Why is there a Crisis at the World Trade Organization?

Show Notes

Closing Pandora’s Box: The Growing Abuse of the National Security Rationale for Restricting Trade by Simon Lester and Huan Zhu

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, a podcast of the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska Lincoln. I am Jill O'Donnell. Our guest today is Bruce Kirsch, founder of Tailwind Global Strategies. Bruce previously served as the US Trade Representatives' Chief Counsel for Dispute Settlement, and as Legal Advisor to the US Mission to The World Trade Organization. Bruce, thank you so much for being on Trade Matters today. We really appreciate it.

Bruce Hirsh: It's my pleasure. Thank you for having me.

Jill O'Donnell: So, the topic today is a big one. The WTO appellate body is something that I think we've been hearing about and may start hearing about even more as we get closer to a key date of December 11th, as you know very well, and you've written about this, which is the date when two of the three remaining judges on this appellate body will retire, at which point there will be one left, and in that body can no longer function there at The World Trade Organization. So, it's a timely topic today.

I wanted to start by asking you really basic question about what the World Trade Organization's appellate body is, what it does, and what need it was created to address. Can you just address those briefly to start out here?

Bruce Hirsh: Sure. The WTO dispute settlement system takes place in two stages. The first stage is one with ad hoc panelists, and then the appellate body handles the second stage, that is appeals from panels. The appellate body has seven members, each chosen for a four-year term, which is renewable once. The appellate body was created to correct panel legal errors. Under the predecessor to the WTO, the GAT, countries could block dispute settlement panels from being formed, or their results from being made official. So, if a country felt that a panel had made an error, they could prevent the report from becoming official. Under the WTO dispute settlement, the reports become official automatically. WTO members who are negotiating the rules on dispute settlement were worried that if panels make mistakes, they couldn't be corrected, so they created the appellate body as a backstop against these kinds of mistakes.

Jill O'Donnell: Could you talk a little bit as well about the appellate bodies' track record? I've seen reports before that indicate pretty high rates of compliance by countries with rulings overall in the dispute settlement process, including the appellate bodies. Can you can talk a little bit about how that's worked over the last couple of decades since it's been in place?

Bruce Hirsh: Yeah, the appellate body has really brought a lot of legal rigor to the dispute settlement system. Previously, the panelists were rendering more informal opinions, and so it has become much more rigorous. The appellate body also has brought a lot of consistency to the dispute settlement results since they're all going to the appellate body now.

Now as for the question of compliance, really that has something to do with the fact that most of the results have been fairly well reasoned, but it also has something to do with the simple fact that WTO members have a stake in the success of the dispute settlement system. They really are complying because they want others to comply as well when they lose. This goes to the reason for the system in the first place, and that is to avoid in part, at least to avoid tit for tat retaliation, like what we're seeing now with the various trade wars. Since countries don't like to admit that they're breaking the rules when another country accuses them of doing so, they generally will deny it. With the benefit of a neutral third-party adjudicator, countries can accept that they need to make changes rather than just digging in and retaliating in turn.

Jill O'Donnell: Let's talk a little bit about why we're down to three judges right now. The United States, as you know, has blocked the appointment of additional judges to the appellate body as retirements have occurred as a way of bringing attention to some complaints that the United States has over how that body has operated, like over-reaching its mandate perhaps, or not operating in our timeframes that are set out under which it should operate. Can you talk a little bit more about why we're in the situation we're in today with being down to three judges, and what the nature of some of those complaints are?

Bruce Hirsh: The short version is that the US believes that the appellate body has been disregarding the rules that they're supposed to be operating under both procedural and substantive. Procedurally, the appellate body has been regularly missing the 90 day deadline that WTO members established for it to complete their work. It's also been allowing appellate, by members whose terms have expired, to complete cases that they're working on. The US feels that the appellate body has been engaging in fact finding, even though the appellate body's mandate is limited to reviewing panel legal errors. Substantively, the US feels that the appellate body has just too often engaged in gap filling, and in creating new rules that members didn't agree to, and extending the current provisions. The US also feels that the appellate body has increasingly been providing advisory opinions on legal provisions that are not at issue in the dispute before them. Those are the basic nature of the concerns.

Jill O'Donnell: Would you say that these concerns are shared very widely among other WTO member countries?

Bruce Hirsh: Well, other countries have at times agreed that there been problems in particular cases. Others disagree based on a basic philosophical difference about how the system is supposed to operate. They actually like seeing an international adjudicator extending the rules. But you know, even those who have agreed that there have been problems have generally not done so openly. That's because, in part, there was a belief that there wasn't a whole lot that could be done about it, but also because even if they didn't like the way the appellate body got to a result, they often liked the result. So the concerns from others have been muted, but there have been some concerns.

Jill O'Donnell: Let's talk about the why question that's gotten a little bit of attention. You and others have pointed out that the US has been insisting on a discussion of why the appellate body has strayed from the rules, or at least why the US has proceeded to have strayed from the rules under which it should operate rather than focusing on reform proposals. I'd like to quote US Ambassador to The World Trade Organization, Dennis Shea, who said very recently, "If we WTO members cannot agree that we should be concerned that the appellate body has broken the plain rules that members agreed to in the dispute settlement understanding, then it is difficult to see how we can find solutions to a problem we do not agree exists." Does he have a point about that? Is it hard for countries to find a joint solution, or even get to a conversation on proposed solutions, if they don't agree that a problem even exists or why it exists?

Bruce Hirsh: Well, certainly it would be easier to find a solution if there were agreement on the problem and why it exists. But the challenge is, is that some members like the EU, they've been happy with the way the system has evolved, including the way in which the appellate body appears to be taking an expansive view of the agreement provisions. You may not get the EU to agree that the system is not working correctly, but that doesn't mean that they won't agree to make changes to accommodate the US just out of simple necessity. A solution implies a problem, even if not everyone is willing to say so explicitly. The why conversation possibly could help, but to the extent that you know there may not be agreement that there's a problem in the first place. It's not clear that it will move the ball forward beyond what could happen just by looking at solutions.

Jill O'Donnell: How would you rate the effectiveness of the strategy of withholding judges to bring attention to this problem? Has it brought enough pressure to bear to get any traction in terms of a discussion in Geneva about how to move forward on this? Has that been effective at all in just bringing attention to this and maybe starting to move forward on proposals?

Bruce Hirsh: Yes, it has. You know, the US tactics certainly haven't been appreciated, but they have gotten the attention of members, and there has been a process since the beginning of the year to actually consider and address the EU's concerns. I mentioned earlier that to the extent that other members have had concerns over the years, they've often not raised them. The reason for that is because in order to take any kind of decision at the WTO, you have to do so by consensus. At some point or another, whenever there have been concerns raised, the general view was, "Well, what are we going to do about it? We'll never get a consensus." Others took the view, "Well, what can anybody do about it, including the US, short of breaking the system?" Well, that's where we find ourselves now. And so it has gotten the attention of other members, even if there's been criticism of the US for not unnecessarily engaging on solutions in the way they need to.

Jill O'Donnell: So you have served as the Chief Counsel for Dispute Settlement at the US Trade Representatives' office as well as Legal Advisor to the US Mission to The World Trade Organization in Geneva. I wonder if you could give us just a sense of what it's like on the ground as someone who's worked there on legal issues. You know, when you've got a situation of this gravity where the appellate body might cease to function, and you have over 160 members of this organization that operates by consensus, what is it like on the ground there when you're working through different issues where countries may have different viewpoints, as someone in your position has done?

Bruce Hirsh: It's a real challenge and it can be quite frustrating. The interest is, everybody agrees that the dispute settlement system is important and has been really critical to members taking the rules seriously, as well as to resolving disputes, and for avoiding disputes, because the threat of dispute settlement is there. But in the context of a particular case, the concerns which the US has raised with how the system has gotten to a result have often gotten very much tied up with the actual substance of result. When other members see the criticisms, they have often assumed that it was merely the substance of result that has been a problem, and been dismissive of the US concerns because of that. So it is a challenge. This is a consensus-based organization. I think it's pretty well understood and established that that consensus-based decision making process has made it difficult to negotiate new rules, but I think that there hasn't been a full appreciation of how that same consensus-based decision making made it difficult to provide oversight for the dispute settlement system. For example, you'll hear in the United States if there's a court judgment that people are not pleased with, they can go back to Congress and change the law. That's not really an option at the WTO. On the ground, there's been this nagging concern that the appellate body has heading in this direction, but a frustration at the challenge of actually being able to address it.

Jill O'Donnell: You brought up several issues there that lead me to my next question, one of which is the operation of the WTO by consensus and how difficult that can be with so many members. The WTO dispute settlement system itself, including the appellate body, has often been described as the "Crown Jewel" of the WTO, because member countries voluntarily give up a little bit of sovereignty to agree to binding dispute settlement. But we know that it can be really difficult for big and powerful nations to tie their hands to a set of international rules. So I wonder what your perspective is on whether this crisis was sort of destined to happen at some point, because of that inherent tension between giving up little sovereignty, wish nations typically don't want to do, the tension between that in between having a stake in these rules operating well.

Bruce Hirsh: I don't think it was inevitable. You know, the US has always been a strong advocate of rules-based trade and of strong dispute settlement procedures. They've always been willing to live by the constraints established by the rules that they've agreed to. It's the disagreement on whether the appellate body is going beyond those rules that has precipitated the current crisis. There, it is this latent disagreement on how the system was going to function that did perhaps make it inevitable that there would be a crisis less so the concern over having sovereignty constraint than more specifically having sovereignty constraint in a way that wasn't agreed to. On the one hand you, the United States says that WTO is a contract. It's an agreement. We only want to see its terms enforced based on what we've agreed to. And then you have others like the EU who feel that they've agreed to a process that was going to perhaps flush out those rules, and expand those rules, and they're much more comfortable with it. So to the extent that that philosophical difference was underlying it, then yes, perhaps this kind of disagreement was inevitable, but it wasn't simply the case that a constraint on sovereignty was going to lead to a problem.

Jill O'Donnell: I think that's a really interesting distinction you just brought up there, the difference between a constraint on sovereignty overall as a conceptual idea versus a constraint on sovereignty in a way that wasn't agreed to. I think that's a really important part of this discussion that perhaps we haven't heard a lot about yet. Can you talk just a little bit about some proposed solutions that are out there to the extent that those have been flushed out yet? I know the EU and Canada have struck a deal last summer to resolve disputes through an alternate mechanism, which doesn't really solve the underlying issue, but it's a work around for them. Reportedly, the EU in Norway have done something similar. Can you describe a little bit about how countries, or groupings of countries, are responding either to the underlying concerns or to developing their own workarounds in the event of an appellate body paralysis in December?

Bruce Hirsh: The EU has been attempting to convince other WTO members to agree to basically set up a parallel appellate body process so that in their disputes they can continue to have a second stage appeal. Others have been pursuing other approaches. There have been some members who have reached agreements with each other at the time a dispute is initiated, that if the appellate body is not available to hear an appeal once the panel completes its work, then neither party will appeal to the appellate body, and the panel reports themselves can get adopted. Just mechanically, the challenge after December is that because parties have the right to appeal their panel results to the appellate body, if there isn't an appellate body there to hear it, then the case falls into a limbo and the panel results can never become official. Again, so some members have addressed the problem by saying, "Fine, we just want to appeal. The panel results can become official." So in general at this point, it looks like there will be various approaches to workarounds of the situation. You know, the worst case scenario is that there will not be a workaround in a particular case and either party, if they lose, can then appeal to an appellate body which doesn't exist and the case will then go into limbo.

Jill O'Donnell: So the danger that appeals will go into limbo after December 11th seems to be one of the most kind of immediate consequences of the appellate body paralysis that is being predicted. What else might happen after December 11th if the appellate body ceases to function? Will the world notice right away? Will it take some time to notice it? Will countries want to quickly seek to restore the appellate body when they are really in a situation where they don't have that option to appeal?

Bruce Hirsh: Well those who have cases pending now, or are likely to be filed soon, we'll have to scramble for one of those alternative approaches to resolve them. There are some cases, including some high-profile cases, where the absence of an appellate body could become a problem and become a problem for those who aren't even involved in the dispute. Here, I'm thinking about the Airbus dispute between the US and the EU. The US recently imposed retaliatory tariffs, after receiving authorization from the WTO to do so. But the EU is claiming that they've taken additional steps to comply, and that they have a panel which is now considering those steps. If that panel actually concludes that the EU has complied and the US retaliation should be reduced, then we could be faced with a situation in which that result couldn't be appealed to the appellate body and that would fall into limbo. And there would be no way for the US to challenge the current US retaliation. So if that happens, the EU has threatened that they would retaliate anyhow, and we could end up in further deepening the trade disputes with the EU and have further retaliation, which hits other US products outside the sector. Whether countries are going to try to seek to restore the appellate body quickly will depend in the first instance really on whether there's additional engagement on solutions from the US and others. There's a risk that the new situation becomes the new normal, and the impetus for restoring the system will dissipate. That perhaps is the greatest risk overall at this point, because if that happens then many of the benefits of the system, the dispute settlement system, that is the knowledge that it's available to resolve disputes. The concern frankly, is that it's available that forces members to take their obligation seriously. All of that could be diminished.

Jill O'Donnell: This anticipates my question for you about practical implications for farmers, for businesses, for all of us really, if the appellate body ceases to function. Certainly, people would be impacted if there were more tit for tat retaliation that occurs, and more uncertainty that could be created overall for global commerce. What else do you see as really practical implications of this for the individual at the individual level?

Bruce Hirsh: Well, to the extent that the absence of the dispute settlement system forces disputes into bilateral, unilateral attempts at enforcement, then we could see new trade wars arising. You know, I mentioned the EU Airbus situation as one of those places where it might occur, but it could happen in a number of other disputes. But more fundamentally, to the extent that the dispute settlement system is not available, there could be countries that are tempted to disregard the rules knowing that they can't be enforced. The connection may be a little hard to draw for individual farmers and businesses that are doing business, but I think that they could pick up a general sense that there's more willingness to bend and stretch rules.

Jill O'Donnell: So I'd like to zoom out and ask you an overarching question about what we're learning from this situation and from the last 20 plus years of the appellate body since it's been in place. I read a farewell speech by Peter Van den Bossche, who was the most recent appellate body judge to retire, which occurred earlier this year in May. On that farewell speech he said that the WTO dispute settlement system, "Was and currently still is a glorious experiment with the rule of law and in international relations." What have we learned from this experiment in international relations over the last 20 plus years? I think when something new is created and put in place like the dispute settlement understanding, like the appellate body, and it's worked for a number of years, decades, that it can be sort of taken for granted. But then we find ourselves in a situation like we are now where the appellate body may not be functioning in a couple of months. So what does this tell us? What have we learned from the last couple of decades with the system in place?

Bruce Hirsh: Well, I think we've learned that as anticipated and as hoped, that the WTO binding dispute settlement can be extremely valuable not only in resolving particular disputes, but in avoiding disputes in reinforcing respect for the rules. At the same time though, we have learned that, as I mentioned earlier, that dispute settlement's not immune to the fundamental governance problems that the rest of the WTO has been subject to, and that to the extent that we've put together a binding system with automatic, automaticity, or making official the results of these panels, that more thought needed to be given to ensuring that the system was going to operate subject to constraints. The constraints that that members did write, and the rules for dispute settlement perhaps need to be made more specific and clarified to ensure that everybody who's a participant in the system is confident that it's operating as they had anticipated that it would.

Jill O'Donnell: Okay. Finally, I've come to the end. My last question for you, which I ask every guest on this show, is what are you reading right now about trade? Or a book or an article that's most striking to you?

Bruce Hirsh: Well, let's see. It's a bit wonky, but I recently spoke on a panel at the WTO public forum on the national security exception. So I've been reading up on that. I read a good article by Simon Lester at the CATO Institute on ways or procedures that the WTO may want to set up to address trade measures that have been taken for national security purposes. There's a lot of countries right now that are invoking this exception and taking these kinds of measures, not just the US, and there really have not been a lot of very well-developed procedures for dealing with it. So this article is interesting. It's called "Closing Pandora's Box," and it appeared in a policy analysis from CATO in June. It just sets out some ideas for how to manage these kinds of cases without further stressing the dispute settlement system. Like I said, it's a bit wonky.

Jill O'Donnell: Well, that's okay. Wonky is good sometimes. Thank you, Bruce. I think we could have an entire conversation just about the national security exception, so we may have to do that another time. Thank you so much for this very educational conversation about the WTO dispute settlement system in the appellate body. We really appreciate it.

Bruce Hirsh: Thank you. It's been my pleasure.

Jill O'Donnell: That's it for this episode of Trade Matters. A big thank you to Bryce Doeschot, Haley Apel, and Brianne Wolf for helping produce this podcast. Join us next time for a conversation with Katrin Kuhlmann, President and Founder of New Markets Lab and visiting professor at Georgetown University Law Center.

Please subscribe to Trade Matters on iTunes, Stitcher, or wherever you get your podcasts. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu or, follow us on Twitter @YeutterUNL [corrected.] The opinions expressed on Trade Matters are solely those of the guests or hosts, and not the Yeutter Institute or the University of Nebraska Lincoln.