Dispute Settlement Understanding

The importance of addressing “overreach” in reforming the WTO Appellate Body

I have written a number of posts in the last eighteen months looking at the problems of the Appellate Body and the inadequacy of reform proposals put forward by WTO Members. Most importantly there can be no acceptable solution for the United States without addressing the concern over the WTO Appellate Body creating rights and obligations that Members have not agreed to. In the U.S., this is often referred to as “overreach”. In my view, addressing “overreach” requires changes both going forward and correction of overreach that has occurred in the past. My suggested approach can be found in my post of July 12, 2020 with a background note on “overreach contained in my post of November 12, 2019. Some of my prior posts on the WTO Dispute Settlement system include the following: March 11, 2021:  “No Quick Fixes for WTO Dispute Settlement Reform” — a skeptical view by the former Deputy USTR of the EU’s willingness to address core U.S. concerns, https://currentthoughtsontrade.com/2021/03/11/no-quick-fixes-for-wto-dispute-settlement-reform-a-skeptical-view-by-the-former-deputy-ustr-of-the-eus-willingness-to-address-core-u-s-concerns/; February 18, 2021:  The European Commission’s 18 February 2021 Trade Policy Review paper and Annex — WTO reform and much more proposed, https://currentthoughtsontrade.com/2021/02/18/the-european-commissions-18-february-2021-trade-policy-review-paper-wto-reform-and-much-more-proposed/; January 29, 2021:  WTO Panel report on UNITED STATES – ANTI-DUMPING AND COUNTERVAILING DUTIES ON CERTAIN PRODUCTS AND THE USE OF FACTS AVAILABLE should be appealed by the United States, https://currentthoughtsontrade.com/2021/01/29/wto-panel-report-on-united-states-anti-dumping-and-countervailing-duties-on-certain-products-and-the-use-of-facts-available-should-be-appealed-by-the-united-states/; October 1, 2020:  Thoughts on the Geneva Trade Week session entitled “WTO Dispute Settlement – Where Do We Stand?”, https://currentthoughtsontrade.com/2020/10/01/thoughts-on-the-geneva-trade-week-session-entitled-wto-dispute-settlement-where-do-we-stand/; August 29, 2020:  WTO Dispute Settlement Body meeting of August 28, 2020 – how disputes are being handled in the absence of reform of the Appellate Body, https://currentthoughtsontrade.com/2020/08/29/wto-dispute-settlement-body-meeting-of-july-28-2020-how-disputes-are-being-handled-in-the-absence-of-reform-of-the-appellate-body/; August 9, 2020:  USTR Lighthizer on WTO dispute settlement – answers to Congressional questions from June 17 hearings, https://currentthoughtsontrade.com/2020/08/09/ustr-lighthizer-on-wto-dispute-settlement-answers-to-congressional-questions-from-june-17-hearings/; 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/; July 2, 2020:  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, https://currentthoughtsontrade.com/2020/07/02/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/; March 28, 2020: March 27, 2020 Agreement on Interim Arbitration Process by EU and 15 other WTO Members to Handle Appeals While Appellate Body is Not Operational, 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/; March 7, 2020: Impasse on the WTO Appellate Body – Any Progress Likely by the 12th Ministerial?, https://currentthoughtsontrade.com/2020/03/07/impasse-on-the-wto-appellate-body-any-progress-likely-by-the-12th-ministerial/; February 14, 2020: 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/; January 30, 2020: WTO Appellate Body Impasse – How and Why, https://currentthoughtsontrade.com/2020/01/30/wto-appellate-body-impasse-how-and-why/; December 7, 2019: The WTO Dispute Settlement System – Closing Out 2019 and Implications for 2020, https://currentthoughtsontrade.com/2019/12/07/the-wto-dispute-settlement-system-closing-out-2019-and-implications-for-2020/; November 24, 2019: With the WTO Appellate Body Becoming Dysfunctional on December 11, What Happens to Pending Appeals and Other Open Issues?, https://currentthoughtsontrade.com/2019/11/24/with-the-wto-appellate-body-becoming-dysfunctional-on-december-11-what-happens-to-pending-appeals-and-other-open-issues/; November 17, 2019: The WTO budget and the Appellate Body – Potential Fireworks at the end of 2019, https://currentthoughtsontrade.com/2019/11/17/the-wto-budget-and-the-appellate-body-potential-fireworks-at-the-end-of-2019/; November 12, 2019: 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/; November 4, 2019: 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/; November 1, 2019: The October 28, 2019 WTO Dispute Settlement Body Meeting – Another Systemic Problem Flagged by the United States, https://currentthoughtsontrade.com/2019/11/01/the-october-28-2019-wto-dispute-settlement-body-meeting-another-systemic-problem-flagged-by-the-united-states/; October 9, 2019: The World Trade Organization in Crisis – the Last Two Months of the Appellate Body Absent Reform Is Just One Example, https://currentthoughtsontrade.com/2019/10/09/the-world-trade-organization-in-crisis-the-last-two-months-of-the-appellate-body-absent-reform-is-just-one-example/.

In late 2019 and the first half of 2020, the National Foreign Trade Council released two papers it commissioned that were written by a former USTR attorney with extensive experience in WTO dispute settlement matters, Bruce Hirsch, on Appellate Body reform. See Bruce Hirsch, Resolving the WTO Appellate Body Crisis (Vol. 1), Proposals on Overreach, December 2019, https://www.nftc.org/default/trade/WTO/Resolving%20the%20WTO%20Appellate%20Body%20Crisis_Proposals%20on%20Overreach.pdf; Bruce Hirsch, Resolving the WTO Appellate Body Crisis (Vol. 2), Proposals on Precedent, Appellate Body Secretariat and the Role of Adjudicators, June 2020, https://www.nftc.org/default/Trade%20Policy/WTO_Issues/Resolving%20the%20WTO%20AB%20Crisis%20vol2%2006042020.pdf. The first of the two papers dealt with the topic of overreach though did not address correcting past overreach situations. The NFTC press release summarized the proposals for change on the overreach issue as follows:

“The paper includes six key proposals:

“1. Enforce the 90-day timeframe 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.”

This year, a former USTR General Counsel, Warren Maruyama had an article published in the Journal of World Trade that again stressed the importance of addressing overreach to be able to resolve the Appellate Body impasse. See Maruyama, Warren H., “Can the Appellate Body Be Saved?”, Journal of World Trade 55, no. 2 (2021, 197-230. Mr. Maruyama notes that the problem of overreach for the United States is most pronounced in the trade remedy sphere and that there have been concerns for two decades or more flowing in large part from the Appellate Body’s creation of obligations on “zeroing”. As Mr. Maruyama states, “The concerns rest on the conviction of U.S. trade officials who participated in the Uruguay Round negotiations and later served in the Bush 43, Obama, and Trump Administrations, that there was never a WTO agreement to abolish ‘zeroing’.” Id at 197. Mr. Maruyama reviews the Uruguay Round antidumping negotiations and GATT disputes on similar language in the Tokyo Round Code to that relied upon by the Appellate Body to support his thesis that many countries knew about “zeroing” (treating sales that were not dumped as having a “0” dumping amount) during the Uruguay Round, and that efforts to have language added to the Agreement to address the issue were rejected. Id at 202-210.

Mr. Maruyama then proceeds to look at the challenges to addressing overreach and has a number of useful proposals — clarifying the standard of review for the Appellate Body, not review finding of facts under DSU Art. 11, giving meaning to ADA Article 17.6(ii) in terms of deference to administering authorities in constructions where more than one meaning is possible, examining negotiating history and ending gap filling. Id at 214 – 225. He also proposes reforming the Appellate Body appointment process (moving away from academics to individuals with WTO negotiating experience), making Appellate Body positions full time, providing a mechanism to disapprove an AB decision where a significant number of Members object, and by modifying the structure and operation of the Appellate Body Secretariat to have Secretariat personnel hired by each AB member to help the AB member during his/her time on the Appellate Body. Id at 226-228.

The importance of Mr. Maruyama’s article lies in his focus on the critical importance of solving the overreach problem if the WTO is to regain a two-tier dispute settlement system. His is another voice providing a clear signal that overreach is the most important issue to be solved and that the Walker paper from late 2019 didn’t really address this core U.S. concern.

As I have written before, addressing overreach requires both fixing the operation of the system going forward and rebalancing rights and obligations by correcting for the overreach decisions Members have flagged to the DSB in the past. The addressing of overreach is of importance to both political parties in the United States and has been on the radar of current and past Administration since at least 2002.

Because restoration of a two-tier dispute settlement system is viewed as important by many Members, it is time for WTO Members to in fact recognize the problems of past decisions and work for meaningful solutions both of the system going forward and to ensure a restoration of the balance and rights and obligations agreed to by Members during the Uruguay Round.

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.