LAW OF WTO

PROJECT ON

SANCTIONS IN INTERNATIONAL LAW AND WTO

Submitted by:

Shijo George

Semester I, LLM

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TABLE OF CONTENTS

ChapterNo.

Topic PageNo.

LIST OF CASES 4LIST OF ABBREVIATIONS 5-6EXECUTIVE SUMMARY 7

I. INTRODUCTION 8-181.1 Statement of Problem 8

1.2 Introduction 9-10

1.3 Scheme of Chapterization 10-11

1.4 Research Objectives 11

1.5 Research Questions 11

1.6 Hypothesis 11

1.7 Literature Review 12-18

1.8 Methodology Adopted 18

1.9 Limitation 18

1.10 Keywords 18

II. DISPUTE SETTLEMENT MECHANISM UNDER THE WTO- HISTORY AND EVOLUTION

19-24

2.1 GATT and WTO 19-21

2.2 Sanction under the GATT and WTO 21-24

III. LEGAL FRAMEWORK AND THE ANOMALIES UNDER THE LAW

25-37

3.1 Introduction 253.2 Consultation 25-

263.3 Panel 26-

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273.4 Appellate Body 27-

283.5 Authorization and Retaliation 28-

29 3.5.1 Authorizing Procedure 29 3.5.2 Nullification or Impairment 30 3.5.2.1 DeterminingNullification or Impairment

31-32

3.6 Types of Sanctions/Retaliations 33-35

3.7 Post-Authorization of Suspension ofconcession or obligations phase

36-37

IV. EFFECTIVENESS OF SANCTIONS IN INTERNATIONAL LAW

38-49

4.1 Purpose of Sanctions 38-39

4.2 Case-Law study on Sanctions 39-47

4.3 Advantages and Disadvantages of sanction 47-49

V. CONCLUSION AND SUGGESTIONS 50-54

5.1 An Analysis of the Effectiveness ofSanctions

50-52

5.2 Suggestions for reforms 52-53

5.3 Conclusion 53-54

BIBLIOGRAPHY 55-57

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LIST OF CASES

Serial

No.

Name Citation

1. Brazil – Export Financing Programme For Aircraft DS462. European Communities — Regime for the

Importation, Sale and Distribution of Bananas

DS27

3. European Communities – Measures Concerning DS26

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Meat and Meat Products (Hormones)

4. United States — Continued Dumping and Subsidy

Offset Act of 2000

DS217

5. United States — Measures Affecting the Cross-

Border Supply of Gambling and Betting Services

DS285

6. United States-Import Measures on Certain

Products from the European Communities

DS165

7. United States — Subsidies on Upland Cotton DS267

LIST OF ABBREVIATIONS

S.NO. ABBREVIATION. FULL FORM.1. AB Appellate Body (WTO)2. DSB Dispute Settlement Body

(WTO)

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3. DSU Understanding on rules

and procedures governing

the settlement of4. Edn. Edition5. EC European Communities6. EU European Union7. GATS General Agreement on

Trade in Services8. GATT General Agreement on

Tariffs and Trade9. Ibid. Ibdiem (in the same

place)10. Id. Idem (same)11. i.e. Idest (that is)12. ICJ International Court of

Justice13. ILC International LawCommission14. ITO International Trade

Organization15. SCM Agreement on Subsidies

and Countervailing16. SPS Agreement on the

Application of Sanitary17. TBT Agreement on Technical

Barriers to Trade18. TRIPS Agreement on Trade-

Related Aspects ofIntellectual Property

19. VCLT Vienna Convention on theLaw of Treaties (1969)

20. Vol. Volume21. WIPO World Intellectual

Property Organization22. WTO World Trade Organization

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EXECUTIVE SUMMARY

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This Research Paper focuses upon understanding the role,

sanctions have played over the years under GATT and the

World Trade Organization. An endeavor has been made to

analyse the effectiveness of sanctions in bringing about

compliance. The main aim of sanctions is said to induce

violating countries to comply with their respective

obligations under the WTO. This is done under the current

regime with the help of retaliation measures which provides

the complaining countries with the option to suspend

concessions or obligations in the sector where the violating

country has defaulted or in some other sectors so as to

induce the violating country to comply with the ruling of

the Panel or the Appellate Body. However, the basis behind

its functioning seems to be based on the philosophy of ‘an

eye for an eye and a tooth for a tooth’. This also appears

to be going against the basic premise of free trade which

the WTO aims to promote. Further, in most cases it causes

hardship even to the countries imposing sanctions and

therefore, it questions the effectiveness of sanctions in

International Trade. As it is possible that the economy of

the complaining country is smaller as compared to the

economy of the violating country, it is all the more

possible that the present remedy available under the WTO

would be rendered ineffective in terms of achieving its goal

of inducing compliance. Thus, it depicts the weakness of the

current Dispute Settlement Mechanism in terms of enforcement

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mechanism and requires a research in this area. Through this

research paper, the main emphasis is to study the role of

retaliation under the WTO as a remedy in cases where the

obligations under the WTO have been violated. Thus, the

existing regime of remedy is critically examined and an

effort is made to explore introduction of better and

effective alternative remedies.

CHAPTER I – INTRODUCTION

1.1 STATEMENT OF PROBLEM:

The core problem with the concept of the trade

sanctions is that while it is being used by the WTO to

enforce compliance with the WTO obligations, it

conflicts with the traditional GATT principle which

provides that the trade remedy is used to rebalance

concessions not to sanction. Besides, one wrong cannot

undo another. Further, the disadvantages attached along

with the trade sanctions outweigh the advantages

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flowing from it.1 It is pertinent to mention that the

trade sanctions not only have undesirable affects on

the target country but also on the country that imposes

sanctions and at time also on third countries. Further,

it is also considered that since sanctions and other

such trade barriers impose a cost both on the target

country as well as on the country that initiates such

measures, an alternative has to be found to enforce

free trade rules without having to take recourse to

trade restrictive measures. As, it is a dilemma which

still seems to continue, the researcher would like to

research on this issue.

1.2 INTRODUCTION:

In today’s competitive world every country wants to

have the best economy and therefore there arises

conflict of interests between the countries at the

international level. When there is a conflict of

interest between the countries, disputes are bound to

arise and so arises a need for body to look into the

settlement of disputes between the countries. Now, when

we talk about the trade of goods and services between

the countries at the international level, we have the

World Trade Organization as the legal and the

1 Steve Charnovitz, Rethinking WTO Trade Sanctions, the American Journal of International Law, Vol. 95, No. 4 (Oct. 2011) pp. 792-832 <www.jstor.org/stable/2674625>

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institutional foundation of the international trading

system. The World Trade Organizaton was formally

created by the Marrakesh Agreement Establishing the

World Trade Organization (“WTO Agreement”). Annexure 2

to the WTO Agreement comprises of the Understanding on

Rules and Procedures Governing the Settlement of

Disputes (now known as the Dispute Settlement

Understanding (DSU)).2 The Dispute Settlement

Understanding provides for rules and regulations to

look into disputes arising under various WTO

Agreements. All WTO members are governed by it and can

bring and file cases pertaining to such disputes.

Further, the dispute settlement mechanism under the WTO

allows sanctions to be imposed when countries are not

willing to rectify or amend the policies or laws

inconsistent with the WTO rules and regulations. In

common parlance, sanctions is a measure adopted by a

country or various countries collectively against a

country or an organization that gas violated

international law and measures could be economic,

diplomatic or of some other nature.3 In other words,

sanction is a mode through which compliance is induced.

2DAVID PALMETER AND PETROS C. MAVROIDIS, DISPUTE SETTLEMENT IN THE WORLDTRADE ORGANIZATION, PRACTICE AND PROCEDURE, 2ND EDN., 13-14, CAMBRIDGE UNIVERSITY PRESS, UK, 20043http://www.gov.je/Government/JerseyWorld/InternationalAffairs/Sanctions/Pages/SanctionsFAQ.aspx (Last Visited Aug. 16, 2014)

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It is possible that despite the ruling of the Dispute

Settlement Body asking the violating country to changes

its policies to comply with the WTO rules, the

violating country does not comply with it. In that

case, the complainant country is entitled to

compensation. If the agreement on compensation is also

not made between the countries, then Article 22 of the

Dispute Settlement Understanding provides for the

Complainant Country to retaliate.4 The Complainant

Country can ordinarily retaliate under the specific WTO

agreement that has been violated - that is, sanctions

against goods when merchandise trade is at issue,

services for services, and so forth. However, if this

is unlikely to be effective, they allow governments to

"cross-retaliate" against other sectors, such as

Intellectual Property.5 However, the basis of imposing

sanctions seem to be contrary to the principle of open

trade as it allows the government to ban trade in

response to violations by other countries. Further,

some of the other disadvantages are that sometimes the

countries imposing sanctions incurs losses; there is no

mechanism to help the complaining industry etc.

Therefore keeping in mind the aforesaid it is felt that

4 http://www.adelaide.edu.au/cies/papers/0207.pdf (Last Visited Aug. 16,2014)5 http://www.ictsd.org/bridges-news/bridges/news/wto-authorises-antigua-to-move-forward-on-retaliation-in-us-gambling (Last Visited Aug. 16, 2014)

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the sanctions are ineffective and has a lot of negative

impact on trade rather than positive. So, the

researcher feels that there is a need for a study on

the said subject.

1.3 SCHEME OF CHAPTERIZATION:1. Introduction

This chapter will deal with a small glimpse of the

topic, the author wishes to research on and includes

the Statement of problem, Tentative Chapterization,

Research Objectives, Research Questions, Hypothesis,

the Literature Review and the Research methodology

adopted by the author along with the limitations

involved in the present paper and the keywords used.

2. Dispute Settlement Mechanism under the WTO- History

and Evolution

This Chapter will deal with the History and Evolution

of the Dispute Settlement Mechanism under the World

Trade Organization

3. Legal Framework and the Anomalies under the Law

This Chapter will deal with the legal framework and the

various anomalies under the Dispute Settlement

Mechanism under the WTO and in doing so incorporates

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various views of Judges, authors and experts in the

field of law, based on their research.

4. Effectiveness of Sanctions in International Law

This Chapter will specifically deal with the

effectiveness of Sanctions in International Law in

light of various International Case laws.

5. Conclusion and Suggestions.

This Chapter will provide for conclusion and

suggestions of the researcher from the said research

conducted via which the anomalies could be removed or

rectified.

1.4 RESEARCH OBJECTIVES:

The objects of the project would be To understand the History and Evolution of the

Dispute Settlement Mechanism and Dispute Settlement Understanding.

To understand the Legal Framework of the Dispute Settlement Body.

To understand the role of sanctions in International law.

To understand the mechanism of enforcement of sanctions.

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To understand the effectiveness of sanctions in International law.

1.5 RESEARCH QUESTIONS:

The researcher has tried to deal with the topic keeping

in mind the following research questions:

1) Whether the provisions of the Understanding on

Rules and Procedures governing the Settlement of

Disputes with respect to imposition of Sanctions

are ambiguous in nature or not?

2) Whether sanctions in International Law under the

WTO are effective or not?

3) Whether sanctions in International Law are per se

contrary to the basic principles behind formation

of WTO i.e. promoting free trade?

1.6 HYPOTHESIS:

The researcher wants to put to test the following that:

Sanctions in International Trade Law are not

effective in nature.

1.7 LITERATURE REVIEW:

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Books

1. Sherzod Shadikhodjaev, Retaliation in the WTO

Dispute Settlement System, Kluwer Law International,

Netherlands, 2009

The book deals with the WTO Dispute Settlement Remedies

and focuses upon retaliation as one of the remedies

available under the system. It covers an in-depth

analysis of the procedural and substantive aspects of

the retaliation system with reference to relevant rules

under the GATT, Understanding on Rules and Procedures

Governing the Settlement of Disputes (now known as the

Dispute Settlement Understanding) and the Agreement on

Subsidies and Countervailing Measures and case laws. It

examines the way the WTO Retaliation System has worked

and focuses on exploring the possibilities of improving

the system

2. Chad P. Brown and Joost Pauwelyn, The Law, Economics

and Politics of Retaliation in WTO Dispute

Settlement, Cambridge University Press, UK 2010.

The book is a compilation of various articles written

by various authors over a period of time dealing with a

background study of WTO Retaliation and the types of

retaliation. Further, it deals with the policies and

procedures followed for implementing trade retaliation.

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3. David Palmeter and Petros C. Mavroidis, Dispute

Settlement in the World Trade Organization, Practice

and Procedure, 2nd Edn., Cambridge University Press,

UK, 2004

The book basically focuses on the Dispute Settlement

Mechanism and relies heavily on panel and Appellate

Body jurisprudence and the procedures followed by it.

It touches upon case laws but does not deal with the

efficacy of the sanctions in International Law.

4. Autar Krishen Koul, Guide to the WTO and GATT,

Economics, Law and Politics, 2nd Edn., Satyam Law

International, Delhi, 2010.

The book extensively deals with the International

Economic Institutions like the WTO, its dispute

settlement mechanisms and the various agreements under

it. In this second edition, the Author has kept in mind

the developments which have taken place at the WTO/GATT

counter and the decisions rendered by the DSB on

various critical issues. However, it does not deal

extensively with the cases wherein sanctions have been

imposed. Nor, does the book deal with the efficacy of

the sanctions in International Law.

Articles

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1. Steve Charnovitz, Rethinking WTO Trade Sanctions,

http://www.jstor.org/stable/pdfplus/2674626.pdf

(Last Visited Aug. 27, 2014).

The Article is an important text that deals with a

critical analysis of the Dispute Settlement

Mechanism under the WTO and the advantages and

disadvantages of Sanctions in International Law.

2. Kajsa Persson, The Current and Future WTO Dispute Settlement

System – Practical Problems discussing Article 21.5 and Article 22 of

the DSU,

https://gupea.ub.gu.se/bitstream/2077/9862/1/Kajsa_P

ersson_Thesis.pdf (Last Visited Aug. 26, 2014)

The Article is actually a thesis, the purpose of

which is to study the current WTO dispute settlement

system, focusing on the critical stage of

implementation and enforcement and the practical

problems that may arise using the remedies available

in this phase of the process. The main purpose is to

pay attention to the actual effect in practice when

using the remedies available and how the outcome

affects different members of the organization in

different ways.

3. Barbara Marchetti, The WTO Dispute Settlement System:

Administration, Court or Tertium Genus?,

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http://www.iilj.org/gal/documents/marchetti.pdf

(Visited on 29-08-2014)

The Article tries to find answer to the questions as

to whether the decisions adopted by the DSB are

administrative or judicial in nature and in order to

do so the author has tried to look In the process

it deals in great detail regarding the procedure

followed by the Panel and the Appellate Body and

their powers and functions.

4. Anwarul Hoda, Dispute Settlement in the WTO, Developing

Countries and India,

http://www.icrier.org/pdf/Policy_Series_No_15.pdf

(Last Visited Aug. 29, 2014)

This Article mainly focuses upon the WTO dispute

settlement mechanism with respect to serving the

interests of developing countries. It deals with how

cross retaliation though has been favorable for the

developing countries but has on the other hand been

used very sparingly.

5. Asim, Imdad Ali, Non-Compliance and Ultimate Remedies under

the WTO Dispute Settlement System, Journal of Public and

International Affairs, Volume 14/Spring 2003,

http://www.princeton.edu/jpia/past-issues-

1/2003/1.pdf (Last Visited Sept. 11, 2014)

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This article examines the question of non-compliance

and ultimate remedies under the WTO dispute

settlement system. It has tried to analyze the

compliance measures and the author has made an

endeavour to suggest some possible alternatives to

trade sanctions.

6. YE Siyu, The Legal Analysis of the Cross retaliation Under the WTO

Framework,

http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG01-

002061021_2013_0001_AC.pdf (Last Visited Aug. 29,

2014)

This Article is actually a paper on cross

retaliation and tries to analyze whether cross

retaliation is a desirable remedy. In this respect

the Author has also made an endeavour to deal with

the developing countries especially in light of the

option available to the developing countries to

retaliate in TRIPS.

7. William J. Davey, Implementation in WTO Dispute Settlement:

An Introduction to the Problems and Possible Solutions,

http://www.rieti.go.jp/jp/publications/dp/05e013.pdf

(Last Visited Aug. 29, 2014)

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This is a discussion paper which has tried to assess

the effectiveness of the dispute settlement system

of the World Trade Organization. In this paper, the

operation of the WTO dispute settlement system is

briefly outlined, with particular emphasis on the

overall time taken by the various stages. This is

followed by an analysis of the implementation record

for disputes brought under the WTO.

8. Joost Pauwelyn, The Role of Public International Law in the WTO:

How Far Can We Go?,

http://scholarship.law.duke.edu/cgi/viewcontent.cgi?

article=1065&context=faculty_scholarship (Last

Visited Aug. 29, 2014)

This Article examines the general relationship

between public international law and the WTO law

with special emphasis on the role of Public

International Law in WTO Dispute Settlement

mechanism.

9. Mitchell, Andrew D. & Constantine Salonidis, David’s

Sling: Cross-Agreement Retaliation in International

Trade Disputes, 467, Journal of World Trade 45, no.

2 (2011)

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This Article mainly deals with cross retaliation as

a remedy available under the Dispute Settlement

Mechanism of WTO and tries to analyze the credible

and probable threat of cross-agreement retaliation

and how it could provide a powerful incentive for

compliance.

10.Song Guan, WTO Retaliation Rules in Subsidy-Related

Cases: What Can We Learn from the US-Upland Cotton

Arbitration?, 815- 842, Journal of World Trade 48,

no. 4 (2014)

This article provides an in-depth overview of

retaliation in subsidy-related cases and advocates

that ‘inducing compliance’ should be the goal of

retaliation in WTO dispute settlement. To achieve

this, the article analyses two main actors relating

to the retaliation rules in subsidy-related cases,

namely, the determination of the level of

retaliation and the principles and procedures for

retaliation and cross-retaliation. It also examines

how the WTO arbitrators apply the rules in real-case

scenarios, using the case of US-Upland Cotton as an

example.

11.Bernard O’ Connor, Remedies in the World Trade

Organization Dispute Settlement System – The Bananas

and Hormones Cases, 245-266, Journal of World Trade,

38(2), 2004

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This Article examines the remedies available for

breach of legal duty in the WTO Law. Further, it has

tried to examine the effectiveness of those remedies

in light of two landmark cases of E.C. Bananas and

E.C. Hormones case.

12.Gary Horlick & Judith Coleman, The Compliance

Problems Of The WTO, Arizona Journal of

International and Comparitive Law, Vol 24, No.1,

2007, http://www.ajicl.org/AJICL2007/Horlick

%20article.pdf (Last Visited Sept. 11, 2014)

This Article mainly deals with non-compliance and

the forms of non-compliance under the WTO and lists

out the statistics and the case-laws where there has

been compliance and cases where non-compliance is

there.

13.T.B. Simi, Brazil-US Upland Cotton Dispute What does it Augur for

Agricultural Subsidies?,

http://www.cuts-citee.org/pdf/TLB05-02.pdf (Last

Visited Sept. 09, 2014)

This Article mainly focuses upon the Brazil-US

Upland Cotton case. It mainly deals with what was

the dispute about, the verdict of the Appellate Body

and the significance of the ruling in the said case.

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14.Intan Innayatun Soeparna, The Impact Of The WTO Retaliation

From The Perspective of Human Rights Law,

http://www.academia.edu/6141386/THE_IMPACT_OF_THE_WT

O_RETALIATION_FROM_THE_PERSPECTIVE_OF_HUMAN_RIGHTS_L

AW (Last Visited Sept. 10, 2014) 

This paper explains the impact that arises when WTO

retaliation is imposed to a country whether a

developed or developing country, from the

perspective of international human rights law.

15.Jordan Shepherd, Maria V. Sokolova, Wagari Negassa

Wakjira, Effective Compliance in the DSU: The Mechanics of

Monetary Compensation as a form of Reparation,

http://graduateinstitute.ch/files/live/sites/iheid/

files/sites/ctei/shared/CTEI/Law%20Clinic/

memoranda2012/Final%20Memo%20-%20DSU%20Review%20-

%2008062012.pdf (Last Visited Sept. 11, 2014)

This Article focuses upon improving the limitations

of the WTO’s dispute settlement mechanism through

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development of the remedy of monetary compensation

into the Dispute Settlement Understanding (DSU). It

explores possible approaches for applying monetary

compensation in the WTO framework and inspects

different substantive and procedural aspects of its

implementation.

1.8 METHODOLOGY ADOPTED: The research methodology

intended to be adopted for this research is doctrinal

in nature. There shall be extensive review of books,

articles, journals and other literature. International

laws and landmark judgments related to the subject

matter shall be addressed.

1.9 LIMITATION:

As this research paper mainly focuses on sanctions, its

effectiveness and drawbacks based on the cases that

have been decided by the Panel and the Appellate Body

so far, the research is void of other factors that

could also influence the role and effectiveness of

sanctions in International Trade Law. Therefore an in-

depth study and research into those factors might be

necessary so as to support or contradict the present

research paper.

1.10 KEYWORDS:

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Some of the Keywords used are Sanctions, Retaliation,

Suspension of Concessions or Obligations, Nullification

or Impairment, Authorization and Compensation.

Chapter II - Dispute Settlement Mechanism under the

WTO - History and Evolution.

2.1 GATT and WTO:

In order to settle the disputes pertaining to the rights and

obligations arising out of the Agreements under the WTO, a

dispute settlement system is in force. This system is called

the Dispute Settlement Understanding and has been in force

since 1995. However, it would be better to say that it

evolved from its predecessor the General Agreement on

Tariffs and Trade (hereinafter referred to as ‘GATT’), and

is known to be the most developed and most active system of

formal dispute settlement of all international regimes. It

is considered to be the central pillar in the multilateral

trading system, and it aims to bring stability to the global

economy.6

Under the old system of GATT 1947, there was as such no

provision for dispute settlement. It only provided 2

provisions pertaining to dispute settlement, namely Article

XXII and XXIII of the GATT. Further, at that time there was6 Kajsa Persson, The Current and Future WTO Dispute Settlement System – PracticalProblems discussing Article 21.5 and Article 22 of the DSU, https://gupea.ub.gu.se/bitstream/2077/9862/1/Kajsa_Persson_Thesis.pdf(Last Visited Aug. 26, 2014)

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in place a system of working parties which consisted of

representatives of all interested contracting parties

including the parties to the dispute. The working parties

adopted the reports by consensus among all participants.

This system of working parties was later on replaced by

panels consisting of three to five independent experts from

non-involved GATT contracting parties. The panels reported

their conclusions to the GATT Council which consisted of all

the members. The Council had to adopt the recommendations or

rulings by consensus before it became legally binding upon

the members concerned. Now, with passage of time, the

Dispute Settlement System under GATT changed from a power-

based system of settlement through diplomatic negotiations

into a system with features of a rule-based system of

dispute settlement through adjudication.

Although as the first official body at the multilateral

trading system, it had a role to play, yet it was not

without any glitches. To start with, the most acute problem

was the way key decisions were taken. These decisions were

all to be taken by consensus of the Council. A member

concerned by the conflict could block or delay a decision

and paralyze the whole dispute settlement system. Further,

Panels were pressurized to come to a conclusion satisfactory

to all parties even if it may not have been the most

convincing one. Now, during the Tokyo Round, some proposals

were made by the United States to improve the panel

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procedural rules and to increase the predictability of the

dispute settlement system. However, most of the limits of

the prior GATT system remained, and the Understanding Regarding

Notification, Consultation, Dispute Settlement and Surveillance, adopted on

November 28, 1979, did not bring about a real system reform.

From then till the Uruguay Round, the question of the nature

of the dispute settlement system became the crucial issue in

the debate on the World Trade Organization. However, the

End-Result of the Uruguay Round was the creation of a

permanent Appellate Body in the dispute settlement system.

Consequently, most of the deficiencies and faults of the

panel process were corrected; rigorous terms were

established for the assessment of the panel, and the entire

dispute system was streamlined. Most importantly the right

to veto the establishment of a panel or the adoption of its

rulings was eliminated, and the DSU demanded a negative

consensus of all members in order to block the process.7

Now, at key stages such as the establishment of a panel, the

adoption of a panel report or of a report of the Appellate

Body, positive decisions had to be taken unless there is

consensus for not doing so. This made decision making

effectively automatic because the complaining party or the

party that has obtained a favorable verdict cannot be

expected to join the consensus not to establish the panel or7 Barbara Marchetti, The WTO Dispute Settlement System: Administration, Court orTertium Genus?, http://www.iilj.org/gal/documents/marchetti.pdf (Visitedon 29-08-2014)

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not to adopt the panel or Appellate Body report. Further,

now time limits have been laid down for the dispute

settlement procedures to be completed right from the time a

request has been made by the complaining member for

consultations. If an agreement is not reached in the

consultations within 60 days the complaining party may

proceed to request for the establishment of a panel. If no

agreement is reached on panelists within 20 days after the

date of establishment of a panel, the Director General may

determine the composition in consultation with the Chairman

of the DSB and the Chairman of the relevant Council or

Committee. Panels are mandated to complete the process in no

more than nine months and the Appellate Body within ninety

days. Besides, the creation of the Appellate body enabled

appeal on issues of law covered in the panel reports and

legal interpretations developed by the panel. The Body has

been empowered to uphold, modify or reverse the legal

findings and conclusions of the panel. 8

2.2 Sanction under the GATT and WTO:

Now, the term “sanction” per se has not been used in either

the Marrakesh Agreement Establishing the World Trade

Organization or its annexures. The Charter of United Nations

also does not expressly define ‘sanctions’, but Article 41

8 Anwarul Hoda, Dispute Settlement in the WTO, Developing Countries and India,http://www.icrier.org/pdf/Policy_Series_No_15.pdf (Last Visited Aug. 29,2014)

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is generally understood as providing a definition. As per

Article 419, sanctions refer to ‘measures not involving the use of

armed force’, including a ‘complete or partial interruption of economic

relations.’10 Although, here sanction is used in a different

context but is somewhat similar to what sanctions are under

the DSU. Under the DSU, suspending concessions or other

obligations under the covered agreements in response to a

violation or to non-violation nullification or impairment

are called sanctions.11 Fortunately, a WTO ruling has

referred the term ‘sanction’. In the case of United States-

Import Measures on Certain Products from the European Communities, the

panel referred to the U.S. action in the Bananas dispute as

"trade sanctions”. Taking note of the DSU provision

requiring WTO members to abide by DSU rules when they "seek

the redress of a violation of obligations," the panel

characterized a DSU Article 22 measure as "essentially

retaliatory in nature”. Sanction basically arises when the

decision taken in a dispute has not been implemented. In

such a situation, the Complaining Party may be authorized to

retaliate by suspending some of its own obligations

9 Article 41: “The Security Council may decide what measures notinvolving the use of armed force are to be employed to give effect toits decision, and it may call upon the Members of the U.N to apply suchmeasures. These may include complete or partial interruption of economicrelations and of rail, sea, air, postal, telegraphic, radio and othermeans of communication, and the severance of diplomatic relations. 10 https://www.dfat.gov.au/sanctions/about-sanctions.html (Last VisitedSept. 03, 2014)11 http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c6s10p1_e.htm (Last Visited Sept. 03, 2014)

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resulting from the WTO agreements. Article XXIII of the GATT

was considered to be the cornerstone for dispute settlement

at one point of time. Under this Article, the Dispute

process was triggered when a Contracting Party determined

that any benefit attributing to it under the GATT 1947 was

being ‘nullified or impaired’ by the actions of another

Contracting Party. In the event of a dispute, the GATT

firstly encouraged nations involved to solve the dispute

between themselves before referring to the other Contracting

Parties. Only when no mutually agreed solution can be

reached, the Contracting Parties would then decide on the

subject matter or assist the panel in adopting a report. As

a means of remedy, GATT Article XXIII provided that a

complaining nation could possibly be authorized to suspend

concessions or obligations to the other nation under the

GATT, provided that two substantive conditions are

fulfilled, namely, (a) the circumstances are serious enough,

and; (b) the proposed suspension is appropriate. Now, as

mentioned before, retaliation could be authorized only by

‘positive’ consensus, i.e., to say that every single

contracting party, including the parties to the dispute, had

the chance to block the decision by voting against it. As a

result, the losing party could effectively veto any proposal

for suspending concessions, rendering the authorization of

the retaliation being rare. In the entire history of the

GATT, the only case of an authorized suspension was 1952

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United States Import Restrictions on Dairy Products case (hereinafter

‘Dairy Products’ case), whose decision allowed the Netherlands

to impose discriminatory quantitative restrictions on the

United States exports of wheat flour. The retaliation had

been provoked by an admittedly illegal United States quota

on dairy products. Now, the decision was adopted with both

parties to the dispute abstaining. Later on, Netherlands had

renewed the authorization of the suspension once a year for

seven years, but it never enforced the quota, arguably

because the retaliatory restriction itself was of no help in

persuading the U.S. Congress to repeal the dairy product

quotas and even if the restriction had been enforced, it

would require the Netherlands to buy more expensive wheat

flour from someone else.

With the WTO coming into being, the Dispute Settlement

Understanding (DSU) also came into picture which included

within its purview all covered agreement and laid down the

rules and procedures for settlement of the disputes under

the WTO. There are two major differences between GATT and

WTO which needs to be mentioned herein. Firstly, under

Article XXIII: 2 of GATT, the provision states that the

contracting parties “may” authorize suspension of

concessions if the circumstances are “serious” enough, and

in so far as the measures are considered “appropriate”. On

the other hand, DSU states that after a reasonable period of

time has elapsed the DSB “shall grant authorization to

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suspend concessions or other obligations”. Thus, the new

procedure indicates that it has to be followed mandatorily

and also points towards removal of discretion to resist a

suspension in “inappropriate” or less serious cases.

Secondly, there are differences in the extent or level of

countermeasures. While under the GATT the level of

countermeasure was to be “appropriate” to the level of

nullification or impairment, under the DSU, the term used

has been “equivalent”. Thus, DSU imposes a strict standard

of equivalence between damage incurred and the level of

countermeasures.12

Now, Article XXII:3 of the DSU provides a hierarchy of

remedies namely ‘parallel’ retaliation, ‘cross-sector’

retaliation and ‘cross-agreement’ retaliation. In principle,

the complaining party should first seek to suspend

concessions within the same sector where a violation is

found (the ‘parallel retaliation’); if that party considers

that it is not practicable or effective to suspend

concessions within the same sector, it may continue to seek

suspension of concessions in other sectors under the same

agreement (the ‘cross-sector’ retaliation); if it is not

practicable or effective to implement ‘cross-sector’

retaliation, when the circumstances are serious enough, that

12 Asim, Imdad Ali, Non-Compliance and Ultimate Remedies under the WTO Dispute Settlement System, Journal of Public and International Affairs, Volume 14/Spring 2003, http://www.princeton.edu/jpia/past-issues-1/2003/1.pdf (Last Visited Sept. 11, 2014)

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party may further seek to suspend concessions under another

WTO agreement (the ‘cross-agreement’ retaliation). Both

‘cross-sector’ and ‘cross-agreement’ retaliation are

collectively referred to as cross-retaliation. Thus, the

first and foremost role of such sanctions under the DSU is

to ensure compliance. This is also clear from the fact that

Article III:7 of the DSU also provides that ‘the first

objective of the dispute settlement mechanism is usually to

secure the withdrawal of the measures concerned’. Article

22.8 DSU implicitly corroborates the goal of WTO suspension

– only in case that the illegality is removed or a

settlement is found, should the suspension be removed 13

In other words, one can say that the movement from GATT to

WTO has been one from regarding retaliation as aimed at

rebalancing or compensation in GATT to inducing compliance

or sanction in the WTO.

13 YE Siyu, The Legal Analysis of the Cross retaliation Under the WTO Framework,http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG01-002061021_2013_0001_AC.pdf (Last Visited Aug. 29, 2014)

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Chapter III: Legal Framework and Anomalies under the Law

3.1 Introduction:

The WTO Dispute Settlement system is administered by the

Dispute Settlement Body which has the authority to establish

Panels (the referral of a dispute to adjudication) and to

adopt reports of the Panel and the Appellate Body (which

hears appeal from the Panel) under the Understanding on

Rules and Procedures Governing the Settlement of Disputes.

Further, it has the authority to do surveillance of

implementation of rulings and recommendations and to

authorize suspension of concessions and other obligations

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under the covered agreements. Now, therefore the two main

bodies of the DSB are the Panel and the Appellate Body.

However, before approaching the Panel, the parties are given

the freedom to negotiate among themselves so as to settle

the dispute and this process is called consultation.

3.2 Consultation:

The Understanding on Rules and Procedures Governing the

Settlement of Disputes lays down the procedures for the

settlement of disputes and Article 4 provides for the

process of settlement of disputes through Consultation. A

particular country may ask for consultations with another if

the complaining country believes that the other country has

violated a WTO agreement or otherwise nullified or impaired

the benefits accruing to it. Now, the objective of the

consultation stage is to enable the disputing parties to

understand the factual situation and the legal claims

pertaining to the dispute and to resolve the matter without

further proceedings. However, if consultations fail and

consequently the dispute is not resolved within 60 days of

the request for consultations, then the complaining country

may request the WTO Dispute Settlement Body, which is

composed of all WTO members, to establish a panel to decide

on the dispute.14 If requested, the Dispute Settlement Body

(DSB) is required to establish a panel no later than the14 Article 4.7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes.

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second meeting at which the request for a panel appears on

the agenda, unless there is a consensus in the DSB to the

contrary.15 Thus, unless the member requesting the

establishment of a panel consents to delay, a panel will be

established within approximately 90 days of the initial

request for consultations.

3.3 Panel:

Once the panel is established by the DSB, it is necessary to

select the three individuals who will serve as panelists. If

the parties cannot agree on the identity of the panelists

within 20 days of the panel's establishment, any party to

the dispute may request the WTO Director-General to appoint

the panel. After completing the fact-gathering and argument

phase, the panel issues its "interim report", which contains

its findings and recommendations. Parties are allowed to

then comment on some aspects of the interim report. In light

of the comments received, the panel then issues its final

report.16

Now, one thing to be noted here is that the WTO Panel has

Substantive as well as Implied or Incidental Jurisdiction.

Article 3.2 provides that the jurisdiction of the Panel is

15 Article 6 of the Understanding on Rules and Procedures Governing the Settlement of Disputes.16 William J. Davey, Implementation in WTO Dispute Settlement: An Introduction to the Problems and Possible Solutions, http://www.rieti.go.jp/jp/publications/dp/05e013.pdf (Last Visited Aug. 29, 2014)

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limited to claims under the WTO covered agreement. Further,

as per Article 7.1 of the DSU, the standard terms of

reference of the WTO panels are:

“to examine, in the light of the relevant provisions,

the matter referred to the DSB and to make such

findings as will assist the DSB in making the

recommendations or in giving the rulings provided for

in the covered agreements.”

Finally, Article 11 provides that the Panel is to “make an

objective assessment of the applicability of and conformity

with the relevant covered agreements and make such other

findings as will assist the DSB in making the

recommendations or in giving the rulings provided for in the

covered agreements.” Apart from this, incidental or implied

jurisdiction is also inherent in the mandate of the WTO

panels. Elements of the incidental jurisdiction are the

jurisdiction to (a) interpret the submissions of the parties

in order to isolate the real issues in the case and to

identify the object of the claim; (b) to determine whether

one has substantive jurisdiction to decide a matter; (c) to

decide whether one should refrain from exercising validly

established substantive jurisdiction.17

17 Joost Pauwelyn, The Role of Public International Law in the WTO: How Far Can We Go?,http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1065&context=faculty_scholarship (Last Visited Aug. 29, 2014)

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Again, the DSU provides that a panel’s final report is to be

circulated to WTO members within nine months of the panel’s

establishment. The final report is then referred to the DSB

for formal adoption, which is to take place within 60 days

unless there is a consensus not to adopt the report or an

appeal of the report to the WTO Appellate Body.

3.4 Appellate Body:

The WTO Appellate Body, which consists of seven individuals,

is appointed by the DSB for four-year terms. Further, the

Appellate Body is required to issue its report within 60 (at

most 90) days from the date of the appeal, and its report is

to be adopted automatically by the DSB within 30 days,

absent consensus to the contrary.18 Once it is found that a

measure is inconsistent with a covered agreement, the

Appellate Body then as per Article 19 is to recommend that

the Member concerned is to bring the measure into conformity

with the respective agreement. Finally, the final phase of

the WTO dispute settlement process is the surveillance of

implementation stage. This is to ensure that the

recommendations of the DSB are implemented and in order to

ensure effective resolution of disputes to the benefit of

all members.19 If a panel finds that an agreement has been

violated, it typically recommends that the defaulting WTO18 Article 17 of the Understanding on Rules and Procedures Governing theSettlement of Disputes.19 Article 21 of the Understanding on Rules and Procedures Governing theSettlement of Disputes.

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member concerned brings the offending measure into

conformity with the WTO obligations. As per Article 21.3 of

the DSU, under the DSB’s surveillance function, the

defaulting member is required to state its intentions with

respect to implementation within 30 days of the adoption of

the applicable report(s) by the DSB. While members virtually

always express their intention to implement, they typically

indicate that the immediate implementation is impractical,

which means that under the DSU they are to be afforded a

reasonable period of time for implementation. Absent

agreement, that period of time may be set by arbitration,

and the DSU provides. If a party fails to implement the

report within the reasonable period of time, the prevailing

party may request compensation. If that is not forthcoming

within 20 days of the expiration of the reasonable period of

time, it may then request the DSB, within 30 days of said

expiration, to authorize it to suspend concessions owed to

the non-implementing party (i.e. take retaliatory action or

sanctions). Now, suspension of concession is said to be only

temporary and is to be applied only until the inconsistency

of the measure is removed.20

3.5 Authorization and Retaliation:

20 William J. Davey, Implementation in WTO Dispute Settlement: An Introduction to theProblems and Possible Solutions,http://www.rieti.go.jp/jp/publications/dp/05e013.pdf (Last Visited Aug.29, 2014)

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The request for authorization to retaliate must meet the

basic minimal requirements of form. It must identify

basically two aspects:

(a) A specific level of suspension of concessions and

other obligations sought; and

(b) The agreement and sector under which concessions

or other obligations would be suspended.

This is required to examine as to whether the legal

requirements regarding the permissible magnitude and form of

retaliation have been complied with.21 Now, under the DSU,

Article 22.3 provides a hierarchy of sanctions which are

retaliation remedies, namely, ‘parallel’ retaliation,

‘cross-sector’ retaliation and ‘cross-agreement’

retaliation. In principle, the complaining party should

first seek to suspend concessions within the same sector

where a violation is found (the ‘parallel retaliation’); if

that party considers that it is not practicable or effective

to suspend concessions within the same sector, it may

continue to seek suspension of concessions in other sectors

under the same agreement (the ‘cross-sector’ retaliation);

if it is not practicable or effective to implement ‘cross-

sector’ retaliation, when the circumstances are serious

enough, that party may further seek to suspend concessions

21 CHAD P. BROWN AND JOOST PAUWELYN, THE LAW, ECONOMICS AND POLITICS OFRETALIATION IN WTO DISPUTE SETTLEMENT, 94, Cambridge University Press,UK 2010.

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under another WTO agreement (the ‘cross-agreement’

retaliation). Both ‘cross-sector’ and ‘cross-agreement’

retaliation are collectively referred to as cross-

retaliation. The primary purpose of the retaliation/cross-

retaliation is to induce compliance as implied in Article 22.1

DSU, providing that the suspension of concessions or other

obligations are temporary measures available in the event

that the recommendations and rulings are not implemented

within a reasonable period of time. Article 3.7 DSU also

provides that ‘the first objective of the dispute settlement

mechanism is usually to secure the withdrawal of the

measures concerned’. Article 22.8 of the DSU implicitly

corroborates the goal of WTO suspension – only in case that

the illegality is removed or a settlement is found should

the suspension be removed.

Further, Article 22.4 DSU provides that ‘the level of the

suspension of concessions shall be equivalent to the level

of the nullification or impairment’. The proposed suspension

is thus subject to the multilaterally controlled

‘equivalence’ standard examined by arbitration in line with

Article 22.6 DSU.22

3.5.1 Authorizing Procedure:

22 YE Siyu, The Legal Analysis of the Cross retaliation Under the WTO Framework,available at http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG01-002061021_2013_0001_AC.pdf (Last Visited Aug. 29, 2014)

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Article 22 of the DSU provides the main procedural stages to

be followed by a requesting party when it seeks to cross-

retaliate. If the losing party does not bring the contested

measure into compliance within a reasonable time after the

adoption of Panel or Appellate Body report, a mutually

acceptable compensation might be first considered. If no

satisfactory compensation is agreed, then a request can be

filed to seek authorization of parallel, or cross-

retaliation. For the purpose of counterbalance, the losing

party is conferred the right to make objection to the level

of suspension proposed, or to claim that the principles and

procedures set forth in Article 22.3 DSU have not been

followed in the form of arbitration.

The role of Arbitrator in this regard has been explained

under Article 22.7 of the DSU. It explains that the role of

Arbitrators is mainly to:

(a) to determine whether the alleged level of

‘suspension or other obligations’ is equivalent to the

level of ‘nullification or impairment’.

(b) to examine whether the principles and procedures

set forth in Article 22.3 DSU have been followed.

Now, as per Article 22.3 of the DSU, it is evident that

as a general rule the complaining party should first seek

to suspend concession or other obligations with respect

to the same sector as that in which the Panel or43 | P a g e

Appellate Body has found a violation or other

nullification or impairment. However, if Parallel

retaliation is not practicable to induce compliance then

cross sector retaliation and if cross sector is not

practicable or effective and the circumstances are serious

enough then cross-agreement retaliation.

Further, under Article 22.3 (d) of the DSU there are

factors which the parties shall take into account like:

(a) the trade in question and the importance of such

trade to the requesting party, and;

(b) the broader economic elements related to the

Nullification or Impairment and the broader economic

consequences of suspension.

3.5.2 Nullification or Impairment:

The concept of “nullification or impairment appears in

Article XXIII of the GATT and Articles 3.8 and 22 and 23 of

the DSU. Now, Article 22.4 of the DSU provides that the

level of the suspension of concessions or other obligations

authorized by the DSB shall be equivalent to the level of

the nullification or impairment. This means that one has to

determine the ‘level’ of suspension of concession and that

this level should be ‘equivalent’ to the level of

Nullification or Impairment. Now, the term ‘equivalent’ has

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not been defined under the DSU. However it has been

interpreted in the case of E.C. Bananas23 to mean a

correspondence, identity or balance between two related

levels. It therefore means that the level of Nullification

or Impairment should be equal to the level of retaliation.

3.5.2.1 Determining Nullification or Impairment:

Now, determining the level of nullification or impairment is

also an important task and the arbitrators in the past have

done this through the use of so called ‘counterfactual situations’

(i.e., a hypothetical state of affairs that would have

existed if the defending party had complied with its

obligations). For example, in E.C. Hormones24 case, the

arbitrators made a series of assumptions on what U.S. and

Canadian exports of hormone-treated beef to the EC would

have been if the EC had withdrawn its ban. The

counterfactual included assumptions on issues such as trade

volumes, price, and the division of market share between

Canada and the United States. It basically compared, on an

annual basis, (a) the value of the beef exports under the

current WTO-inconsistent EC regime, with (b) the value of

the beef exports which would have occurred in a WTO-

consisted EC import regime.

23 DS2724 DS26

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Another significant case in this regards is that of U.S.

Gambling25 case. In this case, the Arbitrator had selected a

counterfactual in which only the horseracing sector of the

US remote gambling market was opened up to foreign

suppliers. Now, in this case, as per the counterfactual used

by the arbitrators, the level of nullification or impairment

was found to be US$21 million per year, while as per the

counterfactual proposed by Antigua the level should have

been more than $3 billion a year. In this case, the

arbitrators had to actually select between three proposed

counterfactuals as mentioned below:

(a) A Counterfactual proposed by Antigua, in which the

entirety of the US remote gambling market was opened up

to foreign suppliers.

(b) A counterfactual mentioned by US, in which the US

implemented a ban on the provision of remote gambling

services in all sectors.

(c) A counterfactual proposed by US in which the US

permitted the provision of remote gambling services in

the horseracing sector but not in other sectors.

Now, the majority of the arbitrators had opted for the third

counterfactual.

Another aspect to be considered in this process of

determining nullification and impairment is that arbitrators25 DS285

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also have to make assessments of whether there is a causal link

between a claimed loss and the underlying violation. Generally, only

losses caused by the violation will be considered in the

calculation of nullification and impairment. Some of the

cases mentioned below are an illustration of this:

(a) Canada – Aircraft case: Brazil had argued that if

Canada had withdrawn the export subsidies at issue, a

customer would have switched its sourcing and purchased

aircraft from a Brazilian manufacturer, The Arbitral

Panel had concluded that there was no demonstrated

causal link between his loss and the grant of export

subsidies by the Canadian Government.

(b) US- Gambling Case: US argued that Antigua’s

estimates of nullification and impairment improperly

attributed all of the revenue lost by the Antiguan

suppliers to the effects of the US measures without

factoring in the impact of the increased competition

from suppliers located in other countries. Based on the

evidence submitted, the Arbitral Panel agreed with the

objection. Accordingly, estimates of remote gambling

revenues lost by Antiguan suppliers were adjusted to

account for losses that could not be attributed to the

US measures but instead to increased competition from

non-Antiguan suppliers.

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(c) EC-Hormones Case: In this case, the US had argued

that if the EC had lifted its import ban, US exporters

would have embarked on marketing and promotional

efforts and these promotional efforts would have led to

increased exports of edible beef offal worth 20.1$

million. The Arbitral Panel however refused to include

these marketing effort driven additional exports in its

calculations, reasoning that taking these exports into

account would be too speculative.26

3.6 Types of Sanctions/Retaliations:

As mentioned earlier, the Dispute Settlement Understanding

provides for 3 ways of suspending concessions or other

obligations. Article 22(3) of the DSU provides as follows:

“In considering what concessions or other obligations to

suspend, the complaining party shall apply the following

principles and procedures:

(a) The general principle is that the complaining

party should first seek to suspend concessions or other

obligations with respect to the same section(s) that in

which panel or Appellate Body has found a violation or

other nullification or impairment.26 CHAD P. BROWN AND JOOST PAUWELYN, THE LAW, ECONOMICS AND POLITICS OFRETALIATION IN WTO DISPUTE SETTLEMENT, 108-109, CAMBRIDGE UNIVERSITYPRESS, UK 2010.

48 | P a g e

(b) If that party considers that it is not practicable

or effective to suspend concessions or other

obligations with respect to the same sector(s), it may

seek to suspend concessions or other obligations in

other sectors under the same agreement;

(c) If that party considers that it is not practicable

or effective to suspend concessions or other

obligations with respect to other sectors under the

same agreement, and that the circumstances are serious

enough, it may seek to suspend concessions or other

obligations under another covered agreement.”

Now, the first remedy i.e., which lies in the same section

(i.e., parallel retaliation) is not an issue if it is

possible. However, issue arises when it is not practicable

or effective to induce such compliance.

Not practicable or effective:

Here, the retaliating party need not show that retaliations

are both not practicable and not effective in order to

satisfy the conditions of Article 22.3 DSU. Accordingly,

even if the retaliation was practicable, still the

retaliating party could show that it would be ineffective in

order to proceed to retaliate under a different agreement.27

27 Mitchell, Andrew D. & Constantine Salonidis, David’s Sling: Cross-Agreement Retaliation inInternational Trade Disputes, 467, Journal of World Trade 45, no. 2(2011)

49 | P a g e

Now, what is practicable and effective has not been defined

under the DSU and each of them has to be examined for a

better understanding. The examination of ‘practicability’

concerns whether the parallel retaliation is available for

application in practice as well as suitable for being used

in a particular case. For example: suppose China’s

commitment in financial service sector under GATs has not

come into force (i.e. China has not opened its market to

foreign financial institutions), but the benefits of Chinese

financial institution in the U.S. are somehow impaired by

the U.S. illegal action. Now, China raises this issue before

the panel. Further, assuming the proceedings have reached

the retaliatory stage. Unfortunately, the parallel

retaliation in financial service sector is not ‘practicable’

for China, since there is no market access for the U.S.

financial institutions at all. The imports volume from the

U.S. relating to the financial services is zero with a

consequence that there is no concession in the same sector

to be suspended.28

Similarly, ‘effectiveness’ means that the impact of a

suspension must be strong and have desired result of

inducing compliance. If the parallel retaliation can

sufficiently achieve the purpose, then there is no

requirement to request for cross retaliation. To give an28 YE Siyu, The Legal Analysis of the Cross retaliation Under the WTO Framework,http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG01-002061021_2013_0001_AC.pdf (Last Visited Aug. 29, 2014)

50 | P a g e

extreme example, if the offending party, an economy

dependent on exports to the complaining party, violates

certain obligations under the GATT 1994, the parallel

retaliation seems to be sufficient to induce compliance

since it will have a deep and adverse effect on that

country’s economy. Moreover, arbitrators also consider the

observation that the cross-retaliation is least detrimental

to the complaining party itself if actual evidence is

attached.29

In the US-Upland Cotton case, it was observed that:

“A consideration of the ‘effectiveness’ criterion under

these provisions involves an assessment of the effectiveness

– or lack thereof – of suspension in the same sector or

under the same agreement, rather than an assessment of the

relative effectiveness of such suspension, as compared to

suspension in another sector or agreement. In other words,

the procedures and principles under Article 22.3 do not

entitle a complaining party to freely choose the most

effective sector or agreement under which to seek

suspension. Rather, it entitles the complaining party to

move out of the same sector or same agreement, where it

considers that suspension in that sector or agreement is not

‘practicable or effective’.”30

29 Id.30 Mitchell, Andrew D. & Constantine Salonidis, David’s Sling: Cross-Agreement Retaliation in

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Further, it is not expected that developing countries, will

have to prove that practicability or effectiveness does not

exist in all the sectors of the relevant agreement or in

exhaustive detail. For instance, the arbitrators in US-

Gambling had observed that it would not be reasonable to

expect Antigua to be in a position to produce in the context

of the proceedings, such detailed sector-specific statistics

and data relating to its bilateral services trade. Further,

it observed that Antigua may not maintain such data on a

regular basis, in the same way as some developed countries

or larger developing countries may do.31

Circumstances are serious enough:

Now, to retaliate under a different agreement altogether,

the complaining party also needs to show that the

circumstances are serious enough to warrant cross-agreement

retaliation pursuant to Article 22.3(c). Since, the said

Article does not interpret the meaning of ‘seriousness’, the

arbitrators in the U.S. Gambling had adopted a neutral

alternative by seeking contextual guidance as provided under

Article 22.3(d) by considering:

(a) the trade in question and its importance to the

requesting Member, and

International Trade Disputes, 469, Journal of World Trade 45, no. 2 (2011)31 Id.

52 | P a g e

(b) the broader economic elements related to the

nullification or impairment and the broader economic

consequences of the proposed suspension on both

parties.

3.7. Post-Authorization of Suspension of concession or

obligations phase:

Article 22(6), (7) and (8) mainly deal with the process

involved once the authorization has been granted. Article

22(6) of the DSU provides that once the authorization has

been requested and if the member concerned objects to the

level of suspension proposed or claims that the principles

and procedures set forth have not been followed, then the

matter shall be referred to arbitration. Further, such

arbitration shall be carried out by the original panel, if

members are available or by an arbitrator appointed by the

Director General and shall be completed within 60 days after

the date of expiry of the reasonable period of time.

Besides, Article 22(7) provides that the arbitrator acting

pursuant to paragraph 6 shall not examine the concessions or

other obligations to be suspended but shall determine

whether the level of such suspension is equivalent to the

level of nullification or impairment. The arbitrator may

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also determine if the proposed suspension of concessions or

other obligations is allowed under the covered agreement. 

However, if the matter referred to arbitration includes a

claim that the principles and procedures set forth in

paragraph 3 have not been followed, the arbitrator shall

examine that claim.  In the event the arbitrator determines

that those principles and procedures have not been followed,

the complaining party shall apply them consistent with

paragraph 3.  The parties shall accept the arbitrator's

decision as final and the parties concerned shall not seek a

second arbitration.  The DSB shall be informed promptly of

the decision of the arbitrator and shall upon request, grant

authorization to suspend concessions or other obligations

where the request is consistent with the decision of the

arbitrator, unless the DSB decides by consensus to reject

the request.

Further, Article 22(8) also provides that the suspension of

concession or other obligations shall be temporary and shall

only be applied until such time as the measure found to be

inconsistent with a covered agreement has been removed, or

the Member that must implement recommendations or rulings

provides a solution to the nullification or impairment of

benefits, or a mutually satisfactory solution is reached. 

In accordance with paragraph 6 of Article 21, the DSB shall

continue to keep under surveillance the implementation of

adopted recommendations or rulings, including those cases

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where compensation has been provided or concessions or other

obligations have been suspended but the recommendations to

bring a measure into conformity with the covered agreements

have not been implemented.32

32 http://www.wto.org/english/docs_e/legal_e/28-dsu_e.htm (Last Visited Sept. 04, 2014)

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Chapter IV - Effectiveness of Sanctions in International Law

4.1 Purpose of Sanctions:

To ascertain whether sanctions have played an effective role

in International Law, one needs to first look at the

objectives and the purpose or the legislative intent behind

introduction of the concept of sanctions under the WTO for

the purposes of settlement of disputes and ascertain as to

how far have they been able to achieve the goal. Initially

under the GATT, the goal was towards rebalancing or

compensation while under the WTO, the goal is to induce

compliance or settlement of the dispute. Article 22.1 adds

another sentence that also specifies the temporary nature of

retaliation: neither compensation nor the suspension is

preferred to full implementation of a recommendation. In

short, the temporary nature of suspension of concessions

indicates that the DSU has a strong preference for

compliance and that retaliation is an alternative measure

applied until compliance occurs. This goal of inducing

compliance was also recognized by the arbitrators in para

6.3 of the E.C. Bananas III(US) (Art 22.6-EC) case for the

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first time in history of WTO dispute settlement and has been

repeatedly confirmed by arbitrators in later cases. In the

said case, the arbitrators had stated as follows:

“…the authorization to suspend concessions or other

obligations is a temporary measure pending full

implementation by the Member concerned. . . . this

temporary nature indicates that it is the purpose of

countermeasures to induce compliance. . . . there is

nothing in Article 22.1 of the DSU, let alone in

paragraphs 4 and 7 of Article 22, that could be read as

a justification for counter-measures of a punitive

nature.”

Further, arbitrators in US-Gambling (2007) further confirmed

that the sole goal of WTO retaliation is to ‘induce

compliance’, and held that ‘the very reason for the

existence of countermeasures under the DSU is to induce

compliance with the covered agreement that has not taken

place within the period foreseen in the DSU. Likewise, in

the arbitration decision on Brazil-Aircraft (2000), the

arbitrators discussed the meaning and purpose of

‘countermeasures’ under Article 4.10 of the SCM Agreement for

the first time, stating that they ‘find it more appropriate

to refer to its meaning in general international law and to

the work of the International Law Commission (ILC) on state

responsibility, which addresses the notion of

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countermeasures’. They ‘note that countermeasures are meant

to “induce” [the State which has committed an

internationally wrongful act] to comply with its obligations

under Articles 41 to 46’. Borrowing the meaning and purpose

of countermeasures from general international law, the

arbitrators concluded that ‘a countermeasure is

“appropriate” inter alia if it effectively induces compliance’. They

further pointed out that ‘in such a case, effectively

“inducing compliance” means inducing the withdrawal of the

prohibited subsidy’.33

4.2 Case-Law study on Sanctions:

Now, a study of few cases that have taken so far would help

in understanding as to how far the sanctions have been able

to meet the requisite goal and whether they are an efficient

method of inducing compliance.

European Communities — Regime for the Importation, Sale and

Distribution of Bananas34:

This case dates back to April 1996, when Ecuador, Guatemala,

Honduras, Mexico and the US requested the establishment of

Panel to examine the revised EC regime for the importation,

sale and distribution of bananas established by a Council

Regulation. The Panel held that the EC bananas import regime33 Song Guan, WTO Retaliation Rules in Subsidy-Related Cases: What CanWe Learn from the US-Upland Cotton Arbitration? , 815- 842, Journal of WorldTrade 48, no. 4 (2014)34 DS27

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violated the WTO obligations under the GATT, GATS and the

Agreement on Import Licensing Procedures. The US requested

suspension of concessions under Article 22.2 of the DSU

without requesting a compliance Panel under Article 21.5 of

the DSU. At the same time Ecuador requested a compliance

panel under Article 21.5 which found that the revised EC

regime was not fully compliant. Ecuador then requested for

suspension of concessions against European Communities upto

US$ 450 million. Now, the DSB authorized Ecuador to suspend

US$ 201.6 million. In this case, conditional cross

retaliation was authorized for the first time providing for

retaliation first in GATT and GATTS and then TRIPs. Now,

negotiations were held and US provisionally lifted the

sanctions against the European Communites. Ecuador had never

made use of the option of applying sanctions against the

European Communities on the basis that the harm to the

Ecuadorian economy would outweigh the possible benefit of

persuading the European Communities to comply with its

commitments.35

European Communities – Measures Concerning Meat and Meat Products

(Hormones)36

35 Bernard O’ Connor, Remedies in the World Trade Organization Dispute Settlement System – The Bananas and Hormones Cases, 245-266, Journal of World Trade, 38(2), 200436 DS26

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This case concerns the EC measures prohibiting the

importation of meat and meat products that have been treated

with growth hormones. Accordingly, the EC had decided to ban

all imports of US beef and beef products. Now, the parties

approached the Panel which held that they were not in

conformity with a number of WTO rules. The EC objected to

the conclusions of the panels in September 1997, which were

consequently submitted for review to the Appellate Body

(AB). Now, the Appellate Body held that the EC had provided

‘‘general studies which do indeed show the existence of a

general risk of cancer; but they do not focus on and do not

address the particular kind of risk at stake here’’.

Accordingly, due to the lack of specific scientific

verification for the EC measures, the Appellate Body

recommended the EC to bring its measures into conformity

with its obligations under the SPS Agreement. Now, USA

requested the Dispute Settlement Body (DSB) of the WTO to

authorize the suspension of the application to the EC and

its Member States to tariff concessions covering trade in an

amount of US$202 million per. A similar request was made by

Canada on May 20, 1999 for an amount of CDN$75 million per

year. The EC objected to the level of suspension proposed by

the US and Canada, and, on July 12, 1999, the WTO Arbitrator

determined that the level of nullification or impairment11

suffered by the USA and Canada was US$116.8 million per year

and CND$11.3 million per year respectively. The retaliatory

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measures were set in the same sector as the noncompliance

had taken place, namely in the agricultural sector. The list

of agricultural products for suspension of concessions was

proposed by the USA. However, after a long time of almost

10 years, in the year 2009 a mutually agreed solution was

notified and on 14th April 2014, EU and US notified the DSB

of a revised Memorandum of Understanding entered into

between the two on 21st October 2013.

Thus, in this case even full retaliation did not lead to

compliance, and the retaliation did not and could not

compensate the exporters injured by the measure found to be

WTO-inconsistent.37 Further, sanctions are of no use to the

U.S. beef producers as there are virtually no EC beef

imports to stop.

At present, there is no disincentive for countries to delay

coming into compliance whereas on the other hand there are

all reasons available to delay the same.

United States — Measures Affecting the Cross-Border Supply of Gambling

and Betting Services 38

In this case, Antigua and Barbuda brought a complaint

concerning certain US measures relating to gambling and

37 Gary Horlick & Judith Coleman, The Compliance Problems Of The WTO, Arizona Journal of International and Comparitive Law, Vol 24, No.1, 2007, http://www.ajicl.org/AJICL2007/Horlick%20article.pdf (Last VisitedSept. 11, 2014)38 DS285

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betting services including federal laws such as Wire Act,

Travel Act and Illegal Gambling Business Act. According to

Antigua, these measures prohibited cross-border supply of

gambling and betting services to consumers in U.S. and thus

violated the U.S. market access commitments under the GATS.

After fruitless consultation, the matter was considered by

the Panel and then finally by the Appellate Body. The Panel

found out that the US GATS schedule included under sub-

sector 10.D on ‘other recreational services’, specific

commitments on gambling and betting services. Further, US

acted inconsistently with Article XVI:I and sub-paras (a)

and (c) of Article XVI:II by maintaining certain limitations

on market access not specified in its schedule. Finally,

although measures at issue are justified under Article XIV

(a) as measures ‘necessary’ to protect public morals or

maintain public order, they are inconsistent with the

chapeau of Article XIV. In particular, in the light of the

Interstate Horsing Act (which appeared to authorize domestic

operators to engage in the remote supply of certain betting

services), the US failed to demonstrate that its

prohibitions on remote gambling applied to both foreign and

domestic service suppliers, i.e., in a manner that did not

constitute arbitrary and unjustifiable determination within

the meaning of the chapeau. As confirmed by the Compliance

Panel, the US has not implemented the adopted rulings. Thus,

Antigua requested authorization from Dispute Settlement Body

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to suspend its concession and related obligations vis-à-vis

US in amount of USD 3.443 billion per year. Antigua

initially sought to retaliate under GATS and TRIPS

Agreement, but ultimately limited its request to TRIPS

retaliation only. The arbitrators firstly established that

the parallel retaliation in the same sector (that is,

‘Recreational, Cultural and Sporting Services’) under the

GATS was not practical or effective because the only trade

within this sector under the GATS that Antigua had made

commitments on was Entertainment services. The suspension in

this sector would adversely affect Antiguan citizens, i.e.

limiting entertainment options available, while having

virtually no impact on the U.S., due to Antigua’s negligible

trade volume. Antigua continued to argue that it heavily

relied on imports of products and services sourced from the

U.S. by virtue of the fact that it is a small island with

limited natural resources, so that raising tariff on

products or limiting the provision of services would have ‘a

disproportionate adverse impact on Antigua by making these

products and services materially more expensive to the

citizens of country. Therefore, it was not practicable or

effective for Antigua to take the cross-sector retaliation

in other sectors under the GATS. Finally, TRIPS was selected

as the sector to be targeted. The target areas were

copyright, Industrial Design, Patent and protection of

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undisclosed information under TRIPS. The assessment of

Arbitrators was in 4 steps:

(a) Establishment of workable assumption about

Antigua’s revenues from exports of remote gambling

services to US

(b) Adjustment of ‘this time series for apparent

impact of competing suppliers’

(c) Determination of plausible share of betting

service on horse racing in Anitgua’s total

revenues from remote gambling

(d) Consideration of developments in US demand

for gambling services on horse racing.

Further, it was estimated that an estimated annual revenue

loss by Antigua from gambling on horse racing would be USD

18 million and USD 14 million respectively. Finally

considering growth in US demand for gambling on horse racing

services, the arbitrators increased the figures to USD 23

million and USD 18 million. Taking average of figures and

rounding off to next full million, the Arbitrators concluded

that the annual level of nullification or impairment of

benefits was USD 21 million.39

However, this authorization has not been used so far by

Antigua and Barbuda. Antigua is of the view that ceasing all39 YE Siyu, The Legal Analysis of the Cross retaliation Under the WTO Framework, http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG01-002061021_2013_0001_AC.pdf (Last Visited Aug. 29, 2014)

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trade with the United States would have virtually no impact

on the economy of the United States, which could easily

shift such a relatively small volume of trade elsewhere.

Since the threat of the traditional retaliation really

depends on the market size and trade volume of the

retaliating country in relation to the non-complying

country, the traditional retaliation will be of no help for

developing countries in face of considerably larger

economies.40

United States — Subsidies on Upland Cotton 41:

In this case, the complainant, Brazil argued that the

subsidies amounting to US$ 12.9 billion paid to the US

farmers growing upland cotton during the 1999-2002 period

and others mandated through to 2007 by the US Farm Bill

violated the WTO rules. Such subsidies as per Brazil

increased the production of high cost US upland cotton,

increased its export and suppressed the prices in the US,

the World and Brazil. Brazil argued that the US cotton

subsidy programmes caused ‘serious prejudice’ to the

interests of Brazil, contravening Article 5(c) of the

Subsidies and Countervailing Agreement which provides that

no member should cause adverse effects to the interests of

other members. Brazil further argued that the US cotton step

2 programme and US export credit guarantees for all40 Id.41 DS267

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commodities were prohibited subsidies under Article 3 of the

Subsidies and Countervailing Agreement. The Panel ruled

largely in favour of Brazil. It charged the US for

practicing trade distorting measures like marketing loans,

market loss assistance and counter cyclical payments and for

wrongly classifying direct payments on cotton. The Panel

also judged that the US Domestic Support measures caused

‘serious prejudice’ to Brazilian interests. The Panel

therefore asked the US to withdraw these subsidies entirely

or to take appropriate steps to negate its adverse effect.

Consequently, US appealed before the Appellate Body and the

Appellate Body issued its report on 3rd March 2005,

upholding the Panel’ ruling on all major points of the

dispute. With respect to the ‘serious prejudice’, the

Appellate Body upheld the Panel’s finding that the

challenged price-contingent subsidies caused significant

price suppression within the meaning of Article 6.3(c) of

the Subsidies and Countervailing Agreement. In August 2009,

the WTO Arbitration Panel was assigned to determine the

level of retaliation and it announced that Brazil’s trade

countermeasure against US goods and services could include:

(a) a fixed amount of $147.3 million in response to the US

Cotton programme or (b) a variable amount based on guarantee

program spending. It also ruled that Brazil would be

entitled to cross-retaliation if overall retaliation amount

exceeded a formula based variable annual threshold. Brazil

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had requested to suspend concessions or other obligations

under GATT 1994 and the GATS and TRIPS agreements. The

arbitrators differentiated between two different kinds of

goods, namely, the ‘capital goods, intermediate goods and

other goods’ that constituted inputs into Brazil’s economy

and ‘consumer goods’. The arbitrators held that suspension

of concessions or other obligations in relation to imports

of capital, intermediate or other essential inputs would

harm Brazil’s domestic economy, and was therefore not

practicable or effective. However, considering the total

amount of consumer goods Brazil imported from the US in

2007, the arbitrators ruled that there was no basis for

Brazil to determine the suspension of concession or other

obligations in the entire range of consumer products to be

impracticable or ineffective. After careful calculation, the

arbitrators held that there were enough imports of consumer

goods for Brazil to target to retaliate without causing

‘serious and unreasonable cost’ to itself.42

Now, the authorization granted to Brazil can be seen to have

induced settlement of the dispute between Brazil and the US.

On 21 December 2009, Brazil announced its intention to

impose retaliatory trade sanctions against US goods and

services in 2010 amounting to USD 829.3 million. Brazil also

announced a preliminary list of US patents and intellectual

42 T.B. Simi, Brazil-US Upland Cotton Dispute What does it Augur for Agricultural Subsidies?,http://www.cuts-citee.org/pdf/TLB05-02.pdf (Last Visited Sept. 09, 2014)

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property rights it might restrict. The threat of trade

retaliatory measures eventually had an effect. On 20 April

2010, Brazil and the US signed a Memorandum of Understanding

establishing a USD 147.3 million annual fund for technical

assistance and capacity-building for Brazil’s cotton

sector.43

However, this case brought out an issue regarding the

‘reasonable period of time’ in respect to compliance. The

reasonable period of time for the US to repeal the Step 2

payments expired on 1 July 2005.The US did not actually

withdraw the subsidies until 31 July 2006, before the

establishment of the compliance panel. In response, Brazil

sought a one-time countermeasure for the failure to comply.

However, the arbitrators rejected the claim on the basis of

the absence of a multilateral determination of non-

compliance and the fact of the non-compliance had ceased.

They also took into consideration the temporary nature of

countermeasures aimed at inducing compliance. They believed

that once such an objective had been achieved, past

incompliance should not be retrospectively punished in the

form of ‘one-time countermeasures’, even if the reasonable

period of time is not respected Now, If this view is

followed, we cannot avoid the question that if a Member can

escape being punished by withdrawing the inconsistent43 Song Guan, WTO Retaliation Rules in Subsidy-Related Cases: What Can We Learn from the US-Upland Cotton Arbitration? , 815–842, Journal of World Trade 48, no. 4 (2014)

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measures before the compliance panel determination, does the

reasonable period of time still have meaning? Under such

circumstances, the reasonable period of time for compliance

is automatically postponed to the time of establishing the

compliance panel.44

Brazil – Export Financing Programme For Aircraft45:

The case pertains to “PROEX”, an export financing support

programme of Brazil which was created by the Government of

Brazil and provides export credits to Brazilian exporters

either through direct financing or interest rate

equalization payments. Canada approached the Panel

contending that it was prohibited export subsidy. Now, in

this case at the final stage, DSB gave Canada authorization

to suspend tariff concession up to 100 percent surtax

on selected imports from Brazil. However, Canada did not

retaliate.

One of the reasons was that Canada imported goods from

Brazil amounting to approximately $1.5 billion per year, the

majority being primary materials, agricultural and low-

technology goods. Now, agricultural products were also

included among the imports that would be aggrieved if Canada

imposed a 100 percent punitive tariff as retaliation.

Further, some domestic industries such as industries of iron

44 Id.45 DS46

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products, textiles and low technology products were also

affected industries if Canada imposed a 100% punitive

tariff. On the other hand, Brazil would be able to clear

these products through other international markets, in the

light of the relatively limited quantities sold into Canada

and thus it would be Canada who would be adversely

affected.46

United States — Continued Dumping and Subsidy Offset Act of 200047:

In this case, the Byrd Amendment was a US law providing for

distribution of import duties collected as a result of

antidumping and countervailing duty among the petitioners in

a case. Now, this Act was successfully challenged before the

WTO Panel and the Appellate Body. Eight complainants sought

retaliation and were consequently authorized to retaliate

against US. But only the European Community, Canada, Japan

and Mexico actually implemented the authorized retaliation,

while, all the other developing countries, including Brazil,

Chile and India, gave up in the end. They were fully aware

of the potential risks that the suspension of concessions in

trade in goods would bring about irreparable damages to

themselves in the light of the imbalance of trade volume.

46 Intan Innayatun Soeparna, The Impact Of The WTO Retaliation From The Perspective ofHuman Rights Law, http://www.academia.edu/6141386/THE_IMPACT_OF_THE_WTO_RETALIATION_FROM_THE_PERSPECTIVE_OF_HUMAN_RIGHTS_LAW (Last Visited Sept. 10, 2014) 47 DS217

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Thus, an analysis would show that either the countries have

taken too much time in complying or the complaining

countries despite being authorized have restrained

themselves from imposing sanctions for one reason or the

other.

4.3 Advantages and Disadvantages of sanction:

Now, before analyzing the effectiveness of sanctions, it

would be essential to see some of the advantages and

disadvantages sanctions have as per various trade law

experts. Some of the advantages are:

Medium to show discontent and seek redressal:

One of the purposes served through sanctions is said to be

that it provides a platform for the complainant to signal

its outrage, placate the injured domestic constituency, and

close the chapter so that it can move on.

Acts as an external pressure to change internal laws

and policies:

Being retaliated against can also be useful for the

defendant government by giving it leverage at home to change

the law. The threat of sanctions changes the domestic

political scenario; however, by catalyzing the forces who

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would be hurt by the retaliation and who therefore lobby for

the required policy change.

Improves the stature of WTO:

Giving the WTO teeth improves its stature among

international organizations and engenders respect for it.

The availability of trade sanctions can be said to be a key

factor in the high number of complaints that have been

brought to the DSB.48

On the other hand, some of the Disadvantages of sanctions in

International Law are:

No Relief to Private Actors:

The DSB has no requirement that the sanctioning country

choose categories that will help the complaining private

economic actors. Indeed the DSU (unlike some other WTO48 Steve Charnovitz, Should the Teeth Be Pulled? A Preliminary Assessment of WTO Sanctions, http://www.iatp.org/files/Should_the_Teeth_Be_Pulled_A_Preliminary_Asses.pdf (Last Visited Aug. 29, 2014).

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Agreements completely ignores the complaining industry. One

could imagine a requirement that any import duties collected

in trade sanctions be paid to the complaining industry, but

the DSU does not do that.

Reverse Effect:

One of the biggest disadvantages of WTO sanctions is that

they are badly aimed. For example, in the hormones cases,

the United States and Canada imposed high tariffs on EU

exports which frustrate domestic users who suffer a loss of

choice and probably have to pay higher prices for substitute

products. The sanctioning country does entail some overall

efficiency losses, and could end up getting hurt as much or

more than the target country.

Against the basic concept of Free Trade:

In approving trade sanctions for commercial reasons, the WTO

undermines its own principles in favor of trade. When the

importing nation is voluntarily imposing the tariff, it is

making a statement that such tariffs are welfare-enhancing.

Thus, free trade which is said to be propagated by the WTO

as its main objective per se is seemed to be hit by

sanctions.

Undermines Intellectual Property Rights:

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In many cases, it has been seen that for cross-retaliation,

that intellectual property rights as the sector to retaliate

has been allowed. One thing to be kept in mind is that the

suspension of obligations under the TRIPS Agreement (the

Agreement on Trade-Related Aspects of Intellectual Property

Rights) interferes with private rights owned by natural or

legal persons and should not therefore be taken lightly.

Adversely effects Human Rights:

Trade sanctions also adversely effects Human Rights in both

the violating country and the country imposing sanctions.

The freedom to engage in voluntary commercial intercourse is

a basic human right that the WTO/DSB pays no attention to in

authorizing trade sanctions. In the process, the DSB does

not even take into account the impact on innocent

individuals.

Favors Larger Economies:

One of the disadvantages of sanctions as per the trade law

experts is said to be that it favors large economies. A

small country may cause a small amount of “nullification or

impairment” and therefore the sanction against it would be

small. As a plaintiff, a smaller country would not be able

to inflict much harm upon a larger country.49

49 Id.74 | P a g e

Chapter V – Conclusion and Suggestions

5.1 An Analysis of the Effectiveness of Sanctions:

Based on the study of sanctions and how they have been used

in various cases, one can conclude that the Adjudicating

Bodies have tried to use sanctions to inducing compliance by

countries that have violated their obligations under the

respective agreements. However, it is also clear that it has

not been successful to a major extent and carries with it

certain major glitches pertaining to the following aspects:

o Developing Countries:

From a study of cases in the preceding chapters it is clear

that the developing countries have been reluctant in

implementing retaliatory measures despite being authorized

by the DSB to do so. At the maximum, these countries like

Brazil, Ecuador, Antigua and Barbuda have threatened to

impose them but have not done so. Ecuador and Anitgua and

Barbuda had obtained rights to cross-retaliate in the sector

of intellectual property rights. Now, the reason behind the

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reluctance shown by the developing countries is that

retaliatory measures would adversely affect the developing

countries more than it would affect the violating countries.

Say for instance, an import tariff on a small country pushes

up its domestic import price, which in turn leads to higher

domestic production and less consumption on the

importable. Without a doubt, such a small country bears

a dead weight loss due to both production and consumption

distortions. Therefore, this term will aggravate domestic

users, who suffer a loss of choice and probably have to pay

higher prices for substitute products; otherwise if

a small country is retaliated, the import tariff will boost

the price of exported product, which means domestic

users particularly in a large country will acquire

substitute product from different exporter country but at

less price. Furthermore, the competition among exporters

from developing countries is fierce, since developing

countries are typically exporting similar products.50

In E.C. Bananas and E.C. Hormones case, the US government

had imposed high tariffs on imports from E.C. But, this

frustrated even the domestic users in the US who had

suffered loss of choice and had to pay higher price for

substitute products.

50 Intan Innayatun Soeparna, The Impact Of The WTO Retaliation From The Perspective ofHuman Rights Law,http://www.academia.edu/6141386/THE_IMPACT_OF_THE_WTO_RETALIATION_FROM_THE_PERSPECTIVE_OF_HUMAN_RIGHTS_LAW (Last Visited Aug. 10, 2014)

76 | P a g e

o Against the Basic Concept of Free Trade:

One of the negative features of sanctions is that it

encourages trade discrimination and is thus against the

concept of free trade. The basic postulate on which the WTO

seems to work is to reduce trade barriers and ensure free

trade among its members. Further, it undermines the WTO as a

rule based system. If the illegal act of one party is met by

an authorization for another party to reciprocate with

another illegal act, then it is like deviating from the

basic rule of law.51

o TRIPS or other sectors:

Now, as discussed in the preceding chapters, a party has the

option to cross-retaliate as well that is to say,

retaliation under another WTO agreement. Now, some consider

it advantageous as by the possibility of suspending under

TRIPS, small countries might gain leverage over large

countries and induce compliance through a sanction that

minimizes damage to its own economy. However, as mentioned

in the preceding para, this is against the rule of law.

Further, it amounts to disregarding multilateral treaties on

intellectual property.52

Besides, in cross retaliation, innocent private parties have

to face the rod for no wrong on their part51 Steve Charnovitz, Rethinking WTO Trade Sanctions,http://www.jstor.org/stable/pdfplus/2674626.pdf (Last Visited Aug. 27,2014).52 Id.

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Further, for instance, assume that a retaliatory member

suspends its copyright obligations under TRIPS by uploading

on websites, downloadable movies of the targeted country

either at discounted prices or for free as a part of

retaliation. Now, the fact that such products will be

accessible all around the world, the complexity arises

regarding how a retaliating Member will ensure that the form

of suspension corresponds to the level of nullification or

impairment.53

5.2 Suggestions for reforms:

Compensation and Imposing fines:

While retaliation seems to work when threatened by a large

country against a smaller one, and has worked as between two

large countries, it may not be an effective remedy for a

small country. One obvious possible change would be to

provide for the payment of fines or damages. One obvious

problem would be the disparity in fine-paying ability among

WTO Members. The system would have to be designed to avoid

the possibility that rich Members could effectively buy

their way out of obligations in a way not available to the

poor Members. One alternative would be to tie the amount of

fines to the size of the Member’s economy, or otherwise

53 SHERZOD SHADIKHODJAEV, RETALIATION IN THE WTO DISPUTE SETTLEMENT SYSTEM, 93, KLUWER LAW INTERNATIONAL, NETHERLANDS, 2009.

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provide for a sliding scale that would minimize

“discrimination” against poor Members. To avoid the

perception that the payment of fines is simply an

alternative to compliance, the fines could be assessed

annually (or on some other periodic basis) and could be

increased over time. Such a system could serve as a method

of rebalancing if the fines are paid to the Member owed

compliance and could promote prompter compliance if the

fines are increased over time.54

Even various developing countries over the period of time

have suggested monetary compensation as a reform to make

compliance procedure effective. 55

Further, imposing fines could act as some kind of cost on

the violating party for delay in compliance with its

obligations under WTO.

Membership Sanction:

Another possible option could be to withdraw a benefit from

being a member of the international organization. Say for

instance, withdrawal of a right to vote or the ability to

obtain financial or technical assistance or say going to the

54 William J. Davey, The WTO Dispute Settlement System: How Have Developing CountriesFared?,http://luc.edu/media/lucedu/law/students/publications/ilr/pdfs/2008pdfs/davey_wto_dispute_paper.pdf (Last Visited Sept. 10, 2014) 55 Jordan Shepherd, Maria V. Sokolova, Wagari Negassa Wakjira, Effective Compliance in the DSU: The Mechanics of Monetary Compensation as a form of Reparation, http://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTEI/Law%20Clinic/memoranda2012/Final%20Memo%20-%20DSU%20Review%20-%2008062012.pdf (Last Visited Sept. 11, 2014)

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extent of taking away the right of the scofflaw country to

approach WTO for settlement of its disputes until compliance

is induced.56

Collective Criticism:

A collective criticism from other countries at the

International Forums might help in creating political

pressure on the non-complying country and thereby pressurize

the country to comply with its obligations under the

respective Agreements. For, a country that does not respect

the rulings of the Panel or the Appellate Body should be

treated in the same manner so as to induce compliance.

5.3 Conclusion:

Thus, once it is determined that a country has violated its obligations under the

WTO, rather than allowing retaliation, the researcher feels that the remedy be

narrowed down to the following two:

The violating country continues to pay compensation (i.e. to say an

amount of compensation equal to the losses already incurred and an

amount in the form of fine) annually till the date it complies with the

ruling of the Panel/Appellate Body.

The violating country is restrained from approaching the DSU for

settlement of its disputes and is restrained from joining as a third party till

the date it complies with the rulings of the Panel/Appellate Body.56 Steve Charnovitz, Rethinking WTO Trade Sanctions,http://www.jstor.org/stable/pdfplus/2674626.pdf (Last Visited Aug 29,2014)

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One of the positive aspects of the above mentioned alternatives are that these

would have less trade distortive effect in comparison to the current remedies.

Further, as the complaining country does not increases tariff or imposes any

other kind of restrictions, therefore, the probability of trade diversion in other

sectors is also eliminated. Besides, this should be made enforceable as an award

in the domestic courts of the countries. If this is done then, the probability of

improving the enforcement aspect of the DSB will increase and the trade

distortive effects of imposing sanctions would also be reduced.

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BIBLIOGRAPHY:

A. PRIMARY SOURCES-

i. LEGISLATIONS

1. General Agreement on Tariffs and Trade 1947.

2. General Agreement on Tariffs and Trade 1994.

3. Marrakesh Agreement Establishing the World Trade

Organization

4. Understanding on Rules and Procedures Governing the

Settlement of Disputes.

B. SECONDARY SOURCES

i. BOOKS:

1. David Palmeter and Petros C. Mavroidis, Dispute

Settlement in the World Trade Organization, Practice

and Procedure, 2nd Edn., Cambridge University Press,

UK, 2004

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2. Sherzod Shadikhodjaev, Retaliation in the WTO

Dispute Settlement System, Kluwer Law International,

Netherlands, 2009.

3. Chad P. Brown and Joost Pauwelyn, The Law, Economics

and Politics of Retailiation in WTO Dispute

Settlement, Cambridge University Press, UK 2010.

4. Autar Krishen Koul, Guide to the WTO and GATT,

Economics, Law and Politics, 2nd Edn., Satyam Law

International, Delhi, 2010.

ii. ARTICLES-

1. Mitchell, Andrew D. & Constantine Salonidis,

David’s Sling: Cross-Agreement Retaliation in

International Trade Disputes, 467, Journal of

World Trade 45, no. 2 (2011)

2. Song Guan, WTO Retaliation Rules in Subsidy-

Related Cases: What Can We Learn from the US-Upland

Cotton Arbitration? , 815- 842, Journal of World

Trade 48, no. 4 (2014)

3. Bernard O’ Connor, Remedies in the World Trade

Organization Dispute Settlement System – The

Bananas and Hormones Cases, 245-266, Journal of

World Trade, 38(2), 2004

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iii. WEBSITES-

4. Steve Charnovitz, Rethinking WTO Trade Sanctions,

http://www.jstor.org/stable/pdfplus/2674626.pdf

(Last Visited Aug. 27, 2014).

5. Kajsa Persson, The Current and Future WTO Dispute

Settlement System – Practical Problems discussing Article 21.5 and

Article 22 of the DSU,

https://gupea.ub.gu.se/bitstream/2077/9862/1/Kajsa

_Persson_Thesis.pdf (Last Visited Aug. 26, 2014)

6. Barbara Marchetti, The WTO Dispute Settlement System:

Administration, Court or Tertium Genus?,

http://www.iilj.org/gal/documents/marchetti.pdf

(Visited on 29-08-2014)

7. Anwarul Hoda, Dispute Settlement in the WTO, Developing

Countries and India,

http://www.icrier.org/pdf/Policy_Series_No_15.pdf

(Last Visited Aug. 29, 2014)

8. Asim, Imdad Ali, Non-Compliance and Ultimate Remedies

under the WTO Dispute Settlement System, Journal of Public

and International Affairs, Volume 14/Spring 2003,

http://www.princeton.edu/jpia/past-issues-

1/2003/1.pdf (Last Visited Sept. 11, 2014)

9. YE Siyu, The Legal Analysis of the Cross retaliation Under the

WTO Framework,

http://lib.ugent.be/fulltxt/RUG01/002/061/021/RUG0

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1-002061021_2013_0001_AC.pdf (Last Visited Aug.

29, 2014)

10.William J. Davey, Implementation in WTO Dispute

Settlement: An Introduction to the Problems and Possible Solutions,

http://www.rieti.go.jp/jp/publications/dp/05e013.p

df (Last Visited Aug. 29, 2014)

11.Joost Pauwelyn, The Role of Public International Law in the

WTO: How Far Can We Go?,

http://scholarship.law.duke.edu/cgi/viewcontent.cg

i?article=1065&context=faculty_scholarship (Last

Visited Aug. 29, 2014)

12.Gary Horlick & Judith Coleman, The Compliance

Problems Of The WTO, Arizona Journal of

International and Comparitive Law, Vol 24, No.1,

2007, http://www.ajicl.org/AJICL2007/Horlick

%20article.pdf (Last Visited Sept. 11, 2014)

13.T.B. Simi, Brazil-US Upland Cotton Dispute What does it Augur

for Agricultural Subsidies?,

http://www.cuts-citee.org/pdf/TLB05-02.pdf (Last

Visited Sept. 09, 2014)

14.Intan Innayatun Soeparna, The Impact Of The WTO

Retaliation From The Perspective of Human Rights Law,

http://www.academia.edu/6141386/THE_IMPACT_OF_THE_

WTO_RETALIATION_FROM_THE_PERSPECTIVE_OF_HUMAN_RIGH

TS_LAW (Last Visited Sept. 10, 2014) 

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15.Jordan Shepherd, Maria V. Sokolova, Wagari Negassa

Wakjira, Effective Compliance in the DSU: The Mechanics of

Monetary Compensation as a form of Reparation,

http://graduateinstitute.ch/files/live/sites/

iheid/files/sites/ctei/shared/CTEI/Law%20Clinic/

memoranda2012/Final%20Memo%20-%20DSU%20Review%20-

%2008062012.pdf (Last Visited Sept. 11, 2014)

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