WTO Dispute Settlement Mechanism (DSM) in Developing Countries

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WTO Dispute Settlement Mechanism (DSM) in Developing Countries


The World Trade Organization’s (WTO) Dispute Settlement Mechanism (DSM) evolved from the ineffective mechanism used under the General Agreement on Tariffs and Trade (GATT) to settle trade-related disagreements among member states (WTO 2015a; Read 2005, p. 1). Under the GATT mechanism, procedures were not only costly but also time consuming because the disputing parties could delay or block stages of the dispute resolution process. The fundamental steps of dispute resolution addressed in the mechanism include consultation, mediation, conciliation and remedies among others (Böhmelt & Spilker 2013, p. 8). Complex disputes translate to more stages making the WTO litigation costly in terms of money and time, particularly for developing countries. For this reason, the new DSM was established to eliminate inefficiencies and unfairness in dispute resolution. Given that the DSM has been in operation for several years, it is possible to make a tentative investigation of the impact of the mechanism within the international trading system. Several cases have been addressed through the DSM. These include complaints against developed countries and international trade unions like the United States and the EU respectively. The dispute settlement procedures had targeted countries at different levels of development, including the U.S. and the EU states at one edge and India and Pakistan at the other edge of the development spectrum. Developing countries suffered most due to lack of political and economic influence in the international arena (Busch & Reinhardt 2004, p. 6). This paper describes the role of the WTO with emphasis on developing countries. Also, it explores WTO’s DSM with a case study of the Combed Cotton Case between the United States and Pakistan. In closing, the need to improve WTO’s DSM is outlined.

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The Role of the World Trade Organization

The WTO is a global entity that deals with the rules and procedures of trade between countries (WTO 2015a). It emerged from negotiations meant to improve international trade. The negotiated agreements are rule-based. At its core are trade agreements, negotiated and signed by a majority of countries trading globally. The agreements serve as the legal ground rules for this multilateral trading system. Essentially, WTO agreements are contracts that guarantee member states essential trade rights (Gallagher 2005; Read 2005). Additionally, the agreements bind the trading governments to ensure that their cross-border trade policies are within acceptable limits to every country’s benefit. The fundamental goal of the organization is to aid producers and importers to carry out their business freely across their national or regional boundaries. Consequently, the welfare of people in the trading countries is improved.

One of the roles of the WTO entails implementing provisions and rules related to the global trade policy review mechanism (WTO 2015a). The WTO also provides a platform for member states to develop strategies related to tariffs and trade. The organization also provides facilities for administration and execution of bilateral and multilateral trade agreements. Also, the WTO administers not only the rules and procedures, but also the processes linked to dispute settlement. The procedure for resolving trade disagreements as outlined in the Dispute Settlement Understanding (DSU) is essential for ensuring that trade rules are enforced and international trade flows smoothly (Shedd, Murrill & Smith 2012, p. 1). Countries that feel that their business rights have been infringed file cases at the WTO. It is the role of the organization to encourage countries to settle their trade-related disputes through consultations (Shedd, Murrill & Smith 2012, p. 5). Failure to address their differences, the disputing countries is required to follow a clearly mapped-out, systematic procedure that provides the possibility to appeal a ruling by the panel on legal grounds. In its efforts, the organization ensures that global resources such as oil and natural gas are used optimally. Most importantly, WTO assists intergovernmental organization such as the World Bank, and IMF is catalyzing economic development in developing nations (WTO 2015b).

The success of the WTO is attributed to the reduction of hurdles to global trade and the fact that governments carry out trade by agreed rules (WTO 2015b). By eliminating or reducing trade barriers, the multilateral system also removes other barriers between nations. The result of the WTO membership is guarantee that manufacturers and consumers can benefit from diversified pool of products and secure supplies of both, raw materials and finished products. Producers are assured that foreign markets will be available for their products. WTO is also a major player in the area of global governance. As from 1995, WTO has expanded the reach of international trade rules rooted in the regulatory structure of over 160 countries, influencing the daily lives of people across the globe. The vibrancy of global trade calls for the reforms in the WTO’s role and processes.

WTO Dispute Settlement Mechanism

Disputes are inevitable and emerge when a WTO member state contends that another member state has violated a commitment or agreement that is bound by the WTO. The WTO’s DSM is a fundamental aspect of the Multilateral Trading System for developing countries (Torres 2012, p. 1). In the same context, developing countries face several challenges while striving to ensure that they effectively play a part in the DSM. Since the establishment of the DSM (WTO), there has been a significant increase in the participation of developing countries as compared to the initial GATT dispute settlement. The primary users of the DSM since its establishment include the United States, the European Union (EU), Canada, Brazil, Mexico, India and Argentina (Read 2005, p. 15; Torres 2012, p. 5). China and India are main emerging economies alongside Brazil that continue to use the DSM. The DSM is essential for developing countries because it is a rule-based system, and all WTO members are treated as equal with the mechanism. In the DSM, even the countries with least economic clout that cannot impose their will on other countries do prevail if they have the soundest legal argument (Torres 2012, p. 2). As of consequence, the mechanism enables a leveling playing field, especially for the politically and economically weakest countries. This implies that small and developing countries can confront the big and developed countries on equal footing as in the trade disputes involving Costa Rica and the United States. Additionally, the mechanism ensures fairness even in cases involving developed countries, as in the cases of Australia against New Zealand.

Dispute Settlement Mechanisms are integrated with trade agreements as a means of ensuring that rules are enforced and that trade disputes are settled effectively. DSM provides an efficient and rapid means of addressing disputes on whether a party has acted by the agreed international obligations. The DSM also develops an interpretive comprehension of agreements. DSM thwarts damaging unilateral actions by preventing member countries from retaliating before the dispute settlement process is completed. Since 2000, the EU has incorporated a DSM based on WTO’s Dispute Settlement Mechanism in its Free Trade Agreements (EU 2015). The EU system allows for efficient and rapid settlement of disputes among EU states.

There are several perceived or real obstacles to the enforcement of DSB commendations or remedies. One of the barriers is a lack of capacity or expertise to litigate in the world trade organization. Initiating a WTO dispute is an extremely costly process in terms of money and time because of the complexity of the procedure and likelihood of the litigation to having to entail various stages (Böhmelt & Spilker 2013). The development of legal expertise to take part in WTO litigation is a worthwhile investment for both, developing and developed countries. For example, based on the number of cases the EU or the United States is involved in a respondents or complaints, these entities need a solid domestic legal expertise. For developing countries, the development of such legal expertise would probably not be profitable. However, external advisors may be recruited to support complex disputes. According to Torres (2012, p.1), Latin-American nations have overcome some of these challenges by developing creative and innovative solutions, without deviating from the initial guiding principles established by WTO rules.

Developing and Non-participating Countries in WTO

The original signatories of the WTO are parties to the GATT following the endorsement of the WTO in 1995. Other members joined WTO through negotiations. The process of membership is unique to the applicants, whereas terms of accessing depend on the applicant’s level of economic development. Some of the member states include Argentina, Belgium, Rwanda, Pakistan, China, India, Finland, France and the United States among others (Davis & Bermeo 2009, p. 1041). Observers include Algeria, Andorra, Ethiopia, Sudan, Eritrea, Comoros, Libya, Liberia, Syria, and Belarus. Typically, accession is offered once consensus has been reached. Averagely, the process takes around five years, but it can even take more than a decade for some countries. The delay may be linked to less commitment to the accession process, and/or of political inference emerges (Read 2005, p. 6). For example, it took almost two decades for Russia to be acceded to the WTO. All WTO member states are subject to DSM. Legally, only member states are allowed to present and file cases to the world trade organization (Davis & Bermeo 2009, p. 1033).

Approximately two-thirds of the WTO’s members are developing countries (WTO 2015b). Developing countries play a pivotal role in the organization because of their numbers. Also, developing countries are becoming significant in the globalized economy. Apart from that, developing countries play an active role in the organization because they consider trade as a pivotal tool in their development programs or projects. It is worth outlining that developing countries present an extremely diverse group in the WTO with different concerns and views. WTO agreements entail special provision for this group. For instance, the agreements contain provisions that give least-developed and developing nations more kindness or special rights (WTO 2015b). One of the provisions allows developing nations to be treated more considerately by developed countries than other members.

Pakistan Experience: The U.S. – Cotton Yarn Case

The Combed Cotton Case was a dispute between Pakistan and the U.S. over the institution of quantitative limits on Pakistani exports of combed cotton to America. The case began on 24 December 1998 with the United States claiming that exports from Pakistan had a negative influence on the United States textile industry (Hussain 2005, p. 459). As of consequence, transnational safeguard measures approved under Article VI of the Agreement on Textile and Clothing (ATC) of the world trade organization were employed for three years that followed.

The Need to Improve the WTO’s DSM

Trade disputes are unavoidable, and can be constructive if addressed positively. Also, the nature of disputes is increasingly changing the realm of globalization. While the DSM provides an avenue for developing countries to find solutions for their grievances, the mechanism also presents various challenges, including funding, inability to enforce DSB solutions, economic and political pressure and duration of proceedings (Torres 2012, p. 9). For these reasons, there is an urgent need to improve WTO’s DSM to eliminate obstacles that hinder the enforcement of its recommendations or remedies. Reinforced procedures and rules with stringent time limits for settling disputes would provide significant predictability and security to the all-party trading system. Additionally, a mutually acceptable solution to the disputing parties would be achieved in line with the addressed disputes. Although many developing countries are signatories to the WTO, a few developing countries participate actively. Institutional weaknesses in developing states are the main barrier to successful participation or representation of cases and concerns at the WTO. To improve the participation, such countries should establish domestic legal expertise. The WTO should also place a higher priority on the programs that support the development of legal skills and programs that strengthen institutional development in poor countries. Eventually, improved institutional reinforcement in developing countries would enhance the capacity to participate in the global trading system (Davis & Bermeo 2009, p. 1037). Furthermore, WTO should review its DSM procedures and rules to ensure that the mechanism inadvertently does not make the involvement of developing countries difficult.

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Global trade rules are effective when they are enforced with proper entities, systems and processes. The WTO develops and implements international rules regarding trade between committed countries. Trade disputes arise when WTO member state infringes a trade commitment or agreement bound by the WTO. The main task of WTO is to ensure that cross border trade flows are as smooth, free and predictable as possible. From the Pakistani experience, it is apparent that governments should play a more proactive role in international trade-related disputes than they were in the past. Disputes should also be settled through consultation where possible to reduce the cases of formal complaints presented to the Dispute Settlement Body. Formal cases or disputes against least developed member states should be avoided at all costs to lessen the backlog of disputes at the WTO.