Dispute Settlement in the World Trade Organisation - Essay Example

Dispute Settlement in the World Trade Organisation Introduction At the heart of the multilateral trading system created in the 1990s is the World Trade Organisations's and its dispute settlement procedures. It is through these procedures that the many kinks of the international trade flow are worked over. In a world of intense global competition member states of the WTO are attempting to pave the way towards a more just and organised trading system by affecting positive change and finding just ends to economic conflicts through dispute resolutions. Yet there are many who question the viability of the dispute settlement system of the WTO. While the leading superpowers of trade, the United States and Europe, struggle over questions of a seemingly intractable nature, the poorer nations find it difficult to find the financial means to come to the podium to be heard. Most importantly, and despite the organisation and efficiency of the WTO in producing resolutions, there is the question of whether or not member states will follow through with panel mandates, most specifically those states with the greatest economic power. Experience so far tells us that state cooperation on panel findings may not be the norm and that attempts at retaliation by complaining states could cause a bitter tit for tat situation in which no one wins. History of the World Trade Organisation By the 1990s the predecessor to the World Trade Organisation, the GATT (The General Agreement on Tariffs and Trade), was of limited use in a world of ever increasing economic interdependence. Member states who came to negotiate at the Uruguay Rounds clearly saw the need to move beyond discussions pertaining purely to trade in goods and into to the areas of services and intellectual property. The trading system that was to come out of these negotiations would become the basis of the new multilateral trading system established on January 1, 1995. The mandate of the newly created WTO was composed of sixteen articles and four annexes which covered the newly adopted issues as multilateral services and intellectual property. Most importantly, the negotiations had resulted in the restructuring of the dispute settlement system, something that would at the core of the new agreements. In order for the new system to work there was no doubt amongst the members that it must have a stronger institutional structure.1 Article 3.2 of the WTO Agreement states, "'The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system.'"2 In order to fully appreciate the importance of the changes made to the process of dispute settlements it is helpful to discuss the nature of dispute settlement under the GATT. Before 1995 complaints of unfair trade practices were heard under the GATT by a panel of independent experts on legal matters. The panel would listen to both arguments and then it would issue a ruling which would in turn have to be accepted by members of the GATT in order for it to take affect. Most often than not the offending nation would vote against the ruling and political and economic pressure would be the only recourse left to make it comply.3 In addition, while these types of pressure may have worked on smaller countries, bigger members of GATT could not easily be swayed by such measures. In this sense the GATT system was completely lacking in adjudication because it did not have "the means to enforce compliance or conduct surveillance of adherence to panel decisions."4 One of the most important advances made during the creation of the WTO charter was the requirement that for panel findings to be reversed the majority of the nations must reject the decision of the panel. This change formally ended with the veto problem by the offending country. The Uruguay Round also introduced greater discipline for the time limits within which a dispute should be settled. Prompt settlement of an issue was seen as essential if the WTO was to function properly and the WTO charter, sets out in considerable detail the procedures and the timetable to be followed in resolving disputes. If a case runs its full course to a first ruling, it should not normally take more than about one year - 15 months if the case is appealed. The agreed time limits are flexible, and if the case is considered urgent (e.g. if perishable goods are involved), it is accelerated as much as possible."5 Dispute Settlement in the World Trade Organisation When one member government of the WTO believes that another member government has violated one of the rules or regulations outlined by the charter a dispute arises. According to the WTO "the authors of these agreements are the member governments themselves - the agreements are the outcome of negotiations among members. Ultimate responsibility for settling disputes also lies with member governments, through the Dispute Settlement Body."6 The WTO claims to not pass judgement in its dispute settlement process but rather sets as a priority the settlement of disputes "through consultations if possible."7 The dispute settlement system outlined by the WTO has a fairly straightforward structure and simple rules designed to ensure the fastest possible solution of disputes without interference by individual countries. When one member country believes that another member country has violated WTO agreement they can bring the issue before dispute settlement. The Dispute Settlement Board is composed of all of the members of the WTO. This body can "'establish panels, adopt panel and appellate reports, maintain surveillance and implementation of rulings and recommendations, and authorize suspension of concessions and obligations.'"8 At this point other countries may decide to declare interest in the case, but before the case is taken up by the Dispute Settlement Body the case passes through the consultation stage where countries have the opportunity to try and come to an agreement through one on one dialogue. If this cannot be done the issue will be passed on to a panel for consideration. The panel, which is made up of experts selected by the Dispute Settlement Body, will then present it findings within six months. The panel's report is important because it can only be rejected by consensus within the Dispute Settlement Body. Both the complaining country or countries and the responding country are allowed to present their case before the panel and experts are called in to support or reject the claims of each side. The panel's final report becomes a ruling and may include recommendations. Both sides of the dispute are allowed to appeal although they must be based on points of law and not have to do with the reexamination of evidence previously presented. Appeals can end in the agreement with, the disagreement with, or the modification of a panel's findings. Once a finding has been made the losing party is given time to modify its economic policy. If the country that has received the complaint looses, it should follow the panel's recommendations within a set amount of time or it must meet with the complaining countries to agree upon compensation. If no action is taken up within this time the complaining party may go to the Dispute Settlement Body and ask permission to retaliate with limited trade sanctions. Williams (2001) claims that, "judges need not be enamored with free trade to recognize that the WTO/GATT is binding legal authority. The agreement is effective and enforceable against the United States on the international plane."9 Upon first glance the WTO dispute settlement system does appear to offer a process of adjudication that could result in its member states following its recommendations. Yet, the WTO lacks the power of enforcement so necessary in compelling member states to follow through. O'Neal (1997) claims that "the WTO system ultimately rests on the willingness of Member States to accept their legal obligations as defined by the DSB or face WTO-authorized retaliation. The WTO system is thus limited by the fact that its potential litigants are governments."10 Despite the well organised process and methods of the WTO's dispute settlement it is clear that it has not been successful in obligating member states to follow its findings. A closer inspection of three dispute settlements will show this. Bananas The United States was one of the first members to bring forth another member states violation of the WTO agreement when they, along with Mexico and various Central American countries, complained to the WTO of the preference given by the European Union to the bananas of their former colonies. Although this compliant had been brought before the GATT, "the GATT's weaker dispute settlement procedures allowed the EU to block any remedial action."11 The WTO panel found that while certain allowances could be made for helping these developing countries, an import quota must be established. The EU appealed but the appellate body held up the panel's recommendations. The EU stated that it would comply with the decision but for months it waylaid measures to dismantle the banana regime. The EU, although it accepted defeat still did not meet its obligations and the U.S. resorted to threats of retaliation, "possibly setting off a tit-for-tat trade war."12 Cotton Developing countries have taken limited advantage of the WTO to assist them in disputes with developed nations. One of the most important of these disputes was that of various African nations in their compliant over the unfair subsidies by the U.S. and the EU given to American and EU cotton farmers. While most developed nations give support to producers of agriculture, U.S. agricultural subsidies climbed up to $18.7 billion in 2003 and the European Union annually spends about $50 billion, almost half its annual budget, on its agricultural policies.13 Subsidies to cotton farmers in both the U.S. and Europe has garnered considerable criticism from developing nations but in 1997 African nations decided to take action. In their complaint to the WTO African nations blamed "overproduction and the dumping of exports by the United States, caused by subsidies, for slumping prices." 14 Yet cases brought before the WTO by poorer nations are still few and far between. Frieder Roessler, director of the ACWL (Advisory Centre on WTO Law) at the time, commented on the importance of this case saying that "due to a lack of funds and information, "[t]here's never been a case brought, or brought against [least-developed countries] so far."15 The ACWL is one of the only ways in which developing countries find the means to participate in dispute settlement within the WTO. Griesberger (2004) believes that the non-participation of poorer countries in the WTO dispute processes is one of the reasons the WTO faces problems of legitimacy. She claims, "when parties are equally represented, the entire system is legitimated, and legitimacy, especially in the eyes of developing countries, has been a problem that has plagued the WTO for years."16 American Tax Subsidies The longstanding complaint of the European Union over tax subsidies given by the United States government to U.S. companies that export has been an issue that has been coming and going with the dispute settlement branch of the GATT and the WTO since the late 70s. At the heart of the problem is the differing approaches used in taxing foreign source income of corporations. The United States for most purposes uses a "so-called worldwide system of taxation--that is, it taxes income of a person or corporation regardless of where the income is earned."17 Most members of the EU use a system where they tax income within their border but not abroad. Various suits and countersuits were started under GATT until in 1981 an understanding was reached that "economic processes, including transactions involving exported goods, need not be taxed by the exporting company."18 Yet in 1997 the EC requested consultations with the United States over specific sections of the US Internal Revenue Code that gave special tax treatment to US companies selling abroad. The EC contended that these provisions were "inconsistent with US obligations under Articles III:4 and XVI of the GATT 1994, Articles 3.1(a) and (b) of the Subsidies Agreement, and Articles 3 and 8 of the Agreement on Agriculture."19 On July of 1998 the EC requested that the WTO establish a panel to look into the matter and after months of deliberation the panel upheld the complaints of the EC. The US Congress revised the tax regime but not to the EC's satisfaction and the findings of another panel and appellate body sided with the EC. On 30 August 2002, the Arbitrator determined that the suspension by the EC of concessions under the GATT 1994 in the form of the imposition of a 100 per cent ad valorem charge on imports of certain goods from the United States in a maximum amount of $4,043 million per year, as described in the EC's request for authorization to take countermeasures and suspend concessions, would constitute appropriate countermeasures within the meaning of Article 4.10 of the SCM Agreement.20 Subsequent panels and appellate bodies have been in favour of the EU's complaints. The latest development has been the finding of a WTO Appelate Body in favour of the EU complaint of US federal tax subsidies for exporters in the FSC dispute. A WTO Panel had previously found in favour of the EU by concluding that, despite some changes to its domestic legislation the US has yet to abide by earlier rulings and recommendations of the WTO Dispute Settlement Body on its payments of export tax subsidies preserved in the "transition" and "grand-fathering" provisions of the revised Jobs Act that have been judged to violate WTO rules.21 Under the Appelate body's findings the US will have 60 days to change it legislation to reflect WTO obligations or it will face EU retaliatory measures. Barfield believes that the treatment of the tax subsidies issue illustrates the inability of the dispute settlement process of the WTO to deal with issues of a complex economic nature, in this case international taxation.22 He also claims that there may be dangerous consequences for becoming so involved in highly charged political issues. He states that this case illustrates, the twin dangers inherent in the mindset of the panels and the Appellate Body that is, incautious incursions into highly volatile political areas such as food safety and international taxation, combined with a determination to provide a legally "correct" answer to all questions, even when it means--as with the FSC decisions--that they will be forced to venture into complex substantive areas beyond their competence.23 Differing Approaches Since the end of World War II and the advent of the Bretton Woods System there have been two prominent fields of thought on dispute resolution in the developing multilateral trading system. While the diplomatic approach calls for problem solving and conciliation, the legalistic approach calls for legally binding rules. The Uruguay Round marked a clear switch from the diplomatic approach of the GATT system to a more legally binding dispute settlement system. As mentioned the most important change within the dispute settlement process was the standing of findings by WTO panels or the Appellate Body unless the member states produced a consensus against the findings. This system gives final say to these judicial bodies. The switch could have negative side-affects in that this legal approach cannot be backed up by member governments. This will invariably create problems of democratic illegitimacy. It also may create a hostile environment where member states use various methods of retaliation in order to pressure member states into complying by the rules set out by the WTO dispute settlement panels and appelates. Barfield believes the complete disappearance of the old system based on consultation and conciliation has resulted in a meaningful step being taken out of the process. He recommends that the WTO reintroduction elements of the GATT diplomatic approach and place greater emphasis on mediation and conciliation.24 Conclusion Although the WTO claims to set as a priority the settlement of disputes through consultations, the judiciary nature of the process and the war of retaliations that often comes out of it has resulted in the decline of diplomatic dispute settlement, something that is a necessity in international organisations where there are no powers of enforcement backing up its findings and recommendations. It is in this bitter eye for an eye situation that the U.S. and Europe now find themselves. In addition, the poorer members of the WTO question the legitimacy of an organisation where they very often have neither the possibility nor the means to defend themselves on an equal level with that of the organisations rich countries. By bringing back an element of consultation and diplomacy the WTO may be able to pull in the alienated poorer countries while at the same time pulling apart the organisations most powerful members. References Barfield, C. 2005, 'Securing American Sovereignty: A Review of the United States' Relationship with the WTO', Testimony Senate Committee on Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, Government Information, and International Security, American Enterprise Institute for Public Policy Research, July 15, Available at: http://www.aei.org/publications/filter.all,pubID.22847/pub_detail.asp 'Dispute Settlement: Dispute DS108 United States - Tax Treatment for "Foreign Sales Corporations"', World Trade Organization online, Available at: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds108_e.htm Fischer, T.C. 2000, The United States, the European Union, and the "Globalization" of World Trade: Allies or Adversaries, Quorum Books, Westport, CT Greisberger, A. 2004, 'Enhancing the Legitimacy of the World Trade Organization: Why the United States and the European Union Should Support the Advisory Centre on WTO Law' Vanderbilt Journal of Transnational Law, Vol. 37, pp. 827-849. O'Neal Taylor, C. 1997, 'The Limits of Economic Power: Section 301 and the World Trade Organization Dispute Settlement System', Journal of Transnational Law, Vol. 30, pp. 209-348. 'Understanding the WTO: Settling Disputes', The World Trade Organization on line, Available at: http://www.wto.org/English/thewto_e/whatis_e/tif_e/disp1_e.htm Williams, M.F. 2001 'Charming Betsy, Chevron, and the World Trade Organization: Thoughts on the Interpretive Effect of International Trade Law', Law and Policy in International Business, Vol. 32, pp. 677-699. 'WTO condemns US tax subsidies; EU calls on US to end illegal tax breaks for Boeing, others', 2006, European Union Press Releases, 13 Feb, Available at: http://europa.eu.int/rapid/pressReleasesAction.doreference=IP/06/158&format=HTML&aged=0&language=en&guiLanguage=en 'WTO Rejects Farmer Subsidies; U.S. to Fight Trade Ruling', 2004, The Washington Times, 27 April, C08. Read More