The WTO Appellate Body Crisis: FTAs and the Enforceability of World Trade Law

The WTO Appellate Body Crisis: FTAs and the Enforceability of World Trade Law

By Ursula McDonnell, JS Law and Political Science

The World Trade Organisation (WTO) has been the champion of world trade law enforcement since its inception in 1995. The WTO’s dispute settlement mechanism (DSM) has prevented harmful cycles of tariffs and retaliation by facilitating arbitration between its Members. Today, the WTO-DSM function is in jeopardy of collapsing, the consequences of which may be disastrous for the enforceability of world trade law.

World trade law refers to the branch of public international law which governs the regulation of the international flow of goods and services. World trade law is an outlier amongst typically fragmented and decentralised public international law enforcement mechanisms. This can be attributed to its concrete mechanisms which have, until recently, been effective in ensuring that relevant parties implement obligations contained in international trade treaties.

World trade law is primarily enforced by the World Trade Organisation. The WTO was formed during the Uruguay Round of the General Agreement on Tariffs and Trade in response to a general belief amongst world leaders that the global community was missing a multilateral organisation to effectively oversee and enforce complex interstate trade relations. It was ratified by the Marrakesh Agreement and began to facilitate a common organisational structure for the management of trading ties between Members on 1 January 1995. The establishment of the WTO essentially solidified the law governing world trade and has been viewed by many as one of the most important advances in multilateralism.

The Marrakesh Agreement created an exclusive, centralised, and integrated DSM for WTO Members to settle disputes. The mechanism is supported by the WTO Dispute Settlement Understanding, which specifies that its judicial scope extends to resolving disputes emerging from violations of WTO covered agreements, i.e. all the multilateral WTO agreements.

Previously proclaimed the ‘jewel in the crown’ of the WTO, the WTO-DSM was once extremely productive. Its sophisticated organisational structure and accessible procedural phases were very active, with 610 disputes being submitted since its inception. Its extensive application reflects the confidence that Members once had in its ability to resolve disputes and maintain Members’ rights under the covered agreements. Today however, the WTO-DSM is a system in crisis.

As more complex disputes have entered the WTO-DSM, Members are increasingly critical of the inadequacy of WTO rules to resolve them.

The most vociferous of critics has been the United States. In particular, the US takes issue with the judicial organ of the WTO-DSM, the Appellate Body (AB).

has blocked any opportunity to fill vacancies on the AB by preventing the appointment of jurists. They have specified their condemnation on substantive, jurisdictional, and procedural aspects of the AB’s practice and jurisprudence, namely complaints about judicial activism and apprehension about detrimental effects on US sovereignty. Any attempt to reform the WTO-DSM following US pressure has been ineffective. In December 2019, the number of jurists on the AB fell to below the minimum of three required for it to hear appeals. The AB is paralysed by this in the sense that it has been unable to complete any pending disputes and cases are appealed ‘into the void.’

Such an impasse has detrimental ramifications on the enforcement of world trade law. With the demobilisation of the WTO-DSM there is no overarching institution responsible for the supervision and regulation of world trade law. This has created huge uncertainty and insecurity in the international trade community. Many countries’ economic prosperity depends on international trade. Developing countries participating in international trade also rely on special rules that foster global economic equality.

Hence, world trade must be regulated or the stimulating effects of international trade will be squandered.

In response to the deadlock, states are looking for alternative dispute mechanisms to resolve disputes. Many are beginning to consider free trade agreements (FTAs) to maintain the enforcement of world trade law.

An FTA is an agreement in which signatories offer concessions to other members. It establishes a preferential trading system between participants, usually in the form of affording fellow members more favourable treatment in issues of trade than they afford to members of the WTO. The WTO allows for their creation under Article XXIV of the GATT to provide room for preferential arrangements between states in trade.

Given the current nature of the AB crisis, it would be premature to fully assess the strengthening capacity of FTAs in relation to the enforcement of world trade law. However, even before the AB crisis, the signing of FTAs had already functioned as a complementary supervisor of the enforcement of world trade law. FTAs govern the realms of world trade law that the WTO cannot or are not designed to, essentially filling in any gaps they have left. Indeed, FTAs provide their own DSMs to carry out this aim that are very similar in nature to that of WTO-DSM. Hence, states may find that FTAs are well-equipped to fulfil the enforcement role that the WTO has not been able to.

FTAs may strengthen world trade law compliance by promoting global governance. Taking an institutionalist approach, it is possible that states will agree to cooperate and comply with the rules of FTAs when it is in their interests. Indeed, FTAs are very flexible. Their regionalist and discriminatory nature enables states to achieve free trade in spheres where the WTO is ineffective. Thus, FTAs can more effectively achieve partial liberalisation in situations where the WTO cannot achieve any liberalisation for Members. When FTA members benefit from these conditions, they are more likely to cooperate and comply with FTA-DSM judgments. Hence, if complied with, FTAs may facilitate compliance with world trade law while the AB is frozen.

It is important to note that in a scenario where the AB is restored and FTAs are more prevalent in international trade, issues may arise where disputes occur in sectors covered by both WTO and FTA agreements. Known as the ‘spaghetti bowl’ effect, the existence of individual DSMs creates major confusion and unpredictability in the enforcement of world trade law. This problem has plagued world trade law enforcement even before the paralysis. Crucially, increased dependence on FTAs may further aggravate the issue if the AB is defrosted. Hence, as states begin to consider relying on FTAs, the possibility of ensuing jurisdictional conflict should be taken into account.

Overall, there is no indication that the US will lift the impasse in the near future. In assessing life without the WTO AB, given that they are sufficiently resourced to facilitate dispute settlement proceedings, FTAs may facilitate the enforcement of complex state-to-state trade relations. This is dependent on whether signatories will actually comply with FTAs. Nevertheless, replacing the AB with such an alternative is an extremely complicated task and is marred by the ‘spaghetti bowl’ effect. Due to the developing nature of the AB crisis, it seems that the task of ensuring that world trade law is continuing to be enforced will be an uphill battle for the international business community.