Compliance and Remedies Against Non-Compliance Under the WTO System
Towards A More Balanced Regime for All Members
Project on Dispute Settlement Series • Issue Paper 3
The creation of the WTO dispute settlement system has been called a major achievement by observers and its importance has been echoed from all sides of the multilateral trading system. The Dispute Settlement Understanding (DSU), the agreement that governs the WTO dispute settlement mechanism, seeks to ensure an improved prospect of compliance, given its provisions on compensation and retaliation, and thus constitutes a central element in providing security and predictability to the multilateral trade system.
With more constraining procedures, and a fast-growing jurisprudence, the dispute settlement system has, however, become significantly more legalised and consequently more complex. This, in turn, has raised the demands on the capacity of Member countries interested in engaging the system to protect or advance their trade rights and objectives. While developing countries’ participation in trade disputes has increased tremendously since the time of the GATT, most disputes are still confined to a small number of ‘usual suspects’ – the US, the EC, Canada, Brazil, India, Mexico, Korea, Japan, Thailand and Argentina. So far, 76% of all WTO disputes have been launched among this group of Members. This begs the question of engagement of other Members, and in particular of developing countries which may be facing undue trade restrictions.
Various reasons have been propounded for this lack of active engagement by the majority of the Membership. These include: a lack of awareness of WTO rights and obligations; inadequate coordination between government and private sector; capacity constraints in monitoring export trends; identifying existence of undue trade barriers and feasibility of legal challenge; financial and human resources constraints in lodging disputes; and often a lack of political will – the ‘fear factor’ – i.e., that trade preferences or other forms of assistance will be withdrawn, or some form of retaliatory action will be taken, if developing countries pursue cases against certain major trading partners. While many of these constraints need to be addressed at the national level, the current review process of the DSU also offers a potential avenue to improve the functioning of the DSU. A major area of controversy in this process has been the issue of compliance and remedies.
With the establishment of the WTO, enforcement of dispute settlement rulings has indeed been strengthened. In fact, the overall compliance rate rises above 80%. Even so, available options for retaliation arguably seem to be geared more towards re-balancing the level of concessions rather than inducing compliance with Member obligations. Moreover, the smaller the economy and the narrower the trade basket, the slimmer the opportunity to find a sector to retaliate against without adversely affecting the domestic market. In this context, the present study argues that as long as retaliation is the only remedy, and that the system does not provide adequate opportunity or incentives for disputing parties to agree on meaningful compensation, only larger economies will be in a position to impose ‘effective’ retaliation. This creates particular problems and challenges for smaller and poorer economies wanting to impress remedies to force compliance by a stronger trading partner.
Analysing the relationship between compliance and remedies against non-compliance, the study raises the dilemma: should sanctions against non-compliance aim merely at repairing the damage caused or should they go beyond to achieve a punitive effect? Could an alternative solution be found in-between? The study questions the fact that the level of nullification or impairment, as determined by WTO adjudicative bodies, which is a key factor in determining the retaliation amount, in many cases appears to be lower than the damage actually incurred. It argues that this could lead to a situation in which the challenged Member prefers to be retaliated against rather than comply with WTO recommendations and rulings. The study further suggests that rectifying actions do not always comply with the recommendations and may only be of ‘cosmetic’ nature, protracted or partial. Arguably, the practice of Members in the WTO’s first ten years of operation confirms such trends.
The study explores ways in which to make Panel and Appellate Body reports more conducive to compliance to advance the position of developing countries by enabling them to retaliate efficiently against a stronger trading partner. In doing so, the study offers a series reflections and suggestions on how the DSU could be improved to achieve equilibrium. These include options for ensuring better compliance, i.e. by making WTO rulings binding and not merely recommendatory, as well as a critique of the DSU for not containing provisions on retroactive retaliation which would thus allow for ‘compensation’ from the time of imposition of the harmful measure. Currently, a Member can implement a measure that may potentially be WTO-incompatible, maintain it until all legal options are exhausted (on average three years), and only discharge it at the end of the ‘reasonable period of time’ granted to implement rulings without being liable to retaliatory action. Another ‘glitch’ of particular concern to weaker Members in a system established to ensure equality among Members. The study also reflects on the necessity to clarify the so-called ‘sequencing’ problem and the relationship between compliance panels and retaliation (Articles 21.5 and 22.2/6). It argues that in spite of Members’ attempts to resolve this problem bilaterally it is preferable to amend the DSU to reduce legal uncertainty in the system. Finally, the study suggests that to strengthen remedies under the DSU, the option to provide monetary compensation should be considered – a proposal which has received support from several developing countries.
This paper is produced under ICTSD’s research and dialogue programme on Dispute Settlement and Legal Aspects of International Trade which aims to explore realistic strategies to maximise developing countries’ capability to engage international dispute settlement systems to defend their trade interest and sustainable development objectives. The author is Virachai Plasai, Director General at the Ministry of Foreign Affairs in Thailand. We hope that you will find this study a useful contribution to the debate on whether adequate options for developing countries to enforce compliance and invoke effective retaliation under the WTO is in fact provided in DSU or whether certain changes should be made to truly balance the legal playing field of the WTO.