The LexGaze Weekly - DECIPHER

Trade Sanctions under the World Trade Organization Regime- Understanding Article 22 of the Dispute Settlement Agreement

Shambhavi Shekhar

Issue 17 | October 11, 2020

Economic sanctions, under the international law regime can be defined as the deliberate, government-inspired withdrawal, or threat of withdrawal, of customary trade or financial relation (Elliott, Hufbauer and Oegg. Sanctions. The Library of Economics and Liberty). It’s a mode of retaliation against the party in breach having historical significance, and is the most serious consequence, faced by the defaulting member (Art. 3.7, DSU). The objectives of imposing a sanction are- to punish a country; to act as a deterrent and to restore status quo, which are often led by the goals of a country’s foreign policy. Under the World Trade Organization (WTO) rules, there is absence of “international sanctions” in the strict sense and a WTO member is allowed to impose trade sanctions in cases of breach. We shall focus on Article 22 of the Dispute Settlement Understanding (DSU), 1994 to understand the process of imposing countermeasures against the party in breach. The DSU does not use the term “sanctions”, instead, Article 22 entails provisions regarding suspension of concessions or obligations in the event its rulings or recommendations in any dispute are not implemented by the concerned party within a reasonable period of time. Article 22.1 states that compensation or suspension of obligation are temporary measures. Once the member in breach fully complies with the rulings, the suspension is necessarily revoked. Compensation is voluntary, and in case it is granted, it must not be inconsistent with the agreements forming the subject matter of the dispute. Article 22.2 further provides that in case the party in breach, fails to consider the recommendations or does not comply with the rulings within a reasonable period (as decided under Article 21.3), it can enter into negotiations with the party which invoked the dispute settlement mechanism of the WTO in order to mutually decide the compensation. However, if this step does not yield satisfactory results, the complainant party has been empowered to request the Dispute Settlement Board (DSB) to suspend any concessions or obligations conferred upon the defaulting party under the relevant agreement. This suspension is nothing but imposition of ‘trade sanctions’ by a member party upon the non-complying/defaulting member. Tariff reduction is an example of concession provided under multilateral trade agreements entered into. In this regard, a trade sanction may take the form of tariff surcharges. Trade sanctions are discriminatory in nature and unless a permission in this regard is obtained from the DSB and only against the defaulting member, following the dispute settlement procedure, the imposition would otherwise be inconsistent with the WTO Agreement (Marrakesh Agreement). The DSU also lays down requirements concerning the kinds of obligations which can be suspended (Article 22.3). Essentially, sanctions are imposed in those sectors only in which non-compliance was observed. Sectors are classified based on Annex 1 of the WTO Agreement which comprises of 3 divisions namely-Annex 1A (covering GATT and multilateral trade agreements concerning goods), Annex 1B-services (GATS) and Annex 1C (Trade Related Aspects of Intellectual Property). With regard to TRIPS, each Intellectual Property constitutes a separate sector. To exemplify, if non-compliance takes place in trademarks, the countermeasure should also conform to trademarks. In case of goods, an obligation can be suspended against another good. However, if the invoking party finds it impractical to confine within the same sector, the DSU allows imposition of countermeasures under different sector but within the same trade agreement. Example- violation in trademark can be countered with a sanction with respect to patents. Next, if compelling circumstances exist, countermeasures can be taken under a different agreement also. This is known as “cross retaliation”. The objective of this structure is to restrict sanctions within a particular sector but at the same time, also provide “teeth” to the countermeasures. It is imperative that the extent of sanctions should be proportionate to the breach or nullification committed, so that the countermeasure does not result in unnecessary trade barriers (Article 22.4). In case an agreement does not allow suspension of obligations, the same cannot be carried out. In case the complainant is not satisfied with the extent of suspensions or feels that the procedure has not been adhered to, the matter is then referred to arbitration (decision is final), during the pendency of which, the obligations cannot be suspended. The task of the arbitrator is to check the proportionality of the sanction imposed and also see whether due procedures have been followed. If the decision of the arbitrator is in consonance with the request before DSB, it shall proceed to suspend obligations. Although countermeasures provide a system of checks in case of non-compliance, yet they are not resorted to in each case, owing to the drawbacks they suffer with. First, in a sense, they impose a trade barrier in reply to an existing trade barrier (emanating from the non-compliance by the party in breach), which otherwise than with permission, is inconsistent with WTO rules. Next, these sanctions affect both, the party seeking authorization and the non-complying party, thereby hampering unrestricted trade flow. Therefore, it should not be resorted to as the first measure to seek redressal. Other alternative modes such as awarding pecuniary fines should be exhausted first.

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