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CHAPTER 16:
DISPUTE SETTLEMENT
However, there are political, strategic, and some business reasons for
pursuing some issues in a regional context. If one accepts that, I think
one then has to look in some more detail at how those regional rules are
going to interact with multilateral rules. [Robert Howse, 33:1540]
The Need for a Dispute Settlement Process
In addition to agreeing to the terms of a treaty for the Free Trade
Area of the Americas (FTAA), the parties will also have to come to an agreement
on a process for settling disputes that may arise in the treaty's implementation
or enforcement. Virtually all governments taking part in the FTAA negotiations
are already members of at least one regional trade agreement or of the
World Trade Organization (WTO) and have some experience with dispute settlement
in accordance with the procedures under those agreements.
Trade liberalization agreements will be nothing but empty shells if
the parties to them do not comply with their undertakings. They can discuss
the difficulties they encounter in implementing the agreement at great
length, but if none of the parties has the will to implement the spirit
and letter of that agreement, they could well remain nothing but a pious
hope. Hence, the addition of a mechanism compelling the implementation
of the terms of the agreement and providing for sanctions for non-compliance
would be more convincing than any diplomatic conference or committee meeting,
not to say what it could do for the government's effectiveness.
The opportunity for a contracting party to the General Agreement on
Tariffs and Trade (GATT), the WTO's predecessor, to block the formation
of a panel or the adoption of a panel report, has been the subject of constant
criticism over the past few decades. Consequently, the signing of the Dispute
Settlement Mechanism (DSM) under the aegis of the WTO introduced a
mechanism that virtually cannot be paralyzed. Indeed, it is now impossible
to block the formation of a panel or the adoption of a panel report or
Appellate Body report.
However, the DSM, which will be five years old in the year 2000, is
now beginning to come under criticism as well. Though no dispute settlement
mechanism is perfect by any means, participants in the FTAA negotiations
will be able to draw on experience with the dispute settlement mechanisms
of the various bilateral, regional and multilateral fora in establishing
their own mechanism to address the specific concerns of those members of
the free trade area. Indeed, it is likely that their experience will have
a decisive impact on the dispute settlement procedures they favour for
the FTAA.
Choosing a Dispute Settlement Process
Clearly, the economic power of member countries is a much less important
factor where an equitable dispute settlement mechanism is available. In
the case of the FTAA, the small economies may thus receive the same treatment
and enjoy the same rights as the major economic powers of this proposed
free trade area, in particular the United States and Brazil. The WTO's
dispute settlement process provides a fairly accurate picture of what an
impartial system would look like. Less developed countries may win their
cases against the United States and the European Union, thus forcing the
latter to alter measures that are inconsistent with their undertakings
under the WTO agreements.1
Equality amongst all members of the free trade area will be an essential
factor in the agreement's likely success. Small countries will not want
to be party to a trade liberalization agreement if they sense that the
ground rules can be altered depending on the members' economic power.
None of the participants in the FTAA negotiations appear to have challenged
the necessity of a dispute settlement mechanism. Dispute settlement was
addressed in the Joint Declaration of March 19, 1998 of the Fourth Trade
Ministerial Meeting held in San Jose, Costa Rica, in the following terms:
To establish a fair, transparent and effective mechanism for dispute
settlement among FTAA countries, taking into account inter alia
the WTO Understanding on Rules and Procedures Governing the Settlement
of Disputes. To design ways to facilitate and promote the use of arbitration
and other alternative dispute settlement mechanisms to solve private trade
controversies in the framework of the FTAA.
According to this declaration, impartiality, transparency and efficiency
should be the main features of the FTAA's dispute settlement mechanism.
Consequently, all members of the FTAA will be accorded identical treatment
regardless of their level of economic development or political power.
However, this appears not to be enough, given that a dispute settlement
action is not a costless undertaking. Before taking an action under a dispute
settlement process, a state would normally conduct a cost-benefit analysis
of the exercise. In the case where the costs, including litigation costs,
would exceed the perceived benefits, the state may well decide not to seek
remedy. But since the smallest and poorest countries cannot spread these
litigation costs over a wide economic base as the largest and richest countries
of the hemisphere can, they would likely find litigation prohibitive in
a greater percentage of disputes. The Committee was told of some proposals
to correct this imbalance.
What I have in mind is the dispute resolution of the WTO. A number of
proposals have been floated to provide poor small countries with the legal,
financial and technical expertise they need to bring disputes to the dispute
resolution process. It seems to me that when we're designing an FTAA, we
should think about that and build that in at the very start, which is to
say that not everyone is going to have equal access to dispute resolution.
This is something we ourselves, as a small and open economy, value very
much, to live in a system with rules that are enforced. So this is a very
practical agenda item that in this case Canada can support. [Rohinton Medhora,
28:1625]
It would, therefore, be advisable to establish a financial assistance
program in the case of dispute settlement. Such a program would cover only
a portion of the litigation costs associated with a legitimate exercise
to prevent a proliferation of cases which could reasonably be settled through
inter-party negotiation. In addition, a cap should be imposed on the amount
that a country could receive in a given period.
Under the WTO, the members of a panel may not be nationals of the parties
to the dispute. For example, if Canada and the United States are involved
in a dispute, no citizen of either of those countries may be a member of
the panel. The purpose of this requirement is to guarantee the impartiality
of members in a dispute they are called upon to adjudicate. The Committee
was told that it would be better to go further in guaranteeing the impartiality
of panels. One witness advocated the establishment of tribunals independent
of the international organization's secretariat. In this way, it would
be possible to prevent the parties, and even the organization's secretariat,
from intervening in the process. [Howard Mann, 33:1540]
The transparency of the dispute settlement system is also a growing
concern among parties to trade liberalization agreements. A number of criticisms
of the WTO's dispute settlement mechanisms focus more precisely on the
system's transparency. In a dispute before the WTO, the parties' arguments
and the deliberations of the panel and Appellate Body are kept secret.
Only the parties to the dispute and other members that have expressed a
desire to make submissions concerning the dispute are allowed to express
their point of view; no organization that is not a WTO member may participate.2
Witnesses underscored the importance of transparency in dispute settlement
procedures and expressed the opinion that the parties' arguments and the
hearings should be made public. Furthermore, third parties should be able
to intervene and express their views on the dispute. [Robert Howse, 33:1530
and Howard Mann, 33:1545]
The effectiveness of the dispute settlement mechanism is another factor
to consider. The system must be able to produce a decision in a relatively
short time, and no party should be able to paralyze the system. Finally,
it must be ensured that decisions are implemented by the parties to the
dispute. The Committee recommends:
29. That the Government of Canada adopt the position that the dispute
settlement mechanism of the Free Trade Area of the Americas be based on
World Trade Organization principles, including emphasis on the implementation
of a panel finding, compensation and retaliation.
Although the WTO's DSM has a number of positive features, it can nevertheless
be improved upon. Between now and the negotiating deadline of 2005, the
countries taking part in the negotiations will be able to draw on some
10 years of experience with this mechanism that will enable them to establish
a dispute settlement system more suited to the FTAA.
Specific Problems to Resolve
One of the WTO's basic principles is that every member of the organization
must treat all other members in the same way; this is the most-favoured
nation (MFN) principle. However, one's membership in a regional trade liberalization
agreement is a direct violation of this principle because a member state
may grant more concessions to other member states than to WTO members.
The WTO does, nevertheless, recognize regional agreements. Article XXIV
of the GATT 1994 and Article V of the General Agreement on Trade in Services
(GATS) exempt members that are parties to a regional trade liberalization
agreement from the application of the MFN principle in respect of undertakings
made under that agreement. This does not, however, mean that regional agreements
do not pose any problems for realizing greater multilateral trade liberalization.
This plethora of new issues dealt with under the WTO and the signing
of agreements in these various areas mean that there is now the risk that
the agreements and commitments may contradict each other. [Ivan Bernier,104:940]
The increasing number of regional trade liberalization agreements raises
some implementation and interpretation problems. Consider the following
example. The North American Free Trade Agreement (NAFTA) and the WTO agreements
contain similar provisions in a number of areas. In a dispute between Canada
and the United States, the complaining party may file its complaint with
the NAFTA Free Trade Commission or with the WTO Dispute Settlement Body.
The forum selected will be based on the complainant's assessment of the
provisions of each agreement in the hope of finding the forum most favourable
to it.
This "forum shopping" behaviour could undermine the stability
and predictability of the international trading system. If all the provisions
concerning a particular field were identical (i.e. they were worded in
the same way) from one agreement to the next, and if identical provisions
were interpreted in the same way, there would likely be no problem created.
However, this is not currently the case.
A proliferation of different basic rules will inherently lead to forum
shopping, and there's not going to be anything that's going to be capable
of stopping that. You'll simply spin the law and say, I don't have access
under this rule, I don't have access under that. The critical issue is
going to be the underlying compatibility or similarity of the rules. [Howard
Mann, 33:1555]
The situation was also explained to us in the following terms:
A proliferation of similar but not identical legal provisions interpreted
by different fora is likely to reduce predictability in trade law rules
and norms and undermine one of the main purposes of regulating international
commercial relations by rules. [Robert Howse, 33:1535]
Participants in the FTAA negotiations must become aware of the disadvantages
of the increasing number of trade liberalization agreements containing
similar but not identical provisions. There are three potential solutions
to the problem. The first would be to avoid signing regional free trade
agreements and to refer disputes to the WTO. However, this proposal disregards
the underlying purpose of regional agreements which is to respond more
satisfactorily than the WTO to the needs of a particular group of countries.
The second solution would be to use the same terms in all agreements
in addressing the same subjects. However, this solution does not take into
account the specific needs of the parties to a regional agreement. It is
natural for there to be differences between agreements, since inter-party
dynamics differ from one agreement to the other.
The third solution would be to establish a hierarchy amongst the various
regional agreements and between the regional agreements and the WTO agreements.
This would limit a party's recourse to shop between forums, since this
hierarchy would determine which agreement would be applicable in a particular
case.
1 Agreements
resulting from the Uruguay Round of Multilateral Trade Negotiations.
2 For
a description of the main criticisms made of the WTO's dispute settlement
mechanisms, please see Chapter 3 of the June 1999 report by the Standing
Committee on Foreign Affairs and International Trade entitled, Canada
and the Future of the World Trade Organization: Advancing a Millennium
Agenda in the Public Interest.