Is #WTO a Good Model for #ISDS Reform?

Whoa, acronym city!

Earlier this week, I mentioned how the European Union partly modeled its new investment court proposal on the World Trade Organization. We can draw on the vast literature on the WTO to begin to assess how effective, legitimate, authoritative, and independent this new body could be.

How WTO Disputes Work, in Brief

While newspaper coverage of the WTO for the last 15+ years has focused on negotiators’ inability to complete a ninth round of trade talks (i.e. the Doha Round), the 1994 Uruguay Round set up a powerful infrastructure that has conducted business every day since. The Dispute Settlement Understanding is one of the multilateral deals under the WTO umbrella.* It lays out procedures for countries to challenge one another’s alleged violations of the substantive rules of the other 17 pacts.

If countries cannot amicably resolve a dispute, the complainant can ask the WTO Secretariat to appoint a three-member panel to hear their case. These individuals can (but needn’t) come from a list of available panelists maintained by the Secretariat. While the countries can object to the individual nominees, the Secretariat has the default authority to go ahead with the panel in the case of gridlock. The panel then proceeds to rule on the merits of the case.

Countries can appeal panel decisions. The WTO’s Appellate Body is composed of seven geographically diverse adjudicators, who are appointed to a four year term (once renewable). Three of the seven are selected to hear each appeal, which are limited to reviewing legal issues (not facts). After the panel and/or Appellate Body issue their decisions, the Dispute Settlement Body (which has a representative from each WTO member country) votes to adopt them. The bar to non-adoption is high: every country must agree to do so, including the country that “won.” As a result, non-adoption has never happened.

If there is disagreement about whether a “guilty” respondent country has sufficiently changed their policies after a “reasonable” amount of time (which is set between the countries or by an arbitrator), then the original panel can be reconvened to assess compliance. Their determination can be appealed to the Appellate Body. In the event of any dispute about the amount/sector of permissible retaliation, the original panel or an arbitrator(s) decides. The amount of retaliation cannot exceed the amount of damage the complaining country incurred, although it needn’t be in the same industry or sector. For example, if Country A harms Country B’s steel exports in a way that violates WTO rules, then Country B could raise tariffs on Country A’s bananas, or violate their copyrights.

Which Is Best?

Is the WTO, ISDS Status Quo, or ISDS Tribunal preferable? I’ll follow Tamar Gutner and Alexander Thompson’s three metrics for evaluating international organizations: policy outcomes (real world benefits and costs), policy outputs (did decisions contribute to those benefits and costs), and policy operations (are internal procedures efficient, fair, etc.).

At the outset, I should say that there are conceptual difficulties in linking operations and outputs of courts to real world outcomes. As explained here and here, courts may be most effective when they don’t rule, and more influential when cases are never brought. It’s hard to say that non-cases “caused” more trade, or that a case “caused” trade that might have happened. Accordingly, I’ll be briefest on the outcomes component.

Policy Outcomes

The WTO has trade in its name, so that’s a fair place to start. A recent survey of the economics literature found that the WTO may have increased global income by up to about a percentage point, and may have doubled global imports.

Note what this is really measuring: not the WTO per se, but the welfare impact of each member’s sovereign decision to lower tariffs. The WTO is merely the legal framework backstopping that collection of autonomous decisions. It might be more appropriate to look at whether the WTO prevented backsliding on those tariff commitments. As Dan Drezner notes in his recent book, the WTO system worked (in this narrow trade openness sense) during the Great Recession. While countries faced domestic political pressures to protect industries in the face of rising unemployment, few did so. This is because the WTO changed countries’ calculation of their own interests (if I raise tariffs, I will face retaliation), and also changed ideas about what is acceptable policy in the 21st century. Drezner finds similar patterns for global investment flows, suggesting that the thousands of ISDS pacts are at least consistent with FDI. However, there is a considerable spread in the academic literature on whether investment pacts are responsible for this increase in FDI.

If linking the international economic agreements to actual trading activity is hard, linking them to changes in non-trading activity is even harder. In the interest of space, I won’t even attempt to parse those issues here (beyond what I mention below).

Policy Outputs

Let’s focus even more narrowly on the marginal contribution of the dispute settlement functions, which have been called the “the jewel in the crown of the WTO.” Have their rules contributed to the real world outcomes noted above?

Conflict avoidance / management: Research shows that the introduction  increased the number of declared trade disputes, but shortened their duration. This may not tell us much, however: the comparison is to a world where effective international dispute settlement didn’t exist. If we compare the universe of total claims that could be brought under the WTO regime to the number that is actually brought, the number appears to be low. Moreover, out of over 500 cases that have been filed, only 20 go as far as the final arbitration phase I mentioned above. These findings are consistent with the notion that the threat of litigation helps countries preemptively settle their disputes.

Consistency: If disputes are settled or litigated efficiently, it could be that the DSB is deciding predictably. While there is no system of binding precedent, both adjudicators and WTO members act as if there were. Consistency creates stable doctrine, which presumably promotes business and government planning.

Compliance: The WTO is unique in that it is the only legal system I know of where the complaining plaintiff wins (at least in part) over 90 percent of the time. Given that record, it is surprising that compliance appears to be high, at least in the case of traditional trade disputes. However, this is not the full story. More recent cases over non-tariff issues have provoked slower compliance or even non-compliance.

Retaliation: As noted above, the mechanism for retaliation is a suspension of equivalent trade concessions. This has been criticized for being inherently difficult to calculate, for further distorting rather than liberalizing trade, and for doing nothing to compensate for past (and during-litigation) harm of the WTO violation. More fundamentally, a country’s ability to meaningfully retaliate is only as good as its relative economic might. Poorer countries cannot credibly retaliate against rich countries, as their imports from richer countries are low relative to the size of rich country economies.

Which is Best? Would ISDS benefit from being more like the WTO? In some ways, yes. While official statistics show that a third of formally launched ISDS cases are settled, there is also evidence that the inconsistencies across tribunals (see here and here) increase uncertainty and invite excessive litigation. Moreover, ISDS tribunals tend to work very slowly. In these respects, a move to a more institutional bench with streamlined case law and time limits could be an improvement. In other ways, it would make no difference. ISDS already accomplishes (and would continue to accomplish, under the EU proposal) some things that the WTO lacks and some want, like ease of enforcement, high compliance, backward-looking remedies, and private investor access.

Policy Operations

As I noted in the previous post, a core part of the EU investment court proposal is to create tenured judgeships. This is a big move from the ad hoc system ISDS uses today. And it’s no coincidence that the EU Proposal looks like the WTO Appellate Body. The European Union has long advocated that even the WTO’s own ad hoc WTO lower panels should look like the Appellate Body.

The move assumes that more formal procedures will lead to more independence and thus legitimacy. The WTO experience casts doubt on these claims.

Formal independence = real independence? First, the lower panel will still have an appreciable bit of discretion in what it discusses, and what is elevatable to the appellate body. Research has shown that WTO panelists have used their similar discretion to benefit rich countries. The EU proposal will address this somewhat, by allowing the Appellate Tribunal limited review of facts, and by reducing panelists’ pressure to be reappointed each case. But research shows a increasing politicization of even the tenured WTO Appellate Body. According to Gary Hufbauer, for instance, the U.S. pushed out an Appellate Body member who was up for reappointment, perhaps wanting “a judge who is more attentive to US positions in future cases.” So, formality is not a silver bullet.

Independence = legitimacy? Even if the Investment Tribunal were to achieve higher independence, this would not necessarily lead to more legitimacy. I provided several reasons yesterday, but the WTO offers further support. First, Judith Goldstein and Richard Steinberg argue that the WTO’s formal independence from litigating states has insulated it to the point where it pursues a single-minded focus on trade expansion. The placing of trade above other competing values has triggered lasting legitimacy problems. Second, Joost Pauwelyn has found that the WTO uses more adjudicators from less developed countries than does ISDS.  Under the EU’s TTIP proposal, that would likely be true as well (as the chair of cases has to be from neither the US or EU). While such a reform might be desirable in some cosmopolitan sense, it might not help sell unpopular opinions back home. Finally, the EU even envisions the possibility of having the US and EU governments fund the Investment Tribunal. I think it would be very unpopular to have the public subsidizing a forum for foreign investors to sue the public. Granted, that is what we do through our court system – but that’s more firmly embedded in a domestic political and constitutional structure.

Conclusion

The WTO has been around for nearly 20 years, and still hasn’t firmly established its legitimacy.** ISDS has been around for longer, and faces its own legitimacy problems. Mixing the “strengths” of the two systems could make things worse on this front. Respondent states win more than investors in ISDS, while they lose 90 percent of the time at the WTO. If the move to an institutional investment bench promotes more speed and coherence in case law at states’ expense, this will be popular with investors – and less so with states and broad publics.

Indeed, some of the perceived weaknesses of the WTO relative to ISDS may help insulate it from some sources of blowback. While ISDS decisions are enforceable in third country courts, the WTO puts the obligation to comply squarely with the respondent country, who can find the most politically palatable way to move forward. And while the WTO’s retaliation devices might seem monetarily modest relative to ISDS, this is also a strength: the incentives are on returning to a path of future economic cooperation, rather than litigation-driven payouts.

Legitimacy of a court’s operations with the public is not the only way to evaluate the WTO or ISDS. Indeed, outcomes and output are also important. And international law is often sold as a way to help achieve certain real world outcomes by insulating states from democratic pressures. But given that the EU reforms are explicitly sold as a way of addressing legitimacy defects, it is worth asking whether they are well poised to do so.

If you’re interested in more on evaluating the WTO’s effectiveness, a recent paper by Manfred Elsig, Bernard Hoekman, and Joost Pauwelyn provides a useful overview.

 

Footnotes

* These include GATT 47, GATT 94, Agriculture, SPS, TBT, TRIMS, Anti dumping, Customs Valuation, Preshipment Inspection, Rules of Origin, Import Licensing, SCM, Safeguards, GATS, TRIPS, GPA (Plurilateral), and the Information Technology Agreement (where some countries go further on their basic GATT commitments). Additionally, countries could agree to allow the DSB to hear cases related to Aircraft. The Understanding on Financial Services may come into play in some cases. Agreements on dairy and textiles have been phased out. Finally, the WTO Marrakesh Agreement sets up much of the WTO structure.

** It’s worth noting that we have little empirical basis – survey or otherwise – to estimate the extent of this legitimacy crisis.

Advertisements

3 Comments

Filed under Uncategorized

3 responses to “Is #WTO a Good Model for #ISDS Reform?

  1. Pingback: Political Isolation in EU #ISDS Proposal | Todd N. Tucker : Under Two Ceilings

  2. Pingback: What would be the consequences of pulling out of the WTO? | Todd N. Tucker : Under Two Ceilings

  3. Pingback: What Would Be the Consequences of Pulling Out of the WTO? - Roosevelt Forward

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s