Forum Most Recent Post – 30 November 2022

latest post 30/11/2022

The World Trade Organization’s Dispute Settlement System Is Not Equally Available To All Member States

Avtandil Sofromadze[1]

1. Introduction

Resolving trade disputes is one of the main tasks of the World Trade Organization (WTO). Since its inception in 1994, some 614 disputes have tested the WTO’s Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). Over 350 rules have been made by ad hoc panels appointed specifically to hear each case and the dispute settlement process has changed from a diplomatic, power-based process to a legalised, rule-based procedure.[2] Some of the objectives and purposes of the WTO dispute settlement system are to provide security and predictability to the multilateral trading system and preserve the rights and obligations of WTO members. DSU is a guarantee that some systemic changes brought about through WTO law do not weaken developing countries’ interests and concerns.[3]

Despite the aforementioned benefits, a huge majority of developing[4] countries have not participated actively in the WTO dispute settlement system. There are challenges in the system that its member countries face too. This raises concern that they are not fully benefiting from the WTO legal regime[5] which may create an unfair arena for some member states.

In the legal literature, there is much discussion about the primary challenges of developing countries participation in the WTO dispute settlement system. Also, there are obstacles that impede member states from using the DSU, such as: prejudices against development aid, hazards to trade agreements, a lack of legal resources, industry and government harmonisation and concern over political and economic pressures. This article highlights the poor involvement of many developing countries in the WTO dispute settlement system by illustrating that it does not produce a fair and level playing field for all member states. After discussing the main issue, entry barriers, the focus is on the recent challenges that developing countries face: (i) weak retaliation; (ii) high costs; and (iii) enforcement problem of recommendations and rulings.

 

2.  Entry Barriers

The main issue which prevents members from using DSU effectively is entry barriers. The most important precondition for seeking legal redress from any unfair trade practice is a decision to seek redress and the capacity (both intellectual and material) to do it.[6] The process under DSU is such that cases usually start after complainants have assessed the facts and set their initial arguments.[7] The developing members are not capable of performing these tasks. Therefore, the lack of pre-case assistance is one of the main obstacles. The rising cost of initiating litigation, which some countries are not able to afford, effectively denies access to the system. At the same time, the existing Special and Differential Treatment (SDT)[8] provisions are applicable only after a case is officially initiated. Following discussion by Horlick and Boekmann, it is possible that developed countries may have had an interest in obscuring this omission, since discussing and making recommendations to address it may impede their advantage or equalise the playing field.[9]

 

A) Weak Retaliation

The next significant problem is weak retaliation. When the losing member state refuses to comply, some countries with poor economies may be frightened and refrain from initiating a complaint considering their “limited retaliatory power”.[10] Under the Article 3.7 of the DSU:

“Retaliation is the final and most serious consequence a non-implementing Member faces in the WTO dispute settlement system”. If a member does not voluntarily comply with the WTO ruling, the burden of enforcement falls on a complainant, which has a right to raise tis tariff or otherwise suspend WTO obligations against the products of a noncomplying member.”

Some countries are afraid of political and economic pressure from strong members. There are a number of reasons for this. Developed countries are less dependent on imports of any certain product, but small developing countries usually import necessities such as food, fuel, medicine or other useful inputs for internal manufacturing. When there is a huge difference in the market size of the developing and developed country, the WTO’s retaliation rules are considered worthless, because developing countries harm themselves by imposing sanctions.

The problem is that most developing WTO members cannot meaningfully retaliate against their bigger trading partners due to their share of international trade, because their potential losses would outweigh any potential gains. For example, most of the South Pacific WTO members depend on their major trading partners, mainly New Zealand and Australia, for financial support.[11]

The situation of Antigua and Barbuda the 2007 dispute case against the United States (United States- Measures affecting the Cross-Border Supply of Gambling and Betting Services) succinctly exemplifies the weak retaliation scenario. In its request for retaliation, Antigua and Barbuda observed that ceasing all trade with the United States would have virtually impact on the US economy but would cause them untold hardship. The relatively low volume of trade (approximately USD 180 million or 0.02 per cent of all annual exports from the US) could easily be shifted elsewhere. Ecuador experienced a similar situation with the EC – Bananas III case. Ecuador imports less than 0.1 per cent of total European Communities exports. Also, African countries are depended on US Food Aid and if they are to retaliate, their vulnerability to the whims of the US would be exposed.

The retaliation ability of developing countries to punish rich states for non-compliance is hindered by access to aid, debt relief and trade preferences. Even when a developing country has a legitimate claim, it elects not to file a complaint due to fear of retaliation. Weak retaliation makes WTO dispute settlement system unfavorable for developing countries with weaker economies.

 

B) High Cost

Another primary challenge that affects the participation of developing countries in the WTO dispute system includes the high cost. The dispute process is extremely costly[12] and many developing countries simply do not have the resources required to mount a challenge.[13] Startup costs for trade litigation are high.[14] This is exacerbated by the length of WTO disputes. A country need not possess a legal capacity of its own to pursue cases as the WTO, providing it has the means to hire the services of specialised lawyers. However, such services can be obtained only at a very high cost.[15]Moreover, to address their lack of internal expertise, most developing countries are required to hire external advisors and the majority of law firms with experience of WTO litigation are international and expensive. This puts the WTO dispute settlement system beyond the financial reach of developing countries if they have to bear the full costs.

In an effort to fight against the financial inequalities in participating in DSU, the Advisory Centre on WTO Law (ACWL) was established.[16] However, it is also ineffective.

It is true that the ACWL service rates are much lower than prices of private law firms and it also applies a cost ceiling,[17] but as Footer argues, while a developed country is able to deploy a large team of lawyers specialising in trade law, developing members must depend on the ACWL’s team of two former WTO counsellors working part time, alongside two junior staff members.[18]

Another criticism of the ACWL for developing countries has been that it is unable to provide “the non-legal technical inputs increasingly required” in WTO disputes.[19] Unfortunately, the ACWL is insufficient and the legal playing field is therefore far from level due to the significant resource advantage gained by developed countries.

 

C) Recommendations and Rulings

Under the Understanding on Rules and Procedures Governing the Settlement of Disputes, Marrakesh Agreement Establishing the World Trade Organisation, the parties are expected to comply promptly with the recommendations and rulings contained in the adopted report. It means that each WTO Member must ensure the conformity of its laws, regulations and administrative procedures with its obligations under the covered agreements. Decisions of the WTO may be binding, but the WTO is devoid of the ability to force members into adopting the DSU recommendations.

Regarding enforcement, another issue that puts both developed and developing countries in a precarious position is that a member state is able to enforce the rules under which it trades in DSU proceeding only if those rules are part of enforceable WTO law. A good example is the dispute between the US and Mexico on the taxation of soft drinks: the provision only urges and advises members to give special attention to the particular problems and interests of developingcountries and therefore is not a mandatory provision. The provision is more declaratory than operative and does not provide any operative content, it does not state exactly who gets what assistance from whom. As a result, it does not create an enforceable obligation on the part of the members.[20]

It is clear that one of the main disadvantages for developing members is the inability to enforce positive rulings against stronger WTO members. Politically and economically powerful members cannot be forced to comply with DSU rulings, and power inequalities in the global economy ensure that weaker members cannot force the powerful into compliance.[21]

There is also concern as to whether the members, especially developed members, faithfully implement the dispute settlement body’s recommendations and rulings. A reasonable period of time shall normally not exceed fifteen months from the date of adoption of the report by the DSU. This time period may be too long for some countries,[22] and if a developing country is unable to find new markets during the implementation period, it is possible that a business could cease to exist.

 

3. Conclusion

Most developing countries face many challenges in the WTO dispute settlement system.

There are questions about enforcing retaliation properly and fairly. In the DSU where one party is economically much weaker, there is more opportunity to financially harm the stronger party. The vast majority of WTO members are developing countries and they cannot effectively use retaliation. The system leaves developing members without recourse to enforceable justice. A failure to comply promptly with the recommendations and rulings contained in the adopted report compounds this.

Lack of legal and financial resources remains one of the main issues. Developing countries have no ability to deal with long processes and their high costs. The WTO dispute settlement is very complex and expensive, so it is quite hard for developing countries to overcome the human and financial resources that are used in the process,[23] as Japan – Photographic Film, illustrates. Additionally, it is clear from the global market that international legal firms that focus on WTO law charge high hourly rates. There is also a shortage of WTO legal experts in developing countries.

Other barriers include biases and risks for development aid, loss of trade partnerships, lack of legal resources, harmonisation between government and industry, and fear of political and economic pressures.

However, three issues discussed in this article – weak retaliation, high cost and implementation of recommendations – have been advanced for the low participation of many developing countries in the WTO dispute settlement system, which does not create a fair and level playing field for all member states.

 

[1] Avtandil Sofromadze, School of American Law, Chicago-Kent College of Law.

[2] Borght Kim van der , ‘The Review of WTO Understanding on Dispute Settlement: Some Reflections on the Current Debate’ [1999] 14(4) American University International Law Review 1224.

[3] Asif H Qureshi, ‘Participation of Developing Countries in the WTO Dispute Settlement System’ [2003] 47 Journal of African Law 175.

[4] There are the “developed”, “developing” and “least developed” countries. The developing and least developed countries are sometimes placed in one category. The WTO does not offer a definition of a developing country, the practice being that countries “self-declare” their status. Abbott Roderick , ‘Are Developing Countries Deterred from Using the WTO Dispute Settlement System?’ [2007] 1 ECIPE 6.

[5] Hunter Nottage, ‘Developing countries in the WTO Dispute Settlement System’ [2009] 47 University of Oxford, Global Economic Governance Programme (GEG).

[6] Mohammad Taslim, ‘Barriers to Least-developed Country Participation in the WTO’s Dispute Settlement System’ [2005] 9 Bridges 21, 22.

[7] Golman Wilfred, ‘Is World Trade Organization (WTO) Dispute Settlement System Underutilized? An Assessment from the WTO Members of the South Pacific Region’ [2018] 1 Journal of South Pacific Law 24, 39.

[8] The WTO agreements contain special provisions which give developing countries special rights and which give developed countries the possibility to treat developing countries more favorably than other WTO Members.

[9] Gary N Horlick and Hanna Boekmann, ‘Where do WTO Cases Come From? The pre-litigation assessment of trade barriers’ [2012] 27.

[10] Reich Arie, ‘The Effectiveness of the WTO Dispute Settlement System: A Statistical Analysis: Current Trends in International Business Law’ [2017] 11 European University Institute Department of Law 11.

[11] (n7) 39.

[12] In some estimations, private law firms can charge anywhere from USD 250 to USD 1,000 per hour in fees, leading to total fees anywhere between USD 100,000 to over USD 1,000,000. The prices only increase for complex cases, such as Japan – Photographic Film, where legal fees charged to Kodak and Fuji were reportedly in excess of  USD 10 million. It has been estimated that the costs of supporting such litigation with data collection, economic analysis, and the hiring of experts as testifying witnesses could increase the base cost by up to USD 100,000 or USD 200,000. Bohl Kristin , ‘Problems of Developing Country Access to WTO Dispute Settlemen’ [2009] 9(9) Chi-Kent J Int’l & Comp Law 131.

[13] Walters Jeffrey, ‘Power in WTO Dispute Settlement’ [2011] 28(1) Journal of Third World Studies 175.

[14] Christina L Davis and Sarah Blodgett Bermeo, ‘Who Files? Developing Country Participation in GATT/WTO Adjudication’ [2009] 71(3) The Journal of Politics 1033

[15] (n5) 22.

[16] The Advisory Centre on WTO Law (ACWL) is an independent intergovernmental organisation established in 2001 with the predominant aim of providing support, legal advice and training on WTO law. Their mission is to provide developing countries with the legal capacity necessary to enable them to take full advantage of the opportunities offered by the WTO.

[17] Raúl A Torres, ‘Use of The WTO Trade Dispute Settlement Mechanism by The Latin American Countries – Dispelling myths And Breaking Down Barriers’ [2012] World Trade Organization Economic Research and Statistics Division 10.

[18] Mary E Footer, ‘Developing Country Practice in the Matter of WTO Dispute Settlement’ [2001] 35(1) Journal of World Trade 55, 98.

[19] C Bown and B Hoekman, ‘WTO Dispute Settlement and the Missing Developing Country Cases: Engaging the Private Sector’ [2005] 8(4) JIEL 861.

[20] Anyiwe, Linimose and Ekhator, Eghosa, Developing Countries and the WTO Dispute Resolution System: A Legal Assessment and Review’ [2013] 2(1) Journal of Sustainable Development Law and Policy 121-138.

[21] Jeffrey Walters, ‘Power in WTO Dispute Settlement’ [2011] 28(1) Journal of Third World Studies 178.

[22] (n7) 39.

[23] (n20).