Exchange between Chinese and U.S. Legal Experts on the WTO

IMGXYZ202IMGZYXCarnegie's China program hosted an exchange between twenty-five senior Chinese appellate judges and four U.S. WTO legal experts. In the morning session, David Palmeter, Niall Meagher and Rufus Yerxa discussed the U.S. relationship with the WTO. In the afternoon, Professor John Jackson spoke about China and the WTO. An extensive question and answer period followed both sessions. Carnegie Associate Veron Hung chaired the morning session and Carnegie Senior Associate Minxin Pei moderated the afternoon session.

Carnegie President Jessica Mathews opened the event by noting the historical significance of China's WTO accession. Among the many reforms China will undertake, legal reform is of crucial importance. Ms. Mathews emphasized that the event was timely, as analysis of the U.S. example might provide an instructive starting point for discussion of China's own challenge of implementing judicial and legislative reform.

David Palmeter, a partner at Sidley, Austin, Brown & Wood LLP with extensive experience in WTO dispute settlement proceedings, began the morning's analysis of the U.S. example by describing the WTO's fit into the U.S. constitutional system. In a word, Palmeter summarized the fit as "uncomfortable".

Mr. Palmeter laid the foundation for his analysis by outlining the U.S. constitutional system. The authority over trade issues is divided among the President, the House of Representatives and the Senate. While the President has the authority to make treaties, including those regulating trade, the Constitution limits presidential power by requiring two-thirds Senate approval for treaty ratification. Moreover, the Constitution confers on Congress the power to regulate foreign trade, and all legislation affecting revenue measures, which includes tariff and trade issues, must originate from the House of Representatives. In light of this dispersed authority, it is inevitable to have unresolved constitutional questions.

Mr. Palmeter then discussed the resulting difficulty of integrating WTO law into U.S. domestic law. Most importantly, the WTO Agreement is not a ratified treaty in the U.S., but rather an executive agreement. As a result, alleged WTO violations against the U.S. can be raised in domestic courts only on the grounds that they violate the domestic law implementing WTO agreements, not on the grounds of violation of the WTO Agreement itself. U.S. courts only refer to WTO provisions to clarify the interpretation of U.S. law. The application of WTO provisions is further limited by the Supreme Court principle that as long as a possible interpretation consistent with an international accord, in this case, the WTO agreement exists, a U.S. law must not be construed otherwise. Mr. Palmeter concluded his presentation by noting that together, the constitutional structure and the complicated integration of WTO and U.S. domestic law make for a difficult union.

Mr. Niall Meagher, a partner with Sidley, Austin, Brown & Wood LLP with extensive experience representing domestic and foreign corporations before the U.S. trade regulatory bodies, continued the morning discussion by detailing the legal and political complexities of implementing WTO decisions in U.S. law. Mr. Meagher first observed that the WTO Agreement itself contributes to the difficulty of changing U.S. law found to be inconsistent with the WTO. Losing parties in WTO dispute settlement proceedings may disregard recommendations to change national practices or law in favor of paying fines or facing retaliatory measures levied by winning parties. Although the U.S. has a consistent record of attempting compliance, the option of non-compliance allows political opposition to present a formidable challenge to bringing domestic law into compliance with the WTO Agreement.

With this qualification noted, Mr. Meagher outlined two ways in which the U.S. could be found in violation of the WTO Agreement and the subsequent course of action the U.S. would take to comply with the ruling. First, a WTO Dispute Settlement Panel or the Appellate Body may issue a report finding U.S. law to be inconsistent with WTO obligations. The U.S. would then be given a certain time frame to bring the measure at issue into compliance with the WTO Agreement. At that point, the U.S. Trade Representative (USTR) would go before Congress to persuade them that there is a need to change the relevant U.S. law. Legislation amending U.S law involves much political negotiation, and the final product may win the approval of Congress, but still fall short of WTO standards. In a recent case brought by the E.U., the WTO Appellate Body found U.S. tax law involving subsidies in violation of WTO rules. The USTR succeeded in persuading Congress to amend the U.S law, but the Appellate Body still found the changes inconsistent with the WTO rules. Again the USTR persuaded Congress to make other amendments, and again the Appellate Body found the changes insufficient.

In a more complicated type of dispute, a U.S. administrative action taken by a U.S. government agency in domestic proceedings may be found to be inconsistent with the WTO Agreement. When deciding whether the U.S. agency acts in accordance with U.S. law, U.S. courts, particularly the Court of International Trade, must decide how much effect should be given to WTO reports interpreting the same point of law. Generally, the U.S. court prefers an interpretation consistent with the WTO interpretation, but on some occasions, the court is bound to show deference to the U.S. agency and adopt the agency's interpretation. Mr. Meagher concluded that compliance with WTO adverse decisions and interpretations, like the U.S. constitutional structure itself, creates a difficult political and legal challenge.

Mr. Rufus Yerxa, International Counsel for Monsanto Company, has an extensive career in international trade negotiations both in government and private practice. He concluded the morning presentations with a discussion of the WTO's impact on U.S. trade rules. Even with the many complexities regarding the status of WTO in U.S. law and its relationship to the U.S. Constitution, Mr. Yerxa asserted that a history of GATT, the WTO predecessor, illustrates the important role GATT/WTO plays in shaping U.S international trade laws.

Mr. Yerxa began his overview of the historical impact of GATT by noting that the Smoot-Hawley Tarriff Act of 1931, which raised tariffs by an average of 50 percent, represents the last major effort by Congress to drastically change the structures regulating foreign products in the U.S. Over the last seventy years, beginning with the Reciprocal Trade Agreements Act of 1933, Congress has delegated significant authority for regulating trade to the executive branch. With the introduction of the GATT system, the executive continued to negotiate tariff reductions, and Mr. Yerxa stated his belief that the present overall trade weighted tariff rate which is below 3 percent is the direct result of GATT on the U.S. trading laws. Even with respect to non-tariff measures, such as anti-dumping, countervailing duties, intellectual property and trade in services, the Trade Agreements of 1979 and 1994 represented major enactment of changes in U.S. law concerning these non-tariff policies. While the WTO agreements are not enforceable in a court of law directly, Mr. Yerxa stated that in reality, the U.S. has consistently attempted, and largely succeeded, in bringing about the fullest implementation of GATT/WTO obligations. According to Mr. Yerxa, U.S. legislation implementing the 1994 Uruguay Round Agreements Act, which was thousands of pages long and the result of extensive negotiations between the president and Congress, further demonstrates the major impact of the WTO on U.S. law.

In conclusion, Mr. Yerxa noted that the totality of all controversies regarding U.S. and WTO law is very small in comparison to the vast majority of U.S. law that is impacted by bilateral and executive agreements, including GATT and WTO. With fast track authority granted to the President, and adverse WTO rulings that will require changes to U.S. law or the payment of fines and facing of retaliatory measures, domestic law will continue to be heavily impacted by the WTO Agreement.

During the question and answer period that followed, most questions raised underscored the difficulty of integrating WTO law into U.S. domestic law. Speakers were asked to clarify the extent to which U.S. courts defer to U.S. executive agencies and to clarify the procedures for bringing U.S. domestic law into conformity with WTO obligations. Questions were also raised regarding the role that intermediary organizations such as industry associations and professional groups, play in fighting trade protection and the ways in which WTO cases appear before appellate judges.

Professor John Jackson of Georgetown University Law Center, a leading WTO legal scholar, delivered a speech titled "China and the WTO Dispute Settlement Process" at the luncheon. Professor Jackson first discussed the significance of China's WTO accession. In his view, China's accession is the most significant event in the short history of the WTO. He also noted that China's preparation for substantial membership and compliance with the WTO is greater than any other country's preparation for accession.

Acknowledging that not all scholars in the West share his views, Professor Jackson offered three observations of the impact China's accession will make. First, China's WTO membership will greatly affect China itself. WTO precedent attests to the enormous impact membership has on reform both in government and the economy. Professor Jackson noted the impressiveness of the advances China has already made. Reform of the internal constitutional structures of the court and administrative structures are progressing rapidly. For example, MOFTEC (Ministry of Foreign Trade and Economic Cooperation) is developing research centers that will act as advisory councils in WTO matters. Second, Professor Jackson observed that China's accession will have a great reciprocal impact on the WTO. Upon accession, China immediately became one of the major players in the WTO. As Professor Jackson describes it, the WTO remains a "work in progress" and China's influence will be critical in helping to induce change and guiding the direction of WTO development. Third, Professor Jackson noted that China's accession will greatly impact world affairs, particularly international economic relations. Professor Jackson affirmed the positive nature of this impact-for one thing, China's membership will be a good and welcome influence on how the U.S. conducts trading relations with China.

Professor Jackson then turned attention to the WTO itself. He began by discussing the necessity for the WTO's existence. Professor Jackson noted that the experience of the last century demonstrates the great value of markets. Although not perfect, markets have proved to greatly increase the ability of societies to create wealth and raise standards of living. But, Professor Jackson stressed, history also teaches that markets will not work unless adequate institutional structures-i.e. rules-are in place. The question then arises as to which bodies will make and apply the rules necessary for regulating markets. Professor Jackson argued that modern technological advancements that dramatically decrease the time and cost of transportation and communication necessitate institutions beyond the nation state. Coordination benefits allow groups of countries to act together, especially in situations where individual countries acting alone could cause great harm. As decentralized power marks a defining characteristic of market-oriented system and coordination benefits require adequate rules-based institutions, Professor Jackson noted that a different attitude towards national sovereignty must evolve.

Professor Jackson continued his discussion by commenting on the present limits of the WTO. Although some claim the WTO exceeds its mandate by becoming involved in internal national matters, he noted that the historical record of GATT demonstrates otherwise. GATT's regulation in matters such as national treatment evidences a mandate that goes beyond the regulation of external matters alone. In recognition of the tension between international and national authority, diplomats who negotiated during the last phase of the creation of the WTO stressed the need for containing the power of the WTO. As a result, severe voting requirements that require consensus risk paralysis of the political/diplomatic organ of the WTO. Paralysis could cause the WTO's Dispute Settlement Body to gain misplaced authority to rule on issues more appropriately settled through political negotiation by diplomats.

Professor Jackson then briefly commented on the Dispute Settlement Body. On balance, it is both very powerful and successful. WTO dispute settlement proceedings mark a shift from GATT's power-oriented practice of forming and implementing rules via one process of diplomatic negotiation resolved through power struggles. The WTO Dispute Settlement body is now rule-oriented. Rules are formulated through one process and implemented by another. Professor Jackson concluded by noting only time will tell if the WTO possesses the resources and competence necessary to successfully resolve trading disputes of the present and future.

During the question and answer period that followed, Professor Jackson was first asked whether a solution exists to the problem of political paralysis in the WTO. Professor Jackson noted that alternatives have been offered to the consensus rule, such as consensus minus one or consensus minus two, but that it is almost impossible to change this rule. Modification requires consensus, and as some countries use the power of their vote to hold the system hostage in an effort to further their agenda, modification is unlikely.

A question was raised regarding the most important challenges China's entrance to the WTO creates in China's legal arena. Professor Jackson noted three challenges. First, the Protocol of Accession is particularly harsh on this subject because state-owned enterprises may undermine the discipline of the trading system. China's ability to address this issue presents a serious challenge. Second, China's judicial system must meet the challenge of gaining judicial independence. Critics currently argue that China's legal system is too intertwined with China's political bodies. Third, China's ability to comply with the Protocol of Accession according to the mandated timetable presents a formidable challenge. Professor Jackson predicted that satisfying obligations within the established timeframe is unlikely. Other countries will have to demonstrate considerable maturity in responding to this scenario.

Professor Jackson was then asked to comment on the need to reform WTO Dispute Settlement procedures for selecting panel members at the first level. Professor Jackson advocated a combination of ad hoc appointments and a standing roster. This would allow diplomats to continue to sit on panels in Geneva through ad hoc appointments, thereby gaining invaluable insight into the WTO settlement process and strengthening their own contribution to the WTO. In addition, ad hoc appointments also allow legal experts to sit on the panels, such as professors or officials, who offer important expertise, but who would not be available for inclusion on a standing roster.

Professor Jackson was asked whether problems exist regarding WTO remedies. He noted that negotiators of the WTO admittedly did not know how to deal with the issue of compliance. Certainly, there is room to strengthen assurance of compliance with the WTO so that non-economic punishments are avoided. In general, Member countries must internalize the idea that governments should comply with WTO decisions. Measures also must be pursued to assist governments that do not have the capacity to comply and enforce WTO provisions.

The final question sought a prediction of the future relationship between the U.S. and the WTO. Noting that three weeks before this speech the future looked quite dismal, Professor Jackson pointed to the approval of presidential fast track authority as reason for encouragement. Though many administrative decisions of the last six months have been questionable, at the very least, fast track authority creates a framework for trade negotiations until 2007. Addressing another dimension of the question raised, Professor Jackson noted that tendencies within the U.S. create legitimate concerns over whether the U.S. will be a "good citizen" in complying with the WTO in the future, even though the official U.S. position holds the U.S. will comply. Professor Jackson added that the U.S. does have a good record in attempting to comply with the WTO, even better perhaps than the E.U. Still, the question of U.S. compliance will only be answered by the events of the next few years. Professor Jackson concluded by noting that as with all human institutions, particularly those with so much at stake, the tensions between the WTO and its Member nations are only natural.