Article 25: An Effective Way to Avert the WTO Crisis?

The World Trade Organization’s (WTO) Dispute Settlement System is at risk of becoming inoperable by the end of 2019 as the United States continues to block appointments to the Appellate Body over a variety of concerns related to the body’s independence and activism. Despite a general agreement among WTO members on the necessity to reform the WTO and find a solution to the Appellate Body crisis, consensus on a path forward has remained out of reach. The Appellate Body will not be able to operate by mid-December absent a resolution from the WTO membership. Chances of reaching consensus on a solution are slim, which has led some WTO members, most notably the European Union, to explore alternative dispute settlement schemes. One option that has gained traction is the use of arbitration to resolve trade conflicts—a mechanism allowed for under Article 25 of the WTO Dispute Settlement Understanding (DSU).

Q1: What is behind the current dispute settlement crisis?

A1: An essential component of the WTO’s dispute settlement system, the Appellate Body allows WTO members to appeal rulings. Generally consisting of seven members, the body is currently down to its last three judges, the minimum number required for it to hear and decide on appeals. Furthermore, the terms of two of those members are set to expire on December 10, 2019. At that point, the Appellate Body will be rendered incapable of operating unless the vacant seats are filled—a scenario that may arrive even earlier if one of the remaining members is forced to recuse himself from a case due to a conflict of interest. The crisis is borne out of the United States repeatedly vetoing the initiation of a process to nominate and appoint Appellate Body members over a variety of criticisms multiple U.S. administrations have levied at the Appellate Body.

In a long-standing criticism of the WTO’s dispute settlement system that pre-dates the Trump administration, the United States has claimed that the Appellate Body has overstepped its mandate in the DSU in a number of ways. The United States claims that the Appellate Body in its rulings has reversed factual findings of panel reports and created new obligations or reinterpreted existing obligations in a matter not previously agreed upon by WTO members. Critics of the Appellate Body claim those practices have made U.S. trade remedies less effective at addressing unfair dumping and subsidies. In addition to the perceived judicial overreach, the United States has criticized the body’s frequent failure to produce reports within the 90-day period provided by WTO members in the DSU. Recently, the Trump administration has taken issue with the Appellate Body allowing its members to finish working on cases even after the expiration of their terms without prior permission from the WTO membership. Despite its criticism of the dispute settlement system, the United States has successfully wielded the WTO’s dispute settlement system as a tool to tear down trade-distorting measures abroad since its inception in 1995. The United States has been the most prolific user of the WTO’s dispute settlement system and receives favorable rulings on a majority of complaints.

In an effort to resolve the deadlock over the Appellate Body and other issues at the WTO, several WTO members, led by the European Union, have introduced proposals to reform the organization. One proposal from the European Union and 11 other WTO members including China, India, and Canada, would require the Appellate Body to consult with the involved parties if it anticipates to exceed the 90-day deadline, to limit the body’s findings to those “necessary for the resolution of the dispute,” and to allow Appellate Body members to serve only one, longer term compared to the two four-year terms that members can serve under current rules. However, while the United States is a strong advocate for WTO reform, it disagrees with the European Union as to what those reforms should look like. U.S. ambassador to the WTO Dennis Shea rejected the European Union’s latest proposal, arguing that it fails to effectively address the concerns outlined by the United States and in some cases exacerbates issues stemming from the Appellate Body’s independence.

Under WTO rules, the Dispute Settlement Body (DSB), which represents the entire WTO membership, cannot formally adopt a panel report before an appeal is resolved. Accordingly, once the Appellate Body no longer has a quorum, any member could block the enforcement of a panel report simply by filing an appeal. With the WTO’s formal appeals process and its ability to issue binding rulings paralyzed, countries might abandon the multilateral system all together and resort to unilateral retaliatory measures to settle trade disputes.

Q2: What is Article 25 and how can it be used to resolve this conflict?

A2: Given the looming crisis and the unlikelihood of a breakthrough in reaching the consensus needed to change dispute settlement rules, some members have begun exploring alternative mechanisms to settle trade disputes within a multilateral framework. One option under discussion is to resolve disputes via arbitration as outlined in Article 25 of the DSU. Article 25 allows for “expeditious arbitration within the WTO as an alternative means of dispute settlement [. . .] of certain disputes that concern issues that are clearly defined by both parties [. . .] which shall agree on the procedures to be followed.” The vague language of Article 25 implies that members are given a broad scope in determining which aspects of a dispute they want to resolve using arbitration and which rules exactly that process should follow.

Scholars and a former chairman of the Appellate Body have suggested that Article 25 could provide for a parallel dispute settlement structure within the WTO framework. Members could agree on whether to use arbitration for the entirety of the dispute settlement process or just the appeals stage, thus circumventing the Appellate Body or lack thereof. Theoretically, members to a dispute could agree to set up arbitration procedures identical to those guiding the current Appellate Body. Unlike in the selection of judges for the Appellate Body, outside parties to the dispute would have no influence over the arbitration process unless permitted by the members involved. Disputing parties would be able to select personnel to hear appeals via Article 25 arbitration which would prevent the United States from unilaterally paralyzing the appeals process.

Critics of an ad hoc arbitration approach have pointed out that members would have no incentive to bind themselves to arbitration if they expect an unfavorable outcome. Therefore, Article 25 as an alternative to the current dispute settlement system would have a greater chance of success if members sign a plurilateral general arbitration agreement, defining the scope and procedures of the arbitration process and binding signatory respondents in a dispute to engage in the alternate Article 25 dispute settlement process.

Q3: What are the implications of settling disputes through Article 25 arbitration?

A3: Resorting to Article 25 arbitration and circumventing the U.S. blockade of the Appellate Body, while theoretically possible, would at best be a partial and temporary solution to the overall crisis at the WTO. If the United States refuses to take part in the new arbitration system, which is to be expected if the arbitration process simply mirrors the function of the current Appellate Body, trade conflicts involving the world’s largest economy would not be settled. A WTO enforcement regime excluding the United States would have limited utility. Alternatively, the United States might agree to bind itself to arbitration but not on the terms previously agreed upon by other members, thus using its economic power to coerce other countries to play by a U.S.-designed set of rules.

No matter whether the United States decides to abide by an arbitration-based dispute settlement system or not, a deviation from existing WTO procedures is likely to stir uncertainty of how trade disputes will be resolved in the future. Ad hoc arbitration would allow countries to refuse participating in the process, generating global economic uncertainty by leaving the international community without an automatic system to mediate trade disputes. To establish a general arbitration agreement—the seemingly most viable approach under Article 25—WTO members would have to agree on which rules the arbitration process should follow, establish a new body of arbitrators, and bind themselves to the arbitration process when a dispute arises. It is unclear whether a plurilateral general arbitration agreement would require approval from all WTO members to function. If the plurilateral were to be incorporated into the Marrakesh Agreement, a consensus from the WTO membership would be required. However, if the plurilateral were negotiated outside of the WTO architecture, a consensus would likely not be needed.

Moreover, while Article 25 may present an option to circumvent the United States’ opposition and avert the imminent collapse of the WTO’s dispute settlement system, it would merely side-step addressing structural issues in the WTO criticized by several of its members by sidelining the organization’s most vocal critic. Rather than engaging members in a discussion on comprehensive WTO reform, those broader concerns could be buried temporarily only to emerge again in the future.

If the vacant seats on the Appellate Body are not filled by the end of the year, the WTO’s dispute settlement system will essentially be incapacitated. Without enough Appellate Body members to issue a ruling, appeals will remain unresolved, the DSB will be unable to adopt final decisions, and WTO rules will become unenforceable. Members might abandon the WTO all together and focus on negotiating bilateral and regional trade agreements. In the absence of a rules-based system to settle disputes, trade conflicts are more likely to trigger unilateral tariffs and other retaliatory measures. Replacing the function fulfilled by the Appellate Body through an arbitration system grounded in Article 25 of the DSU could ensure that trade conflicts will continue to be solved within the multilateral WTO framework, provided members can agree on a common set of arbitration rules and abide by them. However, even if implemented successfully, this approach would likely leave the United States out of the picture and do little to address underlying, broader issues within the WTO.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jack Caporal is an associate fellow with the CSIS Scholl Chair in International Business. Jonas Heering is an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2019 by the Center for Strategic and International Studies. All rights reserved.

Jonas Heering

Intern, Scholl Chair in International Business

Jack Caporal