Enforcing WTO Dispute Rulings: Remedies & Retaliation

[00:00:32]Hello everyone, my name is Ganjali Sharma. I'm a graduate of Cambridge University having specialized in the areas of international trade law and other aspects of international law. In this module, I present before you the second chapter on dispute settlement understanding titled the enforcement of WTO rulings.

[00:00:54]As you'd know this particular module is in continuation to the introductory module on dispute settlement understanding that has already been provided to you. In that module we traced the overall historical transition from the URSTW GAT regime to the modern-day WTO dispute settlement mechanism or the dispute settlement understanding as it is popularly known as.

[00:01:20]We looked into the various benefits that the modern WTO DSCU regime provides to different actors in the WTO framework.

[00:01:29]In this particular module, we delve deeper into this institution of dispute settlement understanding or the dispute settlement body and we critically analyze the different remedies and the overarching scheme as provided under various provisions of the dispute settlement understanding. As I take you through the learning objectives as have been highlighted for this module, we will understand the nature, scope and the interesting aspects in which these concepts play out in the framework of the modernday dispute settlement understanding. So moving on the first learning objective of this particular module is to understand various aims of the remedies that have been designed under the WTO dispute settlement understanding. Broadly there are three main remedies that have been designed under the framework of uh modern day dispute settlement understanding. Our idea would be to investigate into the nature and scheme of each of these remedies and to understand the basic legal nuances behind the remedies. The second is to particularly understand the nature and scope of the concept of cross retaliation. Here I'd like to mention that WTO dispute settlement regime by continuing or rather introducing this new concept of cross retaliation makes WTO a very unique body within the larger ambit body of international law.

[00:03:01]International law largely has outlawed the concept of counter measures.

[00:03:06]However, as an organ of international law, WTO still continues or rather promotes the concept of cross retaliation which in a way is nothing but a form of counter measures. And this special remedy has been designed to taking into account the various nuances behind the politics and economics of international trade law regime and we'll understand how this particular concept plays out in the larger scheme of WTO and international law. Now the third objective before us today is to understand the role of an arbitrator in granting cross retaliation. As I've just mentioned, cross retaliation is slight of a controversial provision because of it being very unique and new to the modern day international law regime where otherwise outlawed it only finds a presence in the WTO range of things.

[00:04:09]Therefore, to what extent is this remedy of cross retaliation actually to be applied and what is the role of the arbitrator who is the chief designer of how a cross retaliation has to be implemented by member states becomes very crucial. The various concepts that go about in defining and implementing cross retaliation would become crucial for our analysis in this present module.

[00:04:34]And lastly, we'll provide a critical overview of the various re regimes of remedies that have been designed under the WTO scheme and whether from the aspect of both the developing and the developed world to what extent can we say that they are effective. Now moving on we as I mentioned we will now take up every remedy and various schemes as have been provided under the dispute settlement scheme. So first I would draw your attention to article 3.7 of the DSU and to understand the provision in detail I'd read out the specific provision the specific phrases in this particular article and how they provide an overall scheme of how the dispute settlement remedies have been designed. So article 3.7 of the DSU states and I read in the absence of a mutually agreed solution the first objective of the dispute settlement mechanism is usually to secure the withdrawal of the measures. So the first uh solution that is being provided is securing the withdrawal of the measure measure concerned if these are found to be inconsistent with the provisions of any of the covered agreements. Now this point being very clear that the first objective is to secure the withdrawal of the inconsistent measure. The provision goes on to read the provision of compensation should be resorted to only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure which is inconsistent with a covered agreement. Therefore, compensation, the scheme of compensation is also introduced into the design of remedies. However, it is specified that it will be resorted to only if the immediate withdrawal is difficult or is impractical. And the second rider provided is that the compensation measure has to be a temporary measure and not the ultimate objective of how the remedies have been designed or why the remedies have been designed.

[00:06:47]Therefore, this is the second option given to member states, but it has to be implemented only when the two riders as have been pointed out will get fulfilled. Now, the last aspect which is the most interesting aspect for our analysis for the future course of this module is the provision of cross retaliation which reads as follows. The last resort which this understanding provides to the members invoking the dispute settlement procedure is the possibility of suspending the application of concession or other obligations under the covered agreement on a discriminatory basis with the other member states subject to the authorization by the DSP of such measures. The third resort is here the concept of retaliation is being introduced and as I was mentioning cross retaliation would be considered as a subset of the overall concept of retaliation and that is the last resort which member states have been afforded to and the specific applications of it have been defined further when we talk about the role of an arbitrator and how the scheme has to be executed.

[00:08:00]Therefore from the overall scheme of article 3.7 we have first the withdrawal of the measure second the compensatory scheme and last resort which is the concept of retaliation. Therefore to just reiterate where can one find these specific provisions. Now article 19.1 of uh the dispute settlement understanding talks about the withdrawal of the inconsistent measure. Then we have article 22.1 that talks about the concept of compensation.

[00:08:31]The last being article 22 which talks about sus suspending the application of concessions or other concessions which in common parliament is known as retaliation.

[00:08:43]Now this is just a brief transitory scheme of how the remedies were designed under the earthw wild gat regime of 1947 and how article 3.7 that we've just stated is in a way the newer concept or something which takes you far ahead of what was otherwise envisaged under the earthw wild gat regime. So under the earthw wild gat regime you had article 23.2 two that provided that a complaining nation could be authorized to suspend concessions or obligations under the GAT provided two substantive conditions were fulfilled. First, the circumstances are serious enough and second that the proposed suspension is appropriate. Now, as you'd see that the result of interpreting this particular provision rather gets slightly murky because of the thresholds being provided under article 23.2 to being very wake.

[00:09:42]Now these are wake standards and over and above this as you'd remember from your previous learnings that under the GAT era there was a prevalence of the positive consensus rule and that rule uh ensured that the losing party could effectively veto any proposal for suspending concess concessions. Therefore, any member state that wishes to take recourse of suspending concessions first of all has to fulfill a very vague criteria and prove that the circumstances are serious enough and second that the proposed suspension is appropriate and that too even if such a criteria is fulfilled and the member state is able to prove that the requirement of such suspensions of concession is important. the losing party could effectively use its veto and under the regime of positive consensus negate the very proposal and therefore it rendered the whole regime effective effectiveness and meaningless. Now there have been illustrations of how provisions of 23.2 were misused. We have the EC oil seed second case where the suspension of the concessions was blocked by the European Commission and then you had the and by the way European Commission went on to state that it will move out of the U WTO or the URSTW grant framework if such proposals were implemented. So that was the level of threat that members could give and the extent to which they could veto any such implementation of suspension of concessions. Then you also had the US super fund case which was blocked by the United States again a very big player in the world trade organization today and the earthwat era as well. Now all of this resulted in academic scholars such as John Jackson stating that the the GAT system suffered from certain birth defects. Now linked very much to its inadequacy of enforcing and implementing uh the various remedies that were designed in that era. Uh therefore WTO when it was designing its scheme of remedies in 1994 there it was a very challenging task ahead and they wanted certain bold actions to be implemented in order to make the overall system of u WTO functional and important and therefore pursuing to article 22 of the dispute settlement understanding the first thing that was implemented is to have the concept of negative consensus rule by virtue of which any country especially the losing country cannot prevent the process of retaliation by blocking such a proposal. Therefore, the negative consensus rule meant that everyone had to veto such a proposal including the member state which wanted to implement such suspension of concession for it to be valid. And this in theory becomes impossible or rather it it such a thing would never happen and therefore in effect all such retaliation measures if approved by the DSP or the dispute settlement body would become effective on its own. Now the dispute settlement rules are further elaborated and we now talk about specifically the concept of retaliation.

[00:13:14]Now as I'd said that retaliation is a unique concept because in to a great extent and especially when we talk about cross retaliation is something where parties the member states of the WTO have carved out or they have come out of the usual rule of counter measures which is otherwise outlawed under international law. So delving more into the nature and concept of retaliation I present before you the various types of retaliation that have been envisaged under the scheme of the WTO dispute settlement understanding. So first we have the concept of parallel retaliation where the complaining party should first seek to suspend the concessions within the same sector where the violation is found. So if a violation has occurred in the GAT sector or the a goods agreement the retaliation by the other member state also must be in the goods agreement itself. Second is the concept of cross sector retaliation.

[00:14:14]uh if the party considers that it is not practical or effective to suspend concessions within the same sector, it may continue to seek suspension in other sectors under the same agreement. Now just to clarify the difference between parallel and cross- sector retaliation.

[00:14:31]To further give you an example, if if there has been a violation say in the in the transport sector in the in the delivery of cars and that is the particular uh transport sector then retaliation parallel retaliation demands that the complaining party should retaliate in the same sector as well. Whereas cross- sector retaliation says that you stay beyond the ambit of the same agreement which is say the goods agreement or the services agreement and you retaliate into a different sector. For instance from transportation you could move to say food or if you talk about GAT specifically from a recreational sector you could move to another sector say tourism. So that is the concept of cross- sector retaliation but you stay within the confines of the same agreement. Now the third form of retaliation is the cross agreement retaliation where if it is found impractical or ineffective to implement a cross- sector retaliation when the circumstances are serious enough. So that again is the second rider first being impractical and ineffective a condition which was also present under cross- sector retaliation. Now, a cross agreement retaliation in addition also warrants the circumstances to be serious enough and that party may further seek to suspend concessions under another WTO agreement. Both cross- sector and cross agreement retaliations are collectively referred to as the concept of cross retaliation and they have been enshrined under various provisions of DSU that is article 6, 16.4, 17.14 and 22.7.

[00:16:17]Therefore cross a classic example of cross agreement retaliation as we'll give a live example of United States and Antigua Barbados the online gambling dispute the US online gambling dispute is when a violation has happened say for instance in the goods or the services sector but the retaliation actually happens in the IPR sector which is covered in the trips agreement. So there you make a transition from one agreement to the other agreement and that is cross-aggreement retaliation. And as stated the conditions for a cross agreement retaliation would be both being impractical and ineffective and at the same time the circumstances being serious enough. Now we talk about the legal aspects of what do we specifically mean by these uh terminologies that have been presented before us. So you have the meaning of the term effective. Now the impact of a suspension must be strong and have the desired results of inducing compliance. So as lawyers when or as judges when the term effective is being implemented from the perspective of a member state, you need to take into account that it has to be strong and must lead to the desired result of inducing compliance. Because if we go back to our original slide of uh article 3.7 and the main aim of the dispute settlement understanding the aim is to withdraw the inconsistent measure and therefore the idea is to maintain the status quo that such inconsistency gets removed or eliminated and therefore this the idea behind retaliation is also to achieve the same which is induce compliance and remove all the ill effects. of the inconsistencies. However, it's easier said than done because while executing what may be effective, member states may not have all the free hand in getting the desired results by virtue of executing the remedies because of several factors. Now, a very simple factor could be the imbalance in trade volume. For instance, if country A is a small country and has only two or 3% impact on the trade of country B, even if it is trying to retaliate against country B and it it it it uses its margin of that two or 3% of entire trade ambit and retaliates to that extent. Still for country B it will remain that that that amount of retaliation will not have any impact on country B merely because the sheer volume of international trade that happens between the two countries is very very less or insignificant and that is also linked to the second aspect where there's an asymmetry in the market power between both countries where we have the developed world and the developing world where the flow of goods services IPR or any nature An aspect of of trade may be very less and therefore even for country A whatever be effective for it may not have the same desired impact on country B because of the sheer less volume of trade between the countries. Therefore this aspect becomes a roadblock in ensuring that remedy schemes are uniformly applied in the modern day scheme of dispute settlement understanding.

[00:19:53]Now moving on to the legal aspects of cross retaliation. As I stated that cross retaliation especially under cross agreement has to prove through three thresholds. It has to be practical. It has to be only only when a scheme is impractical or ineffective that you move on to do cross retaliation across agreements and the situation has to be something that warrants a serious circumstance. So here we must take up a case study which is one of the most illustrious and famous cases of uh both the services agreement and a classic case of dispute settlement understanding that has implications not just from a legal economic point of view but also from a political point of view. This the case reinforces the belief of the modern-day WTO system where even smaller countries that have low or insignificant amount of trade contribution to the global trade have been armed and equipped with the tool of cross retaliation where they can influence larger powers and powers as big as the United States in order to effectively get their remedies executed or seek compliance when they have been wronged.

[00:21:10]and when they want to initiate cases against big trade giants. So this dispute I won't go too much into the facts because the facts have been covered in the services module but I will specifically talk about the dispute settlement remedies aspect of it and how cross retaliation here was discussed by uh the dispute settlement and dispute settlement body. So this dispute related to this particular service entry under the gats agreement which is recreational cultural and sporting services. Now in this case Antigua and Barbudas were the ones who had won a case successfully against the US and it was their turn now to seek compliance with United States since it did not comply they wanted to take up retaliation. Now there were different modes available before them to seek retaliation. Now they realize that the retaliation in the same sector or even in the same agreement which is the GATS agreement in this case will not be practical or effective for the reasons that have been mentioned as below. Now the reasons were that Antigua and Barbadas as you'd know from a geographical point of view they are two small island nations and in terms of size geography and the contribution to international trade it is minuscule when you compare it with a giant such as the United States. So you had Antigua and Barbudas who had made commitments only in the entertainment services. They realize that if they retaliate in that narrow segment of entertainment services where the volume of trade is anyway low, they would be the ones who will be suffering by virtue of this retaliation because they will be the ones who will be deprived of the Hollywood movies which is a great source of entertainment in their countries and also for their own consumers to move to a different uh segment when they've been uh deprived of all the services that they received from the United States would be a high switching cost. So the volume of trade of these countries been in insignificant and the heavy reliance of the consumers on the services being exported from the United States and the high switching cost that the consumers would have to bear. It was realized that the suspension within the same sector or the same agreement would make the products expensive for its consumers and therefore it was an impracticable solution for the country and therefore it decided to retaliate and move to a different agreement itself which was the intellectual property rights and uh United States as is known that is very protective of its IPR being protected not just in the US but across its border in every aspect in every corner of the world was definitely very was was hit to a very great extent because that will lead to a lot of piracy of its u uh movies and other literary works which would thereafter have u ripple effects for other countries in the world also and therefore this this political and economic decision of Antiguan Barbadas to retaliate in a different agreement provided to be very very useful for them and at the same time induced compliance from the part of United States. Now there were other cases in which cross retaliation happened. So you have the famous um EC bananas the third decision where Ecuador was the requesting member and it sought cross retaliation again in the trips sector whereas the violation had occurred in the GAT the goods agreement and the GATS which is the particularly the distribution services agreement. You also have the US upland cotton case.

[00:25:01]Another very intense decision where a great amount of legal analysis has gone into the nature of cross retaliation and how that has to be calculated. So you had Brazil which sought for retaliation and retaliated in the gats in the trip sector whereas the violation occurred in the goods sector which is gat 1994 goods agreement. So now we move on to the third learning objective that we enumerated in the beginning of the chapter which was the role of an arbitrator in granting cross retaliation. So what goes into the mind of an arbitrator and how is the quantum of cross retaliation determined is something which is the role of a special arbitrator that is set up under the scheme of dispute settlement body. So we have uh that the law as the arbitral decision in this regard being final and binding and not subject to the judicial review. The role of the arbitrator is to assess the legal requirements for the authorization of of retaliation which includes the level of equivalence to the damages suffered. So the test as demarcated and is defined under the dispute settlement understanding. It's popularly known as the trade effects test where the level of equivalence has to be taken into account when any form of retaliation is authorized and it has to be in proportion to the damages that have been suffered by the member state.

[00:26:28]So if it has it has suffered say 50% of damages if that can be quantified then retaliation also has to be within that 50% framework. It cannot be 90 or 100% as compared to what damages it has actually suffered. So trade effects test is nothing but a concept of proportionality. There's also another rider which says that an arbitrator may not intrude upon the qualitative aspect of the proposed suspension and the analysis only has to be made with respect to the quantum and the volume.

[00:27:01]So therefore the question of whether to retaliate in apples or oranges or whether within a particular agreement or sector or across different sectors also which sector should that member state choose is not the prerogative of the arbitrator that amount of discretion is offered to the member states.

[00:27:22]Now in this regard there this this particular concept of equivalence and trade effects test has been to some extent also a debate amongst various academic scholars. I will not go upon into the depths of what uh has been discussed and debated but just to give a brief outline of what this debate is.

[00:27:44]Juice Powin a very famous trade scholar has in effect questioned the very nature of why and how the remedies have been designed under the WTO scheme spec specifically with the concept of retaliation. He questions whether the real aim of retaliation as it happens in practice is to merely compensate, rebalance the concessions as to what has been lost to you must be given to you or it is something that goes on to become more punitive. From the aspect of member states which is the subject of retaliation is WTO scheme offering them a real opportunity to comply which is they rebalance their trade concessions when met with retaliation and actually comply or it is nothing but a system of buyout whether they are compensating the victim and they they are being uh bought off even though they choose not to comp not to comply ultimately. So this whole debate in the context of whether compensation or retaliation is a better scheme or and whether retaliation what is the main objective of retaliation whether it is to comply or just be a punitive measure in itself or between compliance and or between um compensation and retaliation whether compensation is only a mechanism to buy out or it genuinely seeks for compliance. These are the different questions that have been raised and some of the case laws have as have been highlighted whether the importance of each of these um remedies have been looked into. So this could be for a future reference but but the academic debate as I just touched upon is between um compensation and retaliation and between compliance and compensation.

[00:29:48]Now we move on to the end of u this module where the last aspect where we touch upon is the critical overview of the various regimes of WTO.

[00:30:01]Now furthering to what the debate that we mentioned as to what is the true remedies of what is the true objectives of the dispute settlement remedies. I bring to you a very classic dispute, the Australian Salmon dispute where this question of uh removal of inconsistent measures versus conformity to the WTO provisions or the the letter of law versus the inspirit removing inconsistencies within um their domestic policy was the debate. Now to clarify what had happened was in Australia salmon dispute that Australia was found to be guilty of certain provisions under the ESPS agreement because it did an arbitrary and incorrect risk analysis of u what should be banned and therefore Canada won the case against Australia and the options before Australia was to either remove its inconsistent measure which was to remove that particular scheme altogether or to and also at the same time to make its provision conform to the letter of law which is the provisions of the SPS agreement. However, in this case, the two objectives which ideally should go together, which is you have to remove the inconsistent measure and at the same time confirm to this letter of law became contradictory because Australia what they did in effect was that now they increased their scope of u restrictions that were put on the def on on on the import of fish by virtue of which it's not just Canada that was being harmed but or Canada which was suffering because of the policy but all the other member states because the regime adopted by Australia became so so stringent. Now in effect what has happened is that Australia was able to comply by the provisions of SPS agreement because the moment its policy was increased in the scope. Canada was not the only one that was being discriminated and therefore the arbitrary element gets removed and therefore in theory it conforms to the nature of uh or or the text of the SPS agreement. But in effect what has happened is that it is leading to more trade restricting effects for which nothing can be done because now there is no fresh case which can be instituted against Australia. Therefore we have a situation where remedy has been designed. Australia technically has complied and Canada had initially won its case. But what in effect is now happening that in order to confirm and comply Australia is increasing the scope of its restrictions by virtue of which the trade the negative impacts of uh the negative impacts on international trade or the trade restrictions have actually been widened in scope. So in theory the provisions of WTO dispute settlement understanding are being fulfilled.

[00:33:16]the measure has been uh brought to conformity with the theory and the letter of law but at the same time the dispute settlement understanding cannot do anything to overall target the scheme of Australia in effect implementing a far more trade restrictive measure so that's a classic case of controversy which it also brings out another drawback of the modern day dispute settlement understanding standing. Now a few limitations of compensation. Now compensation um it's specifically mentioned in article 22.1 that DSU requires compensation to be consistent with the covered agreements. Now the moment this is mentioned it clearly is a contradictory term because compensation in effect will go on to violate the MFN clause which is one of the core obligations of the covered agreements. And therefore in theory article 22.1 remains u an incorrect provision or because both of them cannot go together. 22.1 while members are seeking for compens or members are resorting to compensation will violate MFN and till a carveout is created in article 22.1 its interpretation cannot happen in the true spirit of the word. Similarly, retaliation as has been mentioned a few problems for retaliation both from the perspective of the developing and the developed world would be that for the developing countries if they go on to retaliate it has certain cost on its own welfare because if they are increasing their it it is it is in effect increasing their import prices and these economies are dependent on uh for instance an economy which is the exporting economy against which retaliation is being sought then the welfare cost gets enhanced and therefore it becomes an impracticable and inefficient rather tool for the smaller and less diversified economies for developed world as well uh retaliation is not all that easy because for instance a country like the European Union has to seek a lot of political will uh if the tool of retaliation has to be accepted and implemented against member states for instance if uh Say Netherlands is facing certain difficulties because of which a case has been instituted and it seeks to resort to say retaliation. It may not go very well with the interest of say another EU country versus Germany and therefore to gain that kind of a consensus within its organization becomes difficult and it may not be a very viable solution even for the developed world. Now quickly touching upon the last aspect which is the debate of sequencing which is more of a theoretical problem where a clear cons inconsistency between article 21.5 and 22.6 six of the dispute settlement understanding gets u invoked has been described. So I will not read out the entire provision because it's uh here but the question that has to be asked in this context is that have the drafters who wrote article 22 timetable thought that it will reconcile with the potentially protracted compliance review which is person pursuant to article 21.5. Now 21.5 basically states that in case there's a disagreement that a particular member state has complied or not and whether a country feels that its members the member state against whom it's fighting has not complied it shall refer such a dispute to the dispute settlement procedure and a fresh panel will be set up based on which uh the adjudication will be done. However 22.6 Six also points out points out the situation and says DSP upon the request shall automatically grant authorization to suspend concessions within 30 days of the expiry of a reasonable period unless the DSP decides otherwise. So in case a country and here we refer to the classic EC bananas dispute where uh US believed that EC was not complying it had two options. It had the recourse of directly approaching a fresh panel and creating a fresh panel under 21.5 or it had the recourse to directly seek for suspension of concessions within 30 days of a reasonable period when it expires and seek this the defined recourse. Now we don't know which what timeline runs and whether 21.5 should first should later come only after countries have uh exhausted their uh recourse to suspend concessions or it should be invoked in the beginning before countries should even go to a 22.6 kind of a remedy. So in this particular case the uh the finally as we'll see here that this case was improved because um this this solution was u reached in this case because in effect the panel that dealt with the 20 uh 22.5 and the 21.6 six case to just clarify the the panel that dealt with both the cases was comprising of the same members. So you had the 21.5 panel and the uh 22 6 panel which comprised of the same set of members and they were able to give out the decision at the same time because of which there was no particular time lag that happened.

[00:39:12]However, if members if if different members were sitting in both the panels that could have led to a deadlock situation where one panel will come up with uh a scheme where uh it will grant suspension of concessions whereas the other uh panel will still say that the dispute has to be freshly litigated, brought before the panel and based on what the final results are, members will be free to do what they want. And therefore this is slight of a peculiar problem that arises in this context and till a particular amendment happens where a timeline as to what comes before whether a fresh panel has to be constituted or whether parties may automatically go uh and seek suspension of concessions when once that issue gets u resolved by virtue of particular timeline that's the only thing which will lead to consistency in how the provisions can be interpreted And u for any further information the main handbook could be referred to. Thank you.