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The WTO’s Appellate Body Crisis Threatens Rules-Based Trade

The dispute settlement system of the World Trade Organization is heading towards a December crisis, triggered by U.S. calls for reform and its tactic of blocking appointments to the system’s Appellate Body. WTO members have been working for several months to consider U.S. concerns, as well as proposals to address those concerns, but few are optimistic that those efforts will be far enough along by December to satisfy the United States. In that case, WTO members wishing to use the system to resolve trade disputes will be confronted with the possibility that their cases will be left in indefinite limbo.

The WTO dispute settlement system is a key pillar of the rules-based global trading system, helping to ensure that members, whether litigants or not, take their obligations seriously. The system also helps to contain disputes and avoid tit-for-tat trade wars; losing parties in WTO disputes have accepted the possibility that they may be subject to trade sanctions and have refrained from retaliating when those sanctions have been applied. By contrast, the trade wars now raging on several fronts illustrate the risks of a unilateral approach to enforcement outside of agreed-upon dispute settlement procedures.

The WTO dispute settlement system addresses disputes through two levels of adjudication. Panels first issue reports making findings of whether violations have occurred. Parties may then appeal those findings to the Appellate Body. All the findings become official when the WTO membership endorses them through what is essentially an automatic approval process.

The United States has expressed concern over the years that the Appellate Body, free of effective oversight of the membership, has, in certain cases, exceeded its mandate to simply review panel findings for legal error, instead creating new obligations and otherwise disregarding time limits and other rules for how to conduct its business. The United States has raised these concerns in the context of the individual disputes and in dispute settlement reform negotiations. But as with other WTO negotiations, the WTO’s consensus-based decision-making stymied any effort at change, as did the general high level of satisfaction with the overall operation of the system—including with the Appellate Body, which has brought greater consistency and analytical rigor to dispute settlement outcomes.

The United States had agreed on the positive benefits of the system and addressed its concerns with the Appellate Body in a manner that sought to avoid undermining the whole system. The Trump administration has chosen a different approach. Generally skeptical of multilateral institutions, it has forced a conversation on reform by blocking appointments for open Appellate Body seats. By mid-December, the Appellate Body will have only one member, two short of the figure required to hear appeals. Since parties that have lost at the panel stage can continue to appeal, panel findings thus appealed will never come before the membership for adoption, and the winning party will be prevented from receiving authorization to sanction the losing party for non-compliance.

Since January, a working group of members has been considering the U.S. concerns, as well as proposals to address them. The group has come further than ever before in recognizing and responding to U.S. concerns, but has been hobbled by the limited engagement of the United States on solutions to its concerns. The United States has instead been insisting on a discussion of why the Appellate Body has chosen its current approach to its work. In the meantime, the working group has been aiming to develop reform proposals by December. While few believe the work will head off the Appellate Body crisis in December, the hope is that it will at least lay the groundwork for a deal the United States will accept. Without such a deal, the value of WTO rules for international traders, including those in the United States, will be seriously diminished.

Bruce Hirsh is an attorney and principal and founder of Tailwind Global Strategies.  He previously served as assistant U.S. trade representative for Japan, Korea and APEC and as USTR’s chief counsel for dispute settlement. Bruce can be reached at bhirsh@tailwindglobalstrategies.com.

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