26 June 2019

Erika Szyszczak is a Research Professor in Law at the University of Sussex and a Fellow of UKTPO

The Dispute Mechanism Systems (DMS) in many trade agreements have lain dormant because countries preferred to use the World Trade Organization (WTO), with its Appellate mechanisms, as the forum to resolve international disputes. This may change in the coming years as the confidence in, and reliability of the WTO, is slowly paralysed by the disruptive attitude of the United States. One question that emerges is whether the use of EU dispute resolution mechanisms offer a faster and clearer approach towards dispute resolution and might serve as a model for future regional trade treaties.

The enforcement of international trade rules has been identified as a top priority in the European Commission’s ”Trade for All” strategy of 2015 and, more recently, the European Court of Justice has approved the use of DMS in trade agreements in its recent Opinion 1/17.

The EU-Ukraine DMS

A notable feature of the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA) is the use of a DMS involving an arbitration panel where consultations over a trade dispute break down.

Rudyuk describes the EU-Ukraine DSM as “a modern and “quasi-judicial” model of dispute settlement which has been inserted in all FTAs of the EU since 2000” in the EU-Mexico FTA and “ is largely based on the WTO Dispute Settlement Understanding (DSU).”

Thus, the recent initiation of the EU-Ukraine DSM over a disagreement on wood exports from Ukraine offers a focus to test if EU mechanisms are more effective than existing DSM in international trade agreements. Most notably the NAFTA springs to mind, where it has proved impossible to create an arbitration panel since 2000 because the US has asserted its dominance in blocking arbitration panel members. As Lester et al (2019) point out,

“Without a properly functioning dispute process, the obligations in a trade agreement may not be worth much.”

And now that the WTO is also stymied by the antagonism of the US to new judicial appointments the search is on for different models of dispute resolution.

Ukraine’s Export Ban on Wood

Since 2005, Ukraine has imposed a permanent ban on exports of timber and sawn wood of certain tree species (acacias, checker trees, cherry trees, pear trees, walnut trees, chestnuts, common yews, black cherries, acers, and junipers). Pine trees have been included in the ban since January 2017. Ukraine also considered imposing an export duty of 15% on the export value with a fixed minimum duty per cubic meter applied to certain wood categories.

Any visitor to Ukraine will see why management of woodland is necessary as deforestation has allowed for large-scale open farming to take place, alongside unregulated removal of timber for building purposes. However, the EU believes that the export restrictions applied by Ukraine are incompatible with Article 35 of the EU-Ukraine Association Agreement, which sets out a prohibition of export restrictions and measures having an equivalent effect, equivalent to Art. XI of the General Agreement on Tariffs and Trade (GATT).  While the EU maintains that it strongly supports legitimate measures taken by states to preserve forests and to combat illegal logging, the EU  has repeatedly stated that Ukraine’s export ban cannot be considered an appropriate or effective measure for that purpose and has repeatedly offered co-operation in the area of forest preservation and management.

On 21 June 2019, the EU revealed that the DSM mechanism has been triggered to resolve this issue with Ukraine, first identified in 2015.

Seeing the wood through the trees?

Under the EU-Ukraine DSM there is a mandatory stage where the parties should attempt to reach a mutually agreed solution to their dispute (Art. 305). The EU initiated bilateral negotiations with Ukraine on 16 January 2019, setting out its case in a Note Verbale.

The consultations did not find a solution to the problem and therefore the EU moved to the next stage of the process, requesting the creation of an arbitration panel, composed of three arbitrators (Art. 306-307).

Membership of arbitration panels is often the stumbling block of dispute resolution mechanisms and the EU-Ukraine AA attempts to ensure that a panel will be formed by using a set of complex balancing rules for the appointment of the arbitrators.

First, the panel should be appointed within 10 days of the request to create the panel. The impasse of potential disagreements is broken by the fact that either party to the dispute may ask the chair of the Trade Committee (or its delegate) to select the members by lot from the list of arbitrators established by the Trade Committee (Art. 307).

This list contains the names of 15 potential panel members. Five members are proposed by each party and the other five names are non-nationals of either party, but selected by both parties, and one will act as the chair of a panel (Art. 323).

Where the parties agree on two arbitrators, the remaining arbitrator shall be selected by lot from the individuals on the list of non-nationals who can act as chair. But, if parties agree only on one member, another panel member shall be selected by lot from the list of individuals proposed by the complainant, and the last one from the list proposed by the respondent (Art. 307). The selection by lot is carried out by the chair of the Trade Committee, within 5 days of the request to perform the drawing of the lot.

Once established, the role of the panel is to analyse the facts of the dispute and to make a determination of whether the terms of the AA have been violated in an interim report which is sent to the parties for comment (Art. 308). On receiving the comments, the panel has the option of reviewing its findings before issuing a final report (Art. 310). To encourage the swift settlement of a trade dispute the final panel ruling must be notified to the parties no later than within 150 days from the creation of the panel.

The responses to the findings and recommendations of the panel should be taken within a reasonable period of time (Art. 311-312). If the responding party does not comply with the final report, or the measures taken are inconsistent, as established by the arbitration panel, the complainant is entitled to temporarily suspend obligations or receive compensation (Art. 313-315). These measures continue until the panel’s recommendations are complied with. (AA, 315).

Is it any good, Ukrainian wood?

One key element of Mrs May’s red lines in Brexit negotiations was the elimination of the European Court of Justice as a body which could pass judgment on UK internal affairs. But if a post-Brexit trade deal is ever reached with the EU it will be inevitable that some form of Dispute Mechanism System (DMS) will be included in the agreement.

While the political wrangling over the manner in which the UK will leave the EU continues to dominate the news, observers should maintain a keen eye on the way the EU is developing a model of trade relations, which may be adopted by other regional trading groups, looking to work around the inefficacy and inefficiency of the beleaguered WTO system.

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