Incoterms_® and Commercial Contracts

Executive Summary

Unlike investor-state disputes, the dispute settlement systems of the WTO and RTAs are not open directly to the business community, nor is financial compensation for a violation of trade law usually available. Businesses with trade grievances must operate indirectly through Member governments to bring a dispute to the WTO or before an RTA tribunal. Since government resources are limited, only influential businesses with important grievances are likely to have their disputes pursued in the WTO or before RTA tribunals. This explains why many WTO disputes involve powerful industries such as steel, agriculture, aircraft manufacturing, alcohol and tobacco. This does not mean that less influential members of the business community are impotent. In many cases, Member governments are willing to go to bat for business interests short of litigation. They will work with businesses at the diplomatic level by asserting their interests on a bilateral or regional basis, or by publishing their grievances in reports that list the trade barriers of other member governments, as an exercise in “naming and shaming” the offending Member. They may also “name and shame” the Member by raising the issue in the appropriate WTO Committee or RTA forum. These approaches constitute an important way for businesses to bring trade issues to national and international attention, as many trade disputes can be resolved bilaterally and informally.

Members of the business community also have other means of resolving trade disputes and protecting their economic interests. National courts and government agencies are available to adjudicate certain trade issues. For example, industries can seek relief from their governments from dumped or subsidised imports that are causing them harm, as well as imported products that infringe their intellectual property rights. Domestic courts can review decisions by customs agencies on the classification or valuation of imported goods.

1.0 Introduction

Businesses can benefit from understanding how they can best profit from the procedures for the settlement of trade disputes. Unlike the case of investment disputes, businesses are generally unable to bring claims under trade agreements directly at the international or regional level. Business must instead work through governments that are parties to particular trade agreements, such as the WTO[Page288:]

Agreements or NAFTA. Also, financial compensation for past harm is not normally available; the usual remedy is a recommendation that the losing party correct the offending practice. Furthermore, even if a member government prevails on behalf of a business interest, there is no guarantee that the losing party (another member government) will comply with a decision from the WTO or a regional tribunal. While compliance is common, there is no means under international or regional trade agreements to assure it. Sanctions for failure to comply are available, but they do not guarantee that decisions will be followed, and only very rarely have they resulted in financial compensation for affected businesses.

* Patrick F.J. Macrory and Arthur E. Appleton are partners in the law firm of Appleton Luff, based in Washington, DC and Geneva respectively. Mr Macrory is also Director of the International Trade Law Center at the International Law Institute in Washington, DC. Dr Appleton is also an Adjunct Professor at the Johns Hopkins University School of Advanced International Studies (SAIS-Europe).

Another problem facing aggrieved businesses is that international and regional trade commitments are not enforceable against member governments in the domestic courts of most WTO Members.

With these points in mind, this chapter is designed to assist businesses confronted with trade problems to decide how to make the best use of their options.

The first step in any trade dispute is to identify likely trade issues and possible remedies. While this may seem obvious, the process is more complicated than most business interests realise.

Trade issues may arise at the international (usually WTO), regional and national levels, and pursuing appropriate remedies requires a thorough understanding of the law and practice at each level, followed by a determination of which avenue is the most cost and time effective.

2.0 The International Level

2.1 The WTO Agreement

With the exception of trade disputes involving European Union members, most formal dispute settlement involving trade matters takes place in the WTO, rather than under Regional Trade Agreements (RTAs). This is because the WTO has a fairly effective dispute settlement system that plays an important role in assuring compliance with WTO obligations. As discussed in Section 3.0 below, many RTA dispute settlement systems are quite flawed.

The Uruguay Round made radical changes to the weak GATT dispute settlement system discussed in Chapter One, Section 2.1.1. The rules of the new system are spelled out in detail in the Uruguay Round Dispute Settlement Understanding (DSU). The DSU makes the WTO one of the few international organisations with a somewhat enforceable dispute settlement process, and has contributed greatly to the stability of the WTO. While practice demonstrates that these claims are somewhat exaggerated, in many cases the WTO dispute settlement system has been successful in helping to bring about the elimination of government actions that violate WTO rules. Nevertheless, from a business perspective the system has some limitations.

• As explained above, the dispute settlement process can only be initiated by a Member government, and not by a private party. A business that wishes to challenge a government practice that is harming its business must persuade a Member government to take action. The government may be reluctant[Page289:]to do so, for a variety of reasons. It may feel that the merits of the case are weak, or that the volume of trade involved is not large enough to justify the effort. Or the government may be reluctant to bring a case because it involves a subject where the government has strong defensive interests, for example its use of similar trade measures that raise WTO issues, such as antidumping or countervailing duties.
• Although WTO dispute settlement moves comparatively quickly, considering the complex issues that are often involved, it is slow from a business point of view, particularly where products with a short life cycle, such as agricultural goods, mobile phones or fashion items, are involved.
• Any relief is for the future only (in the form of a recommendation that an offending practice be brought into conformity with the relevant WTO Agreement).¹No damages are awarded for past harm.²Moreover, WTO tribunals do not have power to issue interim relief, such as an order directing that the challenged practice be suspended while the case is pending.
• While governments that are found to be violating a trade rule often reform their practice, the WTO cannot force them to do so. Although sanctions can be applied to countries that fail to comply with a WTO ruling, this will not guarantee relief to the aggrieved goods or services sector.

2.1.1 The WTO Dispute Settlement Process

WTO disputes normally arise when a business interest is adversely affected by the trade policy of another Member. WTO disputes are almost always preceded by informal discussions between Members, which sometimes last many years. These discussions usually begin when a business or trade association brings a trade issue (usually a barrier to trade) to the attention of its government. If the discussions are unsuccessful, a WTO Member may choose to bring the issue to the appropriate WTO Committee, as a “naming-and-shaming” exercise designed to encourage negotiations and persuade the other Member to drop the offending measure. Business pressure is often essential to assure that a Member government represents its interests before WTO committees.

Businesses are advised to monitor the trade policies of WTO Members to which they are exporting goods or services, or where competitors reside, and to bring possible violations of WTO rules to the attention of their trade associations and government officials. While businesses usually seek assistance from the government where they are headquartered, in appropriate circumstances they can act through other Member governments. As discussed below, several Member governments, in particular the United States and the European Union, publish reports on the trade barriers of other Members as an exercise in naming and shaming. Businesses and trade associations involved with trade can benefit greatly by studying these documents.

As suggested above, WTO litigation is usually the last stage of a lengthy process. Many trade disputes settle in the informal consultations phase. There is a good reason for this – the business community often benefits from the trade regime, so that Members have a strong economic interest in complying with WTO rules. This “good citizenship” theory explains much of the success of both the GATT and WTO regimes. Also, consultations may encourage resolution of the issue by leading the complaining country to realise that it does not have as strong a case as it thought, or, conversely, the responding country to believe that the case will be hard to defend.

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If informal consultations or Committee “naming and shaming” fail to resolve a trade dispute and the stakes are important enough, a business may convince a Member government to commence formal WTO dispute settlement proceedings. This is a rare step. Relatively few formal disputes (usually less than 20) are launched in a given year, and even fewer (only about 10) proceed beyond the initial consultations stage of WTO dispute settlement.

Where other efforts to solve a trade problem have failed, and WTO litigation seems to be the only remaining avenue, it is important to show that the entire industry is behind the request to the government to help resolve the issue. Governments are unlikely to be willing to expend the considerable time and effort required to litigate a WTO case on behalf of a single company or a minority of the industry. Trade associations often make requests to the government for assistance, although sometimes an ad hoc coalition is set up for this purpose.3 It will be helpful as well to show that other countries may be willing to join in the case, particularly developing countries if the principal complainant is a developing country. Also, it is essential to present the government with a detailed statement of the facts and a legal analysis, as well as an indication of why the case is important, perhaps because of the volume of trade affected or because it could establish a useful “precedent”. However, governments will sometimes be reluctant to file a case in the WTO, even though it may be strong on the merits, out of fear that the respondent will file a “titfor- tat” case against it, or out of concern that its position might come back to haunt it in a later case.⁴ For example, the United States is said to be very reluctant to challenge other countries’ anti-dumping or countervailing duty regimes, in case the decision is used against the United States in the future.

2.1.2 The Formal Litigation Process

WTO litigation involves four formal stages: consultations, panel proceedings, Appellate Body proceedings and implementation. The first three stages are supposed to be completed within 15 to 18 months; the implementation stage typically takes about one year. The increasing complexity of panel and Appellate Body rulings, and the need for translation into the other official languages,⁵is giving rise to more and more delay, particularly during the panel stage.

2.1.2.1 Consultations

Reflecting the diplomatic origins of the GATT/WTO system, the parties to a dispute are required to consult with each other for a minimum of 60 days before proceeding to the panel stage. The idea is that by discussing the issues, the parties may decide that it is not worth litigating the case, either because the complaining Member’s case is not as strong as it had supposed, or because the defending Member realises that it has no real defence and decides to withdraw the offending measure. Or the parties may be able to reach a compromise. The value of the consultation process is shown by the fact that roughly half of the cases initiated do not progress beyond this stage.

A Member’s Request for Consultations marks the beginning of the formal dispute settlement process. Although the parties can jointly agree to shorten the consultation procedure, this rarely happens. The business community of the responding Member almost invariably benefits economically from a WTO violation and as a result gains from any delay in the proceedings, including a delay at the consultations stage. In large part this is due to the fact that the complaining Member wins on the major issues in the great majority of cases that reach a panel or the Appellate Body. This is understandable, as governments whose resources are limited tend to focus their energy on stronger cases.

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By the time a dispute reaches the consultation stage, Members and affected businesses have usually consulted counsel or other trade law experts. It is common for affected businesses to retain counsel to work with a Member government’s trade experts. In some cases, private counsel (sometimes paid by business interests), or the Advisory Centre on WTO Law, represent smaller Member governments in WTO proceedings.6 The United States, the European Union, and other larger trading countries have lawyers on their staff who handle trade litigation, though lawyers representing the private stakeholders often assist the government lawyers in developing the facts and legal arguments.

2.1.2.2 Panel Proceedings

If a matter is not resolved at the Consultation stage, the WTO will appoint a panel of three experts to consider the case. In principle the panellists, who are picked from a roster of “well-qualified governmental and/or nongovernment individuals” maintained by the WTO Secretariat, are supposed to be selected by agreement of the parties. In practice the parties rarely agree, and by default the WTO’s Director-General chooses the panellists. The parties file written submissions with the panel, which usually holds two rounds of hearings. The panel issues a report with its findings and, if it finds that a violation has occurred, its recommendations. If the decision is not appealed, it automatically enters into effect and binds the parties (Member governments, and not businesses) to the proceedings, unless all WTO Members (including the winner) decide to block the decision – an extremely unlikely event.

Although businesses cannot be parties to WTO panel or Appellate Body proceedings, they can be involved in the process in several different ways. Not only can they hire counsel to advise and assist a Member government involved in a case, they can submit amicus curiae submissions (friend of the court submissions expressing their views) to a panel or the Appellate Body, though such submissions are rarely cited as influential by the tribunals. They can also ask a government to accredit a representative (usually paid counsel) to the diplomatic delegation taking part in a dispute settlement proceeding.

2.1.2.3 Appellate Body Proceedings

Any legal, as opposed to factual, issue can be appealed to the WTO Appellate Body. Like panels, the Appellate Body receives written submissions and holds a hearing.

The Appellate Body has seven Members, who are appointed for four-year terms that the Members can renew once. Three Members decide each dispute, but all seven Members confer before a decision is reached to help ensure correct and consistent decisions. The WTO Agreement calls for the Appellate Body to be composed of “persons of recognised authority, with demonstrated expertise in law, international trade and the subject matter of the covered agreements generally”. Although there is no formal geographic distribution, there are always Members from the United States, the EU, Asia, Latin America and Africa.

As with unappealed Panel decisions, Appellate Body decisions automatically enter into effect unless all WTO Members decide to block the decision. The Appellate Body has created a significant body of jurisprudence and clarified many of the ambiguities that exist in the WTO Agreements – the inevitable result of the compromises that[Page292:]must be made in order to conclude multi-party international negotiations. As a Member of the Appellate Body said:

[…] there is an inevitable recognition that a treaty bears the imprint of many hands. And what is left behind is a text, sometimes negotiated to a point where an agreement to regulate a matter could only be reached on the basis of constructive ambiguity, carrying both the hopes and fears of the parties. Interpretation is an endeavour to discern order, notwithstanding these infirmities, without adding to or diminishing the rights and obligations of the parties.⁷

Although Panel and Appellate Body proceedings only bind the parties to a dispute and there is no formal system of legal precedent, panels generally respect Appellate Body decisions, and the Appellate Body strives for consistency in its interpretations. This gives businesses that follow WTO matters some degree of legal certainty and allows them to plan accordingly. Likewise, old GATT jurisprudence is sometimes referred to by the Appellate Body and panels and is regarded as creating legitimate expectations among Members and the business community. This is why GATT cases are sometimes cited in this book. Businesses in sectors that are often subject to WTO litigation (for example, steel, agriculture, alcoholic beverages, tobacco and aircraft manufacture) are advised to have their government affairs departments pay particular attention to the evolution of WTO case law.

2.1.2.4 Implementation

If the final decision (from the Appellate Body or an unappealed Panel report) is that there has been a WTO violation, the responding Member is given a “reasonable period of time” to bring its offending trade measure (usually a law or regulation) into compliance. If the parties do not agree as to what is “reasonable”, the issue is arbitrated, nearly always by a single member of the Appellate Body. The length of time will vary depending on what needs to be done (for example, a law is likely to take longer to change than a regulation), ranging from 6 to 15 months, and frequently about a year.

If the responding Member takes some action (usually a law or regulation) that it claims brings its measure into compliance with the decision, but the complaining Member disagrees, the complaining Member may request a panel (the original panel if possible) to determine whether the action complies with the decision.

Frequently businesses in the Member that lost the dispute benefit economically from the delay in determining whether a Member has brought its trade measure into conformity with the Panel’s recommendation. Likewise there are businesses from the prevailing Member that are harmed economically by the delay. As WTO dispute settlement proceedings do not award financial compensation, there is little that can be done to make businesses in the winning state financially whole. This is one of the remaining imperfections in the dispute settlement system

2.1.2.5 Compensation, Retaliation and Cross-Retaliation

What happens if the responding Member simply fails to comply with an Appellate Body or panel decision? This may happen for political reasons. For example, after the Appellate Body found that an EU ban on the sale of beef treated with growth hormones violated the Agreement on Sanitary and Phytosanitary Measures (which regulates food safety among other matters),⁸the EU concluded that it could not lift[Page293:]the ban because of the grass-roots outcry that would result. Under these circumstances the complaining Member is entitled to receive “compensation” or to “retaliate”.

In the WTO, an agreement to “compensate” is virtually unknown. This is because compensation in the WTO does not mean financial compensation, but compensation in trade terms – in the form of negotiated tariff reductions. In principle, if a WTO violation has reduced Member A’s exports of a particular product to Member B by US$50 million, and Member B is unwilling to change its practice, it should restore the trade balance upset by the violation by negotiating tariff reductions on other products of interest to Member A, in order to increase Member A’s exports by the same amount. In reality this outcome does not happen since it would have a negative effect on businesses in the losing Member that were not involved in the dispute. Why should an unrelated industry that has not benefitted from a violation of the WTO Agreements, say the European alcoholic beverage and cheese industries, be forced to face increased import competition, as a result of lower tariffs, to settle a dispute involving another sector such as beef? Furthermore, pursuant to WTO rules, all other Members would probably be eligible to benefit from the tariff reduction granted by the losing Member.

If the case cannot be settled through compensation, the final step is “retaliation”. WTO Members authorise the complaining Member (Member A) to raise tariffs on imports from the offending Member (Member B) in order to reduce exports from Member B to Member A by the amount of trade lost by Member A, again with the notion of restoring the trade balance. Obviously, this is not an ideal solution as it will result in double the amount of trade being destroyed; it will hurt exporters in Country B who are “innocent bystanders”; it will increase the cost to consumers of imported goods in Member A; and it may increase the cost of inputs when the targeted product is incorporated in a domestically produced good and a reasonably priced substitute is not available. For example, the United States was calculated to have lost US$116.8 million per year of exports to the European Union as a result of the EU ban on the sale of hormone treated beef, and was therefore given the right to increase tariffs on an equivalent amount of EU imports. This retaliatory measure was designed to block all imports of the products in question.⁹

The idea of retaliation is that the exporters in Member B who are affected by the higher tariffs will put pressure on their government to settle the case. However, the effectiveness may diminish over time if the exporters are able to find new markets. Nevertheless, in the few cases in which retaliation has been authorised, it has sometimes helped to resolve disputes, although often this has taken considerable time.

In principle, retaliation should be under the same Agreement (e.g., GATT, GATS or TRIPS). In the EC – Beef Hormones case the United States raised its tariffs to the prohibitive level of 100% on certain EU meat, cheese and other food and beverage products. If retaliation in the same sector would be ineffective (due to the absence of sufficient trade in that sector) “cross-retaliation” is possible. In two cases involving trade in goods, the complaining Member was given the right to suspend intellectual property rights belonging to nationals of the offending Member, thus in effect granting its own nationals a royalty-free license to exploit those rights domestically. As a result of political pressure from its rights holders, this provided an incentive for the responding Member to settle the cases in favour of the developing country Members involved.¹⁰

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Retaliation is fairly rare, having been authorised by WTO Members in only a handful of the many disputes decided in the WTO. The value of retaliation is primarily as a deterrent. The threat of retaliation should encourage a Member found to be in violation of a WTO agreement either to drop the offending measure entirely, or to try to reach a negotiated solution with the complaining Member.

2.2 Other Agreements

2.2.1 United Nations Resolutions

As noted in Chapters Two and Ten, the GATT and the GATS authorise WTO Members to impose trade sanctions in compliance with Security Council Resolutions involving national security. In addition, the WTO has on occasion granted waivers to allow Members to restrict trade in accordance with United Nations General Assembly Resolutions that do not affect national security, for example General Assembly Resolution 55/56 that restricted trade in conflict diamonds (the Kimberley process). In such cases, Members would not initiate WTO dispute settlement proceedings as there would be no likelihood of success.

2.2.2 Other Treaties

Several prominent and widely ratified international agreements, such as the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, and the Convention on International Trade in Endangered Species of Wild Fauna and Flora, have trade implications. However, WTO panels and the Appellate Body cannot apply such agreements, since they are restricted to the interpretation and application of the “covered agreements”, i.e., the WTO Agreements themselves. On rare occasions, the Appellate Body has mentioned such agreements, but only for interpretive purposes. Business interests should be able to rely on the established practice that WTO panels and the Appellate Body cannot be used as fora for enforcement of other (non-WTO) international agreements.

3.0 Regional Trade Agreements

Almost all RTAs have provisions covering dispute settlement – with some agreements being more effective than others. In a few cases courts, such as the European Court of Justice, handle dispute settlement. Instead, however, most RTAs incorporate a dispute settlement system resembling the WTO process, with ad hoc panels, and trade sanctions for failure to comply with rulings. A few systems provide for appellate review.

There has been very little activity under the majority of RTA dispute settlement systems. For example, there have only been three cases under Chapter 20 of NAFTA, the basic (trade-related) NAFTA dispute settlement provision,¹¹despite the fact that NAFTA covers a huge volume of trade, and has been in effect for more than 20 years. In fact parties to regional trade agreements sometimes file cases against other parties in the WTO rather than use the dispute settlement procedures in the RTAs. There are a number of possible reasons for this, including:

• The greater familiarity and predictability of the WTO system;
• Difficulties and delays in appointing panellists in RTA dispute settlement proceedings, for example the reported refusal of the United States to appoint panellists in a case initiated by Mexico involving sugar;¹²
• The possibility of forming alliances in WTO proceedings; [Page295:]
• The weak enforcement mechanisms in some RTA dispute settlement systems; and
• The opportunity for appellate review, which is rare in RTA dispute settlement systems.

The ultimate decision whether to initiate proceedings in the WTO or under an RTA, where both possibilities exist, will of course rest with the government of the affected business. But businesses should be aware that, outside the EU system, most RTA dispute settlement systems are underutilised and may not be very strong, and that the WTO may often be a better forum for resolving a trade dispute.

4.0 National Level

In a “naming and shaming exercise”, a number of countries regularly publish details of trade barriers imposed by other countries. For example, the EU publishes an annual Trade and Investment Barriers Report,¹³and the United States publishes an annual report on “National Trade Estimates of Foreign Trade Barriers.”¹⁴ In addition, each year the United States publishes a “Special 301 Report”, which lists concerns that the United States has over inadequate intellectual property protection and enforcement in other countries.¹⁵

Businesses facing trade barriers in other countries should bring them to the attention of their government, with a view to having them listed in a trade barrier report, which may help to bring pressure to bear on the foreign government to remove or lower the barrier.

The role of domestic courts in resolving international trade disputes is quite limited. The national courts of most WTO members, including the European Union, the United States and Japan, do not give “direct effect” to the WTO Agreements; that is to say they will not rule on the compatibility of a domestic law or regulation with a WTO obligation.¹⁶An importer in one of these countries that believes that a government action is inconsistent with one of the WTO Agreements cannot challenge this action in a domestic court based solely on the WTO Agreement.

However, some of the WTO Agreements do require creation of a judicial mechanism for the domestic review of certain administrative actions involving trade. For example, Article X of the GATT requires WTO Members to establish “judicial, arbitral or administrative tribunals or procedures for the […] prompt review and correction of administrative action relating to customs matters.” Under the Anti-dumping and Subsidies and Countervailing Measures Agreements, anti-dumping and countervailing duty determinations must be subject to judicial review. And the TRIPS Agreement requires Members to establish judicial procedures “concerning the enforcement of intellectual property rights covered by this Agreement”.¹⁷

Businesses should ascertain whether domestic options exist to accomplish their trade objectives. While only available in limited circumstances, such alternatives may be faster and more effective than working through WTO or RTA Members, and WTO and RTA dispute settlement procedures.

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