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The World Trade Organization Now Finds Itself in the Worst Crisis of All Times

Date of publication: 25 August 2020

In the middle of 2020, it is already possible to outline a number of trends and events in the sphere of international trade that would have a material impact on Ukraine’s economy, foreign trade of the nation’s business, as well as on legal regulations of the international trade. Those were the topics on which Yurydychna Gazeta dwelled in conversation with Partner, Attorney at Law and Head of International Trade Practice of Ilyashev & Partners Law Firm Olena Omelchenko.

– What modern global economic trends are likely to affect the international trade development?

– The World Trade Organization (WTO) now finds itself in the worst crisis or all times it existed. The global trade negotiations have come to a standstill. The international system of settling the trade disputes has been blocked. Unavailability of containment mechanisms results in growth of the protectionist measures in international trade.

Roberto Azevêdo, Director-General of the WTO, took a decision to resign a year before the end of his term in office, thus having given the overall understanding of the crisis situation inside the organization, after which the process of searching for the new Director-General started. There have already been a number of meetings held between the group of candidates with government representatives of the Member States. Replacement of the WTO’s executive, who is currently holding the office, was planned for this coming fall. With regard to certain factors, including the USA’s protectionist policy, the election process shall not be seamless, whereby its outcome shall play an important part both for the organization’s future and for the world trade order in general. The WTO Member States must elect the Organization’s new Director-General responsibly. On this further trade policy and the opportunity of creating the improved competitive trade terms would depend, particularly, for Ukraine alike.

– Trade wars — how do they unfold nowadays? How do you protect the national interests in the international trade wars? Shall there be any changes in the dispute settlement system and how is Ukraine going to react to such changes?

– From the moment of taking office by US President Donald Trump, the WTO faced increasing scepticism of the United States as far as the key idea of the organization was concerned, which was and continues to be the abating of international trade barriers. For that matter, the crisis was made even worse due to the economic ruin and deglobalization, which were determined, particularly, by armed conflicts of the previous years and the COVID-19 pandemic. Such actions completely fit into the concept of relations between the United States of America and the WTO, which had been promoted by the previous administrations alike. Thus, in the times of President Obama, the USA made two attempts at blocking the candidates to the WTO’s Appellate Body. At first, they did not let the US representative get re-elected in 2011 and then they prevented a Korean judge from being re-elected back in 2016. In 2020 Washington paralyzed the work of the supreme instance of the organization’s dispute resolution system by refusing to appoint judges to the WTO’s Appellate Body.

The US’s dissatisfaction is caused predominantly by two factors. Firstly, the WTO’s system does not offer any standards or practical regulations in the spheres of employment and environment, whereas the relocation of manufacturing activities to the countries offering low production costs and cheap labor force contributed materially to the emergence of economic instability. Secondly, insufficient attention, paid by the organization to issues of excessive concentrations and the protection of fair competition led to the rise of powerful monopolies both on the national and international levels and also let China use the advantages from being a party to the global trade system.

It is improbable that Washington’s trade policy vector would shift considerably any time soon, while the scenario of the US’s possible withdrawal from membership in the WTO remains realistic.

The election of the WTO’s new Director-General is considered as a chance of reconsidering and reforming the World Trade Organization system. If the upcoming Director-General would be willing to abstain from serious restoration of currently applicable approaches and principles of structuring the organization’s activities, we shall have to expect even stronger criticism to the address of this institution and certain turbulence in the international trade.

For as long as the USA have now been blocking the operations of the Appellate Body for an indefinite time, parties to the disputes within the framework of the WTO may be abusing the currently existing situation by freezing the cases that stand little chances of success with a help of filing the appeals. The idle dispute settlement body is a straight way to stronger protectionism.

In the applicable circumstances we may expect that for the purpose of maintaining the efficient review of trade disputes, the WTO Member States shall take advantage of one of the two scenarios: they would either enter into temporary agreements on refusal to appeal the reports by the groups of experts at the idle supreme instance, or would simply revert to the alternative ways of dispute settlement, such as arbitration. Implementing the second scenario, part of the WTO Member States, namely, Australia, Brazil, Guatemala, Hong Kong, Iceland, Canada, China, Columbia, Costa Rica, Mexico, New Zealand, Norway, Pakistan, Singapore, Ukraine, Uruguay, Chile and Switzerland supported the European Union’s initiative by joining the Multi-party interim appeal arbitration arrangement pursuant to article 25 of the DSU.

Article 25 of the appeal arbitration arrangement provides for an opportunity of setting up the ad hoc arbitration for the purposes of settling the disputes that pertain to issues, clearly determined by the parties. Herewith, for the dispute to be made subject to arbitration, mutual agreement between the parties, expressed in an arbitration agreement, is a mandatory condition. The rules and procedures, elaborated by the European Union, are most closely approximate to those, which are applied by the WTO Appellate Body and the review is planned to be conducted with the participation of a tribunal that consists of 3 arbitrators, who are elected by Director-General out of the former members of the Appellate Body.

Ukraine has been a fully-fledged member of the WTO since 2008 and currently also belongs to the group of countries that supported the EU’s initiative regarding implementation of the alternative appellate procedure. But as long as Ukraine has not executed the appropriate arbitration agreements, the fact of such support in itself does not incur any legal consequences or the emergence of any obligations under international law.

Currently Ukraine appears to be plaintiff in 9 disputes, defendant — in 4 and a third party — in 45 disputes within the framework of the WTO. In view of unavailability of the report by the group of experts or any mutually agreed decision in 8 out of 13 disputes, where Ukraine acts as plaintiff or defendant, the appeals in such disputes, if Ukraine choses to execute an arbitration agreement with an opponent state, may be referred for review by the ad hoc arbitration. In another case, each party would have an opportunity of protracting the proceedings for an indefinite time by filing an appeal to the abandoned WTO Appellate Body. Such situation would result in recurrent breaches of the international trade arrangements and resolving the controversial issues exclusively via political means, that is, from the position of strength.

– What changes shall occur on the national level in the near term? How would this impact the practice?

– It is not worth expecting any material changes on the national level in the near future. However, it is worth taking care of improving the existing practice, particularly, in the part of adopting the new laws aiming at the protection of national manufacturers against dumping, subsidized and growing imports. The law that would provide the state with the opportunity of swiftly responding in case of detecting the circumstances that fall within both general and special exceptions, imposed by the WTO, including the exceptions for security reasons, is also much in demand.

– What does the state do in order to protect the national manufacturers?

– In fact, the state does a lot to protect the national manufacturers. It is a different matter that the government officials are restricted in terms of the choice of instruments that are available to them for such protection, because the WTO rules only allow applying measures subject to certain conditions and in pursuance of clearly defined procedures. Not everything depends on the officials of the Ministry of Economy or the Interdepartmental Commission on International Trade. The outcome directly depends on the evidence, submitted by the national manufacturers, involvement of foreign manufacturers into the process, as well as on the political influence of foreign states, which are interested in the increase of imports of their generic goods to the territory of Ukraine.

If we take a look at the statistical data, we shall see that out of the 10 investigations that were complete back in 2020, decisions were awarded for the benefit of the national goods manufacturers in as many as 8 cases. On one part, it is the proof that the state understands the need to protect the market, and on the other — that the state would only initiate the proceedings, when there is every chance of completing the proceedings with application of measures. For these reasons, there are only a few of such projects and it is extremely difficult to initiate the proceedings, if one does not have the proper experience and the skills needed to collect the corroborative evidence.

– What requests do the clients address you with most often?

– We are most often requested to protect our clients’ interests within the framework of a variety of trade investigations. We have a considerable advantage over other law companies, because all the projects that we ever endorsed ended up in favour of our clients. Our one-of-the-kind expertise allows us initiating both the anti-dumping and special investigations or the reconsiderations of anti-dumping duties within the shortest practicable terms, while the work done by our economists allows planning the supplies of goods in such a manner that a client would not have any troubles on the foreign markets.

– Could you share some interesting cases in 2020, which affected the international trade practice?

– Definitely, the most interesting case in 2020 was the arbitration between the European Union and Ukraine regarding a temporary ban, imposed by Ukraine on export of wood products (in other words, pertinent to the moratorium on export of round timber). It was for the first time that the state would execute an official contract with a Ukrainian law company to represent Ukraine’s interests in this trade dispute. We are very proud that our company became the one to handle this case; however, I may not go into any details for confidentiality concerns.

But I want to point out that this was a landmark case, because it was for the first time that the European Commission initiated setting up an arbitration group to review the dispute pursuant to applicable procedure, designated in the Association Agreement between Ukraine and the EU. Conventionally, the EU used to employ a mechanism for dispute settlement purposes that was designated within the framework of the WTO’s treaties and featured untarnished reputation. Besides, we may make an assumption that the troubles with blocking the arbitrators from being appointed to the WTO’s Appellate Body motivate the European Commission to review its practice and to fine-tune the alternative mechanisms for reviewing the cases in bilateral format. It is not unlikely that the EU shall be testing the bilateral mechanisms of dispute settlement, envisaged in other treaties on the free trade zone with the third parties, if the WTO crisis is not resolved shortly.

In order to review this dispute, we needed to handle the whole lot of organization issues for the first time ever — starting with the appointment of arbitrators and paying remuneration to them and ending with organization of hearing sessions under conditions of the COVID-19. It is this particular kind of experience that may become the basis for improving the choice of instruments for dispute settlement when re-adjudicating the Association Agreement between Ukraine and the EU, which is broadly discussed by the government officials at the moment.

Also, this year the interim anti-dumping duty and the interim special duty were applied in Ukraine for the first time in almost 20 previous years. It is a certain breakthrough for the practice in general, because this provides us with an opportunity of effectively responding to the cases of competition abuse and to protect the national manufacturer without having to wait till an investigation is complete. Such practice has been implemented by the EU, the USA and other Member States of the WTO quite for a while already. It is the all-new experience for Ukraine and it has its detriments, so it is worth elaborating the mechanism of such application within the shortest possible time.

– How much time and how many resources are needed to successfully deliver a case?

– The largest, the most important and the most complicated cases in the sphere of international trade in Ukraine are those pertaining to protection of Ukrainian goods manufacturers from either dumping or growing import of goods. It is worth mentioning that the challenging thing is to work on the projects that you create and support till the end, if I may say so, when you deliver a project “on a turnkey basis” over the course of some 12–18 months. Ukrainian businesses are vaguely aware of these instruments and do not always believe that the state is able to protect them. First of all, one needs to persuade a national manufacturer that the trade protection instruments are efficient enough, to unite the Ukrainian manufactures that compete with one another into a joint team in order to come up with consolidated position of the entire industry, to collect the materials, to build up the case and to initiate the proceedings, after which to oppose the large number of legal representatives or importers, exporters, foreign manufacturers, embassies and foreign representative establishments for a period of one year. In one of the proceedings, it took us more than two years to unite 4 large manufacturers, after which the investigation was underway for another year. However, the result was worth it: we managed to apply the appropriate measures that actually prohibited the import of goods from 3 countries for 5 years.

There are only a few law companies on Ukrainian market that would initiate the proceedings and are able to carry them through. The majority of law companies would join the already initiated proceedings, representing interests of exporters and foreign manufacturers. As a matter of fact, these are the law firms that initiate the investigations and set up the new project that shape the market in international trade practice.

– Speaking about the national manufacturer protection on both home and international markets, what do the businesses and legal advisers need to know to stand out for the interests of business?

– First of all, one needs to remember that the amount of time spent by an attorney directly affects the project outcome. This is the particular case where the price is of fundamental importance. This is why we never proceed with the projects on a part-time basis, because we believe that this is just a waste of our clients’ money. We always care about the outcome. It is better to take up just one case with a realistic budget and to bring it to a logical conclusion than to have 10 cases with minimal budget and to fail them all.

Secondly, with trade investigations, having an economist in the team is a must.

Thirdly, it is necessary to take the conflict of interests seriously. Recently some law firms have routinely been joining several clients within a single case to save on the budget. However, in such cases it is worth bearing in mind that the case outcome may be different for each client and the law firm may face the conflict of interests at certain stage.

And finally, each project requires care on a daily basis, otherwise the outcome may be rather unexpected.