WTO Appellate Body

USTR's Report on the WTO Appellate Body — An Impressive Critique of the Appellate Body's Deviation from Its Proper Role

On February 11, 2020 the U.S. Trade Representative released a Report on the Appellate Body of the World Trade Organization . https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The Report is a total of 174 pages, the report itself being 122 pages along with four appendices. The Report does not lay down what it views as the required solutions to the widespread problems that the United States has with the Appellate Body’s actions over the first twenty-five years of the WTO. But the report lays out the U.S. concerns in great detail, why the concerns reflect violations of the limited role of the Appellate Body within the WTO’s dispute settlement system and how WTO Members are harmed by the actions of the Appellate Body over time. The report goes over the issues that the U.S. has reviewed extensively at the Dispute Settlement Body and the General Council over the last two years and adds several additional concerns.

On the critical issue of Appellate Body overreach, the Report lays out examples of specific major problems for the United States in terms of the Appellate Body creating obligations or limiting rights under the WTO Agreements but identifies a number of other examples as well. It is fair to opine that the overreach issues flagged in the report constitute an absolute minimum of issues that need to be corrected for there to be an adequate restoration of rights and obligations in the view of the United States.

The appendices review concerns expressed over the last twenty years by members of Congress, various U.S. Trade Representatives and their Deputies on the continuing problem of WTO Appellate Body overreach vis-a-vis U.S. laws, regulations and practices, and actions by Congress calling for the U.S. Administration to address problems of WTO Appellate Body overreach.

In short, the Report is an extraordinary document that lays out in a comprehensive and coherent manner the U.S. view on why the WTO dispute settlement system has deviated far from its intended path. The full report is included below.

USTR-report-on-the-AB-of-the-WTO

The Report’s release at the time that the WTO Members seek a road forward on the dispute settlement system and how to restore an appellate body level of review gives all WTO Members notice that the U.S. is serious in insisting on Members coming to grips with how and why the Appellate Body has strayed so far from the limited mandate of the Dispute Settlement Understanding. Without a coming together of the Membership on the causes, one can expect that the United States will continue to block the start of selecting Appellate Body members.

Because certain major WTO Members seem unconcerned with (or are even supportive of) the violations that characterize a large number of Appellate Body decisions (at least on particular issues), it is not clear that meaningful movement and discussion will occur in the coming months in the lead up to the 12th Ministerial Conference in Kazakhstan in early June of this year. If not, resolution of the current impasse on the WTO Appellate Body is likely to drag on indefinitely.

Excerpts from the Executive Summary

The Executive Summary provides a concise review of the U.S. concerns. Excerpts are provided below (Report at 1-3):

“The United States and other free-market nations established the World Trade Organization (“WTO”) in 1995 as a forum for negotiating and implementing trade agreements. The dispute settlement mechanism of the WTO was designed to help Members resolve trade disputes arising under those agreements, without adding to or diminishing the rights and obligations to which Members had agreed. When the WTO dispute settlement system functions according to the agreed rules, it provides a vital tool to enforce Members’ WTO rights and obligations. For more than 20 years, however, the United States and other WTO Members have expressed serious concerns with the Appellate Body’s disregard for those rules.

“As detailed in this Report, the Appellate Body has repeatedly failed to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements, as negotiated and agreed by WTO Members. The Appellate Body has strayed far from the limited role that WTO Members assigned to it, ignoring the text of the WTO agreements. Through this persistent overreaching, the Appellate Body has increased its own power and seized from sovereign nations and other WTO Members authority that it was not provided. For example:

“ The Appellate Body consistently ignores the mandatory deadline for deciding appeals;
“ The Appellate Body allows individuals who have ceased to serve on the Appellate Body to continue deciding appeals as if their term had been extended by WTO Members in the Dispute Settlement Body;
“ The Appellate Body has made findings on issues of fact, including issues of fact relating to WTO Members’ domestic law, although Members authorized it to address only legal issues;
“ The Appellate Body has issued advisory opinions and otherwise opined on issues not necessary to assist the WTO Dispute Settlement Body in resolving the dispute before it;
“ The Appellate Body has insisted that dispute settlement panels treat prior Appellate Body interpretations as binding precedent;
“ The Appellate Body has asserted that it may ignore WTO rules that explicitly mandate it recommend a WTO Member to bring a WTO-inconsistent measure into compliance with WTO rules; and
“ The Appellate Body has overstepped its authority and opined on matters within the authority of WTO Members acting through the Ministerial Conference, General Council, and Dispute Settlement Body.

“The Appellate Body’s persistent overreaching has also taken away rights and imposed new obligations through erroneous interpretations of WTO agreements. The Appellate Body has attempted to fill in “gaps” in those agreements, reading into them rights or obligations to which the United States and other WTO Members never agreed. These errors have favored non-market economies at the expense of market economies, rendered trade remedy laws ineffective, and infringed on Members’ legitimate policy space. For example:

“ The Appellate Body’s erroneous interpretation of the term “public body” threatens the ability of Members to counteract trade-distorting subsidies provided through SOEs, undermining the interests of all market-oriented actors;
“ The Appellate Body has intruded on Members’ legitimate policy space by essentially converting a non-discrimination obligation for regulations into a ‘detrimental impact’ test;
“ The Appellate Body has prevented WTO Members from fully addressing injurious dumping by prohibiting a common-sense method of calculating the extent of dumping that is injuring a domestic industry (“zeroing”);
“ The Appellate Body’s stringent and unrealistic test for using out-of-country benchmarks to measure subsidies has weakened the effectiveness of trade remedy laws in addressing distortions caused by state-owned enterprises in non-market economies;
“ The Appellate Body’s creation of an “unforeseen developments” test and severe causation analysis prevents the effective use of safeguards by WTO Members to protect their industries from import surges; and
“ The Appellate Body has limited WTO Members’ ability to impose countervailing duties and antidumping duties calculated using a non-market economy methodology to address simultaneous dumping and trade-distorting subsidization by non-market economies like China.

“For many years, successive Administrations and the U.S. Congress have voiced significant concerns about the Appellate Body’s disregard for the rules agreed to by WTO Members. As set forth in the Appendices to this Report, in multiple Congressional Sessions, up to and including the current Session, Senators and Representatives of both parties have voiced urgent concerns and the need for reform in numerous resolutions, reports, and statements.1

“1 See Statements by Members of the United States Congress Expressing Concerns with Appellate Body Overreaching (Appendix A1); Congressional Legislation and Reports Expressing Concern with Appellate Body
Overreaching (Appendix A2); Statements by U.S. Trade Representatives or Their Deputies on Appellate Body Overreach (Appendix B1); and Statements by the United States to the WTO Dispute Settlement Body Expressing Concerns with the Appellate Body’s Failure to Follow WTO Rules and Erroneous Interpretations of the WTO Agreements (Appendix B2).

“Unfortunately, U.S. efforts were ignored, and the problem has worsened as too many WTO Members remain unwilling to do anything to rein in this conduct. The proper functioning of the WTO Appellate Body has a disproportionate impact on the United States because more than one quarter of all disputes at the WTO have been challenges to U.S. laws or other measures. Specifically, 155 disputes have been filed against the United States, and no other Member has faced even a hundred disputes. According to some analyses, up to approximately 90 percent of the disputes pursued against the U.S. have led to a report finding that the U.S. law or other measure was inconsistent with WTO agreements. This means that, on average, over the past 25 years, the WTO has found a U.S. law or measure WTO-inconsistent between five and six times per year, every year.

“But these failings have dire consequences for U.S. interests in the WTO, and for all WTO Members, as well. The negotiating function of the WTO has atrophied as the Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved through negotiation; the effectiveness of WTO tools designed to address distortions by nonmarket economies has been greatly diminished; and the WTO dispute settlement system continues to lose the credibility necessary to maintain public support for the system.

“In short, the Appellate Body’s failure to follow the agreed rules has undermined not only WTO dispute settlement, but the effectiveness and functioning of the WTO more generally. Furthermore, by encouraging behavior that distorts markets, the Appellate Body has helped to make the global economy less efficient. Lasting and effective reform of the WTO dispute settlement system requires all WTO Members to come to terms with the failings of the Appellate Body.”

Additional Comments

The Executive Summary lists seven ways in which the Appellate Body has deviated from the limited role assigned to the Appellate Body within the Dispute Settlement Understanding. The last two listed have not been the focus of much of the U.S. commentary over the last several years but reflect additional concerns with the Appellate Body’s conduct. The first issue goes to decisions where the Appellate Body has ignored the clear Dispute Settlement Understanding requirement to recommend a party bring its actions into conformity with its WTO obligations where during the pendency of a dispute the Member alleged to be acting inconsistent with WTO obligations withdraws the measure in question. Report at 64-68. The second deals with situations where the Appellate Body has articulated how WTO bodies should carry out their functions even though the functioning of various WTO bodies is not an area properly before the Appellate Body. Report at 69-74. A third additional issue that is not listed in the Executive Summary but is in the full report (Report at 74-80) is “The Appellate Body Has Departed from WTO Rules by Deeming Decisions Not Made under Article IX:2 to Be Authoritative Interpretations of Covered Agreements”.

A major part of the Report is a review of selected Appellate Body decisions which have incorrectly interpreted various WTO Agreements and have thus either created obligations or reduced rights of the United States (and other Members). See pages 81 – 119. The opening paragraphs of this part of the Report summarize the concerns (page 81):

“In addition to failing to follow the rules that WTO Members have adopted, the Appellate Body has erroneously interpreted and applied numerous important WTO agreements. The Appellate Body has overreached on substantive issues, engaged in impermissible gap-filling, and read into
the WTO agreements rights or obligations that are not there.

“The texts of the covered agreements result from extensive negotiations among sovereign nations and autonomous customs territories, and reflect differing negotiating objectives and positions. It is often possible to reach agreement on only one particular obligation or discipline while being unable to reach agreement on any obligation or discipline even in a related area. As such, ‘gaps’ in the text of a covered agreement may simply reflect a situation where there was a limit upon what negotiators could agree. WTO Members have not agreed to delegate to WTO adjudicative bodies the task of filling in gaps in the covered agreements, and it is critical for WTO
adjudicators to respect these limits.

“Despite this, the Appellate Body has expanded its own power and attempted to substitute for negotiators to re-write, reduce or supplement the agreed text. Among other interpretive errors, the Appellate Body has engaged in impermissible gap-filling and read into the text of the covered agreements obligations or rights that are not present in the text. This conduct is inconsistent with the Appellate Body’s role and adds to or diminishes Members’ rights and obligations, contrary to Articles 3.2 and 19.2 of the DSU.”

Five examples are reviewed at length, including four that address issues from trade remedy agreements (Subsidies and Countervailing Measures; Anti-Dumping; Safeguards) and one that involves the Technical Barriers to Trade Agreement. Moreover, four additional decisions are referenced in footnote 195:

“195 For example, this Report does not discuss the dispute US – Continued Dumping and Subsidy Offset Act Of 2000, in which the Appellate Body’s interpretation of the Subsidies Agreement in effect created a new category of prohibited subsidies that was neither negotiated nor agreed to by WTO Members; or other examples, such as US – Gambling, US – Cotton, US – FSC.”

The problem of the Appellate Body (or panels) creating obligations or diminishing rights not contained in the various agreements of the WTO is not limited to these nine cases where the U.S. has raised serious concerns but has included concerns raised by many trading partners. In a paper prepared for the Asia Society Policy Institute in early 2018, I reviewed excerpts from various Dispute Settlement Body meetings where various WTO Members raised concerns about creating obligations or diminishing rights. The paper is enclosed below.

Final-Asia-Society-Paper-re-dispute-settlement

Conclusion

The fundamental questions facing the WTO membership on the dispute settlement system are whether Members will agree to conform the dispute settlement system to the limited role envisioned at its creation in 1995 and restore balance to the Agreements that were negotiated. The United States has laid out its case that a limited role for the Appellate Body was all that was intended and all that the U.S. supports. Many Members have seen the deviation from the Dispute Settlement Understanding but have looked the other way or even encouraged the expansion of the deviation for a variety of reasons, not least of which is achieving through disputes what wasn’t achieved through negotiations. Without a resolution acceptable to the United States, the WTO dispute settlement system will struggle to regain its full measure of legitimacy and there will be no restoration of an Appellate Body.

WTO Appellate Body Impasse – How and Why

When the number of Appellate Body members dropped to one after December 10, 2019 (full membership is seven; minimum number to hear appeals is three), no new appeals could be heard by the Appellate Body. And only those appeals which had proceeded through a hearing were allowed to be completed by the Appellate Body (current and past members).

Many WTO Members are desirous of getting the Appellate Body restored and various Members have been discussing interim procedures to permit a second tier review pending resolution of the Appellate Body impasse.

While there has been a great deal of discussion during Dispute Settlement Body meetings and meetings of the General Council on the issue of the functioning of the Appellate Body and while Amb. David Walker, acting as facilitator for the General Council, developed a draft proposal to address concerns of the United States, such efforts have to date not been successful in resolving the impasse.

For the United States, the core issue is the following:

“the fundamental problem is that the Appellate Body has not respected the current, clear language of the DSU.

“Members cannot find meaningful solutions to this problem without understanding how we arrived at this point. Without an accurate diagnosis, we cannot assess the likely effectiveness of any potential solution.”

https://geneva.usmission.gov/wp-content/uploads/sites/290/Jan27.DSB_.Stmt_.as-deliv.fin_.public.pdf.

Stated differently, “if the words of the DSU are already clear, then why has the Appellate Body strayed so far on each of these issues?”

https://geneva.usmission.gov/2020/01/27/statement-by-ambassador-shea-at-davos-informal-wto-ministerial-gathering/.

Nearly seven weeks after the reduction of Appellate Body members to just one, there has been no apparent effort to resolve the “how” and “why” questions that the United States has teed up for many months.

U.S. suggested possible explanations for the why and how

Proposals put forward by WTO Members to address U.S. concerns (and the facilitator’s draft decision) often merely restated that which is in the Dispute Settlement Understanding (“DSU”) but not observed by Appellate Body actions.

The United States provided a detailed statement at the December 9, 2019 General Council meeting including a large number of possible reasons why the Appellate Body has felt free to deviate from the requirements of the DSU. A lengthy excerpt follows:

“For more than 16 years and across multiple U.S. Administrations, the United States has been raising serious concerns with the Appellate Body’s disregard for the rules set by WTO Members. Over the past two years, the United States has outlined its concerns in exhaustive detail.  We have not avoided discussion; rather, we have laid out in the clearest possible terms the U.S. position on the issues raised.

“While the DSU text is straightforward and clear, the Appellate Body has ignored that text, and many WTO Members had not focused on just how far the Appellate Body’s practice had strayed from that text.

“And beyond our detailed DSB statements, we have made clear our willingness to discuss these concerns further with any Member in order to deepen each other’s understanding of these substantive issues.  Several Members have participated in these dialogues and in many instances we have found the discussions to be frank and productive.

“Of course, engagement is a two-way street.  For nearly a year, in the General Council and the Dispute Settlement Body, we have sought to deepen Members’ collective understanding of the concerns raised and asked Members to engage on a fundamental question: why did the Appellate Body feel free to disregard the clear text of the agreements?

“The United States did not pose this question as part of an academic exercise.  Rather, this question is critical in the context of any “solution-focused discussion:” Without an accurate diagnosis, we cannot assess the likely effectiveness of any potential solution.

“A fuller understanding of the cause is particularly important here.  As the United States has explained, the rules of the DSU are clear.  Where ambiguity or uncertainty over the meaning of the treaty text has not caused the problem, then simply re-affirming the rules that have been persistently broken cannot resolve the concern.  Remarkably, nearly one year later, we have yet to hear Members engage with the United States on this question.

“Notwithstanding Members’ public silence, at the October meeting of the General Council, the United States offered several potential explanations based on conversations and on our own reflections.  For example, one cause could be the ongoing challenges facing the WTO negotiating function and its oversight function, leading to unchecked “institutional creep” by the Appellate Body.

“At the same meeting, we suggested that another cause could be that some WTO Members believe that the Appellate Body is an independent “international court” and its members are like “judges” who inherently have more authority to make rules than the focused review provided in the DSU.  A related cause could be that some Appellate Body members view themselves as “appellate judges”  serving on a “World Trade Court” that is the “centerpiece” of the WTO dispute settlement system, rather than one component of it.  Such an expansive vision of the Appellate Body is not reflected in the DSU and was not agreed to by the United States.

“We also commented at that meeting that it was possible that some explanations for why the Appellate Body felt free to depart from the clear text of the DSU may be specific to the concerns that have been raised.  For example, with regard to the Appellate Body’s repeated breach of Article 17.5 of the DSU, we noted that while some WTO Members raised concerns about the Appellate Body’s exceeding 90 days, particularly without consulting the parties, a few Members excused the breach of our agreed rules.  We asked whether the attitude of those Members contributed to a mindset among the Appellate Body that the WTO’s rules and deadlines did not need to be respected.

“Similarly, in that statement, with respect to so-called “cogent” reasons, we noted the Facilitator’s Report suggests that Members agree that “precedent” is not created through WTO dispute settlement.  And so we asked at that meeting why some WTO Members advocate for the Appellate Body to assert that its interpretations must be followed by panels absent unidentified cogent reasons.  We also asked why then does the Appellate Body assert a precedential value for its reports like an authoritative interpretation that only WTO Members in the Ministerial Conference or General Council can give.

“More recently, at the November meeting of the DSB, we sought to discuss with Members systemic concerns regarding the compensation of Appellate Body members.  We sought to further Members’ understanding of the compensation structure as a general matter, and to consider the possible consequences of that structure.  In that statement, we commented that a system that provides a financial reward for violating DSU rules and prolonging the duration of an appeal would appear inconsistent with the objective behind the DSU rule of providing for the prompt resolution of disputes.  And we asked Members whether the current structure creates the correct incentive, or a negative one?  Does this structure encourage prolonged appeals at the expense of clear WTO rules?  Without debate or effective oversight, have WTO Members acquiesced in a compensation structure that may undermine, rather than promote, the prompt resolution of a dispute?

“These repeated attempts over many months by the United States to provoke a meaningful conversation among Members in the DSB, in the General Council, and in the Informal Process have proven unsuccessful.  Accordingly, we are no closer to an understanding of how we have arrived at this point.”

https://geneva.usmission.gov/2019/12/09/ambassador-shea-statement-at-the-wto-general-council-meeting/ (emphasis added).

Some additional thoughts on causes

To the list teed up by the United States, I would add two and provide a subissue on the topic of precedent and a comment on failure to abide by time limits.

(1) achieving through disputes what was not achieved in negotiation

Many WTO Members have indicated privately that the dispute settlement system as it has evolved permits them to achieve objectives that are not part of existing agreements without having to negotiate. But for the current system, these Members would raise issues within ongoing or new negotiations. This cause is different than the institutional creep concern expressed by the United States and clearly undermines the negotiation function of the WTO.

(2) Subcontracting by many WTO Members of litigation to private law firms

While WTO Members have typically consulted with and worked with their domestic constituencies where disputes are being considered or pursued, over the last twenty-five years, there has been a dramatic increase in the role of private lawyers in developing and presenting cases for many governments at the WTO. Similar to the U.S. concern about the Appellate Body compensation scheme, a change in the dispute system to one often dominated by private lawyers has ensured cases with a huge number of alleged violations, a likelihood of more cases being appealed, an incentive for the case to take as long as possible, and a reduced likelihood of WTO Members finding an acceptable resolution without pursuit of the dispute.

(3) What, if any, role does the AB Secretariat play in the push for precedent

On the question of precedent, some observers have viewed the structure of the Appellate Body Secretariat as contributing to the rigidity of the Appellate Body in viewing later cases raising similar issues as generally controlled by earlier AB decisions. While the United States has not to date called for the review of the Appellate Body Secretariat as potentially relevant to understanding the how and why, to the extent other Members refuse to consider all aspects of the Appellate Body, including the Secretariat, one can predict that the impasse will drag on for a long time.

(4) Loss of compliance with DSU requirements over time

There is no doubt that some problems have worsened in the last decade. For example, the Appellate Body rendered most decisions in 90 days through 2010 while the vast majority since have been well beyond 90 days. Moreover, whereas the Appellate Body previously sought consent of the parties for missing the 90 day deadline, it no longer does. Thus, for the first fifteen years, the Appellate Body was able to conform to the requirement of DSU Article 17.5 for timely decisions but has flipped its position over the last ten years.

Conclusion

The January 27, 2020 Dispute Settlement Body meeting showed a basic replay of the existing positions of the WTO Members. A large number of WTO Members want the Appellate Body nomination process to be started. The U.S. does not agree since there has been no resolution of its longstanding concerns.

China noted that there are 10 appeals that are suspended until the Appellate Body resumes and that there are 33 panel proceedings ongoing that could be affected if the impasse is not resolved. https://www.wto.org/english/news_e/news20_e/dsb_27jan20_e.htm.

Those numbers will only grow without a resolution of the underlying concerns with the operation of the dispute settlement system. Such a resolution will not occur without a meeting of the minds by WTO members on the how and why of the current situation. While pursuit of an interim approach announced in Davos by 17 WTO members may provide a second tier review for those members, the approach will not include all members and has the potential to make more rigid positions of some Members not interested in Appellate Body reform.

The involvement of the Director-General may encourage Members to engage more than the last year has shown many are willing to do. Absent such engagement, don’t expect movement by the United States.