Regional Trade Agreements and the Paradox of Dispute Settlement

Transcription

1 Manchester Journal of International Economic Law Volume 11, Issue 3: , 2014 Regional Trade Agreements and the Paradox of Dispute Settlement Marc D. Froese ABSTRACT: This article addresses the paradox of trade dispute settlement in which countries allocate resources to the creation of dispute settlement mechanisms in regional trade agreements even as the WTO's system has become the primary forum for the arbitration of state-to-state disputes. I argue that while the WTO remains the primary insurance against the breakdown of trading relations, these new instruments play a political role in securing the gains of regional and multilateral liberalization (real and potential) against the possibility of multilateral failure. The paper reviews literature on the institutional and conceptual developments in the study of regional dispute processes, develops an empirical study of the rise of regional DSMs over time, and then links this evidence to changing ways of conceptualizing the costs and benefits of trade regionalization. A reinsurance hypothesis goes a ways towards explaining why countries negotiate DSMs that for the most part, they do not use. 1. INTRODUCTION Scholars have begun to remark upon the paradox of dispute settlement. As regional trade agreements containing dispute provisions have proliferated, most disputes continue to go to the World Trade Organization. 1 This paper hypothesizes that the trend towards fully-articulated dispute settlement mechanisms in regional trade agreements is driven by both the relative success of the WTO s DSU as well as a basic uncertainty about its future institutional relevance. 2 The paper traces the correlations between, on the one hand the rise of WTO dispute settlement and the development of similar regional models, and on the other, the peaking of that trend during the latter years of the Doha Round of trade negotiations. Using a timesequence methodology, I argue that the creation of regional dispute settlement mechanisms (DSMs) peaked in 2009, not in spite of the WTO s noted success in dispute settlement, but precisely because of that success. Marc D. Froese is Associate Professor of Political Science and Founding Director of the International Studies Program at Canadian University College in Lacombe, Alberta. 1 Claude Chase, Alan Yanovich, Jo-Ann Crawford & Pamela Ugaz, Mapping Dispute Settlement Mechanisms in Regional Trade Agreements: Innovative or Variations on a Theme? WTO Economic Research and Statistics Division, Staff Working Papers (World Trade Organization, 2013). 2 Jeffrey L. Dunoff, The Politics of International Constitutions: The Curious Case of the World Trade Organization, in Jeffrey L. Dunoff & Joel Trachtman (eds.), Ruling the World? Constitutionalism, International Law, and Global Governance (Cambridge University Press, 2009). 367

2 RTAs and the Paradox of Dispute Settlement Building on the conceptual work of Slaughter, Drezner, and Drahos, this paper examines a number of hypothetical claims about the uses of DSMs in RTAs, and then argues that regional dispute settlement provisions are an attempt to securitize the risks of liberalization. 3 In effect, when countries sign regional agreements with dispute provisions they are purchasing a form of reinsurance. While the WTO remains the primary insurance against the breakdown of trading relations, the development of new instruments through which to leverage the gains from trade requires a securitization of those gains (real and potential) against the possibility of multilateral failure. 4 It is not a coincidence that the vast majority of RTAs with DSMs were signed between 2001 and 2013, throughout the long and uncertain Doha Round of multilateral negotiations. Reinsurance in the trading order, as in financial markets, is both an expression of confidence in the overall health of the system as well a bulwark against the remote, yet real possibility of institutional failure. 5 This reinsurance hypothesis goes a ways towards explaining why countries negotiate DSMs that for the most part, they do not use. In order to test this hypothesis the article will examine the extent to which regional DSMs have converged towards the WTO's model of an autonomous judicial mechanism with automatic outcomes and binding decisions. 6 In doing so, we follow two parallel lines of enquiry. The first examines the extent of DSM development in RTAs, developing a typology with which to classify mechanisms according to the extent which they resemble dispute settlement at the WTO. The second examines the intensification of DSM creation, charting the timing of negotiated DSMs in RTAs and examining the extent to which the proliferation of RTAs has meant an intensification of the rate at which parties develop DSMs. Importantly, the hypothesis speaks to the larger issue of how to conceptualize the overall direction of the growth of international economic law. 7 First, it examines the extent to which the certain conceptual models coming out of international relations speak to changes underway in the trading system. 8 For example, Slaughter's community of courts hypothesis offers a potentially powerful lenses through which to examine the globalization of judicial mechanisms. It also speaks to the functionalist argument currently circulating in legal circles about the WTO's quasi-constitutional impact upon international economic law. Second, the hypothesis 3 In particular see Anne-Marie Slaughter, A Global Community of Courts, Harvard International Law Journal, 2003, 44: ; Daniel W. Drezner, The Tragedy of the Global Institutional Commons, in Martha Finnemore & Judith Goldstein (eds.), Back to Basics: States Power in a Contemporary World (Oxford University Press, 2013); Peter Drahos, Weaving Webs of Influence: The United States, Free Trade Agreements and Dispute Settlement, Journal of World Trade, 2007, 41: Edward D. Mansfield & Eric Reinhardt, Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements, International Organization, 2003, 57: Donald F. McIsaac and David F. Babbel, The World Bank Primer on Reinsurance, 1995, World Bank, ibrary.worldbank.org/doi/book/ / E.g. see Kal Raustiala, Institutional Proliferation and the International Legal Order, in Jeffrey L. Dunoff & Mark A. Pollack (eds.), Interdisciplinary Perspectives on International Law and International Relations: The State of the Art (Cambridge University Press, 2013); see also Alter, Karen J., The New Terrain of International Law: Courts, Politics, Rights (Princeton University Press, 2014). 7 Joel P. Trachtman, The Future of International Law: Global Government (Cambridge University Press, 2013). 8 Anne-Marie Slaughter, International Law and International Relations Theory: Twenty Years Later, in Jeffrey L. Dunoff & Mark A. Pollack (eds.), Interdisciplinary Perspectives on International Law and International Relations: The State of the Art (Cambridge University Press, 2013). 368

3 MJIEL Vol. 11 Iss Marc D. Froese addresses newer questions about the potential future political effects of a proliferation of judicial mechanisms, suggesting that Drezner s institutional viscosity hypothesis, while potentially useful in a number of settings, may not hold in this case. Ultimately, the study offers the possibility of an empirically grounded account of the place of the WTO in the evolving network of regional trade governance. 9 The next section examines the recent literature on the place of dispute settlement in regional trade governance, paying particular attention to attempts by the literature to explain the development of regional DSMs and account for the relative lack of dispute settlement activity at the regional level. 10 The goal of the literature review is to link two bodies of knowledge, the first being literature on the design, function and legal implications of regional dispute settlement and the second being the literature on the challenges of conceptualizing the scope and impact of the growing sphere of international economic law. 11 Building upon this theoretically informed foundation, the third section develops a typology of dispute settlement mechanisms that is rooted in previous studies, but shifts focus from a judicial comparison to an institutional assessment of dispute mechanisms as they are articulated in RTAs. I use a time-sequence method for tracing the developmental trajectory of regionalization in order to explain typological development between 1947 and This empirical study of the paper's central hypothesis examines two parallel lines of inquiry - the growth of regional DSMs and the intensification of the development of certain forms of dispute settlement mechanism. The fourth section examines the findings of the empirical study, suggesting a number of implications for the conceptualization of regional DSM developmental dynamics. In particular, it discusses the implications for Slaughter s community of courts hypothesis, Drezner s institutional viscosity hypothesis and the hypothetical proposition of this paper. The study concludes with a note on further research and a comment on the type of data that ought to be collected over the next ten years in order to expand our understanding of both the place of the WTO s DSM in the global trading system and the implications for dispute settlement at the regional level. 2. REGIONAL DISPUTE SETTLEMENT MECHANISMS: LEGAL AND POLITICAL DIMENSIONS Within the large and multidisciplinary body of research on the politics of international economic law, the growth of literature on regional trade agreements has not kept pace with the development of the agreements themselves. 12 However, over the past several years, a number of studies have begun to come to terms with the scope and depth of this emerging body of 9 H. Jo & H. Namgung, Dispute Settlement Mechanisms in Preferential Trade Agreements: Democracy, Boilerplates and the Multilateral Trade Regime, Journal of Conflict Resolution, 2012, 56(6): Laura Gomez-Mera & Andrrea Molinari, Overlapping Institutions, Learning and Dispute Initiation in Regional Trade Agreements: Evidence from Latin America, International Studies Quarterly, 2013, 58(2). 11 Andreas F. Lowenfeld, International Economic Law (Oxford University Press, 2002) chapter See the Introduction in Broude, Tomer, Marc L. Busch & Amelia Porges (eds), The Politics of International Economic Law (Cambridge University Press, 2011). 369

4 RTAs and the Paradox of Dispute Settlement literature. 13 Chase et al. consider the main divide within the literature on regional trade and dispute settlement to be between a very small body of literature that examines the design and function of RTAs in relation to the WTO and a relatively larger body that focuses on jurisdictional conflict, both real and hypothetical. 14 This literature tends to focus on very specific issue areas, usually with close readings and conjectural interpretations of the agreements themselves. In an attempt to create a broader generalization about the emerging literature on RTAs, Gomez-Mera and Molinari note that international relations literature tends to focus on the sources and consequences of the legalization of dispute settlement, while international law scholarship tents to focus upon potential conflicts that emerge from the overlap between regional and multilateral processes. 15 Both bodies of literature have been somewhat slow to consider the many ways that RTAs engage with the changing body of international economic law. Following upon these recent attempts to draw some larger taxonomic significance from the available literature, this paper examines an emerging cleavage in the literature between the scholarship that deals with design, function, and the legal implications of RTA dispute settlement, and another, more multidisciplinary body of literature that attempts to conceptualize the changes underway in the global trading system, as they relate to the new juridical processes for dispute settlement. 16 Clearly these bodies of literature overlap with literature on jurisdictional conflict, but this contextualization offers a more systematic attempt to think through the political implications of large scale changes. 17 As such I will summarize the legal thought in order to provide context, and engage with a number of conceptual approaches to mapping the evolving terrain of law Literature on the design, function and legal implications of Regional DSMs Legal literature approaches the issues of dispute settlement through a broadly functionalist lens, dealing most prominently with the empirical dimension of regional dispute settlement and a number of hypothetical legal scenarios, which examine the potential conflicts between regional and multilateral rules in more detail. Frequently using the WTO's legal parameters as an organizing frame, this literature tends to locate its critique of regionalism within the three criteria contained in GATT Article XXIV that are required for regionalism to translate into effective liberalization at the multilateral level. The basic goal of regional integration is to build upon the concessions offered through the multilateral system, and then in turn extend regional preferential concessions to the MFN level over time. Although in practice regional concessions 13 J. Chauffour & J. Maur, Preferential Trade Agreement Policies for Development: A Handbook, World Bank (2011) accessed 1 May See supra note See supra note Henry S. Gao & C. L. Lim, Saving the WTO from the Risk of Irrelevance: The WTO Dispute Settlement Mechanism as a 'Common Good' for RTA Disputes, Journal of International Economic Law, 2008, 11: William J. Davey & John H. Jackson (eds.), The Future of International Economic Law (Oxford University Press, 2008). 18 Martti Koskenniemi, The Politics of International Law (Hart Publishing, 2011). 370

5 MJIEL Vol. 11 Iss Marc D. Froese are seldom generalized through the multilateral system. 19 Crawford and Fiorentino were among the first to begin to examine in detail the significant data collected at the WTO regarding RTA proliferation. This work includes an interesting note on former Soviet states. Post-Cold War attempts to revive economic links from the soviet period, in particular through FTAs among the Commonwealth of Independent States, have not been a great success, and so in an attempt to build upon the CIS institutional frame, a number of bilateral deals have been struck with the goal of deeper economic integration. 20 This seemingly small insight into post-cold War economic integration is a significant piece of the regionalization puzzle, as I will show below. Building upon this empirical overview, Marceau and Wyatt Consider the overlap between RTAs and the WTO system in terms of flexibilities offered by the WTO for the deployment of retaliatory countermeasures in disputes covered by an RTA. They attempt to determine the framework required to decide whether RTA trade countermeasures that led to trade restrictions can nevertheless be justified in the WTO system. 21 Ultimately, they suggest a three-part test that examines the compatibility of the RTA with Article XXIV, its legitimacy with WTO membership, and the conformity of the countermeasure with the stated aims of Article XXIV - the encouragement of regional integration that does not undermine the rights of WTO members. Using a similar approach to the problem of jurisdiction, Hammond argues that WTO and RTAs ought to share responsibilities, with RTAs agreeing to refer all disputes to the WTO and the WTO basically leaving the expansion of trade law to the regional level. 22 In what is perhaps the most significant empirical study of dispute settlement arrangements in RTAs, Chase et al develop a typology of regional dispute settlement and examine a number of emerging trends. 23 They highlight the central paradox that is the subject of this paper, namely that an increase in RTA DSMs does not correspond with a significant rise in state-to-state panels in these regional fora. Most regional DSMs use a structure similar to the WTO, with consultations, third party adjudication and panel implementation phases. Overall, however, RTAs exhibit a lower level of institutionalization than the WTO processes. Some require more transparency than the WTO's DSU, and some contain some remedies not available at the WTO. In an aside they ask, why do states negotiate RTA-DSMs? They begin to answer the question by suggesting that the replication of WTO dispute settlement commitments at the regional level may be an attempt to recreate the stability of the DSU in the service of regional commitments that extend (WTO-plus) or add to (WTO-extra - competition and investment for example) multilateral disciplines. Secondarily, these agreements may also provide a way to generally increase enforcement capacity, adding an extra level of deterrence. 19 Jo-Ann Crawford & Roberto V. Fiorentino, The Changing Landscape of Regional Trade Agreements, WTO Discussion Papers (World Trade Organization, 2005), pp See supra note 19 at p Gabrielle Marceau & Julian Wyatt, Dispute Settlement Regimes Intermingled: Regional Trade Agreements and the WTO, Journal of International Dispute Settlement, 2010, 1: In particular consult pp Felicity Hammond, A Balancing Act: Using WTO Dispute Settlement to Resolve Regional Trade Agreement Disputes, Trade, Law and Development, 2012, 4: See supra note

6 RTAs and the Paradox of Dispute Settlement In the construction of a comprehensive taxonomy of RTA DSMs, Chase et al build upon Smith, 24 who created a five category taxonomy, Jo and Namgung, 25 and Porges, 26 bringing together these previous studies in order to create three basic categories of DSM - political diplomatic, quasi-judicial model and judicial model. 27 This may be the definitive comparison of regional trade court systems and as such, it focuses upon the specific processes of dispute settlement as they relate to the comparative development of international economic law. Interestingly, the writers suggest that less developed DSMs may signal the importance of policy autonomy for regional signatories, a conclusion that is not fully supported by the evidence. The empirical research below suggests that a commitment to diplomatic solutions to trading frictions signals a different type of approach to trading order in which a regional hegemon remain unencumbered by independent judicial inquiry. 28 Aside from the question of comparative function, a number of legal scholars have begun to question the basic divide between global and regional trade governance, noting that due to the slow progress on WTO negotiations, these two forms of interdependence may be considered different means to the same end. 29 Even so, in one of the more important case studies of trade regionalism, Davey looks at the relevance of NAFTA for Asia and concludes that the economic benefits of negotiating FTAs are quite limited, complex rules of origin should be avoided, the initial simplicity of negotiating agreements with a limited number of partners is likely to be outweighed in the future by the complexity of managing complex networks of RTAs, and attention ought to be paid to creating robust DSMs, because without them, the limited benefits of RTAs may not be realized Recent Literature on the Conceptualization of Trade Regionalization Beyond the literature on the institutional development of regional DSMs lies the literature that attempts to grapple with the challenges involved in conceptualizing the proliferation of RTAs, and in assessing their impact upon the growing field of international economic law. To be more specific, this body of literature develops a number of conceptual tools for analysing varieties of governance and charting trends in the development of agreements over time. Most research in this epistemic community has moved beyond the spaghetti bowl metaphor (and Bhagwati's 24 J. Smith, The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts, International Organization, 2000, 54(1): See supra note Amelia Porges, Dispute Settlement in Preferential Trade Agreement Policies for Development: A Handbook, 2011, World Bank, 27 Focus on automaticity of judicial access and suggest that the difference between categories 2 and 3 is one of degree of permanence. This is a useful way to divide a typology of this nature, although I divide the categories between DSMs located outside the agreement, and those fully articulated inside the agreement. I suggest a qualitative difference between those that contain stand-alone DSMs and those that outsource DS to another body. 28 Eric Voeten, International Judicial Independence, in Jeffrey L. Dunoff & Mark A. Pollack (eds.), Interdisciplinary Perspectives on International Law and International Relations: The State of the Art (Cambridge University Press, 2013). 29 Sayantan Gupta, Changing Faces of International Trade: Multilateralism to Regionalism, Journal of International Commercial Law and Technology, 2008, 3: William J. Davey, Evaluating WTO Dispute Settlement: What Results Have Been Achieved through Consultations and Implementation of Panel Reports? Social Science Research Network elibrary (2005) com/paper= accessed February 18,

7 MJIEL Vol. 11 Iss Marc D. Froese well-publicized concerns about the disintegration of governance consensus) to an examination of the changing institutional processes underway at the regional level. 31 Abbott's study of the legalization of world politics approaches the regionalization dynamic through the analytic lens of the North American Free Trade Agreement. 32 He argues that regionalization thrives due to a preference for hard over soft law in global governance. Hard law, by which he means the law of treaties and contractual obligations, is often preferable way to manage the politics of interdependence because it reduces intergovernmental transaction costs associated with trade and investment, this is particularly the case for partners with high trade volumes, but it turned out to be a prescient point, as hard law spawned a robust network of agreements over the next decade. 33 Hard law reduces private risk premiums associated with trade and investment, and promotes transparency while simultaneously restraining strategic political behaviour. 34 NAFTA has proven to be a significant factor in maintaining the North American economic community. Even so, Abbott's final point, that baking contractual obligation into regional integration may increase the range of integration effects by encouraging private actions to enforce intergovernmental obligations, remains prescient, and somewhat controversial, especially in light of the economic pressures placed upon North American private sector by the financial crisis. 35 In a useful update to Abbott's discussion of the hard law of global governance, Subramanian and Kessler note that regional agreements are central to the hyperglobalization of trade. 36 This hyperglobalization phenomenon is driven by rising trade volumes, integration at the regional and multilateral levels, and a new emphasis on deep integration that delves into behind the border regulatory issues. All WTO members except Mongolia are part of RTAs. Half the exports of the top 30 exporters go to preferential trade partners. The biggest issue is the development of what they call mega-regional agreements, such as the Trans-Pacific Partnership, and the Trans-Atlantic Trade and Investment Partnership, which link the US with other regions outside the Western Hemisphere. Trade agreements between North America and Asia may increase trade volumes significantly, a conclusion increasingly challenged by scholars studying the economic benefits of RTAs. 37 Drahos calls the proliferation of DSMs in RTAs a 'bilateral web' that knits large traders such as the US with smaller economies through an institutionalized set of relations that are inherently unequal. Strong states use a variety of negotiating tactics, legal mechanisms and 31 Jagdish Bhagwati, Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford University Press, 2008). 32 Frederick M. Abbott, NAFTA and the Legalization of World Politics: A Case Study, International Organization, 2000, 54: Ibid., at p Ibid. 35 Ibid. 36 Arvind Subramanian & Martin Kessler, The Hyperglobalization of Trade and Its Future, Peterson Institute for International Economics (2013) accessed February 21, William J. Davey, Regional Trade Agreements and the WTO: General Observations and NAFTA Lessons for Asia, International Economic Law, 2004, 13:

8 RTAs and the Paradox of Dispute Settlement political strategies to maintain their interests vis-a-vis smaller economies. In particular, Drahos suggests that choice-of-forum clauses allow strong states (as complainants) to shift dispute settlement out of the WTO system. 38 Of course in the context of the study below, it is not clear if forum shopping actually happens, or if pursuing secondary judicial options would even be a preferable strategy for large traders. In strategic terms, it might behove a smaller state to take a strong case to the WTO because it is a higher profile institution and enjoys a large degree of political legitimacy. Likewise, a larger trading partner might have an interest in taking a relatively weaker case to a regional body. Much of the research assumes a complex calculation that goes into choice of forum, although at this point it is largely a theoretical discussion. Noting the changing dynamics of political power that accompany trade regionalism, Gao and Lim suggest that the best way to increase the WTO's relevance in the face of increasing regionalism is to use the WTO to develop a model RTA template and to strengthen oversight of the WTO-RTA transparency mechanism. 39 Such a process would certainly strengthen WTO oversight of RTAs, but given the significant growth that has already occurred in regional agreements, it is not clear that there are a great many more agreements to negotiate. In an attempt to come to grips with this significant shift in the locus of governance, Slaughter is primarily interested in the conceptual shift what occurred in the 1990s as arbitral forms of dispute settlement moved out of the specialized world of national courts, and into the GATT, the ICSID, RTAs and other new judicial systems. She marks this as a conceptual shift from two systems (national and international) to one system in which judges apply international law, national law, or a mix of both. 40 She calls this blurring of boundaries between domestic law and treaty obligation the birth of a global community of courts. Through this global commons, judges become part of a single epistemic community that no longer operates within the bounds of nation states. Slaughter is not the first to note the changing relations between courts, but her concept of a community of courts raises the possibility of considering an increasing formalization of the relations between national courts, international arbitral mechanisms and RTAs that have populated the trading system. This is such a new process, and our conceptual tools for describing it are so underdeveloped, that Berman suggests that the process described above has strained the concept of international law and requires a new multidisciplinary treatment that expands the conceptual frame of legal studies. 41 This research on the emergence of multi-level, and indeed global, legal influence suggests that there is something to the idea of increasingly formal relations between the WTO DSB and RTA dispute settlement. 42 At this point some of that relationship is written into RTAs in the form of forum exclusion clauses and other articles that limit the recourse to 38 See supra note 3 at p See supra note See supra note Berman, Paul Schiff, From International Law to Law and Globalization, Columbia Journal of Transnational Law, 2005, 43: Sungjoon Cho, Breaking the Barrier between Regionalism and Multilateralism: A New Perspective on Trade Regionalism, Harvard International Law Journal, 2001, 42:

9 MJIEL Vol. 11 Iss Marc D. Froese certain mechanisms. Much of this research is related to the constitutionalization debate because it deals with relations between legal systems, but the community of courts hypothesis is interesting because it eschews of the hierarchical terms of constitutionalism and suggests a more networked approach to understanding the relationships between legal systems. 43 It focuses on the practicalities of legal interdependence, examining the changing nature of political discourse as it takes place both inside and outside changing juridical institutions. Drezner is primarily concerned with the political implications of the proliferation of governance institutions. He argues that institutional proliferation erodes the causal pathways through which regimes ostensibly strengthen international cooperation. 44 The proliferation of regimes and subsequent forum shopping shifts governance from rules based to power based outcomes. Drezner suggests four reasons for scepticism about the benefits for governance of the proliferation of rules-based systems. First, proliferation dilutes the power of prior focal points. Second, nested and overlapping governance arrangements makes it more difficult to detect defections from existing regimes. 45 Third, conflicting legal mandates may weaken legal obligations over time. Fourth, increased complexity of governance places a disproportionate strain on small economies. Each of these outcomes benefits great powers that have the resources to use the proliferation of institutions for power-based outcomes. This institutional viscosity thesis, which emphasizes defection and the erosion of pathways of institutional causality suggests that great powers will use RTAs as a back door through which to channel state power along pathways that better suit their interests. In many ways this thesis runs counter to the conventional wisdom which has assumed that great powers prefer a political order from which they provide leadership and lesser powers follow in order to maintain the contours of a system of predictable rules and outcomes. 46 For the institutional viscosity hypothesis to hold in the context of the growth of RTAs, we would need to see a significant use of RTA dispute settlement as dominant regional partners attempt to escape the straight-jacket of WTO trade discipline through the development of regional governance blocs better suited to their interests. As the research below shows, this has not been the case. Although the larger question of institutional viscosity in other contexts remains open, it appears that in the trading system, most countries still prefer a centralized, binding and multilateral mechanism for dispute settlement. 3. VARIETIES OF DISPUTE SETTLEMENT MECHANISMS This study reconsiders the typing of RTAs, as it has been developed in Smith, Jo and Namgung, 43 Cass, Deborah Z., The Constitutionalization of the World Trade Organization: Legitimacy, Democracy and Community in the International Trading System (Oxford University Press, 2005). 44 See supra note 3 at pp Ibid. 46 Sylvia Ostry, Who Rules the Future? The Crisis of Governance and Prospects for Global Civil Society, New Geographies of Dissent: Global Counter-Publics and Spheres of Power Conference, York University (2006) www. robarts.yorku.ca. 375

10 RTAs and the Paradox of Dispute Settlement Porges, and Chase et al. 47 As the literature review above showed, a number of studies have highlighted the 'variations on a theme,' that is dispute settlement at the regional level. This study attempts to come to terms with the extent to which the similarities between the WTO DSM and regional dispute settlement are related to the institutionalization processes at the multilateral level. Using the WTO's Dispute Settlement Understanding as an independent variable, I compare the mechanisms articulated in RTAs in order to get some sense of the extent to which Members are indeed 'reinventing the wheel' when they negotiate regional dispute processes. Using this typology, I then conduct a time-sequence study in order to determine A) when different types of DSM become significant, and B) the outer limits of this dynamic. While most of the literature tends to divide the history of RTA development into pre and post-wto eras, this study examines post-war liberalization in terms of four distinct eras, the most significant of which is the post Uruguay Round, pre-doha Round period of , and the troubled decade of the Doha Round, between launch and the Bali Ministerial Declaration, which offers a natural punctuation mark at the end of A total of 261 active RTAs had been notified to the WTO as of November In cases where the same parties signed separate agreements covering goods and services, I treated them as a single entity to avoid double counting. I then referenced the dispute settlement provisions from the agreement covering goods in order to get the clearest comparative view of dispute settlement that covers the largest volume of trade. The typology is designed to compare institutional convergence and as such answers a question posed by the other lit, why do countries spend significant resources reinventing the wheel? This research suggests they do not. Rather they copy an existing template that already enjoys significant legitimacy. The typology consists of four categories. Category A contains WTO Members who have signed RTAs that do not contain negotiated DSMs. No provisions for dispute settlement are mentioned in the text of the agreement. There are couple different sorts of agreements in this category. The first are EU enlargement agreements that do not contain DS provisions, with the expectation that members have access to other provisions. The rest are agreements with no mechanism for dispute settlement. Category B contains those agreements that are closest to a purely political dispute settlement process. In these agreements, parties agree to consultation only, without any recourse to a judicial mechanism. Category C includes agreements with basic arbitral provisions. Parties agree to basic provisions for arbitration tribunals, which may include referral to a permanent joint committee or to an external judicial mechanism. In the case of internally organized arbitration there are few negotiated rules beyond a formula for panel composition and a general agreement to abide by the arbitrated decision. The DSM may also include a forum shopping clause. It is important to note that Category C is not necessarily a lesser form of dispute settlement. The agreements may include referral to an external mechanism that handles such disputes in the broader context of regional integration, such as the EU s system at the Stabilization and Association Council Category D agreements include a fully articulated DSM, which includes features such as 47 See supra notes 1, 9, 24 and

11 MJIEL Vol. 11 Iss Marc D. Froese a timelines for dispute resolution, rules for panel composition, a specified channel for diplomatic/legal communication, rules for implementation of decisions, forum exclusion clauses, and/or a forum shopping clause. These agreements may also include investor-state DS provisions and/or separate DS provisions for specific articles, such as the Chapter 19 antidumping and countervailing duty review provisions in the North American Free Trade Agreement. The chart below shows a basic comparison of the WTO dispute settlement process with the dispute process drawn from an illustrative treaty, the Korea-Singapore Free Trade Agreement (KSFTA). 48 Both processes feature a high degree of automaticity - the extent to which juridical systems are driven by procedural rules, routinized processes and automatic adoption of reports. Figure 1: Dispute Settlement at the WTO and in Category D RTAs The key difference between Category C and D agreements is the extent of development of the dispute mechanisms contained within the agreement itself. So some Category C agreements may have a less developed process for DS, but others may not if they have a welldeveloped set of procedures that were subsequently developed at the joint committee, or if they contract out to a regional court. Even so, a well-articulated DSM may suggest both fluency with intergovernmental commercial arbitration processes and a political will to develop comprehensive mechanisms. 49 Figure 2 below shows the distribution of dispute settlement provisions within regional trade agreements. A complete table of the taxonomic breakdown of RTAs notified to the WTO is contained in Annex Korea-Singapore Free Trade Agreement (adopted 4 August 2005, entered into force 2 March 2006) 49 Gregory C. Shaffer, Developing Country Use of the WTO Dispute Settlement System: Why It Matters, the Barriers Posed, in James Hartigan (ed.), Trade Disputes and the Dispute Settlement Understanding of the WTO: An Interdisciplinary Assessment (Elsevier, 2009). 377

12 RTAs and the Paradox of Dispute Settlement This typology may be mapped over time. I divide the post-war period between 1947 and 2013 into five periods. The first period is , when by the end of the Dillon Round, the GATT had 26 members. During the next period from 1962 until the end of the Tokyo Round 1979 saw membership grow to 102 countries. The third period from 1980 to 1994 was capped by the successful conclusion of the Uruguay Round, the creation of the WTO and saw membership grow to include 123 countries. The fourth era, from 1995 to 2001 has been differentiated within the larger WTO era in order to examine post-uruguay Round events as they relate to the events of the Doha Round. The following charts show the development of RTA DSMs grouped by type across time, with particular attention paid to the eras associated with the post-1995 period. Figure 2: Dispute Settlement Mechanisms in Regional Trade Agreements 28 A - No DSM B - Consultations only C - Basic Provisions D - Full DSM The first chart is a reconfiguration of the well-known figure, first developed by Crawford and Fiorentino, showing the explosion of RTAs in the post-war period. 50 This version breaks that growth down according to the typology above, showing that very few regional trade agreements were signed between 1947 and 1980, with at least half of them containing no dispute settlement provisions. The most notable trend here is the rise and fall of Category B (political consultations) between 1980 and 2001, and the significant growth of fully articulated regional DSMs between 1995 and One of the most significantly under-examined trends in regional dispute settlement has been the rise and fall of a political approach to dispute settlement. Chase et al have suggested that the political/diplomatic solution to trade irritants means certain members prefer a dispute settlement system that offers a more flexible role for diplomacy in dispute settlement, and perhaps privileges policy autonomy over the straightjacket of juridical decisions. 51 However a breakdown of the agreements that contain this unstructured approach suggests that this may not be the case. Of the 36 RTAs in which members bind themselves to diplomatic solution, 31 are signed with Russia or among the current, former and de facto members of the Commonwealth 50 See supra note See supra note 1 at p

13 MJIEL Vol. 11 Iss Marc D. Froese of Independent States. 52 Figure 3: The Development of Regional Dispute Settlement Mechanisms Time Series, by Type A - No DSM B - Consultations only C - Basic Provisions D - Full DSM Time Series, by Type, A - No DSM B - Consultations only C - Basic Provisions D - Full DSM Time Series, by Type A - No DSM B - Consultations only C - Basic Provisions D - Full DSM Source: WTO RTAIS 52 Of the five remaining, the most significant is ANZCERTA (Australia-New Zealand) signed in 1984, followed by Faroe Islands-Norway (1993), Melanesian Spearhead Group (1994), South Asian Preferential Trade Arrangement (SAPTA, 1995) and Turkey-Albania (2008). 379

14 RTAs and the Paradox of Dispute Settlement For a significant majority of these agreements, we may term this a 'post-soviet' approach to trade-policy making. Far from suggesting that the political model signals the importance of policy autonomy for signatories, it is more likely that it telegraphs a different sort of political decision making, one that is decidedly uncomfortable with an independent role for judicial actors. Importantly all of these agreements were signed during the decade following the end of the Cold War as Russia attempted to articulate a proto-liberal, post-soviet template for the continued political-economic control of Eastern Europe. The third chart in Figure 3 above shows another trend of great interests in this period, the rise and decline of the regional trade agreement containing a fully-articulated set of dispute settlement procedures. The trend for RTAs with fully articulated DSMs peaks during years of greatest uncertainty over the Doha Round, with 18 agreements coming online in 2009 at the height of the global financial crisis. Considering the significant numbers of agreements already signed, and the fact that only six RTAs in Category D came online in 2013, it is entirely possible that we are already past the busiest years of this form of regional integration. We may consider these to be first generation regional agreements, linking interested partners with the goal of increasing trade flows within regions. The next frontier, of regionalization is already upon us, the so-called era of Mega-regional trade agreements that attempt to generate linkages between regions. Already these agreements are competing with a partially revived multilateral liberalization process, and like previous attempts at megaregionalism, they are likely to encounter many of the same problems faced by multilateral trade liberalization - increasing technical complexity, uncertain economic gains and indecisive politicians who are unable to sustain focus or spend large amounts of political capital on the time-consuming negotiating process. 53 Moving on from our discussion of the dynamics of DSM development, we must turn to the issue of how these proliferating court systems are used. Most disputes brought to NAFTA are Chapter 11 investor-state cases and Chapter 19 cases which offer an alternative to domestic judicial review of antidumping and countervailing duty cases. Chapter 19 allows panels to review an investigating authority's decision involving antidumping and countervailing duty determinations. Only three chapter 20 cases - that is state-to-state disputes regarding the interpretation or application of the NAFTA as Figure 4 shows. 54 In comparison, 17 cases involving the NAFTA partners came through the panel process at the WTO in the same period as Figure 5 shows. 53 Jorge C. Castaneda, NAFTA s Mixed Record: The View from Mexico, Foreign Affairs, 2014, Much of the activity in NAFTA dispute settlement occurs under the Chapter 19 provisions for binational review of antidumping and countervailing duty determinations. As of the end of 2013, 59 such reviews have been completed, and another 73 have been brought to the Chapter 19 Article 1904 mechanism and subsequently terminated. This is not strictly the litigation of trade policy and practice that contravenes treaty obligations, per se. Rather it is a novel regional approach to smoothing the frictions associated with AD/CV determinations made by national authorities. 380

15 MJIEL Vol. 11 Iss Marc D. Froese Figure 4: State to State Dispute Settlement - Completed Panels WTO Mercosur NAFTA ASEAN Figure 5: Comparison of Dispute Panels by Regional Trading Bloc WTO NAFTA WTO Mercosur NAFTA Partners Mercosur Partners In the centralization dynamic by which dispute settlement increasingly occurs at the WTO, Mercosur disputes are very likely the exception that demonstrates the rule. Of the five partners, (Argentina, Brazil, Paraguay, Uruguay and Venezuela), only two, Argentina and Brazil are active users of the WTO system. Argentina has initiated 20 complaints and participated as complainant or respondent in eight completed panels. Similarly, Brazil initiated 27 complaints and has appeared as complainant or respondent in eight completed panels. However, Venezuela has only participated in one panel process, and Uruguay has launched just one request for consultations. Paraguay has not participated in dispute settlement at all. The Mercosur dynamic is fuelled by Brazil and Argentina's trade frictions. Dispute settlement is broadly related to trade flows which accounts for most of what we see with Brazil and Argentina. Both trade a great deal more with Europe and North America than they do inside Mercosur, and dispute settlement patterns reflect that. The Mercosur partnership has been an attempt to use regional governance organization to overcome a traditionally conflictual dynamic and create a more cohesive regional marketplace. To a great extent this has not happened, even though dispute settlement in this agreement bucks the trend under discussion, to a limited extent. 381

16 RTAs and the Paradox of Dispute Settlement Commenting on the larger picture of regional dispute settlement, Chase et al has shown that only one case has been brought to an RTA to which the US is a party - an American request for consultations with Guatemala regarding labour legislation. In addition to the Mercosur cases discussed above, in Latin America there have been four CARICOM disputes, and four initiated under ALADI. There have been no disputes initiated under RTAs signed by the EU, none under ASEAN, and none initiated by any other WTO members RESOLVING THE PARADOX OF DISPUTE SETTLEMENT This dynamic of DSM proliferation alongside an intensification of centralized dispute settlement at the WTO suggests that we need to reconsider the some of the basic ways we conceptualize the integration/fragmentation narrative, in which RTAs serve as evidence that states are increasingly disenchanted with multilateral approaches to trade governance. To that end, this final section returns to a number of conceptual touchstones - the nascent community of courts, the growing global web of bilateralism, and the impact of institutional proliferation on pathways of global governance. The community of courts hypothesis argues for an increasing articulation of judicial precedent across jurisdictions as fewer distinctions are made between national law and international law. If this is the case, we would expect to see less distinction made in where a case is decided, and perhaps the use of judicial decisions from one trade court, rearticulated in another forum. In short, dispute settlement would be situated across the spectrum of national, regional and multilateral forums. This might be the case in the future, but it seems for the time being that the network of global governance is one in which RTAs are relatively passive in the making of judicial precedent. We could say that in terms of conceptualizing a global community of trade courts, the network metaphor, while apt in some contexts, begins to break down upon closer inspection. The multilateral conception, on the other hand, of a central governance institution with the institutional authority and political legitimacy to settle disputes, remains persuasive. With so few cases going to RTAs, it appears that when a member really needs a dispute resolved, the WTO is the forum of choice. I had suggested earlier in the paper that there might be a rationale to be made for pursuing a case at a regional forum, but the contextual frame in which regional dispute settlement makes strategic sense remains a counterfactual, at least in case of state-tostate dispute settlement. This is not to say that the community of courts hypothesis is entirely unpersuasive. On a number of fronts, from investor-state arbitration to anti-dumping and countervail review, regional trade bodies such as NAFTA and the ICSID are playing a larger role in the regulation of trade. 56 Drahos has written persuasively on the role that political and economic power play in the development of trade governance, arguing most recently that the rise of regionalism places 55 See supra note 1, at pp Mathias M. Francke, Chile's Participation in the Dispute Settlement System: Impact on Capacity Building, Social Science Research Network elibrary (2008) accessed 24 February

17 MJIEL Vol. 11 Iss Marc D. Froese smaller economies in a subordinate position, in which large traders would use their political clout to push dispute settlement at fora that suited their interests. 57 Drahos has particularly concerned that in RTAs, away from the spotlight of WTO review, the strong would dominate the weak. This argument, like Slaughter's above, is persuasive as counterfactual, but must wait for more evidence for empirical testing. At this point perhaps we can say that the web of bilateralism argument ignores one very salient point - dispute settlement is initiated by a complainant, who is only likely to initiate a review of a competitor's national policies that they think they can win, and enforce. If governments are going to participate in state-to-state dispute settlement, in which compliance is never fully assured, most choose to do so in the forum from which they are more likely assured a high degree of compliance. In strictly functionalist terms, it appears that large economies have significant incentive to take strong cases to the WTO, as do smaller economies. This is not to say that RTAs will not figure in strategic trade policy considerations in the future. And certainly Drahos s overall contention that RTAs are stacked in favour of the stronger economy, at least in terms of their overall negotiated shape and the rules they favour, continues to be relevant to the larger discussion of trade regionalization. But when it comes to dispute settlement, it appears that complainants prefer the WTO over regional mechanisms for a variety of reasons, not least of which is its high degree of legitimacy, which is entirely necessary when the weak bargain with the strong. 58 Drezner claims that proliferation of institutions dilutes the power of prior focal points. In this case, however, despite the proliferation of regional DSMs, the WTO s DSM continues to be the main focal point of dispute settlement. 59 His second claim is that overlapping governance institutions make it easier for states to defect from existing regimes by forum shopping. In this case, defection can easily be measured in cases going to different fora, which is not happening. But even if it did happen, if the judicial forum was not substantially different, or less rigorous than the WTO, it is not clear what that defection would accomplish. Certainly if we were seeing the rise of regional DSMs that clearly benefitted the larger economy in the agreement and a rise in subsequent cases coming to that forum, we could make a case for defection, but that does not seem to be the case. If anything, the opposite seems to hold true. At least in the case of NAFTA, more cases have come to the WTO concerning trade irritants between the NAFTA partners, than have been heard at the regional forum, as I showed above. The third claim is that conflicting legal mandates may weaken legal obligations over time, and this is also the concern of many legal scholars who are looking for the compatibility 57 Peter Drahos, When the Weak Bargain with the Strong: Negotiations in the World Trade Organization, International Negotiation, 2003, 8: Andrew F. Cooper, Internet Gambling Offshore: Caribbean Struggles over Casino Capitalism (Palgrave MacMillan, 2011). 59 Aside from the institutional viscosity hypothesis discussed above, the dangers associated with the proliferation of DSMs come from two directions one is similar to Bhagwati s termites in the trading system metaphor. The second is the danger of proliferating paper tiger RTAs, which may lock countries into agreements with DSMs that fall far below the WTO s standard for dispute settlement. This is primarily the issue in trade agreements between ex-soviet states. See David A. Lynch, Trade and Globalization: An Introduction to Regional Trade Agreements (Rowman and Littlefield, 2010). 383