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The ruling was a widely trumpeted defeat for the United States. On March 26, a panel of the World Trade Organization (WTO) issued a preliminary ruling that the United States had violated international trade law when President Bush in 2002 imposed temporary tariffs on foreign steel designed to protect various sectors of the U.S. steel industry. This ruling was not wholly unexpected. It was just the latest in a string of defeats that the United States has suffered in the WTO dispute resolution process. But losing a case doesn’t mean a country has to change its ways. In a growing number of instances, countries are not complying with WTO rulings, say some trade experts. And this behavior, they say, is undermining the WTO and putting the global economy at risk. “The whole WTO dispute resolution process is breaking down,” said Gary Horlick, a partner at Washington, D.C.’s Wilmer, Cutler & Pickering who specializes in international trade practice. Since the WTO began operating seven years ago, there have been at least 10 cases where the losing countries have failed to comply with WTO rulings, said Horlick. This is about 14 percent of the final decisions so far, but “eventually, as cases like this mount up, the dispute resolution mechanism collapses,” he said. “You can’t have a system where people don’t comply. It won’t be credible.” If the WTO dispute resolution system collapses, “you would have no way of enforcing the rules of international trade,” said William Barringer, a partner in the international trade department in New York-based Willkie Farr & Gallagher’s Washington, D.C., office. “You’d go back to a system of unilateralism, which is what we had before [the WTO was created]. You’d go back to a wild West cowboy mentality, where might makes right. And that would ultimately adversely affect the flow of international trade, which would adversely affect the world economy.” Various countries have defied WTO rulings on politically sensitive issues. The European Union, for instance, has refused to comply with a ruling that its ban on hormone-fed beef violated WTO rules, said Barringer. Canada has failed to comply with a ruling on aircraft subsidies, according to the WTO. The greatest scofflaw, however, may be the United States. Other countries have shown a willingness to resist WTO rulings, but “the U.S sticks out like a sore thumb,” said Barringer. “The U.S. is the No. 1 non-implementer.” The biggest example, according to Barringer, concerns the tax credits that the United States provides to “Foreign Sales Corporations,” U.S. subsidiaries acting abroad. The WTO ruled on March 20, 2000, that these credits were an export subsidy that violated WTO rules. The United States responded by altering its tax law, but the WTO found the changes were insufficient. So on Aug. 30, 2002, the WTO ruled that the complaining party in the case, the European Union, was entitled to impose more than $4 billion a year in trade sanctions against U.S. products. This was the largest amount of trade sanctions ever granted by the WTO. It is so large that, if the Europeans were to put this amount of duties on U.S. products, “it would undermine virtually all the tariff-cutting imposed by the Uruguay round [that created the WTO],” said John Jackson, professor of international law at Georgetown University Law Center. But many expect these retaliatory duties will never be imposed. “The EU doesn’t want to impose $4 billion in tariffs, because that would hurt their own industries and consumers,” said Dan Ikenson, trade policy analyst at the Cato Institute. So the United States has lost this major case, has not altered its behavior to comply with WTO rulings and has not suffered any retaliation. The WTO’s dispute resolution process was supposed to be one of the organization’s crowning glories: A country brings its allegations that another country has violated WTO rules before a panel of three to five experts. Any appeal is heard by three members of a permanent seven-member appellate body. Within 30 days of the appellate body’s ruling, the WTO’s Dispute Settlement Body, its highest appellate level, must accept or reject the report — and acceptance is automatic unless there is a consensus in favor of rejection. This whole process was created to run on a timetable of just 15 months. CHANGED BEHAVIOR NOT REQUIRED However, it is not easy to enforce a WTO ruling on a sovereign country. That’s because the system was set up so that losing parties were not required to alter their behavior to comply with WTO rules, according to John Magnus, a partner in New York-based Dewey Ballantine’s international trade group in Washington. A losing defendant can instead compensate the successful complaining party by concessions in some other area — e.g., cutting duties on beef instead of steel, although the latter was the subject of the action. The defendant also has the right to do nothing, according to Magnus. In such circumstances, the winning complainant can get authority from the WTO to impose retaliatory duties against the defendant’s goods in an amount sufficient to make the complainant whole. However, retaliation is effective only if it causes the defendant country such economic pain that the country decides to bring its behavior into line with WTO rules. This does not always occur. When politically sensitive issues are at stake, countries may be willing to put up with large retaliatory tariffs. The European Union has tolerated $128 million per year in retaliatory trade sanctions since July 1999, rather than repeal its ban on U.S. beef produced with hormones. Even in the absence of politically sensitive issues, developing countries are often unable to wield the threat of retaliation successfully. These countries “import such a small fraction of the overall exports of rich countries, that their retaliation matters little to large industrialized economies,” according to a March 2002 paper written by Karen Alter, assistant professor of political science at Northwestern University. This paper, “Resolving or Exacerbating Disputes? The WTO’s New Dispute Resolution System,” is available online at http://eucenter.wisc.edu/ Publications/Alter.htm. When retaliatory duties fail to alter a defendant’s behavior, the imposition of such duties provides little help to the real party in interest — the industry being harmed in the complainant’s country. “I represent U.S. cattlemen in the beef hormones case,” said Horlick. “The EU has never complied with the WTO ruling, so the U.S. retaliated. The U.S. imposed duties on Roquefort cheese, truffles, mustard, goose liver, all kinds of stuff. But that doesn’t help my clients.” Retaliation also creates larger, systemic problems. If imposed, retaliation “creates a tremendous distortion of trade, undermining the free trade system of the WTO,” said Barringer. But, he added, if there is no retaliation and a defendant can violate WTO rules with impunity, this undermines the WTO’s credibility. POINTING A FINGER AT THE WTO But some experts say the real problem is the behavior of the WTO itself. The organization’s panels are “overreaching” and engaging in unwarranted “judicial activism,” according to Kevin Dempsey, a partner in the Washington, D.C., office of Dewey Ballantine who specializes in international trade. He said, “Panels have gone out of their way to fill in the gaps in the WTO agreements, creating new law on an international level, imposing new obligations that countries have not agreed to. It is wholly inappropriate for these panels to be creating new obligations for sovereign countries.” In her paper, Alter wrote: “Faced with vague rules, dispute resolution bodies fill in their own meaning — at times handing one side a victory it had failed to achieve through political negotiations.” It is no wonder, according to this analysis, that countries sometimes refuse to comply with WTO rulings.

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