World Trade Organization

March 27, 2020 Agreement on Interim Arbitration Process by EU and 15 other WTO Members to Handle Appeals While Appellate Body is Not Operational

With the reduction in members of the Appellate Body from three to one after December 10, 2019, the WTO’s Appellate Body has not been in a position to handle new appeals nor to complete a range of other appeals that were pending where no hearing had occurred. The United States has blocked consideration of replacements while solutions to its substantive and procedural concerns with the actions of the Appellate Body are developed. As it is unlikely that U.S. concerns will be resolved in the near term, a number of WTO Members have been searching for alternative approaches to maintain a second stage review in disputes where one or more parties desires that second stage review.

Specifically, a number of WTO Members have wanted to establish an arbitration framework for disputes between Members willing to abide by such a framework. The European Union has been one of the most outspoken on the topic and had completed agreements with Canada and Norway ahead of Davos this year.

On the sidelines of Davos, a significant number of countries indicated a desire to find a common approach on arbitration to address the lack of Appellate Body review until such time as the operation of the Appellate Body was restored.

On March 27, 2020, a Multi-Party Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU was agreed to by to the following WTO Members — Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, the European Union, Guatemala, Hong Kong, Mexico, New Zealand, Norway, Singapore, Switzerland and Uruguay. The text of the arrangement is here, https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158685.pdf. The arrangement is open to other Members should they opt to join at a future date.

As stated in the Ministerial Statement released yesterday, https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158684.pdf

“Further to the Davos statement of 24 January 2020, we, the Ministers of Australia; Brazil; Canada; China; Chile; Colombia; Costa Rica; European Union; Guatemala; Hong Kong, China; Mexico; New Zealand; Norway; Singapore; Switzerland; and Uruguay, have decided [1] to put in place a Multi-party Interim Appeal Arbitration Arrangement (MPIA) on the basis of the attached document. This arrangement ensures, pursuant to Article 25 of the WTO Dispute Settlement Understanding, that any disputes among us will continue benefitting from a functioning dispute settlement system at the WTO, including the availability of an independent and impartial appeal stage.

“We believe that such WTO dispute settlement system is of the utmost importance for a rules-based trading system. The arrangement is open to any WTO Member, and we welcome any WTO Member to join.

“We wish to underscore the interim nature of this arrangement. We remain firmly and actively committed to resolving the impasse of the Appellate Body appointments as a matter of priority and urgency, including through necessary reforms. The arrangement therefore will remain in effect only until the Appellate Body is again fully functional.

“We intend for the arrangement to be officially communicated to the WTO in the coming weeks.

“1/ Subject to the completion of respective domestic procedures, where applicable.”

The European Commission reviewed the significance of yesterday’s group decision in a press release:

“The EU and 15 other members of the WTO today decided on an arrangement that will allow them to bring appeals and solve trade disputes among them despite the current paralysis of the WTO Appellate Body. Given its strong and unwavering support for a rules-based trading system, the EU has been a leading force in the process to establish this contingency measure in the WTO.

“Commissioner for Trade Phil Hogan said: ‘ Today’s agreement delivers on the political commitment taken at ministerial level in Davos in January. This is a stop-gap measure to reflect the temporary paralysis of the WTO’s appeal function for trade disputes. This agreement bears testimony to the conviction held by the EU and many other countries that in times of crisis working together is the best option. We will continue our efforts to restore the appeal function of the WTO dispute settlement system as a matter of priority. In the meantime, I invite other WTO Members to join this open
arrangement, crucial for the respect and enforcement of international trade rules.’

“The Multiparty Interim Appeal Arbitration Arrangement mirrors the usual WTO appeal rules and can be used between any members of the Organisation willing to join, as long as the WTO Appellate Body is not fully functional.

“Today’s agreement underscores the importance that the participating WTO members – Australia; Brazil; Canada; China; Chile; Colombia; Costa Rica; the European Union; Guatemala; Hong Kong, China; Mexico; New Zealand; Norway; Singapore; Switzerland; and Uruguay – attach to a functioning two-step dispute settlement system at the WTO. Such a system guarantees that trade disputes can be resolved through an impartial and independent adjudication, which is essential for the multilateral trading system based on rules.

“We expect the Multiparty Interim Appeal Arbitration Arrangement to be officially notified to the WTO in the coming weeks, once the respective WTO Members complete their internal procedures, after which it will become operational.”

https://ec.europa.eu/commission/presscorner/detail/en/IP_20_538.

The Interim Appeal Arrangement

Led by the European Union, the interim appeal arrangement looks a lot like an appeal to the Appellate Body and that is by design. As stated in paragraph 3 of the arrangement, “3. The appeal arbitration procedure will be based on the substantive and procedural aspects of Appellate Review pursuant to Article 17 of the DSU, in order to keep its core features, including independence and impartiality, while enhancing the procedural efficiency of appeal proceedings.” Many parts of practice and procedure of the Appellate Body are incorporated into the appeal arbitration procedures (Annex 1) and included in the text of the arrangement itself.

Arbitrations will be heard by three members of a standing pool of 10 appeal arbitrators who may be current or former Appellate Body members or other qualified individuals. See Annex 2. Such current and former AB members are not subject to any additional vetting if nominated by one of the signatories. Selection for serving on an appeal arbitration, similar to the Appellate Body, will be subject to rotation.

The participating Members are looking to the WTO Secretariat to provide “appropriate administrative and legal support”, that such support “will be entirely separate from the WTO Secretariat staff”. Stated differently, the participating Members are seeking the maintenance of something like the Appellate Body Secretariat but as an interim appellate arbitration group or secretariat.

The participating Members are permitting arbitration to be completed in 90 days (subject to extension approved by the parties) and give arbitrators authority to streamline proceedings to accomplish the 90 day timeline (page limits, time limits, etc.).

The full text of the interim arrangement and two appendices is embedded below.

3-27-2020-multi-party-interim-appeal-arbitration-arrangement-pursuant-to-Article-25-of-the-DSU

Approach of Other WTO Members

Time will tell the success of the interim appeal arbitration arrangement both among the existing participants and on any future participants.

The United States and many other Members are not presently participants in the interim agreement though that could, of course change as the arrangement is open to additional Members joining. Existing Members not participating in the arrangement include Japan, South Korea, India, Indonesia, Thailand, Malaysia, Argentina, South Africa, Saudi Arabia, Russia, Ukraine and many others.

Where a Member does not participate in the interim agreement, there are a wide range of options for the resolution of disputes including a bilateral agreement between the parties either during consultations or during the panel process, agreement to adopt the panel report without appeal or separate arbitration procedures agreed by the parties to a dispute. The U.S. and India in a pending dispute have also simply agreed to hold up any appellate review until such time as the Appellate Body is functioning again. Time will also reveal how well alternative dispute resolution approaches work for WTO Members.

What is certain is that absent a resolution of the underlying concerns raised by the United States over the last several years, the WTO dispute settlement system will be in a period of uncertainty with various approaches possible to resolve disputes but no clarification of the proper role of dispute settlement within the WTO.

Will the Interim Arrangement Promote Resolution of Long-Standing Problems with WTO Dispute Settlement?

While the participating Members to the interim agreement all state a commitment to pursue the prompt resolution to the WTO dispute settlement system challenges, the reality on the ground does not appear to match the rhetoric. While the U.S. has presented detailed information on its concerns and asked for engagement by Members to understand the “why” of the current situation, many Members have limited their engagement to suggesting modifications of the existing Dispute Settlement Understanding that do little more than repeat existing requirements – requirements which have been routinely flouted by the Appellate Body. Nor have Members advanced either an understanding or approaches for resolving the large number of instances where the Appellate Body has created rights or obligations not agreed to by Members. Thus, there has not been meaningful forward movement in recent months on the long-standing problems identified with the WTO dispute settlement system. Nothing in the interim arrangement augurs for an improved likelihood of resolution.

Moreover, the adoption of an interim arrangement that cloaks itself in much of the Appellate Body rules and procedures and is likely to have a number of former Appellate Body members in its pool of arbitrators is likely to create additional challenges as time goes by particularly in terms of the relevance of arbitral awards other than to the parties to the arbitration, whether existing problems are perpetuated through the interim appeal arbitration process, etc. There may also be short term challenges to the propriety of arbitrators being supported by a separate group of staff and who will pay for such services.

Conclusion

For WTO Members liking the past operation of the Appellate Body and wanting a second phase review of disputes that approximates the Appellate Body approach under the DSU, the interim appeal arbitration agreement will provide an approach while the Appellate Body itself is not functional. The WTO Members who are participating are significant users of the WTO dispute settlement system. More may join in the months ahead.

At the same time, other approaches to resolving disputes continue to be available to WTO Members and used by various Members.

There is nothing wrong with multiple approaches for handling resolution of disputes.

At the same time, nothing in the interim agreement or the actions of the participants to that agreement in the first quarter of 2020 provides any reason to believe the participants are working any harder to reach a resolution on the longstanding concerns of the United States on the actual operation of the Appellate Body.

Rule of law issues include seeing that the dispute settlement system operates within the confines of the authority defined by the Dispute Settlement Understanding. That has not been the case for many actions by the Appellate Body as well documented by the United States.

There won’t be meaningful forward movement in WTO reform or restoration of the two-step dispute settlement system until Members are able to both understand why the Appellate Body has deviated so widely from its limited role and fashion solutions that will ensure a properly functioning dispute settlement system that supports the other functions of the WTO and doesn’t replace or handicap them. Yesterday’s announcement of the interim agreement does nothing to advance those underlying needs.

Coronavirus (COVID-19) and trade, how bad will declines get?

What started as a novel coronavirus in China at the end of 2019/beginning of 2020 has transformed into a global pandemic. Data compiled as of this morning (March 20, 2020) shows a tripling of confirmed cases globally in the last fifteen days from 102,123 cases to 305,225. The number of countries and territories reporting at least one confirmed case now stands at 177 — -41 in Africa, 36 in the Americas, 39 in Asia, 55 in Europe and 7 in Oceania. See European Centre for Disease Prevention and Control, Situation update worldwide, as of 22 March 2020, https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases

The spread of COVID-19 in China has dramatically slowed in the last fifteen days. While there had been 80,759 confirmed cases of COVID-19 fifteen days ago in China (79.1% of the global totals), in the last fifteen days, China has reported only 731 additional confirmed case (0.36% of the new cases over the last fifteen days) with China’s share of global cases to date dropping sharply to 26.7% as of March 22. The European Union has shot into the number one slot for most confirmed cases and highest number of deaths. Data for the EU/EEA and UK show confirmed cases as of March 22nd at 141,858 (46.48% of global total) and with deaths at 7,319 (56.55% of the global total of 12,942). See European Centre for Disease Prevention and Control, Situation update for the EU/EEA and the UK, as of 22 March 2020, https://www.ecdc.europa.eu/en/cases-2019-ncov-eueea The United States is also finding a rapidly growing number of confirmed cases, numbers that are likely to grow dramatically higher as widespread testing abilities become available in the coming days and weeks. As of March 22, US confirmed cases were 26,747, 98.7% of which were identified in the last fifteen days.

With the rate of growth of the number of people infected with COVID-19 still accelerating in many parts of the world and with no currently available vaccine, a number of countries have taken increasingly stringent measures to try to control the spread of the virus. Moreover, many countries are facing growing challenges in terms of availability of testing supplies and ventilators, protective equipment (gloves, masks, etc.), medical facilities capable of handling severe cases, and simple workload for medical providers. Lockdowns of countries or cities or states/provinces for other than essential personnel has grown in an effort to flatten the number of cases and prevent medical systems from being overwhelmed. The wholesale closure of schools, restaurants, sports facilities and other venues is having high economic costs and obvious major challenges for significant parts of the populations in some countries. So too, travel restrictions first internationally and even in country have expanded. Social distancing is being mandated. Quarantining of individuals returning from foreign travel or who have been in contact with someone who has tested positive has disrupted lives for hundreds of thousands of people.

As reviewed in a recent Congressional Research paper entitled “COVID-19: An Overview of Trade-Related Measures to Address Access to Medical Goods,” some countries have implemented export restraints on medical supplies. Others have been reducing or eliminating tariffs on specific products in short supply in country. See, e.g., https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/march/ustr-response-coronavirus-crisis. Some countries have also been modifying import procedures to permit expedited clearance of critical medical goods. And some countries have been prioritizing domestic production of items deemed critical. The March 20, 2020 CRS paper is enclosed below.

CRS-March-2020-COVID-19-an-overview-of-trade-related-measures-to-addr.._

While there may be questions of WTO-compatibility of some of the actions being taken, the severity of the problem of the spread of coronavirus is leading to a wide range of actions by those nations hard hit by the virus as they attempt to safeguard the health and safety of their citizens.

International organizations like the World Trade Organization, businesses and governments are all having to rethink what can be done remotely, postponed or cancelled while efforts are ongoing to address the pandemic. The 12th Ministerial Conference that was to be held in Kazakhstan in June 2020 has been postponed for an unknown period of time. Meetings in the WTO have been cancelled for several weeks and efforts at virtual meetings are facing challenges. While efforts continue to make progress on fisheries subsidies talks, the challenges flowing from the pandemic may subconciously reduce the collective will to achieve a meaningful result (or any result) in the remainder of 2020.

Because of the severity of the virus on large portions of the population and the lack of a vaccine (with likely availability still a year or more away), efforts to estimate the effect of the virus on national or global economies has been an exercise in chasing a moving target. A March 4 release from UNCTAD looked at likely reductions in global trade from COVID-19 where the major disruption was in China and to supply chains dependent on Chinese inputs. A reduction in trade of $50 billion was estimated. https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf?user=1653. The March 4 estimate is dwarfed when one includes the collapse of the global airline industry, the harm to tourism in China, Europe and the US (and other countries) and the shuttering of sectors in major markets like Europe and the United States (e.g., restaurants and bars, sporting events, entertainment facilities (theme parks, movies, theater, etc.). In a March 9 statement from UNCTAD, concerns about reduced global growth (but still positive) put the likely cost of COVID-19 at $1 trillion with a worst case of $2 trillion. https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2300.

A mid-term update to the OECD’s economic forecast released in early March revised estimated global growth down from 2.9% to 2.5% and if widespread problems in Asia, Europe and the United States, a decline to a growth rate of just 1.5% due to COVID 19. But the interim projections had the EU and the US still with some GDP growth in 2020. 2 March 2020, OECD Interim Economic Assessment, Coronavirus – The World Economy at Risk, https://www.oecd.org/economic-outlook/.

A more recent estimate by Goldman Sach’s predicts an extraordinary 2nd quarter 2020 contraction in the U.S. GDP of more than 24% and a full year 2020 contraction in GDP of 3.8%. See, e.g., Markets Insider, “Goldman Sachs now says US GDP will shrink 24% next quarter amid the coronavirus pandemic – which would be 2.5 times bigger than any decline in history,” March 20, 2020, , https://markets.businessinsider.com/news/stocks/us-gdp-drop-record-2q-amid-coronavirus-recession-goldman-sachs-2020-3-1029018308.

Governments are taking aggressive steps to try to address the potential economic damage from their efforts to slow the spread of the coronavirus. The U.S. Congress has passed one piece of legislation last week and will likely pass a second where the collective costs may exceed $2 trillion as Congress and the Administration try to deal with the challenge to millions of Americans suddenly unemployed, to the collapse of many small businesses and the challenges to major industries like the airline industry.

Similarly, the European Union is looking at actions that would involve hundreds of billions of Euros to address many of the same challenges.

With the collapsing of demand in major developed economies in Europe and the U.S. while these extraordinary measures restricting movement are in place, global trade has been and will continue to be significantly impacted. Articles indicate that China’s exports in January and February were reduced by 17.2% from prior year levels due in large part to COVID-19 (imports into China were down 4%) with spillover effects to many other countries who use Chinese inputs for further manufactured goods. See, e.g., Bloombergs, China’s Exports Slump As Coronavirus Forces Shutdown, March 6, 2020, https://www.bloomberg.com/news/articles/2020-03-07/china-s-jan-feb-exports-fall-17-2-y-y-in-dollars-est-16-2. While China has embarked on efforts to spur economic growth and growth in exports now that the number of cases seems to be under control in China, the rebound in China’s trade will certainly be slowed by the challenges being experienced in other major markets, particularly in the EU and the United States.

While G-7 leaders have indicated the importance of keeping trade flowing and many restrictions specifically exclude coverage of legitimate trade (e.g., US-Canada and US-Mexico recent agreements on restricting cross-border movements), there is little doubt that 2020 will be a challenging year for global trade whether the country engaged in trade is experiencing serious challenges from coronavirus or not. See, e.g., G7 leaders’ statement on COVID-19, https://www.consilium.europa.eu/en/press/press-releases/2020/03/16/g7-leaders-statement-on-covid-19/ WTO DG welcomes G&7 leaders’ statement on COVID-19, https://www.wto.org/english/news_e/news20_e/dgra_17mar20_e.htm.

Still, any efforts of major trading nations to support the global trading system and limit restrictions as possible in these extraordinary circumstances is important, as are efforts of business associations to collaborate to address challenges to business operations from the virus.

Because past outbreaks appear to be poor examples of either the severity of the problems being faced by a number of countries or the length of time disruption will occur before economies hard hit can start to rebound, an air of uncertainty of unique dimensions is likely to continue to overhang global markets for a number of months and potentially longer. The best that may be possible in the global trade field is a substantial slump in traffic without major long-term barriers being introduced.

Here’s hoping that the “invisible enemy” that COVID-19 has been called by some proves addressable in the near term. Billions of people are watching and attempting to cope with lives often seriously disrupted. Helping the people of the world survive the health challenges posed by COVID-19 is obviously job one for governments around the world confronting rapidly increasing numbers of confirmed cases. Trade can assist in some important ways during such a crisis. Unfortunately, trade actions can be used in times of crisis to promote beggar-thy-neighbor actions which can make dependence on global supply chains and foreign sources of key products politically untenable. We are seeing both sides of how trade is perceived playing out in countries at the present time.

WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies

The GATT and the WTO were created by market economy countries, and the rules embodied within each reflect an effort to identify principles and rules that would promote reciprocal trade among its members. While there have long been members of the GATT and now the WTO that have not been market economies in fact, the problem of the distortions that occur to the global trading system from state-directed or non-market economies has come into sharp focus in the last twenty years with the accession and rapid growth of China and the accession of a number of other countries or the emulation of China’s model by existing members with substantial state direction, state ownership of business, state planning, forced technology transfer and massive subsidization.

While a number of WTO members have been concerned about the disconnect between the WTO rules-based system and such non-market economies where various conduct is not actually addressed by WTO rules, the United States has led the effort to obtain a reaffirmation of the market-oriented nature of the WTO and the need to address the distortions that exist but are not addressable under the WTO.

The European Union, Japan and the United States since the 11th Ministerial Conference in Buenos Aires in 2017 have been working on addressing the massive industrial subsidies, challenges from state-owned or invested enterprises and forced technology transfer. The recent joint declaration with identified changes to the Agreement on Subsidies and Countervailing Measures was the subject of a prior post. See https://currentthoughtsontrade.com/2020/01/14/wto-reform-joint-statement-of-january-14-2020-of-japan-the-u-s-and-the-eu/

The U.S. Raises the Issue of Nonmarket Economies in 2018

But the United States has led on the broader issue. The U.S. teed the issue up in a presentation to the General Council during the summer of 2018 with the submission of a fourteen page paper. China’s Trade-Disruptive Economic Model, Communication from the United States, WT/GC/W/745. The paper was broken down into four sections. The first dealt with “non-market oriented conditions set by the government and the party” looking at the objectives of control and at control at the firm level. The second section deal with “non-market allocation of resources” and covered non-market allocation of key means of production, industrial policies, and the use of law as an instrument of the Party State. The third section reviews the “costs to WTO Members of China’s economic model” covering topics like non-reciprocal and protected markets, excess capacity created by the Chinese model and the extensive use of forced technology transfer. The forth section looked at “benefits to China of its economic model”. The U.S. paper and the additional document submitted by the U.S. (2017 Report to Congress on China’s WTO Compliance) are included below.

WTGCW745

WTGCW746

While the effort of the U.S. has been vigorously opposed by China and other like minded Members of the WTO, to the United States and other major players like the European Union and Japan, there cannot be meaningful WTO reform without addressing the distortions flowing from economic systems that are not premised on market principles or where the state has a large role.

The March 3-4, 2020 General Council Meeting

The first meeting of the WTO’s General Council in 2020 will be on March 3-4 (an informal meeting was held on February 21st). On the agenda will be the United States paper in the form of a draft General Council Decision titled “The Importance of Market-Oriented Conditions to the World Trading System”. WT/GC/W/796. The text is copied below:

“THE IMPORTANCE OF MARKET-ORIENTED CONDITIONS TO THE WORLD TRADING SYSTEM DRAFT GENERAL COUNCIL DECISION

“Communication from the United States

“The following communication, dated 20 February 2020, is being circulated at the request of the delegation of the United States.


“The General Council decides to adopt this declaration on the importance of market-oriented conditions to the world trading system.

“The General Council recalls that the World Trade Organization (WTO) was established to promote Member economies’ participation in a world trading system ‘based on open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions’.1

“The General Council also recalls that the establishment of the WTO reflected Members’ ‘desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples’ and, during the period of time during which the Uruguay Round was being negotiated, ‘significant measures of economic reform and autonomous trade liberalization were implemented in many developing countries and formerly centrally planned economies’.2

“The General Council expresses its serious concerns with non-market-oriented policies and practices that have resulted in damage to the world trading system and lead to severe overcapacity, create unfair competitive conditions for workers and businesses, hinder the development and use of
innovative technologies, and undermine the proper functioning of international trade.

“The General Council affirms that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system, to ensure a level playing field for Members’ workers
and businesses.

“The General Council affirms Members’ citizens and businesses should operate under market-oriented conditions and notes the following elements indicate and are important so that market-oriented conditions exist for market participants:3

“i. decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals;

“ii. decisions of enterprises on investments are freely determined and made in response to market signals;

“iii. prices of capital, labor, technology, and other factors are market-determined;

“iv. capital allocation decisions of or affecting enterprises are freely determined and made in response to market signals;

“v. enterprises are subject to internationally recognized accounting standards, including independent accounting;

“vi. enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law, and private property law, and may enforce their rights through impartial legal processes, such as an independent judicial system;

“vii. enterprises are able to freely access relevant information on which to base their business decisions; and

“viii. there is no significant government interference in enterprise business decisions described above.

“The General Council agrees to reaffirm Members’ commitment to open, market-oriented policies in order to achieve market-oriented conditions that are critical to ensure a level playing field for workers and businesses and a fairer and more open world trading system that benefits their peoples.

“1 Marrakesh Declaration of 15 April 1994, fifth preambular paragraph.
“2 Marrakesh Declaration, paras. 2 and 4.
3″ This decision is without prejudice to the rights or obligations of any Member under the Marrakesh Agreement Establishing the World Trade Organization.”

Conclusion

While a lot of attention remains on reform to the dispute settlement system to permit a return to a two-tiered level of review of Member actions, there has been a growing recognition that significant reform is needed for the WTO to restore its relevance in a rapidly changing global environment. While reform needs to address updating of rules to cover new areas and making existing rules more effective, there cannot be meaningful reform without addressing the disconnect between Members who operate on market economy principles and those that don’t.

While it is highly unlikely that in a consensus based system Members with economic systems that are not premised on market principles will agree to address the massive distortions their economic systems create, the future of the WTO depends on finding ways to address the differences and distortions. Look for a contentious General Council meeting on this topic.