WTO Dispute Settlement, Compensation & Retaliation

Gaisford & Kerr Handbook on Trade Policy

Dispute Settlement, Compensation & Retaliation under the WTO

45. Dispute Settlement, Compensation and Retaliation Under the WTO

Robert Read

One of the key outcomes of the GATT Uruguay Round negotiations was the creation of more effective system of dealing with international trade disputes, the WTO Dispute Settlement Understanding (DSU). This entered into force on 1 January 1995. The DSU succeeded the original GATT system for dispute settlement which had become increasingly unable to resolve major trade conflicts between its Member countries. This Chapter outlines the structure and operation of the WTO trade dispute settlement system, particularly with respect to the implementation of dispute panel findings and the issues of compensation and retaliation. The first section provides an overview of the objectives of the DSU in the context of the shortcomings of the previous GATT dispute settlement system. Section 2 summarises the key articles and procedures of the DSU. This is followed by a discussion of the DSU framework for the suspension of concessions, compensation and retaliation supported by illustrative examples from recent cases. The final section offers a brief critique of the key issues that have arisen in the first decade or so of the operation of the DSU.

42.1The Origins of the WTO Dispute Settlement System

Prior to the introduction of the DSU, the GATT system of dispute settlement had been functioning more or less successfully for almost 50 years in spite of its evident shortcomings. The new WTO DSU was the outcome of a thorough overhaul of the GATT system although it mirrored much of the original GATT legal framework and retained the accumulated body of case law and precedent.

The GATT Dispute Settlement System

The GATT system of dispute settlement was founded upon two principal articles: Consultation (Article XXII) and Nullification or Impairment, i.e. compensation (Article XXIII). The operation of the dispute system from 1947 led to the incremental evolution of procedures and case law based upon accumulated legal interpretation and precedent. The linchpin of the GATT system for settling trade disputes was the principle of consensus which required all parties to a dispute to accept the outcome of any investigation. Any findings only became binding if a panel report was accepted by consensus. Defendants in a case could therefore veto this ratification procedure and so avoid complying with the findings.

The consensus requirement was one of several weaknesses of the system leading to growing frustration about its failure to resolve trade conflicts among GATT Members. The principal shortcomings of the GATT system were: a lack of clear objectives and procedures; ambiguity about the role of consensus, leading to adverse decisions being blocked; a lack of time constraints, leading to delays and uncertainty; and frequent delays in and partial non-compliance (Read, 2005). The survival of the GATT system for almost fifty years owes much to the its members commitment to multilateralism and their realisation that persistent flouting of the trade rules and conflict served to undermine the long-term benefits of a relatively liberal global trade regime.

The GATT system was, to some extent, a victim of its own success in that it was originally intended to regulate the trade of just 23 countries. Its rules were simply not designed to deal with the massive growth of world trade in the latter half of the 20th Century. This was partly fuelled by trade liberalisation under the GATT Kennedy and Tokyo Rounds, a rapidly growing membership (there are now 147 WTO Members) and the increasing volume and complexity of trade conflicts. All of these developments placed increasing stresses and strains on an imperfect dispute settlement system. By the start of the Uruguay Round negotiations in 1986, the general view among GATT Members was that the system for the settlement of trade disputes needed to be reformed.

It is important to note that some 88 per cent of all GATT trade dispute cases 1948-89 were resolved through full or partial compliance. This compliance rate however, did fall to 81 per cent post-1980 a period covering more than half the total number of cases (Hudec et al., 1993). The actual performance of the GATT dispute settlement system can thus be regarded as having been reasonably successful; a view reinforced by the incorporation of its basic legal framework into its successor, the WTO Dispute Settlement Understanding.

The WTO Dispute Settle System

The DSU superseded the GATT system from 1 January 1995 and is regarded as being one of the central achievements of the Uruguay Round negotiations. The desire for the reform of the GATT dispute settlement system was made very apparent in the Punte del Este Declaration at the commencement of the Uruguay Round:

To assure prompt and effective resolution of disputes to the benefit of all contracting parties, negotiations shall aim to improve and strengthen the rules and procedures of the dispute settlement process, while recognizing the contribution that would be made by more effective and enforceable GATT rules and disciplines. Negotiations shall include the development of adequate arrangements for overseeing and monitoring of the procedures that would facilitate compliance with adopted recommendations. (GATT, 1986)

There was however, no clear consensus as to how any new system for settling trade disputes should be constructed. The United States sought the creation of a rule-oriented approach (automaticity), along the lines of the NAFTA system, with a defined timetable for dispute resolution and the potential for cross-retaliation. In contrast, the primary objective of most other members of the OECD, along with many developing countries, was a system that would constrain unilateral action by the United States. The final outcome of the negotiations was the DSU which dealt with many of the perceived weaknesses of the GATT system as well as, at least partially, satisfying the differing objectives of its leading members.

The new negative consensus requirement means that the implementation of panel findings can no longer be blocked by respondents, so triggering the right of plaintiffs to retaliate. Automaticity is a pivotal element of the DSU, which includes a clearly stipulated timetable for the dispute settlement procedures and limited potential for cross-retaliation between sectors. Unilateral action is constrained by the requirements that Members abide by the rules and procedures of the DSU and that their national laws comply with their obligations under the WTO.

The introduction of the DSU must also be viewed as having been a necessary condition for the successful implementation of the range of revised and new trade rules, known collectively as the Uruguay Round Agreements. The more substantial legal framework of the DSU is capable of enforcing the complex rules of these agreements but this would not have been possible under the previous GATT system.

42.2The Key Articles & Operating Procedures of the WTO Dispute Settlement System

The DSU is an integral part of the Uruguay Agreements, running to 27 Articles and four Appendices. This Section outlines the principal operating procedures of the WTO dispute settlement system with respect to the key articles of the DSU.

The Grounds for a Complaint Under the WTO DSU

GATT Article XXIII, Nullification or Impairment, stood at the centre of the GATT dispute settlement system and its paragraphs continue to define the conditions under which violation of the WTO rules permit Members to seek redress and their means of so doing. There are three specific circumstances identified in GATT Article XXIII under which WTO Members are permitted to make a complaint under the DSU. The standard case is where a Member country violates the WTO rules and thereby adversely affects other Members. The second is non-violation where harm is caused even though there is no specific violation of a GATT provision. Finally, there is a catch-all provision. The scope of the application of the article covers all of the component multilateral agreements of the WTO. This means that any Member country may seek redress with respect to any violation of the WTO rules by another. There is no requirement to demonstrate that a violation has resulted in injury since all Members are legally obliged to conform to the WTO rules.

The WTO Complaints Procedure

The primary objective of the WTO DSU system is to settle trade disputes between Members by means of bilateral consultations and mediation in the first instance. Recourse to the establishment of a formal dispute panel is intended as a last resort when all other avenues of conciliation have been exhausted. Further, the provisions permit third parties, including other Member countries and the WTO Secretariat, to mediate in a dispute and take part in the consultations. Any agreed solution however, must be consistent with the WTO Agreements. It is only after the failure of the consultation and/or mediation process that a plaintiff may have recourse to the formal dispute provisions. Third parties with a substantial trade interest in a dispute may also engage in the consultation process, subject to the agreement of the respondent.

The specific guidelines and timetable for consultations to take place are provided in Article 4 of the DSU. Consultations are a mandatory condition for a subsequent request to be made to establish a dispute panel. A respondent has a 10-day limit within which to reply to a request for consultations, a maximum of 30 days to enter into consultations and a minimum of 60 days to engage in the consultations. If a Member does not meet one or more of these deadlines, a plaintiff may request the establishment of a panel immediately. In practice, many parties to disputes often take considerably longer over consultations that the minimum of 60 days (WTO, 2004).

Many trade disputes never go further than the consultation stage, particularly given that WTO Members are under an obligation to resolve their disputes by this means. The parties to a dispute may also make use arbitration as an alternative method, subject to mutual agreement.

The Establishment of a WTO Dispute Panel

In the event of that a trade dispute is not resolved through consultations, a plaintiff can then proceed to a formal request for the establishment of a dispute panel no earlier than 60 days after the request for consultations. Such a request is submitted in writing to the Chair of the Dispute Settlement Body (DSB) and sets out briefly and clearly the grounds for a complaint. This request forms the legal basis for a complaint and its contents define the scope and extent of the remit of a dispute panel investigation and adjudication. The formal request document is then circulated to all WTO Members, so as to inform the respondent together with any interested third parties, and included on the agenda for the next meeting of the DSB. The first time that a request is presented to the DSB, a plaintiff has the right to block a panel being set up. Under the negative consensus requirement introduced in the Uruguay Round, any such request is automatically accepted at a second DSB meeting.

Where there is more than one plaintiff in a case or where several Members file similar complaints, Article 9.1 provides for the establishment of a single panel whenever feasible. Co-plaintiffs however, may request the publication of separate reports.

Any third party country with substantial interest in a trade dispute also has a right to make submissions to and be heard by a panel, even if they were not involved in the consultation process. Participation in panel procedures as a third party requires the DSB to be notified, in practice within 10 days of the establishment of a panel. In the event of nullification or impairment of their benefits, third parties may also have recourse to the DSU.

The Functions & Procedures of WTO Dispute Panels

The functions and procedures of WTO dispute panels are laid out in Articles 7, 8 and 11 to 15 of the DSU. Their primary function is to assist the DSB by making an objective assessment of the facts and conformity with the relevant WTO agreements. Their Terms of Reference are to examine the facts of a trade dispute with respect to the complaint as laid out by the plaintiff in the request for the panels establishment. Panels are thus required to investigate the evidence in the context of the relevant provisions of the WTO agreements cited by the parties of a dispute. They then make recommendations or rulings to the DSB with regard to the relevant WTO agreements.The composition of WTO dispute panels is set out in Article 8 of the DSU. A panel normally has three members but may, in certain cases, have five. The panellists are nominated by the WTO Secretariat from an indicative list that includes the nominees of Member countries. Panellists are required to possess expertise appropriate to a case but may not be citizens of parties or third parties to a dispute.

The procedures for dispute panels are set out in Appendix 3 of the DSU, including a proposed timetable for panel deliberations (shown in WTO, 2004). This timetable is, to some extent, flexible dependent upon the complexity and evidential needs of particular cases. In general, most dispute cases take between 9 and 12 months from the establishment of a panel to the publication of its report. Dispute panels have the power to seek information and technical advice from any appropriate individual or body and evidence may also be requested from an Expert Review Group. All Panel deliberations are confidential and non-attributable.

Panel procedures normally begin with the receipt of (often lengthy) written submissions by the plaintiff and respondent, which are then exchanged. Any third parties may then make their own submissions. These tend to be shorter commentaries on specific aspects of a case (WTO, 2004). This is followed by a closed oral hearing involving all of the parties after which the parties exchange written rebuttals to each others legal arguments. A second closed oral hearing is then held, during which the parties arguments and rebuttals are presented. Where expert evidence, usually of a scientific nature is required, additional sets of oral hearings may be held. A panel then drafts the descriptive section of its report outlining the arguments of each party and summarising all of the factual and legal arguments which is circulated to the parties for comments and corrections. This is followed by the circulation of the Interim Review, which contains the description of the case along with a panels findings and conclusions regarding the legal validity of the complaint. Again, the parties are permitted to make comments, request corrections and ask a panel to review specific points. These amendments and elaborations are then incorporated to produce a Final Panel Report which is circulated to all WTO Members and published.

The Adoption of Panel Reports

A Final Panel Report and therefore its recommendations - has no standing until it is adopted at a meeting of the DSB. Under he negative consensus requirement however, Final Reports are automatically adopted and their rulings become binding if they are placed on the agenda and submitted to the DSB. A victorious plaintiff may therefore choose not to add a Report to the DSB agenda, in which case it will not be adopted. This contrasts with the potential of losing respondents in trade dispute cases to use a veto under the GATT dispute settlement system which enabled them to block the implementation of panel rulings indefinitely. Once a Panel Report is adopted by the DSB, its recommendations become binding on the parties to a dispute.

The Role & Function of the WTO Appellate Body

A party (but not a third party) to a dispute has 60 days after the publication of a Final report to lodge an appeal. In this case the Report is not submitted to the DSB until the appeal process is completed. Although respondents and plaintiffs may appeal against the findings of a dispute panel with respect to the case in question, it is not unusual for parties to request clarification or reinterpretation of particular legal points with respect to their broader implications for future cases. The Appellate Body has the power to modify or reverse the findings and recommendations of a Panel Report following procedural rules that have been amended periodically since 1996.

The Appellate Body has seven members, three of whom (the division) are selected to preside over an appeal by rotation. An appellant has ten days to submit its legal arguments concerning the relevant point(s) of law in a Panel Report, followed later by an oral hearing. The collegiality of the Appellate Body is sustained by sanctioning deliberations between the division and its remaining four members to ensure jurisprudential consistency and coherence. The objective of the Appellate Body is to resolve dispute cases and this may also require it to complete the legal analysis of a case by examining other claims not dealt with by the original panel. After drafting, the Appellate Body Report is circulated to all WTO Members and published. It is also submitted to the DSB for adoption and the parties to a dispute must accept its recommendations unconditionally in the absence of a negative consensus.

The Implementation of WTO Panel Decisions

Once a Final or Appellate Body Report has been adopted by the DSB, its recommendations and rulings become binding on the parties to a dispute and the losing respondent is required to bring its trade regime into compliance with the WTO rules. This normally means the disputed measures that were the subject of the original dispute and found to be inconsistent with the WTO are withdrawn. Under Article 21, Surveillance of Implementation, losing respondents have 30 days after the adoption of a Report to inform the DSB of their intentions regarding the implementation of Panel or Appellate Body recommendations. While the onus is on prompt compliance to ensure effective resolution of disputes, compliance is required to be within a reasonable time, normally not exceeding 15 months. The DSB is responsible for the surveillance of the implementation of adopted recommendations and rulings.

In the event that there is dissatisfaction or disagreement concerning a respondents compliance with the recommendations and rulings of the DSB, a plaintiff has further recourse to the dispute settlement procedures and a new Panel Report (Article 21.5). Actions under this article are not uncommon and have been used by both plaintiffs and respondents to establish whether any regulatory changes that have been made are WTO-compatible.

Other Means of WTO Dispute Settlement: Arbitration & Mutually Agreed Solutions

The use of dispute panel procedures is the most well known means of resolving trade disputes between WTO Members, primarily because of the publicity generated by high profile cases, such as the recent EU-US banana and steel disputes. The principal alternative to a dispute panel is arbitration, the procedures for which are outlined in Article 25 of the DSU. The use of arbitration is by mutual agreement between the parties to a dispute. The outcome of arbitration must be WTO-compatible and is binding on the parties. Any award for nullification or impairment is subject to the same Articles on compensation and the suspension of concessions as a dispute that follows panel procedures.

Parties to a trade dispute may, at any time, side-step the formal dispute settlement process in favour of securing a mutually agreed solution. This is normally a bilateral agreement negotiated between the parties to a dispute. The DSU procedures actively promote negotiation and conciliation to avoid conflict, such that mutually agreed solutions to disputes are encouraged subject to their satisfying the need for consistency with the WTO rules. If such a solution is WTO-incompatible, the original respondent could be vulnerable to a dispute action by adversely affected third parties.

45.3The Compensation, Suspension of Concessions and Retaliation Provisions of the WTO

The power of the DSB and therefore a Dispute Panel to authorise the suspension of trade concessions by a plaintiff to a respondent where there is harm (nullification or impairment) is established in Paragraph 2 of Article XXIII of GATT 1994. This paragraph effectively binds Members of the WTO to accepting the rulings of the DSB and also, where appropriate, for the DSB to permit sanctions against countries found to be acting contrary to the WTO rules.

The Nature of Compensation, the Suspension of Concessions & Retaliation

Compensation and the suspension of concessions, i.e. of Most-Favoured Nation (MFN) treatment, to a WTO Member are intended to be temporary measures. They are only implemented if the recommendations and rulings of the DSB are not acted upon within a reasonable time period. Where compensation and the suspension of concessions are sanctioned by the DSB, a respondent has the alternative option of withdrawing from the WTO and its associated treaty obligations within 60 days.

Neither compensation nor the suspension of concessions however, can be applied retrospectively. This means that there is no recompense for any harm caused by an illegal trade measure prior to and during the implementation of dispute procedures.

Where nullification or impairment is ruled to have occurred, a respondent may choose either compensation or the suspension of concessions as the form of restitution. Compensation normally takes the form of tariff reductions and is purely voluntary since the suspension of concessions is the default means of restitution. Any compensation must satisfy the requirement that it is compatible with the provisions of the WTO. Compensation is rarely used however, because most tariff reductions are not consistent with the requirement of MFN treatment (WTO, 2004).

The suspension of concessions is more complex. In the first instance, the general principle is to suspend concessions in the same sector as the violation occurred - i.e. within goods, services and trade-related intellectual property rights (TRIPs) respectively.. If this is not practicable, then concessions are suspended in other sectors covered by the same agreement i.e. all of the WTO Agreements covering trade in goods, the General Agreement on Trade in Services (GATS) and TRIPs respectively and only then between agreements. These provisions are particularly important for smaller developing countries where the adverse impact of the suspension of equivalent concessions within a sector or an agreement may be quite substantial (WTO, 2004).

In requesting the suspension of concessions, a Member is required to take into account the trade and its importance to them in the relevant sector or under relevant the agreement along with the broader economic consequences of suspension. The suspension of concessions must be temporary and may only remain in place until a WTO-inconsistent measure is removed, any harm ceases or there is a mutually agreed solution.

The Grounds for Compensation, the Suspension of Concessions & Retaliation

The grounds for compensation, the suspension of concessions and retaliation are dealt with under Article 22 of the DSU. In the event of an illegal measure not being brought into compliance and no satisfactory compensation being agreed between the parties to a dispute, a plaintiff may request authorisation to suspend concessions to a respondent, This may be requested 20 days after the expiry of the reasonable period of time.

The principal objective of compensation or the suspension of concessions is to induce Member countries to comply with the WTO rules. This punitive action results in a tangible loss by a respondent through the removal of its preferential access to the market of a plaintiff. This is incurred in through reduced earnings by exports and exporters in those sectors targeted by the plaintiffs suspension of concessions. A plaintiff may gain from increased tariff revenue but its consumers will face higher prices such that neither side is better off as a result of permitted retaliation.

In some cases, a respondent may choose not to withdraw an illegal trade measure, whether for logistical or other reasons. Instead, the provision of compensation is permitted as a temporary measure pending the withdrawal of the measure that is inconsistent. In the dispute over beef produced with growth hormones brought by Canada and the United States, the EU has refused to remove its import restrictions in spite of their being found to be illegal by a WTO panel. Instead, the EU has willingly accepted retaliation on the grounds that its import restrictions are justified by health fears over the long-term effects on consumers.

An important procedural dispute arose in the second WTO banana case between the EU and the United States over the relative primacy and sequencing of compliance and compensation (Articles 21 and 22 of the DSU). The United States wished to retaliate immediately while the EU argued that this could only be done if its new trade measures for bananas were found not to comply with the WTO rules. This matter was eventually referred to the WTO General Council for clarification. An arbitration panel however, ruled that an Article 21.5 ruling was not a pre-requisite for action under Article 22.6. This decision has never been adopted since neither the EU nor the United States desired this legal precedent to become established in WTO case law because of its broader implications for dispute settlement.

The Magnitude of Compensation, the Suspension of Concessions & Retaliation

The magnitude of any compensation or suspension of concessions is required to be equivalent to the level of harm (nullification or impairment) that is caused by any illegal measure. The DSB authorises the suspension of concessions automatically under the negative consensus rule unless the respondent objects, in which case the matter is referred to arbitration, normally to the original panel.

An objection can be lodged against the suspension of concessions by a respondent on two grounds: that the proposed level of suspension is greater than the nullification or impairment incurred; or that the procedures contained in Article 22 have not been adhered to. If a dispute over compensation is referred to arbitration, then concessions cannot be suspended in the meantime. The only concern of the arbitrator is whether suspension of concessions is equivalent to the nullification or impairment and has been carried out in accord with the procedures in the article. The arbitrators decision is final and there is no recourse to a second arbitration.

In the beef hormone dispute, arbitration established that the annual value of trade affected by these measures was C$11.3 million for Canada and $116.8 million for the United States. This represents only a small fraction of the total value of the transatlantic beef trade. In the banana dispute, the initial claim for the suspension of concessions by the United States was for $520 million but this was reduced to $191.4 million after arbitration. In the same dispute, the Arbitration Panel awarded Ecuador sanctions worth $201.6 million, substantially greater than the annual value of its imports from the EU. In the case of the recent steel dispute, the EU estimated that the lost value of its trade concessions as a result of US restrictions on steel imports was some $3 billion (2.407 billion) per annum.

Retaliatory Lists of Products for the Suspension of Concessions

The procedure for implementing the suspension of concessions includes the drawing up and publication of a retaliatory list of products to be targeted by a plaintiff. A respondent may object to the list if there is dispute over the value of the harm or that the products covered do not conform to the sectoral requirements.

Retaliation by Canada and the United States in the beef hormones dispute specifically targeted key EU agricultural exports, particularly from France, with the US retaliatory tariffs set at 100 per cent. In addition, the United States has also threatened to escalate its retaliation by carouseling, i.e. rotating the products on its retaliatory list every 180 days. This would increase the uncertainty faced by EU exporters to the United States. Carouseling is not illegal under the WTO rules but its use would be expected to result in legal action by the EU. In the banana dispute, the United States made it known that it retaliatory targets included exports of luxury cashmere products from Scotland. In the recent steel dispute, the EU proposed a short retaliatory list worth some $390 million and a long list worth $625 million. In addition to targeting imports of US steel products, these lists targeted sensitive exports from politically key marginal states in the 2004 US Presidential Election.

Further Reading on the DSU and WTO Trade Disputes

The best source of information about the WTO DSU is A Handbook on the WTO Dispute Settlement System (2004). This provides a full discussion of the procedures and operation of the DSU, the interpretation of its articles and recent developments. A comparative overview of the performance of the GATT and WTO dispute settlement systems can be found in Trade Dispute Settlement Mechanisms: the WTO Dispute Settlement Understanding in the Wake of the GATT (Read, 2005). More general analyses of the WTO, including the DSU, can be found in The Political Economy of the World Trading System (Hoekman and Kostecki, 2001) and The Regulation of International Trade (Trebilcock and Howse, 1999).

Up to date documentation for every case dealt with under the DSU is available on the WTO web-site at http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm#disputes. Information and documentation about WTO trade disputes involving the EU can be found on its web-site at http://trade-info.cec.eu.int/wtodispute/search.cfm. Details and publications relating to investigations by the US International Trade Commission (USITC) can be found at http://www.usitc.gov/webinv.htm. In depth discussions of several recent trade disputes, including bananas, beef hormones and steel can be found in The WTO & the Regulation of International Trade: Recent Trade Disputes Between the European Union & the United States (Perdikis and Read, 2005). The banana and beef hormones cases are also discussed in Transatlantic Economic Disputes: the EU, the US & the WTO (Petersmann and Pollack, 2003).

45.5A Critique of the WTO System of Trade Dispute Settlement

Almost all of the 300-plus trade disputes that have arisen since the inception of the DSU have been resolved in accord with WTO disciplines. The number of completed cases is now sufficient for several critical issues of concern to be identified relating the operation and application of the WTO dispute settlement system.

The willingness of the worlds strongest and most influential economies to adhere to an agreed set of multilateral trade rules must be seen as a positive indication of not only the health of the global economy but also of the effectiveness of the DSU and international economic relations in general. This view is supported by the leading role played by the DSU in resolving recent major trade disputes between the EU and the United States in bananas and steel. Nevertheless, questions still remain concerning the scope of the WTO trade rules and the effectiveness of the DSU.

Bias in the Use & Outcomes of the DSU

The WTO dispute settlement system has been accused of being biased against developing countries in that it favours the leading industrialised countries. The EU and the United States, in particular, are seen as having created and using the DSU to achieve their own objectives by virtue of their international economic and political leverage, greater resources and retaliatory power. The DSU however, is a more effective system for settling disputes because the dependence of the GATT system on positive consensus was vulnerable to pressure.

Empirical analyses of WTO dispute cases indicate that the industrialised countries have been the primary complainants and respondents although the NICs are now making increasing use of it. The EU and the United States however, have been the most frequent litigants; trade disputes between them account for 40 per cent of all complaints 1995-2002. None of the least-developed countries were involved in any cases at all. Normalising according to the share of global trade suggests that there is little evidence of systematic bias in the use of the DSU. Even if there is no bias in the use of the DSU, the leverage and resources of the industrialised countries may mean that they are more likely to win dispute cases.

The high success rate of the DSU suggests that it has been more effective in resolving trade disputes than the GATT system. This issue is complicated by the fact that many disputes do not result in formal complaints and not all complaints result in panel reports. There is some evidence to indicate that WTO Members with greater economic and political leverage are more likely to achieve a mutually agreed settlement - resolving or dropping complaints prior to the issuing of a panel report - while weaker Members rely more upon the judicial process of the DSU. The empirical literature on the performance of the GATT and DSU systems is reviewed in Read (2005).

The Function & Composition of WTO Panels

Some concern has been expressed about the function and composition of WTO Panels, particularly the reliance of the DSU procedures on part-time non-professional panellists. The greater effectiveness of the DSU has meant the rapid growth of both the volume and complexity of dispute cases. Doubts have arisen about the competence of part-time panellists, given the rules-based legal foundations of the dispute settlement procedures and the heavy workload. As a consequence, the EU has proposed that the WTO should create a permanent or standing body of qualified and experienced panellists.

Automaticity

There is a concern, arising partly as a consequence of the misgivings about panellists, that panels and the WTO Appellate Body are exceeding the scope of their remit. That is, that they are interpreting some of the WTO Agreements in a manner that affects the rights of Members, positively or negatively, without their consent.

The Transparency of the Panel and Appellate Systems

A further concern relating partly to automaticity and the functions of panels and the Appellate Body is that their procedures lack transparency. Because evidence and written submissions to panels are generally confidential until the publication of Panel Reports, the WTO system has been accused of excessive secrecy. Greater transparency is unlikely to have an adverse impact upon the system although it is opposed by many developing countries.

The Implementation of Panel Recommendations and Sequencing

There is some debate about the relative primacy of Articles 21.5 and 22.6 of the DSU, highlighted by the WTO banana case. The former provides for referral back to a panel where there is disagreement about compliance with a ruling while the latter provides for automatic retaliation in such a case. The DSU currently provides no indication of which Article should take precedence although logic suggests that the suspension of concessions should await a decision on the consistency of a revised measure.

The Participation of Developing Countries in the DSU

Although the DSU Articles pay special attention to the needs of developing countries, their participation continues to be constrained by a lack of financial and intellectual resources necessary to fight dispute cases, whether as plaintiffs or respondents. The failure of least-developed countries to use the system at all gives some cause for concern. While this reflects the small number of least-developed Members of the WTO and their small share of global trade, their vulnerability to retaliatory action means that positive evidence is needed to demonstrate that they are not failing to make appropriate use of the DSU.

National Sovereignty & the Democratic Deficit

The WTO dispute settlement system raises important issues relating to the competing demands of its Member countries obligations under international agreements and their domestic democratic mandates. Popular disquiet with the WTO, among other international agreements, is by no means confined to the anti-globalisation movement. There is a growing feeling in many Member countries, both developed and developing, that the WTO is usurping the democratic process by enforcing externally imposed rules on sovereign states.

In the past, the recourse of national governments to international agreements has been seen as a means to side-step domestic constituencies opposed to trade liberalisation. A democratic deficit has emerged however, between policy-makers convinced of the long-term beneficial effects of such commitments and national electorates, some part of which remain sceptical of such benefits. The WTO rules do impose constraints upon the exercise of its powers designed specifically to preserve the sovereignty of the nation state. Nevertheless, national governments may be faced with a crisis of credibility in the face of substantial domestic opposition to the obligations required by the WTO among others. At its mildest, this might lead to the adoption of a policy of non-compliance while possible outright rejection of the WTO could mean a reversion to unilateralism with its attendant problems.

Critical current factors in this apparent deficit relate to national concerns about the interfaces between the international trade rules and environment and consumer food health and safety issues so-called process and product method (PPM) issues. The perceived strict interpretation of the rules on trade by the WTO to the neglect of broader issues of great concern to consumers has engendered further scepticism over and above those related to trade liberalisation. Although the consideration of PPM issues at the WTO remains incomplete, incremental progress in the interpretation and establishment of appropriate legal grounds for trade restrictions on environmental and health grounds has been made in several recent dispute cases. Any fundamental reform of the WTO however, remains in the hands of its Members.

Acknowledgements

*Department of Economics, Lancaster University Management School, UK. The author is grateful for critical supportive comments made by Bill Kerr and Nick Perdikis.

References

GATT (1986), Ministerial Declaration, Punta del Este, Geneva: GATT.

Hoekman, B.M., and Kostecki, M.M. (2001), The Political Economy of the World Trading System, Oxford: Oxford University Press, 2nd edition.

Hudec, R., Kennedy, D., and Sgarbossa, M. (1993), A statistical profile of GATT dispute settlement cases, 1948-1989, Minnesota Journal of Global Trade, vol. 2, no. 1, pp. 1- 25.

Perdikis, N., and Read, R. (eds.) (2005), The WTO & the Regulation of International Trade: Recent Trade Disputes Between the European Union & the United States, Cheltenham: Edward Elgar.

Petersmann, E-U., and Pollack, M.A. (2003), Transatlantic Economic Disputes: the EU, the US & the WTO, Oxford: Oxford University Press.

Read, R. (2005), Trade dispute settlement mechanisms: the WTO Dispute Settlement Understanding in the wake of the GATT, in Perdikis, N., and Read, R. (eds.), The WTO & the Regulation of International Trade: Recent Trade Disputes Between the European Union & the United States, Cheltenham: Edward Elgar, pp. 41-67.

Trebilcock, M.J., and Howse, R. (1999), The Regulation of International Trade, London: Routledge, 2nd edition.

WTO (1999), The Legal Texts: the Results of the Uruguay Round of Multilateral Trade Negotiations, Cambridge: Cambridge University Press.

WTO (2004), A Handbook on the WTO Dispute Settlement System, Cambridge: Cambridge University Press.

Dispute Settlement, Compensation & Retaliation under the WTO

Robert Read

Chapter 45 for Gaisford, J., & Kerr, W.A. (eds.), Handbook on Trade Policy,

Cheltenham: Edward Elgar, 2005.

2423