Introduction: The Nature of the Problem

No one supporting America's interests can view WTO dispute settlement without serious concern. Consider the following items:

• The United States prevails on the merits with respect to two European agricultural market access issues. (Beef and bananas). The result to date is retaliation by the United States against inoffensive imports from Europe. No further access to the EU's market for U.S. exports has been gained.
• The EC obtains a judgment against the United States for having the Foreign Sales Corporation, a measure put into place by the U.S. in a settlement with the European Community twenty years ago. The FSC is necessary because the original GATT rules regarding different tax systems disadvantage U.S. exports, with no economic justification. The U.S. commits to change its tax laws.
• After a one-year investigation, the United States finds that the Government of Japan has acted unreasonably and burdened U.S. commerce by closing its market to foreign photographic film. It asks for substantive talks with Japan, a request that is denied. The U.S. is joined by the EU when it brings the case to WTO dispute settlement. The WTO panel cannot find any actionable problem. Japan Photographic Film.
• All U.S. trade remedies have been subject to attack in the WTO. Most notably:
• The EU has prevailed in curbing the use of countervailing duties in cases where there has been a transfer of assets from the original subsidized company. (UK Bar.) Under the ruling, the trade distortion persists, but there is no longer a remedy. The U.S. commits to change its practice.
• Japan has filed a case that is a broad attack against the United States' use of antidumping duties. The President had singled out Japan in his State of the Union Message in 1999 for causing serious harm to American industry. Japan's steel cartel had sought to avoid restructuring by exporting millions of tons of excess steel at dumped prices. (Japan hot-rolled steel). Now, the U.S. must defend its response to Japanese dumping before a WTO panel.
• Japan has announced the formation of a WTO Countermeasures Office within MITI's Basic Industries Division to bring WTO cases against any defensive measures taken to prevent further injury caused by Japan's steel cartel.
• U.S. use of trade measures to deal with environmentally unsound practices has attacked in the GATT. Findings have been made against the United States. Many in the U.S. environmental community now view the WTO as a threat to legitimate environmental concerns. (Shrimp-turtle, tuna-dolphin).

Concerns with WTO dispute settlement are not limited to outcomes in specific cases. The process by which results are arrived at is very troubling:

• All proceedings are conducted in secret.
• Often the true parties at interest (e.g. industries whose fates are being decided) are excluded both from direct participation and even from being heard indirectly as a matter of right through amicus briefs.
• Panelists are selected without clearly adequate credentials and without careful clearance for possible conflicts of interest.
• U.S. laws are effectively overturned without sufficient oversight by the Congress.
• New obligations that were never agreed to at the bargaining table are created by panels.
• By not according due deference to national decision-makers, panelists substitute their judgment for that of WTO Members' officials, interfering in domestic administration of national laws.
• Contrary to sound judicial practice, panels are issuing advisory opinions designed to shape the administration of U.S. law prior to any action having been taken by U.S. authorities.

In short, the current WTO dispute settlement process is at best disappointing, at worst seriously defective.

However one may view the legal arguments made in any of the above-cited cases, each is at odds with immediate U.S. interests. Longer term, an adverse effect on more fundamental U.S. interests in maintaining the current multilateral trading system cannot be discounted. If no reforms are put into place, there is more than a small likelihood that these problems will threaten America's continued support for the WTO. The WTO without the United States would be about as effective and long-lived as was the League of Nations. It would become another historical relic along the shores of Lake Geneva. That this should happen is in no other trading nation's interest and at least equally not in the best interests of the United States. The challenge is to take early and effective remedial action. This paper sets out the author's view of where America's interests lie, identifies flaws in the current system, and suggests a number of reforms that are urgently needed.

I. The Setting
The creation of an open international trading system is a centerpiece of American policy in the post World War II period. It has been one of the most notable successes in American diplomacy. The multilateral trading system, first the GATT and now the WTO, is part of the foundation of sustained global economic growth. It is has helped create a highly competitive American economy. It underlies the unparalleled economic expansion of the U.S. economy over the last decade.

The multilateral trading system for its first 47 years of was composed of a series of agreements. It did not include a formal organization. For most of its life, the "GATT" was an ad hoc institution with a temporary secretariat residing in a few charming villas overlooking Lake Geneva, and as a poor cousin begged meeting rooms from the United Nations. The GATT consisted of countries' commitments to a certain level of trade liberalization; a weak executive structure that sufficed to call meetings of the "Contracting Parties"; and a non-binding, not very effective, dispute settlement system.

In the Uruguay Round of Multilateral Trade Negotiations, which ended in 1994, a World Trade Organization (WTO) was formed. Countries were no longer completely free to decide which obligations and agreements they would sign; instead, a core group of undertakings was required. Trade in services and protection of intellectual property were covered by new accords. By then the GATT had moved to new, much larger quarters on the shore of Lake Geneva originally constructed for the International Labor Organization. The GATT secretariat had grown substantially. All of this the WTO inherited. New decision making bodies made up of WTO Members were established. Alongside the new far-reaching agreements, the most notable feature of the new WTO was binding dispute settlement.

Binding dispute settlement was a principal negotiating objective of both the United States and its main trading partners. The United States was seeking to deal with its enormous frustration of trying to obtain full compliance by the European Union with the international rules covering agriculture. For their part, America's trading partners sought an end to what they viewed as U.S. "unilateralism." This term they applied to the United States' practice, given its status as the world's largest market for imports, of using its economic strength to press others to open their markets. America used for this purpose statutory authority for trade sanctions called "section 301". What Americans took to be the pursuit of enlightened self-interest, others viewed as arrogant bullying.

Binding dispute settlement was a major step in the evolution of the international trading system. The Congress has the Commerce Power under the U.S. Constitution. Did it give informed consent to this new system of binding dispute settlement? Did it fully understand the implications of what the United States was getting and what it was giving up?

• The negotiators swore to Congress that there would be no impairment of the U.S. ability to impose trade measures unilaterally in the quest for foreign market access.
• They cited the history of difficulties of trying to curb the adverse effects of the European Union's Common Agricultural Policy (CAP) and advanced binding dispute settlement as a cure.
• They promised that America's trade laws would remain unimpaired.
• None of these propositions proved to be valid.

However, Congress approved the package of agreements. The United States joined the WTO. It bound itself to accept the results of WTO dispute settlement, not only as a potential defendant, but, as importantly, as a complainant. WTO dispute settlement became for nearly all international trade issues the exclusive means of resolving differences between America and its trading partners.

Now there are five years of experience from which to judge whether foreign trade distorting practices have been susceptible to cure through the new mechanism, whether U.S. leverage has been maintained, and whether American law has been harmed by adverse decisions. In short, there is now a basis on which to make some judgments as to how well the dispute settlement system works for America's pursuit of its interests.

II. A Current Assessment of WTO Dispute Settlement
The purpose of this presentation today is to give credit where it is due, point out the most glaring problems where they are detectable, and to identify workable solutions wherever possible.

First, what do we require of dispute settlement? How are we to judge its performance? We require four things:

1. A powerful tool to open foreign markets
2. Maintaining U.S. laws unimpaired by "judicial" expansion of negotiated obligations
3. An impartial, highly qualified "judiciary"
4. An open (transparent) process

This set of criteria is not overly complicated. What we want for America in WTO dispute settlement is what we want as citizens from our own courts:

• effectiveness when we are plaintiffs,
• avoiding excessive intrusiveness when we are defendants,
• fairness and competence, and
• due process that we can be sure of.

While there are substantial differences between the place of dispute settlement among nations, on the one hand, and the role of the judiciary under the U.S. Constitution for settling differences among citizens, on the other, the fundamental requirements set out above apply to each.

The WTO falls far short of satisfying these basic standards. Let us consider each in turn -- first the results, then the process by which those results were reached.

a. A powerful tool to open foreign markets
For the United States, opening foreign markets was what it was all about. In particular, it was the intense annoyance of generations of U.S. negotiators failing to get a hold on the Common Agricultural Policy (the CAP), and the constant hope that they could wrestle it into some less disruptive form.
We are a litigious people. Americans go to law courts more readily than any other people do, we assume. It is part of the genius of our system that seeks to have a government that applies as light a hand as possible. We seek to be ruled by laws, and to implement them through individual tests and trials. We do not cede authority willingly to government to make sweeping decisions in advance. It was natural that our negotiators, facing an impasse over a key objective, thought that something that seemed judicial might be just the answer. It was satisfyingly very high minded, too: "binding dispute settlement", "rule of law". All good phrases. Sound concepts perhaps too, if obtainable, and employed in the right circumstances.

Many of those who were most enamored of binding dispute settlement were often not themselves practicing lawyers. What they saw was a relatively simple cure-all.
Thus were several errors made.

First, in the eyes of the world, America's leverage was substantially diminished by the adoption of binding dispute settlement. The system may be of clearest benefit to a medium-sized trading country -- such as Canada -- that could never muster the leverage of a United States. The dispute settlement understanding (DSU) was something of an equalizer. In contrast, while America notionally could play power politics in the "state of nature" that was the GATT, America's power would not be of great use if it were bound always to get formal WTO approval before it acted. Under the new system, America would have to go to major competitor nations as well as to minor, and gain acceptance of its use of its trade measures. The practical effect of the de facto requirement that all matters be litigated meant that diplomacy was all but dead. However, we have since learned that litigation cannot solve everything, even if the complainant is right on the merits. Casting aside the tools of diplomacy -- without even meaning to -- was a mistake.

Second -- outside the area of trade remedies -- it appears that barriers against which a case is brought must be self-evident in order for the complainant to prevail. Unfortunately, foreign barriers are often imbedded and obscure. The WTO has no investigative machinery. No adverse inference is drawn from a party failing to supply information. (See, for example, Japan Film and Canada Aircraft). Foreign trade measures being rarely as transparent as those of the United States, there is an imbalance in the litigative process -- the more complex the foreign protectionist practice, the safer it is from WTO panels.

Third, binding dispute settlement only works for a plaintiff if there are substantive rules to enforce. For example, private restraints of trade, clandestinely assisted by governments, are not explicitly covered by the WTO rules (and for a variety of reasons will remain outside the purview of those rules). They are not directly reachable under WTO dispute settlement however effective these measures may be as substitutes for formal government measures and despite their resulting in foreign market closure.

Fourth, there may be so much political resistance abroad to implementing a decision adverse to the foreign country, that the commercial interest that would have been served by the U.S. "win" is not served at all. No further foreign market access is obtained. Instead pressure builds for U.S. retaliation, even so-called "carousel retaliation" designed to prevent any harm done to the foreign trade interests from healing. Thus is a chancy process. Ask those who produce beef in the United States or who invest in banana production abroad. Nothing gained, some further trade lost.

This does not mean that there are not wins for the United States. When the foreign measure is clearly WTO-inconsistent on its face, litigation may not even advance beyond the stage of making threats (Japan copyright), or it may be resolved with greater difficulty, but nevertheless resolved, at the last possible moment through litigation (Japan liquor taxes). These cases provide substantial benefits that can be weighed. Beyond these actual wins, there might be hundreds of foreign WTO-inconsistent trade measures that are deterred. These are by their nature not quantifiable. But it is safe to assume that the presence of the possibility of enforcement has a positive effect greater than the mere existence of rules.

What is the record of wins and losses? It is best to ask those who were supposed to benefit from each specific case and ask whether commercial benefits flowed. The U.S. won bananas and beef hormones, and the intended private sector beneficiaries got nothing. In Japan Film, the United States lost (if one counts a thumping rejection by the panel of all the evidence marshaled by United States and the EU in the case as a loss), and yet as a result of the case, many of the complained of measures were withdrawn by the Government of Japan. This may have been a win of sorts for the United States, but it was not a win for the WTO dispute settlement process.

Thus it is overly simplistic and misleading to rely on a U.S. litigator's checklist of wins and losses. The wins may not be wins. The losses may not be losses. In a commercial sense -- and after all, that is what the WTO is really about -- maintaining a balance of commercial interests is what matters most.

Given the complaints brought, and those considered and not yet brought (e.g. cars in Korea, large commercial aircraft vis-à-vis the EU), WTO dispute settlement certainly has not yet proved itself to be the "crowbar" to be used to open foreign markets if need be, a term once bandied about as a ready means to open foreign markets.

To be sure it is possible, as government officials at one time argued, for the United States to act outside the WTO, and take whatever international opprobrium might be thrown in the direction of Washington. Unilateralism is still notionally possible, it is just very costly. The gain must be worth it. The circumstances must be just right. The only instance in which this was a course seriously contemplated (or said to be seriously contemplated) was with respect to Japan and its inhospitable policies with respect to foreign autos and auto parts. Would it all have worked? We will never know. Was it really a serious U.S. threat? We can only speculate. What we do know is that the Government of Japan has refused serious negotiations on any trade subject since that time. Was this a reaction to the United States making the threat in the first place, backing down, or a combination of the two? Perhaps Japan's current policy of flaunting its intransigence in regulatory reform is based on the sanctuary provided by the WTO dispute settlement system, that marginalized U.S. trade diplomacy. This has been cheered by some as a reduction in trade friction. But it has left Japan to muddle through its economic quagmire on its own, imposing greater costs in terms of the slowing of its own reforms and the continuing burden on its Asian trading partners.

Perhaps like a mini-review in the style used by veteran decision makers to explore the Cuban missile crisis, the participants in the auto confrontation will some day sit down in an academic setting and reconstruct their squabble as a case study, to assess who won and who lost. (Hint: Chances are that both sides lost.)

b. Maintaining U.S. laws unimpaired by "judicial" expansion of negotiated obligations
The first requirement of an international dispute settlement system is that it not create or increase obligations not undertaken at the bargaining table. Where this occurs, not only are commercial interests at risk, but it is right sound an alarm about loss of national sovereignty.

There is a fundamental difference between the role of the judiciary in the United States and the role of dispute settlement tribunals under an international agreement. Our national legal system does cede a measure of "individual sovereignty" to government, and one of the three branches of government is the courts. We live with our courts sometimes filling in the blanks in statutes, or supplying meaning where there is ambiguity. This is, however, not acceptable in an international arena where concessions are bargained for and granted by explicit decision. Obligations are not generally to be implied. There is no assumption that the dispute settlement panels should carry the parties into areas that they could not reach themselves in fashioning the rules.

Even in our national system where we have ceded individual sovereignty, judicial restraint is an important if not central feature. Judicial legislation, while far from unknown, is to be resisted. Substitution of outcomes preferred by judges, replacing positions taken by the decision-makers in the Executive Branch, is not acceptable. At the international level, it is intolerable, and a threat to the continued legitimacy of the WTO system itself.

The second requirement of dispute settlement is that it not upset the balance of concessions that were negotiated. The trade remedies -- antidumping and countervailing duties in particular -- were the subject of particularly vigorous attention in the Uruguay Round negotiations. A central aspect of the acceptability to the United States of the negotiated result was that these remedies not be further impaired. Those nations who did not achieve their objective of weakening the U.S. trade remedies further at the bargaining table, have announced their intention to achieve this objective through the use of dispute settlement. Japan, in particular, has announced this intention with respect to antidumping, and has even formed within the Ministry of International Trade and Industry a "WTO Countermeasures Bureau".

The first trade remedy casualty of the dispute settlement system was the ability to counter subsidies after a company's assets have been sold. (UK Bar, a case the EU brought against the U.S.). This was a case in which judicial activism created limits on the use of countervailing measures that were not agreed. The result is contrary to sound economic analysis and will remove an important discipline on the use of subsidies that distort international trade. More importantly, appropriate deference was not paid to national decision-makers. The WTO panel created obligations for the United States where none had previously existed.

There is not a U.S. trade remedy that is not the subject of current or planned attack by some of our trading partners in the dispute settlement process. The balance struck between trade liberalization and disciplines over unfair and otherwise injurious trade practices over decades of trade negotiations may be undone. Doctrinaire free traders may cheer this result, but if this trend continues their pleasure will be short-lived. The liberalization itself will not be sustainable. Already the current Administration has been unable to get further negotiating authority from the Congress in the form of renewal of the "fast track" Congressional approval process. What will the chances be of obtaining this mandate if the negotiators' commitment that the U.S. trade laws would remain unimpaired cannot be fulfilled?

Even were the WTO dispute settlement system less infirm, the fact remains that every attack on the U.S. trade laws has three chances of prevailing on appeal (at the trial court, at the appellate court and then at the WTO) while those administering the U.S. trade laws only have the first two levels of appeal. There is a grim mathematics to this process, an imbalance that will ultimately have a bearing on results, regardless of merits, unless U.S. administrations create a counter-strategy. Lee and Grant both understood numbers. The current process of uninhibited attack on the trade laws, of three appeals against all affirmative determinations, will surely undermine the WTO system and ultimately bring about the opposite of the result sought by its perpetrators.

The attack on U.S. measures continues during this writing. Press reports indicate that a WTO panel has decided in favor of the European Union's claim that an emergency restriction on imports of wheat gluten -- signed by President Clinton on May 30, 1998 -- violates WTO rules. This case adds to a little-noticed pattern of decisions in which no challenged safeguard measure has ever survived WTO panel review. The net effect is to restrict dramatically the ability of American policymakers to use the "escape clause" provisions of our trade laws to protect domestic industries against import injury, thus undermining a significant tool long considered necessary to protect American interests. The conclusion seems inescapable that those running the dispute settlement machinery in Geneva are determined to block import relief of whatever type and under almost all circumstances.

Another worrisome trend is the increasing willingness of panels to issue what are in effect "advisory opinions" about the WTO-consistency of U.S. laws thought to be capable of chilling trade, even in the absence of any use of those laws. The general prohibition on advisory opinions in the U.S. federal court system exists for good reasons. These reasons are amplified several-fold in the context of international dispute settlement. This is one of the areas where the "sovereignty" concerns about the WTO have the most merit. An uncertain but largely workable doctrine applied in dispute settlement under the GATT 1947 held that laws which mandatorily directed a country's Executive authorities to take GATT-inconsistent actions were reachable via dispute settlement, while laws which vested those authorities with discretion -- such that they could be implemented in a GATT-consistent fashion -- were immune to attack unless and until used otherwise.

This doctrine has been pared back in a series of recent cases in which panels, following the lead of the WTO Legal Affairs Division, have become much more assertive. In the Korean DRAMs case, Korea was able to secure panel review of a provision of the U.S. antidumping law that had not been applied to Korean DRAMs but which nevertheless offended the Korean Government's sensibilities. (The provision allows the Commerce Department to refrain from using in administrative reviews a particular "averaging" technique which it is now required by WTO rules to use in new investigations.) In the case against section 301 brought by the EU, the panel should have been content to observe that section 301 merely authorizes -- it does not require -- the President to take WTO-inconsistent actions in retaliation against foreign trade barriers. That should have ended the panel's analysis. Instead, the panel delivered a lengthy essay on the circumstances under which the President can and cannot use the legal authority conferred on him by section 301.(1)

Two newer cases highlight the troubling directions this trend may take.
· Canada has requested consultations based on the mere possibility that the Commerce Department might, in a future CVD case, find certain Canadian forestry practices to be actionable subsidies. In effect, Canada wants this issue addressed by a panel before it can ever come up for decision at Commerce.
· The "Havana Club" case likewise features a request, this time by the EU, for an advisory opinion on the WTO-consistency of an unused U.S. statutory provision -- namely, subsection (a) of section 211 of the Omnibus Appropriations Act of 1998. Subsection (a) was not applied by the U.S. courts that made the rulings regarding Havana Club to which the EU is objecting; has in fact never been applied by any court; and if applied in the future, is capable of being applied in a fully TRIPs-consistent manner. There is thus no basis for a WTO panel to opine, in any way, on section 211(a).

b. An impartial, highly qualified "judiciary"

When private parties wish to challenge an American administrator's decision, they take the matter up on appeal to a specialized trial court, the Court of International Trade (CIT). If they are unsatisfied, or the Administrators are unsatisfied with that result, they can appeal to the Court of Appeals for the Federal Circuit (CAFC), again a specialized body. In theory, and on the rarest of occasions, it is possible to bring a case to the U.S. Supreme Court.
Each of these judicial bodies consists of individuals nominated by the President of the United States and confirmed by the Senate of the United States. The backgrounds of the individuals are subject to scrutiny. They enjoy life tenure, and are highly expert in understanding the role of the judiciary. If they were to carry a decision outside the ambit of Congressional intent, the Congress can by passing a bill signed into law by the President change the judicial result. In short, this is part of a system of checks and balances.

The WTO process is nearly at the opposite extreme in terms of the selection of individuals serving and an assurance that they are fit for their positions. Each panel in each case is chosen on an ad hoc basis. Often, little is known of the individuals except what might be found in a short personal resume -- on the basis of which standing by itself no prospective employer would ordinarily offer far less