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Publications - Spinning a coin: Dispute Settlement Mechanism under Free Trade Agreement or the WTO?

Spinning a coin: Dispute Settlement Mechanism under Free Trade Agreement or the WTO?

The Ukrainian Journal of Business Law
Vol.9 #1-2 January - February 2011

Andrii Zablotskyi, associate with Volkov and Partners
Iryna Polovets, associate with Volkov and Partners
Tetiana Kheruvimova, associate with Volkov and Partners

This article addresses the dispute settlement mechanism under free trade agreements which have flourished in the last few decades, and considers their potential as an effective substitution of WTO dispute settlement mechanism and a tool for reducing potential conflicts of norms and jurisdictions

Currently, the European Union has provided the boldest and perhaps most advanced example of regionalization in the world [1]. Within the framework of the WTO, the European Union has become a major proponent and user of the approach to stipulate specific dispute settlement mechanism as a solution of trade disputes. A fundamental shift occurred with the conclusion of the free trade agreements with Mexico (2000), Chile (2005) and Korea (2010), which incorporate a dispute settlement mechanism. Since 2000, the EU has sought to introduce similar procedures to all ongoing free trade negotiations. Negotiations on the free trade agreement between the European Union and Ukraine (hereinafter — the EU-Ukraine FTA), which began in 2007, are still ongoing. Although information about the course of these talks and their current state is scarce, we also made an attempt to analyze the transformative power on Ukraine in the sphere of dispute settlement taking into consideration previous EU experience.

The ABCs of RTAs and their happy co-existence with the WTO

Regional trade agreements (RTAs) are all those agreements between subsets of states allowing them to depart from the WTO's fundamental most favored nation clause in order to pursue a liberalization agenda which goes beyond that of the multilateral system [2]. In Turkey — Textiles, Appellate Body elaborated on Paragraph 5 of GATT Article XXIV and confirmed the conditional "right" of WTO members to form RTAs. However, WTO dispute settlement is considered to be an exclusive system, as Article 23 of the Dispute Settlement Understanding (DSU) requires all members to resort exclusively to WTO dispute settlement mechanism so as to guarantee "security and predictability" for the international trading system as set out in Article 3.2 of DSU.
This ambiguous relationship raises many concerns, primarily the issue of overlaps of jurisdiction between WTO dispute settlement mechanism and those under RTAs, as well isolated interpretation of law between WTO and RTA's dispute settlement bodies, which is often said to result in fragmentation of international trade law.
Despite the tendency towards a buildup in the number of free trade agreements concluded all over the world, the parties to a specific agreement should bear in mind both the pros and cons of trade regionalization. This is especially crucial for the repercussions of regionalism in terms of dispute settlement. In the light of the prospective EU-Ukraine FTA the possibility of overlap and conflict in jurisdictions should be addressed.
Undoubtedly, one of the most dangerous pitfalls of trade regionalization is a possible overlap or even clash in jurisdictions, which derives from the possibility to choose a forum and ambiguity in the hierarchy of international adjudicating bodies. Despite the fact that jurisprudence on this matter is limited so far, this issue arose before WTO panels and was addressed several times. WTO jurisprudence on the issue of choice in jurisdiction among the WTO and RTAs consists of two cases: Mexico — Soft Drinks and Argentina — Poultry AD Duties.
In Mexico — Soft Drinks the complaining party insisted on triggering WTO dispute settlement mechanism, while respondent Mexico requested the settlement of the dispute under RTA (NAFTA). In that dispute both the Panel and AB opted for WTO jurisdiction by stating that they had no discretion to decide whether or not to exercise the jurisdiction in a case brought properly before them. Furthermore, Mexico did not claim the existence of any obligations in RTA, which could prevent the Panel from exercising its jurisdiction.
In Argentina — Poultry AD Duties Brazil triggered WTO dispute settlement in the WTO after obtaining an unsatisfactory report from the MERCOSUR panel. It is worth mentioning that by the time the dispute arose, the Protocol of Olivos, prescribing the jurisdiction of MERCOSUR panels, was not yet into force. Therefore, the subsequent hearing of the dispute under the WTO was natural. However, in its ruling the Panel implied that in case of existence of conflict clauses they would have been taken into consideration.
Taking into account the above-mentioned, neither panels nor the AB exclude the possibility of applying the conflict clauses and decline their jurisdiction in favor of adjudicating bodies under RTAs, if the conditions of their application are fulfilled.

EU know-how in the sphere of RTAs

All the EU agreements which are mentioned above (Mexico, Chile and Korea) have one common feature: they are all free trade agreements (FTAs) within the meaning of Article XXIV of the GATT. In this sense they can be used as good background for analysis. Whereas prior to this EU agreements only had one article to regulate all aspects of dispute settlement procedures, the FTAs with Mexico, Chile and Korea include detailed rules on arbitration procedures.
The EU-Mexico Agreement includes a chapter on Dispute Settlement consisting of 7 articles, as well as a separate set of rules of procedure and the Code of Conduct for arbitrators. The EU-Chile Agreement includes a chapter titled on Dispute Settlement consisting of 9 articles, rules of procedure and the Code of Conduct. The main source of the arbitration procedures in the two agreements is WTO dispute settlement. NAFTA was also an important source for the EU-Mexico Agreement, particularly as regards the Rules of Procedure and the Code of Conduct [3].
An obvious advantage of dispute settlement procedure under RTA is to secure speedier resolution of commercial disputes in comparison with DSU which is attained due to the absence of an appellate review. To go further, the mandatory consultation period is 45 days versus 60 days under DSU. A panel is to be established within no more than 45 days (Mexico) [4] and within 3 days (Chile) [5]. As regards the timeframe for the issuance of a final report (from the date of the panel's establishment), this is four to six months (Mexico) and three to five months (Chile).
However, the EU-Chile Agreement is more innovative than the EU-Mexico Agreement, DSU or NAFTA, as it provides that rulings should be made public if both parties agree. It also provides for the admissibility, under certain conditions, of amicus curiae. It was the first bilateral FTA to provide for open hearings.
The EU-Korea FTA also includes an efficient dispute settlement mechanism. The procedures envisaged under the dispute settlement chapter foresee the ruling within 120 days. Article 14.19 of the EU-Korea FTA sets out the general principle for forum exclusivity by clarifying that recourse to FTA dispute settlement provisions shall be "without prejudice to any action in WTO framework, including dispute settlement action." However, when a party initiates a dispute settlement proceeding regarding a particular "measure" either under FTA or WTO Agreement, it may not institute another proceeding in another forum until the first proceeding ends.
Talking about the EU-Ukraine FTA, it differs from classic free trade agreements, as the two sides will not merely discuss changes in tariffs and quotas to improve conditions for mutual market access [6]. In other words, the EU-Ukraine FTA is supposed to become one of the first of a new type of "deep and comprehensive" trade agreements.
The Draft of the FTA contains a chapter regarding the dispute settlement mechanism to follow Paragraph 5 of the European Parliament Resolution of 15 November 2007 on trade and economic relations with Ukraine (2007/2022(INI)), which calls on the contracting parties to carefully consider the establishment of a sound and efficient institutional framework, providing for the setting-up and the bestowal of power on Supervisory Joint Committees authorized to make recommendations which further improve mutual trade and economic relations and give impetus to the creation of a functioning dispute settlement mechanism.
The agreement between the EU and Ukraine should contain an effective mandatory bilateral dispute settlement mechanism with fixed unambiguous deadlines. However, this mechanism should not differ significantly from WTO mechanism or the mechanism prescribed in FTAs between the EU and Chile or Korea.

Pros and cons: WTO or RTA

In other words, the dispute settlement mechanism under regional trade agreements has many advantages and was recognized following one of the principles of the Public International Law set out in Article 33 of the Charter of the United Nations — the principle of "free choice of Means".
We would like to emphasize that the dispute procedure under regional trade agreements is less time-consuming and money-losing. Additionally, the "blocking" defects, which used to exist under GATT dispute settlement, were eliminated. Under RTA dispute settlement system Members cannot block the initiation of a dispute, the establishment of a panel, or the adoption of a panel report. Many RTAs lack effective enforcement mechanisms as the relationship between parties to RTAs is not purely commercial or legal, but quite political and strategic.
Additionally, the founding fathers of RTA hone their skills and incorporated the best features of DSU mechanism considering WTO obligations as starting points. However, even taking into account all advantages of dispute settlement mechanism under RTA, many parties to them do not bring disputes to RTA forum, willing to initiate cases in WTO forum. It is reasonable to assume that this can be caused by the willingness of a party to create a multilateral precedence, in other words, de-facto stare decisis. To attain such a goal it is better to file the claim to the forum of the WTO rather than RTAs. We concede that it is true that reports of panels and an Appellate Body are binding only on the disputing parties; however, they are often taken into consideration to guarantee predictability and scrutiny of the trade system.
To go further, an Appellate Body procedure may be attractive, especially for respondents as application of RTA mechanism deprives the right to appeal. As a result, its rulings have some value as precedents. Another reason why parties to RTA follow WTO dispute settlement procedure is that the mentioned mechanism reduces the risk of influence on a weaker country as there is a view that RTA dispute settlement mechanism allows developed countries to use particular levers on the procedure results.
WTO dispute also has detailed rules to monitor the compliance of default parties, including reporting requirements, and the possibility of negotiating compensation or suspending concessions.
It seems that currently RTA dispute settlement mechanisms can successfully co-exist with WTO mechanism for settling disputes and in no way poses a threat to the multilateral forum. Despite the above-mentioned, it is perhaps premature to conclude that lessons have been learned.

[1] Shaheen Khan. Regional Trade Integration and Conflict Resolution. Available at http://www.idrc.ca/openebooks/414-7/
[2] Gabrielle Marceau and Julian Wyatt. Dispute Settlement Regimes Intermingled: Regional Trade Agreements and the WTO J Int. Disp. Settlement 2010 1:67-95
[3] Ignacio Gaicia Bercero. Dispute Settlement in European Union Free Trade Agreements: Lessons Learned? Available at http://www. tradecom-acpeu.org/Portals/49/lnstttution-al%20Issues%20%20Bartels-chapl6.pdf
[4] The EU-Mexico Free Trade Agreement (2000/658/EC). Available at http://ec.europa. eu/trade/creating-opportunittes/bilateral-relations/countries/mexico/ index_en.htm
[5] The EU-Chile Free Trade Agreement (2005/106/EC). Available at httpy/ec.europa. eu/trade/creating-opportunities/bilateral-relations/countries/chile/index. .enhtm
[6] Julia Langbein. The EU-Ukraine FTA: Plus or minus? Available at http://www. icps.com.ua/files/articles/54/76/EF_ November_2009_ENG.pdf

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