I. Introduction

1. The WTO’s dispute settlement system is considered by most WTO members as one of the most important achievements of the Uruguay Round. However, seven years of experience with the system has revealed areas where improvement is possible. At the Doha Ministerial Meeting in November 2001, the Ministers agreed to include the Dispute Settlement Understanding (DSU) as one of the subjects of the Doha Work Programme and to negotiate these improvements. Paragraph 30 of the Doha Ministerial Declaration provides that:

We agree to negotiations on improvements and clarifications of the Dispute Settlement Understanding. The negotiations should be based on the work done thus far as well as any additional proposals by Members, and aim to agree on improvements and clarifications not later than May 2003, at which time we will take steps to ensure that the results enter into force as soon as possible thereafter [Note 1].

2. Paragraph 30 has several significant elements. First it recognises that the DSU is in need of improvement and clarification. Second, Paragraph 30 provides that negotiations for reform are to take place based on work done, as well as new proposals. Third, it establishes what appears to be a deadline, May 2003, to complete negotiations on DSU reform. Fourth, it does not contain a guarantee that improvements and clarifications will enter into effect before the end of the negotiations – Paragraph 30’s final sentence leaves open the possibility that the “single undertaking” principle of agreeing to the results of the negotiations as a package, thereby eliminating the possibility to “pick and choose” which agreements to sign on to, may be applied to DSU reform. Nevertheless, Paragraph 47 of the Ministerial Declaration leaves open the possibility that DSU reform will be outside of the single undertaking.

3. This Background Note briefly describes the innovations of the DSU. [Note 2] The problems with the DSU that led to the inclusion of Paragraph 30 are examined along with likely improvements. Lastly, the implications of the reform programme for WTO members, in particular the less-advantaged countries (“LACs”), are discussed.

II. DSU Innovations

4. On 1 January 1995, the WTO Agreement came into effect. While maintaining certain features of the GATT dispute settlement system [Note 3], the WTO Dispute Settlement Mechanism (DSM) was designed to overcome several serious shortcomings of the GATT system: in particular, unnecessary delays in the dispute resolution process, problems related to the adoption and implementation of panel reports by consensus and the resulting recourse to unilateral trade measures when consensus was not achieved.

5. Aimed at resolving these flaws, the DSM introduced several important innovations:

i. an increasingly juridical system evidenced by the creation of precise rules and the imposition of shorter and stricter time-limits;

ii. the creation of an appellate procedure and a standing Appellate Body, composed of seven members, who have been vested with considerable responsibility;

iii. the implementation of a “reverse consensus” system whereby a consensus is required to block the adoption of panel and Appellate Body reports;[Note 4] and

iv. the creation of a viable enforcement mechanism to encourage implementation of adopted dispute settlement reports.

6. Despite the success of the DSU, problems have emerged. The following are among the issues that may be addressed within the framework of Paragraph 30 of the Doha Ministerial Declaration.

III. Problems, Possible Improvements and Clarifications

7. Permanent Panellists: The success of a standing Appellate Body composed of seven permanent members has had an important influence on the views of some WTO members, in particular the European Union. The EU has advocated the creation of a list of permanent panellists from which panels would be drawn to hear cases of first instance. The EU believes that permanent panellists would be readily available and that they would bring greater competence and independence to the first stage of DSU proceedings. Some members also find the idea attractive in light of the criticism levelled by the Appellate Body at the work of various panels, and the criticisms of “civil society” that has been directed at WTO panel decisions. [Note 5] Permanent panellists might be more adept at interpreting and applying the covered agreements than panellists selected under the present ad hoc system of appointment. While forming panels from a list of permanent panellists could bring greater competence to the dispute settlement system, there is also some fear that a system of permanent panellists would further insulate the WTO from developments outside the system.

8. Remand: The Appellate Body only has the authority to “uphold, modify or reverse the legal findings and conclusions” of a panel. [Note 6] When a panel has failed to make certain necessary factual findings, it may not be possible for the Appellate Body to reach a decision. [Note 7] Granting the Appellate Body “remand” authority, whereby cases can be sent back to a panel for additional factual findings, would make it easier to achieve the “satisfactory settlement” of certain trade disputes. [Note 8] Although some members argue that remand power would be a source of delay, other members view remand power as a means to resolve disputes in instances when the factual record before the Appellate Body is insufficient. Creation of a remand authority would also make it more difficult for the Appellate Body to avoid resolving difficult or sensitive disputes based on the alleged insufficient factual findings in the record. [Note 9]

9. Increasing the Size of the Appellate Body: The Appellate Body is composed of seven members. Although the Appellate Body members discuss disputes together pursuant to the system of “collegiality”, only three members are formally assigned to the “division” that hears a particular dispute. By adding two more members to the Appellate Body, it would be possible to form three full divisions operating at any given time and better divide the work in what is often an overburdened system. Thailand has proposed that the size of the Appellate Body be increased by two to four members, thus enabling it to cope with its workload more effectively [Note 10].

10. Powers of the Appellate Body: On several occasions developing countries have criticised the Appellate Body for adding to or diminishing the rights and obligations provided for in the covered agreements in violation of DSU Articles 3(2) and 19(2). [Note 11] This raises difficult questions concerning what the Appellate Body can or should do to fill gaps in the DSU, for example concerning burden of proof issues, and the acceptance of amicus curiae submissions. It also demonstrates the relative strength of the Appellate Body vis-à-vis the members when the DSB is unable to muster a consensus to decide a difficult issue. It is probable that the Appellate Body will continue to fill gaps and decide difficult issues, restricted only by political considerations stemming from possible member discontent.

11. Amicus Curiae Submissions: In the WTO-context, amicus curiae submissions are briefs from individuals or entities (“non-members” of the WTO), in particular non-governmental organisations (NGOs), which are designed to provide guidance to a panel or the Appellate Body. Although there is no mention of amicus submissions in either the DSU or the Working Procedures, the Appellate Body ruled that panels and the Appellate Body have the right, but not the obligation, to receive such submissions. [Note 12] The amicus question has been a source of considerable controversy. For example in the Asbestos [Note 13] case the Appellate Body established a Working Procedure governing the submission of amicus briefs, applicable only to that appeal, which appeared on the WTO website and was communicated to NGOs world-wide. When the members learned that the Appellate Body had acted to facilitate the submission of amicus briefs, a special meeting of the General Council was convened in which the Appellate Body was sharply criticised, in particular by developing country members. Perhaps as a result of this criticism the Appellate Body rejected all amicus briefs submitted, ruling that the briefs failed to conform to the promulgated Working Procedure. This decision gives support to the belief that Appellate Body decision-making can be influenced by political considerations.

12. Sequencing: A significant accomplishment of the Uruguay Round was the creation of rules designed to lead to more rapid resolution of trade disputes. Some ambiguity remains in these rules as evidenced by the disagreement between the EU and the US on “sequencing”. As its name implies, the sequencing dispute concerns the order in which two DSU provisions, Article 21.5 and Article 22.6, should be applied. DSU Article 21.5 establishes a 90-day procedure to determine whether a measure taken by one party to comply with the recommendations and rulings of a panel or the Appellate Body is consistent with the WTO Agreement. Article 22.6 requires the DSB to grant authorisation to suspend concessions within 30 days from the expiry of the reasonable period of time unless the DSB decides by consensus to reject the request. As the Appellate Body has pointed out, “the terms of Articles 21.5 and 22 are not a ‘model of clarity’…”. [Note 14] The EU contends that where the losing party takes measures to implement DSB recommendations a finding of non-conformity pursuant to Article 21.5 is required before recourse to the enforcement mechanism of Article 22 is permitted. [Note 15] Thus the EU would require recourse to Article 21.5 before recourse to DSU Article 22 is allowed, [Note 16] while the US has asserted a right to go directly to Article 22 in certain instances, thereby avoiding what it believes is unnecessary delay before recourse to enforcement measures. Sequencing has been discussed in several dispute settlement decisions. [Note 17] Recent practice, including the practice of the US in the FSC case, [Note 18] suggests that acceptance is emerging that recourse should first be had to Article 21.5. This has led to speculation that this question is likely to be resolved in the upcoming negotiations. On 21 May 2002, fifteen WTO members, among them many developing countries, presented a paper at a special session of the Dispute Settlement Body proposing a solution to the sequencing problem. [Note 19] They suggested that Article 21 be amended to create a special “compliance panel” to hear disputes concerning whether efforts taken to comply with an adopted recommendation or ruling satisfy the WTO Agreement. The compliance panel would work rapidly and would be made up of the members of the original panel, where available. Authorisation to suspend concessions could not be requested until the compliance panel report had been circulated to members. The compliance panel report could be appealed and the process set forth in Article 17 of the DSU would apply.

13. Cross-Retaliation: The DSU enforcement mechanism (Article 22) was not successful in bringing about the losing party’s compliance with the covered agreements in either the Bananas or the Hormones disputes. As it stands, the enforcement mechanism has another serious shortcoming. Its strongest remedies, retaliation and cross-retaliation (more properly known as the suspension of concessions) are not only unlikely to benefit the industrial sector affected by an illegal trade measure, they may negatively affect consumers in the prevailing country by raising prices for products subject to punitive tariff increases, as well as industries utilising imports subject to tariff increases. The result is further distortion of the trade system. To the extent that the enforcement mechanism punishes consumers and importers, and does little to redress industries damaged by WTO violations, a case may exist for reform. This question has received little or no attention from the members.

14. The Carousel: Occasions arise when members would rather endure the suspension of concessions (removal of favourable tariff or regulatory treatment), rather than rescind an illegal trade measure. This has already happened in the Beef Hormones and Bananas disputes. This suggests that the enforcement mechanism may be insufficient, but also reflects the political reality that certain domestic policy interests are too important to risk a change in trade policy. The US has sought to add more teeth to the enforcement mechanism by arguing for the “carousel” – a mechanism whereby suspended concessions would be rotated among various industries to maintain a constant level of economic pressure on members that have failed to bring their trade policy into conformity with WTO obligations. The theory behind the carousel is that suspended concessions lose value over time as foreign industrial sectors adapt by finding new markets. “Rotating” suspended concessions (the “carousel”) is viewed by the US as a means of maintaining pressure on a trading partner to bring an illegal trade measure into conformity with WTO obligations. Several members, not least the EU, oppose the carousel issue. Prior to the Doha Ministerial, Thailand and the Philippines proposed that the concessions suspended by a complaining party should not be other than those contained in the list determined by the arbitrator and that such a list should not be modified except by mutual agreement between the parties to the dispute. [Note 20] Similarly, the EU, in the very comprehensive proposal presented in March 2002, reiterates its conviction that any amendment of the DSU should address the carousel. [Note 21] There is now some speculation that in light of loss in the FSC case the United States will retreat on this issue. [Note 22]

IV. Possible New Issues

15. The previous section of this note addressed certain well-known problems with the dispute settlement system. However, the mandate given pursuant to Paragraph 30 is very broad. Paragraph 30 also provides that “The negotiations should be based on the work done thus far as well as any additional proposals by Members”. This means that the DSU negotiations are open-ended and that room exists to examine new issues. Some of the ideas expressed below may find their way onto the Doha “dispute settlement” Agenda.

16. Broader Appeal Powers: the inability to appeal certain arbitral findings may be an area for potential reform. For example, on 24 March 2000 an arbitral decision by a panel in the Bananas dispute found that Ecuador’s trade losses (nullification and impairment) as a result of the EU banana policy amounted to US$ 201.6 million and authorised Ecuador’s request to suspend concessions applicable to EU intellectual property rights, provided that the amount of nullification and impairment could not be offset by suspending concessions made under the GATT 1994 and GATS Agreements. This threat of cross-retaliation, and the inevitable settlement efforts which followed, sent a clear message to the EU, which benefits greatly from the TRIPS Agreement. It also raised questions concerning the need for a modality to review arbitral findings. However, a review at the “enforcement level” risks causing additional delays in dispute settlement proceedings and does not appear to have member support.

17. Automaticity: The ability of the losing party to block GATT panel reports was the most serious flaws in the GATT dispute settlement system. Some members have however indicated that automaticity may go too far in the other direction – with the result that the DSB is in danger of becoming a “rubber stamp” entity that automatically approves panel and Appellate Body decisions. [Note 23] Although the “reverse consensus” system, i.e., the inability to block a decision except by consensus, placed the EU in a difficult position in both the Hormones and the Bananas disputes, and has done likewise for the US in the Shrimp/Turtle and FSC decisions, there is some debate as to whether the solution to the problem lies in moving away from automaticity (perhaps by moving towards a consensus minus one system), or in strengthening the role of the members sitting as the DSB (perhaps by encouraging recourse to “authoritative interpretations” of the covered agreements). [Note 24] Either approach could strengthen the DSB by facilitating increased member scrutiny of Appellate Body decisions, and the redress decisions with which members do not agree.

18. Ethics Issues/Confidentiality: The decision to admit private counsel in panel and Appellate Body proceedings was received positively by developing country members – it has allowed developing countries to compete more successfully in disputes against richer countries who have long had government lawyers in their delegations. However, it has also raised questions concerning the need to establish ethics rules for trade law practitioners. There are no international ethics rules governing private counsel involved in WTO matters. Private counsel are only bound by their local bar association rules, suggesting the need for a system of harmonised international rules governing confidentiality, conflicts of interest and decorum. This seems particularly important because many private counsel involved in WTO disputes enjoy privileged relationships with WTO Secretariat staff and Geneva-based diplomats. Ethical questions have already arisen. For example, in the H-Beam [Note 25] dispute a Washington law firm representing a member was suspected of leaking a confidential submission to a trade association that it also represented and which had an interest in the same proceeding. The Washington firm withdrew from the proceeding.

19. Transparency and Capacity Building: increased public interest in the WTO, public scrutiny of WTO decisions, and the globalisation controversy, means that greater transparency (which in this sense means more openness of the WTO to the public) may be inevitable. Members are increasingly making their legal submissions in WTO disputes public, and educating their citizens about WTO decision-making. The members, through the WTO Secretariat, are also doing what they can to make WTO decision-making and dispute settlement more transparent by increasing public access to WTO documents. However, transparency without capacity building could give rise to negative political consequences. The political future of the WTO, and its continued growth, success and legitimacy, depend on developing a greater understanding at all levels of society of the important economic and political role that the WTO plays. A solution may lie in linking transparency and capacity building. If developing country governments are going to be encouraged to make their trade policy more transparent, they may wish to seek trade-offs for transparency such as increased trade concessions or support from developed country members for capacity building and technical assistance.

20. Participation Issues: Transparency issues (defined above) should be distinguished from “participation” issues. Participation issues involve questions involving the rights of civil society (e.g., NGOs and business associations) to attend WTO meetings and/or to make written and oral submissions to WTO committees and dispute settlement bodies. Some members of “civil society” want to see participation rights increased for NGOs and private actors. At present there is little member support for such a reform. This means that NGOs and private actors will continue to act behind the scenes through trade delegations, international organisations and States with WTO observer status, and through amicus submissions. They will also continue to act in other public forums, scholarly journals and the press. Despite the lack of support among WTO members for such reform, participation issues may nevertheless be raised for strategic or political reasons.

V. Implications for Less-Advantaged Countries

21. Strategic Implications: The implications of DSU reform on the LACs will depend on their ability to make their position known and to extract concessions in return. It would be an error to regard DSU reform as isolated from the rest of the Doha Agenda. It is doubtful that the LACs will be prepared to make major concessions on DSU reform, or reform in general, without seeking something in return in other negotiating areas. Therefore it is unlikely that DSU reform will be achieved until negotiations are completed on the entire Doha Work Programme.

22. Direct and Indirect Implications: The role of the LACs in dispute settlement has until now largely been indirect. They have seldom appeared in dispute settlement proceedings, but they have been affected by the outcome of these proceedings (for example in the Bananas dispute). DSU reform will have implications for these countries, but it is probable that negotiations concerning other agreements (e.g., Textiles and Agriculture) will remain more important. However, as the LACs develop and participate more actively in international trade and the dispute settlement system, the direct implications of the DSU will increase. The growing use of the DSU by India and other developing countries provides a case in point. This means that it is in the long-term interest of all WTO members to follow DSU reform and participate in the negotiations.

23. Legal Services to Developing Countries: The success of the LACs with respect to DSU negotiations may depend on the technical assistance provided to these countries, and their ability to build domestic capacity as the negotiations unfold. If the LACs succeed in building domestic capacity during the overall negotiations and take advantage of legal services available at preferential rates, [Note 26] they may be able to negotiate a better result on DSU reform, and in other areas. This suggests that the LACs may wish to consider supporting an increase in the availability of technical assistance from the WTO Secretariat and other Geneva-based organisations. However, such services are no substitute for building domestic capacity.

24. Special and Differential Treatment: Special treatment is offered to developing countries in various provisions of the DSU. [Note 27] Pursuant to Paragraph 44 of the Ministerial Declaration, all provisions for special and differential treatment are to “be reviewed with a view to strengthening them and making them more precise, effective and operational.” Suggestions for amendments to DSU provisions include: (a) replacing the word “should” with “shall” in Articles 4.10 and 21.2 – this would require members to give special attention to the particular problems and interests of developing country members during consultations and with respect to developing country measures subject to dispute settlement; (b) redrafting Article 12.10 so that when a consultation involves a measure taken by a developing country, the Chairman of the DSB can extend the time period for consultations 15 days in case of urgency and 30 days in normal circumstances; and (c) providing developing countries defending a trade measure additional time for each of their written submissions. Potentially adverse results will be minimised if the LACs work together to strengthen provisions governing special and differential treatment in the DSU, and other such provisions existing throughout the WTO Agreement.

VI. Conclusion

25. The DSU has proven surprisingly successful, but this does not mean that there will not be changes. The international trade regime, including the dispute settlement system, is dynamic and dynamic systems evolve. But a question exists with respect to how such evolution or reform should occur. Increasingly, politically and socially divisive trade disputes are resolved by WTO panels or the Appellate Body, instead of by trade negotiators. Because there are few rules governing appellate proceedings, many gaps have had to be filled by the Appellate Body, either through its Working Procedures, or through its decision-making. Gap-filling decisions have been controversial and sometimes create other gaps that must be filled. This poses risks for the WTO and its dispute settlement system. Difficult trade policy decisions, including DSU reform, will have greater legitimacy if made by a consensus of the WTO’s members, as opposed to panels and the Appellate Body.