WTO dispute settlement update: Frozen Fries put the MPIA to the test

The WTO dispute settlement system, consisting of ad hoc panels and a permanent Appellate Body, was once considered the “crown jewel” of the WTO. Recently however, it has been in operational crisis. Due to concerns about the Appellate Body’s “judicial overreach” and – exacerbating the problem – blindly following its own precedent, the United States has refused to allow the WTO to appoint new judges since 2017. The Appellate Body ceased to function in December 2019, and its Secretariat has now been disbanded.

This has not only resulted in the loss of an appeals procedure, but it has given WTO members the possibility in effect to veto any unfavourable panel report by appealing it “into the void”. This is possible because, according to WTO dispute settlement rules (Art 16.4 of the WTO Dispute Settlement Understanding), if a party has notified its decision to appeal a report, that report will not be considered for adoption until after the completion of the appeal. Because the Appellate Body is no longer functional, the report thus remains in limbo. This is not only a theoretical possibility. So far, 25 cases have been appealed into the void.

Reactions by WTO members

WTO members have adopted different and complementary strategies to the disappearance of the Appellate Body. On the one hand, some WTO Members have adopted legislation permitting them to adopt unilateral sanctions measures to enforce panel reports that have been appealed “into the void”. On the other is an initiative to establish an alternative “appellate body”, the multi-party interim appeal arbitration arrangement (MPIA). This body has now seen its first award.

Unilateral measures

Some WTO members have amended their national legislation allowing them to adopt remedies where the losing party appeals into the void. The EU amended its Enforcement Regulation to this effect, also widening the scope of possible measures that can be used to retaliate. Whereas the previous version of the regulation was limited to imposing additional tariffs on certain goods, the EU can now also restrict obligations regarding trade in services and IP. Similarly, the UK amended section 15 of the Taxation (Cross-Border Trade) Act 2018, removing the requirement that remedies could only be adopted where the UK is “authorised” to do so. Instead, the UK government must consider appropriate remedies, after having regard to the UK’s international obligations. This amendment appears to allow unilateral retaliation in case a party appeals into the void against the UK, an understanding that is confirmed by the fact that, when the UK House of Common’s European Scrutiny Committee called on the government to carry out reforms that mirror the EU’s amendments to its enforcement regulation (see here), the UK government indicated that it would keep its “trade enforcement regime under review to ensure it takes account of developments in the international trade arena” (see here).

Other countries adopted a similar approach after panel reports in their favour were appealed into the void. After this happened in India – Sugar and Sugarcane (Brazil) (DS 579) and Indonesia – Chicken (DS 484), in May 2022 Brazil enacted Law No 14.353 which, similarly to the EU’s Enforcement Regulation, allows unilateral retaliation in trade disputes if proceedings are stalled at the WTO.

Similarly, two panel reports in which Japan was a claimant were appealed into the void (Korea – Stainless Steel Bars (DS 553) and India – Steel and Iron Products (DS 518)), the Japanese Industrial Structure Council of the Ministry of Economy, Trade and Industry approved a report in June 2022 recommending that Japan develop a similar mechanism that would allow it to adopt remedies in case of an appeal into the void.

Ad hoc agreements

Ad hoc agreements can take different forms:

• They include arrangements between disputing parties not to appeal a Panel report into the void. For instance, Indonesia and Vietnam agreed in their dispute on Indonesia’s safeguard measures on certain steel products (Indonesia – Iron or Steel Products (Vietnam (DS 496), WT/DS/496/14) to forego their right to appeal.
• Parties may also agree to replace a possible appeal to the Appellate Body by agreeing to use ad hoc arbitration, which the WTO provides for under Art. 25 DSU (without the need to be party to the MPIA). Turkey – which is not an MPIA member – and the EU agreed to do this in their dispute on certain Turkish measures on pharmaceutical products (Turkey – Pharmaceutical Products (EU) (DS 583)).

The disadvantage to these ad hoc arrangements is that the other party does not have to agree to them. In Saudi-Arabia – IP Rights (DS 567), Qatar proposed to resolve the appeal through ad hoc arbitration, but Saudi Arabia refused and instead appealed the Panel report into the void. The dispute was only resolved in January 2021 when the Al-Ula Declaration was signed, a political declaration aimed to resolve tensions between GCC states more generally.

MPIA

The MPIA aims to avoid the drawbacks of these alternative options. Under the MPIA, the parties use the WTO’s arbitration rules (Art. 25 DSU) to replicate the substantive and procedural aspects of the Appellate Body’s functions until the Appellate Body becomes operational again. The MPIA’s decisions are binding on the parties and the DSU’s usual compliance and enforcement procedures apply.

The MPIA now has 53 members[1] with Japan being the last member to have joined on 10 March 2023. It does not include the UK or, unsurprisingly, the US.

The MPIA has now passed its first real test and issued its first award in an appeal initiated by Colombia. In October 2022, Colombia appealed the Panel’s findings in Colombia – Frozen Fries (DS 591), following a successful EU challenge to Colombia’s anti-dumping duties on frozen fries from Belgium, the Netherlands and Germany. Although this dispute only concerned the relatively modest amount of EUR 19.3 million worth of exports annually to Colombia, it went, to a certain extent, to the heart of the Appellate Body crisis.

Among other things, Colombia questioned whether the standard of review chosen by the Panel had been too expansive and whether its interpretation was “permissible” in the sense of Art. 17.6(ii) Anti-Dumping Agreement (ADA). The Panel had followed previous Appellate Body reports on the issue stating that, following the customary rules of interpretation, a panel can only reach one possible interpretation. However, the arbitrators acknowledged that multiple interpretations are possible, thereby being more deferential to the parties’ own interpretations. Interestingly, while the US was critical of the MPIA proceedings it made a third party submission in the dispute, and, following the award, intervened with a positive comment on the arbitrators’ approach to Article 17.6 ADA at a Dispute Settlement Body meeting.

The MPIA  process deviated from several procedural aspects of the appeals that were routinely employed by the Appellate Body. To list a few differences, the arbitrators issued their award only 74 days after the appeal was made, demonstrating that appeals can be resolved within the 90-day timeframe regulated in Article 21.5 DSU. This was a deadline that the Appellate Body had routinely not been able to meet, a failing that the US had heavily criticised. To expedite proceedings, the arbitrators imposed strict word and time limits for oral hearings and suggested that the parties refrain from making any Article 11 DSU claims on appeal to which the parties agreed.

Conclusion

Overall, the MPIA award should be welcomed as it has demonstrated that it can be a viable alternative to other members who may then revisit their stance of not having joined yet, should it be successful in contributing to the ultimate settlement of the dispute. As a consequence, it is expected that other MPIA members will also start appealing to the MPIA more often. Japan and China notified the Dispute Settlement Body earlier in April 2023 that they have agreed to use the MPIA to handle any appeal in their dispute on China’s anti-dumping measures against stainless steel products from Japan (China – AD on Stainless Steel (Japan) (DS601)). The Panel is expected to issue its final report in May 2023 and it is likely that the Parties will appeal it to the MPIA.

We will continue to monitor developments on the WTO Appellate Body crisis. If any of the topics discussed in this blog are of interest to you, please do not hesitate to reach out to a member of our Trade team, or your usual Freshfields contact.

[1] The 53 Members are: Australia, Benin, Brazil, Canada, China, Chile, Colombia, Costa Rica, Ecuador, the European Union (whose 27 Member States are also Members in their own right), Guatemala, Hong Kong (China), Iceland, Japan, Macao (China), Mexico, Montenegro, New Zealand, Nicaragua, Norway, Pakistan, Peru, Singapore, Switzerland, Ukraine, Uruguay.