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As WTO's Dispute Settlement Body Dies a Dysfunctional Death, What Comes Next?

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A glorious and successful experiment with the international rule of law comes to an end today. What may have killed it? Funnily enough, perhaps its glory and success. 

The World Trade Organisation’s appellate body, the highest global trade court, is effectively going defunct. Some international observers have called it an “existential crisis”. But why should this matter to you? If you are an Indian farmer receiving government aid, a small business enterprise who exports goods or a citizen concerned about the rising prices of onion and garlic in this country, it should matter. Here’s why.

The WTO’s dispute settlement mechanism deals with trade-related legal spats among the member countries. It is made up of two tiers. The first tier is where the disputes are adjudicated by ad-hoc panels. The second tier is the WTO’s appellate mechanism – what is called the ‘appellate body’ (AB). 

Now, the AB provides binding decisions on the members in their disputes. WTO members have almost always adopted the AB’s rulings. The level of efficiency of the WTO dispute settlement system is extremely high, and stands above most adjudicatory mechanisms in other international institutional set-up. 

The AB generally consists of seven members. As of mid-2017, it was reduced to three members. This is the minimum number of members required for its functioning. When the time for new appointments came, the United States blocked them by highlighting the concern that the AB has functioned as a “court” and that Washington DC had never agreed to this style of its functioning in 1995 during the establishment of the WTO. As of yesterday (December 10), two of the members of the body have retired.

With just one sitting member, the body is now practically defunct. The US has been reluctant to even consider any proposals tabled by other countries. 

When countries resort to dispute settlement at the WTO, the first-instance panel issues a ruling. If this ruling is appealed, it cannot be adopted until the AB provides its ruling. Without the AB, the dispute if appealed, goes into ‘void’ and cannot be adopted by the WTO countries.

A country that loses a trade dispute can now easily appeal a panel decision “in void” so as to block the adoption of that decision. This system of blocking the adoption was present in the pre-WTO era, the era of the General Agreement on Tariff and Trade (GATT). One of the main reasons for adopting the new WTO system with an appellate mechanism was so that countries did not exert power in the dispute settlement, and the rule of law was maintained. Until now, the rule of law has existed with a practically independent AB. 

Many academics and policy researchers state that the WTO system without the AB will move back to the GATT days where political power influenced the adoptions of decisions rather than the rule of law. They claim that there will be under-enforcement of laws.

Some progressive scholars, however, think in the other direction. They state that a greater risk of the demise of the AB is over-enforcement. Without an appellate check, winning party of a trade dispute may escalate retaliation of the legal violations of the losing party much above the actual violations.

We have witnessed this over-enforcement issue outside of the WTO in the recent past. The US imposed unilateral tariffs on steel and aluminium imports under the garb of “national security” concerns. Countries, including India, have retaliated and have imposed counter-tariffs on US imports. The US-China trade war is also an example that has escalated tremendously, and with no solution in the near future. If this unilateralist syndrome also plagues the WTO, then countries may keep retaliating against each other and raise trade barriers with no end in sight. 

This situation goes against two of the WTO’s most important principles – that there should be security and predictability in the system and a reduction of global trade barriers. 

Why does this issue matter to India and its citizens? The world has for sometime moved to a high level of globalisation, even despite recent setbacks. The level of global interdependence is strongly intertwined. So, if you are a small producer who also exports some goods, you would want global markets to be stable and predictable. If you are a farmer, you would want predictability in the subsidies you are receiving from the government. If you are a consumer, you would want to buy the goods for a reasonable price without paying exorbitant amount for a particular good. 

All of this goes haphazard and topsy-turvy if there is little enforcement (or indeed even over-enforcement) of global rules. At least the price rise of onions and garlic is a domestic issue. A government can be voted out in elections. If global trade rules are set by powerful countries over which Indian citizens have no control over, it is back to the “law of the jungle” as Director General of the WTO Roberto Azevêdo stated. Azevêdo points out that to prevent this, it is important to make sure the rule of law is protected by way of restoring the AB.

What’s India’s role in this? Many academics have argued that international law was “given” to the decolonised countries in the mid-1900s. They had no part in the making of the laws. The-then decolonized countries merely had to accept these legal norms in order to achieve the larger goals of peace and stability in the global order. The same was with India. 

But in 2019, India has a unique opportunity to be included in the norm-making process, especially in the WTO context. India is a global player in international trade, and also a voice for many other developing countries. India has also raised its opinion in the WTO General Council Meeting that is currently going on (December 9-11): “The choice we make today will have lasting implication for the future of the rules-based trading system. We call upon all Members to choose wisely.”

Countries are raising voice against the US’s blockage. India is doing so as well. On the other hand, India is trying to reach a partial trade deal with the US. It will be interesting to see how events will unfold – whether India will choose multilateral values over interest-based friendship? Or can it achieve both? India’s foreign policy outlook will be tested in the days to come. 

Vineet Hegde is a researcher in WTO Law at the Leuven Centre for Global Governance Studies at KU Leuven, Belgium.  

This article originally appeared in The Wire: https://thewire.in/trade/wto-dispute-settlement-body-defunct