Hard selling

While the dispute settlement mechanism of the World Trade Organization (WTO) is awaiting reform, its role as an international forum for discussion, negotiation and resolution of trade disputes is more important than ever in light of geopolitical instability and growing protectionism.

The 2024 World Economic Forum Annual Meeting in Davos recognised the impact of geopolitical tensions on international trade relations. A key theme was its white paper Shaping Cooperation in a Fragmenting World. The WEF Global Cooperation Barometer 2024 highlights trade as a unifying force for cooperation, while trade and capital is the first of its five key pillars for global cooperation. Indeed, trade underpins the other pillars: innovation and technology; climate and natural capital; health and wellness; and peace and security.

Trade disputes threaten global cooperation so they need to be resolved. Yet, notwithstanding an increase in protectionist measures from major blocs, there have been fewer formal trade disputes in recent years. Governments recognise the dangers of escalation and are more willing to negotiate, arbitrate and settle.

Dumping and subsidies

Most current trade disputes relate to dumping and subsidies. Both result in imported goods being sold at a lower price than their domestic equivalents, potentially undermining the domestic industry. ‘Under WTO rules, once you establish there has been dumping which causes a material injury to your industry, you are entitled to raise tariffs,’ explains Totis Kotsonis, partner and head of state aid and public procurement at Pinsent Masons. ‘For example, there are disputes with China over concerns that solar panels are being sold in the EU and the UK at prices below the cost of producing them on the domestic market.’

The EU has begun a probe into whether Chinese state subsidies allowed Chinese firms to submit unfair bids for the construction of a Romanian solar panel park. While not all state subsidies breach WTO rules, they become actionable if they injure the domestic industry.

The WTO is the intergovernmental organisation for global trade relations, where representatives of 164 member states establish, revise and enforce the rules that govern international trade. Its members account for over 98% of global trade and GDP. The body provides a forum for negotiating trade rules, overseeing trade agreements, maintaining open trade, supporting developing countries and settling disputes. The WTO has at its core the most-favoured-nation principle – that WTO members treat each other equally, with certain exceptions for free trade agreements, customs unions and specific trade remedies.

Brexit fallout

Although the UK is a WTO member, it is still experiencing Brexit fallout. ‘While we were part of the EU, we were part of a trading bloc whereby the European Commission (EC) applies appropriate tariffs to everyone outside the EU, and the CE kitemark requires imported products to meet certain specifications,’ says Kotsonis. ‘All that used to happen on an EU level, but now we have our own tariff code which we apply to every country we don’t have a trade agreement with. We also have our own requirements for imports. Effectively, though, we are still trying to replicate what the EU is doing.’

In the EU, the commission is responsible for trade remedies. Lourdes Catrain, a partner in the global regulatory practice at Hogan Lovells, observes that with the exception of traditional actions before the Court of Justice concerning anti-dumping and anti-subsidies, other trade areas are less litigated, perhaps constrained by the fallout of Russia’s invasion of Ukraine.

The UK Trade Remedies Authority (TRA) was established in 2021 to undertake dumping and subsidy investigations and make recommendations to the secretary of state for international trade. Recent investigations and reviews relate to steel imports from China and an anti-dumping case involving biofuels.

While current trade forecasts are uncertain because of the many risk factors in the global economy, the number of trade disputes brought to the WTO has also fallen dramatically.

Settlement body

The WTO has its own Dispute Settlement Body (DSB) which has the authority to establish dispute settlement panels. These panels produce reports, and refer matters to arbitration, and parties can appeal to its Appellate Body. The DSB also oversees compliance with rulings and recommendations in panel reports. By the end of 2023, WTO members had submitted 621 requests for consultations, the first stage in the dispute settlement process.

However, in 2017-18 the US started blocking the appointment of judges to the Appellate Body, which had been criticised for overreaching its mandate. Lorand Bartels, counsel at Freshfields, and professor of international law at the University of Cambridge, notes that the decision to appoint new judges to the Appellate Body has to be taken by consensus. The US veto meant that no more judges could be appointed and in 2019 the Appellate Body stopped functioning.

‘The reason why this is a problem is not just that losing parties can’t appeal decisions,’ Bartels says. ‘The problem is that there is a right of appeal – the first part of the dispute process continues as before – but when a losing party appeals, that stops the whole process because there is no binding first-instance decision until an appeal has been heard. So, basically, it is a way for losing parties to block a decision that has gone against them. That is called appealing into the void because, in theory, a WTO member that loses a case can stop it having any legal effect.’

As of December 2023, there were 30 pending appeals.

Workarounds

There is an alternative forum for appealing WTO decisions. The Multi-Party Interim Appeal (MPIA) mechanism was established in 2020 in response to the dissolution of the Appellate Body. It has 53 participating countries, including the EU and China – but not the US or the UK, though the UK has been an active participant in WTO dispute resolution reform negotiations.

Under the MPIA, parties can appeal a decision of a WTO panel to a tribunal of three expert arbitrators (chosen from a roster of 10), whose decision is legally binding. Like the Appellate Body, MPIA arbitrators must issue their award within 90 days of the notice of appeal, but they also have the flexibility to streamline proceedings by setting word and time limits for written and oral statements. Consequently, the two awards made so far were delivered within the 90-day deadline. Another eight appeals are ongoing and three have settled.

There are currently about half the number of WTO appeals there were in 2019. The MPIA’s success means that this cannot be explained by the suspension of the Appellate Body, observes Bartels, suggesting that it is more likely due to strategic factors. ‘It is a more protectionist trading environment, so a [country’s] decision to bring a case to the WTO might impact its subsequent activities,’ he says. ‘For example, you might have the opportunity of an easy win by suing the EU on its green tech subsidies, but you wouldn’t want to do that if you were subsidising your own green tech.’

Catrain observes: ‘While China has been at the forefront of some interesting cases, I’m not sure that Appellate Body decisions have had the major impact that some expected in terms of further trade liberalisation, or bringing some of the Chinese [trade] practices within the discipline of the multilateral rules system.’

Retreat from globalisation

Bartels explains that geopolitical tensions and socioeconomic factors such as Covid have raised awareness of the potential consequences of becoming overdependent on one supply source. As a result, countries are retreating from globalisation and supporting domestic industries. This

is being played out differently in the US and the EU, which can lead to disputes. The green agenda further complicates the situation.

US trade legislation is providing economic support for onshoring production in key industries. Christian Lau, a partner in Dentons’ trade, World Trade Organization and customs group in Brussels and Geneva, observes: ‘While there are fewer [WTO] cases than there used to be, there are still big-ticket items. This includes China’s ongoing complaint against the US Inflation Reduction Act, a signature policy of the Biden administration.’

The Inflation Reduction Act was introduced in 2022 to promote domestic electric vehicle (EV) production and renewable energy projects. The Chinese government claims that the act discriminates against Chinese goods in violation of the General Agreement on Tariffs and Trade and other WTO measures. The case is ongoing and the US has accepted China’s request to enter into consultations.

On 14 May, president Biden announced higher tariffs on Chinese products across seven ‘strategic’ sectors: steel and aluminium; semiconductors; electric vehicles; batteries, battery components and parts, and critical minerals; solar cells; ship-to-shore cranes; and medical products.

Lau also cites the US Creating Helpful Incentives to Produce Semiconductors and Science Act 2022, which aims to lure microchip manufacturing back to the US after several decades of offshoring, as another area of concern. As yet, however, this has not been challenged.

The EU is also using legislation to reduce China’s dominance. The 2023 Foreign Subsidies Regulation enables the commission to address distortions caused by foreign subsidies, which provide recipients with an unfair advantage to acquire companies or obtain public procurement contracts in the EU. Kotsonis recalls a commission investigation into whether Chinese bidders to provide train rolling stock in Bulgaria were being subsidised by the Chinese government.

Another commission investigation looked into low-priced EV imports from China into the EU. On 11 June the BBC reported that it is widely expected the commission will provisionally increase duties to level the playing field. One problem is that tariffs and subsidies in the automotive sector are complicated, because many European brands have manufacturing plants in China and export to Europe.

China reciprocated with an investigation into French brandy and other products ‘dumped’ on China, but there has not yet been a formal complaint.

Green concerns

Environment is a hot topic for trade remedies and disputes. The EU’s Carbon Border Adjustment Mechanism (CBAM) was introduced to ensure that the price of carbon-intensive imports matches the price of equivalent domestic production and that the EU’s climate objectives are not undermined. ‘Some countries are saying imports from countries with lower environmental standards create unfair competition because their production costs are lower,’ explains Kotsonis.

Catrain, who is advising a third country on dispute settlement involving CBAM, expects further disputes as developing countries feel they are disadvantaged.

Lau highlights another environmental dispute, in which Malaysia successfully challenged the EU over a decision to prohibit palm oil imports in relation to deforestation. The outcome was that under WTO rules countries can adopt climate-related measures, but they need to do so in an even-handed manner that does not burden their trading partners.

‘Secret weapon’ for fossil fuel

The controversial investor-state dispute settlement (ISDS) arbitration system enables companies to bring cases against countries whose policies threaten profits. It has resulted in $114bn of public money being awarded to investors in fossil fuel corporations, an amount roughly equivalent to the $116bn in climate aid provided by developed countries in 2022 (according to Organisation for Economic Co-operation and Development data).

These arbitrations are largely held in private. However, the Global ISDS Tracker – a joint initiative from the Transnational Institute, the Trade Justice Movement and PowerShift – includes data on more than 1,300 cases. These cases have been considered by ISDS tribunals set up by investor-state dispute mechanisms in treaties such as the Energy Charter Treaty (ECT), from which the EU withdrew on 30 May. While the UK announced its withdrawal from the ECT on 22 February, it is signed up to more than 80 trade deals containing the ISDS mechanism.

Tom Wills, director of the Trade Justice Movement, told the Guardian: ‘The data backs up what we’ve been saying for years: ISDS is the secret weapon for fossil fuel companies against climate laws. Corporate courts are also used to threaten governments not to give in to popular local or national demands for climate action. This needs to be put to an end.’

Doug Parr, chief scientist at Greenpeace UK, said: ‘ISDS are not fit for purpose for a world now in a climate emergency. They seek to protect investors in fossil fuel infrastructure but do nothing to hold them accountable for planet-wrecking activities. It’s the latter that the world now badly needs, not the former. If trade and investment is not supporting the fair transition to a climate- and nature-friendly society, it deserves no protection.’

Post-Brexit

Bilateral negotiation is of course another mechanism to avoid disputes. Catrain explains that bilateral free trade agreements such as the EU-Canada free trade agreement have dispute settlement mechanisms: ‘The EU has been reasonably constrained in bringing disputes, another aspect showing that dispute resolution is not the preferred course of action.’

'To some extent, the US and EU have been seeking to coordinate their respective trade measures, but where does that leave Canada and the UK?'

Totis Kotsonis, Pinsent Masons

However, as Kotsonis observes, this is concerning for the UK, because if EU legislation blocks China from exporting into Europe, and the US continues raising its tariffs, China will be forced to look for other markets and the UK is an obvious choice. Since 2021 the US and UK have had a forum for bilateral discussions, the EU-US Trade and Technology Council, where, Kotsonis says, ‘to some extent, the US and EU have been seeking to coordinate their respective trade measures’. But ‘where does that leave Canada and the UK?’, he asks.

Following its sixth meeting in April, the EU-US Trade and Technology Council published a joint statement on areas of cooperation. ‘The UK is not part of that dialogue,’ explains Kotsonis. ‘Consequently, the rules governing international trade are being defined by two big players – the EU and the US. For a long time, we weren’t going to go with the CBAM, but now we are. It’s a reflection of our standing in the world that we can’t ignore what others are doing. If we do there will be dumping on our market. The system has become more complicated, and for smaller players like the UK, the choices are harder.’

'We are living in a world of enhanced tension but there is cooperation on how to resolve trade disputes in a peaceful manner by the rule of law and not by force or might'

Christian Lau, Dentons

Trade agreements with in-built dispute mechanisms are increasingly providing frameworks for related commitments. Lau points out that the United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement in 2020, is the first free trade agreement to include labour rights.

‘If trade agreements include related disciplines, you have a somewhat enforceable commitment often lacking in other areas of public international law,’ says Lau. ‘For example, one reason the WTO is negotiating on fisheries subsidies is because we want to limit overfishing and subsidies that contribute to overfishing. When we do that at the WTO, at least in principle we have a binding dispute settlement that can be enforced if need be, but this is really about sustainability, not trade.’

Law, economics and geopolitics all contribute to decisions about whether to initiate trade disputes and this plays into WTO reform. On 30 May, WTO members held their first formal meeting on dispute settlement reform. Discussions revealed a ‘strong appreciation for the dispute settlement system overall’ and a strong interest in maintaining a two-tiered system.

As Lau observes, the WTO provides a forum for discussion between nations even when conflict disrupts global supply chains. Notwithstanding the trade sanctions against Russia, the 2022 Agreement on Fisheries Subsidies included the US, Russia and Ukraine. And on WTO reform, Lau concludes: ‘We have the US and China talking about how to change the rules for settling trade disputes. We are living in a world of enhanced tension but there is cooperation on how to resolve trade disputes in a peaceful manner by the rule of law and not by force or might.’

 

Joanna Goodman is a freelance journalist