- Policy Innovation Memorandum
- Policy Innovation Memoranda target critical global problems where new, creative thinking is needed.
The World Trade Organization (WTO) and the rules-based trading system face an existential threat from the Donald J. Trump administration’s blockade on appointments to the WTO’s top court—the Appellate Body. As of December 2019, the Appellate Body had too few members to decide cases, leaving pending appeals in limbo and threatening to turn every future trade dispute into a mini–trade war. The Appellate Body’s demise has brought renewed focus on the important role it has played in resolving trade disputes while opening the door to reforms long-sought by the United States. A solution that improves the efficiency of the Appellate Body and addresses U.S. concerns involves adopting a specific set of operating principles, establishing a new oversight committee to ensure adherence to those principles, and placing term limits on the legal staff to bring in fresh thinking and a better distribution of power between adjudicators and staff.
The United States Led the Effort to Create a Binding Dispute Settlement System
When the WTO was created in 1995, a top goal for the United States was a binding dispute settlement system to replace the previous General Agreement on Tariffs and Trade (GATT) process, which could be easily circumvented, thereby allowing countries to dodge their trade commitments. What was created in its stead was a two-stage process to determine whether a country has violated the rules or otherwise undermined the bargain between countries. At the first stage, an ad hoc panel assesses the facts and applicable WTO rules to determine whether a violation has occurred. The parties can then request that the panel’s determination be reviewed by the Appellate Body, which has the power to either uphold or overturn the decision. The Appellate Body is composed of seven people, with a minimum of three required to rule on an appeal. Each member serves a four-year term and can be reappointed once. The members serve on a part-time basis and are aided in their work by an increasingly powerful staff of full-time lawyers in its Secretariat.
The United States was the strongest proponent of creating an appellate body. Since the WTO rules provide for a nearly automatic adoption of panel reports, the United States sought a process to overturn any erroneous panel decisions before they became binding obligations. While appeals were expected to be rare and limited to narrow questions of law, access to the Appellate Body was considered essential both to ensure that countries could challenge decisions by ad hoc panels that they believed were wrongly made and to bring a measure of consistency across disputes over similar legal texts.
Now, however, the United States believes the Appellate Body is the one making errant decisions, thereby justifying its blockade on appointments.
U.S. Claims of an Appellate Body Gone Astray
The WTO dispute settlement system succeeded initially. An increasing number of WTO members used it. Compliance with its decisions, while not perfect, was considered good. For its part, the United States filed more complaints than any other country, prevailing in 91 percent of these cases. However, the expectations that appeals would be rare and narrow proved to be wrong. Nearly 70 percent of panel reports have been appealed and the average appeal can raise a dozen or more claims, many of them going far beyond narrow legal questions.
U.S. complaints about the WTO, which began more than a decade ago, extend beyond dashed expectations to six additional concerns. First, the United States objects to the practice of Appellate Body members staying on after their term has expired to finish an appeal that began while they were still in office. The United States contends that WTO member countries, not Appellate Body members, should decide whether a term of office can be extended. Second, the United States objects to the Appellate Body’s frequent failure to complete appeals in the required ninety days, arguing that a rules-based system needs the adjudicators themselves to follow the rules. Third, the United States contends that the Appellate Body exceeds its authority in reviewing and sometimes overruling factual findings by panels, despite a mandate that appeals be limited to issues of law. Fourth, the United States objects to the Appellate Body’s issuance of advisory opinions—statements or interpretations not necessary to resolve a dispute—that could be seen as making law in the abstract. Fifth, the United States objects to Appellate Body rulings that elevate the significance of past decisions to near-binding precedent that should be followed by future panels absent cogent reasons to depart from them. Giving precedent a strong role contravenes the WTO provision placing responsibility for definitive interpretations of WTO texts on the WTO members. Sixth, the United States asserts that the Appellate Body has overstepped its bounds by reaching decisions that go beyond the text of the agreements themselves, potentially taking away rights or adding to U.S. obligations.
These complaints have considerable merit. Appeals frequently do violate the ninety-day rule. Appellate Body members have remained past their terms of office. Appeals frequently reexamine facts rather than resolve precise legal questions. Too much is often made of past decisions. Reports often go beyond the critical issues in a given appeal. More debatable is the U.S. claim that the Appellate Body has overreached, filling in gaps in the rules created by the “constructive ambiguity” employed by WTO negotiators to reach agreements. No agreed upon negotiating history of WTO texts exists, therefore each country brings its own understanding of what a given provision means. In some cases, the Appellate Body has added requirements or read precise meaning into broadly worded provisions. In others, the U.S. complaint is more that the Appellate Body accepted a different interpretation than the one it sought.
Responses to U.S. Criticism
Many of the other 163 members of the WTO harbor varying degrees of skepticism about the United States’ concerns. Some members view claims of overreach as sour grapes over U.S. losses in specific cases. Many perceive allowing departing Appellate Body members to finish their work as common sense, saving the considerable time and expense of rehearing an appeal before a new set of Appellate Body members. While conceding that not completing appeals in ninety days violates WTO rules, most members sympathize with a truncated Appellate Body facing record numbers of complex appeals. Where the United States sees the Appellate Body as having made law, the European Union, for one, often sees a proper interpretation of the texts.
Some countries share the United States’ substantive concerns but object to its tactics, which deprive all other WTO members of their right to a functioning Appellate Body. WTO countries are frustrated that the United States has been vocal in its complaints but silent in suggesting fixes. The United States claims it bears no burden to propose changes because it seeks none. Rather, the United States wants a collective recognition from all members that the Appellate Body has strayed from the rules and a process to restore the system to what was envisioned when the WTO was created in 1995.
Breaking the current impasse requires a clear indication from the United States that it will unblock the appointments process if its concerns are met. To date, no such sign has been given, raising suspicions that the Appellate Body’s demise is part of a U.S. effort to destroy the WTO itself. Ruining the WTO, and with it the multilateral, rules-based trading system, would not be in the United States’ interest. American companies depend on the predictable market conditions, strong intellectual property protections, transparent rules, and lower barriers to goods, agriculture, and services exports established by the WTO.
To get the Appellate Body back on track, three reforms are needed.
Adopt the Walker principles. New Zealand’s Ambassador and Permanent Representative to the WTO David Walker was appointed in February to “seek workable and agreeable solutions to improve the functioning of the Appellate Body.” On November 28, 2019, he set forth specific principles designed to address the six U.S. concerns. The principles require the Appellate Body to make its decisions in ninety days and for Appellate Body members to leave promptly at the end of a second term of office, to treat facts as facts (not subject to appeal), to respect the more deferential standard of review for antidumping investigations, to address only issues raised by parties and only to the extent necessary to resolving the dispute at hand so that its opinions are not advisory, to take previous Appellate Body or panel reports into account only to the extent they are relevant and not as precedent, and to ensure that its rulings do not add to the obligations or take away any rights of the parties as contained in the WTO rules. Collectively, the Walker principles are designed to make the Appellate Body more efficient by shortening its time frames and its reports while doing what the United States has demanded—return to the rules as written in 1995. If adopted with unreserved acknowledgement by the European Union and other skeptics, it would demonstrate widespread member agreement that the Appellate Body has a limited mandate to resolve only legal questions raised on appeal in strict accordance with WTO rules.
Establish an oversight committee and audit to ensure compliance. To build trust that the Appellate Body will adhere to the Walker principles, the WTO should convene an oversight committee at least once a year and when requested. The oversight committee could be made up of the chairs of the lead WTO committees—its General Council, Council for Trade in Goods, Council for Trade in Services, Council for Trade-Related Aspects of Intellectual Property Rights, and the Dispute Settlement Body, with the chair of the Dispute Settlement Body appointing four additional independent trade-law experts to the committee to ensure a proper representation of expertise. The committee’s sole task should be to assess whether the Appellate Body has adhered to the Walker principles, either over the course of a given year or, when asked, in an individual case.
Limit the service of members of the Appellate Body Secretariat to no longer than eight years—the maximum length of time of an Appellate Body member. The root cause of many U.S. concerns rests not just with the Appellate Body members themselves, but with its Secretariat—particularly the lawyers who work for the Appellate Body as a whole. Over time, the Secretariat has gained experience and expertise that often is greater than that of the Appellate Body members, who serve on a part-time basis for a maximum of eight years. Secretariat lawyers, on the other hand, devote all of their time over many years to working on appeals and are steeped in (and potentially wedded to) past decisions. Adopting a mobility principle would allow staff rotations throughout other WTO offices, bring new perspectives to appeals, reduce the tendency to treat past decisions as precedent, and help restore an appropriate balance of power between the Appellate Body members and the Secretariat staff. It would also send a strong signal of an end to business as usual.
A Fair Solution
These three reforms would make the Appellate Body more efficient while addressing U.S. concerns. For the United States, it is critical that the Appellate Body respect the current language of the WTO’s Dispute Settlement Understanding. The Walker principles require just that. But the United States needs assurance that the mindset of the Appellate Body has been changed and that, this time around, the rules will be respected. The creation of an oversight process ensures that the Appellate Body will be judged on its consistency with the Walker principles, while injecting an additional measure of political oversight over the functioning of the Appellate Body. Staff rotation brings fresh thinking along with a renewed focus on completing appeals in accordance with the needs of WTO members.
These changes ought to satisfy the United States while not undermining the rest of the world’s desire for a fair and effective system. If more is needed, tweaks to the Walker principles should be sought. By its response to these reforms, the Trump administration will signal to the world whether it wants to fix the WTO’s dispute settlement system or not. Time is of the essence. By the time the WTO ministers meet in June 2020, a package of reforms needs to be in place or the turn away from a binding rules-based system may be irrevocable.
Critics will say that this shake-up is not necessary, that the world should simply wait until President Trump leaves office. However, U.S. concerns about the Appellate Body did not begin with President Trump and they will not end when he leaves office. In the interim years, many mini–trade wars could break out over each unsettled dispute, or countries could move on to less-desirable alternatives that do not include the United States. There would be little incentive for a new president to bring the United States back into a system still perceived to be flawed.
By paralyzing the Appellate Body, the United States has garnered the attention of the world. If this was done as a genuine effort to restore the Appellate Body to the more limited role envisioned in 1995, now is the time for the United States to clearly outline the precise steps that it wants taken to allow a revised Appellate Body to function. Failure to do so risks branding the United States’ concerns as illegitimate and an attempt to destroy not just the Appellate Body, but the WTO itself, and with it the worldwide trading system.