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The dispute settlement mechanism, with its ability to deliver binding decisions, is one of the central elements of the Uruguay Round Agreements. The Dispute Settlement Understanding introduced a more structured dispute settlement process with more clearly defined stages than that which existed under GATT since 1947. A fundamental difference between the two is that under GATT a positive consensus was needed to adopt reports, so any one party could prevent formally adopting a decision. Under the DSU, dispute settlement reports are automatically adopted, unless consensus is to the contrary. This is known as "reverse consensus" and makes the decisions very difficult to reject. The DSU did, however, add a mechanism for appealing rulings to an Appellate Body.
A dispute is brought to the WTO when a member state believes that a fellow member is violating trade rules. This usually occurs when a company brings the violation to the attention of its government. The two parties to a dispute then follow a pre-defined set of procedures (see Box 3-2).
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Box 3-2: Four phases of the dispute settlement mechanism
Consultations: Parties to a dispute are obliged to see if they can settle their differences. If consultations are not successful within 60 days, the complainant can ask the Dispute Settlement Body to establish a panel. The parties may also undertake good offices, conciliation, or mediation procedures.
The Panel: The three-member panel decides the case in a quasi-judicial process. Where the dispute involves a developing country, one panellist is from a developing country. The panel report, circulated to all WTO members within nine months of panel establishment, becomes the ruling of the DSB unless it is rejected by consensus or appealed.
Appeals: The possibility of appealing a panel ruling is a new feature in the DSM as compared with GATT. Either party can appeal the ruling of the panel based on points of law. Appeals are heard by three randomly selected members of the Appellate Body and may uphold, modify or reverse the legal findings and conclusions of the panel in a report issued within 60 to 90 days.
Surveillance of implementation: The violating member is required to state its intentions on implementation within 30 days of the report being adopted by the DSB. If the party fails to implement the report within a reasonable period (usually between eight and 15 months), the two countries enter negotiations to agree on appropriate compensation. If this fails, the prevailing party may ask the DSB for permission to retaliate, by imposing, for example, trade sanctions, the level of which is subject to arbitration.
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The DSM cannot force a state to change its laws, even if they are found to contravene WTO rules. States intent on keeping such laws can either negotiate compensation for the complainant (for example, increasing the access to markets in another area), or failing that, be subjected to retaliatory trade sanctions. The EU-U.S. beef hormones case offers an example of this dynamic at work.
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