WTO DISPUTE SETTLEMENT UNDERSTANDING: An Overview

Introduction

We have now witnessed nearly 16 years of WTO Dispute Settlement mechanism which came
into existence as a result of the Uruguay Round of trade negotiations 1 on January 1, 1995. This
system of dispute settlement has been a tremendous success. Most importantly the member states
of the WTO are complying with the rulings and recommendations adopted by the Dispute
Settlement Body of the WTO.2

This dispute settlement process is a result of State practice and over 40 years of experience under
the GATT.3 Before this, in GATT the dispute settlement was based on negotiations. 4 The old
dispute settlement mechanism under GATT had serious shortcomings such as delays in
formation of panels, and in panel decision making process and delays in implementing GATT
council recommendations5. These difficulties are effectively addressed in the new system of
dispute settlement. The Uruguay Round Negotiations emphasized on a more judicialised, rule-
oriented approach. Hence the WTO system today is based on adjudicative model.

Dispute Settlement Understanding: In a nutshell

The WTO dispute settlement institutions function like a Court of International Trade.6 The
striking features of the dispute settlement system are compulsory jurisdiction; application of
rules of law; bindingness of rules on parties; imposition of sanctions if decisions are not
observed.7

Dispute Settlement commences when a WTO member makes a request for consultations with
another member or other members.8 A dispute settlement panel may be appointed if the dispute
is not resolved within 60 days.9 The Dispute is then considered and decided by an ad hoc

1
The WTO was created by the Marrakesh Declaration of 15 April, 1994 and the Marrakesh Agreement Establishing
the World Trade Organization of the same date. The legal texts are reproduced in The Results of the Uruguay Round
of Multilateral Trade Negotiations, The Legal Texts (GATT Secretariat, 1994) and in (1994) 33 I.L.M. 1145. Legal
texts also available at www.wto.org
2
In every case so far the nation on the losing side of a WTO dispute has announced its intention to implement
corrective action. In the Japan-Taxes on Alcoholic Beverages case Japan and the US are still negotiating on a
timetable for elimination by Japan of its discriminatory system of liquor taxation. See Inside US Trade 5 (31 Oct.
1997).
3
See Ernst-Ulrich Peters-mann, The GATT/WTO Dispute Settlement System (Kluwer Law International, The Hague,
1997), pp 66-91.
4
See Robert E. Hudec, Enforcing International Trade Law, The Evolution of the Modern GATT Legal System
(1993), pp. 138-150; and William J.Davey, “Dispute Settlement in GATT” (1987) 11 Fordham Int.L.J. 51, 67-78
5
See Davey, ibid.
6
See Dispute Settlement Understanding The Legal Text, supra n.1
7
Ibid.
8
Idem, Art 4:3
9
Idem, Art 4:7

1
dispute-settlement panel.10 The Panel’s decision may be appealed and decided by a permanent
Appellate Body.11

A Dispute Settlement Body (DSB) is established which is the central body which supervises and
facilitates functions such as establishment of panels, formal adoption of Panel and Appellate
Body reports, supervision of the implementation of rulings and recommendations, and the
authorization of sanctions.12 The entire process is depicted below:

10
Idem, Arts. 6-7
11
Idem, Art 17
12
See Dispute Settlement Understanding, The Legal Text, Supra n.1, Art. 2

2
Even though the new dispute settlement system is based on adjudicative model it still provides a
plethora of other options to the parties to help them resolve their dispute such as consultations
between parties13; good offices, conciliation and mediation 14; the convening of an expert review
group to resolve factual issues15; and binding arbitration16. The good thing is that the focus is on
resolution of dispute and not on applying the law.

We now discuss in some detail the various stages of Settlement of Disputes.17

First stage: consultation (up to 60 days). Before taking any other actions the countries in dispute
have to talk to each other to see if they can settle their differences by themselves. If that fails,
they can also ask the WTO director-general to mediate or try to help in any other way.18

Second stage: the panel (up to 45 days for a panel to be appointed, plus 6 months for the panel
to conclude). If consultations fail, the complaining country can ask for a panel to be appointed.
The country “in the dock” can block the creation of a panel once, but when the Dispute
Settlement Body meets for a second time, the appointment can no longer be blocked (unless
there is a consensus against appointing the panel).19

Officially, the panel is helping the Dispute Settlement Body make rulings or recommendations.
But because the panel’s report can only be rejected by consensus in the Dispute Settlement Body,
its conclusions are difficult to overturn. The panel’s findings have to be based on the agreements
cited.20

The panel’s final report should normally be given to the parties to the dispute within six months.
In cases of urgency, including those concerning perishable goods, the deadline is shortened to
three months.21

The agreement describes in some detail how the panels are to work. The main stages are:

Before the first hearing: each side in the dispute presents its case in writing to the panel.22

13
Dispute Settlement Understanding, Art 4.
14
Idem, Art. 5
15
Idem, Art. 13:2
16
Idem, Art 25
17
See http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm, Last checked on 21/3/2011 and also Dispute
Settlement Understanding, The Legal Text, Supra n.1
18
Ibid.
19
Ibid.
20
Ibid.
21
Ibid.
22
Ibid.

3
First hearing: the case for the complaining country and defence: the complaining country (or
countries), the responding country, and those that have announced they have an interest in the
dispute, make their case at the panel’s first hearing.23

Rebuttals: the countries involved submit written rebuttals and present oral arguments at the
panel’s second meeting.24

Experts: if one side raises scientific or other technical matters, the panel may consult experts or
appoint an expert review group to prepare an advisory report.25

First draft: the panel submits the descriptive (factual and argument) sections of its report to the
two sides, giving them two weeks to comment. This report does not include findings and
conclusions.26

Interim report: The panel then submits an interim report, including its findings and
conclusions, to the two sides, giving them one week to ask for a review.27

Review: The period of review must not exceed two weeks. During that time, the panel may hold
additional meetings with the two sides.28

Final report: A final report is submitted to the two sides and three weeks later, it is circulated to
all WTO members. If the panel decides that the disputed trade measure does break a WTO
agreement or an obligation, it recommends that the measure be made to conform with WTO
rules. The panel may suggest how this could be done.29

The report becomes a ruling: The report becomes the Dispute Settlement Body’s ruling or
recommendation within 60 days unless a consensus rejects it. Both sides can appeal the report
(and in some cases both sides do).30

Appeals have to be based on points of law such as legal interpretation — they cannot reexamine
existing evidence or examine new issues.31

Each appeal is heard by three members of a permanent seven-member Appellate Body set up by
the Dispute Settlement Body and broadly representing the range of WTO membership. Members
of the Appellate Body have four-year terms. They have to be individuals with recognized
standing in the field of law and international trade, not affiliated with any government.32
23
Ibid.
24
Ibid.
25
Ibid.
26
Ibid.
27
Ibid.
28
Ibid.
29
Ibid.
30
Ibid.
31
Ibid.
32
Ibid.

4
The appeal can uphold, modify or reverse the panel’s legal findings and conclusions. Normally
appeals should not last more than 60 days, with an absolute maximum of 90 days.33

The Dispute Settlement Body has to accept or reject the appeals report within 30 days — and
rejection is only possible by consensus.34

Even once the case has been decided, there is more to do before trade sanctions (the conventional
form of penalty) are imposed. The priority at this stage is for the losing “defendant” to bring its
policy into line with the ruling or recommendations. The dispute settlement agreement stresses
that “prompt compliance with recommendations or rulings of the DSB [Dispute Settlement
Body] is essential in order to ensure effective resolution of disputes to the benefit of all
Members”.35

If the country that is the target of the complaint loses, it must follow the recommendations of the
panel report or the appeals report. It must state its intention to do so at a Dispute Settlement
Body meeting held within 30 days of the report’s adoption. If complying with the
recommendation immediately proves impractical, the member will be given a “reasonable period
of time” to do so. If it fails to act within this period, it has to enter into negotiations with the
complaining country (or countries) in order to determine mutually-acceptable compensation —
for instance, tariff reductions in areas of particular interest to the complaining side.36

If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the
Dispute Settlement Body for permission to impose limited trade sanctions (“suspend concessions
or obligations”) against the other side. The Dispute Settlement Body must grant this
authorization within 30 days of the expiry of the “reasonable period of time” unless there is a
consensus against the request.37

In principle, the sanctions should be imposed in the same sector as the dispute. If this is not
practical or if it would not be effective, the sanctions can be imposed in a different sector of the
same agreement. In turn, if this is not effective or practicable and if the circumstances are serious
enough, the action can be taken under another agreement. The objective is to minimize the
chances of actions spilling over into unrelated sectors while at the same time allowing the actions
to be effective.38

In any case, the Dispute Settlement Body monitors how adopted rulings are implemented. Any
outstanding case remains on its agenda until the issue is resolved.39

33
Ibid.
34
Ibid.
35
Ibid.
36
Ibid.
37
Ibid.
38
Ibid.
39
Ibid.

5
Suggestions for Reforms40

There is a consensus among western researchers that the WTO Dispute Settlement System
represents a move from a power-oriented system (as embodied in GATT) to a rule oriented
system. For Example, according to Trebilcock and Howse “the Uruguay Round Understanding
on Dispute Resolution seeks to advance substantially the legal orders conception of the
GATT.”41

During the Uruguay Round the choice between a negotiation model and an adjudicative model of
dispute settlement was too often presented as an “either-or”. 42 This is a false dichotomy. In
essence both models are needed. Sometimes legal rules need to be applied 43 but at other times it
may not be appropriate to go by strict letter of law as certain disputes are more economic and
political than legal. Hence they should be settled by non-legal means. Though DSU provides a
complete menu of dispute settlement options 44 nevertheless the procedural rules of the DSU
“funnel the parties, sometimes prematurely, into the Panel/Appellate Body process.”45

Two rules are primarily responsible for this: first, the short period of 60 days for consultation as
well as conciliation, good offices or mediation by the Director-General of the WTO 46; and
second, the short periods for consideration by the panel and Appellate Body. 47 It is true that
negotiation-based procedures can continue after the end of the 60-day consultation period, even
after the establishment of a panel48, but this is relatively rare.

Once adjudication has taken over, negotiation is usually impractical.49

40
For a scholarly summary and evaluation of this experience, see Schoenbaum Thomas J., WTO Dispute Settlement:
Praise and Suggestions for Reform (Jul 1998), The International and Comparative Law Quarterly, Vol. 47, No. 3,
pp-647-658
41
M J Trebilcock and R Howse, The Regulation of International Trade (Routledge, London, 1995) p 397. Likewise,
according to Petersmann, legal advisor to WTO: “The progressive transformation of traditionally ‘power-oriented’
trade…policies into ‘rule-oriented’ policies constitutes one of the most important achievements of international law
and policy since second world war.” Ernst-Ulrich Petersmann. The GATT/WTO Dispute Settlement System, (1997) p.
84, See Supra n. 3
42
Supra n.4
43
An example of a dispute that is best settled by adjudication is the Beef Hormone case. EC measures Concerning
Meat and Meat Products (Hormones) AB-1997-4. This WTO report available at www.wto.org
This case concerned primarily important questions of interpretation concerning the Sanitary and PhytoSanitary
Agreement. The Appellate body in deciding this case clarified many interpretative points. Such interpretation, once
settled, can serve as a basis for future cases or as a starting point for new negotiations between parties.
44
Supra n.13 - 16
45
Ibid n.40
46
Supra n. 18, DSU, The Legal Text, Art 4:7
47
Idem Art 12
48
Idem Art 5:5
49
A rare case in which the parties to a dispute have continued to negotiate beyond the 60-day period is United
States: The Cuban Liberty and Democratic Solidarity Act. This case, which was brought by the EC, involved the
issue of the validity of US legislation which adopts sanctions against foreign companies that trade with Cuba or
invest in properties expropriated from American citizens. At the request of the EC, the panel suspended its work in

6
Forcing disputes to a rule-based conclusion through adjudication may put undue strain upon the
WTO system and can lead to unwise results. Even certain rule-based disputes are better settled
through the negotiation process.50

The case European Communities – Regime for the Importation, Sale, and Distribution of
Bananas51 case is an example of a dispute decided on legal grounds through the adjudicative
process that, perhaps, should have been settled through negotiation as economic and political
factors in this case outweighed legal considerations.52

The current WTO dispute-settlement regime also forces non-rule-based disputes through the
adjudicative process. The DSU, continuing the GATT tradition 53, provides for the filing of a
"non-violation" complaint54-where a party considers that a trade benefit is being nullified or
impaired by a measure applied by a WTO member that does not conflict with a "covered
agreement". The DSU also allows a member to file a "situation" complaint, 55 if the objective of a
trade agreement is being impeded as a result of the existence of "any situation". Both of these
complaints are handled through the panel process,56 although a negotiation-based dispute-
settlement process may sometimes be more appropriate.

In summary, the DSU should be amended to give more prominence to and facilitate negotiation-
based dispute-settlement procedures in appropriate cases. This could be done without sacrificing
the efficient operation of the adjudicative-based WTO process. A basic reform is suggested 57: the
panels and Appellate Body should have the authority to decide unilaterally to suspend a
proceeding and to remit the parties to a negotiation process. They should retain jurisdiction over
the dispute in order to monitor the settlement process and decide the case if that becomes
necessary or appropriate.

Apparently, it may seem that excessive emphasis to establish a rule of law in the world of
international trade may help less powerful countries in a battle of briefs due to certainty of
principles and they would have a better chance of having their views accepted than in

Apr. 1997, and negotiations continued between the US and the EC. Inside US Trade1 (17 Oct. 1997). On May 18,
1998, the United States and the European Community settled their dispute involving the Helms-Burton Act. The
settlement involves an agreement that the United States will grant permanent waivers of the Helms-Burton Act
sanctions in return for the European Community's commitment to help establish a global registry of confiscated
property that will be off-limits to investors. This agreement was possible only because the Europeans voluntarily
agreed to suspend their 1996 case filed at the WTO to challenge the legality of the U.S. law.
50
An example is the 1995 dispute US-Imposition of Import Duties on Autos from Japan under Sections 301 and 304.
Since this dispute was settled, it was not the subject of a WTO panel decision. For a complete analysis of this
dispute, see Eleanor Roberts Lewis and David J. Weiler ,"Will the Rubber Grip the Road? An Analysis of the US-
Japan Automotive Agreement"(1996) L aw & Policy in Int. Bus. 631.
51
Report of the Appellate Body, AB – 1997 – 3.
52
See “Bananas: ‘EU must Comply’”, Financial Times, 20 Oct, 1997, p.5
53
See GATT 1994, Art. XXIII in The Legal Texts, supra n.1
54
DSU, Art 26.
55
Ibid.
56
Non-violation and Situation Disputes are subject to a modified panel process: Ibid.
57
Supra n. 40

7
negotiations openly visited by power, this may not be entirely true. 58 The move towards a rule
oriented system in the WTO is of uncertain value for the underdeveloped world, in particular
India. While a rule-oriented dispute settlement system has some intrinsic value it is mistaken to
believe that it automatically translates into justice. Since the substantive rules essentially codify
the interests of dominant actors in ‘international trade’, a rule-oriented system only contributes to
the rigid enforcement of the embodied inequities.59

To add to the saga the national security exception clause contained in Article XXI of GATT has
troubling implications for India. Article XXI appears to allow states to justify the non-fulfillment
of any WTO obligation in the name of national security. 60 While the national security exception
clause contained in it can be invoked by all states its use by dominant States is likely to have
grave implications for the trade and security of other states in the international system. The
national security exception clause allows sufficient flexibility to the powerful states to pursue
unconstrained non-trade objectives.61

Conclusion

While giant leaps and steps have been taken to rectify some of the shortcomings of GATT
system of dispute settlement, but perhaps the WTO dispute settlement system slightly overshoots
the mark. In a way it is a welcome step but over the experience of functioning of this model it
has been felt that it has led to certain difficulties which ironically have come to the light only due
to its tremendous success. Nevertheless international law is an immensely dynamic arena for
interaction between all the countries. With time it can only be hoped that some of the concerns
voiced here will be recognized and we will witness a more balanced approach to international
trade disputes in coming times. Nevertheless the success of DSU is unprecedented and in no way
can it be underestimated. It has certainly helped in curbing violations of principles of
international trade thereby strengthening the idea of world peace which heavily relies on
economic relations between countries.

58
For detailed analysis See, Chimni B.S., India and the Ongoing Review of WTO Dispute Settlement System, (Jan 30
– Feb 5, 1999) Economic and Political weekly, vol. 34, No. 5, pp. 264-267
59
Is it not surprising that at a conjuncture in international relations when one state, or at best a small group of states,
dominate the entire international system that a rule-oriented system has been established? One would have expected
the converse to happen. That it has not happened can only be explained by the fact that a rule-oriented system serves
the interests of powerful states.
60
See, The Legal Texts, supra n.1 GATT, 1994
61
Ibid n.58