By Sudhanshu Roy
Sudhanshu Roy is an international lawyer based in New York. His interests include history, politics and musing about writing a perfect movie which incorporates his two main interests.
On 26 January 2015, even as President Obama became the first American President to preside over India’s Republic Day celebrations, a fierce battle between the two countries was on at the World Trade Organisation (WTO). Later in the day, as the two leaders released a joint statement highlighting the multifaceted partnership between the two nations that was “rooted in the shared value of democracy”, the United States Trade Representative’s (USTR) office was preparing oral arguments challenging India’s domestic content requirements (DCR) imposed under its Jawaharlal Nehru National Solar Mission (JNNSM) before a WTO panel. The JNNSM is India’s flagship, bipartisan clean energy project aimed at installing 100,000 MW of solar power capacity by 2022. Ironically, the joint statement issued that very day reiterated United States’ support for India’s solar mission through initiatives such as funding research, increasing technical cooperation and engaging in capacity building with local Indian firms.
On 24 February 2016, a WTO panel upheld the challenge to India’s JNNSM, finding the DCR measures to be inconsistent with India’s TO obligations. This was not the first time that a WTO panel had found a country’s renewable energy policies to be incompatible with the global trade rules. In the last three years alone, India along with China and Canada have been at the receiving end of adverse WTO rulings that have severely hindered efforts to reinvigorate their energy policies by making a shift to renewable resources.
The increasing propensity of States to use international legal instruments to advance their trade agenda reflects an important emerging trend that forms the subject of this article: the legalisation and judicialisation of international economic relations between States. The WTO has been at the forefront of this legal revolution and its success in providing an institutional forum for settling sensitive disputes remains unmatched, especially when compared to other international dispute settlement bodies. Trade disputes that until a few decades ago were settled by way of threats, sanctions, and unilateral measures are now routinely submitted to WTO with States quietly confident about the effectiveness of its judicial system. Yet, as the recent trade disputes on clean energy illustrate, the WTO dispute system can also be used as tool by powerful States to further their narrow economic interests. This article examines this two-fold phenomenon: the increasing legalisation of international relations through the WTO and its attraction to powerful States to settle contemporary politico-economic disputes.
The move towards international legalisation
In international relations, the traditional wisdom has been that States are motivated by the desire to preserve their legal sovereignty, particularly the sole authority to create, apply and interpret policies in the international sphere. Indeed, the organisational principle of the Charter of the United Nations (Charter) is the concept of sovereign equality – the idea that each State, however powerful or small, possesses the same rights and freedoms to determine its path in international law. Fearful of giving up the most basic aspect of legal sovereignty, States have usually chosen to settle disputes by conventional methods such as negotiation, mediation and other diplomatic channels. Even under the UN Charter, the adjudication of disputes is based on the theory of consent. The principal judicial organ of the UN – the International Court of Justice (ICJ)–does not have jurisdiction over international disputes unless a State gives its prior consent. Other dispute settlement models such as the UN Convention on the Law of the Sea also follow the consent principle and no dispute between States can be litigated unless the participating States have given prior consent.
The path relying on sovereign authority and avoiding compulsory litigation works particularly to the advantage of the powerful nations since they have few incentives to favour a rule-based approach to international dispute settlement. Hans Morgenthau, the great realist scholar, made clear that an anarchic international system works well for the powerful States as they can break rules without risking punishment and enforce rules when weaker nations violate them. In 1984, the United States famously refused to participate in ICJ proceedings in the Nicaragua case after the Court ruled that it had jurisdiction to hear a dispute that the US had illegally used force in violation of the UN Charter by supporting the Contra rebels in Nicaragua. The US Government then proceeded to take the even more radical step of withdrawing its consent to the compulsory jurisdiction of the Court that it had given 40 years earlier. Such incidents validated the famously disdainful attitude of realists towards international dispute settlement.
While power and diplomacy represent a viable way of settling political and military disputes, international trade is an entirely different proposition. From the inception of the General Agreement on Tariffs and Trade (GATT) in 1947, States recognised the valuable role of permanent institutions in reducing uncertainty and transaction costs in enforcing international obligations. Further, in international trade politics, States have always faced more pressure from their domestic constituents to aggressively deal with protectionist trade policies. With the advent of GATT and subsequently the WTO (in 1994), political mobilisation at home compelled States to provide domestic actors with direct access to international dispute settlement.
The WTO’s structural legalisation
Institutional theorists identify three important factors that demonstrate the level of legalisation in an international institution: the degree to which rules are obligatory, the precision of those rules, and the delegation of some functions of interpretation, monitoring, and implementation to a third party. By any measure, the dispute settlement system under the WTO scores high on these parameters. The structure of the WTO Agreement is also conducive to a high degree of legalisation.
First, dispute settlement under WTO is compulsory and binding on all members. Under Article II:2 and II:3 of the Agreement Establishing the WTO, member states have agreed to be subject to all agreements, including the WTO Agreement on Dispute Settlement Understanding (DSU) as a single undertaking. This arrangement is unlike any other international system, and affords real equality to all members in enjoying unrestricted access to the WTO’s dispute process. In fact, the commitment to strengthening the multilateral system goes even further, for Article 23 of the DSU expressly excludes any possibility of unilateral action by a powerful State. Some scholars have suggested that Article 23 was a guarantee against Section 301 of the US Trade Act, which allows the US President to take unilateral retaliatory action against a foreign country that engages in unfair trade practices.
Second, WTO decisions are automatically binding and do not require enforcement by an executive body such as the Security Council under the UN Charter. Under WTO’s two-tier judicial system, once a panel issues a report, WTO member states have 60 days to “adopt” the report unless the losing party has decided to appeal the matter. The rule of “negative consensus” applies, which means that non-compliance with a panel decision can only be by consensus of all WTO members. This is a major improvement from the erstwhile GATT system, where a losing State could unilaterally block compliance with judicial decisions.
Third, the WTO provides for a standing appeals facility. The members of the Appellate Body (AB)are permanent, serving for a four-year term that adds further legitimacy and independence to the dispute resolution process. The losing party has a right to appeal and an appellate review covers all legal issues and interpretations covered in the panel report. No comparable international dispute system has such a full-fledged appeals system with a mandate and working procedures to conduct a full-fledged legal review of lower tier courts.
Fourth, the legal effectiveness of the WTO dispute system also comes from the power to impose sanctions for non-compliance. The WTO system provides for a system of penalties akin to civil remedies rather than retroactive punishment. If a member fails to comply with a panel or appellate ruling by refusing to withdraw the offending measure, the complaining member has the option of seeking compensation or taking retaliatory action (called “suspending concessions or other obligations under the covered agreements”)under Article 22 of the DSU. Both compensation and retaliation are temporary measures designed to deal with delays in the real remedy provided under the DSU: to compel the offending State to remove the trade restrictive measure and bring its laws into compliance with WTO obligations.
Fifth, as compared to the mechanical interpretative approaches developed by the ICJ and international tribunals established under various Bilateral Investment Treaties (BITs), the WTO has been able to develop a “constitutional” system of interpretation that increasingly relies on public law methods to interpret WTO agreements. WTO decisions routinely involve balancing the objectives of the international trade regime, i.e., trade liberalization, non-discrimination limitation of non-tariff barriers, with conflicting and legitimate government purposes such as the protection of the environment, public health and morals. Most of these public purpose objectives are codified under Article XX of the GATT.
Power and fairness
While the WTO has been largely successful in channelling the behaviour of States in an orderly way to ensure that rules are properly applied, the system is also susceptible in working to the advantage of powerful States. Because dispute settlement is compulsory, developing or least developed countries (LDCs) have little choice when they are brought to a dispute as respondent States. Moreover, a lack of experience and capacity coupled with the high cost of hiring private law firms can also act as impediments for less powerful nations to access the WTO dispute system. The true measure of whether the system really works for less powerful States can be found out by looking at the number of times they have been able to bring a dispute as a complainant.
As of January 1 2015, there were 488 total complaints filed under the DSU, out of which 300 complaints (61 percent) have been by a handful of countries – United States, European Union (EU), Canada, Japan, Korea and other developed nations such as Australia and New Zealand.The frequent use of the system by the USA and the EU, which account for 41.8 percent of the total complaints, highlights the fact that high-income countries are the primary users of the WTO dispute system. In fact, high and upper-middle-income (which can include certain developing countries) States account for 404 complaints, which is about 81 percent of the total complaints ever brought before the WTO.
High- and middle-income States also account for the highest number of respondents at about 76 percent of the complaints. However, this statistic overlooks the fact that high- and middle-income countries often bring complaints against each other. Perhaps the most sobering statistic on whether the system actually works is that only one least-developed country – Bangladesh – has ever brought a case as a complainant before the WTO.
In addition to the statistics, how the disputes play out in actual practice also serves as an example of how powerful States can use trade rules in aggressively promoting their economic interests. The United States dispute with India on solar cells is a fascinating illustration. The US complaint was based on the persistent lobbying of the domestic constituents who had long been disadvantaged by the alleged trade restrictive practices adopted by the Indian Government in the clean energy sector. The United States’ request was made under three WTO agreements: the Agreement on Trade Related Investment Measures (TRIMS), Article III:4 of GATT and Article 4 of the Agreement on Subsidies and Countervailing Measures (SCM) that prohibit subsidies contingent on the use of domestic products. However, the US later withdrew its complaint under the SCM Agreement. During the oral argument, it became clear why. India countered that several US States such as California, Minnesota, Kansas and Mississippi have programmes that provide subsidies to local producers of renewable energy. Fearing a retaliatory compliant, the US had little choice but to withdraw the SCM complaint. There have been reports that India is now actively considering filing a counter complaint.
At the same time, the India-US solar dispute also highlights the extent to which rising legalisation at the WTO has been able to depoliticise disputes between States. The solar cell dispute has been playing out in the backdrop of increasing diplomatic bonhomie between the world’s two largest democracies and their leaders. Would this bonhomie and warmth in relationships been possible if the two countries had attempted to resolve the dispute by the politics of sanctions? Probably not. WTO’s emphasis on problem solving and an informal approach that relies on participation and discussion works well with developing countries. Even outside the WTO dispute system, members continuously interact with each other through ministerial meetings, diplomatic representations at the Secretariat and in Trade Policy Reviews. A system of collective deliberation can be particularly encouraging for new entrants in the system who can rely on institutional support to ensure their effective representation at all levels.
Finally, the WTO has also been conscious of the need for reducing costs to encourage greater access to the dispute settlement system. In 2001, with the initiative of certain developing countries, the WTO set up the Advisory Centre on World Trade Organization Law (ACWL), whose mission is to ensure equal access to the dispute settlement process by providing free legal advice to LDCs and developing countries that are entitled to its services. The ACWL has been consciously set up as a non-political organisation financially independent of the WTO so that members can be sure of receiving credible and impartial advice. Although the ACWL does charge fees for legal work in the dispute settlement process, its rates are considerably lower than those of private law firms. ACWL’s cost-effective support provided to developing countries and LDCs has probably helped considerably in democratising and legitimising the WTO as a multilateral institution.