With the expiration yesterday of the terms of two of the WTO Appellate Body’s three remaining panel members, the WTO’s appellate court has lost quorum and can no longer function.

The Appellate Body served a critical function within the WTO’s international trade dispute resolution framework as the final arbiter of appeals from reports issued by the WTO’s lower court, the Dispute Settlement Body (“DSB”).  The Appellate Body has jurisdiction to uphold, modify or reverse the conclusions of a DSB panel, and once adopted by the DSB the Appellate Body’s decision is binding upon the parties to the dispute. Pursuant to the Understanding on Rules and Procedures Governing the Settlement of Disputes (the “Dispute Settlement Understanding”), the seven-member Appellate Body must have at least three sitting members in order to function. As of December 10, 2019, it has only one.

While the DSB can (and will) continue to hear cases, appeals of its decisions brought by disputing parties will effectively languish in limbo now that the Appellate Body has ceased to function. This has the practical effect of depriving the WTO dispute resolution regime of the certainty, finality and binding nature of Appellate Body decisions.

The loss of the Appellate Body’s three-member quorum is the result of the United States’ ongoing refusal to approve the appointment of new Appellate Body members.  For a number of years, the United States has exercised its veto to block the appointment of new Appellate Body members put forward to replace those whose terms of office were expiring, while also withholding budget allocations for the Appellate Body. The meeting of WTO ambassadors from the organization’s 164 member countries that convened earlier this week yielded no change in the United States’ position, as it continues to prefer to advance its interests by means of the unilateral imposition of tariffs rather than the more ordered institutions of the multilateral trading system. By consequence, the Appellate Body has entered a state of paralysis which is expected to continue indefinitely. This will be especially important next year as the DSB will be releasing decisions regarding US steel and aluminum tariffs.

WTO Member Countries Establish Work-Arounds

Member countries have for months anticipated this loss of quorum, and have attempted to establish work-arounds that will allow the WTO dispute settlement structure to continue to operate – at least to some degree. In addition, certain reform proposals have been made, which will be covered in a future post.

On July 25, 2019, Canada and the European Union issued a Joint Statement announcing the creation of an interim appeal arbitration arrangement which will govern the resolution of disputes between the two parties until the Appellate Body resumes its functions (the “Interim Arrangement”). The Interim Arrangement was established pursuant to Article 25 of the Dispute Settlement Understanding, which allows WTO members to mutually agree to arbitration as a means of addressing trade disputes. In an effort to preserve the functions previously fulfilled by the Appellate Body, Canada and the EU stated that the Interim Arrangement is intended to “…replicate as closely as possible all substantive and procedural aspects as well as the practice of Appellate Review…” Norway has since signed on to the Interim Arrangement as well, though it remains to be seen whether larger economies such as China, Brazil, India or Russia will follow suit.

As a practical matter, appeals from DSB panel decisions will be heard by three former members of the Appellate Body, who will be appointed as arbitrators under the authority of Article 25 of the DSU. The Interim Arrangement also adopts by reference the working procedures that typically govern Appellate Body proceedings. Accordingly, disputes arising between any combination of Canada, Norway and the EU will be dealt with for the foreseeable future by means of the Interim Arrangement as a facsimile of the Appellate Body.

Increasing Reliance on Unilateral Measures

The Appellate Body’s loss of quorum can also be expected to result in member countries’ increased reliance upon unilateral trade sanctions.  For instance, the EU has signaled its intention to announce a new avenue for the imposition of tariffs on imports from countries that appeal DSB decisions to a non-functioning Appellate Body as a means of stymieing WTO litigation. 

In the absence of a final arbiter within the WTO multilateral system, member countries are that much more likely to resort to tit-for-tat trade sanctions as a means of addressing grievances – with all of the follow-on effects for businesses engaged in trade and, ultimately, their customers.