Disputes and the WTO

Wednesday, 20 June 2001
Parth J Shah
Economic Times

On July 1, 2001 the European Union will implement a new banana import policy, ending charger brought ending the charges brought in April 1996 by the U.S., Ecuador, Guatemala, Honduras, and Mexico (the G5) against EU about discriminatory import policy for bananas. The battle highlights serious problems with the WTO Dispute Settlement Mechanism, which weaken the case for the existence of WTO.

A brief history of the banana battle: In July 1993, the EU implemented a single EU-wide regime on banana imports. The regime gave preferential entry to bananas from the EU's overseas territories and former colonies in the African, Caribbean, and Pacific (ACP) countries. A GATT panel in 1993 and 1994 found the EU policy inconsistent but EU successfully blocked further action. In September 1994, under the new WTO, Chiquita Brands International, a US company operating in Latin America, requested an investigation from the office of the U.S. Trade Representative (USTR). In April 1996, USTR, asked for consultations with EU, the other members of G5 entered as third parties. The failure of consultations led to the request for a Dispute Resolution Panel. The panel, formed in May 1996, issued its ruling in April 1997, which upheld the charge of discrimination against growers and marketing companies in G5. The Appellate Body supported the initial panel ruling and gave EU until January 1, 1999 to comply. Minor modifications by EU were deemed insufficient as per the WTO panel ruling. In case of non-compliance, WTO’s Dispute Settlement Understanding allows for two options: One, compensation to the affected country, and two, punitive retaliation by the affected country. The US claimed damages of $520 million because of EU’s restrictive import policy, but was permitted retaliation of $192 million. In April 1999, US imposed tariffs on imports from EU, mainly non-agricultural products.

Ecuador, the world's largest banana producer, was allowed retaliation of $202 million. Ecuador found an ingenious method of retaliation that would not harm its citizens: It decided to suspend agreements on "intellectual property" covering areas such as copyright, patents, and performance rights. It began marketing duplicate CDs of European musicians!

The great soap opera came to an end with the agreement of April 2001 that is supported by all the parties to the dispute, G5, EU, and also the ACP countries who would slowly lose the preferential treatment. The EU plans to move to a "tariff-only" system for the import of bananas by 2006.

Several themes and lessons emerge from the banana saga. A country’s preferential policies hurt firms and industries in other countries. But the firms are not members of WTO; they cannot bring complaints, only governments can. The firms have to “convince” their government to initiate consultations at WTO, and then, if necessary, follow through with written and oral presentations to the inquiring panel and the Appellate Body, not to mention the delicate diplomacy the government has to employ to keep the Dispute Settlement Body behind it. Presentations to the panel require the level of expertise that most governments, especially of developing countries, have to hire at the exorbitant Geneva rate. All these consume a great deal of government’s time and money.

Given the volume of international trade, some firm or the other is always affected by a rule from some country or the other. How does the government decide the firm to lend its ears to? It is largely a matter of the number of votes or the number of Gandhi’s (thousand rupee notes). A body allegedly established to promote free trade depends on demagoguery, populism, and corruption to enforce the agreements of its members. Moreover, trade fundamentally occurs among firms, not among governments, but the real trading entities have no representation or voice in WTO, only governments do. After the spectacular Seattle circus, NGOs are now formally part of WTO deliberations. Their inclusion though stacks the deck further against actual trading entities.

In case of non-compliance with the ruling of the Dispute Settlement Panel, use of any of the two options—compensation and retaliation—produce rather perverse and unjust impact. A firm or industry benefits while some completely unconnected and innocent firm or industry suffers. In the EU’s banana regime, for example, domestic and ACP country producers of bananas gained, but the U.S. retaliatory tariffs were imposed on non-agricultural imports from EU. Ecuador’s retaliation caused royalty losses to European musicians. Thus EU’s banana producers earned higher profits but EU’s producers of other goods and music got caught in the fire. The musicians of EU received great public sympathy when they complained to the European Commission and the Parliament about the basic injustice of the dispute settlement. Such injustice is inherent to the WTO Dispute Settlement Mechanism. If the aggrieving country were to pay compensation, instead of the infliction of retaliation, which would harm its innocent citizens, the compensation money would likely come from the general tax and tariff revenues. Natural justice requires that compensation be paid by revenues raised through tariff or tax on the beneficiaries. What would then be the point of preferential treatment? What government gives in one hand will be taken away from the other hand. Collecting revenue for compensation payment is only one side of the problem. Who would receive the compensation? The country or the firms that are harmed due to discriminatory policy? It would be problematic for any government to decide how to divide the amount of the compensation among aggrieved firms. If the aggrieved firms do not receive compensation, then the injustice is compounded. Unless one thinks that two wrongs make it right.

Renato Ruggiero, former Director-General proclaimed, “No review of the achievements of the WTO would be complete without mentioning the Dispute Settlement system, in many ways the central pillar of the multilateral trading system and the WTO's most individual contribution to the stability of the global economy.” Does it uphold or undermine natural justice and the rule of law? Is it the “most individual contribution” or the singular consternation?