Dimensions: 6'' x 9'' 300 pages AEI Press  (Washington) Publication Date: October 2001 Hardcover ISBN: 0844741566 Price: $ 30 Add to Cart   Examination Copies

October 2001
Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization
By Claude E. Barfield

The World Trade Organization faces two formidable challenges--one external and one internal. First, it must confront escalating attacks by outside groups and individuals proclaiming that the WTO lacks democratic accountability and is a lackey for multinational corporations. Second, the WTO must deal with a constitutional flaw caused by the imbalance between consensus-plagued rule-making procedures and a highly efficient dispute settlement system--an imbalance that creates strong pressure to "legislate" new rules through adjudication.

In turn, the United States faces a different, but related, set of challenges. In responding to an increasingly globalized world, the United States must continually recalculate and rebalance a defense of national sovereignty against grants of authority over economic and social policy to international organizations like the WTO. The United States must also devise domestic political mechanisms that provide greater democratic accountability for decisions affecting U.S. international obligations.

This book explores these challenges to the WTO, the United States, and the future of trade liberalization.

Claude E. Barfield is a resident scholar at AEI. His previous books include The New World of Services: Implications for the United States (Florida International University Press, 2001, with Cordula Thum) and Tiger by the Tail: China and the WTO (AEI Press, 1999, with Mark A. Groombridge).

Throughout the history of the postwar multilateral trading system, presided over first by the General Agreement on Tariffs and Trade and since 1995 by the new World Trade Organization, two distinct theories regarding the settlement of trade disputes have competed for dominance. On one side are the "pragmatists" who argue for a "diplomatic" approach that stresses conciliation and problem-solving over legal precision. In keeping with this view of dispute settlement, one former GATT director-general stated, "GATT cannot be a world trade court. Conciliation is our priority; it is not our job to determine who is right and wrong." Ranged against this view are the "legalists" or "rules-oriented" proponents who hold that legally binding rules will produce more certainty, predictability, and--ultimately--fairer treatment for all GATT/WTO member states.

Though the system remains a blend of the two philosophies, decisions taken during the Uruguay Round (1986-1994) marked a clear shift toward a more judicialized, legally binding dispute settlement system, through a WTO Dispute Settlement Understanding (DSU). The new rules establish an integrated dispute settlement system for all parts of the GATT/WTO, including tariff bindings from the old GATT and new rules for services, agriculture, and intellectual property. Cross-retaliation among program areas is also possible--for instance, sanctions against service rules violations can be exacted with increased industrial tariffs. In the most far-reaching change, "automaticity" has been broadly introduced into the DSU process--that is in contrast to the old GATT system, in which a member could block decisions at any step in the process; in the new DSU decisions by WTO panels of the Appellate Body (AB) will stand unless there is a consensus (virtual unanimity) among WTO members against a panel or AB decision. And finally, deadlines have been established for the completion of each stage of the process, with the goal of getting a legally "correct" decision within twelve to eighteen months.

The constitutional flaw and imbalance in the new WTO stems from three sources. First, the "legislative" or rule-making process in reality is unworkable without full-scale negotiations through trade rounds that recently have taken a decade to plan and complete. Under normal operating rule-making procedures, new rules and amendments or interpretations of existing rules can pass only by consensus, or by two-thirds or three-quarters majorities--depending on the situation. Second, because they are the product of the political give and take of trade round negotiations, the underlying texts and language in WTO rules are often ambiguous and even contradictory, giving little guidance to dispute settlement bodies seeking legal clarity. And third, the new, binding judicial process is likely to be the victim of the extraordinary success of the Uruguay Round agreement, which greatly expanded the substantive reach of the multilateral trading system. New rules for intellectual property and for service industries--banks, insurance companies, telecommunications, and transportation companies--are forcing the trade regime to deal with complex issues that go deep into the economic and social structures of member states. As Sylvia Ostry, a former Canadian trade negotiator, has stated, "The degree of intrusiveness into domestic sovereignty bears little resemblance to the shallow integration of the GATT with its focus on border barriers. ... The WTO has shifted from the GATT model of negative regulation--what government must not do--to positive regulations, or what governments must do."

This book contends that the new "judicialized" WTO dispute settlement system is substantively and politically unsustainable. It is not sustainable substantively because there is no real consensus among WTO members on many of the complex regulatory issues that the panels and the Appellate Body are being asked to rule upon. Moreover, as noted above, in many instances the underlying treaty text contains gaps, ambiguities, and contradictory language.

The system is not sustainable politically because the imbalance between the inefficient rule-making procedures and the highly efficient judicial mechanisms is increasing the pressure on the panels and the AB to "create" law, raising intractable questions of democratic legitimacy. As one European trade lawyer and scholar has written, "Governments may too easily think that progress can be made in the WTO through enforcement; that litigation in the WTO is a faster, more convenient way to resolve issues than an open exchange at the negotiating table. That is troubling because it undermines democratic control over international cooperation and rule-making. ... Litigation is not subject to parliamentary control."

This study describes and analyzes four issues in which there is evidence that the panels and AB have overstepped the bounds and indulged in "judicial creativity." These are:

1. Whether a WTO member has the right to unilaterally forbid the importation of goods based upon process and production methods, for example, the kind of nets used to catch shrimp;
2. Whether panels and the AB can accept amicus (friend of the court) briefs from outside organizations and individuals, absent explicit WTO rule-making granting that authority;
3. Whether the AB erred in substituting its judgment for that of WTO Councils on matters relating to regional trading agreements and balance of payments issues; and
4. Whether the panels and the AB have flouted the mandate not to second-guess national authorities in the creation of antidumping regulations.

In order to remedy the constitutional defects in the WTO DSU, the book recommends several complementary reforms. They include:

• A Safety Valve: Conciliation, Mediation, and Voluntary Arbitration. Under this proposal, the director-general or a special standing committee of the dispute settlement body would be empowered to step in and direct contending WTO member states to settle their differences through bilateral negotiations, mediation, or arbitration by an outside party.
• A Blocking Minority. Under this proposal, at any time that at least one-third of the members of the dispute settlement body, representing at least one-quarter of total trade among WTO members, register opposition to a panel or AB decision, that decision would be set aside--blocked--until the WTO rule-making process or a new trade round can reach a consensus on the issue dividing the members.

Whose WTO Is It?

Mounting pressures for greater accountability in the WTO system emanate from across the political spectrum. On the Right, some multinational corporations and their corporate lawyers argue for a private right of action and standing in DSU proceedings, maintaining that they represent the "real" interests in many commercial trade disputes. On the Left, some nongovernmental organizations, particularly from the environmental community and predominantly from developed countries, advocate a new "democratic" international order in which NGOs would offer "an alternative form of representation" in competition with governments. Others foresee a tripartite corporatist model in which governments, orporations, and NGOs would work in partnership to create new rules and settle disputes for an emerging international order.

While this study will recommend more transparency in the WTO procedures and a greater diversity of participants in dispute settlement panels, it also contends that the WTO should remain a government-to-government organization in which appointed officials from democratically elected governments, after having sorted through conflicting claims and interests at the national level, adopt and defend national positions in the WTO and other international organizations. Only at the level of the nation-state can one find the legitimizing panoply of democratic processes, and thus national sovereignty is still the defining filter through which democratic goals can be obtained. As political scientists Joseph Nye and Robert Keohane have stated, "International institutions lack the key feature that makes democracy possible and that, in democracies, facilitates accountability: an acknowledged public, operating within a political community in which there is a general consensus on what makes public decisions legitimate." Further, there is no practical means of legitimizing the claims by many NGOs that they represent the "transnational values" of "world citizens." As Ostry has pointed out, "It’s not clear what the word citizen means in this context. There are no 'world' citizens but only citizens of nation-states. Governments are accountable to their citizens, albeit some more than others."

In the end, argues legal scholar Kal Rausiala, national sovereignty performs a vital function as "a guarantor of democratic control over foreign affairs. ... Sovereignty, for all its faults, acts as a protector against increasing democratic deficit in rule-making, and perhaps as an unwitting champion of democratic values in a globalizing world."

Though the more extravagant demands of corporations and NGOs should be resisted, there is still much that could be done to increase the accountability and legitimacy of the WTO. The following are among the measures toward these ends that are recommended in this book:

• Greater Transparency. The WTO should establish rules that provide for the publication of all government documents submitted pursuant to a panel or AB proceeding at the time those documents are presented. Further, public access should be provided to the opening sessions of dispute settlement proceedings. This would allow the public knowledge of the issues in contention, while protecting subsequent deliberations from the political pressure that would be fostered by continued public access to the legal deliberations.
• Greater Diversity. The language of the DSU clearly foresees that in addition to trade experts, nontrade specialists should be recruited for cases that involve issues that extend beyond commercial rules. Thus, the WTO should move to add to its roster of panelists from such allied fields as the environment, food safety, genetics, and intellectual property.
• More Formal Consultation. The WTO Secretariat should be encouraged to institute more regular and frequent consultations with outside groups and experts, including NGOs, scientific and professional societies, and corporate associations.
• Increased Democratic Legitimacy: Congressional Oversight. One means of increasing the legitimacy of WTO decisions is for national legislative bodies to become more involved in the organization, through more direct policy mandates to U.S. executive officials and through greater oversight. To achieve this goal, Congress should establish a bipartisan commission to report on the implications of WTO decisions for U.S. domestic laws and regulations. Further, Congress should consider establishing a joint oversight committee to evaluate, on an ongoing basis, the impact of rules promulgated by international organizations on U.S. domestic laws and regulations.
• Increased Democratic Legitimacy: Direct Effect. Under the doctrine of direct effect, a nation agrees that its domestic laws will automatically be bound by rules negotiated under a treaty or trade agreement. Direct effect gives a private citizen the power to make a claim against another private citizen or the state pursuant to the terms of an international agreement. The recommendation of this study is that the U.S. Congress should continue to deny direct effect. Recent multilateral, regional, and bilateral trade agreements have produced rules that potentially have major implications for national services, investment, intellectual property regulations, and food safety regulations. Consequently, national legislatures must become more vigilant in retaining final determination over the content and applicability of these core elements of domestic regulation.