Fixing fragmentation in the settlement of international trade disputes

Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs).

As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.

Governments historically used the WTO as their preferred forum but this changed after the WTO’s appellate court, the Appellate Body, stopped functioning in December 2019 because the United States blocked the appointment of new Appellate Body judges.

Appeal judges must be nominated by consensus, meaning objection by one WTO Member is sufficient to prevent the Appellate Body from being restaffed. The lack of a functional Appellate Body has stalled the WTO’s dispute settlement system as panel reports can now be appealed ‘into the void’, suspending the dispute until the appeal can be heard.

The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form it cannot properly address fragmentation.

Since its creation in 2020, the MPIA has only attracted 26 parties. Plus, the mechanism has only delivered appellate rulings and induced implementation in two disputes, while most panel decisions have been appealed into the void. The MPIA’s rulings have also not been consistent with previous decisions made by the Appellate Body on similar issues, rendering WTO case law increasingly fragmented.

As regards enforcement, the Appellate Body impasse fragmented the ways in which decisions are expected to be implemented. Here, it seems that a shift from strict compliance to more flexible approaches to settling disputes is underway.

Evidence of the growing use of dispute settlement mechanisms under FTAs is emerging. For instance, high-profile disputes were initiated and adjudicated under the United States–Mexico–Canada Agreement.

As governments increasingly have recourse to FTAs for settling disputes, similar fragmentation in trade law and enforcement is likely. While many FTA rules align with the WTO, FTA tribunals can develop new interpretations of similar provisions.

Moreover, tribunals under different FTAs may develop different interpretations of rules which go beyond the WTO rulebook. While this leads to case law creation, it may make trade law more fragmented. Simultaneously, the anticipated increase of disputes under FTAs may lead to similar fragmentation in enforcement.

Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Yet a multilateral solution will be difficult as key players remain widely divided on whether an appellate mechanism is desirable and how it should be reconstructed.

The United States has reiterated that a more flexible system is required to ‘maximise the tools available under the Dispute Settlement Understanding to assist WTO Members in resolving trade disputes’ and allow more efficient dispute resolution. This position contrasts those of other core members like the European Union and China. A joint submission by Bangladesh, Egypt, India, Indonesia and South Africa to the WTO on 12 April 2024 also emphasises the critical importance of restoring a functional appellate mechanism.

Reaching a consensus will be difficult, and negotiations will take time. Amendments to the Dispute Settlement Understanding must be adopted by consensus and apply to all members. This means that the multilateral approach for amendments of existing WTO agreements, which was used to create the Agreements on Trade Facilitation and Fisheries Subsidies, is unlikely to work.

Instead, a critical mass-based, open plurilateral provides a viable alternative way to reform the appellate mechanism. This approach is plausible because WTO Members are committed to reforming the dispute settlement system. It is pragmatic given the existing practice of developing plurilateral initiatives on contemporary issues within the multilateral framework — joint initiatives on  e-commerce and investment facilitation — when consensus is lacking.

For the WTO to regain its authority in interpreting and enforcing trade rules, a plurilateral appeal mechanism must involve a majority of WTO Members or at least the major users of the dispute settlement system.

This ‘critical mass’ is absent under the MPIA. The current MPIA parties may propose and lead such a plurilateral initiative for negotiation, open to all Members. While sub-optimal, this system would be more inclusive than any FTAs and more likely to develop the required authority. It should welcome non-participants to maximise its utility and influence and facilitate its expansion towards a multilateral framework.

Yet, to discourage the practice of ‘appealing into the void’, this mechanism should not be available to members continuing that practice. A ‘critical mass’ is crucial to generate community pressure on non-signatories, particularly regarding ‘appealing into the void’.

This plurilateral appeal system must address the criticisms of the Appellate Body and consider some of the creative approaches experimented by MPIA tribunals to avoid delays or rulings unnecessary for resolving disputes.

It must also ensure that the power to develop trade rules is strictly grasped in the hands of WTO Members. This would require mechanisms which provide Members the room to exercise necessary political oversight over judicial decisions.

This plurilateral solution will not eliminate fragmentation, and so should not be seen as an alternative to — but a necessary step towards — multilateralism.

Weihuan Zhou is Associate Professor and Co-Director of the China International Business and Economic Law Centre, Faculty of Law and Justice, UNSW.

Victor Crochet is PhD student at Cambridge University.

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