Compliance at the WTO - rule based or power based?

It is often emphasised that less developed countries, especially countries in Africa and some developing countries cannot actively engage in the DSU due to variety of factors including legal capacity, costs and lack of long term strategic planning.

Another issue that is central to the DSU is compliance. How do countries comply with decisions of the Panel and Appellate Bodies? What is the record of compliance at the WTO? Since it is a rule based system, not dependent on power diplomacy, do the records show that countries both developed and developing/less developed countries comply in a similar manner? What motivates compliance in international trade law? Is the fear of non-compliance strong enough to ensure compliance?

Petros Mavroidis in a brief note brings out the various challenges to compliance at the WTO. In his briefing paper titled "On Compliance in the WTO Enforcement Amongst Unequal Disputants" he tends to argue that the compliance record at the WTO is not very positive and developing countriea are at a disadvantaged position due to a variety of factors. The realities of trade and unequal trading relations influences compliance to a decision rather than the letter of the law per se.

"The intensity of inducement to comply is a function of the credibility of the threat: it is one thing for the EU to be excluded from the Ecuadorian market and yet quite another from Ecuador to be excluded from the EU market in terms of the impact on the Ecuadorian market. As noted before compliance can be induced on grounds unrelated to WTO because the  ‘big’ guys have more ‘persuasive’ power in that they have more weapons to use when they decide to retaliate which increases their retaliatory power as Bernheim and Whinston (1990) demonstrated in their study on enforcement under the competition law regime."

Thus a country which is has a much more diversified export portfolio and is a stronger trading power would be able to resist the threat of non-compliance than a smaller trading power. The reality of international business takes over rather than the power of the law. Compliance is viewed as another negotiating tool rather than a mandate of law.

Mavroidis makes an interesting point on the ability of developing countries to detect violations of WTO obligations by other countries.

" WTO Members possess unequal capacities to detect deviations which is especially true because of the absence of centralised enforcement as present in the EU. Whilst the powerful nations may rely on a highly diversified export portfolio and the presence of trade diplomacy all around the world, the weaker nations are required to rely on the Trade Policy Review Mechanism (TPRM) which offers scattered information on a periodic basis and the notification system which is based on the incentives which support disclosure. Only the member countries which possess better detecting capabilities and more sophisticated administrations are in a better position to act quickly once they identify a deviation, quickly reducing the period of impunity for the deviators."

Thus, compliance depends on the bargaining asymmetries of the parties involved. the DSU is a forum where unequal trading powers are governed by "equal" trading rules. The record of compliance is an interesting aspect of international law, politics and trading relations. In the context of compliance in the Cloves Cigarettes case where the United States and Indonesia are involved, I had raised the issue of compliance here. One would have to go beyond the boundaries of a dispute and the decisions to unravel the motivations and ultimate decision to comply with a Panel or Appellate Body decision. This throws open questions of how "rule based" the system. Does it take us back to the power realities of international trade? Is compliance ultimately dependent on a country's trading power and influence rather than actual non-compliance of international law? If so, how true is to say that the rule based system overrides a power based system at the WTO?

Joost Pauwelyn on the future of the WTO

The WTO website has a Public Forum on "Is Multilateralism in Crisis" which has renowned experts in the field predicting the future of the world trading system. It has a piece on Jagdish Bhagwati's bleak future in the context of PTAs about which I have already blogged here.

Joost Pauwelyn in his submission at this Forum titled the "The WTO in Crisis: Five Fundamentals Reconsidered" has providing thought provoking insights with respect to some of the key underpinnings of the multilateral trading system. I have tried to summarise the five main points:

1. Consensus: A need for a relook on the definition of consensus which should strive to be conciliatory and inclusive yet not "single country" vetoes.

2. Member-driven organisations: Broadening the scope of involvement of stakeholders within countries to include affected interests and not just trade diplomats. Involvement of non-state actors.

3.WTO as "hard law": Emphasis on "soft law" rather than the formal dispute settlement mechanisms

4.Single package:Replacing the single package requirement with diversity of rights and obligations depending on the country's requirements and commitments

5.Special and differential treatment for "developing countries": Recognising that developing countries are not a homogeneous unit with identical interests and are in need of differential treatment.

The submission on the "hard law" aspect of the WTO and its importance is relevant in the context of the high reliance on dispute resolution as a mechanism of sorting out trade disputes. To elaborate on his point on the subject:

"3. The WTO as “hard law” subject to compulsory dispute settlement

The WTO was created at the highpoint of legalization of world politics (mid-1990s), on the (mistaken) assumption that “hard” law, enforced by binding dispute settlement, is necessarily “better” law.  To facilitate agreement and, in some cases, because it is simply the optimal way of addressing an issue (e.g. because the problem is merely one of coordination or enhanced flexibility and adaptation is needed¹⁰), the WTO should consider creating some agreements that are not subject to WTO dispute settlement or even mere guidelines with flexibility for domestic implementation and future adaptation subject to peer review and less adversarial monitoring mechanisms.¹¹  In many cases, the incentive structure to comply with soft or informal law may be greater and more effective than those to comply with hard law.  Many problems in today’s networked knowledge society, where technologies change rapidly and uncertainty prevails, are increasingly difficult to address through the rigidity of traditional treaties and formal dispute settlement.  WTO members have already engaged in this direction, adopting ministerial declarations or guidelines in specialized committees (such as the TBT Committee Principles for the Development of International Standards) or non-binding paragraphs in Accession Working Party Reports.  Although violations of these norms are not enforceable in WTO dispute settlement, WTO panels and the Appellate Body can and have referred to them in the interpretation of the WTO treaty.  They could also be backed-up with Trade Policy Review Mechanism style monitoring with the possible inclusion of non-state actors discussed above."

Would the WTO consider some agreements not subject to the WTO dispute settlement mechanism? The dispute settlement mechanism is considered the jewel crowns of the WTO system. It signifies the rule based system's primacy over a "power based" system. A Burkina Faso is as "powerful" in this system as the United States and can enforce a WTO commitment by a decision in its favour. Trading relations or power equations do not play a role in judicial decision making though it may have an impact on compliance issues. The message conveyed is that how so ever powerful you are in terms of your trading might in the globalised world, all countries are bound by a set of clear, rules that are interpreted in a judicial manner bereft of political considerations or pressures. It also acts as a safety valve in times of extreme tensions as well as assuaging domestic concerns of injustice. Should this system be replaced or supplemented by a "softer system?" Would the softer system of peer review, ministerial declaration, trade policy reviews or guidelines be as effective? Would it re-enforce trading power hierarchies? The Ministerial Declaration at the 8th Ministerial Conference at Doha announced a battle against protectionism. However, countries are increasingly adopting protectionist barriers. The only remedy for an aggrieved country against such measures is the dispute settlement mechanism rather than the reliance on a "soft" Ministerial declaration. Does the real world of trade politics and economics require "hard law" rather than "soft law"? Is a combination of the two desirable?