Both sides can appeal the panel’s ruling based on points of law. Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the Dispute Settlement Body. According to the relevant WTO rules, the Appellate Body has the power to uphold, modify or reverse the legal findings and conclusions of a panel, and Appellate Body Reports, once adopted by the Dispute Settlement Body, must be accepted by the parties to the dispute.
The present crisis in the DSM of WTO stems from the fact that the Appellate Body of WTO is not functional. On 11 December 2019, with the term of two of the remaining three members of the Appellate Body coming to an end and only one member left, it was no longer able to meet the 3-member quorum required to review appeals. US has been blocking the appointment of new judges to the Appellate Body due to concerns regarding ‘overstepping of jurisdiction’ and ‘judicial activism’. The US indicated that the Appellate Body had indulged in rule-making beyond what members negotiated and signed up for at the WTO.
What does this mean for the multilateral trading system?
The non-functional Appellate Body has brought the WTO’s dispute resolution mechanism to a grinding halt and has challenged the relevance of the WTO. Global events like the Russia-Ukraine war have adversely affected global trade due to trade sanctions and trade diversions. The war and the consequent non-alignment of political and economic interests has made a case for either making goods of strategic importance in the home country (reshoring) or procuring them from friendly countries (friend-shoring).
For instance, EU export flows have been increasingly reoriented towards other economies in Eastern Europe and Central Asia. Such realignment of global supply chains based on geopolitical considerations may not always conform to the trading principles laid out by the WTO and are likely to result in disputes among member nations. As geopolitical tensions escalate, the role of a fully functional DSM becomes even more important to lend greater predictability to a rules-based trading system and to sustain the momentum of trade liberalization and growth.
Another fallout of not having a functional Appellate Body in place is greater fragmentation in trade rules and trade laws. The slow process of multilateral negotiations under WTO has already led to a proliferation of regional trade agreements which are notified with the WTO. However, till there was a fully functional DSB, dispute settlement was still predominantly with the WTO. With the Appellate Body not functional since 2019, the dispute settlement process has become fragmented now. For members to continue to have access to an independent appeal process for dispute settlement, 16 WTO members set up a separate appeal system for trade disputes in March 2020 called the Multi-Party Interim Appeal Arbitration Arrangement (MPIA).
WTO members can resort to the use of the MPIA under Article 25 of the WTO Dispute Settlement Understanding, as an alternative mechanism for dispute settlement. While only some members have sought this recourse, it has been observed that in some cases, the rulings of the MPIA rulings have not been consistent with previous decisions made by the Appellate Body on similar issues, thereby creating fragmentation in trade laws. In addition, there is also growing use of dispute settlement mechanisms under Free Trade Agreements which renders more flexibility in interpretation of trade laws. This can lead to a deviation from strict compliance to WTO rules and adversely affect the predictability and effectiveness of the multilateral trading system established under the WTO.
The Way Forward
Till consensus builds on the DSB reforms, the WTO can develop a viable plurilateral dispute settlement appellate mechanism that involves a majority of WTO members with representation from developed, developing and least developing countries, so as to make the system equitable and unbiased. While this may be sub-optimal, it would avoid the kind of fragmentation of trade rule that exists under FTAs.
At the same time, it is imperative that the concerns of member countries with regard to the reforms process are adequately addressed. A primary concern among many member nations has been procedural delays in resolving disputes which affect countries and business firms for a longer period. This provides leverage to those who can benefit from delays. Further, it compels members to look for other solutions which can then lead to fragmentation in trade laws. Therefore, it is imperative that there are shorter deadlines to resolve disputes which may require appointment of more judges to provide the required bandwidth.
Discussions on the DSM reform have been ongoing since MC12. The informal discussions led by Mr Marco Molina, former Minister Counsellor and Deputy Permanent Representative of Guatemala to the WTO, resulted in a Draft Text dated 14 February 2024. The Draft Text proposes to allow member countries to explore alternate dispute resolution methods in the resolution of trade disputes. Options include collaboration with other international dispute settlement bodies to exchange best practices, as well as conciliation and mediation before triggering the consultation process. Additionally, the Draft Text proposes heightened confidentiality of proceedings, but this approach may well diminish transparency and consistency in the interpretation of WTO law.
At the 13th Ministerial Decision in Abu Dhabi, a Ministerial decision was issued which directed officials to expedite discussions and build upon existing progress. The Ministers reaffirmed their dedication to address the outstanding issue of establishing an appeal/review mechanism and reiterated the aim of having an operational dispute settlement system accessible to all WTO Members by 2024.
At MC13, India demanded that an effective multilateral process must be transparent and inclusive, and there is a need to involve more countries in the reform process. India is of the view that to ensure the transition is not just a mere formality but results in an effective multilateralisation of the process, which is member-driven and inclusive, the challenges of developing country members and LDCs should be taken into account. Members should be provided an opportunity to bring in new proposals at any stage, and the resulting text should be fully representative of the views of all WTO members.
With members of the WTO showing renewed commitment at the 13th MC to reform the multilateral dispute settlement system, it is an opportune time to realign the system to changed realities of global trade and make it more effective, equitable and predictable.
Niti Bhasin is Professor (International Business), Department of Commerce, Delhi School of Economics, University of Delhi; Sangeeta Khorana is Professor (International Trade Policy and Endowed Chair), Aston Business School, United Kingdom and Badri Narayanan Gopalakrishnan is a Non Resident Fellow, NITI Aayog, where he served formerly as the Head of Trade and Commerce.
