The Procedural Inconsistency of the Envisaged EU Enforcement Regulation with the EU’s WTO Obligations

[Trung Nguyen is a Research Fellow at the Max Planck Institute Luxembourg for Procedural Law.]

With its appellate function came to a halt on the 10^th of December 2019, the World Trade Organization (‘WTO’) is unlikely to be an attractive venue to settle international trade disputes at the moment or in the near future. The non-functioning of the WTO Appellate Body (‘AB’) presents the problem that the loosing party in a WTO dispute can circumvent an unfavourable ruling of the first-stage WTO Panel by ‘appealing into the void.’ To overcome such an impasse, the European Union (‘EU’) has come up with two initiatives to discharge its right to enforce international trade rules. Multilaterally, the EU led the establishment of a multi-party interim appeal arbitration arrangement (‘MPIA’) to set up an arbitration mechanism based on Article 25 of the Dispute Settlement Understanding (‘DSU’). The MPIA mirrors the main features of the AB and aims at permitting the participants of the Agreement (So far, the MPIA has attracted 22 participants) to file for an appeal if they are not satisfied with the first-stage panel’s findings. At the EU level, the European Commission (‘the Commission’) has proposed to amend the Regulation (EU) No. 654/2014 (‘EU Enforcement Regulation’) concerning the exercise of the EU’s rights to the application and enforcement of international trade rules (‘the Proposal’). The Proposal aims at ‘protect[ing the EU’s] trade interests despite the paralysis of the multilateral dispute settlement system in the World Trade Organization.’ This contribution will argue that under WTO jurisprudence, the Proposal might be incompatible with EU’s procedural obligations under the DSU of the WTO.

The background and rationale to amend the EU Enforcement Regulation

The EU Enforcement Regulation allows the EU to adopt trade sanctions (eg. increased custom duties, quotas on imports or exports of goods, or other measures in the public procurement sector) on the losing party after the EU has secured ‘a win’ in a trade dispute at the WTO. Under Article 3 (Scope), the trade sanctions would be imposed when the WTO Dispute Settlement Body (‘DSB’) adopts the relevant WTO Panel or AB report (if appealed) and authorises the EU to suspend the concessions or other obligations of the losing party under the WTO Agreement. However, in the current state of affairs, the Commission lacks the legal mechanism to impose trade sanctions, as the losing party at the Panel stage can circumvent a DSB’s decision simply by filing for an appeal under Article 17 of the DSU, which would normally be dealt with by the AB. However, due to the continuing difficulty of appointing the AB members, an appeal to this body would effectively stall the procedure and prevent the Commission from imposing trade sanctions under Article 3 of the Enforcement Regulation.

The Proposal came to life to address this deficit. To overcome the current deadlock, the Proposal specifically asks for an extension of the scope of Article 3 of the Enforcement Regulation to cover situations where:

‘a WTO panel report upholding claims brought by the EU is circulated, and an appeal under Article 17 of the WTO Dispute Settlement Understanding (“DSU”) cannot be completed and if the third country has not agreed to interim appeal arbitration under Article 25 of the WTO Dispute Settlement Understanding’ (lit. (aa))

Essentially, the proposed amendment would allow the EU to retaliate against the losing party in situations not currently covered by Article 3, where the latter circumvents the outcome of a WTO dispute either by filing an appeal ‘into the void’ and not agreeing to move the case forward with arbitration under Article 25 DSU.

The Proposal will be subjected to an ordinary legislative procedure where it requires the approval of EC member states gathered in the Council and the European Parliament before it can become effective.

The compatibility of the Proposal with Article 23.1 of the DSU

The Proposal makes sense to the point that it would allow the EU to retaliate when it secures a positive outcome at the WTO Panel stage and prevent the losing party from abusing the current deadlock at the WTO dispute settlement system. In this sense, if amended, the EU Enforcement Regulation can strengthen the rule-based system by inducing other WTO members to join the MPIA if they want to have another day in court, instead of being faced with retaliation after the WTO Panel stage. The problem here is that: when a non-MPIA member makes an appeal under Article 17 DSU and the EU retaliates against that member under the envisaged Article 3 of the Regulation, the EU would, then, seek for redress of a violation of obligations under the WTO covered agreements on the basis of an unilateral decision by the EU, instead of an authorized DSB’s decision.

Empirically speaking, the WTO shows a strong distaste for using unilateral measures to seek redress of violations of WTO rules without going through the WTO dispute settlement procedures. Article 23 of the DSU, perhaps one of the most important provisions of the WTO Agreement, provides that:

‘1.When Members seek the redress of a violation of obligations or other nullification or  impairment  of  benefits  under  the  covered  agreements  or  an  impediment  to  the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.’

This provision’s goal is to emphasize ‘the primacy of the multilateral system and [the rejection of] unilateralism as a substitute for the procedures foreseen in [the WTO Agreement]’ (Panel Report, US – Shrimp, para. 7.43). As such, WTO law discourages attempts to redress non-compliance of WTO obligations by taking self-help countermeasures, including measures that are wholly consistent with the WTO Agreements.

A telling example was set in the EC – Commercial Vessels dispute between the then-European Community (‘EC’) and the Republic of Korea (‘ROK’). The dispute concerned the Temporary Defensive Mechanism for Shipbuilding (‘TDM Regulation’) adopted by the EC to make compatible contract-related operating aids provided by the EC member states for the building of certain ships. The TDM Regulation was implemented by the EC as a response to ROK’s subsidy of its shipyard and was part of a process that included launching its own case against ROK’s subsidy at the WTO. In EC – Commercial Vessels, the WTO Panel found that the TDM Regulation did not violate any substantive WTO obligations since it constituted ‘the payment of subsidies exclusively to domestic producers’ and was exempted under Article III:8(b) GATT. However, on the procedural ground, the Panel concluded that because the EC’s subsidy was enacted to seek unilateral redress for EC’s rights under the WTO treaty against the ROK, it violated Article 23.1 of the DSU. In the Panel’s view, the concept of ‘seeking the redress of a violation’ under Article 23.1 does not ‘encompass the situation where a Member takes actions to compensate or attenuate the harm caused to actors within the aggrieved Member as a result of the allegedly [WTO-inconsistent] action’ (para. 7.197).

In short, even a perfectly legal, WTO-consistent measure that is adopted to restore the balance of rights and obligations and to redress purported violations of the WTO covered agreements can contravene WTO obligations, if it is adopted to seek redress of violations of WTO obligations in a unilateral manner without going through the WTO dispute settlement process.

Returning to the Proposal, in the ‘policy considerations’ section, the Commission relies on general public international law and the Draft Articles on Responsibility of States for Internationally Wrongful Acts to show that countermeasures in form of trade sanctions is compatible with EU’s international legal obligation where they can be imposed under certain conditions, such as proportionality, prior notice, and when one party ‘fails to implement the dispute settlement procedures in good faith or where a State party fails to cooperate in the establishment of the relevant tribunal.’ These claims are not without merit, as the envisaged trade sanctions are arguably compatible with the EU’s international obligation on the substantive side and can be used as ‘a stick’ to buttress the multilateral rule-based system and to protect its market. Nevertheless, the Proposal fails to address the procedural side of the story, which is how the envisaged trade sanctions could be implemented without bypassing the WTO dispute settlement process when a WTO member file for an appeal under Article 17 DSU. The multilateralism and exclusive tone of the WTO, in case of addressing WTO violations, are not only set by the abovementioned case, but also are well addressed and emphasized in other landmark rulings of the WTO adjudicatory bodies (See eg. US – Section 301, Mexico – Soft Drinks). Given the explicit rule requiring the EU to ‘seek […] the redress of a violation’ (Article 23.1 DSU) concerning WTO rights only through the WTO dispute settlement process, there is room to argue that the Proposal might be incompatible with WTO laws on the procedural ground.

Conclusions

Extraordinary times call for extraordinary measures. If there were a ranking for those that favour unilateralism in international trade, the EU would rank very low on such a list. The benefits brought by the ability to counter abusive practices of the stalling condition of the WTO dispute settlement system could arguably outweigh other considerations, such as the possibility that other WTO members may challenge the future-amended Regulation at the WTO. However, when protectionism and unilateralism, like the spectre of Hamlet’s father, hang over today’s affairs; the EU should be cautious not to be pulled to the dark side.