Options for future proofing regional trade agreement dispute settlement mechanisms

26 April 2018

After decades of experience in the General Agreement on Tariffs and Trade and the World Trade Organization, trading nations have become accustomed to orderly and predicable mechanisms for resolving their trade disputes. This post argues that growing challenges in the multilateral environment provide an impetus to consider how the lessons learned in the multilateral system can be applied to regional dispute settlement mechanisms in anticipation of increased use in the future.

 

The international trading system is currently facing its greatest set of challenges in decades. If it weren’t enough that efforts to update the multilateral trade rules have effectively stalled, governments must also increasingly fall back on the existing ones to defend against protectionist pressures. They are supported in this task by the elaborate dispute settlement mechanisms (DSMs) that have been developed over the last seven decades, both multilaterally – originally under the General Agreement on Tariffs and Trade (GATT) and then in the World Trade Organization (WTO) – and as stand-alone components of regional trade agreements (RTAs).

The emerging conundrum of trade dispute settlement, however, is that while many RTAs now include substantive obligations that are WTO-plus (more onerous versions of existing WTO disciplines) and WTO-extra (new disciplines on issues not in the WTO), their DSMs are often WTO-minus. For a variety of reasons, many RTA-DSMs have design constraints or institutional limitations that result in them being activated only infrequently. Instead, many RTA parties still seem to prefer to pursue disputes with their RTA partners under the more predictable and effective mechanisms of the WTO.

But will this remain the case for much longer? As modern RTAs eclipse the aging multilateral rules and as the WTO-DSM confronts various institutional and political challenges, it is possible that more disputes between RTA parties will be resolved under the rules of their RTAs. In anticipation of these regional DSMs potentially receiving more attention and use in the future, it may be timely to review the common design features of RTA-DSMs to identify the considerations that might affect their future use and effectiveness.

The shared DNA of multilateral and regional DSMs

The evolution of RTA-DSMs is inseparable from that of the multilateral dispute settlement system. All modern approaches to state-to-state trade dispute settlement trace their origins to the consultation and rebalancing mechanisms established under the GATT in 1947. The modest beginning of the original non-binding and diplomatic approach under GATT laid the foundation for decades of experimentation, in the GATT and elsewhere.

In the late fifties and sixties, the European Economic Community (the precursor to the European Union) popularised standing tribunals and mechanisms for remedies for non-state actors. The GATT contracting parties spent the seventies and eighties fine-tuning the operation of ad hoc arbitration panels, the model that was then included in the North American Free Trade Agreement (NAFTA) in the nineties. This approach was also codified in the Dispute Settlement Understanding of the WTO, leveraging the benefits of multilateral oversight and robust institutional support. Subsequent RTA-DSMs, such as those contained in the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), further tweaked the ad hoc arbitration model, in particular to address the constraints that often arise from the absence of independent institutions.

The incremental legalisation and judicialisation of DSMs, both multilateral and regional, reflect a continuous effort to achieve two separate but related objectives. The first is the progressive improvement of the design and operation of various options for settling disputes. The second is the calibration of the balance between state flexibility and control, on the one hand, and delegation to neutral third parties of authority over dispute settlement, on the other. Much of the variation in the features of RTA-DSMs can be explained in part by regional experiences and preferences regarding these two considerations.

The common features of modern RTA-DSMs

While there are important differences among RTA-DSMs, most contain a common set of core features, the specifics of which reflect different design choices. The broad categories of features relate to:

  • The initiation of disputes – such as provisions related to standing, scope of coverage and choice of forum  –  to determine who can launch disputes and over which matters;
  • The methodology of dispute settlement – including mechanisms for negotiation, mediation and adjudication – to improve the chances of achieving settlement by providing multiple opportunities;
  • Procedures for adjudication – such as rules for selection of adjudicators, time limits, appellate review, etc. – to make adjudication, where it is offered, more predictable and certain;
  • Implementation and enforcement – including the choice of remedies, selection of the target of sanctions and their amount, and surveillance and compliance review – to bring about better compliance with adverse findings;
  • The degree of openness to others – including access for third party governments, transparency of proceedings and submission of amicus briefs – to provide more systemic outcomes and improve social legitimacy; and
  • Institutional arrangements – including joint technical and political bodies, standing adjudicative tribunals and permanent secretariats – to assist the parties in the administration and resolution of disputes.

Whether a given RTA-DSM has each of these features, and in which configuration, depends on the degree of legalisation and judicialisation that the parties consider necessary to manage their trade cooperation. This may also reflect the nature of their relationship and the depth and breadth of the substantive commitments they are prepared to make.

Explaining the (non-)use of RTA-DSMs

Despite the effort put into the creation of increasingly sophisticated RTA-DSMs, they remain largely underused relative to the growing scope of their subject matter and country coverage. While underuse, or even non-use, does not necessarily mean they are ineffective, there may be a number of reasons for the relative lack of recourse to RTA-DSMs.

For example, the sheer number of RTA-DSMs in effect, reflecting different languages, approaches, and varying levels of institutional support, may mean that a certain number of disputes simply go unreported to a wider audience.

More likely, however, the relative underuse of RTA-DSMs can be explained by a combination of the numerous and important benefits of the WTO-DSM and the design constraints and institutional limitations of RTA-DSMs. That is, where there is an option, most disputes are still brought to the WTO. The certainty of panel appointment, proven and codified procedures, comprehensive jurisprudence, collective action and surveillance, and the support of the institution, all make the WTO an attractive option for settling disputes.

These advantages are significant, and it will be difficult for RTA-DSMs to replicate them completely. But as the WTO-plus and WTO-extra disciplines in RTAs become more important to the trade relations of RTA parties, and as the WTO-DSM itself becomes increasingly burdened with practical, institutional and political constraints, the gap in relative appeal of the two options may narrow. The question is whether RTA-DSMs can be better prepared to respond to the changing circumstances.

Options for Strengthening RTA-DSMs

After decades of experience in GATT and the WTO, trading nations have become accustomed to orderly and predicable mechanisms for resolving their trade disputes. Growing challenges in the multilateral trade system provide an impetus to consider how the lessons learned in the multilateral system can be applied to regional DSMs in anticipation of increased use in the future.

There are at least three areas where more information and analysis might improve the accessibility and effectiveness of RTA-DSMs. First, recommendations related to the design and architecture of existing and new RTA-DSMs can be developed based on the past experiences with trade DSMs. Second, better understanding of the current use of RTA-DSMs can lead to more informed design choices for future DSMs. And third, options for institutional support of existing and future RTA-DSMs can be developed to improve their appeal and effectiveness.

There is still hope that current trade tensions can be managed, that the WTO dispute settlement function can be preserved and even improved, and that the insurance provided by RTA-DSMs will remain unnecessary. However, there is also reason to believe that the centre of gravity of the trading system may shift to regional trading systems for a period while imbalances in the multilateral system get sorted out. In that case, RTA-DSMs may need to be improved as they are increasingly called upon to assist states with their trade cooperation problems.

 

This post is derived from the paper Regional Trade Agreement Dispute Settlement Mechanisms: Challenges and Options for Effective Dispute Resolution commissioned by ICTSD under the RTA Exchange, jointly convened with the Inter-American Development Bank (IDB). The paper was presented and discussed at the meeting Dispute Settlement Mechanisms in RTAs as part of the RTA Exchange dialogue series aimed at constructing better trade and investment agreements for sustainable development at the regional and multilateral levels.

Robert McDougall is Senior Fellow at ICTSD.