Hitting where it hurts: Retaliation requests in the WTO

Diego Bonomo, 1 March 2014

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When a trade dispute being adjudicated in the WTO’s dispute settlement system reaches the end without resolution, the offended member country requests the right to retaliate – or as the diplomats call it – request the suspension of concessions and other obligations vis-à-vis the offender (Shadikhodjaev 2009).

From the WTO’s inception to the end of 2013, there have been 36 such requests related to 28 disputes. In five cases, typically with more than one dispute settlement number, there were multiple requests by different countries against a single offender. Those cases are:

  • Canada and the US against the EU in the famous beef with hormones disputes;
  • Ecuador and the US against the EU in one of the disputes in the so-called banana wars;
  • New Zealand and the US against Canada in a dispute over milk and dairy products;
  • The EU and Japan against the US pre-General Agreement on Tariffs and Trade (GATT) Anti-Dumping Act of 1916; and
  • Brazil, Canada, Chile, the EU, India, Japan, Korea, and Mexico against the US and its Byrd Amendment.

In another two disputes, there was more than one request by the same country: Brazil’s double request in its fight against the US over cotton subsidies, and Japan’s requests related to the US practice of zeroing in trade remedies investigations.

Although what countries request is not necessarily what the WTO Dispute Settlement Body will authorise them to do, analysing their demands can help understand these countries’ strategies in designing trade sanctions to maximise their rights and either compensate for losses, or induce the offending member country to comply with WTO rules. Sometimes, there is a desire to punish another country for its trade misconduct (Bown and Pauwelyn 2010). Therefore, it is worth looking at the pattern of both the magnitude of requests and the means of implementation, as well as the profile of requesting members.

Requesting members

With the exception of five requesting members – Antigua and Barbuda, Chile, Ecuador, Indonesia, and New Zealand – all of the others are among the ten most frequent dispute settlement mechanism complainants, most of them from the old ‘Quadrilateral’ or Quad – Canada, the EU, Japan, and the US. Interestingly, the offending countries are all among the top ten respondents in the dispute settlement mechanism. In addition, in 20 of the 28 disputes, Quad members are both on the offensive and defensive sides. The other non-Quad complainants are Argentina, Brazil, India, Korea, and Mexico, while the non-Quad respondents are only Australia and Brazil.

These numbers point to the reality that a ‘retaliation club’ seems to exist among the WTO membership, as well as to the fact that Quad members tend to resist complying with rulings, thereby forcing offended countries to request the suspension of concessions or other obligations. However, the quantitative analysis alone cannot explain the reasons why (and if) they resist more than other members, aside from the fact that their greater economic clout makes it easier to ignore WTO recommendations. Other factors, such as domestic regimes (i.e. complex democratic process), economic diversification (i.e. complex domestic political economy), and residual protectionism (i.e. pro-protection interests that survived multiple liberalisation efforts), may play a role in non-compliance behaviour.

Canada is the most assiduous complainant – with seven requests – followed by the EU and the US – with six requests each. Among the G20 economies, Canada is the country with the highest ratio of complaints over responses in aggregate WTO disputes from 1995 to 2013, making it an offensive trade power. The US is the most frequent respondent, with 24 requests against it, and it has a ratio of complaints over responses that puts the country among the defensive trade powers, including traditional ‘trade foes’ such as China, India, and Russia. This US number is inflated by several requests related to the Byrd Amendment.

In any case, while there is a relative diversity of both complainants and respondents in the dispute settlement mechanism, the cases that end up in retaliation requests are concentrated among a few members, with a clear preponderance of the GATT-era Quad.

Requested amounts

Most of the 36 requests for retaliation came with a defined yearly amount, whether in US dollars, Canadian dollars, or euros. In some disputes, the offended member did not request a specific amount, but rather proposed the formula to calculate it. That was the case of the Byrd Amendment dispute, when requesting member countries proposed to tie the retaliation amount to US offset payments to domestic producers. In two other cases involving trade remedies affecting Canadian softwood lumber, Canada proposed that the amount be equivalent to the portion of the WTO-inconsistent antidumping duties and countervailing measures. Japan went even further by requesting the addition of interest and the value of lost exports to the amount of non-compliant antidumping duties imposed by the US using the zeroing methodology.

By far, the largest amounts requested were those related to aircraft trade disputes: the Canada-Brazil cases involved Bombardier and Embraer, and the US-EU cases involved Boeing and Airbus. Canada asked for 700 million Canadian dollars per year against Brazil, while Brazil requested $3.36 billion per year against Canada. The large aircraft disputes saw much larger figures compared to the regional aircraft disputes, with the US asking for between $7 and $10 billion per year against the EU, while the EU requested $12 billion per year against the US.

These figures are clear reminders that retaliation can have a huge impact on trade, making it a key instrument in securing compliance with WTO rules.

Means of retaliation

The tools proposed by offended member countries to implement trade sanctions are another key aspect. Of the 36 requests, in 32 of them the offended member asked for authorisation to impose additional tariffs against goods imported from the offending member – what could be deemed the ‘classic’ instrument for trade retaliation. Interestingly, of these 32 requests, five anticipated that the additional tariffs would be 100%. The three-digit ad valorem amount seems symbolically important as both a trade-killer sanction and a punishment against misconduct rather than an inducer of compliance. Nonetheless, these requests were concentrated in the first years of the dispute settlement system; the last one was made in 2000, when the EU asked for trade-killer tariffs against the US connected to the ‘Foreign Sales Corporations’ case. There was, however, an indication by the EU in 2010, in its dispute against the US over zeroing, that it could – but not that it ‘would’, as in the other cases – use the 100% prohibitive tariffs.

In these cases involving the upfront presentation of product lists, another important retaliation tool was to include symbolic goods among those to be affected by high tariffs that had a clear cultural – and sometimes emotional – value, in addition to its economic significance and the political influence of its producers. One can have a lot of fun analysing the different product lists presented over the years, although it was easier to do so in the initial years when the practice was to present the detailed list in the retaliation request. These examples include Canadian retaliation against Australian sunscreen and sun-tan preparations, US retaliation against EU Roquefort cheese and truffles, and Brazilian retaliation against Canadian maple syrup.

Another trend often referred to is the request for ‘cross-retaliation’. There have been six of them so far, four by developing countries against developed countries, and two by the US and the EU against each other. Curiously, the mechanism – advocated by US negotiators during the GATT Uruguay Round as a means to secure developing countries’ compliance with the newborn Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) – was only first requested by developed countries in 2011 and, more tellingly, in a dispute between themselves.

All developing countries’ requests included both retaliation related to intellectual property and services. When it comes to TRIPS, Antigua and Barbuda, Brazil, and Ecuador all asked for trade sanctions to be imposed against copyright and industrial design. Ecuador also targeted geographical indication in its dispute against the EU, a known European weakness both for its symbolism and the potential for political repercussions – for example, French wine or Scottish whiskey. Antigua and Barbuda and Brazil, however, requested sanctions against US trademarks, patents, and protection of undisclosed information, probably looking to pressure Hollywood audio-visual titans, Big Pharma, and biotechnology companies, as well as East and West coast high technology firms.

In services, the choice of sectors was so far more heterogeneous: Ecuador targeted wholesale trade services; Antigua and Barbuda focused on communication services; and Brazil went after a whole range, including business, communication, construction and related engineering, distribution, financial, tourism and travel-related, and transport services. It is clear that while Ecuador and Antigua and Barbuda tried to focus their request on services related to the original dispute, Brazil opted for a different approach by widening the scope of sectors much further than services connected to the cotton industry.

Even more interesting is the case of the US-EU dispute over large aircraft. Both sides requested cross-retaliation, limiting it to commitments made under the General Agreement on Trade in Services (GATS). However, while the US showed a degree of prudence and self-restraint by asking for retaliation against all but financial services, the EU made sure to keep Wall Street on the table by requesting sanctions against all US sectors, including financial.

Aside from the more common strategies of high tariffs and TRIPS or GATS cross-retaliation, there were a few innovative requests. For example, a clever Canadian innovation in its dispute against Brazil on regional aircrafts was to ask for the suspension of concessions or commitments under non-traditional WTO agreements, such as the Agreement on Textiles and Clothing, and the Agreement on Import Licensing (at least when it comes to trade sanctions). The most ingenious request was to suspend the obligation to pursue an injury test by the Canadian authorities when investigating a subsidies case. That meant that domestic producers’ requests to impose countervailing duties against Brazilian imports could be approved based only on a determination of a subsidy and not material injury or threat of material injury to the domestic industry. In practice, Canadian countervailing duties methods would return to a pre-GATT Tokyo Round era, when injury test was not an obligation.

Prolific Canadian trade diplomats also created another invention – in the same dispute against Brazil on regional aircrafts, they included non-WTO retaliation in their mix by informing the membership that “Canada may also suspend Brazil from the list of countries eligible for General Preferential Tariff treatment, a unilateral tariff preference granted by Canada for most imports from developing countries.”

Conclusion

The purpose of this investigation was to identify key trends in the WTO dispute settlement system, in particular in the design of retaliation requests. Practice has demonstrated that additional effort is also put into the implementation of these measures once they are authorised. Nonetheless, the original retaliation request – the first opportunity for an offended member country to induce compensation or compliance – is an important tool, and analysing it helps understand countries’ behaviour and goals when pursuing WTO disputes.

It is also clear that there is a preference among certain countries to either pursue retaliation, or to resist compliance up to the point where the offended member is forced to request it – a sort of retaliation club. This small group is dominated by GATT-era Quad countries, the traditional trade powers of the 20th century.

Nevertheless, the hopes of all offended WTO members when reaching this stage in dispute settlement seem to be the same as those voiced by Indonesia in a very emotional, yet uncommon, statement in its request for retaliation against the US over restrictions to Indonesian clove cigarettes exports: “When the US banned the sale of certain flavoured cigarettes, the burden of that measure fell almost entirely on Indonesia. As a result of the contested measure, Indonesia's exports of clove cigarettes to the US fell to zero. The Indonesian people are following this dispute closely. They want to know if the rules-based trading system promised by the WTO is real or a mere illusion.”

References

Bown, C P and J Pauwelyn (2010), The Law, Economics and Politics of Retaliation in WTO Dispute Settlement, Cambridge University Press.

Shadikhodjaev, S (2009), Retaliation in the WTO Dispute Settlement System, Kluwer Law International.

Topics: International trade
Tags: trade disputes, WTO, WTO retaliations

Executive Manager of Foreign Trade, National Confederation of Industry – Brazil