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WTO Retaliation Rights for Developing Countries: An Argument for Retaliation Based on Consequential Losses

01-11-2013

Bartels, L. 2013. WTO retaliation rights for developing countries: An argument for retaliation based on consequential losses. GREAT Insights, Volume 2, Issue 8. November 2013. Maastricht: ECDPM.

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It has been obvious for a long time that small developing countries are unable to force larger trading partners to comply with their World Trade Organization (WTO) obligations. The ongoing efforts of Antigua and Barbuda to force the United States to respect the WTO ruling in US – Gambling is a salient example.

The reason is simple. Article 22.4 of the WTO Dispute Settlement Understanding (DSU) permits a successful WTO complainant to retaliate by suspending obligations that are ‘equivalent’ to the ‘nullification and impairment’ caused by the illegal measure. This has traditionally been seen in terms of the trade lost as a result of the measure. The problem is that what is substantial for a small complainant can also be trivial for a large non-complying defendant. The damage suffered by Antigua and Barbuda was assessed at US$21m: around 4% of its exports. When converted into a stick, however, this only amounted to 0.002% of US exports.

In negotiations on the review of the DSU, developing countries have made various proposals to address this problem. One proposal is to make monetary compensation mandatory. Whatever its merits, this proposal also has some flaws. In the first place, it presupposes that monetary compensation is a positive outcome. In fact, there is no guarantee that any such compensation would flow back to the affected industries. The compensation paid in US – Section 110(5) went to a European performing rights agency, not the Irish performing rights agency on whose behalf the proceedings were originally brought. In addition, an obligation to pay monetary compensation would still need to be enforced, meaning that the problem is displaced, not eradicated.

A second proposal is to introduce collective retaliation, so that a complainant can auction its rights to retaliate to other countries. Again, this might seem better than the current situation, especially for WTO members who do not wish to ‘shoot themselves in the foot’ by suspending trade obligations. However, this proposal also only goes so far. At best, it is uncertain that any WTO members would wish to exercise any such retaliation rights. This is particularly the case given that the right to retaliate is expressly stated to be temporary, pending compliance, and so it might not be worth acquiring.

A third proposal is to enhance the right to cross-retaliate in another sector, which in practice often means suspending intellectual property obligations. At present, this is only possible when it is not practicable or effective to retaliate in the same sector at issue or under the agreement that was violated. The proposal currently on the table would remove this condition, resulting in an unfettered right to cross-retaliate. While certainly an improvement on the current situation, this proposal is also not a panacea, as the Antigua and Barbuda dispute shows.

Finally, there is an innovative proposal to impose administrative sanctions on recalcitrant wrongdoers. This proposal draws its inspiration from the sanctions applicable to WTO Members in budget arrears, which range from disqualification from participating in WTO committee work to a denial of access to training or technical assistance. This proposal has much to commend it, and one might also look for further inspiration to the EU, where wrongdoers lose more significant voting rights. But it is perhaps unlikely that this proposal will be successful.

Each of these proposals has some merit, but also deficiencies. It is therefore worthwhile reconsidering the source of the difficulty, which is the rule that value of retaliation must be ‘equivalent’ to the value of the damage suffered.

One way of doing this is to reassess the way the damage suffered by the respondent is assessed for purposes of Article 22.4. As mentioned, ‘nullification and impairment’ is traditionally assessed in terms of the trade that would have existed in the absence of the illegal measure. The problem, as others have noted, is that this takes no account of the full range of negative effects of that measure, and such effects can be of particular relevance when the complainant is heavily dependent on the trade that has been lost.

But it can also be argued that this traditional reading of ‘nullification and impairment in Article 22.4 is too narrow. This phrase is actually shorthand for the phrase ‘nullification and impairment of benefits accruing to [the complaining member] directly or indirectly under the covered agreements’. And what are these benefits? Contrary to the assumption underlying the current understanding of Article 22.4, these benefits are not limited to the trade flows that would have existed in the absence of the measure. The WTO agreements secure a range of benefits, some of which are contingent on the expectation of market access and non-discriminatory conditions of competition. For example, some panels have found violations of WTO rules on the basis that the respondent’s unpredictable behaviour created a climate inhospitable for trade-related investment (Japan – Leather II (US); Colombia – Ports of Entry).

In short, it is arguable that the benefit of WTO membership is not limited to lost trade expectations, but includes the economic consequences of those expectations being fulfilled. If one takes into account these lost benefits in determining the value of retaliatory measures, then WTO members should be able to retaliate by suspending WTO obligations valued not only in terms of expected trade flows, but rather in terms of the expected gains consequent upon those trade flows. This is of particular significance for developing country WTO members, for whom the value of these consequential losses may be significantly higher than the value of lost trade flows.

Dr Lorand Bartels is a University Senior Lecturer in Law and Fellow of Trinity Hall at the University of Cambridge.

This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).

Economic Transformation and TradeTradeWorld Trade Organisation (WTO)AfricaAntigua and BarbudaCaribbeanPacific

External authors

Lorand Bartels