Ukraine: Dispute Resolution in the WTO: Not a Piece of Cake

Last Updated: 10 January 2011
Article by Nataliya Y. Mykolska

"From the point of view of international law, the World Trade Organization is perhaps the most advanced of our international institutions because it has binding judicial power."
George Soros

In 2010, Ukraine, as a new member of the World Trade Organization, has for the first time in its history referred to the World Trade Organization (WTO) dispute settlement mechanism by claiming the WTO inconsistency of certain Armenian tax laws. The benefits and complexities of this process are still to be experienced by the Ukrainian government and Ukrainian business entities, but there is already some practice of dealing with a very specific international dispute settlement procedure. This legal vehicle is comparatively fast, equitable and effective, but not easy from the procedural standpoint. Generally, WTO dispute resolution goes through a number of stages with a detailed procedure and deadlines.

Hence, this article focuses on the role, main features and procedural aspects of consultations and the establishment of the Panel within the framework of the WTO dispute settlement in the view of a dispute recently initiated by Ukraine.

Priority is to Settle Disputes, Not to Pass Judgments

A strong dispute settlement is a key feature of the WTO and it would not have become such a powerful institution without efficient resolution of disputes. The WTO dispute settlement system was based on the dispute resolution in the framework of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and was reshaped into a stronger and more efficient system during the Uruguay Round of negotiations. One of the major characteristics of the system is that it mandates the WTO Members to comply with the respective final decision of the WTO Dispute Settlement Body (DSB). Effective enforcement of WTO commitments via the dispute settlement is one of the reasons why WTO Members are very cautious to undertake new obligations in the Doha Round of negotiations.

Another important feature of WTO dispute settlement is that all WTO Members can benefit from it. Generally, the Understanding on rules and procedures governing the settlement of disputes (DSU) which is the main "procedural code" of the WTO provides a forum for the dispute resolution between governments. Private entities may not initiate disputes in the WTO, but, surely, they are the main stakeholders and the ones lobbying the initiation of disputes domestically. Additionally, the DSU provides a possibility for the third parties (WTO Members) to join the dispute between WTO Members. Not only parties involved in the case benefit from the finding, but all other WTO Members receive certain advantages as well. For example, if the DSB finds that the US ban on importation of shrimp is WTO inconsistent following the EU complaint, it means that this trade barrier shall be eliminated not only for the EU, but for Ukraine as well.

Generally, WTO dispute resolution goes through the following stages: 1) consultations; 2) establishment and composition of a panel; 3) panel review; 4) appellate review (optional); 4) implementation; 5) dispute over implementation (optional); 6) arbitration on the level of retaliation (optional)1. The DSU prescribes precise procedure and deadlines for each stage, but as noted above, this article focuses in more detail only on the initial stages i.e. the consultations and establishment of a panel.

Consultations: The Ball is in Your Court

In 2009, the total number of disputes brought to the DSB since the WTO's creation in 1995 reached 402. The European Union, US, Canada, Brazil and Argentina were among top users of the WTO dispute resolution within the period 1995 – 20092. According to the statistics of the WTO Secretariat, "the annual number of requests for consultations peaked in 1997 with 50 requests, then fell to 40 in 1998 and, since then, has fluctuated between 23 and 37 annually"3. In 2009, the DSB received 14 notifications from WTO members formally requesting consultations under the DSU.

First and foremost, official consultations are the compulsory stage of WTO dispute settlement. Article 4(5) of the DSU explicitly provides that "before resorting to further action under this Understanding, Members should attempt to obtain satisfactory adjustment of the matter [through consultations]". Basically, this means that WTO Members may not go to the next stage i.e. submitting a request for the establishment of a Panel unless official consultations failed.

Interestingly, unlike ordinary diplomatic procedures, official consultations conducted under the Article 4(5) of the DSU have firm deadlines. For example, WTO Member has to reply to the request for consultations within 10 days from the date of its receipt. These firm deadlines prevent the delay of the dispute settlement proceedings, but they do allow WTO Members to agree on longer periods, when necessary.

Furthermore, request for official consultations is filed with the WTO Secretariat and it in turn notifies all WTO Members. The notification signals other WTO Members about the potential dispute and gives them an opportunity to join the dispute as third parties in the future. Moreover, notification informs all WTO Members which will need to adopt the final decision about the issues raised in the dispute.4

Quite remarkably, the DSU allows the holding of not only bilateral consultations (between the complaining and responding parties), but trilateral and plurilateral consultations. However, the complaining party may in its request for consultations effectively prevent third parties from the participation in the consultations by referring to specific provisions of the GATT 1994 pursuant to which consultations are held. In its request for consultations Ukraine provided that they will be held pursuant to Article XXII of GATT 1994 which means that Ukraine permitted the participation of third parties in the consultations. Alternatively, if Ukraine requests consultations pursuant to Article XXIII:1 of GATT 1994 third parties may not join consultations. However, it must be noted, that exclusion of third parties from consultations does not prevent them from joining the case at the stage of the establishment of a panel.

Finally, it is worth mentioning that numerous unofficial consultations are held before and after the initiation of official consultations within WTO dispute settlement procedure and in its essence, official consultations are a formal step confirming that there is a disagreement between WTO Members.

Notably, out of the 402 cases filed up to the end of 2009, roughly half were eventually settled directly between the parties following the consultations mandated by the DSU, without going to further stages.5 This demonstrates that disputes can be effectively resolved at the stage of consultations

Establishment of a Panel: Know the Ropes

Following failure to resolve the dispute through the official consultations the complaining WTO Member submits the first request for the establishment of a Panel. Pursuant to Article 6(1) of the DSU "if the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB's agenda, unless at that meeting the DSB decides by consensus not to establish a panel".

Basically, this provision sets the following procedure for the establishment of a panel. After the request of the complaining WTO Member has been put on the DSB's agenda it is considered at the DSB's meeting, The DSB is composed of representatives from all WTO Members (mainly diplomatic personnel or sometimes Ministers) and meets on a monthly basis, but it may also conduct extraordinary meetings when required by the DSU.6 At the DSB's first substantive meeting general rule of 'positive consensus' applies which means that unless everyone agrees the decision is not taken. For that reason, naturally, at the first meeting as the responding party uses its right to object the Panel is not established.

The tricky part about establishing a WTO panel comes up when the DSB considers the request for the establishment of a panel for the second time. On this occasion a special rule of 'negative consensus' applies. It means that unless everyone disagrees the panel is established. And again, certainly, the complaining party wishes to establish the panel and even if everyone else from the WTO Membership is against such decision, the panel will be established.

It is worth mentioning that the complaining WTO Member can use certain tricks in order to decrease the 'waiting period' for the establishment of a Panel. For example, in case of the second request of the establishment of a Panel, footnote 5 to the DSU specifies "if the complaining party so requests, a meeting of the DSB shall be convened for this purpose within 15 days of the request, provided that at least 10 days' prior notice of the meeting is given". Hence, upon the request of complaining party the DSB may held extraordinary meeting and consider the second request before the next scheduled meeting. Therefore, this procedure allows WTO Members either to speed it up if there is not possibility to solve the dispute amicably or to drag out time in case unofficial consultations are in progress.

Panel Established: Going all the way to the Final Binding Decision

Once the panel is established, there is still a long way to go in order to get the final decision. After the establishment of a panel parties to the dispute decide on the composition of the panel i.e. choose panel members who will consider the case. After the panel is composed, the procedure briefly looks as follows. The panel considers the case by organizing several meetings with the parties. Then it prepares the report with its recommendations concerning alleged inconsistency of measures which are to be adopted at the DSB meeting.

The parties have a certain period to appeal against the report in case they disagree with the panel's findings. If this happens, the panel report will not be adopted by the DSB and the case is referred to an Appellate Body. The dispute is considered by an Appellate Body consisting of seven permanent members. The report of the Appellate Body is adopted at the DSB meeting and cannot be challenged. After the DSB adopts the Appellate Body report it becomes legally binding for parties.

However, one should not regard this as the end of the procedure, because the most important thing – implementation, comes up now. Sometimes WTO Members do not drag out time, but usually this is not the case. Moreover, it may be politically impossible to implement the WTO decision domestically or the violating WTO Member does not implement the decision correctly. In this case, the DSU provides a possibility to challenge the way the decision is implemented and such disputes are not rare in the DSB's practice.7

Ukraine vs Armenia Case8

Before discussing in depth the case against Armenia it is worth noting that Ukraine used the procedure of unofficial consultations last year. The Ukrainian Government, following requests from domestic producers had initiated informal consultations with Georgia with regard to the discriminatory excise duty on imported tobacco products and successfully solved this problem and the discriminatory regime was withdrawn, which meant better market access for Ukrainian companies. After following several successful unofficial consultations the problem was resolved. This demonstrates that the mere possibility of WTO dispute settlement facilitates amicable bilateral dispute resolution. However, in the case of Armenia the situation became a bit more complex...

On 20 July 2010, Ukraine after Armenia had failed to react to a number of requests for unofficial consultations, Ukraine requested consultations with Armenia pursuant to Article 4 DSU and Article XXII of the GATT 1994 and notified the WTO Secretariat on the issue. Under the DSU Armenia had to reply to the request within 10 days after its receipt and enter into consultations within no more than 30 days.

Notwithstanding the general trend of using consultations stage for resolving the dispute, Armenia did reply and did not entere into official consultations with Ukraine. Thus, on 8 September 2010 Ukraine submitted its first request for the establishment of a panel9.

On 25 October 2010 at the first DSB meeting devoted to Ukraine`s request for the establishment of a panel, Armenia used its right to object and that is why the panel was not established. This is quite commonplace among WTO Members and usually the panel is not established at the first meeting of the DSB. On 23 November 2010, the request made by Ukraine was on DSB's agenda, but once again the panel was not established. Due to the ongoing bilateral consultations with Armenia the WTO dispute settlement procedures were halted for the time being.

Legally speaking, Ukraine did not lose its right to refer to the WTO dispute settlement in future with the same matter and to submit the request for the establishment of a panel. Furthermore, there is nothing in the DSU preventing parties from holding bilateral consultations whilst conducting dispute settlement procedures. Therefore, currently the outcome of this procedure depends on success of the bilateral negotiations being held.

Conclusions

WTO dispute settlement is an effective and comparatively fast way of solving international trade disputes, because it has clear binding procedure and, most importantly, it mandates violating WTO Members to comply. Even though the procedure is complex and the implementation of decisions could be time consuming and politically complicated, it prevents trade wars and provides security and predictability of market access.

Finally, WTO dispute settlement is an important tool not only for governments but mainly for business entities, because the DSB's decision opens up markets and eliminates trade barriers for companies.

Hence, currently Ukrainian government has in its hands a valuable instrument that can help companies in Ukraine to be better off in the international market. Whether or not this instrument is used depends on the Ukrainian companies. Let's hope that case against Armenia is the first step and Ukrainian business makes the most of the WTO dispute settlement in the nearest future.

Flow Chart of the Dispute Settlement Process10

Footnotes

1. Please consult the flow chart below for more details concerning stages of the dispute settlement.

2. WTO Annual Report 2010, p.82; http://www.wto.org/english/res_e/booksp_e/anrep_e/anrep10_e.pdf

3. http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c12s1p1_e.htm

4. The role of all the WTO Membership in the adoption of the final decision is discussed in more detail below.

5. WTO Annual Report 2010, http://www.wto.org/english/res_e/booksp_e/anrep_e/anrep10_e.pdf

6. This issue is explained in more detail below.

7. Please consult the flow chart for details.

8. Armenia — Measures Affecting the Importation and Internal Sale of Cigarettes and Alcoholic Beverages (DS411)

9. This request was further revised and submitted on 6 October 2010 http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds411_e.htm

10. Source: WTO web-cite: http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c6s1p1_e.htm

Vasil Kisil & Partners

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Authors
Nataliya Y. Mykolska
 
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