, anti-competitive behaviour, as well as the regulation of governmental takings of property (hereafter referred to as ‘the public morals as invoked by the United States’).” [footnotes omitted]

The panel generally agreed with the United States that public morals objectives could include those identified by the United States and were not negated because there were economic effects as well. The U.S. argument was as follows:

“7.3.2.2.3 The public morals objective invoked by the United States

“7.127. The United States asserts that China’s actions documented in the Section 301 Report violate prevailing US ‘standards of right and wrong’ as reflected in US domestic legislation.226 The United States has submitted as evidence several domestic instruments that reflect prevailing US ‘standards of right and wrong’ and that outlaw some (although not all) of the Chinese practices documented in the Section 301 Report.227 Specifically, the United States refers to:

“• state and federal laws, under which the act of “theft” is universally deemed a criminal offence228;

“• US laws that generally prohibit extortion229;

“• US laws that criminalize cyber-enabled theft and cyber-hacking230;

“• US laws that criminalize economic espionage and the misappropriation of trade secrets (including though acts of ‘bribery’ or ‘extortion’)231;

“• US laws against anti-competitive behaviour (in particular the prohibition and criminalization of monopolization)232, which reflect ‘fundamental concepts of fair competition and fair play’233, and the breach of which the United States views as ‘a threat to the ‘preservation of our democratic political and social institutions”234;

“• US laws on contracts and torts235;

“• US laws on patents236; and

“• civil and criminal laws on, and governmental takings, of property.237

“7.128. The United States explains that the economic concerns underlying some of these legal instruments are related to notions of fair competition and fair play238, and that the United States does not view unfair competitive practices merely as a detriment to business and innovation, but
also as a threat to the preservation of its democratic political and social institutions.239 The United States also explains that it ‘imposes constraints on behavior based on national concepts of right and wrong to ensure market-oriented outcomes’.240 According to the United States, China
‘uses coercion and subterfuge to steal or otherwise improperly acquire intellectual property, trade secrets, technology, and confidential business information from U.S companies with the aim of advantaging Chinese companies and achieving China’s industrial policy goals.’241 The United States, considers that these acts, policies, and practices relating to intellectual property and technology transfer violate these US standards of right and wrong and thus implicate US public morals within the meaning of Article XX(a).242″ [footnotes omitted]

In the end the panel faulted the United States for not being able to demonstrate that the actions taken were necessary to achieve its public morals objective, looking at the number of products where there hadn’t been a showing that the products benefited from the Chinese government actions or where exclusions could be made for products where such actions were present but where there were economic reasons to exclude the product. The panel looked at List 1 and List 2 separately. The panel’s characterization of the U.S. position on each list is useful in understanding U.S. concerns.

“7.163. The United States argues that the additional duties at issue are “necessary” to protect public morals because they ‘play a necessary role toward the goal of eliminating China’s unfair trade acts, policies, and practices by raising the cost of such practices and reducing China’s incentive to continue engaging in such conduct going forward’.316 According to the United States, ‘it is reasonable to conclude that China will continue to pursue its unfair trade acts, policies, and practices while it is advantageous to China to do so, for example, until the economic costs of doing so begin to approach or outweigh the economic benefits’317, and for that reason, ‘to protect U.S. interests in moral (right or wrong) economic behaviour, it is necessary for the United States to adopt measures that are capable of changing China’s economic cost-benefit analysis’.318 The United States also asserts that the measures are necessary to achieve the public morals objective as invoked by the United States because it was only after their adoption that China agreed to enter into negotiations with the United States to address the concerns documented in the Section 301 Report.319 Finally, the United States asserts that so long as a WTO Member can establish that a measure that aims to influence the policies or practices of another Member is necessary to protect public morals, that measure can be justified under Article XX(a).320″ [footnotes omitted]

“7.216. The United States adopted and implemented the additional duties on List 2 products through the Notice of 21 September 2018. This Notice explains the rationale of the imposition of additional duties on List 2 products as follows:

“China’s unfair acts, policies, and practices include not just its specific technology transfer and IP polices referenced in the notice of initiation in the investigation, but also China’s subsequent defensive actions taken to maintain those policies. China has decided to impose approximately $50 billion in tariffs on U.S. goods, with the goal of encouraging the United States to drop its efforts to obtain the elimination of China’s unfair policies. Thus, instead of addressing the underlying problems, China has increased tariffs to further protect the unreasonable acts, policies, and practices identified in the investigation, resulting in increased harm to the U.S. economy.

“[…]

“The judgment during the period of investigation, based on then-available information, was that a $50 billion action would be effective in obtaining the elimination of China’s policies.

“China’s response, however, has shown that the current action no longer is appropriate. China has made clear – both in public statements and in government-to-government communications – that it will not change its policies in response to the current Section 301 action. Indeed, China denies that it has any problems with respect to its policies involving technology transfer and intellectual property.445” [footnotes omitted]


“7.218. The United States explains that ‘List 2 measures apply to a broader class of products than those found to directly benefit from the unfair trade acts, policies, and practices documented in the Section 301 Report’.446 The United States asserts that it imposed additional duties on List 2 products ‘after China “made clear – both in public statements and in government-to-government communications – that it [would] not change its policies’ and instead ‘responded … by increasing duties on U.S. exports to China”‘.447 According to the United States, the imposition of additional duties on List 2 products is ‘derivative’ of the imposition of additional duties on List 1 products.448 For that reason, the United States argues that the imposition of additional duties on List 2 products is ‘also necessary to protect public morals in part because to fail to respond to China’s economic retaliation would demonstrate that the United States Government is willing to acquiesce in theft and forced transfer of U.S. technology by one of its largest trading partners’.449” [footnotes omitted]

Reaction to the Panel Report

Much of the panel report is straight forward and unobjectionable. However, on the question of the GATT 1994 Art. XX(a) public morals provision, the analysis of core issues is too wooden and ignores the realities of government operations. The United States has worked for years to get China to address the myriad issues laid out in the 301 investigation which the panel accepts as important public morals issues for the United States. The effect of the many practices has been of major concern to the Untied States, to its businesses and workers for more than a decade. Duties were imposed exactly because prior efforts to get China to address the serious problems were never fruitful, and following the 301 investigation, China opted not to negotiate with the United States. The List One products were largely items known to benefit from one or more of the programs and the intent was to apply the tariffs until China would negotiate and resolve the matters. Thus, on the list one necessity issue, one can only conclude that the panel’s construction was too narrow. Similarly, finding fault with U.S. action because some products were excluded that may have benefited from the programs of concern ignores the political realities of applying pressure without imposing unintended consequences.

Conclusion

The U.S.-China trade dispute is obviously important bilaterally and multilaterally. While the China challenge to the U.S. action is understandable from their perspective, what is clear is that the panel report will make reform at the WTO more difficult and will likely result in the U.S. filing an appeal so that the dispute is not concluded in the foreseeable future.

On reform, China has taken the position on the question of the definition of “public body” that the issue is not subject to negotiations because of an Appellate Body report favorable to China. Similarly, despite the array of problematic practices of China that are not presently subject to WTO rules, the panel report will likely result in China refusing to negotiate on the underlying issues in an effort to kick the can down the road before the myriad Chinese policies that are inconsistent with market principles are ever brought under WTO rules.

At the same time, the panel report supports the views of the current U.S. Administration that the WTO doesn’t address many of China’s practices and rather restricts market-economy countries from addressing distortions not covered by existing rules to get conditions of fair trade established or restored. Thus, one should expect continued reluctance on the part of the U.S. to permit restoration of the Appellate Body with an expanded list of reform needs to cover the expanded list of inadequacies of the existing WTO rule book.

On appeal of the panel report, there is no reason for the U.S. not to file an appeal and there are likely interesting issues for an eventual appeal on the interpretation of GATT 1994 Art. XX(a). The U.S. did not pursue a case on the various retaliations undertaken by China — none of which would presumably pass WTO muster as they were taken without WTO authorization. As China has already taken and is maintaining retaliation, the two countries are presumably in the posture they intend to maintain until there is a broader resolution of their trade differences. While the U.S. may change its posture on the dispute if there is a different Administration, I would not expect a change in direction under the current Administration.

WTO Dispute Settlement Body Meeting of August 28, 2020 — How disputes are being handled in the absence of reform of the Appellate Body

No forward movement has been made on resolving the impasse of the WTO’s Appellate Body which effectively ceased to operate for new appeals after December 10, 2019 when the number of active Appellate Body members fell below the minimum of three needed to hear appeals. At every monthly Dispute Settlement Body meeting, one of the Members presents the proposal to start the process of selecting new Appellate Body members and the U.S. indicates it is not in a position to agree to that action.

While the impasse continues, Members are dealing with how to proceed on specific disputes that have been filed and how to deal with panel decisions that get issued. For the EU and 22 other Members who are parties to the multi-party interim appeal arrangement (MPIA), disputes involving two members of the MPIA are handled through the MPIA after a panel decision if one or both parties are dissatisifed with the panel decision. Current members of the MPIA are Australia, Benin, Brazil, Canada, China, Chile, Colombia, Costa Rica, Ecuador, the European Union, Guatemala, Hong Kong (China), Iceland, Mexico, Montenegro, New Zealand, Nicaragua, Norway, Pakistan, Singapore, Switzerland, Ukraine and Uruguay. This means that more than 110 WTO Members are not parties to the MPIA including the United States, Japan, Korea, India, Indonesia, Malaysia, Argentina, Peru, Egypt, South Africa, Saudi Arabia, the Russian Federation and many others.

Disputes between all other WTO Members or between other Members and one of the MPIA members require the parties to the dispute either before the panel decision or afterwards to decide how they will proceed. Concerns of many WTO Members is that a party dissatisfied with a panel decision will take an appeal which will effectively stop resolution of the matter as an appeal cannot be heard while there is no functioning Appellate Body.

MPIA members can take appeals where they are in a dispute with a non-MPIA member instead of seeking resolution through other means. For example, the Russian Federation is not a member of the MPIA. Their dispute with the EU on its antidumping methodology resulted in a panel decision that the EU found problematic. The EU filed an appeal on August 28, 2020. See WTO, Dispute Settlement, EU appeals panel report on EU dumping methodologies, duties on Russian imports, https://www.wto.org/english/news_e/news20_e/ds494apl_28aug20_e.htm. When raised at the August 28 dispute settlement body (DSB) meeting, Russia provided the following comment:

“The Russian Federation made a statement regarding the European Union’s appeal of the panel ruling in in DS494 (https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds494_e.htm) (EU —
Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia). Russia said it was disappointed with the EU’s decision and that that the EU’s action, in the absence of a functioning Appellate Body, essentially meant that the matter was being appealed “into the void.” The EU was seeking to escape its obligations by not trying to resolve the dispute,
Russia said.” https://www.wto.org/english/news_e/news20_e/dsb_28aug20_e.htm.

Interestingly, the EU has been working to be able to retaliate on any WTO Member who is not a party to the MPIA who appeals from a panel decision where the EU is a party. Presumably they understand that their action will encourage countries like the Russian Federation to take unilateral action against the EU where the EU appeals a panel decision instead of seeking a mutually agreeable solution.

The United States has reviewed at prior DSB meetings that there are many ways for Members to resolve disputes between themselves. At the recent DSB meeting, the U.S. in its prepared statement, after reviewing its ongoing concerns with the Appellate Body and the need to understand why the Appellate Body ignored the clear limits on its authority under the Dispute Settlement Understanding, provided examples of how Members are resolving disputes since December 10, 2019:

“ As discussions among Members continue, the dispute settlement system continues to function.

“ The central objective of that system remains unchanged: to assist the parties to find a solution to their dispute. As before, Members have many methods to resolve a dispute, including through bilateral engagement, alternative dispute procedures, and third-party adjudication.

“ As noted at prior meetings of the DSB, Members are experimenting and deciding what makes the most sense for their own disputes.

“ For instance, in Indonesia – Safeguard on Certain Iron or Steel Products (DS490/DS496), Chinese Taipei, Indonesia, and Vietnam reached procedural understandings that included an agreement not to appeal any compliance panel report.3

“ Similarly, in the dispute United States – Anti-Dumping Measures on Certain Oil Country Tubular Goods from Korea (DS488), Korea and the United States agreed not to appeal the report of any compliance panel.4

“ Australia and Indonesia have agreed not to appeal the panel report in the dispute Australia – Anti-Dumping Measures on A4 Copy Paper (DS529).5

“ Parties should make efforts to find a positive solution to their dispute, consistent with the aim of the WTO dispute settlement system.

“ The United States will continue to insist that WTO rules be followed by the WTO dispute settlement system. We will continue our efforts and our discussions with Members and with the Chair to seek a solution on these important issues.

“3 ‘Understanding between Indonesia and Chinese Taipei regarding Procedures under Articles 21 and 22 of the DSU’, (WT/DS490/3) (April 11, 2019), para. 7 (‘The parties agree that if, on the date of the circulation of the panel report under Article 21.5 of the DSU, the Appellate Body is composed of fewer than three Members available to serve on a division in an appeal in these proceedings, they will not appeal that report under Articles 16.4 and 17 of the DSU.’) and ‘Understanding between Indonesia and Viet Nam regarding Procedures under Articles 21 and 22 of the DSU’, WT/DS496/14 (March 22, 2019), para. 7 (‘The parties agree that if, on the date of the circulation of the panel report under Article 21.5 of the DSU, the Appellate Body is composed of fewer than three Members available to serve on a division in an appeal in these proceedings, they will not appeal that report under Articles 16.4 and 17 of the DSU.’).

“4 ‘Understanding between the Republic of Korea and the United States regarding Procedures under Articles 21 and 22 of the DSU’, (WT/DS488/16) (February 6, 2020), para. 4 (‘Following circulation of the report of the Article 21.5 panel, either party may request adoption of the Article 21.5 panel report at a meeting of the DSB within 60 days of circulation of the report. Each party to the dispute agrees not to appeal the report of the Article 21.5 panel pursuant to Article 16.4 of the DSU.’).

“5 Minutes of the Meeting of the Dispute Settlement Body on January 27, 2020 (WT/DSB/M/440), paras. 4.2 (‘Indonesia also wished to thank Australia for working together with Indonesia in a spirit of cooperation in order to reach an agreement not to appeal the Panel Report’ and 4.3 (‘Australia and Indonesia had agreed not to appeal the Panel Report and to engage in good faith negotiations of a reasonable period of time for Australia to bring its measures into conformity with the DSB’s recommendations and rulings, in accordance with Article 21.3(b) of the DSU.’).”

Statements by the United States at the Meeting of the WTO Dispute Settle- ment Body, Geneva, August 28, 2020 at 14, https://geneva.usmission.gov/wp-content/uploads/sites/290/Aug28.DSB_.Stmt_.as-deliv.fin_.public.pdf.

Thus, there are ways for WTO Members to resolve disputes between themselves even with the Appellate Body inoperative. Some countries, like Australia, have sought positive resolutions where the other disputing party is not a member of MPIA. To date, the European Union has not sought resolution with members who are not party to the MPIA but have rather filed appeals so cases will sit in limbo until such time as the impasse is resolved.

Concluding comments

While each of the eight candidates to become the next Director-General of the WTO believe resolution of the dispute settlement system impasse is an important priority for the WTO, they differ in how quickly they believe Members will be able to overcome the impasse — Dr. Jesus Seade (Mexico) believes it can be resolved in the first 100 days. Amb. Tudor Ulianovschi believes that the challenges presented will not be resolved ahead of the 12th Ministerial Conference in 2021 but will be resolved sometime thereafter. Most other candidates hold out hope that the impasse can be resolved by the next Ministerial in 2021. Thus, the current situation of no functioning Appellate Body may continue for some time.

The U.S. Trade Representative Robert Lighthizer in an Op Ed last week in the Wall Street Journal suggested that reform of the dispute settlement system is critical but may involve changing the system from its existing two-tiered configuration under the DSU to a one-tier process more like commercial arbitration. If that is the path that the United States pursues, resolution of the current situation will take years. See August 24, 2020,  USTR Lighthizer’s Op Ed in the Wall Street Journal – How to Set World Trade Straight, https://currentthoughtsontrade.com/2020/08/24/ustr-lighthizers-op-ed-in-the-wall-street-journal-how-to-set-world-trade-straight/.

Similarly, if dispute settlement reform is lumped into the broader WTO reform being discussed, the timing will be significantly delayed if reform of the WTO is to be meaningful and return the organization to a place of relevance in the 21st century.

With the queue of panel decisions that are yet due this year involving some high profile issues (e.g., national security actions by the United States on steel and aluminum and retaliation taken by many trading partners) and with the recent panel report on the U.S. countervailing duty order on Canadian softwood lumber, pressure will likely build on WTO Members to find a lasting solution to the current impasse. Increased pressure suggests heightened tensions in an organization already suffering from distrust among Members and, as a result, largely nonfunctioning pillars of negotiation, notification/monitoring, dispute settlement. In short, 2021 promises to be a challenging environment for the WTO Members and the incoming Director-General.

USTR Lighthizer on WTO dispute settlement, answers to Congressional questions from June 17 hearings

At the June 17 hearings before the U.S. House and Ways Committee and the U.S. Senate Finance Committee, the U.S. Trade Representative Robert Lighthizer testified about the Trump Administration’s 2020 trade agenda. While there were few questions during the hearing that were addressed to dispute settlement at the WTO, the Committees forwarded follow-up questions to Amb. Lighthizer for responses. Several dealt with WTO dispute settlement, in particular, reform of the Appellate Body (“AB”).

For example, Senate Finance Chairman Chuck Grassley (question 4) and Ranking Member Ron Wyden (question 16) each inquired about the next steps by the U.S. to achieving AB reform. Both Chairman and Ranking Member are strong supporters of achieving Appellate Body reform and limiting the Appellate Body to the role envisioned in the Dispute Settlement Understanding. Amb. Lighthizer’s answer to them was the same. Both questions asked and Amb. Lighthizer’s answer are provided below.

Chairman Grassley, Question 4
“I’m a strong supporter of reforming the WTO Appellate Body, but I’m worried that we still have not made any concrete proposal of our own for reforming dispute settlement. A number of allies who have been supportive of WTO reform have told me that they are discouraged by the continued lack of a proposal from the United States. Unfortunately, many of these countries are now signing up for the EU’s alternative: the Multiparty Interim Arbitration Arrangement.

“I believe we need to do more than identify problems. We need to propose and build consensus for solutions that will carry out what Congress understood it approved in 1995: binding dispute settlement on certain rules carefully negotiated by Members, not discovered by appointed judges. Accordingly, we need solutions that address overreach and other problems like the AB’s failure to follow the 90 day rule.

What efforts are you taking to develop a proposal that we can rally our allies around, and will you commit to working with Congress on it – as is required by the constitution and the law?

Ranking Member Wyden Question 16

“For more than a year, this Administration blocked approval for new Appellate Body Members in an effort to draw attention to concerns regarding the WTO dispute resolution system. I share these concerns, and I want them to be addressed. Last December these concerns captured the world’s attention when the Appellate Body became unable to hear new cases after the retirement of two judges left only one remaining judge. The United States has yet to put forward a reform proposal despite opposing other WTO members’ reform suggestions.

What are the next steps in addressing the problems at the WTO?

“Amb. Lighthizer Answer: The Administration is committed to working with any interested WTO Member to find solutions to the failure of the Appellate Body to follow WTO rules. This means first understanding what is the root of the problem: Why has the Appellate Body consistently broken WTO rules – that is, those rules agreed by WTO Members in the Uruguay Round and approved by the Congress in the Uruguay Round Agreements Act – despite every effort by U.S. Administrations to get it to stop.

“By exercising our right not to approve new members to the Appellate Body, the Administration has forced the WTO to engage in a long-overdue debate on this problem. My office also comprehensively detailed the Appellate Body’s pervasive rule-breaking in its Report on the Appellate Body earlier this year.1 The Report details the concerns expressed by the United States for more than 20 years and the repeated failure of the Appellate Body to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements. The Report also highlights several examples of how the Appellate Body has altered WTO Members’ rights and obligations through erroneous interpretations of WTO agreements.

“Appellate Body overreaching has unfairly taken away U.S. rights and advantaged China. Through a series of deeply flawed reports, the Appellate Body has eroded the U.S. ability under WTO rules to counteract economic distortions caused by China’s non-market practices that harm our workers and businesses. For example, the Appellate Body’s erroneous interpretation of “public body” threatens the ability of WTO Members to counteract trade-distorting subsidies provided through state-owned enterprises, favoring non-market economies at the expense of market economies.

“The dispute settlement system should support, rather than weaken, the WTO as a forum for discussion, monitoring, and negotiation. The Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved – and could not achieve — through negotiation. If WTO Members believe in a rules-based trading system, then we must ensure the dispute settlement system follows the rules that WTO Members established. Without understanding the problem of why the Appellate Body has not followed the rules Members agreed to for it, simply writing new rules or affirming the existing rules in whatever form will not fix the problem. This is why we have continued to insist that Members need to understand why the Appellate Body does not consider itself bound by the rules so that we can find real, lasting solutions.

“Unfortunately, some of our trading partners – prominently, the EU and China – continue to deny that the Appellate Body has broken the rules. Rather than seeking reform in the areas of concern raised by the United States and other WTO Members, the EU and China have pursued an arbitration arrangement that incorporates and exacerbates some of the worst aspects of the Appellate Body’s practices. The numerous departures from agreed WTO rules in the EU-China arrangement highlight a fundamental difference among WTO Members: Some Members prefer an appellate “court” with expansive powers to write new rules and impose new obligations on the United States, instead of the more narrow appellate review as agreed to by Members in the DSU.

“The United States continues to engage with our trading partners and remains committed to working with any WTO Member that acknowledges U.S. concerns and is willing to work together to find real solutions and reform. I look forward to continuing to work with you and the Committee on these important issues.

“1 United States Trade Representative, Report on the Appellate Body of the World Trade Organization, February 2020, available at: https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf.”

In the questions from the House Ways and Means Committee members, one question dealt with WTO reform, and the answer from Amb. Lighthizer included not only reform of the WTO generally but also the needs for addressing Appellate Body overreach. See question 1 from Rep. Jason Smith:

“Rep. Jason Smith

“1. The World Trade Organization (WTO) is in urgent need of reform and modernization. For too long, the WTO has been left stagnant, unable to adapt to the challenges presented by a rapidly changing global economy. As a result, American manufacturing and other critical U.S. industries have suffered the consequences of a body that has time and again, sought to diminish US. sovereignty. I am pleased that you and President Trump have taken on this task and have put forth a vision for a reformed WTO that will better serve the interests of America and our allies. With that in mind, what steps are you and your team taking this year to advance the necessary solutions the WTO system desperately needs?

“Answer: We continue to engage extensively with WTO Members to pursue meaningful reform of the WTO. The United States is pleased that Brazil, Costa Rica, Korea, and Singapore have responded to our reform initiatives by agreeing to forego special and differential treatment in future WTO negotiations. We are continuing to work to ensure all countries are contributing to the WTO commensurate with their role in the global economy. The United States is also leading an effort to bring the WTO back to upholding its core principle of market orientation to ensure a level playing field for U.S. workers, farmers, and businesses. We have also advanced work on transparency, ensuring timely notifications that can help get the WTO back to its core function of negotiating new trade rules.

“Additionally, we cannot allow overreaching by the Appellate Body to continue to weaken our ability under WTO rules to address the harm to our workers and businesses caused by non-market practices such as China’s economic distortions. WTO Members must come to terms with the failings of the Appellate Body and understand the causes if we are to achieve lasting and effective reform of the WTO dispute settlement system. The United States will continue to engage with any WTO Member in order to restore the WTO dispute settlement system to the role given to it by WTO Members and to ensure that dispute settlement supports, rather than weakens, the WTO. The United States led a group of 11 Members to issue a statement calling for transparency in dispute settlement through open meetings and public submissions, and we will continue to work to persuade Members who did not join the statement (such as the EU, China, and India) to support greater transparency.”

No movement at the WTO

Now that the Appellate Body has been without three members for nearly eight months, one would have expected that negotiations would be intense to find a solution acceptable to the United States and the membership. But other than certain Members seeking at each Dispute Settlement Body meeting to get agreement to start looking for new Appellate Body members (which is blocked by the United States), there is no indication that any meaningful activities are being pursued in 2020 to resolve the longstanding concerns of the United States.

With Director-General Azevedo’s announcement on May 14 that he would step down as the Director-General at the end of August 2020, much attention within the WTO in recent months has understandably been focused on finding a new Director-General. The selection process will likely continue until early November. This makes it unlikely that any major effort to address U.S. concerns will happen in the remainder of 2020.

Similarly, as we are less than three months from U.S. Presidential elections, many WTO Members will likely prefer to wait to see the results of the election before engaging with the U.S. on its core concerns.

Some major Members, like the EU, keep talking about looking for permanent solutions. See August 3, 2020, European Commission, Directorate-General for Trade, The WTO multi-party interim appeal arrangement gest operational, https://trade.ec.europa.eu/doclib/press/index.cfm?id=2176. “Commissioner for Trade Phil Hogan said: ‘With the agreed pool of arbitrators, the interim appeal arrangement for the WTO disputes is now up and running. * * * It shows that participating WTO members are willing to take concrete action to preserve an independent dispute settlement system with an appeal function. We can now turn our attention to finding a solution to the underlying problems through reform of the WTO Appellate Body and other aspects of the WTO system that need improvement.'” (emphasis added).

However, it has been the EU’s failure to recognize the departure of the Appellate Body from its limited role and the EU’s embrace of an Appellate Body creating rights and obligations that are not part of existing agreements that have significantly contributed to the problems identified by the United States. While Europe has shown some flexibility on addressing process issues, it has not acknowledged the serious overreach problems that the U.S. and many other Members have identified over the years. Thus, the EU concept of permanent solutions to the Appellate Body reform effort ignores core concerns of the U.S.

Conclusion

The U.S. has documented over the last several years the pervasive problems with the WTO’s dispute settlement system, particularly the actions of the Appellate Body. Since the Dispute Settlement Understanding already makes clear the proper role for the Appellate Body and the limitation on panels and the Appellate Body not to create rights or obligations, the U.S. insistence on Members focusing on why the Appellate Body has felt free to ignore the limits on its authority is understandable as a first step to determining what needs to be done to get the dispute settlement system back to what was agreed to by Members at the creation of the WTO. The U.S. concerns also explain its lack of support for a mere reaffirmation of the original Dispute Settlement Understanding language.

In prior posts, I have put forward thoughts on how one could make the original language self-executing or enforceable by Members to a dispute and hence address U.S. concerns if other countries will not focus on why the Appellate Body has been willing to ignore limits on its authority. See, e.g., July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/.

Absent an agreement among Members as to the reasons for Appellate Body departure from its limited role, Members will need to make modifications to the Agreement or to what is contained in binding interpretations that actually prevent future departures from the correct, limited role of the Appellate Body.

Don’t hold your breath that Members will find solutions any time soon.

U.S. Senate Finance Committee Hearing on WTO Reform: Making Global Rules Work for Global Challenges

On July 29, 2020, the United States Senate Finance Committee held a hearing on WTO Reform: Making Global Rules Work for Global Challenges. The hearing had four witnesses, including two prior Appellate Body Members (Jennifer Hillman and Thomas Graham) and two others.

Senators generally agreed that the dispute settlement system was in need of reform to address long standing U.S. concerns about overreach and other matters. At the same time, Senators view the WTO as an important organization where U.S. leadership is important to address problems and changing needs.

While most U.S. agricultural interests were perceived to have been generally upheld well through dispute settlement, concern was expressed with the Country of Origin Labeling (“COOL”) decision affecting the labeling of meat from animals imported into the United States.

There was broad concern about the problems created by Appellate Body overreach in the areas of trade remedies. For some, there is a belief, confirmed by at least one of the former Appellate Body members, that there has been a bias against trade remedy use by the U.S.

The hearing lasted about two hours and can be seen here. https://www.finance.senate.gov/hearings/wto-reform-making-global-rules-work-for-global-challenges. The prepared statements of the Senate Finance Committee Chairman and Ranking Member and of the witnesses are available for download from the same link.

Written comments to the Committee are accepted for two weeks (til August 12). I am submitting written comments today and provide them in the embedded document below.

August-4-2020-statement-to-Senate-Finance-Committee

As I note in my comments, U.S. concerns center around overreach – the creation of rights and obligations not contained in the agreements themselves. Such concerns can be addressed through clarifying that DSU Art. 3.2 and 19.2 prevent panels and the Appellate Body from filling gaps, construing silence and construing ambiguous provisions. Any clarification of those articles must be accompanied by an ability to correct prior decisions. My prior blogs have provided one suggestion which would address not just U.S. but other Member concerns about overreach.

On the other issues of concern to the U.S., any resolution must provide a means for the DSU terms to be enforced by Members where panels or the Appellate Body wander afield.

WTO Appellate Body Reform – Revisiting Thoughts on How to Address U.S. Concerns

In a November 4, 2019 post, I reviewed a draft General Council Decision that had been presented by Amb. David Walker to the General Council on addressing some of the concerns presented over the last several years by the United States with the functioning of the WTO’s Appellate Body. The United States has been blocking the process for selecting new Appellate Body members until its longstanding concerns are addressed. See WTO’s Appellate Body Reform – The Draft General Council Decision on Functioning of the Appellate Body, https://currentthoughtsontrade.com/2019/11/04/wtos-appellate-body-reform-the-draft-general-council-decision-on-functioning-of-the-appellate-body/.

The Appellate Body ceased to have at least three members on December 11, 2019 at which point it could not hear new appeals. Moreover, only appeals that had gone through hearings were handled after December 10, with the last report released last month.

The United States released in February a lengthy Report on the Appellate Body of the World Trade Organization which provides a detailed review of the purpose of dispute settlement in the WTO and the development of major departures from the agreed language of the Dispute Settlement Understanding by the Appellate Body over the first twenty-five years of the WTO’s existence. The report was reviewed in an earlier post. See https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf; USTR’s Report on the WTO Appellate Body – An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role, https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/.

While a number of WTO Members have joined together in supporting an interim arbitration approach, there has been no apparent ongoing effort to find a resolution to the continuing impasse. Indeed, the interim arbitration approach adopted by the EU, Canada, China and others in the view of the U.S. extends and in some cases exacerbates the longstanding concerns the U.S. has had with the Appellate Body and exceeds the proper role of arbitration.

There have been any number of proposals by academics, former government employees and others on what is needed to reform the Appellate Body to deal with U.S. concerns. The National Foreign Trade Council commissioned a multi-part report on Resolving the WTO Appellate Body Crisis from Bruce Hirsch, a former USTR official with significant responsibilities for dispute settlement matters. See Resolving the WTO Appellate Body Crisis, Proposals on Overreach (December 2019), http://www.nftc.org/default/trade/WTO/Resolving%20the%20WTO%20Appellate%20Body%20Crisis_Proposals%20on%20Overreach.pdf; Resolving the WTO Appellate Body Crisis Volume 2, Proposals on Precedent, Appellate Body Secretariat and the Role of Adjudicators (June 2020), http://www.nftc.org/default/Trade%20Policy/WTO_Issues/Resolving%20the%20WTO%20AB%20Crisis%20vol2%2006042020.pdf. His two papers make an important contribution to those interested in finding a forward path on restoring a second stage to the WTO’s dispute settlement system.

Specifically, Mr. Hirsch’s two papers address a number of important issues with suggestions presented for possible approaches to help move the WTO dispute settlement system back to what was agreed to in the Dispute Settlement Understanding which became operative in 1995 when the WTO was created.

The NFTC press releases on the two papers provides the following summary of proposals in each paper. From the December 17, 2019 press release:

The paper includes six key proposals:

  1. Enforce the 90-day time frame for appeals;
  2. Prohibit advisory opinions, and further elaborate the circumstances constituting advisory opinions;
  3. Clarify that DSU Article 3.2 does not justify expanding or narrowing the reach of WTO provisions or filling gaps in WTO coverage;
  4. Clarify that customary rules of interpretation of public international law do not justify gap-filling and expanding or narrowing the reach of WTO provisions;
  5. Affirm that Article 17.6(ii) of the Antidumping Agreement must be given meaning, by clarifying that the provision reflects the principle just described, that WTO adjudicators may not expand or narrow the meaning of broad provisions and general terms; and
  6. Direct the Appellate Body to reject party arguments that expand or narrow the reach of agreement provisions or fill gaps in agreements.

From the June 5, 2020 press release:

Specifically, the paper outlines 3 proposals that will help “reflect the goal of making the Appellate Body operate as Members expected in 1995:”

  1. Clarify that Appellate Body reports do not create binding precedent;
  2. Replace the Appellate Body secretariat with clerks seconded from the WTO secretariat; and
  3. Guidance on the Role of Adjudicators.

The two papers are an effort to help WTO Members focus on moving forward on bringing the Appellate Body’s role in the Dispute Settlement system back to its intended limited function.

The first paper which deals with the critical issue of overreach also takes in issues such as advisory opinions and adherence to the timeline for completing appeals (absent party consent) which Mr. Hirsch views as often interrelated. If there is a problem with the first paper it is in not addressing how to restore balance to WTO Members by correcting prior cases where overreach occurred. This has been an issue of some importance to the United States and is critical in a number of agreements where there has been a pattern of decisions changing rights and obligations.

In a prior post from November 12, I reviewed the large number of WTO Members who have expressed concern about the Appellate Body creating rights or obligations not contained in the WTO Agreements. See Background Materials on WTO Appellate Body Reform Challenges – The Critical Issue of “Overreach,” https://currentthoughtsontrade.com/2019/11/12/background-materials-on-wto-appellate-body-reform-challenges-the-critical-issue-of-overreach/

The second paper by Mr. Hirsch addresses a number of important issues although only the issue of precedent is on the list of concerns raised by the United States. However, Mr. Hirsch makes a strong case that the structure of the Appellate Body Secretariat has likely contributed to the development of problematic issues such as precedent, and his recommendations make a lot of sense and would return control of the Appellate Body process to Appellate Body members.

Mr. Hirsch notes that there is a lack of trust amongst WTO Members, which certainly reflects the current environment. His proposals are all focused on what he perceives to be a view with which all Members should be able to agree — reform the Appellate Body to ensure it performs the limited role articulated in the Dispute Settlement Understanding. I agree with both his observation on the lack of trust (and the need to develop trust through actions) and what the objective of reform can and should be. I differ only in what type of actions Members can take to ensure compliance by the Appellate Body with the limited role it is to play in dispute settlement.

His two papers do not suggest that all issues raised by the U.S. have been addressed in his papers (not clear if there are additional papers yet to be released). Nor is it the intention of his papers to suggest language amendments to the draft General Council Decision put forward by the then facilitator to the General Council, Amb. David Walker (NZ).

As an aid to readers, I have copied my November 4, 2019 recommended modifications to the draft General Council Decision below. The intention of my edits to the draft Decision was to provide changes reflecting the underlying purpose of the DSU that would be enforceable by the parties to disputes and to suggest an approach to deal with overreach that would deal with the past cases and not simply the future disputes. As one of the objectives of the U.S. is restoring the balance that was agreed to in the negotiated texts, I believe any resolution of the Appellate Body impasse has to identify a path forward on past decisions. The next paragraph and the modified draft General Council Decision are copied verbatim from my November 4th post. There are obviously many excellent ideas in papers from experts like Mr. Hirsch. My suggestions may add some flavor or different options on a number of issues that need to be addressed.

Excerpt from November 4, 2019 Post

What follows is my personal effort to identify some consequences of actions that have long concerned the United States.  Obviously, only the U.S. can determine what will address its concerns.  But possibly some of the following suggestions, if part of any final package, could address some of the ongoing and longstanding U.S. concerns.  The text, other than what is both in bold and underlined, is the draft General Council Decision that is contained as an Annex to Amb. Walker’s October 15, 2019 report to the General Council.  Job/GC/222.  Only one number has been deleted – “6” (60 days has been changed to 90 days under the first topic).

DRAFT GENERAL COUNCIL DECISION ON FUNCTIONING OF THE APPELLATE BODY

The General Council,

Conducting the function of the Ministerial Conference in the interval between meetings pursuant to paragraph 2 of Article IV of the Marrakesh Agreement Establishing the World Trade Organization (the “WTO Agreement”);

Having regard to paragraph 1 of Article IX of the WTO Agreement;

Mindful of the work undertaken in the Informal Process of Solution-Focused Discussion on Matters Related to the Functioning of the Appellate Body, under the auspices of the General Council;

Recognizing the central importance of a properly functioning dispute settlement system in the rules-based multilateral trading system, which serves to preserve the rights and obligations of Members under the WTO Agreement and ensures that rules are enforceable;

Desiring to enhance the functioning of that system consistent with the Understanding on Rules and Procedures Governing the Settlement of Disputes (the “DSU”);

Decides as follows:

Transitional rules for outgoing Appellate Body members

Only WTO Members may appoint members of the Appellate Body.  

The Dispute Settlement Body (the “DSB”) has the explicit authority, and responsibility, to determine membership of the Appellate Body and is obligated to fill vacancies as they arise.

To assist Members in discharging this responsibility, the selection process to replace outgoing Appellate Body members shall be automatically launched 180 days before the expiry of their term in office. Such selection process shall follow past practice.

If a vacancy arises before the regular expiry of an Appellate Body member’s mandate, or as a result of any other situation, the Chair of the DSB shall immediately launch the selection process with a view to filling that vacancy as soon as possible.

Appellate Body members nearing the end of their terms may be assigned to a new division up until 90 days before the expiry of their term.

An Appellate Body member so assigned may complete an appeal process in which the oral hearing has been held prior to the normal expiry of their term if completing such appeal is consistent with Article 17.5 of the DSU or any mutually agreed extension by the parties.

90 Days

Consistent with Article 17.5 of the DSU, the Appellate Body is obligated to issue its report no later than 90 days from the date a party to the dispute notifies its intention to appeal.

In cases of unusual complexity or periods of numerous appeals, the parties may agree with the Appellate Body to extend the time-frame for issuance of the Appellate Body report beyond 90 days.1 Any such agreement will be notified to the DSB by the parties and the Chair of the Appellate Body.

Failure to complete the appeal within 90 days of the notification of intent to appeal, or such other time as the parties agree to, shall result in the appeal terminating with no decision.  In such situations the Dispute Settlement Body will consider adoption of the panel report but rights of the complaining party under Articles 21.6 and 22 of the DSU shall not apply.

The Appellate Body will supply the Dispute Settlement Body with a description of steps taken by the Division to complete any such appeal within 90 days and any modifications to Appellate Body procedures and practice that will be pursued by the Appellate Body to ensure such failure to comply with the 90 day rule is not repeated.   

1 Such agreement may also be made in instances of force majeure.

Municipal Law

The ‘meaning of municipal law’ is to be treated as a matter of fact and therefore is not subject to appeal.  Where the Appellate Body nonetheless addresses the meaning of municipal law in an Appellate Body report, either party may request that the paragraphs of the Appellate Body report dealing with such issue or issues and any conclusions drawn therefrom  be striken, and the Appellate Body will reissue the decision without such paragraphs forthwith.  Compliance with the 90 day requirement will be measured from the date of the revised decision.

The DSU does not permit the Appellate Body to engage in a ‘de novo’ review or to ‘complete the analysis’ of the facts of a dispute. 

Consistent with Article 17.6 of the DSU, it is incumbent upon Members engaged in appellate proceedings to refrain from advancing extensive and unnecessary arguments in an attempt to have factual findings overturned on appeal, under DSU Article 11, in a de facto ‘de novo review’.   Where Article 11 is invoked by a Member seeking review on appeal of whether the panel failed to make an objective assessment, any other party may file an objection.  The Appellate Body will consider the claim only in extraordinary circumstances of facial bias in the assessment by the panel.  A Member raising such a claim that is dismissed will be assessed costs to the Member who filed an objection.

Advisory Opinions and Appellate Body Economy in Decisions

Issues that have not been raised by either party may not be ruled or decided upon by the Appellate Body.   Where issues not raised by either party are addressed in the Appellate Body report, the addressing of such issues constitutes the provision of an advisory opinion and is inconsistent with DSU Article 17.12 .  Either party may request that the paragraphs of the Appellate Body report dealing with such issue or issues and any conclusion based thereon be striken, and the Appellate Body will reissue the decision without such paragraphs forthwith.  Compliance with the 90 day requirement will be measured from the date of the revised decision.

Consistent with Article 3.4 of the DSU, the Appellate Body shall address issues raised by parties in accordance with DSU Article 17.6 only to the extent necessary to assist the DSB in making the recommendations or in giving the ruling provided for in the covered agreements in order to resolve the dispute.  The Appellate Body’s indicating that other issues raised need not be addressed to resolve the dispute satisfies the requirements of DSU Article 17.12.

Precedent

Precedent is not created through WTO dispute settlement proceedings.

Consistency and predictability in the interpretation of rights and obligations under the covered agreements is of significant value to Members.

Panels and the Appellate Body should take previous Panel/Appellate Body reports into account to the extent they find them relevant in the dispute they have before them.  The Appellate Body shall not reverse a panel decision on any issue solely on the basis of the panel not conforming to a prior Appellate Body report where the panel has identified different factual and/or legal issues.  

‘Overreach’

As provided in Articles 3.2 and 19.2 of the DSU, findings and recommendations of Panels and the Appellate Body and recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.   In a large number of Panel and Appellate Body reports, one or more parties and/or third parties have raised concerns about the Panel or Appellate Body adding to or diminishing the rights and obligations contrary to Articles 3.2 or 19.2 of the DSU.

To clarify situations where rights and obligations are being added to or diminished, Panels and the Appellate Body will not fill gaps in agreements, construe silence to indicate obligations or construe ambiguities in language of existing agreements to require a particular construction.  Any such actions by a Panel or by the Appellate Body is inconsistent with Articles 3.2 and 19.2 of the DSU.

Any party to an Appellate Body report that raised at the DSB meeting considering adoption of the Appellate Body report concerns about the creation of rights or obligations inconsistent with Articles 3.2 or 19.2, will have 90 days from the adoption of this General Council decision to request a review of the Appellate Body decision.  Such request will be for the limited purpose of having the Appellate Body determine whether on the specific issues raised where the party complained of creating rights or obligations the clarification of meaning provided in this General Council decision would result in a changed decision on the particular issue.  The Appellate Body will render decisions on all such requests within 90 days and will accept no additional briefing or argument from parties.  Where the report would have been different on one or more particular issues, it is sufficient for the Appellate Body to so indicate.  Where the same decision on an issue would have been made, the Appellate Body shall provide a detailed explanation.      

Panels and the Appellate Body shall interpret provisions of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“antidumping agreement”) in accordance with Article 17.6(ii) of that Agreement.  Any party to an Appellate Body report that raised at the DSB meeting considering adoption of the Appellate Body report that Article 17.6(ii) was not applied in interpreting the antidumping agreement, will have 90 days from the adoption of this General Council decision to request a review of the Appellate Body decision.  Such a request will be for the limited purpose of having the Appellate Body determine whether a different outcome on one or more issues would have resulted had the Appellate Body applied Article 17.6(ii)  of the antidumping agreement.  The Appellate Body will render decisions on all such requests within 90 days and will accept no additional briefing or argument from parties.  Where the report would have been different on one or more particular issues, it is sufficient for the Appellate Body to so indicate.  Where the same decision on an issue would have been made, the Appellate Body shall provide a detailed explanation.       

Regular dialogue between the DSB and the Appellate Body

The DSB, in consultation with the Appellate Body, will establish a mechanism for regular dialogue between WTO Members and the Appellate Body where Members can express their views on issues, including in relation to implementation of this Decision, in a manner unrelated to the adoption of particular reports.  Such mechanism will be in the form of an informal meeting, at least once a year, hosted by the Chair of the DSB.

The Appellate Body Secretariat will prepare and circulate to the DSB at least 60 days in advance of such a meeting a document which reviews:

(a) for any Appellate Body member whose term is or has expired in the last 12 months, assignments to appeals within 90 days of the end of the term and any appeals on which the AB member continued to work after his term expired and whether such continuation was authorized by the parties to the appeal;

(b) the time from notification of intent to file an appeal to the AB decision in each case filed in the last twelve months (and for the first such report and any subsequent reports where appeals are not current with the 90 day requirement) to an AB report (or revised report where paragraphs are requested to be deleted as addressing issues not raised by any party) and copies of any write-ups filed where reports were not filed within 90 days;

(c) a list of AB reports where paragraphs were requested striken and time from request to rerelease of AB report;

(d) a list of requests for review in appeals pursuant to Article 11 of the DSU of panel decisions as not being an objective assessment, how each request was resolved, and for such claims that were not properly filed whether costs were paid by the party raising the issue;

(e) the number of AB reports where parties requested review based on statements made at prior DSB meetings that rights or obligations were being added to or diminished and/or that Article 17.6(ii) of the antidumping agreement was not applied or was applied inappropriately, timing of resolution by the Appellate Body and the number of issues where a different decision was rendered.

Where the Appellate Body has been unable to comply with the requirements of the DSU as clarified by this General Council Decision, it is expected that the Appellate Body Chairman will present at the informal meeting the action plan being pursued by the Appellate Body to achieve full compliance with the terms of the DSU and this Decision. 

To safeguard the independence and impartiality of the Appellate Body, clear ground rules will be provided to ensure that at no point should there be any discussion of ongoing disputes or any member of the Appellate Body other than as it relates to compliance with this General Council Decision. 

WTO Dispute Settlement — How to Handle Allegations That an Appellate Body Member is Affiliated with a Government and Hence Not Properly an Appellate Body Member?

In the first twenty-five years of the World Trade Organization, there have generally been few challenges to Appellate Body members in terms of violations of their obligations under Art. 17.3 of the Dispute Settlement Understanding or of the Rules of Conduct, WTO/DSB/RC/1.

The dispute brought by Canada against a countervailing duty order issued by the United States on supercalendered paper from Canada has resulted in such an issue arising. The WTO summary of the case is contained here, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds505_e.htm. The Appellate Body Report was circulated on February 6, 2020 under the document number WT/DS505/AB/R.

The United States had taken an appeal from certain aspects of the panel report. At the Dispute Settlement Body meeting of February 26, 2020, the U.S. had objected to the DSB considering the Appellate Body report as invalid for various reasons, including the fact that two of the three AB members’ terms had expired and had not received authorization from the DSB to continue to participate in appeals, that the report was issued far beyond the maximum 90 days laid out in the DSU (Art. 17.5 of the DSU). Most importantly, the United States claimed that the third person hearing the appeal was in fact affiliated with a government in contravention of DSU 17.3 and that her participation in the appeal was inappropriate for that reason and the fact that many of the cases relied upon by Canada to establish a practice were cases involving the government of China, the government with which the AB member was allegedly affiliated creating justifiable doubts as to the person’s independence or impartiality (WT/DSB/RC/1, Art. III.1). The U.S. position was that in light of the problems, the only consensus possible would be a positive consensus and that the U.S. would agree to a positive consensus on certain findings by the panel that were not appealed by the U.S.

Canada, the EU, and China all made comments at the DSB meeting in late February. Canada argued that despite the allegations raised by the US which should be looked at but not in the context of a DSB meeting, the DSB would adopt the Appellate Body report absent negative consensus. China agreed and defended the Appellate Body member who was from China. The EU reviewed procedures for raising the types of allegations raised by the US but like Canada and China viewed the DSU as mandating adoption of the AB report where a negative consensus did not exist.

The U.S. did not agree that adoption was permitted or appropriate and continued to oppose. The WTO webpage coverage of the dispute view the AB and panel reports as adopted on 5 March 2020. The minutes of the WTO DSB meeting of February 28 and March 5, 2020 are presented in WT/DSB/M/441 at pages 18-25 (14 May 2020). The document is embedded below and the reader is encouraged to read the discussion on those pages in full to understand the competing positions of the parties and major third parties.

WTDSBM441

While the Rules of Conduct describe a process for presenting information “of a material violation of the obligations of independence, impartiality, or confidentiality or the avoidance of direct or indirect conflicts of interest by covered persons which may impair the integrity, impartiality or confidentiality of the dispute settlement mechanism,” parties are told “at the earliest possible time and on a confidential basis, submit such evidence to the Chair of the DSB, the Director-General or the Standing Appellate Body, as appropriate.” WT/DSB/RC/1 Art. VIII.1. Paragraph 2 of Art. VIII says that the alleged failure to disclose by itself is not a sufficient ground for disqualification “unless there is also evidence of a material violation of the obligations of independence, impartiality, confidentiality or the avoidance of direct or indirect conflicts of interests and that the integrity, impartiality or confidentiality of the dispute settlement mechanism would be impaired thereby.”

Paragraphs 14-17 address how to address alleged violations by a member of the Appellate Body basically calling for the information to be shared with the other party to the dispute and to the Standing Appellate Body.

But the basic premise of the Rules of Conduct is that allegations and resolutions will occur before the panel or Appellate Body process is complete to permit time to substitute a new panelist or an Appellate Body member into the dispute before final resolution.

Challenges of the Supercalendered Paper case

After December 10, 2019, there was only one Appellate Body member. The United States communicated with the Director-General of the WTO and the Chair of the Dispute Settlement Body (the other two entities to whom evidence of possible violations could be sent if other than an Appellate Body member) on January 30, 2020 about the alleged violation of the one remaining AB member as she was affiliated with the government of China and the case, while brought by Canada involved mainly cases in which China was involved. While the evidence wasn’t sent to the Standing Appellate Body, that was not a practical option under the circumstances.

It is unclear whether the Director-General or the Chair of the Dispute Settlement Body did anything with the information provided. Certainly, no action was expeditiously undertaken to permit a resolution of the allegation before the time when the DSB would take up the Appellate Body Report and panel report. There is no reference in the minutes of the March 5, 2020 meeting to any action being taken.

The position of Canada and the EU was that the U.S. would have to wait until the Appellate Body was functioning again to have the issue reviewed. Yet such an approach is counter to the need to determine whether a material violation has occurred expeditiously so that corrective action (e.g., replacement of AB member or panelist) could occur if appropriate.

What is clear is that a system which doesn’t permit the timely evaluation of allegations against the propriety of an Appellate Body member, a panelist or other individual involved in the dispute settlement system, serving on a dispute weakens the integrity of the system and the perceived impartiality of the AB members and panelists.

Nor have Canada, the EU, China or others identified what a later review of allegations would permit in terms of correction of the particular dispute if the allegations are deemed to be confirmed. Nor do the Rules of Conduct seem to provide for retroactive correction of earlier disputes where a panelist or Appellate Body with a demonstrated serious violation of obligations served (and hence either there may have been a split decision on certain issues if there was a dissenting view and where you would not have had three proper AB members participate).

One would assume that the U.S. will make addressing these shortcomings in the existing system part of what needs to be addressed before the Appellate Body is reconstituted.

Continuing saga

Despite the fact that Canada agrees that the U.S. has raised serious issues, Canada has sought rights to retaliation and the topic was discussed at Monday’s Dispute Settlement Body meeting (June 29, 2020). The WTO press release on the meeting included this summary of the discussion of supercalendered paper:

“Paper from Canada

“Canada noted its request to suspend concessions against the United States for the US failure to comply with the WTO’s ruling in DS505. Canada said the US has neither informed the DSB of its intentions in regard to complying with the ruling, nor has it proposed a reasonable period of time to ensure compliance. Thus, Canada was pursuing its right to retaliate.

“The United States objects to the premise that the DSB adopted the ruling in this dispute on 5 March. The US position is that there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the ruling. The report was not valid for three reasons: 1) the ruling was issued after the 90-day deadline set under the Dispute Settlement Understanding (DSU); 2)
two of the Appellate Body members were not authorized by the DSB to continue working on the case after their terms as members expired; and 3) the third Appellate Body member — Hong Zhao of China — was disqualified from serving as a member because she currently serves as vice president of an academy which is a public institution under Chinese law and subordinate to China’s Ministry of Commerce (MOFCOM), and thus she was neither independent nor impartial.

“The US also said Canada was not suffering any trade impact from the measures in question, particularly since the countervailing duties had been removed two years earlier. Nevertheless, the US said it had objected to the Canadian request on 26 June, meaning that the matter is automatically referred to WTO arbitration.

“Canada was joined by China, the EU, Japan, Australia and Mexico in rejecting the notion that the Appellate Body ruling in DS505 was not valid and that the DSB never adopted the ruling. Canada said the minutes of the DSB meeting on 5 March show that the ruling was adopted on the basis of Article 17.14 of the DSU, whereby a ruling can only be rejected if all WTO members present agree to reject it. Canada added that its request is based on a formula to ensure that retaliation can be exercised only if and when the US applies its WTO-inconsistent ongoing conduct to imports from Canada in the future.

“China rejected the accusations that Ms Zhao was not impartial and independent, declaring that the Chinese institute with which she is affiliated is an independent legal entity, and that the US raised no objections to her when she was first appointed to the WTO, nor when she was involved in rulings that were favorable to the United States.

“The US countered that China has not denied US statements regarding Ms Zhao’s affiliation with the institute and its affiliation with, and financial support from, MOFCOM.”

https://www.wto.org/english/news_e/news20_e/dsb_29jun20_e.htm.

The United States releases its statement to the Dispute Settlement Body meetings on the US Mission Geneva webpage. See Statement of the United States at the Dispute Settlement Body Meeting, Geneva, June 29, 2020, https://geneva.usmission.gov/wp-content/uploads/sites/290/Jun29.DSB_.Stmt_.as-deliv.fin_.public13218.pdf The relevant portion (pages 20-24) of the U.S. statement this past Monday is copied below.

“12. UNITED STATES – COUNTERVAILING MEASURES ON SUPERCALENDERED PAPER FROM CANADA

“A. RECOURSE TO ARTICLE 22.2 OF THE DSU BY CANADA (WT/DS505/13)

“ On June 18, 2020, Canada filed a request that the DSB authorize Canada to suspend concessions because it considers that the United States failed to comply with the recommendations of the DSB.

“ The United States objects to the premise of Canada’s request, which is that the DSB adopted recommendations in this dispute on March 5, 2020. As we will explain again, the position of the United States is that no DSB recommendation was or could be adopted because there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the reports.

“ The United States has also repeatedly expressed concern that Canada continues to pursue a dispute that has no real world effect on Canadian exporters – a fact conceded by Canada’s recent request.

“ Canada’s request asks for authorization based on speculation – that is, related to an alleged nullification or impairment that occurs ‘if the ‘ongoing conduct’ continues to exist and [if it] applies to exports from Canada in the future’.

“ Canada is unable to even assert that it suffers from any nullification or impairment today because the alleged conduct is not applied to any Canadian good.

“ Only one determination in this dispute involved Canada – Supercalendered Paper – and that countervailing duty order was revoked two years ago.

“ Therefore, Canada suffers no nullification or impairment from the alleged measure, nor can it say that the alleged measure continues to exist, nor that Canada will suffer nullification or impairment in the future.

“ Nevertheless – and without prejudice to the U.S. position that no recommendations were adopted by the DSB – by letter dated June 26, 2020, the United States also objected to the level of suspension of concessions or other obligations proposed by Canada.

“ Under Article 22.6 of the DSU, the filing of the objection by the United States automatically results in the matter being referred to arbitration. Article 22.6 does not refer to any decision by the DSB, and no decision is therefore required or possible.

“ Consequently, because of the U.S. objection under Article 22.6, the matter already has been referred to arbitration. Although unnecessary, the DSB may take note of that fact and confirm that it may not therefore consider Canada’s request for authorization.

“ The United States recalls that at the March 5, 2020, DSB meeting, we did not join a consensus to adopt the reports put forward. There were multiple reasons why the appellate document was not a valid Appellate Body report under Article 17 of the DSU. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; second, the report was not issued within 90 days, as required by Article 17.5; and third, one person serving was affiliated with the Government of China, and therefore was not a valid member of the Appellate Body under Article 17.3.12

“ Indeed, separate from this dispute, on January 31, 2020, the United States informed the WTO Director-General and the DSB Chair by letter of discovered information that disqualified a Chinese national, Ms. Zhao, from the Appellate Body.

“ At the March 5 meeting, the United States detailed for Members the evidence demonstrating that Ms. Zhao is not “unaffiliated with any government.” No information has been presented, before, during, or after the March 5 DSB meeting that contradicts that evidence.

“ Because of Ms. Zhao’s affiliation with the Government of China, the appellate document is not a valid Appellate Body report because it had not been provided and circulated on behalf of three Appellate Body members, as required under DSU Article 17.1.

“ At the March 5 DSB meeting, Canada agreed that the allegations of Ms. Zhao’s lack of independence are serious and stated that they deserve full and impartial consideration. Canada asserted that the Rules of Conduct addressed such situations.

“ The United States agrees with Canada’s apparent concern that Ms. Zhao’s participation in the appeal may also be inconsistent with the Rules of Conduct.

“ The procedures under the Rules of Conduct for the Appellate Body itself to conduct an inquiry are not available in current circumstances. However, this does not mean that no inquiry may be conducted. To the contrary, in general the Rules provide for the DSB Chair or the Director-General to conduct the relevant inquiry.

“ The DSB Chair and Director-General would be natural leaders of such an inquiry given their roles in the WTO dispute settlement system and the trust Members repose in them.

“ The United States notes that the conduct at issue also would have constituted a breach of the obligation in DSU Article 17.3 to avoid a direct or indirect conflict of interest.13 Ms. Zhao was demonstrably connected with the Chinese Government, which had a direct interest in this appeal as the “ongoing conduct” complained of related almost exclusively to China.14 This reinforces the importance of an alternative form of ethical inquiry.

“ Therefore, given Canada’s acknowledgement of serious issues of independence and impartiality, the United States would support an alternative inquiry under the Rules of Conduct.

“ Even aside from the fact that Ms. Zhao was not a valid Appellate Body member under DSU Article 17.3, such an inquiry would confirm her disqualification from serving on the appeal.

“Second Intervention

“ Canada asserts that the appellate report must have been adopted by negative consensus. But it is evident that not any document issued with the title “Report of the Appellate Body” is such a document. For example, if such a document were signed by three members of the Appellate Body Secretariat, no one would seriously argue the report must be adopted by the DSB by negative consensus. That is because the alleged “Report” would not be consistent with DSU Article 17, which requires an appeal to be decided by three Appellate Body members.15

“ In this dispute, the facts are not seriously contested. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; this is evident from the fact that no such decision was ever proposed to the DSB.

“ Second, the report was not issued within 90 days, as required by Article 17.5; this too is not contested.

“ Third, one Appellate Body member was affiliated with the Government of China; as the United States has pointed out, the evidence of affiliation brought forward by the United States has not been directly contested. Therefore, this affiliated person was not a valid member of the Appellate Body under Article 17.3.

“ Given that there was no valid Appellate Body report before the DSB, the document could not be adopted by negative consensus under Article 17.14 as that rule did not attach to this document. Therefore, the DSB could only adopt the document by positive consensus. The United States made clear at the DSB meeting that it objected and did not join a consensus on adoption.

“ As there was no consensus for adoption, the DSB did not adopt any reports in this dispute. Accordingly, there was no recommendation for the United States to bring a measure into conformity with a covered agreement.

“ Regarding Canada’s comments concerning application of the Rules of Conduct, we note these rules were agreed by Members in order to help preserve the integrity and impartiality of the WTO dispute settlement system. That does not mean that the Rules are all that is necessary to do so. Rather, first and foremost, it is for WTO Members, and all participants in the system, to take responsibility for safeguarding that system.

“ When Canada says only the Appellate Body may apply the obligations of impartiality and independence to a person serving on an appeal, and therefore the Rules cannot be applied now, Canada would actually use the Rules to undermine the integrity and impartiality of the WTO.

“ If there are valid ethical concerns with the service by a person in an appeal, they should be investigated. It would be thoroughly inconsistent with our experience and close relationship with Canada to see it defend the behavior of the Chinese official in this dispute.

“ And there is no question that Ms. Zhao’s professional connections with the Government of China raise serious ethical concerns. For instance, given Ms. Zhao’s professional connections with the Government of China, her participation in the appeal is not consistent with the obligations to be ‘independent and impartial’ and ‘avoid direct or indirect conflicts of interest,’ provided for in paragraph II:1 of the Rules of Conduct.16

“ We therefore look forward to further conversations with Canada to find a shared approach through which we can maintain the integrity and impartiality of WTO dispute settlement.

“ At the March 5 DSB meeting and again today, China has responded to the evidence explained by the United States. Importantly, and revealingly, China has not denied the following:

“o Ms. Zhao serves as Vice President of MOFCOM-AITEC.

“o Ms. Zhao receives or has received a salary for her position of Vice President.

“o MOFCOM-AITEC is an “affiliated” entity “subordinate” to MOFCOM.

“o MOFCOM-AITEC’s budget is part of MOFCOM’s budget, such that the salary for Ms. Zhao’s Vice President position at MOFCOM-AITEC is funded by the Government of the People’s Republic of China.

“ The fact that China did not deny these statements or assert that they are incorrect only confirms that Ms. Zhao is affiliated with the Government of China and is therefore not a valid member of the Appellate Body.

“12 See U.S. Statement at the March 5, 2020, Meeting of the Dispute Settlement Body (Item 8).

“13 See DSU Art. 17.3 (“They [persons serving on the Appellate Body] shall not participate in the consideration of any disputes that would create a direct or indirect conflict of interest.”).

“14 See United States – Countervailing Measures on Supercalendered Paper from Canada (Panel), WT/DS505/R, para. 7.295 and Tables 1-4 (seven of nine proceedings involving China).

“15 DSU Art. 17.1 (“The Appellate Body shall hear appeals from panel cases. It shall be composed of seven persons, three of whom shall serve on any one case.”).

“16 Rules of Conduct, Section II (“Governing Principle”), para. 1 (“Each person covered by these Rules … shall be independent and impartial [and] shall avoid direct or indirect conflicts of interest . . . so that through the observance of such standards of conduct the integrity and impartiality of that mechanism are preserved.”).”

Conclusion

The dispute settlement system at the WTO is facing challenges flowing from long standing concerns about the Appellate Body conforming to the limited role given it by the Dispute Settlement Understanding, the expansive reading of the Appellate Body’s role by AB members over time and the largely ineffective negotiating function of the WTO which has prevented meaningful oversight of the Appellate Body by WTO Members.

Added to the longstanding concerns raised by the United States and others comes a concern that goes to the heart of the dispute settlement system’s legitimacy — the need for impartial decision making and how to ensure prompt resolution of allegations of violations of obligations by AB members or panelists. The allegations against the remaining Appellate Body member raised by the United States in the supercalendered paper dispute have not been addressed by the Director-General of the WTO or by the Chair of the Dispute Settlement Body. Other WTO Members seem to be willing to see challenged reports adopted instead of having allegations pursued. Adopting a report put out by the AB including the challenged member and Canada’s pursuit of retaliation rights make a mockery of a properly functioning system and will do lasting harm to the DSB’s legitimacy. And so the downward spiral at the WTO continues in its dispute settlement function.

WTO Dispute Settlement – With Appellate Body Currently Non-Operational, AB Secretariat Personnel Have Been Shifted to Other Divisions

As of December 11, 2019, there was only one remaining Appellate Body member whose term had not expired. Agreement amongst WTO Members permitted a number of pending appeals (those where hearings had already happened) to be completed even though this would mean completion by individuals whose terms had terminated but who would operate under AB rule 15. The last Appellate Body reports were released on June 9, 2020. AUSTRALIA – CERTAIN MEASURES CONCERNING TRADEMARKS, GEOGRAPHICAL INDICATIONS AND OTHER PLAIN PACKAGING REQUIREMENTS APPLICABLE TO TOBACCO PRODUCTS AND PACKAGING, WT/DS435/AB/R and WT/DS441/AB/R (9 June 2020).

The WTO has contractual arrangements with the remaining Appellate Body member and with many of the Appellate Body Secretariat staff. As a result, the WTO Director-General has worked to move the AB Secretariat staff to other Divisions within the WTO in light of the reduced 2020 Appellate Body budget, the reduced workload and now the termination (at least temporarily) of any work by the Appellate Body.

For example, the Committee on Budget, Finance and Administration meeting of March 9, 2020 had an appearance by Director-General Azevedo. The write-up on the meeting noted that “Turning to the Appellate Body Secretariat, the Director-General observed that until a political agreement emerges as to the format of the future appeals process, 23 staff members of the Appellate Body Secretariat have been temporarily re-assigned to other Divisions.” Committee on Budget, Finance and Administration, Report of meeting held on 9 March 2020, WT/BFA/185/Rev. 1 at para. 1.10.

Last Friday, June 26, 2020, Director-General Azevedo wrote to all the WTO membership to alert them to the creation of a new Division on July 1 “responsible for Knowledge and Information Management, Academic Outreach and the WTO Chair’s Programme”. The new Division will be headed by Mr. Werner Zdouc who was being reassigned. Mr. Zdouc has since 2006 served as the director of the Appellate Body Secretariat. It is assumed that by July 1st all Appellate Body Secretariat staff have either left the WTO or been reassigned. The June 26 letter is embedded below.

DG-letter-to-PRs-re-New-Division-Zdouc-June-2020

Press accounts from 2019 suggested that Mr. Zdouc was viewed as contributing to the problems at the Appellate Body long complained of by the United States and some others, particularly on the issue of precedent (i.e., whether AB reports were precedential) and on the practical problem of whether the Appellate Body would correct elements of decisions that were viewed as wrongly decided by Members. See Inside U.S. Trade’s World Trade Online, Appellate Body’s future could depend on whether its director keeps his job, December 8, 2019.

Movement of WTO Appellate Body Secretariat staff doesn’t end the conflict on second-tier review

While there has been hope amongst some that WTO Members would continue to pursue in 2020 a path to reform that would permit the reactivating of the Appellate Body, that hope seems to have no short-term prospect for fulfillment.

Parties remain locked in their existing positions. With U.S. elections scheduled for November, some WTO Members may be deciding that they will simply await the outcome of the election before further engaging. Ambassador Lighthizer said at the recent U.S. House of Representatives Committee on Ways and Means hearing on the President’s 2020 trade agenda that it would be ok if the Appellate Body never comes back.

Without an operational Appellate Body, WTO Members have various options including arbitration under DSU Article 25. However, there are ongoing skirmishes at the WTO pertaining to the coverage of costs by the WTO of arbitration costs for Members pursuing arbitration through the interim arbitration agreement to which the EU, Canada, China and many other countries are signatories. See JOB/DSB/1/Add. 12, 13 and 14.

During the 2020 budget discussions held at the end of 2019, the U.S. had pushed for a clarification for how arbitrators would be paid (same as panelists which was significantly lower than AB member daily charges; no monthly retainer) and for a reduction in the Appellate Body budget in light of the lack of sufficient AB members. See, e.g., Committee on Budget, Finance and Administration, Report of the Meeting Held on 12 and 27 November and 5 December 2019, WT/BFA/183 (6 December 2019).

Recent press accounts have reported that there continue to be challenges by the United States to the interim arbitration agreement on various fronts including payment from the WTO budget. See Inside U.S. Trade’s World Trade Online, June 12, 2020, Shea: U.S. opposes use of WTO budget for interim appellate plan (article includes a link to the June 5 letter from Amb. Shea to DG Azevedo). As stated in Amb. Shea’s June 5th letter to DG Azevedo, the U.S. objects to the interim arbitration agreement that the EU, China and others are party to because it “exacerbates some of the worst aspects of the Appellate Body’s practices.” The U.S. also objected “to the use of WTO budget funds for a process that is clearly far more than a simple Article 25 arbitration.” The letter is embedded below.

June-5-2020-letter-from-Amb.-Shea-to-DG-Azevedo

Conclusion

With a reduced 2020 budget for the Appellate Body and with the conclusion of disputes on which Appellate Body reports will be prepared until such time as the Appellate Body is reactivated, the WTO has reassigned Appellate Body Secretariat staff to other divisions and has started a new division which will be headed by the former Director of the Appellate Body Secretariat.

Unfortunately, shifting personnel to different divisions does nothing to eliminate the deep divisions on how to proceed with dispute settlement after panel reports. Moreover, there is no apparent willingness to move reform of the dispute settlement system forward at the present time. Efforts by the EU and others to create an interim process that mirror many of the problems found in the Appellate Body practices have simply moved the deep divisions among Members over the Appellate Body into what is permissible under DSU Art. 25. So we will have a crisis in the dispute settlement area at least until 2021 and probably beyond.

U.S. approach to trade – USTR Lighthizer’s Foreign Affairs article and Congressional testimony on June 17

Every year, the U.S. House of Representative’s Committee on Ways and Means and the U.S. Senate Finance Committee hold hearings to understand the Administration’s trade agenda for the year. This year both Committees held hearings on June 17 where the sole Administration witness was U.S. Trade Representative Robert Lighthizer.

Ambassador Lighthizer had separately prepared an article for Foreign Affairs entitled “How to Make Trade Work for Workers, Charting a Path Between Protectionism and Globalism” which had been reviewed by many of the Committee members prior to the hearings. The article is available here and presents the Trump Administration’s approach to trade policy. https://www.foreignaffairs.com/articles/united-states/2020-06-09/how-make-trade-work-workers.

The Foreign Affairs article

Ambassador Lighthizer uses the challenges of the COVID-19 pandemic to state that it is time for discussions to reach a new consensus on “the future of U.S. trade policy.” Amb. Lighthizer’s summary of the approach of the current Administration are repeated below:

“That debate should start with a fundamental question: What should the objective of trade policy be? Some view trade through the lens of foreign policy, arguing that tariffs should be lowered or raised in order to achieve geopolitical goals. Others view trade strictly through the lens of economic efficiency, contending that the sole objective of trade policy should be to maximize overall output. But what most Americans want is something else: a trade policy that supports the kind of society they want to live in. To that end, the right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, wellpaying jobs.

“That is precisely the approach the Trump administration is taking. It has broken with the orthodoxies of free-trade religion at times, but contrary to what critics have charged, it has not embraced protectionism and autarky. Instead, it has sought to balance the benefits of trade liberalization
with policies that prioritize the dignity of work.”

The paper reviews the history of trade liberalization, what the Administration views as its limits, their perception that many trade advocates have extolled the benefits of liberalization while discounting or ignoring the economic costs of liberalization. Unlike other areas of government policy, trade liberalization was viewed as an absolute good and not weighed against the costs of the policy in fact.

The section of the article entitled “The dark side of free trade” reviews the steep economic and human costs for the United States over the period 2000-2016 noting the loss of manufacturing jobs, stagnation of median household incomes, and the devastation to the populations left behind in manufacturing locations. While outsourcing reduces costs, it increases vulnerabilities and reduces the nation’s ability to respond to certain situations, such as the pandemic.

Amb. Lighthizer opines that “A sensible trade policy strikes a balance among economic security, economic efficiency, and the needs of working people.” He reviews how he believes the United States-Mexico-Canada Agreement (“USMCA”) achieves that balance looking at specific improvements from NAFTA.

The article then goes on to look at “two of the most significant trade challenges [the U.S.] will face in the coming years: market-distorting state capitalism in China and a dysfunctional WTO.”

The Trump Administration changed the approach of trying to deal with China’s trade policy issues pursued by prior Administration (e.g., through bilateral talks and through the WTO dispute settlement system) by going after some of the larger issues through the section 301 investigation with resulting tariffs on imports from China which led to the creation of the Phase 1 Agreement and, depending on success of Phase 1, a potential Phase 2.

On the WTO, the article focuses on the WTO’s Appellate Body and its deviation from its original purpose.

“The challenges in the WTO are also vexing. Like many international organizations, the WTO has strayed from its original mission. Designed as a forum for negotiating trade rules, it has become chiefly a litigation society. Until recently, the organization’s dispute-resolution process was led by its seven-member Appellate Body, which had come to see itself as the promulgator of a new common law of free trade, one that was largely untethered from the actual rules agreed to by the WTO’s members. The Appellate Body routinely issued rulings that made it harder for states to combat unfair trade practices and safeguard jobs. This was one of the reasons why the Trump administration refused to consent to new appointments to it, and on December 11, 2019, the Appellate Body ceased functioning when its membership dipped below the number needed to hear a case.

“The United States should not agree to any mechanism that would revive or replace the Appellate Body until it is clear that the WTO’s dispute-resolution process can ensure members’ flexibility to pursue a balanced, worker-focused trade policy. Until then, the United States is better off resolving disputes with trading partners through negotiations—as it did from 1947, when the General Agreement on Tarifs and Trade was signed, until 1994, when the WTO was created—rather than under a made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.”

Congressional Hearings

The Congressional hearings provide the opportunity for the Administration to present its record of accomplishments as well as identifying pressing issues being pursued and for members of Congress to inquire about specific issues of importance to their constituents, to challenge the narrative of the Administration (typically by the opposition party), to press for commitments on actions deemed of importance and otherwise to gain clarification of matters of interest to Congressional members.

Yesterday’s hearings had all of the above. Amb. Lighthizer’s opening statement to both Committees stressed what the Administration viewed itself as having achieved and the benefits to working Americans with a focus on China (and the US-China Phase 1 Agreement), USMCA, the US-Japan Phase 1, disputes at the WTO and WTO reform proposals as well as the Administration’s game plan for the WTO, for pending negotiations with the U.K. and Kenya and for WTO reform, and enforcement of existing agreements. His opening statement to the U.S. Senate Finance Committee is embedded below but mirrors his prepared statement to the U.S. House Ways and Means Committee.

17JUN2020LIGHTHIZERSTMNT1

Senate Finance Committee Ranking Member Wyden (D-OR) in his opening statement painted a different picture of the first three years of the Trump Administration’s trade agenda and whether successes had been achieved. His statement is embedded below.

061720-Wyden-Trade-Agenda-Hearing-Opener1

There were many questions in both chambers on the USMCA agreement, with particular focus on enforcement of labor, environment and other issues. With the final revised USMCA receiving strong bipartisan support in both houses of Congress and with the agreement taking effect on July 1st, many of the questions flagged areas where one of the countries was viewed as not in compliance with obligations in the Agreement (e.g., energy practices in Mexico) and commitments by Amb. Lighthizer to pursue matters where compliance wasn’t in place.

On the issue of Section 232 tariffs on steel and aluminum products from Canada and Mexico, some members inquired whether examining imposition of such tariffs would be consistent with U.S. agreement with the two countries which had excluded them from the additional tariffs. Amb. Lighthizer reviewed that the agreement excluded Canada and Mexico where volumes remained at historic levels. If the U.S. found surges and decided to impose the tariffs, any retaliation by Canada or Mexico would be limited to the same sectors (i.e., could not retaliate against agricultural products). Amb. Lighthizer indicated that the U.S. was considering whether tariffs should be imposed in light of surges that had been occurring.

There were also many questions about the U.S.-China Agreement with a focus on whether China was likely to meet its obligations on the purchase of goods (with most questions focused on agricultural purchases). Ranking Member Wyden (D-OR) cited a Peterson Institute paper claiming poor compliance with purchase commitments. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods Amb. Lighthizer on a number of occasions reviewed what were described as inadequacies in the Peterson data and reviewed strong growth in orders from China on agricultural goods to the present time (vs. exports through April shown in the Peterson graphs which look at January-April, even though the agreement didn’t take effect until February 14, 2020).

There were many questions about reshoring manufacturing of medical goods, particularly personal protective equipment (“PPE”), challenges to such reshoring because of the failure of the Administration to enter into long-term contracts to permit manufacturing to start up, whether broader tariff exclusions should be provided to imports of such products while there were inadequate supplies, concerns about existing supplies of PPEs amidst the ongoing pandemic. The issue featured prominently in Senate Finance Committee Chairman Grassley’s (R-IA) opening statement and in the questions of a number of Senators and House Representatives in the two sessions. Amb. Lighthizer discussed use of tariffs as a longer term issue to support reshoring and contested arguments that the Administration had not done enough to secure supplies during the pandemic. Chairman Grassley’s opening statement is embedded below.

Grassley-at-Hearing-on-the-President

There was also interest in both Houses of the ongoing or soon to be initiated FTA negotiations with the United Kingdom (ongoing, two rounds completed) and with Kenya (to start after July 4). There were questions or statements of support for the U.S.-Japan Phase 1 Agreement particularly by members with agricultural export interests to Japan.

On U.S.-EU trade relations, there were a few questions raised dealing either with the perceived abuse of geographical indications on food products by the EU and its push to get other countries to accept EU indications or with changing EU SPS provisions that appear to members of Congress and USTR as not science based. Amb. Lighthizer characterized both as protectionist trends from our friends in the EU. He also indicated that USTR is considering whether the U.S. should initiate a 301 investigation on the non-science based SPS measures.

On digital services taxes, questions arose about yesterday’s announced U.S. withdrawal from the OECD negotiations. Amb. Lighthizer reviewed USTR’s role in conducting 301 investigations first on France and now on a host of other countries where taxes are being imposed or considered on digital services on a discriminatory basis and on companies with no physical presence in countries imposing the taxes. The OECD effort was started to achieve a global agreement that could be accepted by all. The U.S. withdrew from the talks based on its view that the talks were building in discrimination against U.S. companies. If there is not a solution in the OECD, Amb. Lighthizer made it clear that results from the 301 investigations would permit the U.S. to take appropriate action against countries who proceed without a global agreement.

While Amb. Lighthizer’s opening statement had reviewed various WTO issues relevant to reform efforts — addressing Appellate Body; putting teeth into WTO notification requirements; clarifying which Members are eligible for special and differential treatment, and the concern about bound tariffs which have proven not to reflect current economic realities between countries, there were few questions about WTO reform during the two hearings. Amb. Lighthizer did go through the challenge of a WTO system where tariffs are bound, where the U.S. over 70 years has removed the vast majority of its tariffs and many other countries have maintained very high bound and even applied tariffs with little likelihood that those tariffs would be reduced regardless of the economic advances made by countries with high bindings. India and Indonesia were two of the countries used as examples of where bound tariffs today of such countries were not reflective of their economic advances and hence were unfair to the U.S.

There were also questions that arose from press reports about statements President Trump allegedly made to President Xi in Japan seeking China’s help in his reelection effort and to reports about two USTR professional staff members who had set up a webpage and been contacting automotive companies about helping them with USMCA compliance at a time when they were still USTR employees. Amb. Lighthizer was in a meeting with the U.S. and Chinese Presidents in Osaka, Japan in 2019 and denied that any request for assistance was made by President Trump at that meeting. On the latter issue, Amb. Lighthizer indicated that political appointees clearly could not do what was done by professional staff and that the professional staff had reportedly sought and obtained clearance from the USTR ethics office.

Conclusion

It has long been obvious that the Trump Administration was adopting a significantly different approach to trade policy than had been pursued by prior Administrations over recent decades. Ambassador Lighthizer’s Foreign Affairs article provides an articulation of the underlying concerns that have driven the Administration to the current policy approach. While there are many who remain skeptical about the benefits vs. costs flowing from the modified approach being pursued by the Trump Administration, there is little question that the change in approach has gotten attention of trading partners and at least some important modifications in agreements.

The USMCA has many novel elements, many of which are interconnected in terms of achieving stated objectives. Changes in rules of origin coupled with a high level of labor needing to make a minimum level of hourly wages and labor enforcement provisions are intended to address longstanding concerns of labor and is consistent with Amb. Lighthizer’s articulated objective of making trade work for workers. The willingness to work with the Democrats to achieve the labor and environment provisions contained in the revised agreement objectives permitted broad bipartisan support when implementing legislation was considered in the United States. Similarly, the USMCA provision of a sixteen year sunset of the agreement, extendable every six years should permit Canada, Mexico and the United States to update the agreement on a regular basis preventing the loss of relevance or coverage that normal FTAs have experienced with the passage of time.

On the importance of the U.S. relationship with China, the current Administration has come to the conclusion that China is not interested in converting to a market economy in fact. Reciprocity is unlikely under WTO Agreements since the WTO is premised on market economy Members, and the WTO agreements do not address many of the distortions flowing from the Chinese-style economy. Thus, the Administration has pursued a different approach to achieve a different outcome and greater reciprocity. The importance of the U.S.-China Phase 1 is best understood in that context. While the jury is out on how successful the Phase 1 Agreement will be, Amb. Lighthizer’s review of USTR information on growing orders from China in agriculture and China’s implementation of many of the specific commitments in the SPS area and other areas is encouraging.

On the WTO, the U.S. is looking for fundamental reform to achieve an organization that has rules for all and that reflects the changing capabilities of Members. With the differences in views of the purpose of the Appellate Body between the U.S. and the EU (and others), there is no likelihood of rapid restoration of the Appellate Body. With the EU moving towards taking unilateral action against Members who don’t engage in a second stage review of disputes with them, we are likely facing a period of heightened trade tensions between the U.S. and the EU.

Other U.S. proposals that have already been made at the WTO (notification requirements; eligibility for special and differential treatment; WTO being an organization for market economies ) or are working on jointly with others (e.g., EU and Japan on industrial subsidies and state-owned enterprises), have different challenges in terms of reaching consensus to adopt. The issue not yet formally raised on revisiting tariff bindings and/or how the system addresses changes in economic might over time with existing bindings would seem to require a further major shock to the operation of the WTO to have any chance of being considered.

As trading partners struggle to find new sources of revenue, particularly following the economic challenges flowing from the COVID-19 pandemic, many have looked to tax foreign companies in the digital services space. As the U.S. has many of the major players, there are looming major confrontations over EU and other country efforts to impose discriminatory taxes. The U.S. will defend its interests if an OECD agreed approach cannot be found. Based on yesterday’s withdrawal of the U.S. from the OECD process, major disputes are likely by the end of 2020.

The Trump Administration will continue to utilize all legal tools available to it under U.S. law and pursuant to various Agreements to achieve a rebalancing of the U.S. trade relationship with our major trading partners and with all nations. The Foreign Affairs article provides the Administration’s logic for the approach being pursued.

Qatar’s WTO dispute with Saudi Arabia — panel report released on June 16, 2020

A panel report in the dispute between Qatar and Saudi Arabia, Saudi Arabia – Measures Concerning the Protection of Intellectual Property Rights, WT/DS567/R, was released to the public today, June 16th.

Saudi Arabia and a number of other countries in the MENA (Middle East and North Africa) region had severed all relations with Qatar on June 5, 2017. Report, Section 2.2.2. “The June 2017 severance of relations and events leading up to it”. A Qatari company with exclusive rights of broadcasting in the MENA region (including Saudi Arabia) a range of sports for various leagues around the world found its materials used by a Saudi company without authorization. The Qatari company was unable to hire Saudi counsel to pursue enforcement actions in Saudi Arabia and criminal actions were not pursued by the Saudi government.

The dispute was one of several by Qatar against Members who cut off all relations for alleged violations of WTO Agreements. In the challenge of Saudi Arabia, various violations of the Trade-Related Aspects of Intellectual Property Rights Agreement were alleged by Qatar. While Saudi Arabia participated in the panel process, its main argument was that the matter was not properly the subject of dispute settlement or was justified by TRIPS Article 73.

Because the question of whether actions by countries pursuant to their national security concerns are properly the subject of WTO dispute settlement is important to many Members and in a number of ongoing disputes, there were many third parties (13 in total) to the dispute, including the United States, the European Union, China, Canada, Japan and others.

Panel findings

The panel did not find that the issues presented could not be decided by the panel. Based on the facts that were before the panel, the panel report had little trouble finding violations of various TRIPS Articles, with the key issue being whether security interests of the defending Member permitted an override of the other obligations. On this latter issue, the panel had different views on the two main violations, finding one (Art. 41.1 and 42) covered by the security exceptions and the other (Art. 61) not. More specifically, the panel found that the inability of the Qatari company to obtain local counsel in Saudi Arabia flowed directly from Saudi Arabia’s actions considered “necessary for the protection of its essential security interests” and which were “taken in time of war or other emergency in international relations.” TRIPS Art. 73(b) and (b)(iii). The panel did not find that the claim surrounding the non-application of criminal procedures and penalties to the Saudi company was factually related to the worsened relationship between Saudi Arabia and Qatar and hence did not find Art. 73 overrode the violation of TRIPS Art. 61.

The conclusion to the panel report is embedded below.

567r_conc_e

The earlier case that looked at security interests under the GATT, Russia – Measures Concerning Traffic in Transit, WT/DS512/R (adopted 26 April 2019; panel report was not appealed), was an object of interest for a number of the third parties who filed comments. While the U.S. supported the Saudi position that security interests are a matter of self-determination and are not subject to dispute settlement, that view was not supported by most other Members including Canada, China, the EU or Japan. WT/DS567/R/Add.1 at Annex C-4 (Canada), C-5 (China), C-6 (European Union), C-7 (Japan), C-13 (United States). With many countries (but not Japan) having challenges to the United States Section 232 national security action on steel and aluminum pending before panels, the third party positions mirror arguments being presented in those other disputes.

Next Steps

It is not clear that either Qatar or Saudi Arabia will pursue arbitration under DSU Art. 25 or some other approach to reach a final resolution of the dispute. While Saudi Arabia lost the overarching issue at the panel stage, having cut off all relations with Qatar, it is unclear why it would pursue next steps. For Qatar, having obtained a legal victory on some issues at the panel stage and with relations severed with Saudi Arabia, it is unclear what additional benefit they get from pursuing arbitration. They could decide to leave the issue for later appeal by agreeing with Saudi Arabia that they reserve the right to appeal at such time as the Appellate Body is functioning again. As neither Qatar nor Saudi Arabia are parties to the interim arbitration agreement that the EU and 20 other WTO Members are party to (JOB/DSB/1/Add.12, 13 and 14), any decision to pursue arbitration would have to be negotiated between the two countries including procedures, etc.

Conclusion

The panel report released today is important both in terms of providing some interpretation of TRIPS provisions but also for its interpretation of TRIPS Art. 73, which mirrors the language in GATT Art. XXI.

Bigger panel decisions are due out later this year in the large number of challenges to U.S. Section 232 of the Trade Expansion Act of 1962, as amended, and the actions taken on steel and aluminum products. The U.S. now has two panel reports that don’t agree with the U.S. basic premise that determination of national security interests and appropriate actions to take to defend are matters for Members to determine on their own without review by the dispute settlement system.

Assuming that the upcoming panel decisions go against the United States on that core principle, how the U.S. responds will depend on whether the panel report otherwise upholds the U.S. action as permissible in fact. If the U.S. loses the cases in toto, look for the U.S. to not accept the panel results, and to either negotiate with trading partners individually or take no action. The many countries who took unilateral retaliatory action without WTO disputes will likely continue to do so and may increase the level of retaliation based on the specifics of the decision.

At the same time, the United States has filed a series of challenges to the unilateral imposition of retaliation duties by many trading partners who treated Section 232 relief as being safeguard relief or without any WTO justification. Assuming that the U.S. wins all of these cases at the panel stage, the net outcome for the U.S. and each individual WTO member who has challenged Section 232 relief will depend on the combination of results and presumably bilateral consultations. It is unlikely that the United States will engage in arbitration with any of the disputants.

WTO Appellate Body Reports on Australia’s Plain Packaging of Tobacco Products — Separate Views of One Division Member Merit Close Review

In a post from yesterday, I reviewed the Appellate Body (“AB”) reports released on June 9 in the appeals by Honduras and the Dominican Republic on the panel reports on Australia’s plain packaging regime on tobacco products. As noted, the AB upheld the panel reports that Australia’s regime did not violate any WTO Agreements as alleged by the Appellants. See WTO Appellate Issues Reports on Australia’s Plain Packaging Requirements on Tobacco Products – Last Reports Until WTO Appellate Body Reform Occurs, https://currentthoughtsontrade.com/2020/06/09/wto-appellate-body-issues-reports-on-australias-plain-packaging-requirements-on-tobacco-products-last-reports-until-wto-appellate-body-reform-occurs/

There are important “separate views” contained in the AB reports that while agreeing with the final conclusion that there was no violation disagree with the searching review of the underlying record on the claim that the panels had not made an objective assessment of the facts pursuant to DSU Art. 11. The separate views also disagreed with the finding of the other two Division members that appellants’ due process rights were violated based on use of information in the interim panel reports that had not previously been available to the parties.

As WTO disputes have become ever more litigious, lawyers used by Members to handle appeals have increased the frequency of seeking a review of the factual record on the claim that panels have not made an objective assessment of the record. Instead of parties limiting appeals of such claims to extraordinary situations, increasing numbers of appeals have focused on these appeal issues. The result has been greatly complicated appeals, much longer AB reports and an inability for AB Divisions to render decisions in 60-90 days of the filing of an appeal.

The Australia plain packaging appeals were filed by Honduras on 17 July 2018 and by the Dominican Republic on 23 August 2018. Thus, the AB reports released on 9 June 2020 were 693 days and 656 days after the appeals were filed. While certainly part of the delay flows from the inability to fill the AB member vacancies since 2018, a significant part flows from the failure of the AB Divisions to limit review of claims under DSU Art. 11 to situations that plausibly create the extraordinary circumstances required for its invocation.

The AB reports in these appeals are 232 pages in length. The concept that a Division of the AB will draft reports in 60-90 days that are 232 pages in length is obviously implausiible. Eliminating the DSU Art. 11 claims would have reduced the length of the reports by roughly 100 pages and would have permitted the AB to focus on the legal issues and legal interpretations of the panel appealed by the parties. As clear from the Dispute Settlement Understanding, the AB isn’t to review factual issues. Rather DSU Art. 17.6 limits the AB to reviewing legal issues and legal interpretations of the panel.

The proper role of the AB and the need to clarify the limited circumstances when a challenge to facts found by the panel by claims of panel bias or failure to make an objective evaluation of the record (DSU Art. 11) have been some of the ongoing concerns of the United States in looking at the functioning of the AB. The latest AB reports demonstrate the importance of addressing the U.S. concerns. The separate views included in the report are important in articulating how the DSU Art. 11 claims in these appeals should have been handled.

The separate views are copied below and eloquently lay out the correct approach in these appeals. WT/DS435/AB/R at 179 – 183 and WT/DS441/AB/R at 179 – 183

6.2 Separate opinion of one Division Member regarding Article 2.2 of the TBT Agreement

6.2.1 Introduction

“6.523. It is well settled that not every error by a panel rises to the level of a breach of Article 11 of the DSU. Under the DSU, panels enjoy considerable discretion with respect to fact-finding and the evaluation of facts. This is underscored by the language of Article 11 that ‘a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case’, read in conjunction with Article 17.6 of the DSU, which says that ‘[a]n appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel.’ In other words, Article 11 claims on appeal should be reserved – and entertained – only for rare instances of ‘egregious’ errors by panels, which call into question the good faith of the panel.1433

“6.524. With respect to the appellants’ claims regarding the Panel’s analysis under Article 2.2 of the TBT Agreement, I concur with the majority’s ultimate findings and conclusions. However, I disagree on two points: (i) that it was necessary to examine in detail the appellants’ claims that the Panel erred in determining the degree of contribution of the TPP measures to Australia’s objective; and (ii) that the Panel’s treatment of and reliance on multicollinearity and non-stationarity constituted an error under Article 11 of the DSU.

6.2.2 Addressing the appellants’ claims regarding the contribution of the TPP measures was not necessary to resolve the dispute

“6.525. The complainants’ main argument before the Panel was that the TPP measures are more trade-restrictive than necessary because: (i) they are trade-restrictive; and (ii) they are not apt to, and do not, contribute to Australia’s legitimate public health objective.1434 In the alternative, the complainants argued that, even assuming that the TPP measures contribute to Australia’s legitimate public health objective, they are still ‘more trade-restrictive than necessary’ because there are alternative measures that are reasonably available to Australia and that would be less trade-restrictive while making an equivalent contribution to the objective.1435

“6.526. The Panel rejected those arguments by the complainants, while noting that the TPP measures are necessarily trade-restrictive because all tobacco products are imported into Australia, and that the TPP measures contribute to Australia’s public health objective by reducing consumption of tobacco products. The appellants challenge the Panel’s rejection of their arguments. My discussion of that challenge centres on the two sentences in paragraph 7.1025 of the Panel Report.

“6.527. In the first of these sentences, the Panel found that the complainants failed to demonstrate that the TPP measures ‘are not apt to make a contribution to Australia’s objective’.1436 In the second sentence, the Panel found that, ‘[r]ather, … the evidence … , taken in its totality, supports the view that the TPP measures … are apt to, and do in fact, contribute to Australia’s objective.’1437

“6.528. The appellants’ appeals were silent regarding the first sentence. They addressed only the second sentence. In doing that, the appellants have not explained how any errors undermining the Panel’s finding in the second sentence of paragraph 7.1025 would suffice to demonstrate that the Panel erred in forming the conclusion in the first sentence of that paragraph.

“6.529. In response to questioning at the second hearing, the appellants stated that it was unnecessary to raise any independent appeal or challenge of the Panel’s finding in the first sentence, because the Panel’s finding in that sentence is integrally linked to the Panel’s finding in the second sentence. The appellants underscored that the Panel conducted an integrated analysis of the degree of contribution based on the evidence as a whole.1438

“6.530. I read these two sentences as saying different things. The first sentence says that the appellants failed to demonstrate that the TPP measures are not apt to make a contribution; the second sentence says that the totality of evidence supports the view that the TPP measures are apt to, and do in fact, make a contribution.

“6.531. Even assuming, arguendo, that the appellants are correct that the Panel relied on the totality of the evidence in forming both conclusions in these two sentences of paragraph 7.1025, I do not see how the errors alleged by the appellants pertaining to the Panel’s second-sentence finding would vitiate the Panel’s finding in the first sentence. The mere fact that the Panel may have relied on the same evidence for both findings does not mean that any errors in the Panel’s second determination – that the evidence supports the view that the TPP measures ‘are apt to, and do in fact’ make a contribution – also would undermine the Panel’s conclusion that the complainants failed to substantiate their burden of demonstrating that the TPP measures are not apt to contribute. Those are two different conclusions.

“6.532. Consequently, in order for us to overturn the Panel’s conclusion that the complainants failed to demonstrate that the TPP measures are not apt to contribute to Australia’s objective – expressed in the first sentence of paragraph 7.1025 – the appellants were required to demonstrate that the Panel’s errors in its examination of the evidence vitiated that conclusion, and did so in a manner so egregious as to constitute a violation of Article 11 of the DSU.

“6.533. As noted, the appellants did not appeal the Panel’s finding in the first sentence of paragraph 7.1025. They also did not otherwise address the question of whether any errors in the Panel’s evaluation of the second sentence in that paragraph would vitiate the first sentence, except to argue that the two sentences ‘are linked’ and that the Panel’s evaluation of them was based on the same evidence.

“6.534. As a result, I consider that the Panel’s determination that the complainants failed to demonstrate that the TPP measures are not apt to contribute to Australia’s objective is undisturbed on appeal. Since measures are presumed to be WTO-consistent until shown otherwise, it follows that the TPP measures are presumed to be at least capable of making a contribution to Australia’s objective1439, whether or not the Panel might have erred in determining that the totality of evidence supports the view that the TPP measures are apt to, and do in fact, make a contribution to Australia’s objective.

“6.535. It follows that the Panel’s finding, in the first sentence of paragraph 7.1025 of the Panel Report, stands. Since the TPP measures are therefore presumed to be capable of contributing to Australia’s objective, it further follows that: (i) the appellants have failed to demonstrate that the Panel erred in rejecting their principal argument; and (ii) with respect to their alternative argument, whether or not the proposed alternatives make an equivalent contribution to the TPP measures, the appellants did not present an alternative that is less trade-restrictive than the TPP measures1440, and consequently there is no basis for us to overturn the Panel’s overall conclusion that the appellants failed to demonstrate that the TPP measures are inconsistent with Article 2.2.

“6.536. Thus, I believe it was unnecessary, for purposes of resolving these disputes, for the majority to consider in detail the appellants’ claims regarding the Panel’s assessment of the TPP measures’ contribution to Australia’s objective. For that reason, I also believe that it was inadvisable for the majority to consider in detail the appellants’ contribution claims. This could have been a much shorter report, I believe, based on the findings that the first sentence of paragraph 7.1025, regarding aptness, stands, that the appellants’ proposed alternatives would not be less trade-restrictive than the TPP measures, and therefore that the appellants failed to demonstrate that the TPP measures are inconsistent with Article 2.2.

6.2.3 Due process and Article 11 of the DSU

“6.537. I disagree with the majority’s intermediate finding that, by introducing in its Interim Report econometric analyses that had not been tested with the parties, the Panel failed to observe due process in a way that constitutes a violation of Article 11 of the DSU.

“6.538. In my view, the Panel’s reliance on multicollinearity and non-stationarity to test the robustness of the parties’ evidence was part of the Panel’s reasoning, with respect to which a panel enjoys considerable discretion. The parties to this case submitted to the Panel a large amount of econometric evidence. It was appropriate for the Panel to assess the probative value of that evidence. The Panel tested the robustness of the econometric studies submitted by the parties by taking into account, inter alia, whether the models suffered from multicollinearity and non-stationarity. The mere fact that these two so-called ‘criteria’ were not specifically mentioned by the parties is not sufficient to warrant a different scrutiny of the Panel’s reliance on them, as compared to the Panel’s reliance on other econometric concepts (e.g. overfitting and endogeneity) that the parties had identified. I therefore consider that the Panel acted within the bounds of its discretion as a trier of facts by not only examining the parameters used by each party, but also by going further in its evaluation and testing the robustness of the parties’ econometric evidence for multicollinearity and non-stationarity.

“6.539. With regard to the issue of due process, Australia argues that the complainants could have used the interim review stage to request the Panel to review the relevant parts of the Panel Report pursuant to Article 15 of the DSU but chose not to do so.1441 The appellants submit that interim review would not have provided them with a ‘meaningful opportunity’ to comment on the Panel’s concerns regarding multicollinearity and non-stationarity.1442

“6.540. Article 15.2 of the DSU says, in relevant part, that: Within a period of time set by the panel, a party may submit a written request for the panel to review precise aspects of the interim report prior to circulation of the final report to the Members. At the request of a party, the panel shall hold a further meeting with the parties on the issues identified in the written comments. If no comments are received from any party within the comment period, the interim report shall be considered the final panel report and circulated promptly to the Members.

“6.541. The complainants became aware of the Panel’s analysis of multicollinearity and non-stationarity when they received the Panel’s Interim Report on 2 May 2017. However, the complainants did not raise any substantive concerns with respect to these aspects of the Panel’s analysis in their comments on the Interim Report, nor did they request an interim review meeting. It is reasonable to read Article 15.2 as placing responsibility on the complainants to have raised the Panel’s reliance on multicollinearity and non-stationarity at the interim review stage, especially given the importance that the appellants attribute to these issues on appeal. In my view, the complainants’ failure to raise these issues at the interim review stage undermines the appellants’ claim regarding due process.

“6.542. Thus, since the complainants had an opportunity to raise these issues and did not do so, I do not agree with their claim that the Panel denied them due process by not ‘giving the parties any opportunity whatsoever to comment’.1443 Since the complainants did not attempt to raise their concerns regarding the Panel’s reliance on multicollinearity and non-stationarity at the interim review stage, it is unnecessary to speculate about whether the alleged limited nature of the interim review process, which I do not find to be expressed in the text of Article 15.2, would have been sufficient. Consequently, I disagree with the majority’s interim conclusion on this point.

“6.543. In light of the above, I consider that the appellants have not demonstrated that the Panel failed to make an objective assessment of the facts of the case as required under Article 11 of the DSU by denying the parties an opportunity to comment on the Panel’s reliance on multicollinearity and non-stationarity.

“1428 Panel Report, paras. 7.1025 and 7.1043.

“1429 Panel Report, para. 7.1255.

“1430 Panel Report, paras. 7.1464 and 7.1531.

“1431 Panel Report, paras. 7.1417 and 7.1495.

“1432 See also Panel Report (DS435), para. 8.1.a; Panel Report (DS441), para. 8.1.b.i.

“1433 Appellate Body Report, EC – Hormones, para. 133. See also Appellate Body Reports, Japan – Agricultural Products II, para. 141; Korea – Alcoholic Beverages, para. 164; EC – Bed Linen (Article 21.5 – India), para. 177.

“1434 See Panel Report, paras. 7.426, 7.437, 7.485 and 7.520; Honduras’ and the Dominican Republic’s responses to questioning at the second hearing.

“1435 See Honduras’ first written submission to the Panel, paras. 853 and 911; Dominican Republic’s first written submission to the Panel, paras. 737-739, 980, and 1019.

“1436 Panel Report, para. 7.1025.

“1437 Panel Report, para. 7.1025.

“1438 Honduras’ and the Dominican Republic’s responses to questioning at the second hearing (referring to Panel Report, paras. 7.495-7.497).

“1439 Where a panel finds that the parties’ evidence reveals that a measure is capable of contributing, or the evidence is unclear or mixed as to whether the measure is capable of contributing, a panel should find that the complainant has failed to demonstrate that the measure is incapable of contributing to the objective. This would at the same time mean that, to the extent that the complainant also argues that the measure is inconsistent with Article 2.2 on the basis that there are reasonably available less trade-restrictive alternative measures capable of making an equivalent contribution, the presumption of WTO-consistency requires that a panel presume that the measure is at least capable of making some contribution to the legitimate objective and, on that basis, proceed to examine the remaining factors for determining ‘necessity’, such as the degree of the measure’s trade restrictiveness and the availability of less trade-restrictive alternative measures.

“1440 For the reasons set forth in sections 6.1.3-6.1.4 we have upheld the Panel’s findings that the alternative measures proposed by the complainants would not be less trade-restrictive than the TPP measures.

“1441 Australia’s appellee’s submission, para. 464.

“1442 Honduras’ responses to questioning at the second hearing. In addition, the Dominican Republic noted that, at the interim review stage, it could pose only ‘rhetorical questions’ to the Panel. (Dominican Republic’s responses to questioning at the second hearing).

“1443 Dominican Republic’s appellant’s submission, para. 42. (emphasis omitted).”

WTO Appellate Body Issues Reports on Australia’s Plain Packaging Requirements on Tobacco Products — Last Reports Until WTO Appellate Body Reform Occurs

On June 9th, the long awaited WTO Appellate Body (“AB”) reports on the two challenges to Australia’s plain packaging requirements on tobacco products were released. AUSTRALIA – CERTAIN MEASURES CONCERNING TRADEMARKS, GEOGRAPHICAL INDICATIONS AND OTHER PLAIN PACKAGING REQUIREMENTS APPLICABLE TO TOBACCO PRODUCTS AND PACKAGING, WT/DS435/AB/R and WT/DS441/AB/R (9 June 2020). The appellants were Honduras and the Dominican Republic. The Appellate Body essentially upheld the panel reports not finding violations of WTO Agreements by Australia’s actions. The decisions are important for governments and citizens concerned with the need to limit the reach of health harmful products like cigarettes. With plain packaging laws now prevalent in a number of countries, one can expect today’s AB decision to encourage more countries to emulate the approach taken by Australia (in part or in whole).

The WTO Secretariat prepares summaries of findings on cases. Below is the link to the summary followed by the summary of findings from the AB decisions provided on the WTO webpage, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds435_e.htm#bkmk435abr:

“Honduras (DS435) and the Dominican Republic (DS441) (together referred to as the appellants) requested the Appellate Body to reverse the Panel’s conclusions under Article 2.2 of the TBT Agreement, and Articles 16.1 and 20 of the TRIPS Agreement.

  • “1. With respect to Article 2.2 of the TBT Agreement:
    • With respect to the contribution of the TPP measures to Australia’s objective, the Appellate Body found that Honduras had not substantiated its claim that the Panel erred in its application of Article 2.2 to the facts of the case. Ultimately, the Appellate Body found that the appellants had not demonstrated that the Panel failed to make an objective assessment of the facts under Article 11 of the DSU. In particular, the Appellate Body found that, although the Panel erred by disregarding certain evidence adduced by the Dominican Republic, and acted inconsistently with Article 11 of the DSU by compromising the complainants’ due process rights with respect to the Panel’s reliance on multicollinearity and non‑stationarity when reviewing the parties’ econometric evidence, such errors were not sufficiently material to vitiate the Panel’s findings regarding the contribution of the TPP measures to Australia’s objective, namely improving public health by reducing the use of, and exposure to, tobacco products.
    • The Appellate Body found that the appellants had not demonstrated that the Panel erred in its intermediate conclusions pertaining to the trade restrictiveness of the TPP measures. In particular, the Appellate Body upheld the Panel’s finding that the impact of the TPP measures on reducing the opportunity for producers to differentiate between different products on the basis of brands did not in itself necessarily amount to a limiting effect on international trade. The Appellate Body also upheld the Panel’s finding that the complainants failed to demonstrate that the TPP measures would necessarily lead to a decline in the value of imported tobacco products as a consequence of consumers shifting from premium to non-premium products in response to the TPP measures (downtrading).
    • With respect to the alternative measures, the Appellate Body found that the Panel erred in finding that the complainants had failed to demonstrate that each of the two alternative measures (the increase in the MLPA and an increase in taxation) would be apt to make a contribution equivalent to that of the TPP measures. However, the Appellate Body found that the Panel did not err in finding that the complainants had failed to demonstrate that these two alternative measures are less trade restrictive than the TPP measures. Consequently, the Panel’s finding that the complainants had not demonstrated that the increase in the MLPA and the increase in taxation would each “be a less trade restrictive alternative to the TPP measures that would make an equivalent contribution to Australia’s objective”, stands.
    • Consequently, the Appellate Body upheld the Panel’s conclusion that the complainants had not demonstrated that the TPP measures are more trade restrictive than necessary to fulfil a legitimate objective, within the meaning of Article 2.2 of the TBT Agreement.
  • “2. With respect to Article 16.1 of the TRIPS Agreement:
    • The Appellate Body found that the Panel did not err in its interpretation of Article 16.1. The Appellate Body agreed with the Panel that Article 16.1 of the TRIPS Agreement grants a trademark owner the exclusive right to preclude unauthorized use of the trademark by third parties. However, Article 16.1 does not confer upon a trademark owner a positive right to use its trademark or a right to protect the distinctiveness of that trademark through use.
    • Having found no error in the Panel’s interpretation, the Appellate Body agreed with the Panel that there was no need to examine further the complainants’ factual allegation that the TPP measures’ prohibition on the use of certain tobacco related trademarks would in fact reduce the distinctiveness of such trademarks, and lead to a situation where a “likelihood of confusion” with respect to these trademarks is less likely to arise in the market.
    • Consequently, the Appellate Body upheld the Panel’s conclusion that the complainants have not demonstrated that the TPP measures are inconsistent with Article 16.1 of the TRIPS Agreement.
  • “3. With respect to Article 20 of the TRIPS Agreement
    • The Appellate Body found that the Panel did not err in its interpretation and application of Article 20 of the TRIPS Agreement. In particular, the Appellate Body considered that the Panel did not err in its interpretation of the term ‘unjustifiably’ in Article 20 and in its application of this interpretation to the facts of the case. The Appellate Body thus agreed with the Panel that the complainants had not demonstrated that trademark-related requirements of the TPP measures unjustifiably encumbered the use of trademarks in the course of trade within the meaning of Article 20.
    • Consequently, the Appellate Body upheld the Panel’s conclusion that the complainants had not demonstrated that the TPP measures are inconsistent with Article 20 of the TRIPS Agreement.

“The Appellate Body recalled that, having rejected all of the complainants’ claims, the Panel had declined Honduras’ and the Dominican Republic’s requests that the Panel recommend, in accordance with Article 19.1 of the DSU, that the DSB request Australia to bring the measures at issue into conformity with the TRIPS Agreement and the TBT Agreement.

“Having upheld the Panel’s findings under Article 2.2 of the TBT Agreement and Articles 16.1 and 20 of the TRIPS Agreement, it followed that the Appellate Body also agreed with the Panel that Honduras and the Dominican Republic had not succeeded in establishing that Australia’s TPP measures are inconsistent with the provisions of the covered agreements at issue. Accordingly, the Appellate Body made no recommendation to the DSB, pursuant to Article 19.1 of the DSU.”

While the Reports are Not Surprising in Outcome, They Show Many of the Concerns that U.S. has Raised about the AB Over Time

These are the last reports of the Appellate Body until the impasse on the appointment of new Appellate Body members is solved, which will require the United States achieving reforms in the operation of the Appellate Body and the AB’s actual adherence to the Dispute Settlement Understanding as negotiated.

Many of the concerns that the U.S. has long raised are present in the current decisions. For example, the reports were not prepared in 90 days from the date of appeal, nor were the delays in completion of the appeals specifically authorized by the parties. The decisions were prepared by non-current members of the Appellate Body (although Members had agreed to permit conclusion of appeals where hearings had already occurred). The vast majority of the issues in the appeals were challenges to findings of fact by the panels under the guise of DSU Article 11 challenges that the panels failed to make an objective assessment of the facts. While the Appellate Body decisions attempt to limit what the AB should be reviewing where DSU Art. 11 is the basis for the claim, the bulk of the decisions still involve discussions of at least some of the DSU Art. 11 claims made by the appellants. See WT/DS435/AB/R at 38-135 and WT/DS441/AB/R at 38-135.

The United States was a third party to the cases but limited its written comments to a few issues, the most important of which was the need for the Appellate Body not to permit Art. 11 to be used for a review of factual findings, which by DSU are issues for the panel. See WT/DS435/AB/R/Add.1, Annex C-16 at 92-93; WT/DS441/AB/R/Add.1, Annex C-16 at 92-93:

“III. COMPLAINANTS’ CLAIMS OF ERROR UNDER THE DSU

“7. Honduras and the Dominican Republic both appeal dozens of factual findings under DSU Article 11. Both appeals by Honduras and the Dominican Republic to the Appellate Body make numerous claims under Article 11 of the DSU of what clearly are alleged factual errors by the Panel. By agreement of all WTO Members, the DSU expressly limits the scope of an appeal to alleged legal errors by a panel, not factual errors.6 The United States disagrees with these attempts to re-litigate dozens of unfavorable factual determinations by the Panel through claims of breach of Article 11 of the DSU.

“8. The Appellate Body has an opportunity in this appeal to reconsider how its originally limited approach to review the “objective assessment” of a panel has been seized by appellants to cover practically all factual determinations by a panel. Given the lack of textual basis in the DSU for
appellate review of panel fact-finding, the Appellate Body could instead reassert that the proper issues for appeal are issues of law and legal interpretations covered by a panel report.7

“6 See DSU Article 17.6.

“7 Id. (“An appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel.”).”

Conclusion

The plain packaging decisions by the Appellate Body are the last AB decisions until the impasse over AB member selection is resolved which means that the U.S. concerns of the operation of the AB must be resolved.

While the decisions are important in themselves, they also demonstrate the types of problems which have made Appellate Body decisions untimely and problematic to the United States and other Members.

While some Members are now proceeding with arbitration type actions to maintain a second-level review of disputes, the need for collective action to return the Appellate Body to its proper and limited role continues. With the COVID-19 pandemic and now the Director-General selection process taking up much of the trade oxygen for many WTO Members, the need for Appellate Body reform is likely to slip to 2021 or later before being focused on again.

WTO dispute settlement in 2020 – forward movement or further crisis?

As of April 20, 2020, there has been relatively limited new activity within the WTO on dispute settlement. Indeed just two requests for consultations were filed in the first quarter of 2020. While not the lowest number for the first quarter, it is one of the lowest over the first 25+ years of the WTO existence. The reason or reasons for the low number of disputes is not known. However, many WTO Members are focused on the COVID-19 pandemic at home reducing the focus on WTO activities. Moreover, the pandemic has disrupted the ability of the WTO to conduct business as usual, with no meetings in person having taken place over the last month and with many Members arguing against making substantive decisions during the pendency of the pandemic lockdown in many countries. See https://www.wto.org/english/news_e/news20_e/hod_17apr20_e.htm

There have been a few Appellate Body reports on disputes where Appellate Body hearings had occurred before December 10, 2019 and some panel reports issued in ongoing cases. The Appellate Body will not issue further reports after the plain packaging cases pending a resolution of the impasse on the functioning of the Appellate Body.

Arbitration under Art. 25 of the Dispute Settlement Understanding

The EU and fifteen other WTO Members have agreed to a Multi-Party Interim Arbitration Agreement to permit signatories to use arbitration along agreed lines as a substitute for an appeal within the WTO until the Appellate Body is back functioning. While the agreement has not been notified to the WTO as yet, pending signatories clearing domestic hurdles, the agreement is open to other WTO Members who wish to participate. See March 27 post, https://currentthoughtsontrade.com/2020/03/28/march-27-2020-agreement-on-interim-arbitration-process-by-eu-and-15-other-wto-members-to-handle-appeals-while-appellate-body-is-not-operational/

In an introductory statement by Commissioner Phil Hogan at an informal meeting of EU Trade Ministers on April 16, Commissioner Hogan stated that

“Working with like-minded WTO members since the effective collapse of the Appellate Body last December, we have developed the Multi Party Interim Arbitration Arrangement as a stop-gap to maintain an independent, two step dispute settlement function.

“There are 15 co-signatories alongside the EU, including some of the biggest users of the system, such as Brazil and China. I have also extended a broad invite to the entire membership to join, underlining the inclusive nature of the arrangement.

“There will be 10 arbitrators on the MPIA roster. The EU has the option of nominating a candidate. The nominee will need to be submitted by the end of May. We will notify the TPC of work on this in due course, respecting best practices used for the nomination of members of the Appellate Body heretofore.”

https://ec.europa.eu/commission/commissioners/2019-2024/hogan/announcements/introductory-statement-commissioner-phil-hogan-informal-meeting-eu-trade-ministers_en.

EU’s efforts to retaliate without WTO authorization where Appellate Body is not functioning and defending party does not agree to arbitration

The EU has also been working to develop regulatory authority to impose sanctions without WTO authorization on Members against whom the EU has brought disputes when such Members lose panel decisions at the WTO, don’t participate in arbitration and rather file an appeal when the Appellate Body is not functioning, preventing retaliation at the WTO. See https://www.europarl.europa.eu/meetdocs/2014_2019/plmrep/AUTRES_INSTITUTIONS/COMM/COM/2020/02-19/COM_COM20190623_EN.pdf.

COM_COM20190623_EN

The EU Council and Parliament need to meet to agree to a modified final text. It is assumed that a major target of the EU actions is the United States. There are two pending disputes that the EU has with the US where panels are underway, including the EU challenge to the US Section 232 actions on steel and aluminum and the EU challenge of a countervailing duty order on olives from Spain.

On the 232 dispute, the EU did not pursue a challenge prior to taking retaliation, claiming that the US use of the national security law (Section 232 of the Trade Expansion Act of 1962, as amended) on steel and aluminum was in effect a safeguard action. Thus, the EU claimed it was justified in retaliating to a certain extent immediately consistent with the Safeguard Agreement. The U.S. has filed a dispute challenging the EU’s retaliation as the U.S. action was not taken under U.S. safeguard (escape clause) law but pursuant to a national security law making the EU retaliation inappropriate. Both disputes are pending before panels at the WTO.

The interesting element of the EU’s pursuit of new regulatory authority is its willingness to act outside of the WTO while wrapping itself in the mantle of champion of the multilateral system.

China’s challenge of U.S. tariffs following Section 301 of Trade Act of 1974 investigation (and retaliations by China)

In August 2017, USTR commenced an investigation into whether certain actions of the Chinese government violated Section 301 of the Trade Act of 1974. Forced technology transfer, cybertheft of intellectual property and other issues were investigated by USTR and resulted in a determination in early 2018 of violations of U.S. law. The USTR fact sheet issued in 2018 is attached and embedded below. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/march/section-301-fact-sheet.

Section-301-Fact-Sheet-_-United-States-Trade-Representative

Original tariffs imposed when the unfair practices were not addressed by China were $50 billion. Those amounts were increased as China retaliated against the U.S. without authorization from the WTO. Ultimately, the U.S. imposed tariffs on more than $360 billion and China imposed retaliatory tariffs on nearly all of U.S. exports to China.. https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/march/section-301-fact-sheet.

China filed a WTO dispute after the initial tariffs imposed by the United States. WT/DS543. It filed two additional requests for consultations as the U.S. expanded tariffs on other products, although both of these requests for consulation remain in the consultation phase. WT/DS565 and WT/DS587. The U.S. filed a challenge to China’s retaliation. WT/DS558.

While the panel proceedings have been underway in Geneva, the United States and China reached a Phase One Agreement in January 2020. See prior posts, https://currentthoughtsontrade.com/2020/01/15/u-s-china-phase-1-trade-agreement-signed-on-january-15-an-impressive-agreement-if-enforced/; https://currentthoughtsontrade.com/2020/01/19/u-s-china-phase-1-agreement-details-on-the-expanding-trade-chapter/.

The WTO dispute settlement panel provided a notice to the parties that the panel decision would be available to the parties by the end of June (a little more than two months from now). See WT/DS543/9 (15 April 2020). Because the dispute involves the largest amount of trade (at least when considering the additional actions by both the U.S. and China) of any trade dispute in the history of the WTO, the panel decision will not only be carefully watched by all members but could result in major rifts within the organization by one or both of the parties.

China’s briefs in disputes are typically not publicly available. The U.S. always releases public versions of its briefs. The below excerpt from the first U.S. submission in WT/DS543 gives a glimpse of the importance of the case from the United States perspective. The entire first brief is embedded.

“I. INTRODUCTION

“1. Technology, intellectual property, and innovation are the foundation of the competitiveness of the United States and many other Members in the world economy. China has chosen to adopt a range of policies and practices to obtain an unfair competitive edge over other Members by stealing or otherwise unfairly acquiring their technology and intellectual property. Where those policies or practices can be addressed through WTO rules, the United States is pursuing WTO dispute settlement. Most of China’s practices, however, are not covered by existing WTO disciplines.

“2. In these circumstances, the United States is pursuing its sovereign right to protect its fundamental economic competitiveness from China’s unfair, predatory, and harmful technology-transfer policies. The purpose of the U.S. tariff action is to obtain the elimination of China’s unfair practices, and thereby to promote a fair and sustainable trading system for the United States and all other Members that rely on technology and intellectual property for their competitiveness in world markets. Unfortunately, China has responded not by reforming its unfair technology-transfer policies, but instead by imposing retaliatory tariffs on most U.S. goods.

“3. In pursuing this course of action, China has demonstrated what the Panel should conclude in response to China’s pursuit of this dispute – namely, that this is a bilateral dispute between the United States and China concerning key economic issues not covered by existing WTO rules. In short, this dispute is fundamentally not about WTO rights and obligations.

“4. China’s decision to pursue this dispute represents a profound misuse and abuse of the WTO dispute settlement system. Having already adopted retaliation in response to the U.S. measures aimed at obtaining a fair world trading system, China knows full well that any WTO findings will not contribute to the resolution of the matter. Rather, China’s pursuit of this dispute is a cynical and hypocritical attempt to try to have the WTO side with China in the ongoing dispute involving China’s unfair technology transfer policies. To elaborate:

“5. In bringing this dispute, China seeks to abuse the WTO dispute settlement system by attempting to use it as a shield for a broad range of unfair and trade-distorting technology transfer policies and practices not covered by WTO rules. In doing so, it is China, and certainly not the United States, that – as China puts it – ‘is undermining’1 the viability of the multilateral trading system.

“6. China’s decision to launch this dispute is hypocritical. China is currently retaliating against the United States by imposing duties on most U.S. exports – over $100 billion of trade. China cannot legitimately challenge measures at issue for being “unilateral”2 and WTO-inconsistent, while at the same time openly adopting its own unilateral tariff measures in connection with the very same matter.

“7. The matters related to this dispute are currently subject to bilateral discussions between the Governments of China and the United States. The parties are holding these discussions at multiple levels, including between the leaders of the two disputing parties. It is those bilateral discussions, and not any possible findings to be adopted by the Dispute Settlement Body (“DSB”), that will resolve the important issues arising from China’s unfair and harmful technology transfer policies, from the U.S. response to those policies, and from China’s unilateral retaliation.

“8. Under these circumstances, the outcome of a dispute settlement proceeding would be pointless, and, worse – a misuse by China of the dispute settlement system by trying to have the WTO side with China in support of its fundamentally unfair technology transfer policies. As noted, China has already taken the unilateral decision that the U.S. measures cannot be justified under WTO rules, and on that basis, already imposed tariff measures on most U.S. goods. Accordingly, addressing China’s legal claims would not ‘secure a positive solution to [this] dispute,’3 as China has already adopted the response that China unilaterally has determined is appropriate.

“9. Fundamentally, both the United States and China have recognized that this matter is not a WTO issue: China has taken the unilateral decision to adopt aggressive industrial policy measures to steal or otherwise unfairly acquire the technology of its trading partners; the United States has adopted tariff measures to try to obtain the elimination of China’s unfair and distortive technology-transfer policies; and China has chosen to respond – not by addressing the legitimate concerns of the United States – but by adopting its own tariff measures in an attempt to pressure the United States to abandon its concerns, and thus in an effort to maintain its unfair policies indefinitely.

“10. By taking actions in their own sovereign interests, both parties have recognized that this matter does not involve the WTO and have settled the matter themselves. Accordingly, there in fact is no live dispute involving WTO rights and obligations. Therefore, in light of each party’s action settling the matter, the report of the Panel should “be confined” to a brief description reporting that the parties have reached their own resolution, as provided for in Article 12.7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (‘DSU’).4

“11. Even aside from the fact that the parties have settled the matter through their actions, were the Panel to examine China’s contentions, the Panel would find that the U.S. measures at issue would be justified under WTO rules.

“12. The United States adopted the measures at issue in this dispute to combat China’s longstanding policy and practice of using government interventions, coercion, and subterfuge to steal or otherwise improperly acquire intellectual property, trade secrets, technology, and confidential business information from U.S. companies with the aim of advantaging Chinese companies and advancing China’s industrial policy goals. Although China’s conduct is not addressed by current WTO rules, it is unfair and contrary to basic moral standards. No WTO Member endorses forced technology transfer policies and practices such as those employed by China.

“13. Indeed, such fundamentally unfair policies and practices undermine support for an international trading system that permits such practices to escape discipline, undermine U.S. norms against theft and coercion, and undermine the belief in fair competition and respect for innovation, all of which are key aspects of U.S. culture (as well as that in a number of other Members). ). The United States does not undertake these activities against Chinese citizens or companies. China’s non-reciprocal and morally wrong behaviour further threatens to undermine U.S. society’s belief in the fairness and utility of the WTO trading system, if that system creates the conditions for, and fails to address, a fundamentally uneven playing field. Accordingly, the measures at issue in this dispute are legally justified because they are measures “necessary to protect public morals” within the meaning of Article XX(a) of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”).

“14. Finally, the United States notes that one of the U.S. measures that China is challenging in this dispute is not within the Panel’s terms of reference because it was issued and took effect after China requested the establishment of a panel. Accordingly, for this additional reason, there is no legal basis for the Panel to examine or make any findings with respect to that measure.

“15. The United States emphasizes that a world trading system where one Member can adopt policies to steal or unfairly acquire technology and intellectual property from its trading partners, and where the organization responsible for overseeing world trade would entertain a request to issue findings in support of the Member adopting these unfair actions, is simply unsustainable. In order to maintain the viability and relevance of the WTO, this Panel must reject China’s request that the Panel make findings that China might use as support for maintaining its fundamentally unfair technology transfer policies and practices.

“1 See China’s First Written Submission, para. 5.

“2 See China’s First Written Submission, paras. 3, 4, 5, 24.

“3 See DSU Article 3.7 (Providing in part that “The aim of the dispute settlement mechanism is to secure a positive solution to a dispute.”).

“4 See DSU, Article 12.7 (‘Where the parties to the dispute have failed to develop a mutually satisfactory solution, the panel shall submit its findings in the form of a written report to the DSB. In such cases, the report of a panel shall set out the findings of fact, the applicability of relevant provisions and the basic rationale behind any findings and recommendations that it makes. Where a settlement of the matter among the parties to the dispute has been found, the report of the panel shall be confined to a brief description of the case and to reporting that a solution has been reached.’). (emphasis added).”

US.Sub1_.DS543.fin_.public

Canada’s dispute with the U.S. over Countervailing Duty Order on Supercalendered Paper from Canada

Canada pursued a challenge to a countervailing duty investigation and order on supercalendered paper from Canada conducted by the United States and received reports from the panel and Appellate Body that the U.S. actions were inconsistent with WTO obligations. Canada pursued the challenge despite the fact that the order had been revoked retroactively by the United States. In a submission posted today on the WTO website, Canada has given notice that it intends to seek retaliation at such time as the DSB is able to convene (recognizing the present inability to meet because of the COVID-19 lockdown in place). WT/DS505/11 (20 April 2020).

Because the United States has viewed the panel and Appellate Body as having erred in their decisions in the case and because of the importance to the United States of its countervailing duty law in addressing other countries subsidy practices, any such action by Canada is likely to worsen the dynamics in Geneva and in capitals in terms of reaching reform of the dispute settlement system.

Needed reforms of the dispute settlement system

While there has been activity to put in place for some Members an arbitration system, there is little indication of any effort to pursue resolution of the underlying reform needs to the dispute settlement system outlined by the United States over the last several years. See prior posts, https://currentthoughtsontrade.com/2020/03/07/impasse-on-the-wto-appellate-body-any-progress-likely-by-the-12th-ministerial/; https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/; https://currentthoughtsontrade.com/2020/01/30/wto-appellate-body-impasse-how-and-why/.

The COVID-19 pandemic has made forward movement more difficult as attention of most countries, understandably, is focused on the immediate needs of their populations to address the global pandemic.

Conclusion

With the 12th WTO Ministerial Conference already postponed, with meetings at the WTO cancelled through at least April, there has been increasingly diminished hopes for what the WTO can achieve in 2020. While the dumbing down of expectations appears true across the board of the WTO’s reform program and pending negotiations, it is certainly true for reform of the dispute settlement system. The EU and China have engaged in unilateral action regardless of WTO rules (generally where the U.S. has taken actions that the others disagree with and don’t want to work through the WTO system or pursue reform). The U.S. has taken aggressive actions in a number of situations, though they have articulated WTO justifications for the actions which justifications are currently subject to WTO dispute settlement (but usually in situations where the Members challenging the U.S. have unilaterally retaliated without WTO authorization).

With important panel decisions due out yet this year and with EU actions to give itself retaliation rights regardless of WTO authorization while the Appellate Body is nonfunctioning, the likelihood of WTO Members focusing on dispute settlement reform are seemingly nonexistent for the foreseeable future. The ride is likely going to get a lot bumpier in the coming months.

With the WTO Appellate Body Becoming Dysfunctional on December 11, What Happens to Pending Appeals and Other Open Issues?

There was another WTO Dispute Settlement Body (“DSB”) meeting on November 22, 2019. In addition to the normal agenda item of receiving reports and comments by other members on the status of implementation of recommendations on disputes where reports had previously been adopted by the DSB, there were a number of other agenda items, one of which was not addressed.

First, the United States had put on the agenda making a statement on what it considers systemic concerns on the compensation for Appellate Body.

Second, annually each body within the WTO prepared a report on activity during the year. Adoption of the 2019 draft annual report of the DSB was an agenda item for consideration.

Third, the topic of Appellate Body appointments was an agenda item based on the September 2019 proposal from 117 WTO members.

Finally, there was an agenda item entitled “Pending Appeals” which was meant to permit an examination of how the 13 pending appeals would be handled after December 10 when the number of current Appellate Body members would decline to 1 from 3.

This note looks at several of the agenda items with a focus towards the end on the thirteen appeals which are proceeding at the present time.

I. Compensation for Appellate Body members

As reviewed in a post from November 16, the United States had raised a series of questions on the handling of funds for the Appellate Body and its Secretariat (among other issues) and held up adoption of the 2020/2021 WTO budget at a November 12 meeting of the Committee on the Budget, Finance and Administration. Another meeting of the Committee has been scheduled for November 27, with efforts to provide answers and resolve concerns ahead of that meeting.

At the same time, the U.S. added the agenda item to provide its thoughts on “systemic issues” flowing from the Appellate Body compensation system. The comments on this agenda item were made by Ambassador Dennis Shea and laid out the various elements of the compensation package, the part time nature of the work of Appellate Body members, and the fact that compensation has been paid to individuals whose terms have expired but who continue to handle appeals. See pages 9-12 of Statements b the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, November 22, 2019, https://geneva.usmission.gov/wp-content/uploads/sites/290/Nov22.DSB_.Stmt_.as-handed-out.fin_.public.pdf. U.S. concerns revolved around: (1) the total compensation (some 300,000 Swiss Francs tax free for part time work which is higher than compensation for Deputy Director Generals at the WTO whose work is full time; (2) whether the daily component of compensation contributed to delay in completing Appellate Body decisions, hence undermining prompt resolution of disputes; (3) lack of transparency on expenses; and (4) pay to former members who are continued after terms expire when working on appeals which they started prior to term expiration.

Press reports from the day of the DSB meeting indicated relatively little interest/sympathy by other trading partners on the U.S. concerns including on the size of the compensation. See, e.g., Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

From the earlier U.S. statement of concerns on how to remedy the Appellate Body disregard of clear requirements under the Dispute Settlement Understanding, the U.S. statement provides a potential “why” answer to part of the disregard. Failing to meet the required 60-90 day deadline for appeals results in longer work on any given appeal and hence higher compensation, potentially encouraging longer decisions, coverage of additional issues, etc. and making timely delivery of AB decisions more difficult.

Should the U.S. insist that the AB compensation system be reviewed and potentially modified before agreeing to opening the Appellate Body nomination process, obviously a protracted and difficult process will become more complicated and presumably more drawn out.

II. Appellate Body Proposal to Start the Appointment Process

Not surprisingly, the same proposal to start the process of finding new Appellate Body members that had been presented in October by Mexico and 116 other WTO members was resubmitted for consideration at the November 22 DSB meeting. Once again the U.S. found itself unable to agree to moving ahead with the process for finding six Appellate Body members to fill the existing vacancies and the two that will occur when existing terms expire on December 10. So there is actually nothing new on this agenda item or the outcome at the recent DSB meeting.

Ambassador David Walker’s draft General Council Decision which is an effort to present a possible road forward to addressing U.S. concerns was not taken up within the DSB (other than a review of the effort at resolution contained in the draft annual report of the DSB) but will be on the agenda for the December 9-11 General Council meeting. As reviewed in an earlier post, the U.S. has already rejected the draft General Council Decision as not meeting its concerns. Thus, the General Council meeting in December is not likely to provide a breakthrough on the current impasse. So an obvious question is what happens on December 11?

The panel process of dispute settlement will continue as before. Thus, for the many cases proceeding through panel deliberations, one can expect those panels to continue without interruption. WTO Members have the option of agreeing to arbitration under Article 25 of the DSU, as the EU has done with Canada and with Norway. Similarly, WTO Members can agree not to take an appeal in a given dispute such that the panel report would be what is adopted absent a negative consensus. It is understood that some WTO members are considering this or have agreed to this approach. Thus, December 11 marks not the collapse of the dispute settlement system in its entirety, but rather a need to evaluate options for WTO members as they look at pending or future disputes or face a process where there is no automatic adoption.

A large number of WTO Members have participated in at least one dispute in the first 25 years of the WTO. Other WTO members, who have not been a complainant or a respondent have participated as a third party in one or more cases. While that is true, the number of cases where a Member is either a complainant or a respondent is very small for nearly all countries. The attached table looks at information from the WTO Dispute Settlement listing (looked at on November 22, but not reflecting the EU request for consultations filed against Indonesia on November 22). Six Members (U.S. (11.16/yr), EU and member states (9.44/yr), China (3.61/yr), Canada (2.52/yr), Russian Federation (2.42/year), and India (2.24/yr)) have seen two or more disputes filed each year of membership. Eight others have between one and two disputes each year (Brazil, Argentina, Japan, Mexico, Korea, Ukraine, Australia, and Indonesia). Everyone else (121 members) have less than one dispute per year including 81 who have never either filed a dispute or been a respondent in a dispute in the first twenty-five years of the WTO and 46 of whom have also never been a third party in a dispute.

WTO-Member

The EU’s agreements with Canada and Norway are important for Canada and Norway but relatively minor for the EU itself, other than creating what they hope will be an approach that other trading partners of theirs will agree to. For Canada, 23.81% of the disputes where Canada has been a complainant or respondent have been where the EU was the other party. For Norway, 3 of 5 cases they have been involved in have been with the EU (60%). However, for the EU, Canada and Norway represent less than 6% of the disputes in which they have been a party.

So how disruptive the reduction in Appellate Body membership to one member as of December 11, 2019 will be is uncertain and will depend on actions by a number of major players in terms of ongoing disputes..

III. Pending Appeals Before the Appellate Body

Agenda item 7 on the November 22, 2019 DSB meeting was “Pending Appeals. A. Statement by the Chairman.” WTO/AIR/DSB/89.

In the Dispute Settlement Body’s draft Annual Report (2019), the following brief discussion appears on what the Chair of the DSB was doing on the issue of pending appeals. WT/DSB/W/651 (8 November 2019) at 4:

” Finally, he said that he would be consulting with delegations who had pending appeals before the Appellate Body ahead of 10 December 2019 to see how to deal with those appeals. He said that he would revert to this matter at the November DSB meeting (WT/DSB/M/436).”

While the WTO does not have a summary of the November 22nd DSB meeting up on its webcite as of 11/24 2:30 p.m. (ET), a press article from the 22nd indicated that the agenda item wasn’t pursued as the Chair had not found agreement on how to deal with the 13 pending appeals. The U.S. was apparently the holdout in reaching agreement on how to proceed. Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

In looking at the thirteen appeals that are understood to be underway and the relevant DSU articles on Appellate Body practice rules, there appear to be a number of potential issues that will need to be addressable if the issues are in fact present and the appeals are to proceed.

First, eight of the thirteen appeals were noticed by the appellant after 30 September 2018 the last day of Mr. Shree Baboo Chekitan Servansing’s four year term. See DS541, DS534, DS523, DS518, DS513, DS510, DS461, DS371. After that date, there have been only three Appellate Body members, all of whom would have to be hearing the appeal and no substitute would be possible if one of the two members whose terms end on December 10, 2019 decided not to continue on an appeal after that date. See DSU Art. 17.1; Working Procedures for Appellate Review, WT/AB/WP/6 16 August 2010, Rules 6.(3) and 12 and 13. It is understood that one of the two Appellate Body members whose second term expires on December 10 has indicated an unwillingness to continue to serve on the appeals after the expiration of his term. If correct, absent a decision by the DSB on how those appeals can proceed, the appeals will presumably terminate or be in a state of limbo pending restoration of the membership of the Appellate Body. The United States is a party in four of the eight cases.

Of the other five appeals, it is unclear if a similar situation exists in terms of the composition of the Division hearing the appeal (DSU Art. 17.1 has appeals heard on a rotation basis) and if so, if the remaining AB member would be available to maintain the appeal at three members (two former members and the remaining current member).

For all thirteen appeals, after December 10, 2019, the appeals could only be handled in two or all three of the people hearing the appeal were individuals whose terms expired, hence falling into the space that the U.S. has reviewed as to the lack of authority for the Appellate Body have non-AB members complete appeals that were started when they were members. The U.S. is a party in five of the thirteen pending appeals.

Expect that the DSB Chair David Walker will continue to search for an approach that is acceptable to all members. Don’t be surprised if no consensus is reached. Two known events in December are possible situations where better understanding of the issues will surface: the December 9-11 General Council and the December 18 DSB meeting.

Below is a reverse chronological listing of the thirteen pending appeals:

DS541, India-Export Related Measures (U.S. complainant); notice of appeal, Nov. 19, 2019.

DS534, United States – Anti-Dumping Measures Applying Differential Pricing Methodology to Softwood Lumber from Canada; notice of appeal, June 4, 2019.

DS523, United States – Countervailing Measures on Certain Pipe and Tube Products (Turkey complainant); notice of appeal, Jan. 25, 2019.

DS518, India – Certain Measures on Imports of Iron and Steel Products (Japan complainant); notice of appeal, Dec. 14, 2018.

DS513, Morocco – Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey; notice of appeal, November 20, 2018

DS510, United States – Certain Measures Relating to the Renewable Energy Sector (India complainant); notice of appeal, August 15, 2019.

DS505, United States – Countervailing Measures on Supercalendered Paper from Canada; notice of appeal, August 27, 2018.

DS499, Russian Federation – Measures Affecting the Importation of Railway Equipment and Parts Thereof (Ukraine complainant); notice of appeal, August 27, 2018.

DS476, European Union – Certain Measures Relating to the Energy Sector (Russian Federation complainant); notice of appeal, September 21, 2018 [The WTO webpage shows this dispute still being on appeal before the Appellate Body, but the case is not included in the list of 13 pending appeals on the WTO webpage] .

DS441, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Dominican Republic complainant); notice of appeal, August 23, 2018.

DS435, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Honduars complainant); notice of appeal, July 19, 2018.

DS461, Colombia – Measures Relating to the Importation of Textiles, Apparel and Footwear (21.5, Panama complainant); notice of appeal, November 20, 2018.

DS371, Thailand – Custom and Fiscal Measures on Cigarettes from the Philippines; notice of appeal (2nd recourse to 21.5), September 9, 2019; notice appeal (1st recourse to 21.5), 9 January, 2019).

IV. Conclusion

WTO Members are continuing to look for alternatives to the present appeal process as they await further developments both at the General Council and the Dispute Settlement Body. The U.S. has been looking for adherence to the original DSU commitments and is unwilling to accept simple reaffirmation of those principles in light of the longstanding problems flagged by the United States. The core disagreement on the purpose of the dispute settlement system between the U.S. and the EU (and like minded Members) has made meaningful progress difficult.

What is certain is that the brave new world of a more complicated dispute settlement system within the WTO arrives in less than three weeks. How long the changed status will continue is unclear. Current indications are the wait will be long in fact before the Appellate Body is back functioning with the concerns of the U.S. at last addressed in an enforceable manner. For the U.S. a major concern should be achieving a restoration of the rights and obligations that were agreed to through negotiation and that have been lost through overreach actions by the Appellate Body.