TWN Info Service on WTO and Trade Issues (Oct23/04)
3 October 2023
Third World Network

WTO: India calls for cross-retaliation in trade disputes as part of S&DT
Published in SUNS #9866 dated 3 October 2023

Geneva, 2 Oct (D. Ravi Kanth) — “As part of the treaty-embedded right of special and differential treatment, complaining developing countries should be allowed to seek authorization for retaliation, that is, seek suspension of trade concessions and other obligations in sectors and/or agreements of their choice,” India has argued in a proposal relating to reforms of the World Trade Organization’s dispute settlement system, said people familiar with the discussions.

Earlier, Chinese President Xi Jinping, during a group study of China’s Political Bureau of the Central Committee on “WTO Rules and the WTO Reform” on 27 September, apparently called for “firmly upholding the authority and efficacy of the multilateral trading system with the WTO at the core, and actively promoting the restoration of the normal operation of the WTO’s dispute settlement mechanism.”

In a separate development, India has submitted a detailed proposal to Mr Marco Molina, the deputy trade envoy of Guatemala, the facilitator overseeing the informal discussions on reforming the WTO’s dispute settlement system, insisting that there has to be a waiver on the provisions against cross-retaliation in the draft text, said a person who asked not to be quoted.

India appears to have challenged “the provisions that (1) it was not “practicable or effective” to suspend trade concessions or other obligations in the same sector or agreement in which the violation took place (for cross-sectoral and cross-agreement retaliation) and (2) the “circumstances are serious enough” to seek suspension of concessions under an agreement other than those in which violation was found to exist (cross-agreement retaliation).”

It called for waiving the above provisions by proposing that “a new paragraph 3bis be inserted in Article 22 of the WTO’s Dispute Settlement Understanding (DSU).”

The proposed paragraph by India reads as follows: “Notwithstanding the principles and procedures contained in paragraph 3, in a dispute in which the complaining party is a developing-country Member and the other party, which has failed to bring its measures into consistency with the Covered Agreements is a developed-country Member, the complainant shall have the right to seek authorization for suspension of concessions or other obligations with respect to any or all sectors under any covered agreement/s.”

At a time when the United States seems determined to remove the Appellate Body, thus making the dispute settlement system somewhat “toothless”, it remains to be seen how the facilitator’s process will progress and whether he will be able to create confidence in the manner in which things are unfolding, said a person who asked not to be quoted.

DOUBTS ON THE PROCESS

India appears to have circulated its proposal amidst concerns over the alleged questionable practices adopted by the facilitator in showing apparent bias and lack of inclusivity during the drafting process, said people familiar with the development.

The facilitator, Mr Molina, apparently allowed a drafter from the European Union to appear online virtually while insisting that drafters must be physically present and will not be allowed to participate virtually from their capitals, said an African trade diplomat, who asked not to be quoted.

Indonesia has also raised concerns about the drafting process, saying that discussions “should be carried out by the Dispute Settlement Body and/or the General Council in an inclusive and transparent manner, and shall be open to all Members.”

It said, “All information, submissions, or proposals from Members should be reflected in the meeting documents and are accessible by all Members on a dedicated webpage of the WTO website, if necessary.”

INDIA’S PROPOSAL

In its proposal, seen by the SUNS, New Delhi argued that: “As part of the WTO dispute settlement mechanism, if a country fails to comply with the ruling of a panel or the Appellate Body (AB), and a compensatory adjustment cannot be reached within 20 days after the expiration of the “reasonable period”, the complaining member, acting under Article 22.2 of the DSU, may request the Dispute Settlement Body to authorize it to retaliate, that is, suspend the trade concessions or obligations under the covered agreements towards the non-complying country.”

It said that “Article 22.3 of the DSU provides for the principles that govern the process of retaliation by the complaining party – it sets out three types of retaliation that have to be considered sequentially.”

India said that: “As per DSU Article 22.3(a), the complaining country should first endeavour to suspend trade concessions or other obligations in the same sector in which a violation has been found.”

The term “sector” is defined further in Article 22.3(f), India said, adding that, “While with respect to trade in goods, “sector” means “all goods”, it has a restrictive meaning in the context of trade in services (GATS) and intellectual property (TRIPS).”

According to the Indian proposal, “if a dispute is under GATS, which is classified under 12 sectors (such as business services, communication services, etc.), a country wishing to retaliate must first do so within the specific sector in which the non-complying country has breached its obligations.”

India emphasized that “DSU Article 22.3(b) further provides for cross-sectoral retaliation under the same agreement – if the complainant country finds that it is “not practicable or effective” to retaliate in the same sector(s), it may seek to suspend concessions or other obligations in other sectors under the same agreement.”

“This could happen in situations where retaliation entails more harmful effects for the complainant country in comparison to the non-complying country at which it is directed,” India said.

It argued that, “This could be because of several factors like enormous trade imbalance especially if the complainant is a developing country and the non-complying country is a developed nation.”

Further, according to India, “There could also be a situation where the complainant country is heavily dependent on imports from the non-complying country and any retaliation would harm the complainant country more than the non-complying country.”

It cited the example of a ruling issued by the arbitrator in the US-Upland Cotton case that observed that Brazil cannot retaliate against the US in capital goods, intermediate goods, and other goods because these products are used by the Brazilian industry.

However, cross-sectoral retaliation is possible in trade in services (under the GATS) and intellectual property (under the TRIPS Agreement).

In trade in services, if the violation is in the communication services, the complainant country can retaliate in any other sector like education services.

In a similar vein, under the TRIPS Agreement, if the violation is on patents, retaliation is possible in copyright, said India.

According to India, “Cross-agreement retaliation, which is retaliation under another agreement than the one in which the dispute arose, is permitted as per Article 22.3( c) if the complainant country considers that it is “not practicable or effective” to take cross-sector retaliatory actions, and that “the circumstances are serious enough”.

Given the challenges faced by members to cross-retaliate, India said that “retaliation within the same sector(s) or under the same agreement is either not practicable (if it is not available in practice and suited for use) or not effective (if its impact is not strong enough to persuade a non-complying country to conform with the adopted DSB decision, or if retaliation would be more harmful to the complainant country than the non-complying country).”

India pointed out that in the EC-Bananas III case, “Ecuador argued that the use of the words “if that party considers” in DSU Articles 22.3(b) and 22.3( c) made the provision self-judging i.e., the Member country has the right to decide the practicability or effectiveness of selecting the same sector, some other sector or another agreement. However, the arbitrator held that such decision is subject to review under DSU Article 22.6.”

In short, Ecuador’s experience suggests that “it is not easy for developing countries to prove the requirements of DSU Articles 22.3(b) and 22.3( c).”

India argued that: “Countries cannot self-judge the practicability or effectiveness of the retaliation or whether the circumstances are serious enough to warrant retaliation under another agreement.”

There is also the danger that “the review by the arbitrator poses the risk of the country’s assessment being turned down or not accepted,” and “this in turn, poses the challenge that the complaining developing country will not be able to retaliate effectively, thus compromising its ability to enforce its rights or to benefit from the DSU provisions.”

India said Brazil’s experience in the US-Upland Cotton case “also demonstrates the problems that developing countries may face in this regard,” as “the arbitrator in this case rejected the importance of choosing the least harmful sector/agreement to retaliate against the non-complying country.”

Lastly, India argued that: “When it comes to cross-agreement retaliation, the complainant country also must prove, in addition to the practicability and effectiveness point mentioned above, that the “circumstances” were “serious enough” to warrant retaliation under another agreement.”

“Thus, cross-agreement retaliation is even more exceptional than cross-sectoral retaliation and imposes a higher onus or burden of proof on the complainant country,” India concluded, adding that this is more so for developing countries to undertake cross-agreement retaliation. +