Monday, 19 July, 2010

International Economic Law - WTO & Dispute Settlement Understanding


International cooperation to discipline national actions affecting international trade can be traced back to the beginning of a recorded history. United States of America took major initiatives to the establishment of the GATT, with its allies of World War-II. In 1945, the United States Congress enacted renewal of the reciprocal trade agreements. In that year itself, the United States invited some countries to enter into negotiations to conclude a multilateral agreement for the mutual reduction of the tariffs. In 1945 itself, United Nations was formed and in February 1946, its subordinate body, ECOSOC, at its first meeting adopted a resolution calling for a conference to draft a charter for an international trade organization. The United States at this time published a draft of the suggested ITO charter, a committee was formed for the preparation of the charter, and it was met in London in 1946 .

The history of the preparation of the GATT is strongly connected with the preparation of the ITO charter. The work on tariff reductions and the GATT was concluded towards the end of 1947(Geneva). But the talks on the ITO were deadlocked. However, it was agreed that the GATT should come into force provisionally. Then the work on ITO charter was concluded in Havana in 1948. But it never came into force, because the United States was not happy with some of its provisions .

As a result, the GATT, which was never meant to be an international organization, became one involuntarily. It came into force on 1 January 1948 as a provisional agreement until WTO superseded it on 1 January 1995. The GATT contracting parties met every year and the interim commission for the ITO became GATT secretariat, with its headquarters in Geneva. GATT established multilateral obligations for trade in goods, two fundamental principles-the most favoured nation treatment and the national treatment, transparency and the freedom of transit .

Dispute Settlement System in GATT:

One of the motivating and contentious aspects of GATT as an institution was its dispute settlement system. This system was unique and it was also flawed in some parts because of the troubled beginning of the GATT. Yet these procedures worked well and some could argue that in fact they worked better than that of the world court .

The procedures for resolution of disputes are centred in Articles XXII and XXIII of GATT. Article XXII of GATT simply provides for consultation, on any matter regarding GATT, when any contracting party requests for it. It is simple but very useful provision .

Article XXIII was the main point of Dispute Settlement. It also provided for consultation as a precondition to invoke the multilateral GATT processes .The three features of the processes are :

1. They are usually activated on the grounds of ‘nullification or impairment’ of benefits expected under the agreement and did not depend on actual breach of legal obligation.

2. They established the power for the contracting parties to not only investigate and recommend action but also to give a ruling on the matter.

3. They gave the contracting parties the power in appropriately serious cases to authorize a contracting party or parties to suspend GATT obligations to other contracting parties.

Contracting parties to the GATT, behaved as if they were bound by a compulsory third party adjudication system. And despite the fact that the agreement of the defendant was required to submit the case to a panel, and the agreement of the defendant was required for the report to be adopted by the contracting parties .

A complaint by Netherlands against Cuba in 1948 first showed how GATT dispute settlement system was working with consensus principle. The complaining party, the defendant, and any other contracting party who might have an interest in the dispute can participate. The next stage of the procedure was to eliminate the complainant and defendant parties from the adjudicating panel and instead assign three or five neutral panellists to prepare a report that would eventually be submitted to the contracting parties for consideration and adoption. According to Hudec and Davey two prominent GATT scholars, have observed that the goal of the process was to reach a mutually acceptable solution. Hence, the dispute settlement under GATT was mainly based on consensus principle, which required all parties to a dispute to accept the outcome of any investigation. Any findings only became binding if a panel report was accepted by consensus. Defendant in a case could therefore block this ratification procedure and so avoid complying with the findings .

The consensus requirement was one of several weaknesses of the system leading to growing frustration about its failure to resolve trade conflicts among GATT members. The principal shortcomings of the GATT system were ; a lack of clear objectives and procedures, ambiguity about the role of consensus; leading to adverse decisions being blocked ; a lack of time constraints ; leading to delays and uncertainty ; and frequent delays in and partial non-compliance .

GATT dispute settlement system performed well when compared to other international organizations. Although the institutional possibility of blocking the establishment of a panel existed over forty years, little use was made out of it. Hudec’s study in 1993 demonstrated that from 1947 to 1992 with one or two exceptions panels were always established, and the losing party in due course always accepted the result of an adverse panel report in approximately 90 percent of cases .

The GATT system was a victim of its own success. The system was intended to regulate just 23 countries. Its rules were not designed to deal with the massive growth of world trade in 20th century. In fact, this growth was fuelled by trade liberalisation under GATT and a rapidly growing number of members and the increasing volume and complexity of trade conflicts placed stresses and strains on GATT dispute settlement system .

World Trade Organization:

According to WTO website, WTO is an organization for liberalizing trade. It is a forum for governments to negotiate trade agreements. It is a place for them to settle the disputes. It operates a system of trade rules.

WTO was created, because of the Uruguay Round of the Multilateral Lateral Trade Negotiations, which took place under the framework of GATT of 1947 At the ministerial meeting in Marrakesh the final Act was signed on April 15, 1994 and it was operational on January 1, 1995. This place the international trading system on a firm institutional footing for the first time, the pillars of international trading system rest on a full-fledged international organization with international legal personality .

The WTO Dispute Settlement Understanding:

The power to settle international disputes with binding authority distinguishes the World Trade Organization from most other intergovernmental institutions. DSU gives the WTO unparalleled power to resolve trade-related conflicts between nations and give penalties and compensation to the parties involved .

The new negative consensus obligation means that the execution of panel findings can no longer be blocked by respondents, so triggering the right of plaintiffs to retaliate. Clearly defined rules are a pivotal element of the DSU, which includes a clearly stipulated timetable for the dispute settlement procedures and limited potential for cross-retaliation between sectors. One-sided action is constrained by the requirements that Members abide by the rules and procedures of the DSU and that their national laws comply with their obligations under the WTO. The more substantial legal framework of the DSU is capable of enforcing the complex rules of these agreements but this would not have been possible under the previous GATT system .

Articles XXIII and XXII of GATT 1947 and now part of the GATT 1994 continue to define the conditions under which violation of the WTO rules permit members to seek redress and their means of so doing. There are three specific circumstances identified in GATT Article XXIII under which WTO members are permitted to make a complaint under the DSU. The standard case is where a Member country violates (nullification or impairment of benefits) the WTO rules and thereby adversely affects other Members. The second is ‘non-violation’ where harm is caused even though there is no specific violation of a GATT provision. Finally, there is a ‘situation complaint provision’, here the parties can have access to the available conflict resolution mechanisms. The scope of the application of the article covers all of the component multilateral agreements of the WTO. This means that any Member country may seek redress with respect to any violation of the WTO rules by another. There is no requirement to demonstrate that a violation has resulted in injury since all Members are legally obliged to conform to the WTO rules .

DSU Procedure :

The DSU underline the importance of consultations in securing dispute resolution, requiring a member to enter into consultations within 30 days of a request for consultations from another member. If after 60 days from the request for consultations there is no resolution, the complainant may request the establishment of a panel. Where consultations are denied, the complainant may move directly to request a panel. The parties may voluntarily agree to follow alternative means of dispute settlement, including good offices, conciliation, mediation and arbitration. Where a dispute is not settled through consultations, the DSU requires the establishment of a panel at the meeting of the DSB (dispute settlement body) following which a request is made, if not the DSB decides by consensus against establishment. The DSU also sets out precise rules and deadlines for deciding the terms of reference and composition of panels. Standard terms of reference will apply unless the parties agree to special terms within 20 days of the panel's establishment. And where the parties do not agree on the composition of the panel within the same 20 days, this can be decided by the Director-General of WTO. Panels normally consist of three persons of appropriate background and experience from countries not party to the dispute. The WTO Secretariat maintains a list of experts satisfying the criteria.

It is envisaged that a panel will usually complete its work within six months or, in cases of urgency, within three months. Panel reports may be considered by the DSB for adoption 20 days after they are issued to members. Within 60 days of their issuance, they will be adopted, if not the DSB decides by consensus not to adopt the report or one of the parties notifies the DSB of its intention to appeal.

The concept of appellate review is an important feature of the DSU. The Appellate Body was established in 1995 under Article XVII of the Understanding on Rules and Procedures Governing the Settlement of Disputes. It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO members. The Appellate Body can upheld, modify or reverse the legal findings and conclusions of a panel, and Appellate Body Reports, once adopted by the Dispute Settlement Body (DSB), must be accepted by the parties to the dispute. An Appellate Body will be established, composed of seven members, three of whom will serve on any one case. An appeal will be limited to issues of law covered in the panel report and legal interpretations developed by the panel. Appellate proceedings shall not exceed 60 days from the date a party formally notifies its decision to appeal. The resulting report shall be adopted by the DSB and unconditionally accepted by the parties within 30 days following its issuance to Members, if not the DSB decides by consensus against its adoption. Once the panel report or the Appellate Body report is adopted, the party concerned will have to notify its intentions with respect to implementation of adopted recommendations. If it is impracticable to comply immediately, the party concerned shall be given a reasonable period of time, the latter to be decided either by agreement of the parties and approval by the DSB within 45 days of adoption of the report or through arbitration within 90 days of adoption. In any event, the DSB will keep the implementation under regular surveillance until the issue is resolved.

Criticism of WTO Dispute Settlement System :

The WTO DSU is the most successful peaceful dispute settlement mechanism in the history of international law.But the WTO DSU is also not free from criticisms.These are the main criticisms levelled against it:

1. The Appellate Body started fuctioning beyond its limits.

2. The next issue is about transparency and the invlvement of NGOs.

3. The suspension of concessions or other obligations (SCOO) by the complainant government under authorisation from the DSB is not successful under the following conditions, by doing this the complainant government harms its own economy as well, small and developing countries cannot use SCOO sucessfully, because they lack market size to make credible retaliatory threat.

4. The DSU is also abused in the following high profiled cases, EC-Banana Case, The Kodak-Fuji case, EC-Hormones Case, The US-Forign Sales Corporation Case.


GATT dispute settlement procedure was also successful during its term, but its prboblems were solved by WTO DSU. WTO’s DSU underscores the Rule of Law and is expected to make the international trading system more secure and predictable.


1. GATT, A Commentary, Petros C. Mavroidis 2005, Oxford university Press New York, USA.

2. The Jurisprudence of GATT and WTO ,John H.Jackson 2007,Cambridge University Press, New York, USA.

3. The world trading sytem ,Law and Policy of International Economic Relations, John H. Jackson 1997, The MIT Press,Cambridge, Massachusetts,London, England.

4. International Economic Law,Asif H. Qureshi & Andreas R. Ziegler 2007, Sweet and Maxwell Publication, Great Britain.

5. World Trade Organization, Mitsuo Matsushita et al 2002 ,Oxford University Press,UK.

6. IEL Handouts, Holborn College, London.





11. Dispute settlement comparison and the retaliation under WTO,Robert Read.

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