Can Interim Appeal Arbitration Preserve the WTO Dispute System?

The precise scope of the WTO dispute system’s authority is a proper subject of debate: Just how enforceable should the rules of the WTO be? There are degrees of enforceability, and it is up to the governments that make up the system to decide how much power to delegate to international organizations and other bodies.

The prior trade dispute system that existed under the General Agreement on Tariffs and Trade (GATT) was less enforceable than its WTO successor: losing governments could block the adoption of GATT panel reports by the GATT membership, which meant they had no legal effect. Blocking adoption grew more frequent toward the end of the GATT era and became a concern. As part of the creation of the WTO, governments changed these rules and adoption became, for all practical purposes, automatic. As a result, reports would always have legal effect. At this time, governments also added an appeals mechanism, called the Appellate Body, to review panel reports to ensure that automatically adopted reports were of sufficiently high quality.

In its early years, the Appellate Body received more praise than criticism, but recently the United States has offered strong objections to some of the rulings and behavior of the Appellate Body. The Trump administration has used these objections as justification for blocking appointments to the Appellate Body, which is down to one member and is no longer operating. There is now a fear that the WTO dispute system, without a functioning Appellate Body, has been brought back to the GATT in terms of the degree of its enforceability.

But other WTO members have not been willing to give up on appellate review. They have pushed for a negotiated solution, with changes to the appellate process that might satisfy the United States, but a resolution does not seem to be imminent. They have also put forward a temporary appeals mechanism, known as the Multiparty Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the Dispute Settlement Understanding, to keep the system functioning until a permanent solution can be found. As of July 31, 2020, the MPIA is in effect for the 23 parties that have signed on, and other WTO members may join at any time.

This paper considers the historical development of the Appellate Body, explains the U.S. objections, and then sets out the details of the MPIA and evaluates its prospects. For the WTO dispute system to function properly, two features are crucial: dispute settlement decisions must have automatic effect, and some form of appellate review must be available. Ideally, the Appellate Body itself would be revived, but if that is not possible, many governments are hoping that the MPIA can preserve the effectiveness of the WTO dispute system during the continued shutdown of the Appellate Body.

The GATT set out few details on how disputes would be adjudicated, but in the early 1950s trade officials created a system where panels of neutral trade officials (i.e., unaffiliated with the parties to the dispute) would serve as adjudicators on an ad hoc basis. The system retained some diplomatic elements, however, including allowing a party that was the subject of a successful complaint to block the adoption of the panel report by the GATT membership, which would prevent the report from having legal effect.

The use of this dispute system fluctuated over time. There were periods in which cases were brought frequently, and there were also periods of disuse. By the late 1980s and early 1990s, in the midst of the Uruguay Round of trade negotiations, the case load had picked up, but there were concerns about the increased blocking of panel reports by losing parties. As part of the Uruguay Round negotiations on dispute procedures, there was a push to shift the requirement for adopting a panel report from a positive consensus (which is what allowed losing countries to block) to a negative consensus, under which the report would be adopted unless all GATT parties opposed adoption. Practically speaking, because the winning party would always support adoption, such an approach would mean that adoption, and legal effect of the report, was automatic.

The possibility of automatic adoption concerned some of the negotiators, as panel reports might not always be of the highest quality. If adoption were to now be automatic, they wanted a check to ensure that egregious mistakes did not become a formal part of GATT law. To address this concern, they created an appellate review mechanism known as the Appellate Body.¹ The Appellate Body was a standing tribunal of seven members, three of whom served on each appeal.

The negotiators did not expect that appellate review would be used very often.² However, for any government that had lost a complaint brought against it, the temptation to appeal to get a delay and possible reversal was quite strong, and appeals became common. The number has varied slightly over the years, but overall more than two-thirds of WTO panel reports have been appealed.³

As cases came to the Appellate Body with increasing frequency, its role and importance grew. It began to establish jurisprudence on a wide range of substantive and procedural matters. It interpreted core principles such as the nondiscrimination obligation, and it addressed systemic issues such as the idea that WTO dispute procedures were the exclusive recourse for claims of WTO violation. As the scope of its work broadened, it was bound to cause offense to one WTO member or another, and it did so on occasion. But when it began to rule against various U.S. trade remedy practices and other measures, it aggravated the most powerful member, and it did so in a way that led to its own demise, at least for the moment.

Early on in the life of the Appellate Body, the United States praised some of its decisions that other governments considered to be overreach, such as the decision to allow amicus briefs.⁴ However, the United States also expressed concerns about some of the Appellate Body’s jurisprudence, and in the early 2000s it made a number of reform proposals as part of the review of the WTO’s Dispute Settlement Understanding (DSU).⁵ Later, the United States began to object to the reappointment of particular Appellate Body members. After putting forward former Office of the U.S. Trade Representative official Jennifer Hillman in 2007 (whose nomination was approved by the WTO membership), the U.S. government decided not to nominate her for a second term in 2011, and veteran U.S. trade lawyer Thomas Graham took her place.⁶ And in 2016, the U.S. government objected to the reappointment of South Korean academic Seung Wha Chang, and another South Korean was appointed to the Appellate Body instead.⁷

Things got more serious when Donald Trump came into office. The Trump administration began objecting to all Appellate Body appointments until its wide range of concerns about the Appellate Body were addressed. It set out these objections during various WTO Dispute Settlement Body meetings (in early 2020 it compiled them all in a single document).⁸ The objections included the following:

• that there were overbroad Appellate Body rulings on the scope of the nondiscrimination obligation;
• that there was lack of deference to investigating authorities in trade remedy cases, including in relation to the practice of zeroing and the proper interpretation of the term “public body”;
• that there was an expansive approach to appeals of factual issues, including appeals under DSU Article 11;⁹
• that the Appellate Body was offering advisory opinions on matters that did not need to be addressed to resolve the dispute at hand;
• that the Appellate Body treated its past rulings as binding precedent, when the United States considered that these rulings should have only persuasive value; and
• that the Appellate Body was taking longer than the mandated 90 days to issue its reports without first receiving permission from the parties to the dispute.

Opinions will vary on the merits of each of these concerns, but regardless, the Trump administration has used these objections as the basis for refusing to go forward with appointments to the Appellate Body, and as a result the Appellate Body is down to one member and no longer functioning. WTO members have attempted to respond to these concerns as part of an effort led by New Zealand ambassador David Walker (the so-called Walker Process), but the principles they have developed have not been able to assuage the Trump administration.¹⁰

That leaves WTO dispute settlement in an uncertain place. If there is a right of appeal, as there is under the DSU, but no Appellate Body to hear the appeal, a party that loses a complaint brought against it can effectively block a panel report by appealing into the void.¹¹ Does that mean the system has, for practical purposes, returned to its form under the GATT? Or, instead, will parties to disputes refrain from appealing and apply the principle of automatic adoption to WTO panel reports?¹² That would be an improvement on the situation under the GATT, although it could lead to incoherence in the jurisprudence if different panels interpret core WTO principles differently. The fundamental question is the following: What exactly will happen to the WTO dispute settlement process without an Appellate Body?

In response to these concerns, the European Union has led an effort to use the general arbitration mechanism in Article 25 of the DSU as the basis for an appeal. Inspired by a 2017 paper from a group of experienced WTO lawyers, the EU initiative has now been joined by 22 other WTO members and is known as the Multiparty Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU.¹³ MPIA appeals are only available to parties to the MPIA, but other WTO members may join the MPIA at any time.¹⁴

The MPIA establishes a standing pool of 10 arbitrators to hear appeals of WTO panel reports. As with the Appellate Body, three arbitrators hear the appeal in a specific case. There is also a parallel to the collegiality that exists at the Appellate Body, under which the three serving arbitrators may discuss each case with the full standing pool of arbitrators.¹⁵

The pool of arbitrators has now been selected.¹⁶ All 10 MPIA arbitrators have extensive experience working on WTO disputes, with many of them having served as panelists or arbitrators or in the WTO Secretariat divisions that assist panels and the Appellate Body.¹⁷ The experience of these arbitrators with WTO disputes, combined with their awareness of the circumstances of the MPIA’s creation, could affect how the MPIA treats the work of the panels they are reviewing. For example, the Appellate Body tended to rewrite the reasoning of panels even where it agreed with the result. Perhaps the MPIA will defer a bit more to panels, offering more limited reasoning when it seems appropriate.

The MPIA’s reliance on Article 25 of the DSU, which offers little in the way of guidance, to recreate the appellate review process could lead to other key differences from the Appellate Body. One of the most noteworthy of these is that with the MPIA, its awards will be notified to the WTO’s Dispute Settlement Body but not formally adopted by it. (Nevertheless, the awards will be binding on the parties, as the MPIA states: “The parties agree to abide by the arbitration award, which shall be final.”¹⁸) The implications of this for the value of MPIA awards as precedent is uncertain. Presumably, without formal adoption by the WTO membership, there will be some lesser degree of precedential value for these awards, but how much is unclear.

The approach to the use of legal and administrative support staff by MPIA arbitrators is also uncertain, with the MPIA text somewhat vague on the issue.¹⁹ In WTO disputes, specific divisions of the Secretariat have assisted panels and the Appellate Body, performing the role that law clerks play in domestic legal systems. The Legal Affairs Division and Rules Division took the lead on assisting panels while the Appellate Body had its own dedicated secretariat, which was disbanded and its staff distributed to other WTO divisions after the Appellate Body stopped functioning. Will the former staff of the Appellate Body Secretariat be partially or fully reconstituted to play the same role with the MPIA? Or will the MPIA hire assistants to work only on specific cases?

The arbitrators are going to need some sort of assistance, and the form that it takes could help shape the culture and role of the MPIA. A permanent group of staffers who frequently work together could play a role that is different from that of a shifting group of ad hoc assistants. Staff from the WTO could provide this assistance, but there have been early indications that the United States would object to this, so the MPIA parties may have to provide funding for this assistance on their own, independently of the WTO.²⁰

In terms of substantive law, the MPIA has an innovation that will perhaps address the U.S. concern about the consideration of facts in appeals under DSU Article 11. The MPIA provides that “arbitrators may … propose … an exclusion of claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU,” though it notes that such a proposal “is not legally binding and it will be up to the party concerned to agree with the proposed substantive measures.”²¹ Thus, under this provision, if the MPIA arbitrators choose to do so, they can try to limit the use of Article 11 as a means of addressing factual issues on appeal.

Just as there was uncertainty about the Appellate Body in 1995, there is uncertainty about the MPIA now. In addition to the points noted above, there are other questions: What approach will the MPIA take regarding the interpretation of core WTO principles such as the nondiscrimination obligation and public policy exceptions? How often will the MPIA appeal process be used? What kind of legal culture will develop around it, including the approach of the arbitrators and of the litigants themselves? How much deference will the MPIA show toward politically sensitive domestic laws and regulations? How much deference will the MPIA show toward the findings and reasoning of WTO panels? Will the MPIA avoid novel and controversial issues that are put before it or take them on? Only practical experience will give us clear answers.

The first practical experience may come from several ongoing WTO disputes for which the parties have agreed to procedures for using the MPIA.²² The dispute that may provide the first opportunity for the MPIA to hear an appeal was brought by Australia against Canadian measures that affect the sale of wine. The arbitrators who hear the early cases will have an opportunity to set the tone with high-quality work that satisfies the parties to the MPIA and perhaps gains favor with other WTO members.

There have been no indications that the Trump administration’s trade policy team will change its mind about Appellate Body appointments. Thus if Trump wins the presidential election in November, the United States is likely to continue its current course, and the MPIA experiment will begin.

It is still an open question whether the MPIA will work for the countries that are part of it. Only time will tell whether the decisions the MPIA issues will have the authoritative force that one might hope for, in terms of both resolving the dispute at hand and providing a degree of certainty as to what the WTO’s legal obligations mean.

And many WTO members, including some major trading countries, are not part of the MPIA. What will happen to their ongoing disputes? Japan and South Korea, for example, have not joined. How will they and others approach the issue of adoption or appeal of panel reports in their disputes?

With regard to the United States, part of the U.S. objection to the Appellate Body seems to be based on the view that the Appellate Body saw itself as an institution with the ability to develop and expand its own powers. The U.S. position may be that there is something inherent in creating a permanent body that leads to the growth of such power, and thus institutions themselves are suspect. An appellate review mechanism that is more ad hoc, and less institutional, might therefore be of interest to the United States. If it turns out that, in practice, the MPIA addresses some of the U.S. concerns, is it possible the United States would itself join?²³ At this point in time, the precise functioning of the MPIA is still uncertain. The approach taken by the MPIA arbitrators in early cases on the issues noted above, and the form of support the MPIA receives from WTO staff or other assistants, could shape the U.S. view of it.

If, on the other hand, Joe Biden wins the election, it is possible that the United States would be more amenable to compromise on the Appellate Body.²⁴ In the Walker principles, at least some of the U.S. concerns have been addressed to an extent. Perhaps with a Biden administration, a negotiation can begin again over how to reform the Appellate Body and get appointments moving. Alternatively, a Biden administration might decide to build on the MPIA as the appeals mechanism for WTO panels, depending on how its work has progressed.

Any international legal system must strike a balance in terms of its degree of enforceability. Legal rulings must push toward compliance but also respect domestic sovereignty. GATT dispute settlement had become less effective in terms of enforcement because of members blocking the adoption of panel reports. Under WTO dispute settlement, the system became a bit more enforceable while still maintaining the flexibility of governments to negotiate solutions where compliance was politically sensitive. While many of the specific details can be subject to legitimate disagreement, it is crucial for the WTO to maintain automatic effect of dispute settlement reports and some form of appellate review to preserve the coherence and effectiveness of the system. With a bit of luck, perhaps the MPIA can keep the system functioning in the absence, temporary or otherwise, of the Appellate Body.