Make trade, not war: a new interim mechanism for trade dispute appeals

The World Trade Organisation’s dispute settlement mechanism has long been described as the “jewel in the crown” of the global trading system, offering WTO members certainty about defending their trade rights.  Since last December, however, the ability to take cases through to final appeal has been in limbo.   A group of 16 WTO members, led by the EU and including New Zealand, has recently set up an interim mechanism to help resolve disputes.

Interim mechanism initiated by the EU

New Zealand recently joined 15 other members of the WTO, led by the European Union (and including a range of key trading partners such as Australia, China, Canada and Singapore), in establishing an arrangement that will allow them to solve trade disputes at the appeals stage among themselves.   The mechanism is intended as a temporary solution in light of the current paralysis of the WTO Appellate Body, and should help to preserve New Zealand’s trade rights, at least vis-à-vis the participants in the arrangement.    

It is worth delving back briefly through the history of WTO dispute settlement to understand how we got here, and why it matters.

Part of the beauty of the WTO system lies in its even-handedness.  Small countries like New Zealand have been able to use it to take on much larger trading partners – and win.

Getting to yes: the history of WTO dispute settlement

One of the central elements of the ‘grand bargain’ that was struck to form the WTO system back in 1995 was an effective, reliable and impartial dispute settlement mechanism.  Its key feature was that it was binding on all members.   (Under the predecessor “GATT” system, disputes could be taken but findings were only adopted by consensus, which necessarily included the member accused of wrongdoing – and as the saying goes, turkeys don’t usually vote for Christmas…)   By contrast, since the WTO’s formation, nearly 600 disputes have been brought to the WTO, and over 350 rulings have been issued by dispute “panels”.  Panel rulings can be, and frequently are, appealed for final decision to the Appellate Body.   

The little guys have rights, too

Part of the beauty of the WTO system lies in its even-handedness.  Even small countries like New Zealand have been able to use it to take on much larger trading partners – and win.   We would be unquestionably worse off without such a mechanism.  Not surprisingly, many of New Zealand’s cases have involved defending our agriculture trade interests, and against some weighty trading partners: Canada and the EU in respect of dairy, Australia in respect of apples, Indonesia on beef and horticulture, and the US for lamb.  We were successful in defending our trade rights in all of these cases.

The paralysis of the Appellate Body

Over several years, the United States has been a harsh critic of the Appellate Body.  (The US has incidentally been one of the biggest users of the WTO dispute settlement system, and was a driving force in its establishment.)  It has slowly paralysed the Appellate Body by refusing to agree to appoint replacement AB members as current terms expire.  Last December the number of members dwindled to one, fewer than the quorum required.  

The US has cited a range of problems with the way that the Appellate Body functions, including around the timeliness of its processes and accusations of judicial overreach in its decisions.   In fact, most WTO members would agree that the system is far from perfect, including New Zealand, and that reforms are needed.  An intensive consultation process to seek to address issues raised by WTO members took place in Geneva last year, led by New Zealand’s Ambassador David Walker – but the US remains unpersuaded.

The AB has a full caseload

The result is that WTO members can now in effect appeal cases into ‘legal limbo’.  (There is however no obligation to pursue an appeal, and some WTO members have shown due restraint in accepting an outcome from a panel.)  Around a dozen appeals are currently on the slate, with more likely as a range of cases make their way through the panel stages.  We may see even more as the system grapples with both a slew of trade war-related disputes and the pandemic-inspired rush by some countries to introduce various trade distortions.

The interim mechanism may help with some disputes…

The new EU-led mechanism, called the “Multiparty Interim Appeal Arbitration Arrangement”, may help with at least some of these.  It mirrors WTO rules and can be used by any WTO member that is willing to sign up.  The EU has advised that the arrangement will become operational once officially notified to the WTO in the coming weeks.

…but first-best would be resurrecting the Appellate Body

While welcome, the new arrangement is only a temporary fix – and of course, with only 16 participants, leaves out a sizeable share of world trade, including some of the biggest players such as the US and Japan.   It would be good to see many more countries joining up.  Clearly, however, the best outcome would be for the Appellate Body to function again.  This will be all the more important as countries seek to restart the engines of global trade once the worst of the Covid-19 storm has passed.  It could be argued in fact that the WTO dispute settlement system has actually worked best when it hasn’t been used – the mere fact of its existence has helped to curtail countries’ urges to take trade action in breach of the rules.   That will be more important than ever in the period ahead.

This post was prepared by Associate Director Stephanie Honey.