HomeBlogCustomsThe carrot and the stick: a tale of how the EU is using multilateral negotiations and threats of unilateral retaliation to buttress the multilateral, rule-based trade system, and protect its markets

The carrot and the stick: a tale of how the EU is using multilateral negotiations and threats of unilateral retaliation to buttress the multilateral, rule-based trade system, and protect its markets

  • May 28, 2020
  • Posted by: Florence
  • Categories: Customs, International, Retaliatory duties, Trade Defense
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On 30 April 2020, the European Union (EU) and 18 other Members of the World Trade Organization (WTO) officially notified Multiparty Interim Appeal Arbitration Arrangement (MPIA), an interim appeal system for the resolution of trade disputes between Members who signed the agreement, to the WTO. The MPIA is intended to address the inability to resort to the Appellate Body of the WTO’s Dispute Settlement Body, which no longer has enough arbitrators to adjudicate on appeals due to the United States’ refusal to appoint new Appellate Body members. Disputes between MPIA Parties will enter into arbitration proceedings under Article 25 of the Dispute Settlement Understanding (DSU) to decide appeals of a final report by a WTO panel.

In parallel, the EU is revamping its domestic arsenal, to make it easier to impose unilateral retaliatory duties against WTO Members who refuse to join the MPIA. The European Commission has proposed, and the EU Member States have agreed, changes to the EU’s Trade Enforcement Regulation of 2014 (Regulation 654/2014). Once these changes have been approved by the European Parliament and enter into force, countries that do not join the MPIA will face the EU’s unilateral retaliatory tariffs if they appeal before the – now dormant – WTO Appellate Body against the WTO panel report in favour of the EU.

Background: paralysis of the WTO Appellate Body
The WTO dispute settlement mechanism provides for two-tiered resolution of trade disputes between WTO Members, consisting of a panel and appeal stage. In the panel stage, an ad hoc panel makes its decision after reviewing the factual and legal aspects of the case. The losing country may then appeal the panel decision before the Appellate Body – a permanent body of seven persons entrusted with the task of reviewing the legal aspects of the panel reports. Each appeal is heard by three members of the Appellate Body (ABMs).

The WTO Dispute Settlement Body (DSB) appoints ABMs to serve on the Appellate Body for a four-year term, with the possibility of re-appointing them for another four-year term. In general, the DSB fills vacancies of the Appellate Body as they arise. However, the United States (U.S.) has blocked the appointment of new ABMs over criticism of what the U.S. considers to be the Appellate Body’s judicial overreach. So, the Appellate Body has only had one ABM since 11 December 2019.

Accordingly, since there are fewer than the minimum three ABMs needed to review appeals, no new appeal can be heard before the Appellate Body at the moment. While ad hoc panels can continue to hear new complaints, parties can no longer resolve disputes with final and binding decisions of the Appellate Body. If the losing party brings an appeal before the Appellate Body, the dispute remains in limbo, unresolved.

The carrot: Multiparty Interim Appeal Arbitration Arrangement (MPIA)
On 27 March 2020, the EU concluded an MPIA, an interim appeal system aimed at resolving trade disputes between parties until the Appellate Body can function again, with 15 other WTO Members.1 The participating WTO Members are Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, the EU, Guatemala, Hong Kong, Mexico, New Zealand, Norway, Singapore, Switzerland and Uruguay (MPIA Parties).2

In disputes between MPIA Parties, appeal arbitration under Article 25 of the Dispute Settlement Understanding (DSU) will be initiated if a party appeals against a final panel report. In essence, the interim appeal arbitration will mirror the procedural and substantive aspects of the existing appellate review (under Article 17 of the DSU and the Working Procedures for Appellate Review). Each appeal will be heard by three arbitrators selected from a pool of 10 standing arbitrators. The three arbitrators who review the appeal will be able to discuss their decision with the other seven arbitrators in the pool to promote consistency and coherence in decision-making.

At the same time, the MPIA also introduces a few new elements to the existing appellate review. Arbitrators will have to respect a 90-day timeframe to complete each appeal. To meet the 90-day deadline, the arbitrators may take appropriate organisational measures to streamline the proceedings, such as page limits, time limits and limitations on the number of hearings required. If necessary, arbitrators may propose that parties exclude claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU.

The MPIA also explicitly states that the arbitrators must only address issues that are pertinent to the resolution of the dispute and those that have been raised by the parties.

These novel features in the MPIA partly reflect the EU proposal3  to reform the Appellate Body and address some of the U.S. criticisms against the Appellate Body.

Looking ahead
On 15 April 2020, the Council of the EU approved the MPIA.4 After the other MPIA Parties completed their domestic procedures to adopt the MPIA, the original MPIA Parties and three new signatories (Iceland, Pakistan and Ukraine) – 19 WTO Members in total – officially notified the WTO of the MPIA on 30 April 2020.5 Following notification, the MPIA Parties will now start the selection process to appoint the pool of 10 appeal arbitrators and decide appointments by consensus. The selection process will be completed within three months from notification to the WTO.

Interim appeal arbitration will apply to any pending or future dispute between MPIA Parties (and other WTO Members who join the MPIA at a later stage) where, on the date the WTO is notified of the MPIA, an interim panel report has not yet been issued.

If and when the Appellate Body becomes fully functional again, the MPIA Parties will no longer file new appeals under the MPIA. However, if an appeal arbitration agreement enters into force before the resumption of the Appellate Body, it will remain in effect unless the parties agree otherwise.

The stick: EU to amend its Trade Enforcement Regulation of 2014
As explained above, the MPIA Parties have opened the door for other WTO Members to join the MPIA at any time. The EU is creating an incentive of its own for undecided WTO Members. Indeed, the EU is adopting the changes necessary to allow the European Commission to adopt unilateral retaliatory tariffs under the EU’s Trade Enforcement Regulation of 2014 (Regulation 654/2014)6 against countries that do not join the interim appeal arbitration and instead appeal panel reports before the paralysed Appellate Body in cases won by the EU.

As soon as the Appellate Body ceased to function on 11 December 2019, the European Commission presented a legislative proposal to the European Parliament and the Council of the EU to amend Regulation 654/2014.7

 In essence, the revised Regulation 654/2014 would allow the EU to unilaterally impose retaliatory tariffs in circumstances where (i) the EU has won a WTO dispute with a favourable ruling from a WTO panel, and (ii) the other party appeals the panel report before the paralysed Appellate Body and does not agree to interim appeal arbitration under Article 25 of the DSU.8

Beyond its impact on WTO dispute settlement, the changes to Regulation 654/2014 authorise the Commission to unilaterally impose retaliatory tariffs in trade disputes under regional or bilateral trade agreements, if a trading partner blocks the composition of panels and does not take the steps necessary for a dispute settlement procedure to continue.

The amendment of Regulation 654/2014 takes place under an ordinary legislative procedure which requires the European Parliament and the Council of the EU to give their approval. On 8 April 2020, the Council agreed to the Commission proposal to amend Regulation 654/2014.9 At the same time, the Council added a review clause which calls on the Commission to assess the potential need to extend the scope of Regulation 654/2014 to services and intellectual property rights at the latest within three years from adoption of the amended regulation. This reflects the request from some EU Member States, notably France and Italy, for inclusion of an option to use Regulation 654/2014 not only to retaliate against imports of goods, but also in relation to services and intellectual property.

The Commission proposal has now been sent to the European Parliament for approval. The Parliament’s rapporteur on this matter, Marie-Pierre Vedrenne, will finalise a draft report in the coming weeks and then the Parliament’s Committee on International Trade will consider the Commission proposal in May 2020. Once the Parliament agrees its position on the Commission proposal, the Council, the Parliament and the Commission will start discussions (trilogues) to finalise the text of the amendment of Regulation 654/2014.

Due to the slowdown caused by COVID-19, the amendment of Regulation 654/2014 is unlikely to be officially adopted by mid-2020, which was the time period mentioned by the Commission in December 2019. Rather, the amendment is expected to be adopted at the end of 2020.

Accordingly, companies exporting to the EU are advised to closely monitor the amendment of Regulation 654/2014 as well as how the new interim appeal system under the MPIA is managed in practice, as these changes will result in the more frequent imposition of unilateral retaliatory duties by the EU. Countries that do not join the MPIA will face the EU’s unilateral retaliatory tariffs in cases where the EU wins a WTO dispute at the panel stage.

Any questions? Please do not hesitate to contact Reed Smith’s customs and trade team.

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  1. European Commission, Press Release, “EU and 15 World Trade Organization members establish contingency appeal arrangement for trade disputes” (27 March 2020).
  2. Since the statement announced by trade ministers from 17 WTO Members at Davos, Switzerland on 24 January 2020, the participating Members of the new interim appeal system have been reduced from 17 to 16, with a change in the signatories: while Hong Kong was newly added to the list, South Korea and Panama have not joined the interim appeal system – at least, for the moment. See also European Commission, Press Release, “EU and 16 WTO members agree to work together on an interim appeal arbitration arrangement” (24 January 2020).
  3. EU proposal for reform of the Appellate Body, WT/GC/W/752 (26 November 2018).
  4. Council of the EU, Press Release, “Council approves a multi-party interim appeal arbitration arrangement to solve trade disputes” (15 April 2020).
  5. European Commission, Press Release, “Interim appeal arrangement for WTO disputes becomes effective” (30 April 2020). Since the original MPIA Parties agreed on the text at the end of March, Iceland, Pakistan and Ukraine joined the MPIA.
  6. Regulation (EU) No 654/2014 of the European Parliament and of the Council of 15 May 2014 concerning the exercise of the Union’s rights for the application and enforcement of international trade rules and amending Council Regulation (EC) No 3286/94 laying down Community procedures in the field of the common commercial policy in order to ensure the exercise of the Community’s rights under international trade rules, in particular those established under the auspices of the World Trade Organization (OJ L 189, 27.6.2014, pp. 50–58).
  7. European Commission, Press Release, “Commission proposes new tools to enforce Europe’s rights in international trade” (12 December 2019).
  8. The EU’s unilateral countermeasures would be applicable only after the EU has relied on the WTO dispute settlement procedures. Accordingly, the EU will first file a complaint before the WTO and try to address any dispute at the panel stage before unilaterally imposing retaliatory tariffs.
  9. Council of the EU, Press Release, “EU trade: Council agrees its position on revamped enforcement regulation” (8 April 2020).

Authors: Yves Melin  & Jin Woo Kim
Reed Smith Client Alerts – Published on April 28, 2020