WTO Dispute Settlement Reform Hinges on Washington

There are few issues today on which trade lawyers in Washington, DC, will agree.

But virtually all US trade lawyers – Democrats, Republicans, administration, Congress or private sector – agree that the now defunct Appellate Body at the World Trade Organization was seriously defective and in need of a major overhaul.

To understand this point is to understand what lies at the heart of the paralysis of the WTO dispute function and may offer clues as to how the system could be reformed. Ministers of the 164 Member WTO meeting in Abu Dhabi this week (26-29 February) will take up the question of how to repair the broken dispute settlement system. They will not get very far, not least because the man charged with leading the reform discussions, Marco Molina of Guatemala, was mysteriously fired by his government days before the Conference was due to start.

Problematic though this may be it is not the biggest obstacle to reform. Simply put, this issue is so politically charged in Washington that there is no way the Biden Administration will accept the restoration of the Appellate Body before the 5 November presidential election.

Reform of the WTO means different things to different delegations but the one issue that appears on every Member’s list is the reform of the dispute settlement system.

For more than four years, virtually every other WTO member has called on the United States to accept the reinstatement of the two-tiered dispute process. During meetings of the Dispute Settlement Body, they have pleaded with US officials to tell them what they wanted by way of reforms. But US officials have offered little apart from expressing worries that even if reforms are agreed there were no guarantees that the body would not revert to the past practices which Washington has so sharply criticized.

Mr. Molina’s thankless task

At the 2022 WTO Ministerial Conference in Geneva, WTO Members agreed to “commit to conduct discussions with the view to having a fully and well-functioning dispute settlement system accessible to all Members by 2024.” For most WTO Members this meant deciding at the Ministerial Conference, the occasion on which most important decisions are taken. But the United States never accepted this and those counting on a deal in Abu Dhabi have badly misread the political landscape in Washington.

Since that Ministerial Conference Members have held numerous informal discussions under the leadership of Mr. Molina, who had by all accounts done stellar work. His 16 February draft Ministerial “Decision” is the only dispute settlement reform document currently in play.

Aware that the Americans believe that overemphasis on litigation has stymied the WTO’s negotiating function and turned the organization into a trade court, Mr. Molina drafted a text heavy with references to resolving disputes through mediation, good offices and arbitration. The text attempts to draw up ways to streamline the often cumbersome and lengthy dispute procedures.

The process for appointing individuals to dispute panels, including criteria for such panellists, is more clearly spelled out. For the first time, reference is made to the need for gender balance when Members submit candidates for inclusion on the indicative list from which panelists would be chosen. The role of the Director-General in selecting the panelists is described in more precise detail and would restrict the WTO chief’s options in proposing panellists.

General concerns about the voluminousness of submissions by parties to a dispute and lengthy statements in panel hearings Mr. Molina’s text puts precise word count limits on first submissions to panels (30,000 words), on second submissions to panels (24,000 words) and limits opening statements from parties to 60 minutes. In the case of “extraordinarily complex” disputes these limits may be extended.

Strict timetables are spelled out for the submissions and the panels themselves are required to wrap up their work and issue their rulings within nine months, 12 if the dispute is “extraordinarily complex.”

Most of the Members could accept the tone and content of these suggestions although, predictably India raised objections to specific elements of the text claiming that these proposed reforms would disadvantage developing countries. Specifically, the Indians – along with Bangladesh, Egypt, Indonesia and South Africa – rejected suggestions that individual disputes could be classified as “extraordinarily complex.” The five countries also questioned the emphasis on mediation or other alternative venues for dispute settlement. Maria Pagan, US Ambassador to the WTO, praised Mr. Molina’s efforts but said his text was neither perfect nor the basis for consensus.

Nonetheless,  the text is a good faith effort at resolving the procedural weaknesses which have plagued dispute settlement for more than a decade.

Washington’s Appellate Body Issues

This is all well considered and welcome, if a bit lawyerly. But on the burning issue of reforming the Appellate Body, the text is blank. Instead, there is an empty space which says “Work in Progress.” So loaded is the term Appellate Body for the Americans that the text refers not to an Appellate Body but rather to an “Appeal/Review Mechanism”

Although the Trump administration is generally assumed to have started the process of blocking appointments to the Appellate Body, it was actually the Obama Administration that initially blocked reappointments of sitting jurists. In those cases, however, other candidates were put forward and agreed.

When Donald Trump became President in 2017, his US Trade Representative Robert Lighthizer not only blocked reappointments but derailed any attempt to install other candidates as well. By December 11, 2019, the WTO’s Appellate Body was down to just one member, two short of the quorum needed to sit an appeal (a full Appellate Body had seven members).

Under the rules of the Dispute Settlement Understanding any party to a dispute is entitled to an appeal. If this right is no longer available, dispute cases cannot be resolved. This has led Members to appeal “into the void” rendering the case permanently in limbo. So far this has happened 30 times.

The longstanding US unhappiness with the Appellate Body was initially viewed by other WTO Members as a case of sour grapes. When it lost an appeal, Washington pointed the finger at the Appellate Body for overreaching its mandate, or imposing new rights and obligations on Members. Such charges were never levied when it won.

But Trump administration officials energetically built their case and slowly began to persuade other delegations that something was amiss with the second tier of the dispute settlement system. USTR officials including Mr. Lighthizer and his deputy and US Ambassador to the WTO, Dennis Shea, unveiled a blistering critique of the Appellate Body, its functions, and its decisions. While some of these findings were subjective, many of them were factual and persuasive.

These points were made forcefully in key WTO meetings including the General Council and the Dispute Settlement Body and were compiled in 2020 in a 174-page report entitled appropriately enough, Report on the Appellate Body of the World Trade Organization.

The accusations were to the point and damning. The Appellate Body had “undermined confidence in the World Trade Organization and a free and fair rules-based trading system.” In going beyond its mandate the Appellate Body, raise doubt as to whether “existing or new rules will be respected as written.” The judicial overreach practiced by the Appellate Body had “converted the WTO from a forum for discussion and negotiation into a forum for litigation.”

The USTR hammered the Appellate Body for perpetually missing the mandatory 90 day time limit for producing a ruling. According to their report, up until 2011, the Appellate Body did well in meeting its deadlines to produce rulings within 90 days. Over its first 15 years, the deadline was met in 87 of the 101 appeals. In those cases where the limit was breached,  Appellate Body members informed the parties in advance and explained why. But after 2011, the average time required to issue the appeal jumped to 133 days. From May 2014, every appeal exceeded the 90 day limited and the average time required to conclude an appeal was 149 days.

Moreover, USTR charged that even after the terms of sitting jurists has expired, they continued to sit appeals – and get paid.

Beyond this what particularly infuriated USTR was that, in their view, the Appellate Body issued “advisory” opinions that did not pertain the case at hand in order to “make law.”

While the Dispute Settlement Understanding, which sets the rules for dispute resolution, stresses the importance of consistency it does not permit the Appellate Body to establish precedent with its rulings. Yes, according to USTR, this is precisely what the Appellate Body had done, building jurisprudence with each of its reports.

The rulings themselves tended to support China, said USTR, particularly the 2011 ruling on the appeal of a case involving US anti-dumping and countervailing duties on Chinese products. USTR argues that the Appellate Body narrowly defined the term “public body” in such a way as to insist that such a body need be “vested with governmental authority” a definition which would not capture the power of the Chinese Communist Party or state-owned enterprises to influence policy.

But perhaps the case which rankled USTR, and many others in Washington, the most was its ruling banning the use of anti-dumping investigation methodology known as zeroing. Under this methodology, the US Commerce Department would investigate imports across a range of regions in the United States. In those markets where the import price was lower than the domestic price the difference in prices would be used to calculate the margin of dumping. But in those areas where the import price was above the domestic price the value assigned to that margin would not be the price differential but zero. This method of calculation would ensure higher dumping margins.

In a 2006 ruling in a case brought against the United States by the European Union, the Appellate Body said the metholodology could be challenged and upheld the original panel decision that the practice did not comply with WTO rules. The jurisprudence laid out by the Appellate Body in this ruling formed the basis of similar rulings against the United States in the years to come.

In the report, USTR says that American unhappiness with the Appellate Body went back decades, highlight a 2002 Senate Report for the Trade Act which charged that the Appellate Body burdened the United States with additional obligations while diminishing its existing rights. A 2016 report from six previous US Trade Representatives charged the Appellate Body with much the same thing.

Lighthizer is not amused

The distaste for the Appellate Body in Washington is bipartisan and borders on universal, but Mr. Lighthizer’s loathing is particularly acute.

In his 2023 book, No Trade Is Free, Mr. Lighthizer charges that “The Appellate Body is an experiment that has gone off the rails” and that it “ran roughshod over procedural rules intended to curtail its power.”  He concludes by saying “For decades the AB has taken the side of unfair trade.”

The extent of Mr. Lighthizer’s animus toward the Appellate Body can be better understood by understanding his background.

Mr. Lighthizer has been a major player on the Washington trade scene for decades. He worked as Staff Director for the powerful Senate Finance Committee from 1978 until1983 when he was appointed as Deputy US Trade Representative, a position he held for two years before going into private practice. As an attorney, he gained renowned for representing US companies, particularly steel companies, which faced stiff competition from foreign competition.

The commonly employed tools for curbing steel imports are the application of anti-dumping duties to raise the price of cheap steel dumped on markets or countervailing duties which were applied to offset subsidized exports. But in the 1980s, the industry also benefitted from “voluntary” export restraint agreements (VRAs) negotiated with large steel producing countries like Japan, Germany and the Netherlands.

Beginning in 1986, the member countries of the General Agreement on Tariffs and Trade engaged in a wide-ranging trade negotiation known as the Uruguay Round, which was concluded in 1994. During these negotiations many US trade partners sought to do away with the US imposed VRAs applied to imports of steel and autos.

Washington agreed to scrap the VRAs while negotiating rules for trade in services and the protection of intellectual property that greatly benefitted US companies. The decision to end VRAs, which was opposed by the steel industry, made the preservation of existing methodologies for anti-dumping investigations even more important. Mr. Lighthizer followed the negotiations closely and was in Geneva when the talks concluded in December 1993.

A large number of influential Senators and Representatives had warned the Clinton Administration that failure to preserve Washington’s right to impose such duties as it deemed necessary would lead Congress to reject the legislation required to inscribe the Uruguay Round into law.

One important methodology element that Washington sought to preserve was zeroing.

On its face, zeroing may not seem fair, but fairness is not the essential criteria in determining whether it complies with WTO rules. What matters is what the ministers had negotiated. Mr. Lighthizer and many other trade lawyers from the United States and elsewhere, believed indeed that zeroing had been preserved. His assessment of that outcome proved to be critical in obtaining the necessary congressional approval for the Uruguay Round.

But that’s not how the Appellate Body saw it. To say that this infuriated Mr. Lighthizer would be a gross understatement. Together with the rulings on “public bodies” and the procedural malfeasance practiced by the Appellate Body this was enough to provoke Mr. Lighthizer to dispense with the Appellate Body through his systematic blocking of appointments.

Ironically, Mr. Lighthizer actually sought a seat on the Appellate Body in 2003 but was passed over as the American nominee by the George W. Bush administration in favor of Merit E. Janow, now dean at Columbia University’s School of International and Public Affairs

Conclusion

Mr. Lighthizer’s harsh views of the Appellate Body are important because he continues to be a close advisor to Donald Trump and his campaign. There seems every likelihood that should Mr. Trump regain the White House on November 5, Mr. Lighthizer would return to a prominent role in the Trump administration.

Mr. Lighthizer is by no means alone in directing vitriol at the Appellate Body. The AB’s many detractors including the current US Trade Representative Katherine Tai. Given this animosity, it seems almost inconceivable that the Biden administraiton would agree to bring back the Appellate Body in any form. To do so would be to hand Mr. Trump and Mr. Lighthizer an election year gift which would be used against Mr. Biden in trade adverse, working class swing states like Michigan, Pennsylvania and Wisconsin.

Beyond this political dynamic, efforts to reform the dispute settlement system have been crippled by differences among WTO members. Many members, including India and China, insist on returning to a two-tiered dispute system. They are not prepared to cherry pick certain reform provisions while leaving the fate of the Appellate Body on the sidelines. The informal process led by Mr. Molina did not produce any breakthroughs but it was well run and at least it provided WTO members with a platform for discussing the way forward. Now this too is has been upended.

Hopes for making any real headway on this matter in Abu Dhabi this week are understandably low. Too many factors are conspiring against a productive outcome any time soon. Even without these obstacles, the pathway to resuscitating a two-tiered dispute settlement system is fraught with difficulties. In the meantime, the United States is prepared to play a waiting game because, in Washington, the WTO has few friends and the Appellate Body has even fewer.