The EU’s ‘My Way or the Highway’ Approach?

The multilateral trading system continues to be in an uncertain state due to the ongoing Appellate Body crisis. The US has been incessantly blocking new judicial appointments over systemic concerns with the functioning of the Appellate Body (“AB”). As an interim measure, several countries, led by the EU, entered into the Multi-Party Interim Appeal Arbitration Arrangement (“MPIA”) in 2020. MPIA, formed in line with Article 25 of the Dispute Settlement Understanding (“DSU”), allows parties to take independent recourse to arbitration as a means of dispute settlement. In February 2021, the EU took a significant policy measure in pursuance of persuading other WTO members to join MPIA: it brought Regulation (EU) No 654/2014 (“Enforcement Regulation”, “ER”) to allow the EU to suspend concessions to WTO members that effectively prevent the enforcement of a WTO Panel report by appealing into the void (i.e., appealing the panel report before the defunct appellate body) and refusing to embrace the MPIA.

In April 2023, there were talks of the EU invoking the ER if India decided to approach the non-functioning AB in an appeal against India — Tariffs on ICT Goods (EU). As of  December 2023, both parties have been unable to compromise and India has proffered an appeal to the forum. The Regulation points to deeper questions of State Responsibility and the initiation of such measures under international law that deserve consideration. In this piece, I argue that the ER stands in violation of the principles of the WTO Dispute Settlement System as well as the customary principles reflected in the ILC Articles on State Responsibility (ARSIWA). The impugned mechanism unfairly attributes wrongful behavior to WTO members that cannot be termed as a violation of any of their international obligations. It ends up making the EU the unilateral arbiter of deciding the question of dereliction of State Responsibility and reveals the carrot-and-stick rationale of the ER.

The DSU: The WTO’s Bulwark against Unilateralism

The WTO dispute resolution process exists as a lex specialis regime on State Responsibility and countermeasures. The foundational principle of the system is that no country can unilaterally decide on the question of violation of international obligations. Article 23 DSU imposes a duty upon the members to seek redress for the violation of obligations via DSU’s procedure. In the first stage, the Panels (Articles 6-8) adjudicate the disputes and present their findings in the form of Panel reports; the next avenue comprises an appeal to the Appellate Body (Article 17). If the erring party does not comply with the Panel/Appellate Body’s recommendations, the other side can request authorization from DSB to take countermeasures (Article 22).

The framework therefore seeks to prevent members from unilaterally resolving their disputes regarding WTO rights and obligations (US–Section 301 Trade Act). Countermeasures come at the end of the whole rung of other procedural remedies. The ER, on the contrary, vests the EU with the ability to unilaterally suspend concessions and other obligations, in direct contravention of the DSU. The Appellate Body’s institutional paralysis is undoubtedly an absurd contingency that does not find a resolution in the DSU. Still, the emphatic language of Article 23 (usage of the word “shall”) does not make space for actions contemplated by the EU. Moreover, Article 25 mandates that arbitration mechanisms such as MPIA can only function in a regime of consent, and not coercion. In the so-called appeal into the void, the states are eventually abiding by the scheme of DSU and moving with the remedies available to them, irrespective of their motivations behind these infructuous appeals. If it is about developing creative approaches, the possibility of the EU seeking DSB’s authorization before acting under the Enforcement Regulation can also be mooted.

It seems clear that the EU’s actions fall short of compliance with WTO law. The question, then, is: can the ER be justified in the general international law regime of countermeasures?

Fallback to ARSIWA: A Breakdown of the WTO’s Vision?

A recourse to general international law seems difficult in light of DSU’s creation of a self-contained regime. However, arguments do exist that advocate a fallback theorization. Arango-Ruiz, in his fourth report on State Responsibility, expressed doubts over the legal viability of lex specialis regimes in the broader framework of State Responsibility. The exclusion of recourse to extra-systemic countermeasures, he argued, runs against the sovereignty of member states. According to Ruiz, when intra-systemic remedies fail to correct the wrongful acts, recourse to general international law can be validly made. One may, therefore, claim that the paralysis of AB makes it a fit case for the EU to make use of countermeasures under international law.

Ruiz’s hypothesis can be subjected to its own criticisms. One counterargument harks back to the emphatic language of DSU and even more so, the underlying philosophy of WTO as a consent-based system. No creative interpretation of DSU is possible in this regard since the interpretation of WTO texts is the domain of  DSB and adjudicatory bodies, and even the latter cannot add or subtract the existing obligations under the framework. The more general concern of Ruiz about the relationship between general international law and WTO law can be traced to an argument that exists in a different shape. This line of thought asserts that the WTO adjudicatory bodies must take into consideration the general law on State Responsibility while interpreting WTO texts. Nevertheless, this argument also operates in the context of resolving disputes within the DSU. The impermissibility of going outside DSU stands.

A creative justification to invoke general international law may rest in seeing the member states’ appeals to the dysfunctional AB as a violation of a more abstract obligation. This would place the actions of the EU outside the ambit of DSU’s surveillance since the proscription pertains to obligations existing under the WTO and related agreements.

The ER does not seem to pass the test of legality on this basis, either. The ER’s text does not point to any treaty-based obligation or any customary international law that binds the other states in this situation. The text of the regulation refers to the inability of the EU “to enforce international trade agreements” due to the non-cooperation of the third country. Even though omissions can also amount to wrongful conduct (as in Corfu Channel), the omission engenders legal consequences only if it concerns a legal duty that was not fulfilled. Customary law often creates a multitude of duties that are linked to concepts such as respect for sovereignty (e.g., in Corfu Channel). As discussed above, there is no legal duty on states to join MPIA, as it is a consent-based system. One can even impugn the ER as a way of subtly coercing states into joining MPIA, a maneuver at odds with those states’ sovereignty.

There remains one fundamental argument to be examined: the principle of pacta sunt servanda, which requires states to observe their treaty obligations in good faith (see Article 26 VCLT). The question here is: when a state appeals to the AB knowing very well about its futility, is it acting in violation of its good faith duties?

Good faith has been defined variously in different frameworks. Judge Fitzmaurice found that ‘a State must exercise its rights in good faith and with a sense of responsibility; it must have bona fide reasons for what it does, and not act arbitrarily or capriciously’ (Fitzmaurice, 12-13). In Nicaragua, the Court held that an act cannot be construed as defeating the object and purpose if the act’s possibility has been foreseen in the treaty itself (para 272). Recourse to the AB is an explicit provision in the DSU. Moreover, the Court also highlighted a distinction between a broad categorization of unfriendly acts and those that tend to defeat the object and purpose of the treaty (para 273). If A presents a certain proposal to B which the latter rejects, A may feel offended and take it as an unfriendly gesture. Whether it is an abdication of one’s good faith treaty obligations is a more complicated determination. Similarly, the question of violation of pacta sunt servanda cannot be conclusively answered in the EU’s favor.

Concluding Thoughts

It is not to be denied that the AB crisis has put the member states in an uncomfortable position, as the EU’s position reflected in the ER highlights. Appealing into the void appears to be an astute political move on the part of the member states to employ the crisis in their favor. However, the moral and political considerations at play cannot provide the veneer of legality to the enforcement regulation. To invoke State Responsibility against an erring state, the requirement of legal injury is well-established. The conception of a legal injury involves the violation of legal obligations. As a corollary, the requirement of tangible damage is not necessary. Even if the EU may suffer financial losses owing to the non-operation of the panel report, the same cannot amount to wrongful conduct in the absence of a legal injury. Therefore, the EU’s enforcement regulation needs a stronger legal underpinning to comply with WTO law and the general law on State Responsibility.