Of trade disputes

(published in the June 2011 issue of Billionaire Magazine)

Anatomy of a conflict

There are two ways to look at trade disputes: one is to view it as an unfortunate state of affairs, by which each country treats the other country as engaging in inconvenient behavior. The other is to consider it positively and look at it as an opportunity to manage better the relationships among States and determine a more efficient way of allocating scarce resources.

Trade disputes are better seen from the latter view, chosen from a list of voluntary options that, because of their legal nature and circumstances, could offer benefits that easily address the short-term needs of States. The term "conflicts" is a general term, indicating a "general state of hostility between the parties." "Disputes", on the other hand, refers to an actual specific disagreement, by which rights or interests of a party has been violated and which entitles parties to proceed against each other by a series of inter-locking claims, counter-claims, and so on.

Trade disputes are normally initiated at the WTO level if a member considers that any benefit accruing to it directly or indirectly under the WTO agreements are being “nullified or impaired or that the attainment of any objective [thereof] is being impeded as the result of (a) the failure of another contracting party to carry out its obligations under th[e WTO agreements], or (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of th[e WTO agreements], or (c) the existence of any other situation.” Which is a long, convoluted way of saying that WTO members can file cases anytime they feel like it.
The Philippines, for example, is currently locked in several trade disputes at the WTO. There is DS371, formally designated as Thailand — Customs and Fiscal Measures on Cigarettes from the Philippines. There’s also Philippines – Taxes on Distilled Spirits (docketed as DS396). Then there are the two complaints filed in 2002 against Australia (DS270 and DS271), and our third-party complaints in DS375/376/377- EC Measures on certain ITA Products, that were concluded last year.
The stakes for these cases are unimaginably high. Despite the innocuous or dry sounding titles of the cases, EC’s (later joined by the US) whiskey complaint against the Philippines, for example, involves trade valued in the hundreds of millions of dollars. The complaint in this case centers on whether Philippine excise taxes on distilled liquor (as imposed by RA 9334) discriminate against imports and in favor of domestic products. The Thai cigarettes complaint, involving allegations of Thai discrimination against cigarettes imported from the Philippines, would have an effect on 95% of Philippine cigarette exports. An incredibly historic WTO case that had a huge effect on the Philippine coconut industry went by the harmless sounding title ”Desiccated Coconut”.

Anatomy of a complaint

The first significant stage of a WTO dispute would be the “consultations stage”.
By provisions of Article 4 of the WTO Dispute Settlement Understanding, if a request for consultations is made, a reply to such request must be made by the requested country within 10 days after the date of its receipt and shall enter into consultations in good faith within a period of no more than 30 days after the date of receipt of the request, with a view to reaching a mutually satisfactory solution. If the consultations fail to settle the dispute within 60 days after the date of receipt of the request for consultations, the complaining country may request the establishment of a panel. The complaining country may also request for a panel during the 60-day period if both countries jointly consider that consultations have failed.

However, it may be almost axiomatic to say, in a manner that would make Clausewitz proud, that the outcome of the dispute is settled even before the first documents or pleadings had been filed in the case. International law experts George
Norman and Joel Trachtman:Measuring the Shadow of the Future: An Introduction to the Game Theory of Customary International Law presented “a game theoretic model to identify the circumstances under which States have a rational incentive to comply with customary international law”. The reason as to why States do follow international law is a topic deeply discussed even in law school’s early days. For Norman and Trachtman, State compliance depends on the magnitude of the “shadow of the future” and how such could be employed to increase chances of compliance. According to their theory, a State complies with customary international law out of fear that if it doesn’t it will result in it being unable to realistically invoke international law at a future date when it needs to.

The point here is that it would be interesting to see what inputs game theory could provide on the probable outcome of trade cases. This is because, while normally one would think that the moment a dispute comes before a panel then chances are 50-50 for either party. However, this apparently is not so according to the 2002 findings of Andrew Guzman of the University of California, Berkeley, in his paper The Political Economy of Litigation and Settlement at the WTO. He found that complainant countries (or countries that complain against other countries’ trade barriers) in WTO disputes have almost a 90% chance of winning. These findings were corroborated in A Theory of WTO Adjudication by Juscelino Colares of Syracuse University, which made use of empirical analysis of WTO adjudication from 1995 through 2007, revealing again a high disparity between complainant and respondent countries’ success rates: Complainants do win 90% of the time. This rather unfortunate statistic is obviously well above the “win rate” of any domestic legal system (or any other international dispute system for that matter).

Anatomy of a dispute

As stated above, the proceedings begin with a “consultation”. Think of the consultations stage as the domestic litigation equivalent of pre-trial proceedings. If consultations fail to settle a dispute, the complaining party can now request for the establishment of a panel.

Panels are usually made up of three members (sometimes, in quite rare instances, five). Panel members are selected with a view to ensuring the independence of the members, a sufficiently diverse background and a wide spectrum of experience. When a dispute is between a developing country Member and a developed country Member (as in the case of DS396), the panel shall, if the Philippines so insist, for example, include at least one panelist from a developing country Member. The panel’s powers are usually laid down in what is called the terms of reference. Normally, the terms would read something like: "To examine, in the light of the relevant provisions in (name of the covered agreement(s) cited by the parties to the dispute), the matter referred to the DSB by (name of party) in document ... and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in that/those agreement(s)." Parties, of course, are free to add any other term they can agree upon and the panels are to address the relevant provisions in any covered agreement or agreements cited by the parties to the dispute.

Where more than one WTO Member requests the establishment of a panel related to the same matter (again, as in the case of DS396, where, apart from the EU, the US has already indicated filing a complaint against the Philippines) a single panel may be established to examine these complaints taking into account the rights of all Members concerned. Single panels are encouraged to be established to examine such complaints whenever feasible.

Also, as in the case of DS396, several countries (including China and Thailand), have indicated interest in the case as “third parties”. A third party is any WTO member having a substantial interest in a dispute. It shall have an opportunity to be heard by the panel and to make written submissions. A third party could eventually morph into a complainant in its own right and in such a case, the dispute shall be referred to the original panel wherever possible.

After the panel process, a party may appeal to the Appellate Body, which works as some sort of “supreme court” of the WTO. Unlike our Supreme Court, however, the AB may only uphold, modify or reverse the legal findings and conclusions of the panel but not remand.

The interesting thing about it is that, after all is said and done, where a panel or the AB concludes that a law or measure is inconsistent with a WTO agreement, it merely recommends “that the Member concerned bring the measure into conformity with that agreement”. A finding of damages, unlike in domestic litigation, is rarely given in a WTO proceeding. Furthermore, it’s not, technically, the panel or the AB that “decides” a case. That power is with the Dispute Settlement Body, which is composed of the 154 members of the WTO, voting by way of a bizarre, quite futile, procedure called the “reverse consensus”.

The beauty (and the power) of the WTO dispute system has to do with its speed and efficiency. It is, simply put, the most effective international dispute settlement system around today. Victors, of course, could crow back to their home constituencies and continue to laud the benefits of the global trading system. Losing governments, on the other hand, are not necessarily left completely beaten. They could also go home happy. For any policy measure that they have longed to implement but were afraid to due to political consequences, the losing government could finally implement their desired policies and shift the blame on the WTO for "forcing" them by way of the adverse ruling. In the meantime, business must go on for both the companies of the winning and losing companies.

All of the above also underlines one important thing: international trade disputes are really no places for domestic industries involved to engage in flaky thinking or grandstanding. Particularly as international trade dispute litigation is a hugely expensive (not to mention research intensive) affair, for which domestic industries have a (general) tendency to be suddenly work shy despite their heated patriotic rhetoric.