Dispute Settlement Mechanism under the WTO

INTRODUCTION

The WTO’s procedure is a mechanism which is used to settle trade dispute under the Dispute
Settlement Understanding. A dispute arises when a member government believes that another
member government is violating an agreement which has been made in the WTO. However, these
agreements are consequential to dialogues between the member States and hence they are the
writers of such agreement. In case any dispute arises, the ultimate duty to settle it lies in the hands
of member government through Dispute Settlement Body. This system already achieved a great deal
and providing some of the necessary attributes of security and predictability which trader and other
market participants need and which is called for in the Dispute Settlement Understanding under
Article 3.

The WTO’s Dispute Settlement Understanding (DSU) advanced out of the ineffective means used
under the GATT for settling disagreements among members. Under the GATT, procedures for
settling disputes were ineffective and time consuming since a single nation, including the nation
whose actions was the subject of complaint could effectively block or delay every stage of the
dispute resolution process. It remains to be seen whether countries will comply with the new WTO
dispute settlement mechanism, but thus far the process has met with relative success.

During the phase of 1980’s many new interest groups were fascinated by the GATT’s procedures
which were held as model, and it was used by them for the purpose of accomplishing their goals.
However, service sectors and intellectual property sectors who wanted to engage in multilateral
agreements through GATT’s Uruguay round conference were influenced due to the success dispute
settlement procedures and in role in augmenting the treaty rule compliance.

The DSU was designed to deal with the difficulty of reducing and eliminating non-tariff barriers to
trade. A non-tariff trade barrier can be almost any government policy or regulation that has the
effect of making it more difficult or costly for foreign competitors to do business in a country. In the
early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods
and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all
but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have
become more important since, in the absence of tariffs, only such barriers significantly distort the
overall pattern of trade-liberalization. Frequently, such non-tariff trade barriers are the inadvertent
consequence of well-meaning attempts to regulate to ensure safety or protection for the
environment, or other public policy goals. In other cases, countries have been suspected of
deliberately creating such regulations under the guise of regulatory intent, but which have the effect
of protecting domestic industries from open international competition, to the detriment of the
international free-trade regime.

BACKGROUND

From its inception in 1947, the General Agreement on Tariffs and Trade (GATT), signed by the
United States and ultimately by a total of 128 countries, provided for consultations and dispute
resolution, allowing a GATT Party to invoke GATT dispute settlement articles if it believes that
another Party’s measure, whether violative of the GATT or not, caused it trade injury. Because the
GATT did not set out a dispute procedure with great specificity, GATT Parties developed a more
detailed process including ad hoc panels and other practices. The procedure was perceived to have
certain deficiencies, however, among them a lack of deadlines, a consensus decision-making
process that allowed a GATT Party against whom a dispute was filed to block the establishment of a
dispute panel and the adoption of a panel report by the GATT Parties as a whole, and laxity in
surveillance and implementation of panel reports even when reports were adopted and had the status
of an official GATT decision.

Congress made reform of the GATT dispute process a principal U.S. goal in the GATT Uruguay
Round of Multilateral Trade Negotiations, begun in 1986 and concluded in 1994 with the signing of
the Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement). The WTO
Agreement requires any country that wishes to be a WTO Member to accept all of the multilateral
trade agreements negotiated during the Round, including the General Agreement on Tariffs and
Trade 1994, an updated version of the GATT adopted in 1947, as well as the Understanding on
Rules and Procedures Governing the Settlement of Disputes, applicable to disputes arising under
virtually all WTO agreements.
WTO DISPUTE PANELS AND THE BALANCE BETWEEN TRADES

Agreements and National Policy

Since the various agreements that constitute the WTO cover such a wide range of topics, dispute
settlement panelists find that a number of subjects come under their authority. This places WTO
dispute panels in a delicate position. On the one hand they must identify cases where nations are
failing to comply with international trade agreements; on the other, they must be cautious when
making recommendations that reverse the preferences of national governments.

Thus far, in the decisions of the panels and the Appellate Body, there has been a tendency to write
decisions in a way that minimizes the burden on nations to change their regulations and laws in
order to comply with their WTO trade obligations. This does not mean that dispute settlement
panels have not found nations in violation of the trade agreements. When they have, however, they
have left national governments with a variety of options in order to come into compliance.

Two cases in which panel reports were adopted reflect the WTO’s tendency to avoid becoming
overly involved in the internal regulatory affairs of nations. These cases have been selected as
examples because they have received a lot of attention, but the trend described can be found in each
case where a panel report has been issued. Both examples are complaints by the United States, one
against the European Union (EU) regarding restrictions on import of hormone treated meat, and the
other against Japan regarding the photographic film industry. In the first case the United States won
the concessions it sought; in the second case the panel found no evidence of violation of the trade
agreements.

European Hormone Case

In the European Hormone Case the panel found the scientific evidence for the import restrictions on
beef treated with growth hormones to be insufficient to justify the restriction on trade, but, in effect,
left open a wide variety of ways for the EU to comply. The EU is conducting further studies in the
hopes of justifying the ban. This was a case where the WTO panel clearly confronted the
democratic will of the people, as expressed through their national legislatures and the European
Parliament, since the hormone restrictions were initially adopted under intense public pressure. The
panel sided with the United States by finding that the provisions were arbitrary and had the effect of
restricting trade, but left options for the EU as well by suggesting that more complete scientific
evidence would justify the ban. Alternatively, the panel indicated that technical changes in the way
the policy is implemented could reduce the policy’s negative impact on trade. Still, the panel was
firm in ruling that the current policy is inconsistent with the SPS Agreement, and the EU will have
to make substantive changes to come into compliance. If it does not, the EU will be required to
offer other trading concessions to compensate for losses, some $200 million per year according to
the United States. The EU has until 1999 to comply.

Japan Alcohol Case

A U.S. complaint against Japan that resulted in a dispute settlement panel decision adopted in July
of 1996 will require a 40 per cent reduction of the Japanese tax on alcohol imports, which will add
tens of millions of dollars in exports to U.S. producers. The panel agreed with U.S. claims that the
Japanese Liquor Tax Law that provided for lower taxes on a Japanese produced liquor called
shochu, versus a higher one on whiskey, cognac and wine spirits, was a violation of the GATT
Article III, Section 2, national treatment provisions.

The Uruguay Round package of agreements not only carries forward original GATT obligations,
such as according goods of other parties non-discriminatory treatment, not placing tariffs on goods
that exceed negotiated or “bound” rates, generally refraining from imposing quantitative restrictions
such as quotas and embargoes on imports and exports, and avoiding injurious subsidies, but also
expands on these obligations in new agreements such as the Agreement on Agriculture, the
Agreement on the Application of Sanitary and Phytosanitary Measures, the Agreement on
Antidumping, and the Agreement on Subsidies and Countervailing Measures. Congress approved
and implemented the WTO Agreement and the other agreements negotiated in the Uruguay Round
in the Uruguay Round Agreement Act, P.L. 103-465. The agreement entered into force on January
1, 1995.

OUTLINE OF THE DISPUTE SETTLEMENT UNDERSTANDING

The Dispute Settlement Understanding (DSU) officially known on rules and procedure Governing
the Settlement of Disputes, establishes rules and procedures that manage various disputes arising
under the Covered Agreements of the Final Act of the Uruguay Round. There had been total 314
complaints brought by the member of WTO. All WTO member nation-states are subject to it and
are the only legal entities that may bring and file cases to the WTO. The DSU created the Dispute
Settlement Body (DSB), consisting of all WTO members, which administers dispute settlement
procedures.

It provides strict time frames for the dispute settlement process and establishes an appeals system
to standardize the interpretation of specific clauses of the agreements. It also provides for the
automatic establishment of a panel and automatic adoption of a panel report to prevent nations from
stopping action by simply ignoring complaints. Strengthened rules and procedures with strict time
limits for the dispute settlement process aim at providing “security and predictability to the
multilateral trading system” and achieving “[a] solution mutually acceptable to the parties to a
dispute and consistent with the covered agreements.” The basic stages of dispute resolution covered
in the understanding include consultation, good offices, conciliation and mediation, a panel phase,
Appellate Body review, and remedies.

STAGES IN WTO

Consultations (Article 4)

The DSU permits a WTO Member to consult with another Member regarding “measures affecting
the operation of any covered agreement taken within the territory” of the latter. If a WTO Member
requests consultations with another Member under a WTO agreement, the latter Member must enter
into consultations with the former within 30 days.

If the dispute is not resolved within 60 days, the complaining party may request a panel. The
complainant may request a panel before this period ends if the other Member has failed to enter into
consultations or if the disputants agree that consultations have been unsuccessful.

Establishing a Dispute Panel (Articles 6, 8)

A panel request, which must be made in writing, must “identify the specific measures at issue and
provide a brief summary of the legal basis for the complaint sufficient to present the problem
clearly” (Art. 6.2). Under GATT and now WTO dispute settlement practice, a Member may
challenge a measure of another Member “as such,” “as applied,” or both. An “as such” claim
challenges the measure independent of its application in a specific situation and, as described by the
WTO Appellate Body, seeks to prevent the defending Member from engaging in identified conduct
before the fact.

If a panel is requested, the DSB must establish it at the second DSB meeting at which the request
appears as an agenda item, unless it decides by consensus not to do so. Thus, while a defending
Member may block the establishment of a panel the first time the complaining Member makes its
request at a DSB meeting, the panel will be established, virtually automatically, the second time
such a request is placed on the DSB’s agenda. While DSB ordinarily meets once a month, the
complaining Member may request that the DSB convene for the sole purpose of considering the
panel request. Any such meeting must be held within 15 days after the complaining Member
requests that the meeting be held.

The panel is ordinarily composed of three persons. The WTO Secretariat proposes the names of
panelists to the disputing parties, who may not oppose them except for “compelling reasons” (Art.
8.6). If there is no agreement on panelists within 20 days from the date that the panel is established,
either disputing party may request the WTO Director-General to appoint the panel members.

Good Offices, Conciliation and Mediation

Unlike consultation in which “a complainant has the power to force a respondent to reply and
consult or face a panel,” good offices, conciliation and mediation “are undertaken voluntarily if the
parties to the dispute so agree.” No requirements on form, time, or procedure for them exist. Any
party may initiate or terminate them at any time. The complaining party may request the formation
of panel,” if the parties to the dispute jointly consider that the good offices, conciliation or
mediation process has failed to settle the dispute.” Thus the DSU recognized that what was
important was that the nations involved in a dispute come to a workable understanding on how to
proceed, and that sometimes the formal WTO dispute resolution process would not be the best way
to find such an accord. Still, no nation could simply ignore its obligations under international trade
agreements without taking the risk that a WTO panel would take note of its behaviour.

Panel Proceedings (Articles 12, 15, Appendix 3)

After considering written and oral arguments, the panel issues the descriptive part of its report (facts
and argument) to the disputing parties. After considering any comments, the panel submits this
portion along with its findings and conclusions to the disputants as an interim report.

Following a review period, a final report is issued to the disputing parties and later circulated to all
WTO Members. A panel must generally provide its final report to disputants within six months after
the panel is composed, but may take longer if needed; extensions are usual in complex cases. The
period from panel establishment to circulation of a panel report to WTO Members should not
exceed nine months. In practice, panels have been found to take more than 13 months on average to
publicly circulate reports.

Appellate Body Review

The DSB establishes a standing Appellate Body that will hear the appeals from panel cases. The
Appellate Body “shall be composed of seven persons, three of whom shall serve on any one case.”
Those persons serving on the Appellate Body are to be “persons of recognized authority, with
demonstrated expertise in law, international trade and the subject matter of the Covered Agreements
generally.” The Body shall consider only “issues of law covered in the panel report and legal
interpretations developed by the panel.” Its proceedings shall be confidential, and its reports
anonymous.

This provision is important because, unlike judges in the United States, the members of the
appellate panel do not serve for life. This means that if their decisions were public, they would be
subject to personal retaliation by governments unhappy with decisions, thus corrupting the fairness
of the process. Decisions made by the Appellate Body “may uphold, modify, or reverse the legal
findings and conclusions of the panel.” The DSB and the parties shall accept the report by the
Appellate Body without amendments “unless the DSB decides by consensus not to adopt the
Appellate Body report within thirty days following its circulation to the members.”

Adoption of Panel Reports/Appellate Review (Articles 16, 17, 20)

Within 60 days after a panel report is circulated to WTO Members, the report is to be adopted at a
DSB meeting unless a disputing party appeals it or the DSB decides by consensus not to adopt it.
Within 60 days of being notified of an appeal (extendable to 90 days), the Appellate Body (AB)
must issue a report that upholds, reverses, or modifies the panel report. The AB report is to be
adopted by the DSB, and unconditionally accepted by the disputing parties, unless the DSB decides
by consensus not to adopt it within 30 days after circulation to Members. The period of time from
the date the panel is established to the date the DSB considers the panel report for adoption is not to
exceed nine months (12 months where the report is appealed) unless otherwise agreed by the
disputing parties.

Implementation of Panel and Appellate Body Reports (Article 21)

In the event that the WTO decision finds the defending Member has violated an obligation under a
WTO agreement, the Member must inform the DSB of its implementation plans within 30 days
after the panel report and any AB report are adopted. If it is “impracticable” for the Member to
comply immediately, the Member will have a “reasonable period of time” to do so. The Member is
expected to implement the WTO decision fully by the end of this period and to act consistently with
the decision after the period expires.10 Compliance may be achieved by withdrawing the WTO-
inconsistent measure or, alternatively, by issuing a revised measure that modifies or replaces it.

Under the DSU, the “reasonable period of time” is: (1) that proposed by the Member and approved
by the DSB; (2) absent approval, the period mutually agreed by the disputants within 45days after
the report or reports are adopted by the DSB; or (3) failing agreement, the period determined by
binding arbitration. Arbitration is to be completed within 90 days after adoption of the reports. To
aid the arbitrator in determining the length of the compliance period, the DSU provides a non-
binding guideline of 15 months from the date of adoption. Arbitrated compliance periods have
ranged from six months to 15 months and one week. The DSU envisions that a maximum 18
months will elapse from the date a panel is established until the reasonable period of time is
determined.

Compliance Panels (Article 21.5)

Where there is disagreement as to whether a Member has complied—i.e., whether a compliance

measure exists, or whether a measure that has been taken is consistent with the WTO decision in the
case—either disputing party may request that a compliance panel be convened under Article 21.5. A
compliance panel is expected to issue its report within 90 days after the dispute is referred to it, but
it may extend this time period if needed. Compliance panel reports may be appealed to the WTO
Appellate Body and both reports are subject to adoption by the DSB.12 Compensation and
Suspension of Concessions (Article 22)

If the defending Member fails to comply with the WTO decision within the established compliance
period, the prevailing Member may request that the defending Member negotiate a compensation
agreement. If such a request is made and agreement is not reached within 20 day.

Remedies

There are consequences for the member whose measure or trade practice is found to violate the
Covered Agreements by a panel or Appellate Body. The dispute panel issues recommendations with
suggestions of how a nation is to come into compliance with the trade agreements. If the member
fails to do so within the determined “reasonable period of time,” the complainant may request
negotiations for compensation. Within twenty days after the expiration of the reasonable period of
time, if satisfactory compensation is not agreed, the complaining party “may request authorization
from the DSB to suspend the application to the member concerned of concessions or other
obligations under the Covered Agreements.”

Retaliation shall be first limited to the same sector(s). If the complaining party considers the
retaliation insufficient, it may seek retaliation across sectors. The DSB shall grant authorization to
suspend concessions or other obligations within thirty days of the expiry of the reasonable time
unless the DSB decides by consensus to reject the request. The defendant may object to the level of
suspension proposed. The original panel, if members are available, or an arbitrator appointed by the
director-general” may conduct arbitration.

Arbitration

Members may seek arbitration within the WTO as an alternative means of dispute settlement “to
facilitate the solution of certain disputes that concern issues that are clearly defined by both parties.”
Those parties must reach mutual agreement to arbitration and the procedures to be followed. Agreed
arbitration must be notified to all members prior to the beginning of the arbitration process. Third
parties may become party to the arbitration “only upon the agreement of the parties that have agreed
to have recourse to arbitration.” The parties to the proceeding must agree to abide by the arbitration
award. “Arbitration awards shall be notified to the DSB and the Council or Committee of any
relevant agreement where any member may raise any point relating thereto.”