Is the WTO Dispute Settlement System Fair?

In twelve years, the World Trade Organization’s (WTO) dispute settlement system has emerged as one of the most robust instruments of international rule of law. Supporters say it has helped prevent trade wars while protecting the rights of the smallest states in the WTO. But critics say only the strongest states are able to effectively argue their cases while opponents in the United States say its judgments sometimes infringe on national sovereignty.

Daniel J. Ikenson, associate director of the Cato Institute’s Center for Trade Policy Studies, debates Robert E. Lighthizer, a former Reagan Administration trade official who heads the international trade department at the Skadden law firm, on the fairness of the dispute settlement system.

February 26, 2007
Robert E. Lighthizer

With respect to known WTO advocates like Esserman/Howse, the point is not that they would make generic statements of support about the larger dispute settlement system—but the level of candid, specific and devastating criticisms that have come from such otherwise unlikely and credible sources. In this regard, and outside the trade remedy context, Esserman/Howse have said that the need to take a prudent approach in sensitive trade disputes "is a point that seems to have been wholly lost on the World Trade Organization." They have described the FSC/ETI arbitral award as "arbitrary and silly," "far exceeding any authority granted under the WTO treaties," and as casting "a dark shadow over the WTO dispute settlement system."

Mr. Ikenson cites David Palmeter—a rabid critic of the entire antidumping regime (who once referred to it as worse than "dog law")—as an objective source to defend WTO jurisprudence in the area. He also invokes a former deputy director-general of the WTO (with oversight of dispute settlement) in this same context, which is a little like asking the Appellate Body if they think they're doing okay.

Even die-hard defenders of the system should see a problem when respected analysts and WTO supporters like Gary Hufbauer provide devastating critiques of WTO jurisprudence in the tax area—where Mr. Hufbauer once compared the sophistication of the legal analysis to what one would expect from a "first year law student."

Serious concerns extend not just to the trade remedy and tax areas—but also relate to U.S. policy on appropriations, agriculture, public morals, foreign policy, the environment, and elsewhere.

The notion that the United States—with an $800 billion trade imbalance that is supporting the growth (and exports) of the rest of the world—is some rogue nation deserving of this constant WTO rebuke appears nothing less than absurd.

Mr. Ikenson and others suggest that sovereignty is not a concern because the WTO cannot force us to comply with its rulings. But they are also the first ones to say the sky will fall if we don't. Just a few days ago, Mr. Ikenson wrote on his blog that failure to implement the latest WTO zeroing decision—i.e., the one the Administration ridiculed as "devoid of legal merit" — "could open a Pandora's box that could undermine and eventually destroy the rules-based trading system."

I would argue that all sides of the larger trade debate have an enormous interest in seeing reform of the WTO dispute settlement system. One place to start would be establishing a blue ribbon commission in the U.S. to review adverse WTO decisions and advise Congress on whether panels followed their mandate. It's an idea that at one time or another has been endorsed by the likes of [former and current senators] Bob Dole, Patrick Moynihan, Chuck Grassley, Jay Rockefeller and Max Baucus.

It wouldn't be a cure-all, but it would start the process of re-instilling some faith in a system that needs it badly.

February 23, 2007
Daniel J. Ikenson

I do not dispute Mr. Lighthizer’s contention that other experts share his concerns about the dispute settlement system.  It is worth noting, however, that the Esserman/Howse paper that he cites contains the following passages:

“The [Appellate Body] judges have displayed levels of integrity and independence that rival those found in the best domestic court systems”;

“Disputes at the WTO are now settled largely on the basis of the rule of law rather than simple power politics”;

“An open-minded look at the record shows that, in most areas, the Appellate Body has acted with due respect for state sovereignty and the letter of the law.”

The views of the administration and Congress presented by Mr. Lighthizer lack objectivity.  After all, it is the administration that defends U.S. policies and actions at the WTO, and usually it is Congress’s laws that are in dispute.  Furthermore, although John Greenwald is a knowledgeable and respected trade lawyer, he has represented domestic interests that have received Byrd amendment subsidies, which might animate his harsh assessment of the AB decision in that case.  Here is a brief paper on the Byrd amendment (PDF), which summarizes the critical issues.

Like so much other dissent from WTO trade remedy rebukes, Professor Alford's denunciation of the recent AB decision on zeroing assumes that the due deference provisions in Article 17.6 of the Antidumping Agreement (PDF) give cover to national authorities to do whatever they want with respect to how they determine and measure dumping.  Article 2.4 specifies that "a fair comparison shall be made between the export price and the normal value." The AB has ruled that zeroing precludes a fair comparison by treating certain export transactions as being lower-priced than they actually are, thereby denying full consideration of all export transactions.  Under what permissible interpretation can zeroing be allowed while respecting the fair comparison language?

As I stated in my opening post, the system isn’t perfect.  But, by and large, it gets good grades from those who have followed closely the WTO’s evolution, and who have been published frequently in peer-reviewed legal and economic journals on the topic.  Last year Columbia University sponsored an event honoring the WTO’s 10-year anniversary, at which many experts gave presentations.  The remarks in those papers and talks are predominantly enthusiastic and acclamatory.

David Palmeter, a trade lawyer and academic suggested: “The dispute settlement system has been, and no doubt will continue to be, the crown jewel of the WTO.”

The venerable international trade law professor and scholar, John Jackson, offered: “But even more impressive in the minds of many observers is the operation of the WTO dispute settlement (DS) system.”

And Andy Stoler, a former Deputy Director General of the WTO wrote: “Not only did we get what we wanted [from the Uruguay Round dispute settlement negotiations] but it is also impossible to deny that ten year’s of experience has shown us that the system is in fact working really well.”

February 22, 2007
Robert E. Lighthizer

Mr. Ikenson and I can agree that the United States has become the principal defendant at the WTO and is losing almost every case.  This is not limited to trade remedy cases, although that is perhaps the most egregious area.  Moreover, it is not credible to suggest that these problems simply reflect isolated cases, a pro-complainant bias or the grumbling of sore losers.  Consider just a few of the criticisms and their source:

• John Greenwald, a U.S. attorney who frequently represents foreign producers, has stated that "the WTO dispute settlement system has been far more an exercise in policy-making, and far less an exercise in even-handed interpretation of the carefully negotiated language ... than the WTO enthusiasts are willing to admit."
• Former Deputy USTR Susan Esserman and Michigan law professor Robert Howse stated that "[i]n cases that involve domestic trade laws ... the Appellate Body (AB) has tended to be intrusive ... even when the treaty is ambiguous" and that judges have "failed to apply the deferential standard of review negotiated into the Uruguay Round Agreement."
• The Bush administration has decried "the manner in which WTO panels and the Appellate Body have applied the applicable standard of review in disputes involving trade remedy and safeguards matters, and instances in which they have found obligations and restrictions on WTO Members ... that are not supported by the texts of the WTO agreements."
• Pepperdine law professor Roger Alford stated that the AB's jurisprudence on the "zeroing" issue failed to "adhere to an approach of deference as required by the WTO commitments" and instead "engaged in de novo review of both the law and the facts to reach its preferred result on zeroing." Just this week, the Administration called the AB's latest decision "devoid of legal merit" and commented that the AB "appears to be trying to infer the intent of Members with respect to the issue of 'zeroing' without the benefit of a textual basis."
• The WTO decisions in the FSC/ETI tax dispute [Extraterritorial Income and Foreign Sales Corporation Export Tax] prompted Claude Barfield of the American Enterprise Institute to comment that "both the panels and the AB demonstrated a stunning technocratic determination to barrel forward with their own pet legal theories and ignore the political history and context of the issues at hand."
• Finally, the WTO's reasoning in the Byrd Amendment [the Continued Dumping and Subsidy Offset Act of 2000] prompted seventy U.S. Senators to condemn the panel's actions as "beyond the scope of its mandate by finding violations where none exists and where no obligations were negotiated."  Mr. Greenwald put it colorfully:  "In order to find the Byrd Amendment WTO-illegal, the panel ... had to both stretch the language of the relevant WTO agreement far beyond its plain meaning and to make heroic assumptions of fact without even a hint of evidentiary support."

This does not reflect some isolated inconsistency, but a system that has fundamentally lost its way.

February 21, 2007
Daniel. J. Ikenson

Nobody likes to lose. But the United States has endured several losses in WTO dispute settlement over the past five years. Almost every one has involved some aspect of the sacred trade remedy laws, which has many in Congress and within the trade remedy petitioners' bar crying foul. To some true believers, dispute settlement losses concerning the U.S. trade remedy laws can only be explained within the framework of some broader conspiracy.

The trade remedy laws enjoy broad bipartisan support in Congress, which has tied the president's hands in terms of negotiating any significant changes to the laws in trade agreements. (Regrettably, much of that support is premised exclusively on the appealing rhetoric of fighting unfair trade, while Congress pays little attention to the highly technical rules and procedures and discretion that often unfairly skew antidumping and countervailing duty calculations.) Thus, WTO dispute rulings against U.S. trade remedy provisions or practices are often viewed by Congress as efforts to circumvent their wishes. That, more than anything else, explains the resurgence of interest in the question of WTO fairness.

It would be impossible in the time and space allotted here to demonstrate how dispute panels and the Appellate Body have not overstepped their mandates in each case. I don't even assert that to be the case. Perhaps that has happened in an instance or two, but overwhelmingly the decisions impugning U.S. antidumping, countervailing duty, and safeguards actions have been correct.

If this debate were conducted five years ago, I suspect Mr. Lighthizer could comfortably argue the position I take today. World Bank research published in 2003 (we are endeavoring to update these data at Cato) found that, of all the disputes requiring adjudication between 1995 and 2001, complainants won cases 88 percent of the time. In that period, the United States was mostly a complainant, and it won 76 percent of the time. Since then it has been mostly a defendant, and in keeping with the pro-complainant bias in WTO outcomes (which should make sense since members tend to bring cases they are reasonably certain to win), has lost almost every case.

Although Mr. Lighthizer expresses concern over national sovereignty allegedly usurped, the fact is that the dispute settlement system has no claims whatever against the sovereignty of its members. WTO decisions do not bark orders; they do not mandate compliance. On the contrary, dispute settlement decisions "recommend" that the offending practice, policy, or law be brought into conformity with whatever WTO agreement it is found to be violating. Should the offending party choose not to comply, the complainant has recourse to retaliation, which is designed to shift the debate to the body politic of the offending party, where the interests affected by the offending practice and the interests affected by the retaliation can decide what's best for the country.

The system is quite ingenious, balancing respect for national sovereignty with the capacity to compel.

February 20, 2007
Robert E. Lighthizer

The WTO dispute settlement system is veering off course, and is increasingly a threat to the legitimacy of the entire body. Without confidence that disputes will be resolved fairly—and with full respect for the negotiated concessions actually made by parties to the WTO—there is no question you will see less support for the global system and less inclination of countries to make trade concessions in the future.

There is a widespread (and in my view well-justified) view that WTO jurists see their job not simply as enforcing the intent of negotiators and the agreements they reached —but as helping to "move the engine of world trade" forward. That is a recipe for disaster.

Trade remedies are a perfect example. While never the darling of pure free traders, measures to combat dumping, subsidies, and injurious import surges have always been deemed essential by open economies like the United States to maintain support for trade. Uruguay Round negotiators painstakingly set forth specific rules in this area and made clear that WTO dispute panels should defer to national authorities where possible.

Instead of respecting this mandate, WTO jurists have engaged in an all-out assault on trade remedy measures. Even legal experts hostile to these laws, as well as the Bush Administration, have expressed astonishment at the level to which panels are simply writing new requirements into the WTO agreements. In this same vein, the Safeguard Agreement has become a virtual dead letter—with every measure brought before the WTO struck down, and the legal hurdle set so high that few view the judicially established standard as achievable.

These decisions have, of course, come as a surprise to many in Congress—who were assured that existing U.S. practice was not only consistent with the WTO agreements, but in many cases served as the model.

Even aside from trade remedies, WTO panels have increasingly seen fit to sit in judgment of almost every kind of sovereign act—including U.S. tax policy, appropriation policy, environmental measures, and public morals, to name a few. None of the decisions have reflected the type of judicial restraint appropriate for the body.

It is hard to overstate the threat this poses to the integrity of the system. Unlike national legal systems, there are precious few avenues to address judicial activism at the WTO. You pretty much have to gain consensus to change the agreements, or simply withdraw from the system. The first is nearly impossible, and the second would be—in the view of many—cataclysmic.

February 20, 2007
Daniel. J. Ikenson

The WTO dispute settlement system is better than fair; it's good! On the traditional grading scale, it deserves a B, not a C. Alas, that is not the definition of "fair" that the framers of this debate have in mind. But neither was I being facetious. It is crucial to have some perspective against which to weigh the question of fairness. Although there is some room for improvement, there is no need to storm the Bastille.

The answer to the question is not a binary "yes" or "no." The system is reasonably fair, and it has worked reasonably well through twelve years and 358 disputes, with compliance or resolution achieved in every case concluded thus far. That record should counsel against acting precipitously upon allegations of unfairness—whether those allegations concern particular dispute outcomes or more systemic concerns like access to dispute settlement, access to the full battery of options within dispute settlement, or due process considerations.

Some delegations decry the unfairness of a system that requires too many resources to successfully challenge other members' policies. Cost considerations do favor richer members over poorer, but under what other international arrangements can a tiny country like Antigua and Barbuda win condemnation—and, in all likelihood, compel reform—of the offending policies of the largest economy in the world?

Others claim that the greater capacity of richer countries to endure retaliation, and thus to disregard adverse rulings, is unfair to the poorer countries, which are less capable of withstanding retaliation and which are therefore limited to the option of immediate compliance. That is certainly an asymmetry that tilts in favor of richer countries, but does it warrant scrapping the whole system if a more incremental resolution is elusive?

The length of disputes has also been cited as a source of unfairness. If judgments were rendered more expeditiously, so that the action, regulation, or law under challenge (if and when found to be out of conformity with a WTO agreement) did not enjoy an extended grace period serving as an unjust impediment to trade, then the system would likely be more fair.

Certainly, the system isn't perfect. But in this case, the perfect is, indeed, the enemy of the good. 

For the United States, the question of dispute-settlement fairness typically revolves around the question of outcomes. Recent Appellate Body rulings against the U.S. antidumping calculation practice known as "zeroing" have prompted initial resistance from Congress and the reintroduction of legislation calling for a panel of retired federal judges to review adverse WTO decisions. The question of fairness, narrowly defined, is on the minds of Congress presently.