45.

Dispute Settlement, Compensation

and Retaliation Under the WTO
Robert Read
One of the key outcomes of the GATT Uruguay Round
negotiations was the creation of more effective system of dealing
with international trade disputes, the WTO Dispute Settlement
Understanding (DSU). This entered into force on 1 January
1995. The DSU succeeded the original GATT system for dispute
settlement which had become increasingly unable to resolve
major trade conflicts between its Member countries. This
Chapter outlines the structure and operation of the WTO trade
dispute settlement system, particularly with respect to the
implementation of dispute panel findings and the issues of
compensation and retaliation. The first section provides an
overview of the objectives of the DSU in the context of the
shortcomings of the previous GATT dispute settlement system.
Section 2 summarises the key articles and procedures of the
DSU. This is followed by a discussion of the DSU framework for
the suspension of concessions, compensation and retaliation
supported by illustrative examples from recent cases. The final
section offers a brief critique of the key issues that have arisen in
the first decade or so of the operation of the DSU.
42.1 THE ORIGINS OF THE WTO DISPUTE SETTLEMENT
SYSTEM
Prior to the introduction of the DSU, the GATT system of
dispute settlement had been functioning more or less successfully
for almost 50 years in spite of its evident shortcomings. The new
WTO DSU was the outcome of a thorough overhaul of the
GATT system although it mirrored much of the original GATT
legal framework and retained the accumulated body of case law
and precedent.

Gaisford & Kerr Handbook on Trade Policy

The GATT Dispute Settlement System

The GATT system of dispute settlement was founded upon two
principal articles: Consultation (Article XXII) and Nullification
or Impairment, i.e. compensation (Article XXIII). The operation
of the dispute system from 1947 led to the incremental evolution
of procedures and case law based upon accumulated legal
interpretation and precedent. The linchpin of the GATT system
for settling trade disputes was the principle of consensus 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. Defendants in a case could therefore
veto 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 (Read, 2005). The survival
of the GATT system for almost fifty years owes much to the its
members commitment to multilateralism and their realisation
that persistent flouting of the trade rules and conflict served to
undermine the long-term benefits of a relatively liberal global
trade regime.
The GATT system was, to some extent, a victim of its own
success in that it was originally intended to regulate the trade of
just 23 countries. Its rules were simply not designed to deal with
the massive growth of world trade in the latter half of the 20 th
Century. This was partly fuelled by trade liberalisation under the
GATT Kennedy and Tokyo Rounds, a rapidly growing
membership (there are now 147 WTO Members) and the
increasing volume and complexity of trade conflicts. All of these
developments placed increasing stresses and strains on an
imperfect dispute settlement system. By the start of the Uruguay
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Dispute Settlement, Compensation & Retaliation under the WTO

Round negotiations in 1986, the general view among GATT

Members was that the system for the settlement of trade disputes
needed to be reformed.
It is important to note that some 88 per cent of all GATT
trade dispute cases 1948-89 were resolved through full or partial
compliance. This compliance rate however, did fall to 81 per cent
post-1980 a period covering more than half the total number of
cases (Hudec et al., 1993). The actual performance of the GATT
dispute settlement system can thus be regarded as having been
reasonably successful; a view reinforced by the incorporation of
its basic legal framework into its successor, the WTO Dispute
Settlement Understanding.
The WTO Dispute Settle System
The DSU superseded the GATT system from 1 January 1995 and
is regarded as being one of the central achievements of the
Uruguay Round negotiations. The desire for the reform of the
GATT dispute settlement system was made very apparent in the
Punte del Este Declaration at the commencement of the Uruguay
Round:
To assure prompt and effective resolution of disputes to the
benefit of all contracting parties, negotiations shall aim to
improve and strengthen the rules and procedures of the dispute
settlement process, while recognizing the contribution that would
be made by more effective and enforceable GATT rules and
disciplines. Negotiations shall include the development of
adequate arrangements for overseeing and monitoring of the
procedures that would facilitate compliance with adopted
recommendations. (GATT, 1986)

There was however, no clear consensus as to how any new

system for settling trade disputes should be constructed. The
United States sought the creation of a rule-oriented approach
(automaticity), along the lines of the NAFTA system, with a
defined timetable for dispute resolution and the potential for
cross-retaliation. In contrast, the primary objective of most other
members of the OECD, along with many developing countries,
was a system that would constrain unilateral action by the United
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Gaisford & Kerr Handbook on Trade Policy

States. The final outcome of the negotiations was the DSU which
dealt with many of the perceived weaknesses of the GATT
system as well as, at least partially, satisfying the differing
objectives of its leading members.
The new negative consensus requirement means that the
implementation of panel findings can no longer be blocked by
respondents, so triggering the right of plaintiffs to retaliate.
Automaticity is 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.
Unilateral 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 introduction of the DSU must also be viewed as having
been a necessary condition for the successful implementation of
the range of revised and new trade rules, known collectively as
the Uruguay Round Agreements. 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.
42.2 THE KEY ARTICLES & OPERATING PROCEDURES
OF THE WTO DISPUTE SETTLEMENT SYSTEM
The DSU is an integral part of the Uruguay Agreements, running
to 27 Articles and four Appendices. This Section outlines the
principal operating procedures of the WTO dispute settlement
system with respect to the key articles of the DSU.
The Grounds for a Complaint Under the WTO DSU
GATT Article XXIII, Nullification or Impairment, stood at the
centre of the GATT dispute settlement system and its paragraphs
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
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Dispute Settlement, Compensation & Retaliation under the WTO

a Member country violates 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 catch-all provision. 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.
The WTO Complaints Procedure
The primary objective of the WTO DSU system is to settle trade
disputes between Members by means of bilateral consultations
and mediation in the first instance. Recourse to the establishment
of a formal dispute panel is intended as a last resort when all
other avenues of conciliation have been exhausted. Further, the
provisions permit third parties, including other Member countries
and the WTO Secretariat, to mediate in a dispute and take part in
the consultations. Any agreed solution however, must be
consistent with the WTO Agreements. It is only after the failure
of the consultation and/or mediation process that a plaintiff may
have recourse to the formal dispute provisions. Third parties with
a substantial trade interest in a dispute may also engage in the
consultation process, subject to the agreement of the respondent.
The specific guidelines and timetable for consultations to
take place are provided in Article 4 of the DSU. Consultations
are a mandatory condition for a subsequent request to be made
to establish a dispute panel. A respondent has a 10-day limit
within which to reply to a request for consultations, a maximum
of 30 days to enter into consultations and a minimum of 60 days
to engage in the consultations. If a Member does not meet one or
more of these deadlines, a plaintiff may request the establishment
of a panel immediately. In practice, many parties to disputes
often take considerably longer over consultations that the
minimum of 60 days (WTO, 2004).
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Gaisford & Kerr Handbook on Trade Policy

Many trade disputes never go further than the consultation

stage, particularly given that WTO Members are under an
obligation to resolve their disputes by this means. The parties to
a dispute may also make use arbitration as an alternative method,
subject to mutual agreement.
The Establishment of a WTO Dispute Panel
In the event of that a trade dispute is not resolved through
consultations, a plaintiff can then proceed to a formal request for
the establishment of a dispute panel no earlier than 60 days after
the request for consultations. Such a request is submitted in
writing to the Chair of the Dispute Settlement Body (DSB) and
sets out briefly and clearly the grounds for a complaint. This
request forms the legal basis for a complaint and its contents
define the scope and extent of the remit of a dispute panel
investigation and adjudication. The formal request document is
then circulated to all WTO Members, so as to inform the
respondent together with any interested third parties, and
included on the agenda for the next meeting of the DSB. The
first time that a request is presented to the DSB, a plaintiff has
the right to block a panel being set up. Under the negative
consensus requirement introduced in the Uruguay Round, any
such request is automatically accepted at a second DSB meeting.
Where there is more than one plaintiff in a case or where
several Members file similar complaints, Article 9.1 provides for
the establishment of a single panel whenever feasible. Coplaintiffs however, may request the publication of separate
reports.
Any third party country with substantial interest in a trade
dispute also has a right to make submissions to and be heard by a
panel, even if they were not involved in the consultation process.
Participation in panel procedures as a third party requires the
DSB to be notified, in practice within 10 days of the
establishment of a panel. In the event of nullification or
impairment of their benefits, third parties may also have recourse
to the DSU.
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Dispute Settlement, Compensation & Retaliation under the WTO

The Functions & Procedures of WTO Dispute Panels

The functions and procedures of WTO dispute panels are laid out
in Articles 7, 8 and 11 to 15 of the DSU. Their primary function
is to assist the DSB by making an objective assessment of the
facts and conformity with the relevant WTO agreements. Their
Terms of Reference are to examine the facts of a trade dispute
with respect to the complaint as laid out by the plaintiff in the
request for the panels establishment. Panels are thus required to
investigate the evidence in the context of the relevant provisions
of the WTO agreements cited by the parties of a dispute. They
then make recommendations or rulings to the DSB with regard
to the relevant WTO agreements.
The composition of WTO dispute panels is set out in Article
8 of the DSU. A panel normally has three members but may, in
certain cases, have five. The panellists are nominated by the
WTO Secretariat from an indicative list that includes the
nominees of Member countries. Panellists are required to possess
expertise appropriate to a case but may not be citizens of parties
or third parties to a dispute.
The procedures for dispute panels are set out in Appendix 3
of the DSU, including a proposed timetable for panel
deliberations (shown in WTO, 2004). This timetable is, to some
extent, flexible dependent upon the complexity and evidential
needs of particular cases. In general, most dispute cases take
between 9 and 12 months from the establishment of a panel to
the publication of its report. Dispute panels have the power to
seek information and technical advice from any appropriate
individual or body and evidence may also be requested from an
Expert Review Group. All Panel deliberations are confidential
and non-attributable.
Panel procedures normally begin with the receipt of (often
lengthy) written submissions by the plaintiff and respondent,
which are then exchanged. Any third parties may then make their
own submissions. These tend to be shorter commentaries on
specific aspects of a case (WTO, 2004). This is followed by a
closed oral hearing involving all of the parties after which the
parties exchange written rebuttals to each others legal
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Gaisford & Kerr Handbook on Trade Policy

arguments. A second closed oral hearing is then held, during

which the parties arguments and rebuttals are presented. Where
expert evidence, usually of a scientific nature is required,
additional sets of oral hearings may be held. A panel then drafts
the descriptive section of its report outlining the arguments of
each party and summarising all of the factual and legal arguments
which is circulated to the parties for comments and corrections.
This is followed by the circulation of the Interim Review, which
contains the description of the case along with a panels findings
and conclusions regarding the legal validity of the complaint.
Again, the parties are permitted to make comments, request
corrections and ask a panel to review specific points. These
amendments and elaborations are then incorporated to produce a
Final Panel Report which is circulated to all WTO Members and
published.
The Adoption of Panel Reports
A Final Panel Report and therefore its recommendations - has
no standing until it is adopted at a meeting of the DSB. Under he
negative consensus requirement however, Final Reports are
automatically adopted and their rulings become binding if they
are placed on the agenda and submitted to the DSB. A victorious
plaintiff may therefore choose not to add a Report to the DSB
agenda, in which case it will not be adopted. This contrasts with
the potential of losing respondents in trade dispute cases to use a
veto under the GATT dispute settlement system which enabled
them to block the implementation of panel rulings indefinitely.
Once a Panel Report is adopted by the DSB, its
recommendations become binding on the parties to a dispute.
The Role & Function of the WTO Appellate Body
A party (but not a third party) to a dispute has 60 days after the
publication of a Final report to lodge an appeal. In this case the
Report is not submitted to the DSB until the appeal process is
completed. Although respondents and plaintiffs may appeal
against the findings of a dispute panel with respect to the case in
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Dispute Settlement, Compensation & Retaliation under the WTO

question, it is not unusual for parties to request clarification or

reinterpretation of particular legal points with respect to their
broader implications for future cases. The Appellate Body has the
power to modify or reverse the findings and recommendations of
a Panel Report following procedural rules that have been
amended periodically since 1996.
The Appellate Body has seven members, three of whom (the
division) are selected to preside over an appeal by rotation. An
appellant has ten days to submit its legal arguments concerning
the relevant point(s) of law in a Panel Report, followed later by
an oral hearing. The collegiality of the Appellate Body is
sustained by sanctioning deliberations between the division and
its remaining four members to ensure jurisprudential consistency
and coherence. The objective of the Appellate Body is to resolve
dispute cases and this may also require it to complete the legal
analysis of a case by examining other claims not dealt with by the
original panel. After drafting, the Appellate Body Report is
circulated to all WTO Members and published. It is also
submitted to the DSB for adoption and the parties to a dispute
must accept its recommendations unconditionally in the absence
of a negative consensus.
The Implementation of WTO Panel Decisions
Once a Final or Appellate Body Report has been adopted by the
DSB, its recommendations and rulings become binding on the
parties to a dispute and the losing respondent is required to bring
its trade regime into compliance with the WTO rules. This
normally means the disputed measures that were the subject of
the original dispute and found to be inconsistent with the WTO
are withdrawn. Under Article 21, Surveillance of
Implementation, losing respondents have 30 days after the
adoption of a Report to inform the DSB of their intentions
regarding the implementation of Panel or Appellate Body
recommendations. While the onus is on prompt compliance
to ensure effective resolution of disputes, compliance is required
to be within a reasonable time, normally not exceeding 15
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Gaisford & Kerr Handbook on Trade Policy

months. The DSB is responsible for the surveillance of the

implementation of adopted recommendations and rulings.
In the event that there is dissatisfaction or disagreement
concerning a respondents compliance with the recommendations
and rulings of the DSB, a plaintiff has further recourse to the
dispute settlement procedures and a new Panel Report (Article
21.5). Actions under this article are not uncommon and have
been used by both plaintiffs and respondents to establish whether
any regulatory changes that have been made are WTOcompatible.
Other Means of WTO Dispute Settlement: Arbitration &
Mutually Agreed Solutions
The use of dispute panel procedures is the most well known
means of resolving trade disputes between WTO Members,
primarily because of the publicity generated by high profile cases,
such as the recent EU-US banana and steel disputes. The
principal alternative to a dispute panel is arbitration, the
procedures for which are outlined in Article 25 of the DSU. The
use of arbitration is by mutual agreement between the parties to a
dispute. The outcome of arbitration must be WTO-compatible
and is binding on the parties. Any award for nullification or
impairment is subject to the same Articles on compensation and
the suspension of concessions as a dispute that follows panel
procedures.
Parties to a trade dispute may, at any time, side-step the
formal dispute settlement process in favour of securing a
mutually agreed solution. This is normally a bilateral agreement
negotiated between the parties to a dispute. The DSU procedures
actively promote negotiation and conciliation to avoid conflict,
such that mutually agreed solutions to disputes are encouraged
subject to their satisfying the need for consistency with the WTO
rules. If such a solution is WTO-incompatible, the original
respondent could be vulnerable to a dispute action by adversely
affected third parties.

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Dispute Settlement, Compensation & Retaliation under the WTO

45.3 THE COMPENSATION, SUSPENSION OF

CONCESSIONS AND RETALIATION PROVISIONS OF
THE WTO
The power of the DSB and therefore a Dispute Panel to
authorise the suspension of trade concessions by a plaintiff to a
respondent where there is harm (nullification or impairment) is
established in Paragraph 2 of Article XXIII of GATT 1994. This
paragraph effectively binds Members of the WTO to accepting
the rulings of the DSB and also, where appropriate, for the DSB
to permit sanctions against countries found to be acting contrary
to the WTO rules.
The Nature of Compensation, the Suspension of Concessions
& Retaliation
Compensation and the suspension of concessions, i.e. of MostFavoured Nation (MFN) treatment, to a WTO Member are
intended to be temporary measures. They are only implemented if
the recommendations and rulings of the DSB are not acted upon
within a reasonable time period. Where compensation and the
suspension of concessions are sanctioned by the DSB, a
respondent has the alternative option of withdrawing from the
WTO and its associated treaty obligations within 60 days.
Neither compensation nor the suspension of concessions
however, can be applied retrospectively. This means that there is
no recompense for any harm caused by an illegal trade measure
prior to and during the implementation of dispute procedures.
Where nullification or impairment is ruled to have occurred,
a respondent may choose either compensation or the suspension
of concessions as the form of restitution. Compensation normally
takes the form of tariff reductions and is purely voluntary since
the suspension of concessions is the default means of restitution.
Any compensation must satisfy the requirement that it is
compatible with the provisions of the WTO. Compensation is
rarely used however, because most tariff reductions are not
consistent with the requirement of MFN treatment (WTO, 2004).

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The suspension of concessions is more complex. In the first

instance, the general principle is to suspend concessions in the
same sector as the violation occurred - i.e. within goods, services
and trade-related intellectual property rights (TRIPs)
respectively.. If this is not practicable, then concessions are
suspended in other sectors covered by the same agreement i.e.
all of the WTO Agreements covering trade in goods, the General
Agreement on Trade in Services (GATS) and TRIPs respectively
and only then between agreements. These provisions are
particularly important for smaller developing countries where the
adverse impact of the suspension of equivalent concessions
within a sector or an agreement may be quite substantial (WTO,
2004).
In requesting the suspension of concessions, a Member is
required to take into account the trade and its importance to
them in the relevant sector or under relevant the agreement along
with the broader economic consequences of suspension. The
suspension of concessions must be temporary and may only
remain in place until a WTO-inconsistent measure is removed,
any harm ceases or there is a mutually agreed solution.
The Grounds for Compensation, the Suspension of
Concessions & Retaliation
The grounds for compensation, the suspension of concessions
and retaliation are dealt with under Article 22 of the DSU. In the
event of an illegal measure not being brought into compliance
and no satisfactory compensation being agreed between the
parties to a dispute, a plaintiff may request authorisation to
suspend concessions to a respondent, This may be requested 20
days after the expiry of the reasonable period of time.
The principal objective of compensation or the suspension of
concessions is to induce Member countries to comply with the
WTO rules. This punitive action results in a tangible loss by a
respondent through the removal of its preferential access to the
market of a plaintiff. This is incurred in through reduced earnings
by exports and exporters in those sectors targeted by the
plaintiffs suspension of concessions. A plaintiff may gain from
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Dispute Settlement, Compensation & Retaliation under the WTO

increased tariff revenue but its consumers will face higher prices
such that neither side is better off as a result of permitted
retaliation.
In some cases, a respondent may choose not to withdraw an
illegal trade measure, whether for logistical or other reasons.
Instead, the provision of compensation is permitted as a
temporary measure pending the withdrawal of the measure that
is inconsistent. In the dispute over beef produced with growth
hormones brought by Canada and the United States, the EU has
refused to remove its import restrictions in spite of their being
found to be illegal by a WTO panel. Instead, the EU has willingly
accepted retaliation on the grounds that its import restrictions are
justified by health fears over the long-term effects on consumers.
An important procedural dispute arose in the second WTO
banana case between the EU and the United States over the
relative primacy and sequencing of compliance and compensation
(Articles 21 and 22 of the DSU). The United States wished to
retaliate immediately while the EU argued that this could only be
done if its new trade measures for bananas were found not to
comply with the WTO rules. This matter was eventually referred
to the WTO General Council for clarification. An arbitration
panel however, ruled that an Article 21.5 ruling was not a prerequisite for action under Article 22.6. This decision has never
been adopted since neither the EU nor the United States desired
this legal precedent to become established in WTO case law
because of its broader implications for dispute settlement.
The Magnitude of Compensation, the Suspension of
Concessions & Retaliation
The magnitude of any compensation or suspension of
concessions is required to be equivalent to the level of harm
(nullification or impairment) that is caused by any illegal
measure. The DSB authorises the suspension of concessions
automatically under the negative consensus rule unless the
respondent objects, in which case the matter is referred to
arbitration, normally to the original panel.
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An objection can be lodged against the suspension of

concessions by a respondent on two grounds: that the proposed
level of suspension is greater than the nullification or impairment
incurred; or that the procedures contained in Article 22 have not
been adhered to. If a dispute over compensation is referred to
arbitration, then concessions cannot be suspended in the
meantime. The only concern of the arbitrator is whether
suspension of concessions is equivalent to the nullification or
impairment and has been carried out in accord with the
procedures in the article. The arbitrators decision is final and
there is no recourse to a second arbitration.
In the beef hormone dispute, arbitration established that the
annual value of trade affected by these measures was C$11.3
million for Canada and $116.8 million for the United States. This
represents only a small fraction of the total value of the
transatlantic beef trade. In the banana dispute, the initial claim for
the suspension of concessions by the United States was for $520
million but this was reduced to $191.4 million after arbitration.
In the same dispute, the Arbitration Panel awarded Ecuador
sanctions worth $201.6 million, substantially greater than the
annual value of its imports from the EU. In the case of the recent
steel dispute, the EU estimated that the lost value of its trade
concessions as a result of US restrictions on steel imports was
some $3 billion (2.407 billion) per annum.
Retaliatory Lists of Products for the Suspension of
Concessions
The procedure for implementing the suspension of concessions
includes the drawing up and publication of a retaliatory list of
products to be targeted by a plaintiff. A respondent may object to
the list if there is dispute over the value of the harm or that the
products covered do not conform to the sectoral requirements.
Retaliation by Canada and the United States in the beef
hormones dispute specifically targeted key EU agricultural
exports, particularly from France, with the US retaliatory tariffs
set at 100 per cent. In addition, the United States has also
threatened to escalate its retaliation by carouseling, i.e. rotating
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Dispute Settlement, Compensation & Retaliation under the WTO

the products on its retaliatory list every 180 days. This would
increase the uncertainty faced by EU exporters to the United
States. Carouseling is not illegal under the WTO rules but its use
would be expected to result in legal action by the EU. In the
banana dispute, the United States made it known that it
retaliatory targets included exports of luxury cashmere products
from Scotland. In the recent steel dispute, the EU proposed a
short retaliatory list worth some $390 million and a long list
worth $625 million. In addition to targeting imports of US steel
products, these lists targeted sensitive exports from politically
key marginal states in the 2004 US Presidential Election.
Further Reading on the DSU and WTO Trade Disputes
The best source of information about the WTO DSU is A
Handbook on the WTO Dispute Settlement System (2004). This
provides a full discussion of the procedures and operation of the
DSU, the interpretation of its articles and recent developments. A
comparative overview of the performance of the GATT and
WTO dispute settlement systems can be found in Trade Dispute
Settlement Mechanisms: the WTO Dispute Settlement
Understanding in the Wake of the GATT (Read, 2005). More
general analyses of the WTO, including the DSU, can be found in
The Political Economy of the World Trading System (Hoekman
and Kostecki, 2001) and The Regulation of International Trade
(Trebilcock and Howse, 1999).
Up to date documentation for every case dealt with under
the DSU is available on the WTO web-site at
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm#disputes.
Information and documentation about WTO trade disputes
involving the EU can be found on its web-site at http://tradeinfo.cec.eu.int/wtodispute/search.cfm. Details and publications
relating to investigations by the US International Trade
Commission
(USITC)
can
be
found
at
http://www.usitc.gov/webinv.htm. In depth discussions of several
recent trade disputes, including bananas, beef hormones and steel
can be found in The WTO & the Regulation of International
Trade: Recent Trade Disputes Between the European Union &
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the United States (Perdikis and Read, 2005). The banana and
beef hormones cases are also discussed in Transatlantic
Economic Disputes: the EU, the US & the WTO (Petersmann
and Pollack, 2003).
45.5 A CRITIQUE OF THE WTO SYSTEM OF TRADE
DISPUTE SETTLEMENT
Almost all of the 300-plus trade disputes that have arisen since
the inception of the DSU have been resolved in accord with
WTO disciplines. The number of completed cases is now
sufficient for several critical issues of concern to be identified
relating the operation and application of the WTO dispute
settlement system.
The willingness of the worlds strongest and most influential
economies to adhere to an agreed set of multilateral trade rules
must be seen as a positive indication of not only the health of the
global economy but also of the effectiveness of the DSU and
international economic relations in general. This view is
supported by the leading role played by the DSU in resolving
recent major trade disputes between the EU and the United
States in bananas and steel. Nevertheless, questions still remain
concerning the scope of the WTO trade rules and the
effectiveness of the DSU.
Bias in the Use & Outcomes of the DSU
The WTO dispute settlement system has been accused of being
biased against developing countries in that it favours the leading
industrialised countries. The EU and the United States, in
particular, are seen as having created and using the DSU to
achieve their own objectives by virtue of their international
economic and political leverage, greater resources and retaliatory
power. The DSU however, is a more effective system for settling
disputes because the dependence of the GATT system on positive
consensus was vulnerable to pressure.
Empirical analyses of WTO dispute cases indicate that the
industrialised countries have been the primary complainants and
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Dispute Settlement, Compensation & Retaliation under the WTO

respondents although the NICs are now making increasing use of

it. The EU and the United States however, have been the most
frequent litigants; trade disputes between them account for 40
per cent of all complaints 1995-2002. None of the leastdeveloped countries were involved in any cases at all.
Normalising according to the share of global trade suggests that
there is little evidence of systematic bias in the use of the DSU.
Even if there is no bias in the use of the DSU, the leverage and
resources of the industrialised countries may mean that they are
more likely to win dispute cases.
The high success rate of the DSU suggests that it has been
more effective in resolving trade disputes than the GATT system.
This issue is complicated by the fact that many disputes do not
result in formal complaints and not all complaints result in panel
reports. There is some evidence to indicate that WTO Members
with greater economic and political leverage are more likely to
achieve a mutually agreed settlement - resolving or dropping
complaints prior to the issuing of a panel report - while weaker
Members rely more upon the judicial process of the DSU. The
empirical literature on the performance of the GATT and DSU
systems is reviewed in Read (2005).
The Function & Composition of WTO Panels
Some concern has been expressed about the function and
composition of WTO Panels, particularly the reliance of the DSU
procedures on part-time non-professional panellists. The greater
effectiveness of the DSU has meant the rapid growth of both the
volume and complexity of dispute cases. Doubts have arisen
about the competence of part-time panellists, given the rulesbased legal foundations of the dispute settlement procedures and
the heavy workload. As a consequence, the EU has proposed
that the WTO should create a permanent or standing body of
qualified and experienced panellists.

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Automaticity
There is a concern, arising partly as a consequence of the
misgivings about panellists, that panels and the WTO Appellate
Body are exceeding the scope of their remit. That is, that they
are interpreting some of the WTO Agreements in a manner that
affects the rights of Members, positively or negatively, without
their consent.
The Transparency of the Panel and Appellate Systems
A further concern relating partly to automaticity and the
functions of panels and the Appellate Body is that their
procedures lack transparency. Because evidence and written
submissions to panels are generally confidential until the
publication of Panel Reports, the WTO system has been accused
of excessive secrecy. Greater transparency is unlikely to have an
adverse impact upon the system although it is opposed by many
developing countries.
The Implementation of Panel Recommendations and
Sequencing
There is some debate about the relative primacy of Articles 21.5
and 22.6 of the DSU, highlighted by the WTO banana case. The
former provides for referral back to a panel where there is
disagreement about compliance with a ruling while the latter
provides for automatic retaliation in such a case. The DSU
currently provides no indication of which Article should take
precedence although logic suggests that the suspension of
concessions should await a decision on the consistency of a
revised measure.
The Participation of Developing Countries in the DSU
Although the DSU Articles pay special attention to the needs of
developing countries, their participation continues to be
constrained by a lack of financial and intellectual resources
necessary to fight dispute cases, whether as plaintiffs or
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respondents. The failure of least-developed countries to use the

system at all gives some cause for concern. While this reflects the
small number of least-developed Members of the WTO and their
small share of global trade, their vulnerability to retaliatory action
means that positive evidence is needed to demonstrate that they
are not failing to make appropriate use of the DSU.
National Sovereignty & the Democratic Deficit
The WTO dispute settlement system raises important issues
relating to the competing demands of its Member countries
obligations under international agreements and their domestic
democratic mandates. Popular disquiet with the WTO, among
other international agreements, is by no means confined to the
anti-globalisation movement. There is a growing feeling in many
Member countries, both developed and developing, that the
WTO is usurping the democratic process by enforcing
externally imposed rules on sovereign states.
In the past, the recourse of national governments to
international agreements has been seen as a means to side-step
domestic constituencies opposed to trade liberalisation. A
democratic deficit has emerged however, between policy-makers
convinced of the long-term beneficial effects of such
commitments and national electorates, some part of which
remain sceptical of such benefits. The WTO rules do impose
constraints upon the exercise of its powers designed specifically
to preserve the sovereignty of the nation state. Nevertheless,
national governments may be faced with a crisis of credibility in
the face of substantial domestic opposition to the obligations
required by the WTO among others. At its mildest, this might
lead to the adoption of a policy of non-compliance while possible
outright rejection of the WTO could mean a reversion to
unilateralism with its attendant problems.
Critical current factors in this apparent deficit relate to
national concerns about the interfaces between the international
trade rules and environment and consumer food health and safety
issues so-called process and product method (PPM) issues. The
perceived strict interpretation of the rules on trade by the WTO
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to the neglect of broader issues of great concern to consumers

has engendered further scepticism over and above those related
to trade liberalisation. Although the consideration of PPM issues
at the WTO remains incomplete, incremental progress in the
interpretation and establishment of appropriate legal grounds for
trade restrictions on environmental and health grounds has been
made in several recent dispute cases. Any fundamental reform of
the WTO however, remains in the hands of its Members.
Acknowledgements
*Department of Economics, Lancaster University Management
School, UK. The author is grateful for critical supportive
comments made by Bill Kerr and Nick Perdikis.
References
GATT (1986), Ministerial Declaration, Punta del Este, Geneva:
GATT.
Hoekman, B.M., and Kostecki, M.M. (2001), The Political Economy
of the World Trading System, Oxford: Oxford University Press,
2nd edition.
Hudec, R., Kennedy, D., and Sgarbossa, M. (1993), A statistical
profile of GATT dispute settlement cases, 1948-1989,
Minnesota Journal of Global Trade, vol. 2, no. 1, pp. 1- 25.
Perdikis, N., and Read, R. (eds.) (2005), The WTO & the Regulation
of International Trade: Recent Trade Disputes Between the
European Union & the United States, Cheltenham: Edward
Elgar.
Petersmann, E-U., and Pollack, M.A. (2003), Transatlantic Economic
Disputes: the EU, the US & the WTO, Oxford: Oxford
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Read, R. (2005), Trade dispute settlement mechanisms: the WTO
Dispute Settlement Understanding in the wake of the GATT, in
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International Trade: Recent Trade Disputes Between the
European Union & the United States, Cheltenham: Edward
Elgar, pp. 41-67.
Trebilcock, M.J., and Howse, R. (1999), The Regulation of
International Trade, London: Routledge, 2nd edition.
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WTO (1999), The Legal Texts: the Results of the Uruguay Round of
Multilateral Trade Negotiations, Cambridge: Cambridge
University Press.
WTO (2004), A Handbook on the WTO Dispute Settlement System,
Cambridge: Cambridge University Press.

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Dispute Settlement, Compensation &

Retaliation under the WTO
Robert Read

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Dispute Settlement, Compensation & Retaliation under the WTO

Chapter 45 for Gaisford, J., & Kerr, W.A. (eds.),

Handbook on Trade Policy,
Cheltenham: Edward Elgar, 2005.

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