The WTO Appellate Body is one of the most influential decision-making body in the international order. Since its beginning in 1995 around 570 disputes have been brought to the WTO. The WTO appellate body comprising of seven members acts as the WTO appellate court to adjudicate disputes and play a vital role in the interpretation of commercial jurisprudence. But the rules-based multilateral trading system is all set to be inoperable by the end of 2019. The WTO also signalled that global trade will face “strong headwinds” over the next two years due to commercial tensions and slowdown in the major economies.
Background of the crisis
Appellate body members are appointed by the WTO membership for a period of four years. According to the Dispute Settlement Understanding (DSU) rules, it is mandated that all appeals are to be heard by a bench/division of three members, selected randomly. Presently, there are only 3 members in the Appellate body, namely Ms Hong Zhao from China, Mr Ujal Singh Bhatia from India, and Mr Thomas R. Graham from the United States, which is the bare minimum number to conduct the proceeding. Tenure of two out of the three members are set to expire on 10 December 2019, which will substantially make the whole system inoperative unless new members are appointed to the highest international court. The inoperability crisis may hit any time before December 2019 if one of the remaining members is forced to recuse himself from a case due to a conflict of interest.
Since 2017 the fiercest critic of WTO, the United States has consistently refused to clear the re/appointment of Appellate Body members thereby blocking the entire judicial process and putting the system in a deadlock. The US has claimed that the body commits judicial overreach by making laws than interpreting laws and has questioned its independence and activism by calling the whole institution a disaster and catastrophe. The move to block the appointment of judges goes against the principle of multilateralism. The kneejerk repercussions due to the dysfunctionality of the Dispute Settlement System would impede the market access to developing countries. As many as 67 member states have repeatedly petitioned the US to drop its veto and keep the system working.
The way forward
Strategically, the United States has not accompanied its vetoing of Appellate Body appointments by any justification or demands. It has been left to other WTO Members to come up with reform proposals that are acceptable to the US.
Anticipating the fear of logjam, the European Union together with other members of the World Trade Organisation (WTO) – Australia, Canada, China, Iceland, India, Korea, Mexico, New Zealand, Norway, Singapore and Switzerland – suggested a proposal to reinforce the Appellate Body’s independence and impartiality and to improve its efficiency. These include having a single, longer term for Appellate Body members of 6 to 8 years, as well as increasing the number of members from 7 to 9 working full-time, to support the Appellate Body’s capacity to deliver. The proposal also includes rules to ensure that the selection process of Appellate Body members starts automatically when a post is vacant and that there is an orderly transition with outgoing members. Many International think-tanks and policy researchers have suggested similar reforms. Unfortunately, the United States has rejected all ideas of trade reforms. Recently, US trade representative declared: “the United States sees numerous examples where the dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to.”
Given the sceptical future of WTO’s appellate body, major economies are looking outside WTO for alternative methods to resolve disputes. One option which has received much attention from policymakers is to resolve disputes via lesser-known arbitration mechanism as summarised in Article 25 of the DSU.
Interpreting Article 25 of the DSU
Arbitration is a temporary measure to de-block the crisis. Article 25 provides for ad-hoc arbitration which is contingent upon mutual agreement of the parties. Article 25 provides: “Expeditious arbitration within the WTO as an alternative means of dispute settlement can facilitate the solution of certain disputes that concern issues that are clearly defined by both parties. Other Members may become a party to an arbitration proceeding only upon the agreement of the parties which have agreed to have recourse to arbitration. The parties to the proceeding shall agree to abide by the arbitration award.” The literal interpretation of Article 25 implies parties would decide on their own proceedings, concluding in an arbitration award to be notified to the DSB, the WTO Council or relevant Committees as may be specified. The enforceability of these decisions would be similar to Appellate Body reports. The disputants may also enter into an agreement beforehand not to appeal, which would make the arbitral awards binding.
If the seats on the Appellate Body are not filled by the end of the year the future of WTO appears uncertain. To maintain the continuity of dispute settlement a temporary mechanism has to be implemented and developed. Preserving International rule of law and resolving disputes is quintessential for global economic growth. Article 25 as an alternative to the current dispute settlement system would have a greater chance of success considering the acceptability of procedure and immediate demands of nations.