What is the Goal of WTO Suspension?

1. What is the Goal of WTO Suspension? Joost Pauwelyn Graduate Institute, Geneva “it is not completely clear what role is to be played by the suspension of obligations in the DSU and a large part of the conceptual debate that took place in these proceedings could have been avoided if a clear ‘object and purpose’ were identified” (US – Byrd arbitration, para. 6.4) Sanctions Workshop, Geneva, 18-19 July 2008

2. What could be the goal of WTO suspension? Sanctions Workshop, Geneva, 18-19 July 2008

3. Why does it matter ? • To set the level of suspensions • To select the benchmark for calculation • To select sectors and products • To answer questions of timing • To decide on cross-retaliation (effectiveness) • To assess and critique the current system Sanctions Workshop, Geneva, 18-19 July 2008

4. How can we figure out ? • ‘Reverse engineer’: look at the level and nature of WTO suspensions • Broader context of DSU & WTO treaty • Historical evolution • Public international law default rules • Arbitration reports • DSB statements & state practice Sanctions Workshop, Geneva, 18-19 July 2008

5. GATT Art. XXIII:2 « the circumstances are serious enough » «appropriate in the circumstances »  DSU Art. 22.6 Any continued non-compliance « equivalent to the level of the nullification and impairment » 1. Historical evolution Sanctions Workshop, Geneva, 18-19 July 2008

6. GATT Art. XXIII:2 Conflicting negotiating history Havana Charter: « appropriate and compensatory » Next to safeguards (XIX) and tariff re-negotiations (XXVIII) ‘appropriate’ v. ‘substantially equivalent’ (XIX/XXVIII) DSU Art. 22.6 Temporary, to be lifted once compliance or settlement (Art. 22.1, 22.8) Settlement or full implementation preferred (Art. 3.7, Art. 22.1) Continued surveillance until implemented (Art. 21.6, 22.8) Contrast: TBT Code 1979 « suspension … in order to restore mutual economic advantage and balance of rights and obligations » 2. Broader context Sanctions Workshop, Geneva, 18-19 July 2008

7. GATT Art. XXIII:2 « Treaty suspension » Art. 60 Vienna Convention Inadimpleti non est adimplendum Need material breach No proportionality requirement DSU Art. 22.6 « Countermeasures » Art. 49 Articles on State Responsibility To induce compliance For all violations Proportionality requirement « commensurate with the injury suffered, taking into account the gravity of the … wrongful act and the rights in question » 3. Public international law default rules Sanctions Workshop, Geneva, 18-19 July 2008

8. 4. Arbitration reports: Three Phases Sanctions Workshop, Geneva, 18-19 July 2008

9. PHASE I: «The lion roars but has no teeth» «  … the authorization to suspend concessions or other obligations is a temporary measure pending full implementation by the Member concerned. We agree with the United States that this temporary nature indicates that it is the purpose of countermeasures to induce compliance. But this purpose does not mean that the DSB should grant authorization to suspend concessions beyond what is equivalent to the level of nullification or impairment. In our view, there is nothing in [the DSU] that could be read as a justification for counter-measures of a punitive nature » EC – Bananas (US), para. 6.3, italics in original Sanctions Workshop, Geneva, 18-19 July 2008

10. Phase I … EC - Hormones “The DSU characterizes full and prompt implementation of DSB recommendations as the first objective and preferred solution. The suspension of concessions, in contrast, is only a temporary measure of last resort to be applied only until such time as full implementation or a mutually agreed solution is obtained. To allow the effect of suspension of concessions to exceed that of bringing the measure into conformity with WTO rules would not be justifiable in view of DSU objectives” (para. 39, italics in original) Sanctions Workshop, Geneva, 18-19 July 2008

11. Phase I … EC – Bananas (Ecuador) “Our interpretation of the ‘practicability’ and ‘effectiveness’ criteria is consistent with theobject and purpose of Article 22 which is to induce compliance. If a complaining party seeking the DSB's authorization to suspend certain concessions or certain other obligations were required to select the concessions or other obligations to be suspended in sectors or under agreements where such suspension would be either not available in practice or would not be powerful in effect, the objective of inducing compliance could not be accomplished and the enforcement mechanism of the WTO dispute settlement system could not function properly” (para. 76) Sanctions Workshop, Geneva, 18-19 July 2008

12. PHASE II: «The lion roars and finds teeth » « We conclude that a countermeasure is ‘appropriate’ inter alia if it effectively induces compliance » (Brazil - Aircraft, para. 3.44) « requiring that countermeasures in the form of suspension of concessions or other obligations be equivalent to the level of nullification or impairment would be contrary to the principle of effectiveness by significantly limiting the efficacy of countermeasures in the case of prohibited subsidies » (Brazil – Aircraft, para. 3.58). Sanctions Workshop, Geneva, 18-19 July 2008

13. Phase II … US - FSC “countermeasures are taken against non-compliance, and thus its authorization by the DSB is aimed at inducing or securing compliance with the DSB’s recommendation” (para. 5.52) “a Member is entitled to act with countermeasures that properly take into account the gravity of the breach and the nature of the upset in the balance of rights and obligations in question. This cannot be reduced to a requirement that constrains countermeasures to trade effects …” (para. 5.55) «At the same time …There is nothing in the text or in its context which suggests an entitlement to manifestly punitive measures” (para. 5.56) Sanctions Workshop, Geneva, 18-19 July 2008

14. Phase II … Canada - Aircraft « We agree that the need to induce compliance is a factor that should be considered in evaluating the appropriateness of the level of proposed countermeasures” (para. 3.48) “… we are of the view that Canada's statement that, for the moment, it does not intend to withdraw the subsidy at issue suggests that in order to induce compliance in this case a higher level of countermeasures … would be necessary and appropriate (para. 3.107) “… we have decided to adjust the level of countermeasures … by an amount which we deem reasonably meaningful to cause Canada to reconsider its current position … We consequently adjust the level of countermeasures by an amount corresponding to 20 per cent of the amount of the subsidy …” (para. 3.121) Sanctions Workshop, Geneva, 18-19 July 2008

15. PHASE III: «Is there a lion? » “The European Communities stressed that ‘the basic purpose of the suspension of concessions or other obligations is to induce compliance of the other Member with its WTO obligations’. The United States suggested other possible purposes, such as "to restore the balance of benefits under the covered agreements between the parties to the dispute” (US – 1916 Act, para. 5.3) “… in our view, a key objective of the suspension of concessions or obligations – whatever other purposes may exist – is to seek to induce compliance by the other WTO Member with its WTO obligations” (para. 5.5). “We agree that a fundamental objective of the suspension of obligations is to induce compliance”(para. 5.7) Sanctions Workshop, Geneva, 18-19 July 2008

16. Phase III … US - Byrd The concept of "inducing compliance" … is not expressly referred to in any part of the DSU and we are not persuaded that the object and purpose of the DSU – or of the WTO Agreement – would support an approach where the purpose of suspension …would be exclusively to induce compliance. We cannot exclude that inducing compliance is part of the objectives behind suspension…, but at most it can be only one of a number of purposes in authorizing the suspension … By relying on "inducing compliance" as the benchmark for the selection of the most appropriate approach we also run the risk of losing sight of the requirement of Article 22.4 that the level of suspension be equivalentto the level of nullification or impairment. (para. 3.74) Sanctions Workshop, Geneva, 18-19 July 2008

17. Phase III … US - Byrd 6.2 … the DSU does not expressly explain the purpose behind the authorization of the suspension… . On the one hand, the general obligation to comply with DSB recommendations and rulings seems to imply that suspension of concessions or other obligations is intended to induce compliance … 6.3 On the other hand, the requirement that the level of such suspensions remain equivalent to the level of nullification or impairment suffered by the complaining party seems to imply that suspension … only a means of obtaining some form of temporary compensation, even when the negotiation of compensations has failed. 6.4 In other words, it is not completely clear what role is to be played by the suspension of obligations in the DSU and a large part of the conceptual debate that took place in these proceedings could have been avoided if a clear "object and purpose" were identified. Sanctions Workshop, Geneva, 18-19 July 2008

18. Back to Phase I ? US - Gambling «the purpose of suspension of concessions or other obligations under the covered agreements … is to "induce compliance" …(para. 2.7) “the thrust of the "effectiveness" criterion empowers the party seeking suspension to ensure that the impact of that suspension is strong and has the desired result, namely to induce compliance … (para. 4.84) Sanctions Workshop, Geneva, 18-19 July 2008

19. ASSESSMENT Three propositions … Sanctions Workshop, Geneva, 18-19 July 2008

20. Proposition I: Suspension has variable goals • Goal was from beginning and still is unclear & confused • If anything, move from rebalance to compliance • DSU suspension v. other suspensions • DSU suspension v. prohibited subsidies • Goal may vary case by case • Certain goals that suspension cannot achieve … Sanctions Workshop, Geneva, 18-19 July 2008

21. The goal of WTO suspension Sanctions Workshop, Geneva, 18-19 July 2008

22. Proposition II: How can « equivalent » suspension « induce compliance » • Goal became more ambitious, instrument to get there became weaker • Either goal is wrong or instrument is stronger than one thinks • Equivalence: 1. Limit excessive retaliation 2. Counterpart to automatic system 3. Quantum based on harm to victim (not gain to violator) 4. Type (not level) of suspension matters most • Informal remedies: the kicker of « community costs » Sanctions Workshop, Geneva, 18-19 July 2008

23. Bob Hudec, writing in 2000: “The ultimate ‘remedy’ which made the GATT dispute settlement procedure as successful as it was [was] the force of community pressure. Community pressure is something that can be generated without an elaborate structure of remedial procedures” Sanctions Workshop, Geneva, 18-19 July 2008

24. The kicker of « community costs » Liability ruleArt. XIX/XXVIII[suspension as « price »] Violation suspension dispute & community costs END Property rule DSU Art. 22[suspension as « sanction »] Violation suspension community costs continue compliance = END Sanctions Workshop, Geneva, 18-19 July 2008

25. The kicker of « community costs » (2) • Informal remedies as important as formal remedies • Community costs & compliance depend on perception of other states; not sense of legal obligation of violator • Stronger formal remedies may crowd-out informal remedies • Optimal remedies are difficult to calibrate Sanctions Workshop, Geneva, 18-19 July 2008

26. Proposition III: Optimal Protection of WTO entitlemens = Variable Protection Sanctions Workshop, Geneva, 18-19 July 2008

27. Calibrating Optimal Protection Sanctions Workshop, Geneva, 18-19 July 2008

28. The challenge of collective valuation “… we feel we are on shaky grounds solidly laid by the parties. The data is surrounded by a degree of uncertainty. For most variables, the data consists of proxies … and observations are too few to allow for a proper econometric analysis … we are left with preciously little information and guidance. Nevertheless, we will attempt … to make a maximum use of the limited information base we were given” US – Gambling, paras. 3.173-4 Sanctions Workshop, Geneva, 18-19 July 2008

29. Forthcoming in 2008 … Sanctions Workshop, Geneva, 18-19 July 2008