In keeping with its commitment to awareness-raising and as a prelude to the conference entitled “Dialogue on Dispute Settlement,” held on the 15^th and 16^th of April, the Trade Related Assistance Center (TRAC)/AmCham hosted a panel discussion featuring Dr. George Abi Saabⁱ as the key speaker. The panel discussion took place on 1 March 2007.

The topic of Dr. Abi Saab’s speech was the development of the WTO dispute settlement system. The system’s dramatic evolution from a very rudimentary arbitrating mechanism to a fully-fledged legal system was a vivid illustration of “Darwinian theory” in practice, he said. The blue print for the new post-World War II international economic order was initially based on what he described as “balancing a three-leg stool,” the legs consisting of the short-term flow of capital, the long-term flow of capital and the flow of goods. These three types of flows had been completely disrupted during the war. But the “stool” had begun to teeter precariously well before then, as the result of the heavy state interventionism and the “beggar thy neighbor policy” that dominated government behavior following the crash of 1929. As World War II drew to a close, the architects of the new international economic order hit upon the notion of ‘regulated liberalism’. In 1944, the institutions intended to regulate the first two “legs” were agreed upon in Breton Woods, where the IBRD (The International Bank of Reconstruction and Development, now known as the World Bank) and the International Monetary Fund were established. At that time the concept of development was much more restricted, focusing as it did on the development of natural resources as opposed to the current usage of aiding

underdeveloped countries. Establishing the Fund was more problematic, as countries were reluctant to subordinate their monetary sovereignty to international regulations. Ultimately, therefore, the Fund was founded not as a “Central Bank of the World,” as Lord Keynesⁱⁱ had envisioned, but rather as a form of “Clearance System” to stabilize exchange rates, as Whiteⁱⁱⁱ had advocated.

It was not until a couple of years after the war that the third “leg” was dealt with. In 1947, negotiations in Havana produced what become known as the Havana Charter, which not only introduced substantive rules for regulating the flow of world trade but also established an organization known as the International Trade Organization (ITO). The rules later came to be the foundations upon which the General Agreement on Tariffs and Trade (GATT) was built. As Dr. Abi Saab pointed out, the US had considerable hegemony over trade matters in the immediate post-war era and most of the other parties involved accepted to its vision. Nevertheless, the harbingers of the impending Cold War did cast their shadow over the negotiations. More importantly, among the 51 members of the UN at the time were 20 were Latin American countries.^iv These weighed in heavily in the trade and economic negotiations, and they had their own ideas about liberalization. Effectively they authored the famous “infant industry argument,” which holds that liberalization has to be tempered by the need to protect the nascent industries in developing countries. This was the chief bone of contention in the Havana negotiations over the liberalization of trade.

Eventually the charter did pass. However, to be brought into force it had to be ratified by the countries representing 80% of world trade. The US alone represented more than 50% and it was here that the charter encountered a formidable obstacle. In the US Senate a vehement campaign was unleashed against the “Economic Munich,” as the charter was dubbed, and it appeared as though only a miracle would ensure its ratification. In the interim, such was the urgency to regulate trade (and also to reconstruct the developed economies that had been destroyed by the war) that the US invited all the countries with which it had treaties of commerce, friendship and navigation to a conference intended to address this need. The result was a protocol for the provisional application of certain parts of the Havana Charter, especially those dealing with trade in goods, pending ratification. But the Senate ratification never materialized. Instead, the US administration bypassed the Senate by incorporating the provisional protocol into American law as an “executive agreement.” Unlike treaties, which have to be passed by the Senate, an executive agreement is within the discretion of the executive branch. This discretionary power brought the General Agreement on Trade and Tariffs (GATT) into being, but a provisional agreement (not requiring congressional ratification) it remained until the establishment of the World Trade Organization (WTO).

From the outset the assumption was that GATT furnished norms but not institutions. Yet where there are norms there has to be someone to ensure they are applied, unless the parties concerned are left to act by themselves. Moreover, since some aspects of implementation had to be decided upon collectively some kind of formal institution was needed. It was called the Contracting Parties (CPs).^vi In this plenary council or general assembly of GATT, all decisions were taken by consensus – “consensus” here being used in the archaic sense as full agreement by all parties, unlike in the UN in which abstentions also form part of the consensus.

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In this rudimentary body, the dispute settlement mechanism grounded itself in two GATT articles, one addressing the causes for a dispute, the other the remedies. Article 22 ^vii stipulates that in the event of nullification or impairment of the benefits accruing to a party or parties to the agreement, the affected party can request for consultation with the other party in the interest of finding a solution. Article 23^viii essentially provides that the party that has taken the action that has led to the nullification of impairment of the benefits accruing to another party should take the appropriate measures to remedy the situation. If it refuses, then the injured party has the right to retaliate. As for the means of retaliation, these have to be agreed upon by the collectivity – i.e., by all the other members – which were referred to as the “contracting parties.”

The treaty, thus, provided a form of “controlled economic reprisal’ but it did not explicitly clarify processes and procedures.

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The beginning was tough, Dr. Abi Saab said, and what is now referred to as the Third World was barely in the picture: disputes were among the “elephants.” When there was a dispute, the contracting parties formed a ‘study group’ that later came to be known as a ‘special group’, which included the two disputants and other concerned parties. Their task was to negotiate a solution to the dispute at hand. Eventually, in 1955, the then president of the Contracting Parties felt it important to create some distance between the disputants and the persons trying to help resolve the dispute, and therefore moved to exclude the disputants from the negotiations. Three or four years later, this idea was formalized with the creation of specialized “panels”.

To lawyers the term panels brings into mind an arbitrating authority. But, in general, whereas arbitrating bodies issue decisions that are presumed final and binding, the GATT panels merely issued a report which, in turn, had to be presented to the Contracting Parties and adopted by consensus. Since this meant that every party, including the two disputants, had a say, what in effect took place was a process of conciliation. In international law ‘conciliation’ involves one or more parties who base themselves on the law but also take other considerations into account. More importantly, they offer recommendations to the disputants, but their recommendations are not binding. So, by the end of GATT 1994, the dispute settlement system had not yet approached the threshold of a mechanism with juridical authority.

We come now to Marrakech, where the WTO agreements were concluded (April 1995), by which time more subjects had been brought under the GATT umbrella through the addition of partial agreements to the original one. We find too, by glancing at the Marrakech agenda, that the focus had shifted from international trade in goods, basically manufactured products, to agriculture and services. Dr. Abi Saab said, “It was a whole new therapy to see how we could really capture services with effective legal regulations. It was a momentous task, and until this point the way forward wasn’t very clear. Until then, we had had only one or two cases in services to go by.”

The question of intellectual property rights and their impact on trade in manufactures was a complicating dilemma. But there was great pressure and eventually the Marrakech Agreements were accepted as a “Single Undertaking.” Otherwise, Dr. Abi Saab explained, they would have never been accepted, because that would have entailed prolonged deliberation over each single agreement. Most of the countries had not read part or some of the agreements before they signed them as a bundle in Marrakech. Developing countries were not alone in this, Dr. Abi Saab added. For example, German parliamentary representatives had to read the texts of the agreements in English for lack of translation when they were submitted to the German ‘Reichstag’ for ratification.

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Having agreed to the extension of GATT, the participants from developing nations in particular wanted more solid guarantees that obligations would be taken seriously. One of these guarantees, they felt, lay in a more workable system for settling disputes. Their campaign resulted in a special agreement bundled into the “Single Undertaking” and called the Dispute Settlement Understanding (DSU). On the surface the DSU codified the old system. In reality it created a new system. It turned the frog into a prince, and, as in the fairytale, it produced this transformation through a subtle touch: “negative” or “reverse” consensus. Until this point, the decision-making process relied on “positive” consensus: panel reports had to be approved by all contracting parties, including the disputants, in order to come into effect. Under the DSU, when a panel report is submitted to the Dispute Settlement Body (DSB), as the Contracting Parties was renamed and which constitutes the plenary session of WTO, adoption is automatic, unless there is consensus to set it aside. The move was from ‘positive consensus to adopt’ a report to ‘a positive consensus not to adopt’ a report. The DSB must automatically take an action ahead unless there is a consensus not to do so. It is difficult to imagine both disputant parties agreeing not to adopt a report; a negative consensus is a virtual impossibility. Therefore, from a purely consensual system there evolved an effectively compulsory system for dispute settlement.

But DSU added a second very important touch. It created a mechanism for appeal – the appellate body – and, thereby, created a double-tiered jurisdiction, instead of the single tier that had existed beforehand.

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The DSU regulations governing the panel stage closely follow the ordinary arbitration model: the parties have to agree on terms of reference and on the selection of panelists. As in the average arbitration model, too, there is a default position, which is that in the event that the parties are unable to reach an agreement on panelists, the director-general makes the selections. Other general arbitration rules also apply: panelists, for example, cannot be of the nationalities of the disputant parties (as opposed to in an appellate body in which nationality is not a factor) or have worked for a law firm that was involved with some aspect of the dispute or be in any other way related to the disputants.

Of course, the whole system could be short circuited if the parties decided to go directly to arbitration. Article 25 of DSU, which describes arbitration as a post-adjudication phase, was devised to avert this. Under this article, there are only two areas of possible contention that could justify arbitration. The first is when the party at fault is asked to take an immediate action. If that party asks for an excessive period of time for implementing that action, the injured party has the right to dispute this request.

Arbitration, here, then is over the period of adjustment and, generally, the disputants appeal to a member of the appellate body to act as the sole arbitrator in the determination of a reasonable timeframe. The second possible area of contention mentioned in article 25 pertains to retaliation or compensation. If the party at fault feels that the “retaliation” is disproportionate to the nature of its violation, it too may appeal to arbitration. Arbitration, thus, is restricted to the modalities of the remedies rather than the substance of the actual disputes.

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The Appellate Body brings us to a completely different universe, as Dr. Abi Saab put it, because this is a permanent body, in the sense that its members do not change according to cases. There are seven members, elected for a four-year term, renewable once.

The appellate body is a standing organ. Its mandate is to control the interpretation and application of law. As such, it is an appellate body in the ordinary legal sense, but with a difference. Ordinarily an appeal entails reopening the entire case. Here, however, the Appellate Body functions more like a court of cassations: it reviews the interpretation and application of law in light of the facts, but it does not reexamine the facts themselves.

Another important characteristic of the appellate body is that its members share in one way or another in the decisions taken on the cases brought to appeal. Each case is assigned to three appellate members, chosen at random. However, after their oral hearing, the other four members come to Geneva, having studied the case beforehand, so that all seven members can exchange views on the case. Although only the three selected members take the final decision and sign the report, the collective input is important to ensure general familiarity with and continued accumulation of the jurisprudence.

In appellate decisions, dissenting opinions are not encouraged. If an appellate body member does not agree with his peers, his name and the nature of his objection are not explicitly mentioned. Instead, reference is merely made to the existence of a member who voiced a dissenting opinion. Dr. Abi Saab felt that this discouragement of dissent placed appellate members in something of a straightjacket in their dealings with issues they consider essential.

DSU has brought into being jurisdictional settlement process in a judicial setting. However, the transformation is not complete: smatterings of the old system remain. For one, the proceedings are confidential. Also, in terms of form as opposed to substance, the appellate body delivers a report – not an award, a ruling, or a sentence – and it addresses it to a political body – the DSB – for adoption. So, formally, the decision still rests with the DSB, even though, as mentioned above, the DSB must adopt it automatically unless there is unanimity against it. Formally, at least, this saves the face of the DSB members as they feel that, ultimately, they have the final say on the adoption of a report.

On the whole, the system can be likened to a necklace featuring as its central attraction two semi-precious gems: the panels and the appellate body, which make up the judicial aspects of the system. However, the necklace starts with a political process and ends, after the post-judicatory phase, with a political conclusion.

At the beginning, if one party considers that benefits of the treaty have been impaired or nullified by a measure taken by another party, the former party can ask for direct consultations with the violating party. If these don’t work, the injured party can ask for collective consultations in the DSB. Then, if it is still dissatisfied with the results of these consultations, it can request a panel, thereby setting into motion the report process and, possibly an appeal to the appellate body.

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• No compensation for prejudice suffered as a result of the violating measure:

  It is important, with regard to both the panel and the appellate body, to consider the nature of the output. This is usually a simple finding of compatibility or incompatibility of an action undertaken by a member with that member’s obligations under the terms of the agreements. In other words, it is a simple judgment on legality. The report containing this judgment is then submitted to the DSB, which, in turn, asks the member in question to take the necessary measures to bring its behavior back into compatibility with the agreement. There is no compensation for any prejudice the member might have had to endure during this process. The system is purely protective.

• Remedies are soft:

  The panel and the appellate body cannot instruct a member state to take a particular action. They can only tell it to right a wrong. This is a very mild intervention. Dr. Abi Saab stressed that as much as the jurisdiction has been tightened the remedies are very trimmed and very soft. This, he said, was one of the system’s most vulnerable points.

• Circumvention of rectifying a wrong:

  If it were merely a question of a member righting a wrong, the matter would end there. However, a member can also come back and say that it recognizes its wrongdoing, but that due to internal reasons (often related to the member state’s national constitution) it can do nothing about it. It would then offer to make amends in a different way or in another area. In the final analysis, however, such a solution is a way to persuade the DSB or the injured party to ignore an illegality by buying it off with unrelated concessions. It is a form of bribery.

• Counter-measures:

  If no correction or compensation is acceptable to the injured party, there still exists recourse to article 23 of GATT, which furnishes the legal basis for countermeasures. But they are a very unique kind of countermeasure. To international lawyers they constitute unilateral acts, undertaken by the state in question, on its own responsibility, and that must be proportionate to the violating act. But they are also controlled counter-measures, because not only must they obtain the approval of the DSB, the DSB also sets the degree of severity of the countermeasure that an injured party may take.
  
  Because remedies are soft, the countermeasure option is another weak spot in the system. An injured party has to be roughly equal in power to the offending party for any countermeasure it adopts to be effective. It is difficult to imagine Burkina Faso, for example, taking a retaliatory measure against the US. In the review of the DSU during the Doha Round, numerous suggestions were aired. One was for countermeasures to be taken collectively by several countries. A better solution, however, would be for the system to award damages. The beauty of the system up to now is that it can function without depending on the will of the wrongdoer. Allowing for the possibility of counter-measures opens an avenue of recourse to the claimant. Relying solely on the wrongdoer to remedy a wrong can lead to redress getting bogged down in details over the remedies, means of execution, timeframe, and other problems. So far the system has been self-regulatory.

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Under GATT lawyers were eyed with suspicion. Trade negotiations were regarded as a strictly economic concern, so what business did lawyers have there? Of course, they figured as panel members, but for the most part panel members were not legally trained. When the WTO dispute settlement system first got under way, ironically enough one of the first procedural questions raised in front of the appellate body was whether a country could have its own lawyer in the delegation during the oral pleadings. And it was the appellate body which had to determine, explicitly, that member countries were entitled to choose whoever they wanted on their delegations. The principle seems elementary. Still, for some time, lawyers were either kept out of the room or were not permitted to address the panel. Today, the situation is very different. Not only are lawyers included as members of delegations, they do the bulk of the drafting of memoranda, formulating the legal argumentations and other lawyerly tasks.

Certain problems remain, however. Proceedings are still highly confidential and not transparent. Member states that have not yet been involved in cases have very little idea as to how the system actually functions and how the process works. But even with some first-hand experience it still takes considerable effort to come to grips with the complex and highly detailed technicalities involved. Today, more and more law firms and offices are specializing in these matters and there is a rapidly accumulating body of information about the law and the cases. In addition, for laypersons, there is a good digest of the system and the decisions taken by the panels and the appellate body available on the net.

Another major drawback is that private interests, which are heavily affected by the regulations, have no direct access to the dispute settlement procedures. Only state parties can initiate the procedures, which means that the only way for private entities to make juncture with the system is through interaction with the governmental organs and institutions that deal with the system.

As for the governments of the state parties, themselves, they have the formidable task of ensuring that national legislation and national measures are brought into and kept in conformity with the agreements.

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Question: Is the outcome of the appellate body considered a judicial award? If one party does not obtain the satisfaction it expects, can it seek recourse to another national or international court or arbitrating body? Can the other party refuse to be taken to another judicial system?

Answer: Neither the panel nor the appellate body issues a judicial award; it is called a report, which is eventually adopted through a political procedure by the DSB. The treaty made clear that all disputes have to be settled within the system, precisely in order to create a closed system for dispute settlement. The WTO DSU is charged with the task of settling disputes that arise from any violation covered in the agreements adopted in the Uruguay Round as a single undertaking. However, this does not mean that a party cannot go to another forum. However, would another forum judge a case that has been decided upon in the WTO? In fact, Dr. Abi Saab pointed out, the reverse could occur, even though the system has not dealt with such a situation so far. He was referring, here, to the three NAFTA^ix members (Canada, Mexico and the US) who are frequent players in the system. The US had lost a case in a NAFTA panel and considered referring it to the WTO DSU, after having reworked its approach and defining its objective differently. He added that there is great reluctance in the WTO, on both political and judicial grounds, to pass judgment on Free Trade Agreements, as this would raise the problem of compatibility of free trade agreements with the WTO agreements under article 24 of GATT.

Questions: What incentive do corporate lawyers have to become involved with the WTO system, especially given that the work cannot be very lucrative, since only some 350 cases were handled in the WTO over the past ten years and only a very small percentage of these made their way to the appellate body? With regard to the asymmetry of the system in terms of the disparity in the economic power of its members, how would it be possible to obtain a consensus on collective retaliatory actions? It has also been suggested that the system be reformed through the introduction of a private-public partnership and engaging NGOs to help less developed countries afford presenting themselves in the courts and submitting briefs. Would this redress the asymmetry in the system?

Answer: Collective retaliation is a non-starter. The necessary solidarity would almost inevitably be undermined by consideration of the risks, which are considerable and very tangible when material interests and real money are at stake. Coming to the other questions, the WTO has come under a lot of criticism, but not for the right reasons. Countries of the Third World, which are among its harshest critics, actually have many points in the agreements that they could turn to their benefit. It is true that the big partners have dominated the use of the system. However, over the past few years, developing countries – though not all – have been taking greater advantage of it. Brazil, for example, has come to set considerable store in the system, after having won three major cases against big partners, the EU and the US. It could not have won its cases on cotton, sugar and steel through negotiations, but it did through the WTO litigation process. So the system served it well, and now it is focusing on where else it can benefit from the agreements. It may have flaws, but the system exists and it is here to stay. So at least let us see what we can get out of it. India and China are both taking this approach. They are studying the system closely and they have participated as third partners in almost all cases in order to gain first-hand knowledge of the law and how it is applied. In fact, China offers a remarkable example, having taken a 180-decree turn from an isolationist policy to a policy of full engagement in the system. It took China 12 years of negotiations to enter the WTO. During that time, it created an institute of world trade law studies in Peking, followed a technique of treading softly at the beginning, and utilized the third party position in order to become more familiar with the DSS. The question should be, why doesn’t a country such as Egypt, which has the intellectual resources and the traditions, play a more active role in the system and try to take more advantage of its principles and processes? As difficult as it will be, we still have to prepare ourselves better for the WTO.

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