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Partner, Sayenko Kharenko
In 2018, Mrs. Makhinova was recognized by Who’s Who: Trade & Customs as “a well-known expert with outstanding expertise and poignant advice for clients.” She is a country expert on franchising, distribution and agency for the International Distribution Institute and Chair of the Working Group on International Trade of the ACC, recognized by Who’s Who: Trade and Customs and Who’s Who: Franchising, Clients Choice in International Trade.
Associate, Sayenko Kharenko
Mrs. Mykuliak focuses on international trade law, including WTO-related projects and regulatory advice.
WTO Dispute Settlement: Know the Ropes and Act
In the light of current political discourse, one could well believe that the golden age of globalization is over. Instead, a new era of sluggishness called “slowbalisation” has appeared on the horizon. This is true to a certain extent. Business now faces an unprecedented and turbulent trade environment around the globe, as more and more governments are introducing various protectionist measures to close their internal markets and decrease import flows. This makes the business landscape very unpredictable. Whereas previously business could forgive a restrictive measure, now it is vital to fight against any such measure. The reason is that while some export markets are closing rapidly, unprotected markets are being flooded with imports even faster. In this article, our aim is to shed light on the most effective instrument to open restricted export markets — WTO dispute settlement.
Look at the Data
In the 24 years since it was established, more than 570 disputes have been brought to the WTO. According to official WTO statistics, more than 65% of WTO Members have engaged in dispute settlement as a complainant, respondent, or third party. Among the most active participants are the US, the EU, Canada, China, and Japan.
Efficient or Not!
The primary objective of the system is to settle disputes, not to pass judgements. Therefore, for the sake of prompt and effective dispute settlement, the procedure starts with consultations allowing the parties to reach a mutually agreed solution. This mechanism works — around 20% of all disputes reached settlement during consultations. If a mutually agreed solution cannot be worked out, the dispute is settled through adjudication, involving examination of the case by panels and, if applicable, by the Appellate Body.
The compliance rate for WTO dispute settlement rulings is remarkably high (around 80-90%). At any case, if the “losing” party fails to implement the ruling, it usually faces countermeasures (trade sanctions) and not only in the same sector where the violation was found. For example, a WTO-inconsistent measure relating to agricultural products can be retaliated with an increase of import tariffs on metallurgy or chemical industry products. This makes the system more efficient.
Ukraine: Active Disputes
Ukraine has been a Member of the WTO since 16 May 2008. It has so far taken part in nine WTO disputes as a complainant and in four cases as a respondent. In this article, we will only focus on the disputes we regard as benchmark ones.
Cases Initiated by Ukraine
The panel report on Russia — Railway Equipment was circulated in July 2018. The primary measure at issue was the systematic prevention of Ukrainian producers from exporting their railway products to Russia. Restrictive measures were implemented by suspension of valid conformity assessment certificates for Ukrainian producers, refusal to issue new conformity assessment certificates, and non-recognition of conformity assessment certificates issued by the competent authorities of other EAEU members (namely Belarus and Kazakhstan).
At the outset, the panel agreed with Ukraine that Russia applied its conformity assessment procedure in a manner discriminating Ukrainian suppliers of rail products as compared to the suppliers from Russia and third countries. In this part, Ukraine made a point. Nevertheless, the panel opined that Ukrainian suppliers were not in a comparable situation to suppliers from Russia and third countries because of the security situation in Crimea and the eastern part of Ukraine. Therefore, according to Russia, its officials could not come for an inspection to Ukraine and, as a result, to issue conformity assessment certificates. The panel agreed with Russia. The justification behind this reasoning is questionable. However, the WTO deals primarily with international economic relations and does not assess the security and safety situation of the WTO member.
Moreover, the panel concluded that non-recognition of certificates issued in EAEU countries other than Russia violate GATT 1994. In particular, despite the EAEU common market, Ukrainian products certified in Belarus or Kazakhstan cannot enter the Russian market. At the same time, products from third countries enjoy this advantage. The panel found that the non-recognition requirement is inconsistent with GATT 1994, and Russia is obliged to accept the certificates issued in other EAEU countries. As various Ukrainian products face the same non-recognition restrictions, these findings are of crucial nature not only for rail products but for all Ukrainian goods exported to Russia in general. Ukraine has since filed an appeal that is pending.
The dispute in Russia — Measures Concerning Traffic in Transit relates to multiple restrictions on traffic in transit from Ukraine through Russia to third countries (primarily Kazakhstan and Kyrgyzstan). The panel report was issued in April 2019 and is further to be assessed by the international community.
This is a landmark case not only for Ukraine but for the WTO and world trade in general. The main question confronting the panel in this dispute was whether violations of Ukraine’s transit rights by Russia may be justified under the security exception of Article XXI GATT 1994. According to the position of Russia, transit restrictions against Ukraine were adopted to ensure its “essential security interests … in time of war or other emergency in international relations”. It is important to note that, until now, no other WTO Member has invoked the security exception. The predominant view within the WTO is that Article XXI could open the door to frequent use of this exception as a justification for purely protectionist measures.
Quite remarkably, the position of Russia has garnered criticism from the EU but received support from the USA. The reason behind the US position is that the panel report in this dispute will have an immense impact on the further application of trade restrictions, which have been actively applied by the US during the recent period, especially with regard to the steel industry. Trade sanctions introduced by Ukraine, EU, and the US against Russia might also fall under the security exception. Russia, by the way, has challenged Ukrainian sanctions before the WTO. However, the dispute initiated by Russia has not reached the panel stage yet.
Cases Initiated Against Ukraine
In Ukraine — Certain Passenger Cars (Japan), the panel disagreed with Ukraine’s determination of all elements necessary for imposition of safeguard duties on passenger cars (i.e. recent, sudden, sharp and significant increase in imports that caused serious injury to domestic industry as a result of unforeseen developments). Following this panel report issued in June 2015, no appeal was filed and it took Ukraine less than three months to remove non-compliant safeguard measures.
The panel report for Ukraine — Ammonium Nitrate (Russia) was issued in July 2018. The primary measure at issue in this case was the gas cost adjustment applied to counteract the so-called “dual pricing policy”. In particular, the MEDT rejected the gas price reported by the Russian producer because it was regulated by the state and replaced it with the price of gas outside of Russia at the German border.
It’s not hard to conclude that the domestic price of gas in Russia is not a market price as it is controlled by the state. As a result, the domestic gas price is 3-5 times lower than the price for gas exported from Russia to third countries. Furthermore, calculations show that the domestic gas price was sometimes lower than Gazprom’s cost of production. Upon its accession to the WTO, Russia undertook to eliminate the indicated disproportions, but this issue never came to anything in the end. As a result, different states apply gas cost adjustments in order to replace the state-controlled price with market pricing, which enables an equalizing of competitive conditions and removes distortions on the Russian gas market. This issue is of utmost importance for industries where gas makes up a significant share in the cost of production such as chemicals, metallurgy, glass or construction materials. The panel agreed with Ukraine that investigating authorities in anti-dumping investigations are entitled to adjust the costs of raw materials of foreign producers if there is sufficient evidence confirming that such costs are unreliable.
Business: the Ball is in your Court
The moral of this story is that it is crucial for business to know the ropes of WTO dispute settlement while constantly monitoring the trade restrictive measures introduced against it and to be ready to act. Notably, there is a specific tool for the interaction between the government and businesses to protect Ukraine’s interests in the WTO. The specific CMU Regulation adopted in 2016 defines, among other things, the rules and procedures for protection of Ukrainian companies through all stages of the WTO dispute settlement process. It expressly provides for the right of Ukrainian companies to apply to the MEDT if any WTO Member violates WTO agreements, as well as setting out further procedures (such as for the initiation of a dispute).
At the same time, while elaborating instruments to protect the Ukrainian market, business should bear in mind that such instruments must be WTO-compliant. Otherwise, the situation will be the same as that with safeguard duties on passenger cars…