Strengthening the WTO by replacing trade retaliation with stronger informal remedies?

• Date: 23 March 2012
• DOI: https://doi.org/10.1108/14770021211210704
• Pages: 82-102
• Published date: 23 March 2012
• Author: Claus D. Zimmermann
• Subject Matter: Economics

Strengthening the WTO by

replacing trade retaliation with

stronger informal remedies?

Claus D. Zimmermann

Faculty of Law, University of Oxford, Oxford, UK

Abstract

Purpose – The purpose of this paper is to show that, instead of replacing trade retaliation with

alternatives that are equally problematic, such as monetary damages, mandatory trade compensation,

or formal membership sanctions, the World Trade Organization (WTO) might gain from relying

exclusively on informal remedies.

Design/methodology/approach – The paper critically reviews the main proposals brought

forward in the literature and by WTO members on how to reform WTO remedies. It takes a fresh look

at whether any viable, both economically and legally sensitive, alternatives exist.

Findings – First, the fact that WTO dispute settlement does not rely on monetary damages and on

reparation for past losses is economically justified. Second, switching to an alternative remedy of

mandatory trade compensation is not a viable alternative to proportional countermeasures. Third,

introducing formal membership sanctions into the WTO would either remain ineffective or turn out to

be counterproductive for progressive trade liberalization. Fourth, in order not to provoke an excessive

increase of the total cost for WTO members to breach their obligations, any strengthening of the

WTO’s informal remedies should not be undertaken on top of existing remedies, but as part of a major

paradigm shift built on the abrogation of trade retaliation.

Practical implications – The article contributes to the ongoing debate on how to reform the WTO’s

dispute settlement mechanism.

Originality/value – This article joins an already vast body of literature dealing with potential

reforms of the WTO’s dispute settlement mechanism. It provides a holistic review of the main existing

reform proposals under both legal and economic aspects and adds original insights in discussing the

replacement of trade remedies by strengthened informal remedies.

Keywords Internationaltrade, Dispute resolutions, World TradeOrganization,

Dispute settlementunderstanding, DSU reform,Proportional countermeasures,Trade retaliation,

Compensation,Membership sanctions, Informal remedies

Paper type Viewpoint

There may be good policy in [trade retaliation], when there is a probability that [it] will

procure the repeal of the high duties or prohibitions complained of. [...] When there is no

probability that any such repeal can be procured, it seems a bad method of compensating the

injury done to certain classes of our people, to do another injury ourselves not only to those

classes, but to almost all the other classes of them: (Smith, 1776, The Wealth of Nations).

Introduction

The World Trade Organization’s (WTO) dispute settlement mechanism, a much

improved and strengthened version of the one existing under the former General

Agreement on Tariffs and Trade (GATT), is generally considered to be the most

elaborate and best functioning enforcement mechanism in the realm of international law.

Since the WTO came into being in 1995 to 23 October 2011, there have been 423 requests

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Journal of International Trade Law

and Policy

Vol. 11 No. 1, 2012

pp. 82-102

qEmerald Group Publishing Limited

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DOI 10.1108/14770021211210704

for consultations, with panels having been established in 233 and panel reports having

been adopted in 164 cases. However, only a small proportion of these disputes, less than

4.5 per cent of all initial requests for consultations[1], were litigated through to the

eventual authorization of trade retaliation with a mere 19 arbitration awards (covering

12 different disputes) on the level of suspensions of concessions having been issued

under Article 22.6 of the WTO’s Dispute Settlement Understanding (DSU)[2] so far[3].

Certainly, these figures need to be looked at with a certain amount of caution: not all

breaches of the WTO agreements may have been subject to formal dispute resolution

under the rules of the DSU. Some breaches may not even have been addressed informally

to the extent that affected WTO members have found it opportune, for whatever reason,

to remain silent[4]. The overall picture remains, however, that WTO law is pretty well

respected under the current rules of the DSU; persistent non-compliance is a quite rare

phenomenon. Over the past decade, the reputation of the WTO’s dispute settlement

mechanism appears to have further improved in light of the organization’s ailing

legislative branch and the major difficulties of WTO members to successfully conclude

the Doha Round of multilateral trade negotiations launched in November 2001[5].

The most important features of WTO dispute settlement as framed by the rules and

procedures set forth in the DSU can be summarized succinctly as follows. Once a

non-appealed panel report or a report by the Appellate Body has been adopted by the

WTO Dispute Settlement Body (DSB), the WTO member whose measures have been

found to violate WTO law will have to clearly indicate whether and how it intends to

comply with the DSB’s recommendations and rulings (DSU Article 21.3). If it is

impracticable to comply immediately, the respondent will be given “a reasonable period

of time” in order to make the necessary legislative or regulatory changes. This

“reasonable period of time” will be determined either by mutual agreement between the

parties and approval by the DSB or through binding arbitration (DSU Article 21.3).

In any event, the DSB will keep the implementation under regular surveillance until the

issue is resolved (DSU Article 21.6). If the inconsistent measure is not withdrawn within

the “reasonable period of time”, claimant and respondent must negotiate over

compensation (DSU Article 22.2). Although the DSU does not forbid that such

compensation be pecuniary in nature, compensation, to the extent that it occurs,usua lly

takes the form of an equivalent lifting of trade barriers by the loosing party (Pauwelyn,

2000, p. 337). Only if these negotiations over compensation fail, the claimant may request

authorization from the DSB to suspend concessions or other obligations, in other words,

to proceed to trade retaliation against the respondent and raise trade barriers not

exceeding the level of nullification or impairment caused by the breach at issue (DSU

Article 22.4). In principle, concessions should be suspended in the same sector as that in

issue in the dispute at hand (DSU Article 22.3(a)). If this is not practicable or effective, the

suspension can be made in a different sector of the same agreement (DSU Article 22.3(b)).

If this is again not effective or practicable, and if the circumstances are serious enough,

the suspension of concessions may be made under another agreement (DSU Article

22.3(c)). The last scenario is usually referred to in the literature as cross-retaliation[6],

although officially, the terms “retaliation” or “sanctions” are not used in the DSU. Any

disagreements over the proposed level of suspension may again be referred to binding

arbitration (DSU Article 22.6). The DSU does not provide for retroactive compensation

for the economic harm a member suffered from a WTO-inconsistent measure, i.e. for

reparation of past damages. Under the existing system, compensation and the

Strengthening

the WTO

83