DSB adopts AB report on sanctions ‘sequencing’ dispute

by Chakravarthi Raghavan

Geneva, 10 Jan 2001 --   The WTO’s Dispute Settlement Body (DSB) adopted Wednesday the report of the Appellate Body (AB) which said that the rules of the WTO’s dispute settlement understanding (DSU), in what is known in WTO trade jargon as the sequencing issue (whether trade sanctions for non-compliance with a ruling could be invoked without first going through a compliance panel process), was ambiguous, but that it was for the members to clarify the rules and not for the panels or the AB to fill in the gap.

The AB ruling was issued on 11 December, and in terms of the 30-day rule for automatic adoption, the DSB met Wednesday to formally adopt the ruling.

While the EC-US banana trade sanctions issue raised a number of questions, the one viewed as having a general systemic implication, relates to the ‘sequencing’ issue: the procedure to be followed, at the end of the reasonable period of time for compliance, when one party puts in place a ‘measure’ claiming to comply with a panel/AB ruling and recommendations adopted by the DSB, and the complainant in the dispute claims there is no compliance. Could or should the complainant seek (and automatically obtain) authority to suspend concessions under Art.22 of the DSU or should the compliance of the new measure with the ruling be subject first to a compliance-panel ruling under Art. 21.5? The AB in this case agreed that the terms of Art.21.5 and 22 are not a ‘model of clarity’, but that it was not the task of panels or the AB to provide clarification or decide what ought to be.

The AB was commended and praised at the DSB for deferring to the members and inviting them to clarify or provide an authoritative interpretation of ambiguities in the rules.

[India and Mexico, which in the DSU review process have taken the position that the ‘sequencing’ requirement was already there and that any party had to first go through the 21.5 compliance procedure before taking recourse to the 22.6 trade sanctions route, made no comment at the DSB over this latest AB report]

It would be tempting to think, as some trade officials suggested, that the AB was retreating from its free-wheeling practice of creating law and imposing new obligations (as it and panels have done in a number of cases against developing countries, on  the Indonesia car dispute, the India BOP dispute and the TRIPS dispute etc), and that in effect the AB was heeding the near-unanimous views of the members and deferring  to the legislative authority and competence of members (to clarify the rules and/or provide an authoritative interpretation) in view of the loud outcry in the DSB over the AB invoking ‘working procedures’ to invite NGOs to present amicus curiae briefs in the asbestos dispute.

In a comment at the DSB, Hong Kong-China viewed the AB’s remarks as a welcome statement, coming as it did after what the DSB had been through over the asbestos case.

However, other trade observers noted that the DSB discussion on the amicus curiae issue took place on 22nd November (#SUNS 4790). The EU in this dispute, filed its submission to the AB on 22 September and the AB held an oral hearing on 10 October, and the AB report and ruling was published on 11 December. Given the time needed to reach conclusions and draw up a report, and the internal exchange of views of the AB division with other AB members  (strictly illegal in terms of the DSU, but provided for under Rule 4.3 of the working procedures) on what is acknowledged to be a systemic issue, it is difficult to believe that the AB’s stand on this was taken in the light of, and after the DSB debate on the amicus curiae issue on 22 November, and the views at the DSB conveyed subsequently to the AB chair by the General Council Chairman.

Some trade observers suggested that if the AB had ‘deferred’ to the legislative organ of the WTO, it is perhaps more in deference to the strongly held views on this issue within the four dominant majors, and the fact that three of the majors want to use the legislative process of clarifying the DSU to enable NGOs access to the dispute settlement processes, which Third World nations oppose.

Another interesting aspect of the AB report is that it makes a reference to a proposal for clarifying the DSU rules made at the General Council on 10 October, the same day the AB held its oral hearing. It is not clear from a reading of the AB report, whether any party or a third participant before the AB had made any references to the proposal at the WTO General Council made on the same day as the oral hearing, and if not, how the AB became (as presumably a judicial body) cognizant of this.

This particular dispute between the EC and the United States is an off-shoot of their banana dispute (the so-called Banana-III ruling) and the US trade sanctions imposed in 1999 against the EC, with the US having invoked the sanctions route of Art.22.6 of the DSU.

The AB report sets out some ‘sequences’ and facts. In the original Banana-III dispute and ruling, the EC was given time till 1 January 1999 as the ‘reasonable period of time for complying with the ruling adopted by the DSB on 25 September 1997.  At the DSB meeting on 2 February 1999, the US made a determination under its domestic law that the EC had failed to comply and, under Art 22.2 of the DSU sought authority from the DSB to impose sanctions.  At the same meeting the EU sought in terms of Art.22.6  ‘arbitration’ on the amount of sanctions sought. The arbitrators (who were the original Banana-III panel) could not provide their ruling on the arbitration within the 60-day period (by 2 March), and sought extension of time, and provided the ruling only on 9 April. Meanwhile, the US on 3 March 1999 asked its customs authorities to withhold ‘liquidation’ at customs for specified goods imported from the EC for a total value of $520 million, the entire range of products it had notified for its claimed trade damages.  Subsequently, on 19 April, the US was authorized to take trade retaliation against imports from the EC for a total annual value of $191.4 million. The US then selected a restricted number of products from its original list, imposed 100% duty on the EC products for a total annual import value of $191.4 million, but effective from 3 March. The EC raised a dispute over the initial ‘unilateral’ determination of non-compliance and the initial actions of 3 March by the customs authorities in the US (and the subsequent 19 April action) withholding ‘liquidation’.

[What is not mentioned in the report is that the Banana-III panel, which functioned as the arbitrator to set the level of ‘authorization’ for the US, was also looking into the compliance of the new EC banana regime with the ruling, in terms of the request of Ecuador, one of the banana co-complainants with the US, for such a compliance ruling under Art.21.5. The EC too had attempted to initiate its own request for a compliance ruling by the Banana-III panel. The arbitrator’s ruling on the extent of US trade damage was issued after the Art.21.5 compliance ruling on Ecuador’s petition had been provided, and the EC’s own request for a self-initiated compliance ruling was turned down.]

The panel in the EC dispute over the customs clearance and sanctions, held the 3 March measures of the US illegal (in that the US had moved to sanctions without getting a DSU determination of the dispute as required under Art.23), but said the measures were no longer in effect.  It also held that the 19 April measures of the US were not within the panel’s terms of reference. The panel nevertheless recommended that the US be asked to bring its laws and measures (in terms of the 9 March actions) in line with the WTO.

But on the EC and others view that recourse to sanctions and suspension (under Art.22.6) could only be invoked by a party after getting a ruling on the compliance of the other party with a DSB recommendation (under Art.21.5), the panel ruled that the arbitrators in settling the level of compensation, had the authority to look into the compliance of the regime and thus there was no need to go through the Art. 21.5 procedures.

The AB said that the panel having decided that the 9 March measures were not in effect, could not recommend that the DSB ask the US to bring these measures into compliance. Also, having decided that the 9 March measures were not in effect, it was not necessary for the panel to have gone into the issue of the arbitrator’s authority to judge compliance nor into the issue of sequencing of actions.

“For these reasons,” the AB ruled, “we conclude that the panel erred by making statements in paras 6.121 to 6.126 of its report, on the mandate of arbitrators appointed under Art.22.6 of the DSU. Therefore, these statements by the Panel have no legal effect.”

The AB report then added: “In coming to this conclusion, we are cognizant of the important systemic issue of the relationship between Article 21.6 and 22 of the DSU. As the United States correctly points out in the appellee’s submission, the terms of Articles 21.5 and 22 are not a ‘model of clarity’ and the relationship between these two provisions of the DSU has been the subject of intensive and extensive discussion among Members of the WTO. We note that on 10 October 2000, eleven Members of the WTO presented a proposal in the General Council to amend, inter alia, Articles 21 and 22 of the DSU."

“In so noting, we observe that it is certainly not the task of either panels or the Appellate Body to amend the DSU or to adopt interpretations within the meaning of Article IX:2 of the WTO Agreement. Only WTO Members have the authority to amend the DSU or to adopt such interpretations. Pursuant to Article 3.2 of the DSU, the task of panels and the Appellate Body in the dispute settlement system of the WTO is ‘to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law.’ (emphasis, to the rule cited, added by AB).  Determining what the rules and procedures of the DSU ought to be is not our responsibility nor the responsibility of panels; it is clearly the responsibility solely of the Members of the WTO.”

At the DSB Wednesday, Japan speaking also for Chile and Colombia made a reference to their proposal for clarifying the DSU (on these and a few other matters) and suggested an early agreement on this. Jamaica also commended the AB for its observation on the boundaries of responsibility of the AB and panels and hoped this would provide “the necessary fuel” for Members to revive the DSU review. Canada and Norway too made similar remarks.

Hong Kong-China, noted that the EC appeal had raised a significant systemic issue, namely that the WTO compliance of a measure could not be determined by arbitrators. Among others, it noted that the arbitrator’s rulings cannot be appealed, while a compliance panel’s could, and the time limitations for arbitrators and panels were different. HKC also commended the AB for stating that it was not the task of either the panels or the AB to amend the DSU or adopt interpretations, and that this remained within the authority of the WTO members.

“This is a welcome statement by the AB, especially after what we have been through in the Asbestos Case recently,” Hong Kong-China added.

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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