WTO Cross-Retaliation: An Illusionary Justice

One of the most lauded features concerning the establishment of the World Trade Organisation (“WTO”) is the introduction of its binding dispute settlement system. It introduced the rule of law into a body whose focus was mostly economic and political. Under the WTO dispute settlement system, developing countries have been accorded special and differential treatment. They may choose a faster procedure, request longer time-limits, or request legal assistance. It was supposed to be the torchbearer to uphold the rights of smaller countries, many of which are developing countries and the least-developed countries. It was welcomed as a beneficial system to these countries due to the uneven bargaining capacities between these countries and the developed countries. 

A vast number of developing countries have not taken part in the dispute settlement process of the WTO. Usually the various problems the developing countries might face in approaching these bodies has not been considered. Commonly identified problems explaining the lack of participation are: (a) lack of resources such as lawyers, time, money and other administrative apparatuses (b) an inability to enforce the findings of the Dispute Settlement Body (“DSB”) or the lack of compliance by the developed countries (c) the fear of political and economic retaliation from the developed countries. Though all the above difficulties are equally important the paper would like to comment mostly upon the second problem, namely, the lack of compliance with a focus on cross-retaliation. 

DSB, Developing Countries and the Significance of Counter Measures

There is a lack of compliance of the DSB rulings by the developed countries mainly because of their economic standing. The power disparity between developed countries and the developing countries is vast. The Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”) permits retaliation against a non-complying WTO member through the suspension of trade concessions or obligations as countermeasures. Such measures are mostly ineffective as the developing countries with their small domestic markets would not be able to exert such economic or political pressure on the developed countries to induce compliance.

For instance, in EC-Bananas, it was noted by the Arbitrator that the withdrawing of tariff concessions is unlikely to have any significant effect on demand for EC exports due to Ecuador’s relatively small domestic market. Hence, counter-measures could only lead to the detriment of the developing countries and would in no way harm the developed countries market. Such an outcome would deter the developing countries from spending the resources and effort in approaching the DSU as there is no effective way to enforce the ruling. 

Cross-retaliation and its Effectiveness

The WTO’s DSU in certain circumstances allows for “cross-retaliation” under Article 22.3(c) of the DSU, if the complainant considers it ineffective to remain within the agreement under which the dispute arose. Cross-retaliation is a method in which the retaliating country suspends its obligation in another treaty, for example under Trade-Related Aspects of Intellectual Property (“TRIPS”), to induce compliance. It is, therefore, the suspension of benefits concerning WTO Agreements or sectors not subject of the underlying disputes.

Cross-retaliation, if successful, might benefit the developing countries in terms of social benefit by increasing the access to medicines, cultural goods, entertainment products or just information which was before heavily protected under the strict IP regime. Suspending the IP rights might enable the domestic researchers and industry to access, experiment with, improve and distribute protected technology from the non-complying state and thereby promote technological development as well as domestic innovation through imitation. Howsoever the situation seems like a perfect bargain, the effective functioning of cross-retaliation seems illusionary. The problems to its effectiveness are manifold. 

As Henning Grosse Ruse-Khan argues: 

First, there needs to be a sufficient domestic market size and consumer demand for the product that is to be counterfeited in the country retaliating for the intellectual property rights (“IP”) suspension to have a significant impact on the non-complying state. This entails the need to have a major impact on its economy. Otherwise, it would serve no purpose to deter the non-complying state. However, the corporations which own these IP rights mostly have a major say in the country’s governance policies. This might to an extent, at least to satisfy the demands of such corporations, place the non-complying state at an impasse.

Second, the effectiveness and welfare effects of cross-retaliation depend on the retaliating countries’ technical capability and know-how for a quick and large-scale domestic production of the IP rights protected article. In case the retaliating country does not possess the technology, it would be impossible to envision them engaging in the production process. However, the retaliating country might import the necessary equipment and one could only hope that import of such expensive equipment is not from the non-complying state itself. This situation rather than having a welfare effect might just force the retaliating state into a worse off position. Khan argues that a more viable option for the retaliating state might be to choose easy-to-imitate products.

DSB has authorized the suspension of IP rights in the EC-Bananas, US-Gambling services, and US-Cotton (also see here). However, the suspension of the IP rights has never actually taken place. The lack of concrete cases raises uncertainty and doubt in the practicality of cross-retaliation.

Concluding Thoughts

Observing these above-mentioned obstacles, it appears that the economic incentives from cross-retaliation might not benefit developing countries. Rational states would weigh the benefits and costs from cross-retaliation, and will only choose to cross-retaliate only if it is beneficially for them. Another problem is that to accurately measure the economic benefits and costs of the imitation or the suspension of the IP rights on the national economy is highly complicated and would require resources which the developing states might not have. Cross-retaliation seems like an arduous, time and resource consuming process with unpredictable outcomes. 

Such a model of uncertainty puts into question the effectiveness and efficiency of cross-retaliation. The risks seem to outweigh the benefits that might potentially arise through cross-retaliation. It makes one sceptical of the actual effectiveness and the existence of the DSB as there is no efficient way to ensure compliance by the developed countries.

Gnanavi Gummadi is a final year law student at Jindal Global Law School.

Illustration by Sébastien Thibault.

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