The Dispute Settlement Understanding (‘DSU’) lays down the legal framework under which resolution of trade disputes must operate under the World Trade Organization (‘WTO’). The DSU prioritizes the conclusion of the trade disputes in a positive and effective manner and expresses a preference to the adoption of a mutually agreeable solution between the parties to the dispute. Article 3.7 of the DSU creates a hierarchy of preferences which must be adopted during the dispute resolution process:

1. In case of a trade dispute between Member Countries, the Member Countries must aim at reaching a mutually agreeable solution between themselves and notify such a solution to the Dispute Settlement Body (‘DSB’).[1]
2. However, if the disputing Member Countries are unable to reach a mutually agreeable solution, the dispute resolution mechanism must aim at the withdrawal of the measure which is inconsistent with WTO laws and obligations under various WTO agreements.
3. In the event that the withdrawal of the measure is not practicable, the Member Country imposing such a measure may compensate the aggrieved Member Country. However, the DSU clarifies that compensation is only a temporary solution, till the measure is not withdrawn.[2]
4. Lastly, the aggrieved Member Country may suspend the application of concessions and other obligations under various agreements vis-à-vis the other Member Country. However, the aggrieved Member Country must seek authorization from the DSB before suspending concessions or other obligations. [3]

Interestingly, in a recent trade dispute concerning the ‘trade war’[4] between the United States of America and China, United States- Tariff Measures on Certain Goods from China (DS543), the United States requested the Panel to not issue findings regarding the tariffs imposed by the United States against Chinese imports.[5] Article 12.7 of the DSU states that “[w]here a settlement of the matter among the parties to the dispute has been found, the report of the panel shall be confined to a brief description of the case and to reporting that a solution has been reached.”[6]

In this regard, the United States noted that the bilateral negotiations between China and the United States were underway, which were aimed at addressing various trade concerns between the two countries. It also referred to the Economic and Trade Agreement between the Government of the United States of America and the Government of People’s Republic of China (Phase One) entered into by both the countries on 14-02-2020 (‘Phase One Agreement’). United States also pointed out that China had also imposed retaliatory tariffs against imports from the United States, without the authorization of the DSB, as required under Article 3.7 of the DSU.[7]

However, China was clear that no such solution has been arrived at between the two parties. It pointed out that any mutually agreed solution must be notified to the DSB under Article 3.6 of the DSU. It further argued that the Phase One Agreement was not relevant to the issues being addressed in the dispute since it did not address the measures in question. China’s claim in the dispute was that the tariffs imposed by the United States were inconsistent with Article I:1, Article II:1(a) and Article II:1(b) of the General Agreement on Tariffs and Trade 1994 (‘GATT’) since they violated the Most-Favored Nation Principle and were not in accordance with the United States’ Schedule of Concessions. It pointed out that the WTO-inconsistent measures continue to remain in force and hamper trade. The non-resolution of the matter warranted an adjudication by the Panel.[8]

Adjudicating upon whether bilateral negotiations can constitute a mutually agreed solution between Member Countries, the Panel noted that bilateral negotiations may not always reach a mutually agreed solution. It emphasized on the importance of the solution being arrived at being ‘mutually’ accepted by both Parties. It stated that in the event that a solution is found to a problem, the problem shall cease to exist. However, as pointed out by China, China continued to be aggrieved by the tariffs imposed by the United States. [9]

The Panel Report lays great emphasis on the absolute right of the Member Countries to initiate WTO dispute proceedings, if benefits being accrued to them are impaired by the measures adopted by a Member Country, under Article 3.3 of the DSU. The Panel relied on the Appellate Body Report in the dispute of EC-Bananas III, which held that while Article 3.7 places an obligation on the Member Countries to self-regulate and only initiate proceedings when a mutually agreed solution cannot be reached at, nothing in the language of the DSU bars a Member Country from initiating proceedings if aggrieved. Para 135 of the Appellate Body Report states as follows:

“Accordingly, we believe that a Member has broad discretion in deciding whether to bring a case against another Member under the DSU. The language of Article XXIII:1 of the GATT 1994 and of Article 3.7 of the DSU suggests, furthermore, that a Member is expected to be largely self-regulating in deciding whether any such action would be "fruitful"”[10]

The Panel noted that bilateral negotiations are not a substitute for an ongoing dispute. They are an ‘additional path towards solving the parties’ disagreement.’ If a solution has not been reached at, which is mutually agreeable to both parties, a Member Country should not be barred from initiating proceedings.[11]

The approach adopted by the Panel in this dispute is consistent with existing WTO jurisprudence and rightly spells out the intention of the DSU. It has clarified that for a solution to be accepted as a mutually agreed solution within the meaning of Article 12.7 the solution must be acceptable to both parties, i.e. should be mutual, and must resolve the issue at hand. While shying away from commenting on the consequences of a solution which is not notified under Article 3.6, the Panel has emphasized on the importance of a written document which may serve as evidence of the existence of a mutually agreed solution.

Therefore, the Panel rejected the contentions raised by the United States under Article 12.7 of the DSU and issued a detailed Panel Report on the tariffs imposed by the United States under Section 301 of the Trade Act of 1974 (‘Section 301’). The Panel held that the Section 301 tariffs imposed by the United States against Chinese imports were:

1. Violative of Article I:1, Article II:1(a), and Article II:1(b) of the GATT; and
2. Not justifiable as being in the interest of public morals under Article XX(a) of the GATT.[12]

The effect of the findings of the Panel Report, if adopted, is that the United States would be bound by the Panel Report and would have to withdraw the Section 301 tariffs against Chinese imports. However, the United States may prefer an appeal, which will prevent the Panel Report from being adopted. Given that the Appellate Body of the WTO has been dysfunctional since 11-12-2019, the appeal may remain in a limbo.

[The author is an Associate in International Trade Practice, Lakshmikumaran & Sridharan Attorneys, New Delhi]

1. [1] Article 3.7, Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the WTO Agreement
2. [2] Ibid.
3. [3] Ibid.
4. [4] The United States of America levied additional duties on Chinese imports in July and September 2018. This was in pursuance of  a Section 301 investigation, in which it was determined that the Intellectual Property policies adopted by China were detrimental to US interests. In response to the said duties, China requested for the composition of a WTO Panel in December 2018, and also imposed retaliatory tariffs.
5. [5] Para 7.4, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020
6. [6] Article 12.7, Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the WTO Agreement
7. [7] Paras 7.4 and 7.5, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020
8. [8] Paras 7.6, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020
9. [9] Paras 7.12, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020
10. [10] Para 135, Appellate Body Report in European Communities- Regime for the Importation, Sale and Distribution of Bananas (DS27), 9^th September 2007
11. [11] Paras 7.7, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020
12. [12] Paras 8.1, Panel Report in United States- Tariff Measures on Certain Goods from China (DS543), 15^th September 2020