WTO Dispute Settlement System And Developing Countries

The creation of just, acceptable and satisfactory solutions to arising problems and disputes are the things I always found most significant and appealing within the notion of jurisprudence. From my perspective, dispute settlement is one of the basic constituents when practicing law. The World Trade Organization (WTO) dispute settlement system is distinctively intriguing since the outcome strikes different countries in different ways.

The WTO dispute settlement system which in 1995 succeeded the system under GATT 1947 is one of the major developments in the international trade dispute settlement. It fosters a rule based dispute settlement system as opposed to a power based system. However, the system still has a weak enforcement mechanism. Some commentators say that this was an outcome of a compromise between the negotiators. On one hand, they wanted a strong dispute settlement system and on the other they wanted a weaker enforcement mechanism. This was to balance the interests of negotiators who were aware that their countries may be involved in WTO dispute settlement as both complainants and defendants, so they wanted to insulate themselves from both sides. As complainants, they wanted their case to be heard under a rule based system and as defendants they wanted to have the policy space not to implement the Dispute Settlement Body (DSB) rulings which are politically sensitive or which are against their interests.

Thus it should be clear from the onset that a weak enforcement mechanism was intended and was an outcome of a compromise. Although the enforcement system is weak, developed countries are able to use it against each other and against developing countries.

They can effectively use retaliation, or the threat of retaliation, in most cases. On the contrary, developing countries cannot effectively use retaliation against developed countries due to the fact that their economies are weak. The main problem therefore is that developing countries are left without any effective remedy in the WTO dispute settlement. This study seeks to explore the challenges which are faced by developing countries in enforcing DSB recommendations and

rulings and to suggest for mechanisms which should be put in place to assist developing countries when their rights are breached by developed countries.

The second problem with the DSU is that the remedies provided by it are only prospective in nature. The current remedies only focus on inducing compliance instead of focusing on compensating for the loss which has been incurred by the complainant. Thus presently the compensation is quantified from the time when the reasonable period to implement DSB rulings lapses. It does not seek to compensate the injured party from the initial date of infringement. This in turn gives the responding parties an incentive to delay the dispute settlement proceedings as much as they can while benefiting from an infringement of WTO Agreements. This aspect of the DSU is unfair and trade restrictive and therefore needs to be amended in order to improve the implementation and enforcement of DSB rulings.

Aims of the Research

This Research will:

1. Examine the process of implementation and enforcement of DSB recommendations and rulings.

2. Investigate the trend of non compliance with DSB recommendations and rulings where a complainant is a developing country.

3. Evaluate the effectiveness of the remedies available under Dispute Settlement System.

4. Seek to critically analyse proposals which have been tabled by Members for the reform of implementation and enforcement of DSB rulings during the ongoing DSU reform negotiations.

5. Make recommendations for the DSU reform in relation to the implementation and enforcement system of the DSB recommendations and rulings.

Significance of the ResearchThe significance of this study is based on the problems highlighted above. This research on the challenges faced by developing countries in the implementation and enforcement of the remedies available under Dispute Settlement System is important especially at this moment where more than two thirds of WTO Members are developing countries. It is important for negotiators and policy makers from developing countries to understand the challenges they are facing and accordingly suggest feasible improvements pertaining to the WTO dispute settlement system. With such an understanding, the participation of developing countries is likely to increase not only during the negotiation processes but ultimately in the dispute settlement process as well. This in turn ensures the security and predictability of the Dispute Settlement System, which is the cornerstone of the WTO dispute settlement system.

Research HypothesisThis dissertation will argue that the DSB enforcement mechanism is not effective in ensuring compliance with recommendations and rulings especially when the complainant is a developing country. Remedies available under the DSU cannot be utilised effectively by developing countries. This aspect of the enforcement mechanism fails to take in to account the interests of developing countries thus calls for a reform of the system with a view to affording effective remedies to developing countries.

ScopeThe subject of Dispute Settlement System is very vast. Due to limited space/word count this dissertation will mainly focus on compensation and retaliation provisions as remedies and critically discuss how these can be improved so that developing countries can also have effective legal redress under the WTO Dispute Settlement System. Thus this research will mainly focus on substantive issues rather than procedural issues, of implementation and enforcement of DSB recommendations and rulings.

Methodology and the Overview of the Chapters

This study shall basically be based on the analysis of the relevant available literature on the subject matter. The research shall rely on both primary and secondary sources of the WTO Law. Primary sources will be comprised of the WTO covered Agreements, WTO cases and WTO case statistics.

On secondary sources reference will be taken from various background papers, books, and academic or scholarly articles. Various internet sites will be consulted for relevant up to date data and information. In this pursuit, the current information available on the WTO website is imperative to keep track of the development within the area.

This dissertation is comprised of seven chapters. The first chapter gives an introduction to the topic; the second chapter gives an overview of the objectives and functions of the WTO and also explains, who are the developing countries in the WTO?; the third chapter focuses on the substantive issues relating to the implementation and enforcement of DSB rulings and recommendations, namely compensation and retaliation; the fourth chapter explores the problems with these remedies; chapter five discusses the inequalities in the WTO dispute settlement mechanism; chapter six discusses proposals for reform and is followed by recommendations and conclusion in chapter seven.

Chapter 2

The World Trade Organization (WTO) is the only body making global trade rules with binding effects on its Members. It is not only an institution, but also a set of agreements. The WTO regime is known as the rules based multilateral trading system. The history of the Organization dates back to 1947, when the General Agreement on Tariffs and Trade (GATT), was set up to reduce tariffs, remove trade barriers and facilitate trade in goods. Over the years, GATT evolved through eight rounds of multilateral trade negotiations, the last and most extensive being the Uruguay Round (1986 1994). The WTO came into being at Marrakesh on 1 January 1995, following the conclusion of the Uruguay Round. GATT then ceased to exist, and its legal texts were incorporated into the WTO as GATT 1994.

Objectives and functions of the WTO

(A) Objectives

The reasons for establishing the WTO and the policy objectives of this international organisation are set out in the Preamble to the WTO Agreement. According to the Preamble, the Parties to the WTO Agreement agreed to the terms of this agreement and the establishment of the WTO:

"Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development,

Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development."

Thus the ultimate objectives of the WTO are:

the increase of standards of living;

the attainment of full employment;

the growth of real income and effective demand; and

the expansion of production of, and trade in, goods and services.

However, it is clear from the Preamble that in pursuing these objectives the WTO must take into account the need for the prevention of the environment and the needs of developing countries. The Preamble stresses the importance of the sustainable economic development. The Preamble also stresses the importance of the integration of developing countries, and in particular least developed countries,

in the world trading system. Both of these aspects were absent from the Preamble of the GATT 1947.

The Preamble to the WTO also states that there are two main instruments, or means, to achieve the objectives of the WTO:

the reduction of trade barriers and other barriers to trade; and

the elimination of discriminatory treatment in international trade relations.

The reduction of the trade barriers and elimination of discrimination were also the two main instruments of the GATT 1947, but the WTO Agreement aims at constituting the basis of an integrated, more viable and more durable multilateral trading system.

(b) Functions

The primary function of the WTO is to:

"provide the common institutional framework for the conduct of the trade relations among its Members in matters related to the agreements and associated legal instruments included in the Annexes to [the WTO] Agreements."

However, the WTO has been assigned six widely defined functions.

Article III of the WTO Agreement states:

The WTO shall facilitate the implementation, administration and operation, and further the objectives, of this Agreement and of the Multilateral Trade Agreements, and shall also provide the framework for the implementation, administration and operation of the Plurilateral Trade Agreements.

The WTO shall provide the forum for negotiations among its Members concerning their multilateral trade relations in matters dealt with under the agreements in the Annexes to this Agreement. The WTO may also provide a forum for further negotiations among its Members concerning their multilateral trade relations, and a framework for the implementation of the results of such negotiations, as may be decided by the Ministerial Conference.

The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement of Disputes (hereinafter referred to as the "Dispute Settlement Understanding" or "DSU") in Annex 2 to this Agreement.

The WTO shall administer the Trade Policy Review Mechanism (hereinafter referred to as the "TPRM") provided for in Annex 3 to this Agreement.

With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate, with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies.

In addition to the function of the WTO explicitly referred to in Article III of the WTO agreement, technical assistance to the developing country Members, to allow the later to integrate in to the world trading system, is, undisputedly, also an important function of the WTO.

Who Are the Developing Countries in the WTO?

Identifying which country is a developing country is always a difficult problem in the world trading system. Neither the WTO agreement nor GATT 1947 regime has made a precise legal definition for the term "developing country". It is widely believed that the basic method of designating a developing country Member in the WTO is "self designation". The WTO web page titled "Who are the developing countries in the WTO?" states:

There are no WTO definitions of 'developed' and 'developing' countries. Members announce for themselves whether they are 'developed' or 'developing' countries. However, other members can challenge the decision of a member to make use of provisions available to developing countries."

In principle, any WTO Member can designate itself as a developing country Member. Actually, all countries have chosen to do this at least once, with the exception of the European Community (EC), the United States, Canada, Japan, Switzerland, Norway, Australia and New Zealand. Although "self designation" is considered to be the basic method of designating developing country Members, some other methods are also used, and are often used along with "self designation", which attract less attention but are also important. In fact, the claim that "self designation" by "Special and Differential Treatment" (SDT) beneficiaries is the basic method of identifying developing country Members is quite misleading. In practice, SDT grantors have more power than grantees in identifying developing country Members, which derogates from the effect of SDT provisions. No matter which method is applied, certain quantitative criteria need to be used by both the Member claiming it is a developing country and other Members that challenge the claim to support their arguments.

Special and Differential Treatment and the Difficulty of Defining Developing Countries

(a) Special and Differential Treatment

The cornerstone of the GATT/WTO system is the most favoured nation (MFN) treatment. The spirit of MFN treatment is non discrimination: WTO Members have legal obligations to accord the equal benefit to all other WTO Members in principle. An important exception to the MFN principle is the SDT granted to developing countries. This exception has been enshrined by the Enabling Clause. The aim of SDT provisions is to better integrate developing countries into the world trading system and to facilitate development. Given the limited resources available to developing countries, they would be deterred from being involved into the process of trade liberalization without SDT. In order to fulfil the objective of SDT, however, it will be necessary to identify who should be given such treatment. There is a vast amount of literature discussing why SDT should be given.

Traditionally, the GATT was dubbed as "the rich men's club", and developing countries were very critical of the GATT. As more and more countries, mostly developing countries, join the GATT/WTO, developing countries now constitute a large majority of the WTO Membership. However, most developing countries have little influence on the world trading system. To attract developing countries to fully integrate themselves into the world trading system, certain SDT need to be given for the following reasons. For instance, poor countries have limited resources to train experts in complex WTO rules. Rich countries may send representatives to sit in all commissions, committees, councils and bodies in the WTO, but small, poor economies just cannot afford it. The lack of resources may also limit developing countries' use of the Dispute Settlement Mechanism (DSM) of the WTO.

To compensate for such a disadvantage of developing countries, SDT provisions are important. The WTO Members can help developing countries to train professionals and build up their own trade regulation systems. SDT may also increase the benefits and decrease the costs for developing countries to be involved in the WTO, especially to help them make better use of the DSM.

(b) Difficulty of Defining Developing Country Members

As mentioned above, the WTO has no well defined definition of developing country Members. Some WTO Members have consistently proposed to give developing country Members an operational definition. However, a widely agreed definition has never come out. Why is it so difficult to make such a definition?

1. Heterogeneity of developing countries

Developing countries are different in many aspects. Some countries such as South Korea have GDP per capita close to USD 20,000, but other countries such as East Timor have only GDP per capita as low as USD 400.29 Some countries are growing very fast: Equatorial Guinea has long been treated as a developing country and its GDP per capita was still below USD 1000 in 1989, but by 2005, its GDP per capita had become USD 50,200, one of the richest in the world. Other countries such as Zimbabwe and Maldives have had negative growth rates. Some developing countries, such as Brazil, India, and China are very big in size while a number of developing countries are tiny. Developing countries are also different in their social and political aspects. While some developing countries have working democratic regimes, others have questionable sustainability with regard to their economic development, because, even though their economies are growing, their democracies are still very immature.

The significant heterogeneity of developing countries causes difficulty in defining developing country Members not only because it may be difficult to find consistent and sufficient technical criteria for the definition, but also because developing countries in different situations have different or even conflicting interests. When too many countries are treated as developing countries, the countries that really need SDT may not get enough preference to support their development.

2. Dynamic change of economic performance

Every country tends to experience ups and downs in its economic development. Sometimes these ups and downs can be so dramatic that a country such as Equatorial Guinea can be changed from one of the poorest countries into one of the richest countries within a period of time as short as 15 years. South Korea, Taiwan, Hong Kong and Singapore also metamorphosed from poor economies into rich economies in a relatively short period of time. South Korea still claims it is a developing country, at least in the agriculture sector, at the Doha Development Agenda negotiations, although its GDP per capita is almost USD 20,000. Some

countries, although enjoying healthy growth in some period, may have negative growth in other times. If some threshold criteria of "developing country" are made, some countries may well move on and off the list from year to year.

3. The complexity of the concept of "development"

The concept of "development" is as elusive as the definition of "developing country". It is commonly believed that some criteria, other than national income level, should be considered to define "development", but which ones should be included is always a question. Even for national income level, different choices of measures may render different results.

4. Intrinsic conflict between MFN and SDT

MFN treatment, based on the principle of non discrimination, is easy to define without much ambiguity. Most exceptions to MFN treatment in WTO are well defined because they only shrink the coverage of MFN treatment without derogating from its principle. But SDT intrinsically conflicts with MFN treatment. EU holds the view that SDT should be based on the principle of "different needs, different responsibilities". If one holds onto this principle tightly and classifies all the trading countries according to their different needs, and allows a country to grant treatments accordingly, the MFN principle will not be sustained. On the contrary, if all the developing countries, maybe 90% of WTO Members, were to claim that they are developing countries and should be treated equally, hence South Korea and Somalia are treated the same way, the countries that most need SDT will not benefit much from it, as few developed countries will be willing to grant preferential enough treatment to so many developing countries. Finding a middle way is a difficult and subtle job.

Conclusion

One of the stumbling blocks of WTO negotiations is the relationship between trade and development. Developing countries argue that the SDT should be "mandatory and legally binding through dispute settlement system of the WTO".

To make SDT provisions legally binding rather than just "best endeavour" provisions, a clear, predictable definition of "developing country Members" should be made.

Although some relatively advanced developing country Members such as India, Brazil and China may not be happy with it, the classification of developing countries into several categories is necessary. Classification is compatible with the rationale of SDT. If relatively underdeveloped countries should be given more favourable treatment than developed countries, the most underdeveloped countries should be given the most favourable treatment.

Chapter 3

Dispute Settlement under the WTO

The WTO Dispute Settlement System which came into operation in 1995 was innovative. It is governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). Its prime objective is the settlement of disputes between WTO Members concerning their rights and obligations under the covered agreements. There are two important policy considerations referred in the DSU namely, protecting the security and predictability of the DSS and satisfactory settlement of disputes. Jackson (2004) argues that these two policy issues may conflict with each other as sometimes the need to reach a satisfactory settlement may compromise the security and predictability of the dispute settlement system.

Bossche (2008) noted the following new innovations in the dispute settlement system : First, the quasi automatic adoption of requests for the establishment of panels, of panel reports and of the request to authorise suspension of concessions. Secondly, the strict time frames for various stages of the dispute settlement process and lastly, the possibility of appellate review of panel reports.

The DSB plays an important role in the WTO dispute settlement system. It is made up of all the representatives of every WTO Member and it deals with disputes arising under any of the WTO Agreements, and it does so in accordance with the provisions of the DSU. The DSU confers compulsory jurisdiction on the DSB for the purpose of resolving disputes. The DSB establishes dispute settlement, adopts reports from panels and the Appellate Body, maintains surveillance of implementation of rulings and recommendations it adopts, and authorizes the suspension of concessions and other obligations under the covered agreements, if its rulings and recommendations are not acted upon timely. It also deserves mention at this juncture that WTO reports are adopted automatically unless there is a consensus to the contrary.

Implementation and Enforcement of the DSB Recommendations and Rulings

Although there are many procedural aspects on the implementation and enforcement of the DSB rulings, this section will primarily deal with remedies available when the DSB ruling is in favour of the complainant. The remedies available in the WTO dispute settlement system are provided for in the DSU. The primary and preferred remedy is the withdrawal or amendment of a WTO inconsistent measure. However, sometimes the respondent may not be able to comply promptly and the complainant may have one of the following temporary remedies namely compensation and suspension of concessions or other obligations.

Compensation and Retaliation in Practice

(a) Compensation

From a pure economic view, compensation as it is used within the WTO today, is simply trade liberalisation. When for example, tariffs are reduced, economic welfare will increase in the respondent country, in the complaining country, and even in third countries which export the products whose import barriers have been lowered. Third importing countries will lose from terms of trade deterioration, but the world as a whole will be better off economically according to standard gains from trade theories. From this point of view, compensation should be the most used remedy within WTO simply because trade liberalization is one of the basic ideas within the organization.

Since the introduction of the DSU in 1995, the concept of compensation has not been used very frequently. There are several possible reasons why compensation as a remedy is rarely used in practice. This chapter will examine these reasons. First, compensation is voluntary, and the disputing parties have to agree on the solution. Second, the compensation must be consistent with the covered agreements. Conformity with the covered agreements implies consistency with the most favoured nation (MFN) principle found in article I of the GATT. Third, the current system on compensation may not provide for effective reparation of damages suffered by the complaining party.

The Voluntary and Agreeing Part

The voluntary aspect of the remedy combined with the fact that the parties have to agree on, not only to compensate and to get compensated, but also on the specific amount thereof, makes the concept contentious to use. In practice this has been very difficult since there is no actual way to force the non complying member to compensate. Another aspect is, since the compensation is voluntary, the respondent can end it at the same moment it reforms its WTO inconsistent regime, awaiting the outcome of any further action by the complainant under article 21.5 of the DSU. Hereby, the respondent would gain greater control of how the entire procedure would continue. Article 22 of the DSU states that if no satisfactory compensation has been agreed upon within twenty days after the date of expiry of the reasonable period of time, the complainant may request for authorization to retaliate.

The MFN treatment obligation requires a WTO Member that grants certain favourable treatment to another country to grant the same favourable treatment to all other WTO Members. A WTO Member is not allowed to discriminate between its trading partners by, for example, giving the products imported from some countries more favourable treatment with respect to market access than the treatment it accords to the product of other Members.

The obligation of consistency with the most favoured nation (MFN) principle adds another difficulty to the practical use of compensation. Hereby, members other than the complainant would also benefit if compensation is offered, for example, in the form of a lower tariff. In the end this would probably lead to the complainant asking for a larger degree of access to the market when discussing the compensation than if access was able to be provided only concerning the complaining party. Even though the new openness on the market would increase economic welfare for the respondent, the political economy of trade policy is such that the political leadership of the country would lose from such unilateral reform. Otherwise there would have been no incentive to create the import barriers from the first place. The obligation to offer compensation to all WTO members will in practice result in raised prices for the respondent and no exclusive benefit for the complainant. This will make the remedy less attractive to both of the disputing parties.

Reparation of damages

A breach of an international obligation under general international law leads to responsibility generating certain legal consequences. The obligation to come to an end with the illegal measure is the first consequence under international law. To make an analogy, this remedy of cessation is equivalent to article 21 of the DSU, the withdrawal of the inconsistent measure. Further, the injured state has the right under general international law to claim full reparation in the form of:

(i) Restitution in kind;

(ii) Compensation;

(iii) Satisfaction; and

(iv) Assurances and Guarantees of non repetition.

Restitution means that the state responsible for the wrongful act is obliged to re establish the situation which existed before the wrongful act was committed, provided to the extent that restitution is not materially impossible or does not involve a burden out of proportion to the benefit deriving from restitution instead of compensation .

The erring party is obliged to compensate such damage that has not been made good for by restitution. The compensation shall cover any financially assessable damage including interest and, under certain circumstances, loss of profits. Note that this differs from article 22 of the DSU which does not explicitly provide for the compensation of damage suffered. So far, WTO remedies have concerned only prospective relief. Satisfaction may consist of an acknowledgement of the breach, an expression of regret, a formal apology, or another appropriate behaviour. Satisfaction shall not be out of proportion to the injury and may not take a form humiliating to the responsible state.

Article 3.2 of the DSU provides, in relevant part:

"The Member recognised that [the WTO dispute settlement system] serves 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."

The DSU thus explicitly refers to customary international law on treaty interpretation and makes this law applicable in the context of the WTO.

Question may arise if the rules laid down in the ILC apply when there is a breach of WTO law or if the remedies provided for in the DSU are the only ones available. Most of the WTO members seem to share the view that when creating a detailed set of rules aimed for handling breaches of the WTO law, the DSU has contracted out of the general economic law on State responsibility and, therefore, also the rules concerning compensation. The interpretation seems to be correct since states may actually deviate from customary international rules. The Vienna Convention on the Law of Treaties 1969 declares invalid only those treaties which contradict a peremptory norm of international law. According to the criterion set out in the ILC draft, the DSU must be considered lex specialis handling these kinds of questions. On the other hand, nothing under the current WTO dispute settlement system or any of the disputes decided up to this date explicitly precludes reparation for past damages. If the concept of compensation did provide for effective reparation of damages suffered by the complainant, naturally this would make compensation as a solution more attractive to this party.

(b) Retaliation

The possibility to take action under Article 22.2 of the DSU to suspend concessions or other obligations is the last option for a complaining party to put pressure on the losing party to implement recommendations or rulings. The remedy is used more frequently than compensation and the reason behind this is that it is not a voluntary measure and it is not dependent on the Member in breach. However, there are practical problems arising with this remedy as well. This chapter will discuss a few of them.

Firstly, retaliation measures are trade destructive and can affect the injured party negatively as well as the losing party. Secondly, the possibility to retaliate in particular is not a genuine option to smaller or developing country members. Third, these smaller and developing country members are also the ones that are most affected by the possibility to "cross retaliate". Doubts certainly do exist if the suspension of concessions or other obligations is an efficient temporary remedy for breach of WTO law.

The suspension of concessions or other obligations are very different in nature from compensation. The remedy is, for example, easier to use since there is no need for the parties to agree. As opposed to compensation, retaliation involves the raising of trade barriers which is damaging free trade principles and works contrary to the basic principles of trade liberalisation within the WTO.

Negative Effects

When the complaining party chooses to suspend concessions against the respondent's exports, the complainant is usually not helped by the retaliation in practice. On the contrary, it is actually harmed because of the standard cost of protectionist barriers. This may deter small or developing country members confronting a larger member from seeking a solution through the DSU. This was the case for Ecuador in the EC Bananas III case, where Ecuador was authorized to apply retaliation measures for an amount of 201.6 million US dollars a year, but found it impossible to make use of this possibility without causing severe damage to its own economy. Another problem concerning this remedy is that retaliation actually does nothing to help the specific exporting industry of the complaining party that has been denied market access in the first place. Rather, it is the importing industries of the complaining party that get temporary backing through the prohibitive tariffs imposed by the retaliation measure. On the other hand, the respondent's industries that are harmed by the retaliation are typically not the ones that have been benefiting from the WTO inconsistent measure. Rather, they are the industries chosen by the complainant with a view to have the largest negative political impact to put pressure on the government of the respondent member.

These aspects show that the remedy is targeting different domestic markets and individuals in a way which is difficult to motivate. This may trigger tensions not only within the internal market, but also between the disputing parties. One solution to the problem may be to introduce rules which more specifically point out the areas where the complainant has the right to take action. The right to retaliate could be more closely connected to the trade damaging area and not unilaterally chosen by the complainant. On the other hand, it is important to not wipe out the possibility for small and developing country members to cross retaliate and to use the authorization in an efficient way. This will be discussed more in detail later in this chapter.

Stronger Versus Weaker Members

All of the WTO members are equal from the legal point of view of the DSU. However, when the remedies are applied in practice, it is of great importance which members are opposing each other. For members acting against similar members, political and economic powers as factors in achieving compliance may be manageable. But in cases, where a weaker member is faced with non compliance by a disproportionately stronger member, political powers may make

compliance hard to accomplish. And even if compliance finally occurs, the sectors of the weaker member may already have been forced out of business. From this aspect, negotiation on compensation and the imposition of countermeasures are only highlighting and upholding the inevitable political and economic inequality between WTO members. It would be difficult, for example, for Chad to retaliate against United States or the European Community. Difficulties may arise since the retaliation of Chad may in turn provoke counter retaliation in non WTO related fields such as development aid or fence off the domestic market of Chad from needed imports from the stronger opponent. This scenario would only hurt the weaker member, not induce compliance by the stronger opponent. This is definitely not the desired consequence in applying article 22 of the DSU in practice.

Chapter 4

The Problem with Remedies under the WTO Dispute Settlement

The first option in any dispute settlement procedure is always a request for consultations by the complaining Member. The consultation aims to settle the dispute amicably without the rancour associated with formal dispute settlement. Only when this effort fails, a Member may request for the establishment of a Panel. The Panel considers the submission of both the parties and comes to a decision and in case of a violation; the recommended remedy is withdrawal of the violation. Other remedies will be available only if the withdrawal of the violation is not done. According to Article 22:1 DSU, "Compensation and the suspension of concessions or other obligations are temporary measures available in the event that the recommendations and rulings are not implemented within a reasonable period of time. However, neither compensation nor the suspension of concessions or other obligations is preferred to full implementation of a recommendation to bring a measure into conformity with the covered agreements. Compensation is voluntary and, if granted, shall be consistent with the covered agreements." In WTO, compensation does not mean monetary damages as it is understood in most legal systems. Instead, compensation is taken in a sense that the losing party grants increased concessions to the winning party i.e. increased market access. The increased concession (market access) does not have to be in the same sector which has lead to the dispute.

One of the main problems with compensation as a remedy is that it is voluntary. This means that it is up to the losing party to offer compensation which is

acceptable to the winning party. Again, according to the Article 22, compensation is to be "consistent with the covered agreements". WTO history shows that the principle of Most Favoured Nation (MFN) must be followed in the application of compensatory measures. In simple words, where a party goes through the whole procedure of securing a positive ruling from the DSB, the remedy which it receives from the process is to be enjoyed by all the Members of the WTO. This shows the unfairness of this remedy and is probably one of the reasons why compensation is not usually resorted to. It is very unusual that a Member would not mind going through the whole dispute settlement procedure and then have to share the compensation with every other Member.

Apart from the fact that the MFN principle has to be followed in providing compensation, the DSU has another provision that makes it obligatory to make the measures resulting from negotiations on compensation generally applicable. Article 3:5 DSU states that "all solutions to matters formally raised under the consultation and dispute settlement provisions shall not nullify or impair benefits accruing to any Member under those agreements". But giving increased concessions to one of the Member even though compensatory, nullifies benefits to the other Members. 'Nullification' according to GATT Article XXIII occurs in any of the following situations:

The failure of a contracting party to carry out its obligations, The application by any other contracting party of any measure, whether or

not it conflicts with the provisions of the Agreement, and The existence of any other situation.

Providing compensatory trade concessions to one country without extending same to other Members could be argued to be a nullification of the benefits accruing to other Members, even though the measure is not contrary to any provision of the covered agreements. In order to make this point clearer let's take this example; if after a dispute settlement, the two parties agree that compensation should take the form of reduced tariffs on a particular product coming from the winning party's country, what this means is that other countries exporting those same products to the losing party still pay the old higher tariff which would mean that their goods would be more expensive (thus leading to lower profits) than those coming from the winning party. Hence this is a nullification of benefits accruing to them. Would this not lead to false/intentional violations which could lead to preferential tariffs for certain parties?

Where the recommendation and rulings of the DSB is not carried out, there must be a "request for authorization from the DSB to suspend the application to the Member concerned of concessions or other obligations under the covered agreements". Where the parties cannot reach an agreement as to the level of suspension of concessions, arbitration is resorted to, in order to determine the amount of nullification or impairment suffered by the Member. After completion of this process, the winning Member may retaliate by imposing tariffs on a particular sector until the inconsistent measure is withdrawn. 'Retaliation' is most often resorted to and the reason behind this is that it is not a voluntary measure and it is not dependent on the Member in breach. It is a unilateral action taken by the winning Member.

However, 'retaliation' has its disadvantages. For example, it is often the case that another business sector suffers the retaliatory action rather than the sector in which there was a violation in the first place. For instance in the EC Measures Concerning Meat and Meat Products (Hormones) case, the U.S retaliated on confectionaries, flowers, vegetables etc., and so these other producers in the EU had to pay for the harm caused by the ban on hormone treated beef from the U.S. Increasing tariffs necessarily means increasing the domestic prices of the goods. This makes them less affordable, therefore reducing the quantity, and eventually harming the economy. It is a typical case of 'biting one's nose to spite the face'. Hence, retaliation acts against the main objective of the WTO system which is generally to promote rather than restrict international trade.

For smaller developing countries, the effect of its retaliatory action may not be felt especially where the violator is a Member with whom it has minimal trading relations. Retaliatory actions are limited to suspension of concessions by the complainant within its territory, and cannot be applied outside its borders. The time span for resolving disputes is another crucial point which diminishes the gains of dispute settlement remedies. The dispute settlement process even with its merits is far from being perfect. From the time when a Member requests consultation up until the time when the measure is withdrawn, the period of time which has elapsed is anything from 1 3 years. There is bound to be a huge amount of lost trade which must have occurred within that time and for which there is no remedy because WTO remedies are prospective in nature. This means that the dispute settlement remedies are essentially 'forward looking'. By 'forward looking', it is meant that remedies do not become applicable and calculable until a ruling is eventually given, whatever the remedy may be. In other words, there is no remedy for the harm that has already taken place.

Further, the existing remedies offer no relief to those actually injured i.e. the producers and exporters carrying out the actual trading activities. The way the WTO dispute settlement works is that it is only governments that can bring an action and not the individual traders. Therefore, unless the offending measure is withdrawn, no other remedy will alleviate the harm done to the traders. Whatever remedy is given this does not actually benefit the affected parties directly. It is either that some other parties benefit, or the government revenue is increased. Until the dispute settlement process makes provision for private party rights to participate, some way has to be found to compensate the individuals who actually lose by the application of the WTO inconsistent measure. The problem with the remedies under WTO dispute settlement system can be seen in several cases. In the case of EC Regime for the Importation, Sale and Distribution of Bananas, after obtaining a ruling which the European Communities did not comply with, Ecuador requested authorization by the DSB to suspend concessions or other obligations to the European Communities under the TRIPS Agreement, the GATS and GATT 1994 in an amount of US$450m. This request was granted although the level was reduced to US$210m. Even though the violation was in the goods sector under the GATT, Ecuador had to request retaliation on other sectors under other Agreements because suspension in the goods sector was not practicable or effective. The problem was related to bananas, yet the EC sectors which would be punished as a result were the intellectual property and wholesale trade services sectors.

The Arbitrators in that case recognized that;

"Given the difficulties and the specific circumstances of this case which involves a developing country Member, it could be that Ecuador may find itself in a situation where it is not realistic or possible for it to implement the suspension authorized by the DSB for the full amount of the level of nullification and impairment estimated by us in all of the sector and/or under all agreements mentioned above combined."

Apart from the fact that other sectors in the EC would have to pay the price for banana violations, the banana exporters in Ecuador are not any better off by their government retaliating against the EC in the area of TRIPS and GATS. The only effect is that there might be a restoration of the balance of concessions between the two countries, but this in itself is not sufficient because the effect is in a different area.

A similar situation has arisen in the US Gambling case in which Antigua & Barbuda won its case against the U.S. The U.S did not comply with the ruling, which means that Antigua & Barbuda will be left to come up with creative means

to get back at the United States. Even if it succeeds in doing so, the trade relations between the U.S. and Antigua & Barbuda are not sufficient for Antigua & Barbuda to substantially threaten the US. The point is this: Something needs to be done urgently to address these imbalances which make it difficult for developing countries to derive any benefits from WTO dispute settlement, even where they have taken the step of bringing the case before the DSB.

Chapter 5

Inequality in the WTO Dispute Settlement Mechanism

No doubt, the Dispute Settlement Mechanism of the WTO better enables developing countries to use the system for trade dispute resolution. However, several developing countries have been among the most persistent critics of the system since its establishment. According to the Moon's research, under the new DSM of the WTO, developing countries are now much more frequently taken to DSU panel by developed countries, as the percentage of "developed countries as complaints and developing countries as defendants" increased considerably from 9.5% under the GATT system to 28.1% under the WTO mechanism. Reinhardt and Busch found out that "developing countries are one third less likely to file complaints against developed states under the WTO than they were under the post 1989 GATT regime." Moreover, till today, the least developed countries (LDCs) are even totally absent in the DSM of the WTO.

All the above evidences show that developing countries are still to some extent marginalized under the new Dispute Settlement System of the WTO. If this situation persists, the WTO legal system may be more and more shaped by developed member's interests and wills, and it may be difficult for the developing countries to stand in. Now we find out what is the actual situation and the possible inequality and marginalization of developing countries in the DSM?

High Costs and Limited Resource Availability

1. Financial Cost

The costs of access to the DSM of the WTO are very high and compared with developed members; developing members actually have very few resources to spend to defend their WTO rights. A typical WTO dispute settlement procedure may cost 12 months (without appeal) to 15 month (with appeal), and even it can be more longer if include the implementation phase. For instance, the famous banana dispute, the process lasted 43 months from 4 October 1995 to 19 April 1999 when the DSB authorized the US suspension of concessions. And the DSB suspension authorization to Ecuador was on 18 May 2000, which made the course as long as 56 months. Bown and Hoekman in their research point out that even just calculating the actual litigation and excluding the pre and post litigation costs, the bill for hourly legal services could run from $89,950 for a low complexity DSM case to $247,100 for a high complexity case. And these do not include the costs of litigation support through necessary data collection, economic analysis, and hiring of expert witnesses for testimony, which may lead to another $100,000 to $200,000. Furthermore, other substantial overhead costs associated with many other aspects such as travel, accommodation, communication, paralegal and secretarial assistance all have to be paid. Thus a typical "litigation only bill" to an exporter for a market access case is roughly $500,000 and it even does not cover the resource costs of potential claim investigation in the pre litigation phase and other public and political relation costs, which might be extremely high. Except for the litigation costs, countries initiating disputes in the DSM face income losses from hindered trade during the dispute investigation period. These potential income and market losses may be more unbearable than the litigation bills for developing countries, especially those highly relying on their limited exports for national incomes.

High costs of WTO dispute settlement erode developing countries' capability, to participate in the DSM. Compared with their developed peers, developing countries usually have fewer financial resources to spend on the WTO litigation. Generally, their economic sizes are smaller, their industries are less profitable, their government budgets are limited and their limited resources also have to be spent on many other social needs of their own. Thus the high costs actually lower developing countries' status and make them less willing and less able to pursue dispute settlement through the DSM, which can be seen from their less appearance

in the system. Shaffer asserts that unlike the US and the EU, most developing countries cannot even afford to fly in officials from the capital for specific WTO meetings.

Due to financial inequality, developing countries face big obstacles in pursuing WTO dispute settlement. Theoretically it is true that these developing countries can obtain funds or assistance from sources such as private firms and nongovernmental organizations. But the real problem is that in the developing countries, the private sectors are also relatively weak and less profitable, and even they typically consider WTO dispute settlement as the government's job.

The high financial costs of the WTO dispute settlement trigger inequality in the DSM. Developed countries with plentiful financial resources, can better afford the WTO dispute settlement and use it more frequently than developing members. Hence it comes out that developing countries do not make full use of the DSM.

2. Limited Legal Resources

Legal resources, especially the legal expertise, are also imperative for WTO dispute settlement. The shortage of special expertise, personnel and information for legal activities is one of the reasons why developing countries are suffering inequality and unfavourable outcomes in the WTO dispute settlement system.

Industrialized states such as the US and the EU, also the major players in the WTO, are well equipped with legal experts in the area of the WTO legal system, and they have a worldwide network of commercial and diplomatic representation that feeds their systems with relevant data. In contrast, developing countries have limited legal expertise and it is harder for them to collect data and information because of the lack of networks. Many developing countries have only one or two lawyers to address WTO issues. When small developing countries are involved in disputes with the US or the EU as the other side, the developing ones are obviously in a disadvantageous position concerning legal expertise supply.

To certain extent, developing countries can improve their access to WTO litigation services, by getting technical support from the WTO Secretariat, according to Article 27.2 of the DSU. They can also go to the Advisory Centre on WTO Law (ACWL) for legal assistance for dispute cases or to the NGOs and other issue based organizations or private firms for help. But these methods are limited and ineffective in practice. For example in WTO, legal assistance services are offered by only two expert attorneys on a limited part time basis, and the two experts advise developing countries disputants at most one day per week.

Moreover, a large number of developing countries are designated as "inactive" for not having paid their assessed contributions to the WTO budget for more than 3 years, and such a designation implies that they are not able to receive technical assistance from the WTO, and a number of other privileges, such as the distribution of documents, are withheld from them. But these "inactive" countries are actually the poor ones that most need the WTO's help. Similarly, the ACWL assistance may also encounter the problem of availability of its resources. On the one hand, the operation fund of the ACWL basically comes from individual countries, and a rich country may be hesitant to provide adequate fund to an organization that often provides litigation assistance directly challenging its own interests. On the other hand, even the limited resources have to be allocated on a fiercely competitive basis. Developing countries not only lack legal resources domestically, but also face difficulty in getting assistance from outside as compared to the developed countries. These financial and legal resources constraints bring inequality between developing countries and developed states in the Dispute Settlement Mechanism (DSM) and hence reduce developing countries capability to participate in the system. As Besson and Mehdi's finding suggests, developing countries are unlikely to obtain a favourable outcome unless the asymmetry of capacity is corrected.

3. Compensation Inadequacy and Lack of Enforcement Capability Another Source of Inequality

Except for the inequalities coming from the imbalances of political power and economic burden, even if developing states launch a complaint and win, it is also difficult for them to get adequate compensation or fully enforce the rulings.

4. Inadequate Compensation

As mentioned earlier, the time period, from starting a complaint to the end when the complaining side gets the permission from Dispute Settlement Body (DSB) to impose limited trade sanctions ("suspend concessions or obligations"), is a very long procedure. But the WTO retaliation mechanism prescribes that complaints cannot unilaterally take retaliatory actions unless the DSB makes decisions and permits them to, which means that the defendant side is able to violate the WTO laws and hurt the other side's interests during the long time period, until the WTO recognizes and decides to take action to correct the violations. Thus it is possible that before the DSB authorize them to impose trade sanctions, the developing countries' domestic markets and internal economic capabilities have already been

badly harmed. Under the current "retaliation as compensation" approach, there is no room for retroactive compensation or punishment measures that can help developing countries make up for its previous economic losses that have been already caused before the decision is made. Even if the defendant side corrects its action after the dispute, the complaint still has to assume the economic losses generated before the correction.

Under the DSM, the final dispute settlement decisions are supposed to be implemented on a decentralized, bilateral basis. The DSM relies entirely on state power for enforcement of its rulings. It is arguable whether developing countries possess adequate enforcement capability to fully implement the WTO rulings or recommendations even if the results are favourable to them. It may be hard for a developing country to raise tariff rates on certain products imported from a developed country, even if it is authorized to, since this action may hurt itself in turn at the end.

With a relatively weak economy, a developing country may depend on certain imports from developed countries for development; if the products included in the retaliation are actually essential for its own growth, it can hardly be expected that the developing country will really deter or limit the imports. But considering the other side, since most developing countries' markets and economic power are relatively small and weak, whether or not they take retaliatory actions to developed countries' products does not bring much difference to the developed economies, unless they retaliate in alliance, which does not usually happen. Thus, while the retaliatory actions taken by developing countries to developed states cannot bring much danger or worries to the latter but may incur negative consequences to the users themselves, developing countries actually do not possess real equality with developed countries because of the asymmetry of enforcement capabilities.

The DSU Provisions Inequality behind the Articles

Taking a closer look at the DSU provisions, there is also an interesting story. On the one hand, the Uruguay Round agreement provisions generally demonstrate that strong countries are real beneficiaries. The WTO expanded its coverage to areas such as investment (Agreements on Trade Related Aspect of Investment Measures, TRIMs), intellectual property rights protection (Agreements on Trade Related Aspect of Intellectual Property Rights, TRIPs), service trade (General Agreements on Trade in Services, GATS), etc. Because of these agreements, disputes in these areas now can be brought into the DSM. While most of the agreements reflect developed countries interests, developing countries are actually in an unequal position.

On the other hand, analyzing the special DSU provisions which aim at improving developing countries status, it is found that they are more declarative than operative. For instance, the Article 4.10 requires that special attention should be paid to the particular problems and interests of developing countries during consultation phase. But this article does not point out concretely on what specific aspects and to what extent the "special attention" should be paid. Since there is no specific implementation measure, in practice it is hard to evaluate whether member countries have really and adequately complied with this provision. And Article 21.2 has the similar problem. Furthermore, several other provisions regarding special and differential treatment may be difficult to apply, though they seem to be favourable to developing countries. For example, Article 21.7 states that the DSB must consider what further and appropriate action it might take in addition to surveillance and status reports, if a developing country has raised the matter. But it has not been used by any developing country. According to Delich, the reason here is probably that the country has to devote large amounts of resources to analyze and follow the case development, and developing countries hardly possess sufficient resources to do this. Similarly, as discussed earlier, the provisions regarding technical assistance to developing countries are not able to be adequately applied for the sake of the limited resources availability. And till now, the provisions related to LDCs seem to be "useless" since no LDC has been involved in any dispute. Thus, while the DSU provisions, even those favourable to developing countries, cannot be fully applied, further efforts are needed to improve the inequality between developing states and developed ones in the DSM.

Chapter 6

Proposals for DSU Reforms

Introduction

The preceding chapters have highlighted the problems which are currently being faced by developing countries in the enforcement of DSB recommendations and rulings. This chapter will focus on the attempts which have been made by Members to solve some of these issues with a view to smoothening WTO dispute settlement system and to make it effective from 1995 to date.

History of the DSU Reforms

Discussions on reforming the WTO dispute settlement system began in 1997 in response to a decision that has been adopted at the Marrakesh Ministerial Conference by which Members agreed to review the DSU within four years.

The DSU Review began in 1998. Members did not seem to have much ambition and they seemed to be satisfied by the then prevailing system. Many general proposals for change were discussed but only very few technical ones garnered much support. January 1999 witnessed the so called Bananas case where there was a dispute between the EC and US over the procedures to be followed when a Member allegedly fails to implement DSB recommendations within a reasonable period of time permitted by Article 21 of the DSU. Although the matter was finally amicably resolved, Members felt the need to remove the ambiguities that existed in the text of Articles 21.5 and 22 of the DSU. The DSU review finally came to an end on July 30, 1999, but Members did not reach any consensus.

The Doha Mandate

In 2001 the reform of the DSU was put on the Doha mandate. The November 2001 Doha Ministerial Declaration provides as follows:

"30.We agree to negotiations on improvements and clarifications of the DSU. The negotiations should be based on the work thus far as well as any additional proposals by Members, and aim to agree on improvements and clarifications not later than May 2003, at which time we will take steps to ensure that the results enter into force as soon as possible thereafter".

After several formal and informal meetings, these negotiations culminated into a consolidation of proposals in a document called the Chairman's Text of 28 May 2003. However, it proved impossible for the Members to reach an agreement on a Text by the end of May 2003. Even though the Members did not reach an agreement, it is interesting to note that this was the first time Members attempted some comprehensive DSU reforms. The next section discusses in detail the Members proposals.

Major Proposals from the Members for DSU Reforms

This section evaluates various proposals with a view to find and to recommend those proposals which will benefit developing countries in the implementation and enforcement of DSB recommendations and rulings. For the sake of convenience, these proposals can be arbitrarily classified as follows:

those which seek to enhance compliance with DSB rulings generally, proposals which seek to enhance the threat of retaliation, proposals which seek to enhance the value of compensation and those which seek the improvement of the special and differential treatment in the WTO dispute settlement system.

Proposals to enhance compliance with DSB rulings generally

(a) Time periods

There is a proposal which seeks to shorten some time periods in the DSU and more specifically on the panel report adoption, appeal and adoption of report and reasonable period for implementation. There is also a proposal to put a new Article 3.13 that would allow any time period in the DSU to be extended by mutual agreement of parties. This proposal may lead to delays especially in the implementation and enforcement of DSB rulings and recommendations. Thus this proposal is not acceptable because it may be manipulated by bigger states at the expense of weaker ones. They may use their economic strength to influence the extension of periods under the DSU and this compromises the security and predictability of the dispute settlement system. But on the other hand if a developing country is the respondent then this provision may help them to gather the necessary info and prepare their defence effectively.

(b) Strengthening the Compliance Monitoring System of DSB

Article 21.6 of the DSU gives the DSB the role of keeping under surveillance the implementation of adopted recommendations and rulings. This surveillance by the

DSB needs to be strengthened since it can be one of the ways of putting pressure on the Member which has violated the WTO Agreements. Since the issue of non compliance can be raised by a Member during the DSB meetings, it gives room for other Members to show their interest in seeing Members abiding by their commitment. This is also commendable that developing countries would be able to voice their concern together in support of each other.

The Chairman's Text also significantly elaborates surveillance procedures. It proposes to modify Article 21.3 of the DSU to require that a Member shall inform the DSB no later than 10 days following the adoption of the DSB recommendations of intentions to comply with such a ruling or recommendation. Currently the time period is 30 days. This proposal is acceptable as it is aimed at shortening the time for the implementation of DSB rulings and recommendations.

(c) Provisional remedies

This is a proposal by Mexico which seeks to add a system of provisional remedies in the WTO. The essence of this proposal is that panels should have the authority to recommend interim measures in the form of a suspension of the challenged measure pending a final determination on its legality.

This proposal attracts much criticism. First, it raises the question whether such interim measures should be limited to cases of particularly serious WTO violations. Secondly, if the panels need to evaluate economic damage in order to recommend an interim measure, this would imply significantly longer panel procedures, thereby defeating the essence of interim measures. Thirdly, it is difficult for countries to suspend legislative measures and some administrative measures like anti dumping measures. Fourthly, it would be inappropriate to authorize retaliation before the determination of compliance. Fifthly, it raises the issue of whether the respondent party would be compensated if the final ruling does not confirm the illegality of the measure. Sixthly, provisional remedies are difficult to implement in practice given that panels are appointed on an ad hoc basis. It may be difficult for non permanent panels to assume such a task. Finally, it can be difficult for Members to agree on circumstances which call for such provisional remedies. As a result of the above criticism, it can be said that in the short term this proposal is not accepted in the short. But if there is a serious breach and annulment of the measure in question this may minimise the damage.

(d) Retrospective Remedies

There is a debate in the academic literature as to whether the DSU can be read as providing retrospective damages. However, the understanding of Members is that the DSU is only concerned with prospective remedies. Thus currently the multilateral trading system is about a balance of rights and obligations with WTO remedies to preserve future trading opportunities rather than to redress past injury. It is recommended that WTO law should provide for both prospective and retrospective remedies. Customary International Law provides both for prospective and retrospective remedies. This is also provided for in the Draft Articles of the International Law Commission. The implication of this is that a Member who is found to be in violation of WTO law should have the obligation both to stop the illegal act and to provide reparation for the damage suffered by the injured party. In international law, the leading case is that of Chorzow factories in which the following was stated:

'Reparations must, as far as possible, wipe out all the consequences of the illegal act and re establish the situation which would, in all probability, have existed if that had not been committed'.

This is commendable in that it will give the offending country an incentive to comply early with the rulings and recommendations of the DSB since the longer they take to comply the more they are to pay. This then removes all the present incentives for delay in the dispute settlement process especially on the implementation and enforcement. Some authors have argued that retrospective damages are contrary to the fundamental notion of constitutional and democratic governance. For, instance, there are significant constraints on the ability of the governments to recall subsidies already provided legally and in good faith to private companies.

Mavroidis (2004) supports the introduction of retrospective remedies in the WTO and even argues in a compelling manner that these retrospective remedies can be given in the WTO without any change to the current DSU.

Bourgeois (2006) argues that there are good policy arguments in support of retrospective arguments. Retrospective remedies counteract the incentive for protracting the dispute settlement proceedings, they are a deterrent against potential violators and more appropriate compensation for nullification and impairment suffered by the offended WTO Member.

In conclusion, although there are criticisms levelled against the introduction of retrospective damages in the WTO dispute settlement system, it is argued that there is a strong and compelling case for the introduction of such damages and it is recommended that in the ongoing DSU negotiations, Members should take the stance for the provision of retrospective damages as this has basis in logic.

Proposals to enhance the threat of retaliation

(a) Member sanction

This proposal calls for the amendment of the DSU so as to reflect that WTO Members whose measures have been found to be inconsistent with their obligations, cannot bring forward a complaint on any issue against another WTO Member unless they have first complied with their obligations.

However, the problem with this measure is that it can lead to growing disregard of the WTO rules by a Member who has been sanctioned. In addition, these sanctions are trade distorting as other Members may act against the sanctioned Member's interests knowing that it cannot complain. Another problem would be on whether the sanctioned Member would be able to complain against violations which were done when it was under sanctions.

It is suggested that if such sanctions should be included in the WTO, they should be limited in time or even over a specified subject matter.

(b) Collective Retaliation

This proposal was made by India and its effect is that where a Member has been found to be in violation of the WTO Agreement(s) and has failed to comply with the DSB recommendation or ruling, there should be joint action by all other Members on the suspension of concession. The effect of this is that there will be withdrawal of market access commitments by all Members of the WTO.

The above suggestion may work in favour of developing countries. where a developing country could not have retaliated; collective retaliation seems to create enough pressure to induce compliance by the respondent of whatever stature. For instance, if the US fails to comply with the recommendations or rulings of the DSB in the US Gambling case, all other WTO Members including the heavy weights like the EC, China and Japan would join the retaliation process. This may induce the US to comply because industries in the US would put pressure on the US

government to comply. Such pressure could not be generated if Antigua and Barbuda threaten the US with retaliation.

Even though the above proposal is enticing, it has its own setbacks. First, this proposal perpetuates retaliation. Retaliation by itself is trade restrictive and collective retaliation is even more trade restrictive. Secondly, it is most likely that Members would not agree with such a proposal especially given some Free Trade Areas (FTAs) and trading blocks and bilateral agreements some countries are in. It would be difficult to deny market access in such relationships. Thirdly, it would not compensate the affected industries for the harm caused by a violation. As a result, it can be argued that collective retaliation should not be implemented in the WTO.

(c) Cross Retaliation

Cross retaliation refers to a situation where a winning party is authorized to suspend concession on other sectors apart from those being the subject matter of the case. This is meant to increase developing countries' capacity to retaliate. However, even the case of EC Bananas III has shown that cross retaliation by developing countries may do nothing against the economy of a trading block like the EU or large economies like the US. As a result, the proposal is not feasible as it hurts the economies of developing countries and faces all other setbacks of retaliation mentioned above.

(d)The sequencing problem

This proposal seeks to resolve the conflict in Articles 21.5 and 22. This issue became apparent in the Bananas case. The proposal is aimed at amending the DSU to clearly show that the application for suspension of concession should only be done after it has been proven that the purported compliance by the respondent was inadequate. It is suggested that this proposal should be accepted by Members so that the issue may be settled so as not to rely on bilateral settlement of the issue as was done by the EC and US in the EC Bananas case.

(e) Procedures to terminate retaliation

The present DSU does not provide for a procedure to terminate the suspension of concessions and other obligations put in place by complaining parties if there is still a disagreement on compliance after implementing parties have taken new measures to comply. Thus there is a need for an institutional mechanism to

authorize the withdrawal of suspension of concessions and other obligations. It is suggested that the parties should be allowed to use the Article 21.5 panels to request a withdrawal of a DSB authorization of suspension of concession and other obligations.

Proposals to enhance the value of compensation

(a) Request for compensation

The Chairman's Text proposed a new Art.22.2 which would deal with requests for compensation. Once a request is made, the responding Member would be expected to make a compensation proposal within 20 to 30 days. Non trade compensation is explicitly mentioned as a possibility. The aim of this change is to promote use of compensation, as opposed to suspension of concessions because compensation is trade liberalizing yet suspension of concessions and other obligations achieves the opposite. This proposal is acceptable as it seeks to expedite the implementation process and also to promote compensation rather than retaliation, which is trade restrictive.

(b) Financial or Monetary Compensation in the WTO

Where a respondent has failed to withdraw or amend a WTO inconsistent measure, the current system of remedies in the WTO provides Members with a choice between trade compensation and retaliation. Trade compensation can only be achieved where both complainant and respondent agree and this is usually difficult to achieve. This may lead to punishment of innocent industries in both complainant and respondent Members' territories. Retaliation distorts trade and developing countries have no muscle to retaliate against developed countries without seriously hurting their own economy.

As a result, it is recommended that financial compensation should be introduced in the WTO dispute settlement system. Repatriation by governments of injury for which they are held liable is acceptable under public international law. This remedy was proposed in the GATT for the first time in 1966. There are also proposals to the same effect in the ongoing DSU negotiations. Bronckers and Broek (2005) support the proposal and succinctly capture the following compelling advantages of financial compensation . Firstly, it is not trade restrictive. Secondly, it helps to redress injury. Thirdly, it may work better to induce compliance. Fourthly, it does not lead to disproportionate burden on innocent bystanders. Fifthly, it can be a disincentive to foot dragging in the implementation and

enforcement process. Sixthly, it is in line with general public international law and finally, it can add an element of fairness.

The same authors also discuss the systemic issues and other setbacks poised by financial compensation.

In the end, they provide the following as the key elements of financial compensation:

1. that the DSU should be amended and make specific provision for financial compensation as a remedy.

2. that financial compensation should provide for compensation for the damages caused

3. that the distribution of the money for compensation be within the sovereign discretion of each Member

4. that the victim should have the right to choose traditional trade retaliation and the new monetary damage remedy

5. that the monetary damages should be retroactive to the time of infringement

6. that the financial compensation would be preset at a certain annual amount of financial compensation for all types of violations

7. that only developing countries, and LDCs should be allowed to claim financial compensation for an initial period of time (positive discrimination) and;

8. that a system of financial compensation could be put in place for all covered agreements.

The said authors recommend that the financial compensation should not be a replacement of the other remedies in existence but should co exist with them.

It is submitted that the above approach is commendable and is acceptable in logic and in principle. Its main strength is that it seeks to broaden the existing framework of remedies rather than trying to invent a new system. This approach is likely to be acceptable to Members especially the developing countries since they are likely to receive a tangible cure in the event of any violation against them.

In US Copyright case, US and EC made a mutually satisfactory temporary agreement in terms of Article 22 of the DSU where the US made a payment to a specific private body in the EC as a temporary arrangement during implementation. O'Connor and Djordjevic (2005) in their commentary to the above

case acknowledged that a system of monetary compensation is acceptable in principle. They advanced that such a change would require the amendment of the DSU to clearly reflect the monetary compensation and it should not be left to judicial activism as in the above case. In addition, consideration should be given on how such compensation should be administered in the WTO Members' national legal systems for the purpose of ensuring the basic principles of transparency and predictability.

Although this suggestion is persuasive, it also has its setbacks. For many Members it may require authorization by legislature, and this could imply significant delays. The other challenge is that financial compensation is hardly practical in cases involving serious breach of WTO measure and at the same time it may provide too easy way out of compliance in small cases. There are some situations where this remedy does not make sense, for instance, it is not an efficient remedy to stabilize a non compliance situation with the provision of subsidy to the affected industry in the complainant Member.

Despite the above criticism this remedy warrants consideration. It could introduce an element of greater equity in view of the fact that developing countries that may lack sufficient retaliation power can be compensated financially. This remedy is practical and achievable, and is in the interest of developing countries. It should be considered seriously in the ongoing negotiations.

Proposals for the improvement of special and differential provisions in the WTO dispute settlement system

(a) Adding a development dimension to the Dispute Settlement

The Least Developed Countries (LDC) Group and the African Group have proposed adding a requirement that a panel make a finding on the development implications of the issues in a case and consider adverse impact that its findings may have on the social and economic welfare of a developing country in a case. The DSB is supposed to take such findings into account in making its recommendations.

Davey (2004) noted that given controversies over what policies are in the best development interest for developing countries, it is not clear what such a requirement should add in practice. Moreover, the heart of the requirement is that the DSB should take such findings as are made of these issues into account in making its recommendations. However, given the way in which the DSB makes such decisions, that is, by reverse consensus, it is not clear how it would ever take

such findings into account in a meaningful way. Thus this can be an example of a Special and Differential Treatment (SDT) provision that would be very difficult to operate in practice.

Conclusion

This chapter has shown that there are numerous proposals for DSU reform. However, most of these proposals are either too radical or are trade restrictive therefore undesirable. Since the WTO dispute settlement is still evolving, it may be too early to adopt radical proposals which may fundamentally alter the operation of the DSB. Thus there is a need to strike a balance between improving and preserving the WTO dispute settlement system. The next chapter gives some general and specific recommendations for the improvement of the WTO dispute settlement system.

Chapter 7

DSU Reforms: Recommendations and Conclusions

Introduction

The question of reform of the WTO dispute settlement system is very important to the WTO Members. The issue of strengthening the implementation and enforcement of DSB recommendations and rulings directly affects the level of enforcement pressures which would be applied to governments in violation of WTO obligations. It should also be noted that whatever the legal niceties of the recommendations to be taken, the issue of reforming the DSU rests with the WTO Members who make their decisions by consensus, so the reforms should be acceptable to all Members. This underpins some of the difficulties in reforming the DSU.

There are different schools of thought on the manner and nature of the DSU reforms pertaining implementation and enforcement of DSB rulings and recommendations. On the one hand, some prefer to preserve and strengthen the existing system. Thus they speak of 'broadening the existing remedies. On the other hand, some are suggesting revamping the whole system and starting an alternative system of implementation and enforcement. While the latter seems to be innovative and enthusiastic, it is always important to note that a sweeping and radical change is difficult to execute especially when dealing with sovereign states. In the first place it should be noted that a weak enforcement was deliberate and unless there is a political will to change by Members, no radical changes can be adopted. Thus this chapter will suggest a mixed bag, which is, preserving and strengthening the current regime while at the same time accommodating some new ideas on improving the system.

The next part will deal with general recommendations for reform which are drawn from the discussion in previous chapters, and will be followed by specific recommendations which seek to formulate a new package of remedies .The final part will be the conclusion. It should be taken into account that although these recommendations focus on implementation and enforcement of DSB rulings, they cannot be done in clinical isolation but they form part of broad and interrelated reforms which need to be adopted within the WTO dispute settlement system.

General Recommendations

It is recommended that Panels and the Appellate Body make specific orders or recommendations, which are not broad. They should avoid orders that are too general and open to many interpretations, making it possible for developed countries to manipulate weaker countries concerning compliance.

It is recommended that the Panels and Appellate Body should make use of suggestions as provided in Article 19 of the DSU. This would give guidance to the parties on how best they can implement the DSB recommendations and rulings. In the event of a dispute over whether the measures taken by the losing defendant have led to full compliance with DSB recommendations and rulings, it is usually the original panel which becomes the compliance panel. Instead of waiting until a dispute arises, it is suggested that the panellists and the Appellate Body be proactive in giving suggestions on implementation. This may as well expedite the implementation process.

It is recommended that the time in which a member needs to notify the DSU of its intention to comply with a recommendation or ruling according to Article 21.3 be reduced from 30 to 10 days as it will increase the security and predictability of the Dispute Settlement System.

It is recommended that the DSU be amended to solve the sequencing problem on Article 21.5 and 22 of the DSU. The purpose is to make it clear that the application for suspension of concession should only be done after it has been proven that the purported compliance by the respondent was inadequate.

It is recommended that the reasonable period of time for implementation be kept as it is but the compliance panels should take the special needs of developing countries on case by case basis where a developing country is a losing defendant.

It is recommended that the compliance monitoring mechanism of the DSB as provided under Article 21.6 of the DSU should be strengthened as it will exert pressure on the Member which has violated the WTO Agreements.

There is a need to look for new tools for improving the interaction between the WTO and domestic process. However, the discussion on such a mechanism is beyond the scope of this dissertation.

There is need for clarification on how the interests of the developing countries are to be taken into account in terms of Article 21.7 and 21.8 of the DSU. Such clarification should make such a special and differential provision legally binding, justifiable and enforceable.

It is suggested that DSU reform negotiators should take note of the experience of the Appellate Body and the WTO on some procedural changes to the DSU.

There is a need for a procedure to terminate suspension of concessions and other obligations if there is still a disagreement on compliance after implementing parties have taken new measures to comply.

Specific Recommendations

The previous chapter provided many proposals for DSU reform and most of them were criticized to show their suitability to be included in the WTO dispute settlement system. Given the need for developing countries to access the remedies under the WTO dispute settlement system, it is recommended that the following model of remedies be adopted by the WTO.

The WTO dispute settlement system should adopt financial compensation and the payment should be quantified from the date of the infringement. The key elements of this model are as follows:

There is need to amend the DSU to clearly include financial compensation as one of the remedies. This new remedy should co exist with current remedies, namely compensation and retaliation.

Some would say that financial compensation is too difficult to calculate. This depends, first of all, on the standard one would choose to fix damage amounts. That calculation will undoubtedly encounter complications, although these complications also arise in normal private contractual disputes. Calculating the right amount of trade volumes in connection with trade retaliation is not necessarily easier. Furthermore, one can alleviate this calculation problem through the establishment of liquidated damages, which is a tested and proven technique in

contract law. For instance, one could establish the rule that for each year in which any WTO violation occurs the non complying country is to pay the aggrieved country the equivalent of 10 million SDRs in damages. In fact, some have argued that one could include a rule that with each year of non compliance following a WTO dispute settlement ruling, this annual amount would increase by a certain percentage. A WTO Member which believes that these amounts of liquidated damages are disproportionately low or disproportionately high could ask for review through arbitration, while carrying the burden of showing what the proper amount would need to be.

Retroactivity should be in the WTO dispute settlement system. This would mean that financial compensation, compensation and retaliation should be quantified from the time of infringement, or at least from the date of commencement of dispute settlement proceedings.

Financial compensation should be awarded to developing and least developed countries only.

There should be a transparent mechanism on how such financial compensation should be distributed in the receiving countries in order to benefit the affected industries, otherwise that money may be diverted for other use and this would erode the benefit of this remedy and would also hinder and affect international trade. One cannot be sure that financial compensation will actually reach the private interests that were injured by the WTO illegal measure. Experience shows, however, that it is possible to tailor make compensation mechanisms to ensure that private parties will be compensated. In any event, it should be left to the discretion of the individual Member governments who receive damages, to decide if and how the money should be redistributed to private parties. It is important to note that even if the payments do not reach those who actually suffered damages, financial compensation can still meet most of its purposes (pressure to comply; disincentive against foot dragging; no restraint on trade).

Where a developing country is a losing defendant, it should not be expected to give monetary compensation to developed countries.

Use of trade compensation and financial compensation should be encouraged.

This remedy should co exist with other remedies which are already in place in the WTO dispute settlement system.

The weaknesses of this model is that financial compensation cannot replace the withdrawal of an offending measure .Secondly, the money which is supposed to compensate the affected industries can be misused if there are no proper mechanisms to curb such misappropriation. Thus developing countries need to improve on governance and stakeholder's participation within a country. The other inherent weakness which is not peculiar to this remedy is that the developing country would be at a loss if the developed Member does not have the political will to pay financial compensation. The developing country would be back to square zero.

However, the strength of this remedy is that it is less trade restrictive and has the potential of compensating for injury incurred if compensation is granted retroactively. Secondly, it can give a defendant who is under a temporary political pressure a leeway for not complying with the DSB recommendations and rulings. Thirdly, it does fundamentally alter the existing remedies, thus it can be easily be acceptable to WTO Members. It can be said that the merits of financial compensation with a retroactive element outweighs its demerits. Developing countries have been clamouring for this remedy for over four decades now and it's high time financial compensation be taken seriously in the WTO. Thus this proposal is accepted both in logic and in principle.

Conclusion

Reform of the DSU needs a political commitment from Members of the WTO. Apart from the above remedies, there is a need of community pressure among the Members to obey WTO recommendations and rulings. Members should use the DSB meetings to put pressure on those countries who do not comply with DSB rulings. This naming and shaming mechanism is important in international relations and would create enough incentive to comply with DSB recommendations and rulings. It is hoped that over a long period of time, there would be no need to resort to cohesive measures to ensure compliance but the peer pressure from other Members would force a Member to comply in order to be a 'good citizen' in the international community.

In the meantime, however, it is recommended that compliance panels should have a more active role taking the special circumstances of the developing and least developed countries in the implementation and enforcements of DSB recommendations and rulings. At the same time, developing and least developed countries should be united and speak with one voice and negotiate for more binding special and differential treatment provisions and more effective enforcement mechanisms within the WTO dispute settlement system in the ongoing DSU reform negotiations.

Bibliography

WTO Agreements

Agreement Establishing the World Trade Organisation 1995. General Agreement on Tariff and Trade 1947. General Agreement on Tariff and Trade 1994. Understanding on the Rules and Procedures Governing the Settlement of

Disputes, Annex 2 to the Agreement Establishing the World Trade Organisation 1995.

Understanding on the Interpretation of Article XXVIII of the General Agreement on Tariffs and Trade 1994.

WTO Documents Dispute Settlement Body Special Session Negotiations on Improvements

and Clarifications of the Dispute Settlement Understanding Proposal by Mexico November 4, catalogue record WTO/2002/TN/DS/W/23 (4 Nonember,2002).

Websites

World Trade Organization (WTO) http://www.wto.org WTO Documents Online (Dispute Settlement, General Council...) http://docsonline.wto.org Global Trade Negotiations Homepage (Harvard) http://www.cid.harvard.edu/cidtrade WorldTradeLaw.net http://www.worldtradelaw.net World Trade Online http://www.insidetrade.com European Commission, DG Trade http://ec.europa.eu/trade Office of the United States Trade Representative (USTR) http://www.ustr.gov ASIL Guide to Electronic Resources for International Law http://www.asil.org/resource/iel1.htm