The International Economics
Study Center


Chapter 2
The Dispute Resolution Mechanism



The WTO's Dispute Settlement Understanding (DSU) evolved out of the ineffective means used under the GATT for settling disagreements among members. Under the GATT, procedures for settling disputes were ineffective and time consuming since a single nation, including the nation who's actions were the subject of complaint, could effectively block or delay every stage of the dispute resolution process.(1) It remains to be seen whether countries will comply with the new WTO dispute settlement mechanism, but thus far the process has met with relative success.

The DSU was designed to deal with the complexity of reducing and eliminating non-tariff barriers to trade. A non-tariff trade barrier can be almost any government policy or regulation that has the effect of making it more difficult or costly for foreign competitors to do business in a country. In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade-liberalization. Frequently, such non-tariff trade barriers are the inadvertent consequence of well meaning attempts to regulate to ensure safety or protection for the environment, or other public policy goals. In other cases, countries have been suspected of deliberately creating such regulations under the guise of regulatory intent, but which have the effect of protecting domestic industries from open international competition, to the detriment of the international free-trade regime.

The WTO's strengthened dispute resolution mechanism was designed to have the authority to sort out this "fine line between national prerogatives and unacceptable trade restrictions"(2) Several of the supplemental agreements to the GATT created during the Uruguay Round, such as the SPS Agreement, sought to specify the conditions under which national regulations were permissible even if they had the effect of restraining trade. The United States, perhaps more than any other country, has found itself on both sides of this delicate balance. In 1988, it was the United States who pushed for strengthening the Dispute Settlement provisions of the GATT during the Uruguay Round, in part because Congress was not convinced that, "the GATT, as it stood, could offer the United States an equitable balance of advantage."(3) The concern was that formal concessions granted to U.S. exports going into other countries would be eroded by hidden barriers to trade. On the other hand, the United States harbors reservations in regards to its sovereignty, with much of the negative reaction to the WTO itself centered around the concern that U.S. laws and regulations may be reversed by the DSU panels or the Appellate Body.

Critics argued that the WTO would "compel Congress and our states to abandon many health and environmental standards" if they were at odds with international trade rules.(4) Particularly, these critics noted that the United States would not have a veto in the WTO and that each nation would have an equal say in the DSB, which ultimately votes to adopt or reject panel reports. They further noted that the Appellate Body and the dispute settlement panels vote in secret, and that they could authorize nations to retaliate against violations of the trade agreements with unilateral sanctions. It was argued by some that the cumulative effect of WTO dispute panel decisions would be to erode the sovereignty of the United States. One of the purposes of this review is to assess the validity of this claim in light of the actual functioning of the WTO system over the last three years.


The Dispute Settlement Understanding (DSU), formally known as the Understanding on Rules and Procedures Governing the Settlement of Disputes, establishes rules and procedures that manage various disputes arising under the Covered Agreements of the Final Act of the Uruguay Round.(5) All WTO member nation-states are subject to it and are the only legal entities that may bring and file cases to the WTO. The DSU created the Dispute Settlement Body (DSB), consisting of all WTO members, which administers dispute settlement procedures.(6) It provides strict time frames for the dispute settlement process(7) and establishes an appeals system to standardize the interpretation of specific clauses of the agreements.(8) It also provides for the automatic establishment of a panel and automatic adoption of a panel report to prevent nations from stopping action by simply ignoring complaints.(9) Strengthened rules and procedures with strict time limits for the dispute settlement process aim at providing "security and predictability to the multilateral trading system"(10) and achieving "[a] solution mutually acceptable to the parties to a dispute and consistent with the covered agreements."(11) The basic stages of dispute resolution covered in the understanding include consultation, good offices, conciliation and mediation, a panel phase, Appellate Body review, and remedies.(12)


A member-country may request consultations when it considers another member- country to have "infringed upon the obligations assumed under a Covered Agreement."(13) If the respondent fails to respond within ten days or enter into consultations within thirty days, the complaint "may proceed directly to request the establishment of a panel."(14)

Good Offices, Conciliation and Mediation

Unlike consultation in which "a complainant has the power to force a respondent to reply and consult or face a panel,"(15) good offices, conciliation and mediation "are undertaken voluntarily if the parties to the dispute so agree."(16) No requirements on form, time, or procedure for them exist.(17) Any party may initiate or terminate them at any time.(18) The complaining party may request the formation of panel, "if the parties to the dispute jointly consider that the good offices, conciliation or mediation process has failed to settle the dispute."(19) Thus the DSU recognized that what was important was that the nations involved in a dispute come to a workable understanding on how to proceed, and that sometimes the formal WTO dispute resolution process would not be the best way to find such an accord. Still, no nation could simply ignore its obligations under international trade agreements without taking the risk that a WTO panel would take note of its behavior.

Panel Phase

If consultation, good offices, conciliation or mediation fails to settle the dispute, the complaining party may request the formation of panel. The DSB(20) shall form a panel, "unless at that meeting the DSB decides by consensus not to establish a panel."(21) "Panels shall be composed of well-qualified governmental and/or non-governmental individuals"(22) "with a view to ensuring the independence of the members,"(23) and whose governments are not the parties to the dispute, "unless the parties to the dispute agree otherwise."(24) Three panelists compose a panel unless the parties agree to have five panelists.(25)

The Secretariat proposes nominations for panels that the parties shall not oppose "except for compelling reasons."(26) If the parties disagree on the panelists, upon the request of either party, "the director-general in consultation with the chairman of the DSB and the chairman of the relevant council or committees"(27) shall appoint the panelists.

When multiple parties request the establishment of a panel with regard to the same matter, the DSU suggests a strong preference for a single panel to be established "to examine these complaints taking into account the rights of all members concerned."(28) The DSU gives any member that has "a substantial interest in a matter before a panel"(29) (and notifies "its interest to the DSB"(30)) an opportunity "to be heard by the panel and to make written submissions to the panel."(31)

"The panel shall submit its findings in the form of written report to the DSB."(32) As a general rule, it shall not exceed six months from the formation of the panel to submission of the report to the DSB.(33) In interim review stage,(34) the panel submits an interim report to the parties. The panel "shall hold a further meeting with the parties"(35) if the parties present written comments. If no comments are provided by the parties within the comment period, the "report shall be the final report and circulated promptly to the members."(36) Within sixty days after the report is circulated to the members, "the report shall be adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adapt the report."(37)

Appellate Body Review

The DSB establishes a standing Appellate Body that will hear the appeals from panel cases. The Appellate Body "shall be composed of seven persons, three of whom shall serve on any one case."(38) Those persons serving on the Appellate Body are to be "persons of recognized authority, with demonstrated expertise in law, international trade and the subject matter of the Covered Agreements generally."(39) The Body shall consider only "issues of law covered in the panel report and legal interpretations developed by the panel."(40) Its proceedings shall be confidential, and its reports anonymous.(41) This provision is important because, unlike judges in the United States, the members of the appellate panel do not serve for life. This means that if their decisions were public, they would be subject to personal retaliation by governments unhappy with decisions, thus corrupting the fairness of the process. Decisions made by the Appellate Body "may uphold, modify, or reverse the legal findings and conclusions of the panel."(42) The DSB and the parties shall accept the report by the Appellate Body without amendments "unless the DSB decides by consensus not to adopt the Appellate Body report within thirty days following its circulation to the members."(43)


There are consequences for the member whose measure or trade practice is found to violate the Covered Agreements by a panel or Appellate Body.(44) The dispute panel issues recommendations with suggestions of how a nation is to come into compliance with the trade agreements.(45) If the member fails to do so within the determined "reasonable period of time,"(46) the complainant may request negotiations for compensation.(47) Within twenty days after the expiration of the reasonable period of time, if satisfactory compensation is not agreed, the complaining party "may request authorization from the DSB to suspend the application to the member concerned of concessions or other obligations under the Covered Agreements."(48)

Retaliation shall be first limited to the same sector(s).(49) If the complaining party considers the retaliation insufficient, it may seek retaliation across sectors.(50) The DSB "shall grant authorization to suspend concessions or other obligations within thirty days of the expiry of the reasonable time unless the DSB decides by consensus to reject the request."(51) The defendent may object to the level of suspension proposed.(52) "The original panel, if members are available, or an arbitrator appointed by the director-general"(53) may conduct arbitration.


Members may seek arbitration within the WTO as an alternative means of dispute settlement "to facilitate the solution of certain disputes that concern issues that are clearly defined by both parties."(54) Those parties must reach mutual agreement to arbitration and the procedures to be followed. Agreed arbitration must be notified to all members prior to the beginning of the arbitration process. Third parties may become party to the arbitration "only upon the agreement of the parties that have agreed to have recourse to arbitration."(55) The parties to the proceeding must agree to abide by the arbitration award. "Arbitration awards shall be notified to the DSB and the Council or Committee of any relevant agreement where any member may raise any point relating thereto."(56)


Now that the WTO Dispute Settlement procedures have been in use for three years, it is possible to make a tentative analysis of the impact of this institutional evolution of the international trading system. A rich variety of cases have been addressed by the WTO dispute settlement procedures. (See Figure 1) These include complaints against countries with economies as small as Guatemala, and as large as the European Union.(57) They have also targeted countries at vastly different stages of development, including countries like India at one end of the spectrum and the United States and Japan on the other.(58)

Figure 1
Industry Number of cases
Agricultural Products 32
Alcoholic and other Beverages 6
Textile and Clothing 10
Animal Skin Products 2
Electronics 3
Telecommunications 3
Automobiles 5
Aircraft 2
Satellite Systems 1
Cement Products 1
Chemical Products 6
Pharmaceutical Products 5
Other Industrial Products 4

Note: Among eighty-three distinct matters, including settled and inactive cases; above statistics include five cases of disputes involving more than two industries.

In the entire forty-seven years of the GATT, only some 200 cases were disputed. In the first three years of the WTO, 118 complaints have been brought, dealing with eighty-three distinct matters. Nine of these cases have gone through the entire process, resulting in the adoption of appellate reports by the DSB.(59) The increased use of the dispute settlement procedures under the WTO suggests that nations see value in the reforms that were implemented, and that they have increased confidence that other nations will abide by their trade obligations if the DSB finds them to be in violation of specific provisions.

Due to the wide range of topics addressed by the dispute settlement panels, it is difficult to make generalizations about the overall impact of the DSU. Nevertheless, a few early trends are evident. The majority of complaints have been brought by developed countries against other developed countries, with the next largest category being complaints by developed countries against developing nations. However, at least twenty-five complaints have been initiated by developing countries. (See Figure 2)

Figure 2
Complainants Frequencies by matter
Developed Country against Developing Country  27
Developed Country against Developed Country  36
Developing Country against Developed Country  16
Developing Country against Developing Country 

Note: Four matters were more than doubly counted because the suits were brought by multiple complainants.

These complaints have dealt with traditional sectors such as trade in goods, manufactures, and agricultural products, but they have also dealt with newer trade issues such as intellectual property rights. (See Figure 3)

Figure 3
Sector By Request
Manufacturing 48
Agricultural 42
General Goods 9
Intellectual Property 10
Others 6

Note: Statistics are from data provided through the WTO website and USTR press releases.


Agreements and National Policy

Since the various agreements that constitute the WTO cover such a wide range of topics, dispute settlement panelists find that a number of subjects come under their authority. This places WTO dispute panels in a delicate position. On the one hand they must identify cases where nations are failing to comply with international trade agreements; on the other, they must be cautious when making recommendations that reverse the preferences of national governments.

Thus far, in the decisions of the panels and the Appellate Body, there has been a tendency to write decisions in a way that minimizes the burden on nations to change their regulations and laws in order to comply with their WTO trade obligations. This does not mean that dispute settlement panels have not found nations in violation of the trade agreements. When they have, however, they have left national governments with a variety of options in order to come into compliance.

Two cases in which panel reports were adopted reflect the WTO's tendency to avoid becoming overly involved in the internal regulatory affairs of nations. These cases have been selected as examples because they have received a lot of attention, but the trend described can be found in each case where a panel report has been issued. Both examples are complaints by the United States, one against the European Union (EU) regarding restrictions on import of hormone treated meat, and the other against Japan regarding the photographic film industry. In the first case the United States won the concessions it sought; in the second case the panel found no evidence of violation of the trade agreements.

European Hormone Case

In the European Hormone Case the panel found the scientific evidence for the import restrictions on beef treated with growth hormones to be insufficient to justify the restriction on trade, but, in effect, left open a wide variety of ways for the EU to comply.(60) The EU is conducting further studies in the hopes of justifying the ban. This was a case where the WTO panel clearly confronted the democratic will of the people, as expressed through their national legislatures and the European Parliament, since the hormone restrictions were initially adopted under intense public pressure. The panel sided with the United States by finding that the provisions were arbitrary and had the effect of restricting trade, but left options for the EU as well by suggesting that more complete scientific evidence would justify the ban.(61) Alternatively, the panel indicated that technical changes in the way the policy is implemented could reduce the policy's negative impact on trade. (62) Still, the panel was firm in ruling that the current policy is inconsistent with the SPS Agreement, and the EU will have to make substantive changes to come into compliance. If it does not, the EU will be required to offer other trading concessions to compensate for losses, some $200 million per year according to the United States. (63) The EU has until 1999 to comply.

Kodak-Fuji Case

The Kodak-Fuji film dispute centers on the distribution system in Japan. In May 1995, Eastman Kodak, Co. asked the U.S. Trade Representative (USTR) to investigate the Japanese photographic film and paper market. Kodak charged that Fuji Photo Film, Co., Japan's biggest photographic film and paper producer, was involved in "anti-competitive trade practices" in Japan. Kodak asserted that Fuji, with the support of the Japanese government, tacitly dominated the consumer film market in Japan using unfair practices. According to Kodak, Japanese regulations implicitly favored Fuji by making it difficult for imported consumer photographic film and paper to be marketed in Japanese shops. Kodak also said that some shops in Japan were not allowed to carry Kodak's products because of back room deals with Fuji. According to Kodak, this explained why Fuji had a 75 percent market share in Japan while Kodak had only a 7 percent share in 1996.(64) Kodak estimated its losses since the 1970s due to the unfair practices at $5.6 billion.(65) Accordingly, Kodak requested that Japanese regulations be changed in order to break up Fuji's exclusive distribution system.

In the Kodak-Fuji case, the panel ruled that Japanese regulations predated the reductions in tariffs that had been negotiated on photographic film. Consequently, those regulations could not have negated the benefits accruing to the United States in the trade agreement. This technical ruling allowed the WTO to avoid a far-reaching decision that could have found Japanese vertical integration of business in conflict with the intent of the WTO regime.(66) Currently, there is no international standard for anti-trust regulation. If the WTO dispute settlement panel had found in favor of the United States, it would have been involved in creating new international obligations, an act not sanctioned by the WTO Agreement. The ruling suggests that the United States and other nations need not be overly concerned that the WTO's dispute settlement mechanism will overtly threaten national sovereignty.

In June of 1995, the United States began to investigate Japanese market barriers for photographic films and papers, and found that three "liberalization countermeasures" discriminated against imported goods.(67) The first measure was exclusive wholesaling arrangements currently dominated by Fuji; the second was the large-stores law enacted in 1974. According to the United States, this law discouraged large stores from carrying film other than Fuji's. The third discriminatory measure cited involved controls on price competition and promotion as supervised by the Japanese Fair Trade Commission. After eleven months of investigation, the United States filed a complaint in the WTO on June 13, 1996, requesting consultations with Japan. The United States argued that the import-resistant market structure created by the Japanese government violated the national treatment principle of the GATT Article III. The United States also asserted that Japan's restrictions on retail operations and promotional activities ran counter to the transparency standard set out in the GATT Article X, even if Japan appears to offer neutral treatment of imported goods. The United States also made a "non-violation" claim that these measures nullify or impair benefits accruing to the United States. A "non-violation" claim is specifically authorized in the GATT Agreements if the actions of another nation reduce the value of negotiated trade concessions, even if the specific measure taken by the other country does not directly violate any of the Articles of the trade agreements. The types of redress available under such complaints, however, are limited.

Fuji denied Kodak's assertion. Fuji asserted that it had never conspired with the Japanese government to discriminate against imported goods. Furthermore, Fuji claimed that Kodak's loss of market share in Japan could be attributed to Kodak for a number of reasons. First, Kodak failed to introduce innovative products to compete with Fuji's new products. Second, Kodak's marketing strategy was not superior to that of Fuji's. Third, there was no bottleneck to block Kodak from the market since it had the same access to consumers as Fuji. These market channels included selling directly to retailers, selling to secondary dealers, and selling to smaller retailers through photo finishing labs.(68) Fourth, Fuji stated that its market share in the United States is only 11 percent while Kodak dominates the market with a 75 percent share.(69) Thus, the proportion is exactly the reverse of the situation in Japan suggesting that both Kodak and Fuji have difficulty penetrating the domestic market of its rival. Therefore, consumers' loyalty to the domestic brand, and not formal restrictions on trade, can explain low market penetration by foreign competition.(70) There is also a claim that, although Kodak is cheaper in Japan, customers buy Fuji because of its investment in innovative products and its creative marketing skills and services.(71)

The United States, failing to reach an agreement with Japan, requested a dispute settlement panel on September 20, 1996. The panel was tasked to investigate Kodak's allegations that Japanese regulations had the effect of supporting anti-competitive practices by Fuji film. After more than a year's investigation, the WTO interim report was submitted on December 5, 1997. The report rejected the U.S. complaint against Fuji. The tribunal arbitration panelists were from Brazil, Switzerland, and New Zealand. They determined that the United States had not demonstrated that its WTO rights had been impaired.

Even though the panel did not rule as Kodak would have liked, there is evidence that Fuji's market share in Japan has diminished from 74 percent in the early 1990s to 67 percent at the end of 1997, though Fuji denies this.(72) The profit margin of the color film industry in Japan used to be close to 12 percent, compared to 6 percent on overseas sales, but this has also fallen. Current retail prices for photographic film and paper in Japan reflect this, with prices about 30 to 40 percent below comparable prices in the United States.(73) Kodak's market share in Japan now accounts for about 11 percent since it won the Nagano Olympic Games sponsorship by paying $44 million in 1996. In the Nagano area where the Games were held, Kodak has doubled its market share to 20 percent.(74) In the U.S. market, however, Kodak's profits decreased by 25 percent in 1997 from the year before. Fuji's business in the U.S. market is also improving. Fuji increased its market share to 14 percent while Kodak had 76 percent of the market. Kodak announced plans to cut costs by a billion dollars and lay off 10,000 jobs over next two years in order to remain competitive.(75) (See Figure 4)

Figure 4
Kodak's Layoffs
Month/Year Jobs Cut
January 1993 2,000
August 1993 10,000
November 1994 800
February 1995 4,000
November 1997 10,000
Total 26,800

Source: Challenger, Gray & Christmas, Inc.(76) 

Increased market share for Fuji in the United States, and for Kodak in Japan, suggests that consumers are increasingly trying the imported brand. In the end, it is consumers who benefit from increased global competition through lower prices.

Figure 5
WTO Complainants by Country


In practice, the United States has used the DSU procedures to its advantage more than any other member of the GATT. (See Figure 5) In contrast, the United States has only been the target of complaints in the same number of cases as the European Union. Japan has only initiated five complaints, but it has been the target of twice as many. (See Figure 6)

Figure 6
COMPLETED CASES (Appellate Reports Adopted)
Total Completed Cases US involved as Complainant US as Respondent
9 5 3

Figure 7
Respondents to WTO Complaints by Country

Of the five complaints by the United States where final appellate reports have been adopted, all five decisions found that there were barriers to exports from the United States that violated the trade agreements and should be rectified.(77) The result has been significant moves on the part of U.S. trading partners towards allowing greater access in their market places for U.S. goods and services.

Japan Alcohol Case

A U.S. complaint against Japan that resulted in a dispute settlement panel decision adopted in July of 1996 will require a 40 percent reduction of the Japanese tax on alcohol imports, which will add tens of millions of dollars in exports to U.S. producers.(78) The panel agreed with U.S. claims that the Japanese Liquor Tax Law that provided for lower taxes on a Japanese produced liquor called shochu, versus a higher one on whiskey, cognac and wine spirits, was a violation of the GATT Article III, Section 2, national treatment provisions.

European Union Banana Regime Case

The United States, along with four Latin American countries, complained that EU rules favor bananas from domestic producers and former colonies over the cheaper bananas produced in the Americas. Under EU rules, bananas from the Americas face duties, quota restrictions, and limits on the amount that can be marketed through a complex licensing system. American complaints about European banana importation practices pre-date the WTO. In January 1994, a GATT panel found the "banana protocol," part of the Lomé Convention between the EU and ACP countries (former European colonies in Africa, the Caribbean, and the Pacific), to be inconsistent with the GATT. Since the panel report was never adopted, however, the United States, Guatemala, Honduras, Mexico, and Ecuador joined together to request consultations with the EU again on February 5, 1996. Unable to settle their dispute with the EU, the American group requested a WTO panel on April 24, 1996, which the EU blocked, but which was finally established on May 8th. The complainants alleged that the EU banana regime violated the GATT 1994, the Agreement on Importing Licensing Procedures, the Agreement on Agriculture, the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Investment Measures (TRIMs).(79)

The European Union claimed that it obtained a waiver from WTO obligations for the Lomé Convention,(80) while the United States believes the current banana regime goes beyond the convention's requirements. The EU also claims that ending the regime would cause severe economic and political hardship in the Caribbean, as the banana industry is often the mainstay in many Caribbean economies. EU member-states have differing views on the issue, however, with France, Spain, Portugal, pushing for more protection of the ACP economies and the northern states preferring more liberalization of banana importation.

On May 22, 1997, the DSB found that the EU banana regime's practices were inconsistent with the GATT and GATS Articles. The EU filed an appeal on June 11 stating, among other things, that the United States did not have standing in this case. The Appellate Body issued its report on September 9, 1997, upholding most of the previous panel's rulings, with the exception of certain violation of the GATS with regard to Mexico, Honduras, and Ecuador.

Since the ruling against the EU banana regime, the EU has issued proposals to reform its banana importation rules in hopes of bringing them in line with the WTO. The measures include a ten-year modernization plan to make traditional suppliers more efficient as well as an end to the contentious import licensing system. If the reforms are approved by a qualified majority of the EU, the European Commission will likely propose funding of up to $412.8 million.(81) As of February 1998, the U.S. and Latin American banana producers had rejected the EU proposal, which continues to let ACP bananas enter duty-free. Now the EU must find a solution acceptable to its members, the ACP countries, and American producers. If the final EU reform plan is unsatisfactory to the United States and the four Latin American countries, they can ask the WTO panel to reconvene on the dispute. The EU will have to pay compensation or face WTO-authorized retaliation if a satisfactory settlement is not reached before January 1999.(82)


As of April 17, 1997, Renato Ruggiero, director-general of the WTO, noted that nineteen out of the seventy-one cases brought before the WTO's dispute settlement mechanism were settled 'out of court', before a final decision was reached. He said, "The system is working as intended - as a means above all for conciliation and for encouraging resolution of disputes, rather than just for making judgements."(83) The United States has been a beneficiary of such settlements that occurred in part because nations were motivated to settle in order to avoid a definitive panel ruling. One such case is the U.S. dispute with Japan in regards to the auto parts industry.

Japan Auto Parts Dispute

The U.S.-Japan automobile and auto parts dispute was the first major conflict presented to the WTO. The case was filed by Japan on May 17, 1995, after the United States threatened Japan the previous day with punitive tariffs on luxury cars unless Japan opened its automobile and auto parts market. Auto-related disputes between the United States and Japan were not a new issue. On October 1, 1993, then U.S. Trade Representative Mickey Kantor announced his intention to investigate the Japanese auto parts market.(84) The United States complained that unbalanced trade in the auto industry between the United States and Japan could be attributed to Japan's anti-competitive policies, which closed the auto industry to foreign competitors. Moreover, the U.S. auto companies' share of the Japanese automobile market was only 1.5 percent, and its share of the $107 billion Japanese auto parts market was only 2.4 percent. In comparison, the Japanese auto companies' share of the U.S. auto market was for 24 percent and its share of the $122 billion U.S. auto parts market was 37 percent.(85) The U.S. automobile industry estimated its losses at about $6.2 billion.(86) In the United States, the auto industry accounts for 5 percent of GDP and employs 2.3 million people, which includes 7 percent of the nation's scientists and engineers.(87)

After completing its investigation, the United States announced on May 16, 1995 that it would impose 100 percent tariffs, worth $5.9 billion, on thirteen luxury models of five Japanese cars. The tariffs were set to take effect on July 28, 1995 if Japan did not respond to the U.S. complaint.(88) The next day, Japan requested that the United States hold a bilateral consultation by May 27, and simultaneously apprised the WTO of the request. In taking the case to the WTO, Japan asserted that unilateral sanctions were not consistent with the principles of the trade agreements. Japan alleged that the import surcharges violated GATT Articles I and II. However, the dispute was settled on July 19, 1995, just before U.S. sanctions were to take effect. The United States canceled the unilateral sanctions on the condition that Japan deregulate the auto parts after-market, or replacement market, increase voluntary purchases of U.S. auto components, and allow increased access to Japanese auto dealer networks.(89)

President Clinton cited the agreement as "a great victory for the American people because it would bolster exports to Japan by US auto-makers and create thousands of new jobs."(90) The USTR was also content with the dispute solution, saying that it "will result in significantly increased market access and structural change in the Japanese automobile sector."(91)

Although the dispute was settled bilaterally, this case raised a question about the propriety of unilateral sanctions. Another significant point raised by this case regards the fact that, "the WTO acted as a deterrent against conflict and promoter of agreement."(92) The fact that "the resolution of the Japan-US trade dispute before the sanctions went into effect illustrates many of the improvements that the new WTO has brought to the dispute settlement process."(93)


Two different concerns have been raised about how the WTO's DSU may erode U.S. sovereignty. The first is the concern noted above that if the WTO panel finds that specific U.S. laws or regulations are inconsistent with what the United States has agreed to in international trade agreements, it can pressure the United States to change its practices. The second concern is that the DSU may constrain U.S. legal authority in imposing unilateral economic sanctions under Section 301 of the U.S. Trade Act, designed to retaliate against foreign trade practices determined to be unfair.

As with the panel decisions under the GATT, the reports by panels or the Appellate Body under the WTO do not compel executive or legislative action under U.S. law. If a report by a panel or the Appellate Body requires the United States to amend federal law to be consistent with an Uruguay Round Agreement, the Congress is the only body with the authority to decide whether such amendments will be made. Reports do not grant federal agencies or state governments legal authority to modify their regulations or procedures or to cease to enforce any specific laws or regulations.

Two early dispute panel cases illustrate the ways in which the WTO panels have dealt with conflicts between U.S. laws and regulations and U.S. obligations under international trade agreements. They include a complaint by Costa Rica regarding restrictions on imports of cotton underwear, and a complaint by Venezuela and Brazil regarding U.S. restrictions on gasoline imports.(94)

The Cotton Underwear Case

In the Cotton Underwear Case, the panel found the U.S. measure inconsistent with trade agreements. However, the U.S. measure was allowed to expire a little over a month after the panel report, as amended by the Appellate Body, was adopted, bringing the United States automatically into compliance with the decision.(95) This suggests that the U.S. government was able to signal its willingness to abide by WTO panel rulings by choosing not to renew a regulation that was set to expire.

The Gasoline Case

A panel report dated January 29, 1996 found the U.S. Clean Air Act's (CAA) "Regulation of Fuels and Fuel Additives - Standards for Reformulated and Conventional Gasoline," to be inconsistent with Article III, Section 4 of the GATT. The CAA creates two gasoline programs to keep pollution from gasoline combustion at or below 1990 levels and to reduce pollutants in metropolitan areas. The first program concerns reformulated gasoline for nine metropolitan areas and some additional areas requested, while the second program covers conventional gasoline that can be sold in the rest of the United States. Venezuela and Brazil complained about the establishment of 1990 baseline levels for conventional gasoline, which could be set by either the individual producer or the U.S. Environmental Protection Agency (EPA). While domestic refiners had a choice of three possible methods of baseline establishment before the EPA set one, importers had only one possible method. Since importers had insufficient data to calculate a 1990 level using the first method, importers were forced to adopt a baseline level set by the EPA.

The United States appealed the ruling on February 21, 1996, stating that the discriminatory treatment of importers was justified under Article XX of the GATT as necessary "to protect human, animal or plant life for health," as well as to conserve an exhaustible natural resource, clean air. The Appellate Body issued its report on April 29, 1996, upholding the DSB's findings.(96) The U.S. gasoline regulations were found to violate international trade rules and lack qualification for exception under WTO natural resource conservation measures. Pursuant to this decision, the United States agreed with Venezuela, on December 3, 1996, to a fifteen-month phase-out of U.S. regulations.

This first WTO decision was a poignant one since many opponents of the WTO were concerned that democratically created environmental, health, and consumer safety laws could be undermined by trade bureaucrats in Geneva. WTO supporters, in the United States and elsewhere, touted the stricter enforcement mechanism as a tool that free-trading countries, the United States in particular, could use to break down protectionist trade barriers in other countries.(97) Perhaps an example was made of the United States to show that Technical Barriers to Trade will be contested in all WTO member-states, and that all members must relinquish some sovereignty in order to benefit from the free-trading regime established by the WTO. Ultimately, though, WTO panels cannot change U.S. laws or regulations. Although the United States chose to change its regulation in response to the Gasoline Case, it had other options. The U.S. government and its agencies retain the authority and the responsibility to take measures to protect the environment, public health, and safety. If these measures conflict with U.S. trade obligations, the United States can always choose to compensate its trading partners in other ways.

The Helms-Burton Case: the National Security Exception

The outcome of another complaint brought before the WTO, by the European Union and other nations against the U.S. Helms-Burton Act, suggests that if national security issues are at stake, the United States has the political power to convince other nations to choose a different venue for settling disputes.

The Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act, was signed into law by President Clinton on March 12, 1996 and has been at the center of serious controversy ever since. The Act gives the right to U.S. nationals whose property was confiscated by the Cuban government decades ago, to sue, in U.S. courts, foreign investors who profit from the use of those properties. Another provision bars senior executives of U.S. firms from doing extensive business in Cuba. Canada and the EU adamantly oppose this law, asserting that it extends past U.S. territory and thus falls outside U.S. jurisdiction, and have enacted their own counter legislation.

In order to soften the law, the U.S. Republican Congress would have to amend it. The EU formally requested a WTO dispute settlement panel to investigate the Helms-Burton Act, and such a panel was established in November 1996. The establishment of the panel was not meant to preclude negotiations, however, and the United States and European Union agreed in April 1997 to work cooperatively on a resolution before October 1997. The EU suspended the panel but reserved the right to reinstate it, while the Clinton Administration has so far refrained from filing any claims under the Act.

This case could have been a breaking point for the WTO, as the United States has threatened to relinquish jurisdiction in this matter. The United States has argued that the Act involves national security and is not strictly an economic concern. Therefore, the United States could ignore any WTO panel ruling. If a dominant country such as the United States were to deny a dispute settlement panel ruling in a politically sensitive case such as this one, it would seriously undermine the authority of the organization.(98) While a short-sighted politician might see a weaker WTO as an increase in U.S. national sovereignty, future generations would not benefit from the powerful, and so far very respected, settlement mechanism for resolving trade disputes. This reality explains why the EU agreed to halt the WTO dispute panel. By reaching a negotiated settlement with the United States, the EU avoided jeopardizing the WTO.

Section 301: Unilateral Sanctions and the Japan Auto Dispute

The second argument that raised vis a vis the WTO dispute settlement mechanism and U.S. sovereignty regards the question of whether or not the United States can employ unilateral sanctions to punish trading partners who do not cooperate with U.S. wishes. In the Japan auto parts dispute, the United States insisted that the WTO does not cover the anti-competitive policy issue, therefore unilateral action was permissible. However, the language of the DSU implies that unilateral sanctions without authorization by the WTO violate WTO rules. For example, Article III and Article XXII of the DSU, which emphasize multilateral dispute settlement; and Article I of the GATT, which addresses MFN status, as well as Article II of the GATT, which deals with excessive tariffs, can all be interpreted as prohibiting unilateral punitive sanctions.(99) Other WTO member-states also opposed the United States' unilateral action, with the European Union and Canada going so far as to reserve their third party rights in the dispute because of this issue.

The DSU does not affect application of Section 301 if it is used against non-WTO members, however. The DSU does not demand any significant modification in Section 301 investigations if those investigations include alleged breaches of Uruguay Round Agreements or the impairment of U.S. benefits under the Agreements. The United States could always decide to use Section 301 trade sanctions without WTO authorization against a fellow member-state. In this case, the member-country subjected to the use of Section 301 may seek counter-retaliation against the United States by arguing that the United States has violated its obligations under the DSU. While the United States clearly retains the practical ability to apply Section 301, doing so would probably undo the delicate world trade regime that the United States has sought to promote.

Since the United States and Japan settled the auto-parts dispute before a WTO panel was formed, the issue of the legality of unilateral sanctions was not formally decided by the WTO. Both the threat of sanctions by the United States and the existence of the possibility of a binding settlement by the DSU panel brought pressure on the parties to come to a negotiated settlement. Since the issue was not formerly resolved, the United States has quietly maintained the legal position that it could use unilateral sanctions in the future, even before a panel found that a U.S. complaint was justified. The Clinton Administration has not chosen to force the issue.

On balance, the record of the first three years suggests that the WTO's dispute settlement provisions are not a significant threat to the sovereignty of the United States. Instead, the United States maintains enough practical power to move issues out of the venue of the WTO when it sees fit, as illustrated by Helms Burton case and the Japan auto parts conflict. Since dispute settlement panels are only authorized to consider whether laws and regulations are consistent with trade agreements, there is a tendency for their decisions to place a preponderance of importance on trade issues. Ultimately, the United States may face the need to exercise its sovereignty by violating a WTO recommendation on environmental, health and safety, and/or national security grounds. The United States, or any other member-country, should carefully consider the consequences of such an action for long-term trade stability before doing so. The option to maintain the controversial regulation always remains, while compensating trading partners in another realm.

The existence of the WTO regime offers the United States a valuable opportunity to extend its global influence. Through minor adjustments in policy, the United States has demonstrated its willingness to abide by the dispute settlement process. By setting an example of compliance, the United States further promotes its vision of a stable, law-based international trading system.

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1At the time that the WTO was created the following criticisms were made of the old GATT dispute settlement system are as follows:

It has no mechanism reviewing legal issues reported by panels and does not provide any guarantee for the parties to adapt the decisions made by panels unmodified. When a panel issues a report, a Member country including the respondent is able to block its adoption by the GATT Council. Even though a report is adopted by the Council, no guarantee is provided to ensure that the respondent whose measure found to be inconsistent with the GATT would comply with the GATT or pay compensation to the complaining party or parties. There is no guarantee for the Council to authorize the complaining party or parties to withdraw retaliation. It does not have a unified dispute settlement system, which in turn, led to uncertainty in determining which procedure should apply. There is no procedure for the GATT Council to ensure monitoring the action or inaction of a party whose measures are in consistent with the GATT, unless the initiative of the party that challenged the measures is prompted(See Bello, Judith H. and Holmer, Alan F.. "U.S. Trade Law and Policy Series No. 24: Dispute Resolution in the New World Trade Organization: Concerns and Net Benefits." The International Lawyer 28 (1994) p. 1096).

2Tracy M. Abels "The World Trade Organization's First Test: The United States-Japan Auto Dispute" 44 UCLA Law Review (1996.) p.503.

3See, id., p. 491.

4 America's Future, Inc. "Behind the Headlines" October, 1994. 2/20/98

5The full text of the Dispute Settlement Understanding is available at

6See, Rubenstein, Kim and Schultz, Jenny. "Bringing Law and Order to International Trade: Administrative Law Principles and the GATT/WTO." St. John's Journal of Legal Commentary 11 (1996) p.278.

7. See, id.

8. See, id.

9. See, id.

10. See, Understanding on Rules and Procedures Governing the Settlement of Disputes(Understanding), art. 3, para. 2.

11. See, id. art. 3, para. 7.

12. See, Dillon Jr., Thomas J.. The World Trade Organization: a New Legal Order for World Trade? Michigan Journal of International Law 16 (1995), p.375.

13. See, id., p381.

14. See, id.

15. See, Dillon, Jr., p.382.

16. See, Understanding, art. 5, para. 1.

17. See, id. para. 3.

18. See, id.

19. See, id. para. 4.

20. "The DSB is simply a special meeting of the General Council in its dispute settlement role and is composed of all General Council Members present at the DSB meeting"(Dillon, Jr., supra 3, p. 363). The DSB oversees the application of the DSU. Dillon, Jr. defines the General Council as follows: "Certain executive authority and day to day functions of the WTO will rest with the General Council. It will also be composed of representatives of all the WTO's Members"(id).

21. See, id. art. 6, para. 1.

22. See, id. art. 8, para. 1.

23. See, id. para. 2.

24. See, id. para. 3.

25. See, id. para. 5.

26. See, id. para. 6.

27. See, id. para. 7.

28. See, id. art. 9, para. 1.

29. See, id. art. 10, para. 2.

30. See, id.

31. See, id.

32. See, id. art. 12, para. 7.

33. See, id. para. 8.

34. For more information, see id. art. 15, para. 2.

35. See, id.

36. See, id.

37. See, id. art. 16, para. 4.

38. See, id. art. 17, para. 1. "Persons serving on the Appellate Body shall serve in rotation"(id.).

39. See, id. para. 3.

40. See, id. para. 6.

41. See, id. para. 10.

42. See, id. para. 13.

43. See, id. para. 14.

44. See, Dillon, Jr., p.386.

45. See, id. art. 21, paragraphs 2, 3 and 4.

46. For more information, see, id. para. 3.

47. See, id. art. 22, para. 1.

48. See, id. para. 2.

49. See, id. para. 3.

50. See, id.

51. See, id. para. 6.

52. See, id.

53. See, id. para. 7.

54. See id. art. 25, para. 1.

55. See id. para. 3.

56. See id.

57. (DS 60) and (DS 26) among others.

58. (WT/DS50) and (WT/DS2) and (WT/DS8) amongst others.

59. "Overview of Disputes." 2/13/98. Some of the double requests for the establishment of panel that were not proceeded by request for consultations under DSU. Nonetheless, they are included in this 118 figure for the number of complaints.

60.WTO Backs Key Findings on Hormones, But Could Make SPS Cases Harder" Inside US Trade, January 16, 1998.

61. (WT/DS26) Appellate Report circulated January 16, 1998.

62.(WT/DS26) Appellate Report circulated January 16, 1998.

63 See, supra 60.

64."US to SEEK TO Panel Against Japan in Kodak Case," The Reuter European business Report, September 20, 1996, available in LEXIS-NEXIS, News Library. The figures differ according to different source. For example, Fuji says that Kodak has 71% market share in the US and 8% in Japan, while Fuji has 71% market share in Japan and 11% in the US.

65. Serge Romensky, "US Shocked by WTO Ruling in Kodak-Fuji Dispute," Agence France Presse, Decomber 5, 1996, available in LEXIS-NEXIS, News Library.

63.Robert S. Greenberger, "WTO's Kodak ruling heightens Trade Tensions" The Wall Street Journal, Dec. 8, 1997, p. A3.

67. Nigel Holloyway, "Black and White," Far Eastern Economic Review, July 24, 1997, Vol.60 No.30, pp.77-78.

68."Put the Facts in Focus: Another Look at the Kodak-Fuji Dispute." Tokyo Business Today, January, 1996, p 12.

69. See, WTO Backs Key Findings on Hormones, But Could Make SPS Cases Harder" Inside US Trade, January 16, 1998.

70."Fujifilm in push to Boost Exposure in US," Financial Times, May 13, 1997, at World Trade???

71. See "Kodak-Fuji Dispute Reaches World Trade Deadline," National Public Radio Morning Edition, June 24, 1996, Transcript Number 1896-11; Jeff Nesbit, "Japan pushes Myth of US Firms' Failings," The Washington Times, June 14, 1996, at B7.

72."Fujifilm Snaps Up Market Share in US," Financial Times, December 9, 1997 at Companies and Finance: International.

73. See, Id.

74. Wall Street Journal, February 3, 1998

75. See, supra note 66.

76."Kodak Leads 5 firms shedding US Jobs," The Washington Times, November 12, 1997, p.7.

77. The Five are (WT/DS11) (WT/DS31) (WT/DS27) (WT/DS50) and (WT/DS26).

78.Bhushan Bahree "Face Off" Wall Street Journal December, 16 1997.

79. World Trade Organization, "European Communities - Regime for the Importation, Sale and Distribution of Bananas," Report of the Panel, WT/DS27/R/USA, May 22, 1997.

80.World Trade Organization, "European Communities - Regime for the Importation, Sale and Distribution of Bananas," Report of the Appellate Body, WT/DS27/AB/R, September 9, 1997.

81. Tucker, Emma and Dombey, Daniel, "Europe: Banana quota proposals run into US criticism," Financial Times, January 15, 1998.

82.Williams, Frances, "Bananas: EU proposals rejected by US," Financial Times, January 23, 1998.

83."The WTO's 'most individual contribution." 2/10/98

84. David E. Sanger, "100% tariffs Set on 13 Top models of Japanese Cars," New York Times, May 17, 1995, at A1.

85. See, supra 2, p. 475, footnote 30. Referred to US-Japan Relationships-How Will It Be Affected by Auto Sanctions? Hearings Before the Subcommittee on East Asian and Pacific Affairs of the Senate Foreign relations Committee, 104th Congress.

86. Abels, p.475.

87. Abels, p.475, footnote 29.

88. Abels, p.477.

89. Jared R. Silverman, "Multilateral Resolution Over Unilateral Retaliation: Adjudicating the Use of Section 301 Before the WTO," University of Pennsylvania Journal International Economic Law, Vo.17:1, 1996. Referred to Fact Sheet on US-Japan Auto and Auto Parts Agreement Issued By US Trade Representative's Office June 28, 1995, [Jan.-June] Daily Republic for Executives (BNA) No. 125, at M-1 (June 29, 1995).

90. Washington Post, June 29, 1995 at A1.

91.Silverman, p.266. Referred to USTR Fact Sheet, supra note 7.

92.The WTO Director-General Renato Ruggiero's announcement, see USTR Fact Sheet.

93.William E. Scanlan, "A Test Case for the new World Trade Organization's Dispute Settlement Understanding: The Japan-United States Auto Parts Dispute," Kansas Law Review, Vol. 45, 1997, p.591.

94. (WT/DS2/AB/R) Adopted by the DSB May 20, 1996.

95. "Overview of Disputes" p. 2 of 27, updated January 23, 1998.

96. World Trade Organization, "United States - Standards for Reformulated and Conventional Gasoline," Appellate Body Report and Panel Report, WT/DS2/9, May 20, 1996.

97. Tonelson, Alan and Wallach, Lori, "We Told You So; The WTO's First Trade Decision Vindicates the Warnings of Critics," Washington Post (section C, pp. 4), May 5, 1996.

98. De JonquiÀres, Guy, "World trade: WTO hopes for a hat-trick," Financial Times, September 18, 1997.

99. Abels, p. 484

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Last Updated on 4/1/98