EU adopts more efficient retaliatory measures to face WTO paralysis

By Kiliane Huyghebaert, Hein Hobbelen

10-2020

When one country imposes trade-restrictive measures against goods or services from another country, the latter country can challenge the legality of the measures before the World Trade Organization's (WTO) dispute settlement system. The WTO's dispute settlement system, once called the jewel of the multilateral trading system, was designed to have a panel at first instance and an Appellate Body, functioning as a court of appeal. This system has proven to be very successful, and since 1995, over 350 rulings have been issued.

For over four years, the Appellate Body has been in crisis due to the fact that the United States blocked the appointment of new judges. The crisis culminated on 10 December 2019, when the Appellate Body had only two judges left, which is insufficient to function according to its own rules. The consequence of a paralysed Appellate Body is that countries found to have violated WTO legislation by a panel at first instance can go unpunished for potentially years simply by appealing the panel's decision. Indeed, once appealed, the finding of the panel is not final as long as the Appellate Body has not confirmed or rejected the panel report.

If a country refuses to comply with the final recommendations by either the panel or the Appellate Body, the European Union (EU) can retaliate by either increasing import duties on certain goods or by imposing quotas. However, today, retaliation is not allowed if the panel's decision is not binding and thus, final. This means that when a dispute is blocked because of an appeal, the country found to violate WTO legislation does not have to bring its measures into compliance, and the EU cannot retaliate to force the country to.

To prevent this from happening, the Commission, the Council and the Parliament came to an agreement on 28 October 2020 to expand the application of the Trade Enforcement Regulation of 2014 (Regulation 654/2014). After the entry into force of the amendment, the European Union will be able to unilaterally retaliate when it has won a WTO dispute before a WTO panel, regardless of a potential appeal. The European Union will have the necessary tools to act when a third country tries to exploit the currently non-functioning Appellate Body.

In addition to expanding the circumstances in which the European Union can retaliate, the European Union also enhanced its trade weapon. Whereas retaliation was only possible on goods, the measures will now also be able to target services and some intellectual property rights. For instance, the EU will have the possibility to increase registration fees for European trademarks, geographical indications, and EU protected designs for foreign companies as a retaliatory action. The rationale behind this expansion is to have a more efficient retaliatory arsenal, which can bring a country to comply.

Amid the turbulent times for international trade, the EU thus ensures that European companies remain protected against illegal trade measures imposed by other countries. The new retaliatory actions may be put at use against the measures that are currently being challenged before a WTO panel. In particular:

  • Indonesia's measures on certain raw materials necessary for the production of stainless steel; 
  • Turkey's measures concerning pharmaceutical products; 
  • India's tariff treatment of certain goods in the information and communications technology sector; and
  • United States' anti-dumping measures on Spanish olives.