The Dispute Settlement Mechanism in EU – Ukraine DCFTA: Could it be Paralyzed at the Stage of Panel Selection?

Photo of Cornelia Furculiță

Cornelia Furculiță, PhD Candidate, German University of Administrative Sciences Speyer.

Abstract:  The dispute settlement mechanisms from free trade agreements have been rarely used in practice. States preferred solving their disputes within the WTO. This, however, seems to be changing. One of the first examples indicating this change is the EU’s request for consultations with Ukraine under the EU – Ukraine DCFTA. This post describes the possible stages through which this dispute could go through, if parties do not reach an agreement and investigates whether procedures could be paralyzed at the stage of panel selection.

 

 

 

 

 

Introduction

Since 2016 the EU and Ukraine have applied the Deep and Comprehensive Free Trade Area (‘DCFTA’) that regulates their bilateral trade relations and is part of the EU – Ukraine Association Agreement (‘AA’). On 15 January 2019, the EU requested bilateral dispute settlement consultations with Ukraine over certain export restrictions on wood (Commission, 2019). The EU alleges that these export restrictions maintained by Ukraine are in violation of Art. 35 of the AA that is equivalent to Art. XI of the General Agreement on Tariffs and Trade (‘GATT’).This post will not perform a substantive analysis of the measures in question, instead, it will be dedicated to the dispute settlement mechanism (‘DSM’) provided by the DCFTA.

Most international trade agreements contain rules on dispute settlement, however in practice states have rarelyavailed themselves of these DSMs (Vidigal, 2017). On the other hand, the multilateral dispute settlement was used very actively by states – over 500 disputes have been brought and over 350 rulings have been issued within the WTO (WTO, 2019). In the context of the stalled negotiations at the WTO,the escalation of protectionist measures and, especially, the Appellate Body (‘AB’) crisis, as a result of which the WTO DSM could be inoperable,it is expected that a rise in the use of the free trade agreements (‘FTAs’) DSMs will be witnessed soon.The fact that the EU requested consultations with Ukraine under the DCFTA instead of the WTO for a measure that is regulated similarly within both frameworks, is showing that states are starting to turn to FTA DSMs to solve their disputes with trade agreement partners.

Since the DSM under the EU – Ukraine DCFTA has not been tested in practice, this post will describe the procedures that the dispute between the two parties could go through, in the event they do not reach a mutual agreement. It will then, particularly, focus on whether the DCFTA offers the necessary safeguards to ensure that the process of establishing the panels runs automatically and that the dispute settlement procedures will not be paralyzed at an early stage.

The DSM under the EU-Ukraine DCFTA in brief 

The process of dispute settlement in the EU – Ukraine DCFTA consists of several stages through which a dispute between the parties could go through. The procedural stages are very similar to the ones at the WTO. However, there is no appellate stage.

The whole process starts with consultations, that is a mandatory stage during which parties shall attempt to reach a mutually agreed solution to their dispute (AA, Art. 305). If consultations fail, the complainant is entitled to request the establishment of an arbitration panel. An arbitration panel under the EU – Ukraine DCFTA is to be composed of three arbitrators (AA, Art. 306-307). After its establishment, the panel analyzes the facts of the dispute and makes determinations with respect to the compliance of the contested measure with the obligations under the agreement. The descriptive parts of facts and law, as well as the findings and recommendations are included in an interim report on which parties can comment (AA, Art. 308). After considering the comments of the parties, the panel may or may not review its interim report and then proceeds to issue the final report (AA, Art. 310).  The last stage that the dispute could go through is that of compliance. During this stage, any measures necessary to comply with the findings and recommendations of the panel should be taken within a reasonable period of time (AA, Art. 311-312). If the responding party does not comply with the final report or the measures taken are still inconsistent and this was established by the arbitration panel, the original complainant is entitled to temporary suspend obligations or receive compensation (AA, Art. 313-315). The respondent should take measures to comply with the report, as a result of which the suspension of obligations or compensation should be terminated. (AA, 315).

The parties, however, are encouraged to adopt a mutually agreed solution at any time, as a consequence of which the DCFTA dispute settlement procedures would be terminated (AA, Art. 317). They can also avail themselves of a separate mediation mechanism designed for reaching a mutually agreed solution with the assistance of a mediator in cases concerning issues under the Chapter on National Treatment and Market Access for Goods (AA, Art. 327).6

A flawed panel selection process could paralyze the entire DSM 

According to the EU – Ukraine DCFTA, the final panel ruling should be notified to the parties no later than within 150 days from the establishment of the panel. Thus, dispute settlement procedures under the DCFTA are designed to be expeditious. Nonetheless, a panel needs to be established first, in order to be able to decide the case.

If parties to international trade agreements want to have functioning mechanisms of enforcement for the obligations contained therein, it is important that they draft DSMs that do not allow the process of the panel selection to be blocked by the defendant. The process of panel selection has been a significant obstacle for the North American Free Trade Agreement (‘NAFTA’) disputes. After solving three disputes under Chapter 20 NAFTA on state-to-state dispute settlement, the procedures have been blocked by the United States and no panels have been established since 2000 (Lester et. al., 2018). The rules for composing the panels to hear disputes have been drafted in NAFTA, by intention or inattention, in such a way that a respondent not willing to cooperate could block the process (Lester et. al., 2018). Chapter 20 of NAFTA provides that the chairperson of the arbitral panel is to be selected by the agreement of the parties, while other panelists shall be selected by the disputing parties – each party selecting two members. If disputing parties cannot agree on the chairperson or fail to select the other members, they are to be selected by lot. However, panelists are normally selected from a roster of up to 30 individuals agreed by the NAFTA signatory states. When an individual that is not on the roster is proposed as a panelist, any party can exercise a ‘peremptory challenge’ against that candidate (NAFTA, Art. 2011). Thus, if there is no roster and if the respondent is not willing to agree on an individual outside the roster, the process can be paralyzed.7

Having the case of NAFTA as an example of a binding DSM that became dysfunctional, because of the panel selection process, this post assesses whether the panel composition process under the EU – Ukraine DCFTA is automatic, meaning that it can take place without blockages and there is a default mechanism for panel selection, even if parties failed to select or appoint the panelists (Chase et. al., 2016).

The panel selection process under the EU – Ukraine DCFTA

The EU-Ukraine DCFTA establishes that the composition of the arbitration panel is to be agreed by the parties. If they are unable to reach an agreement within 10 days, either party may request the chair of the Trade Committee or its delegate to select the members by lot from the list of arbitrators established by this Committee (AA, Art. 307). The list should be comprised of 15 individuals: 5 of them proposed by each party and other 5, non-nationals of either of them, selected by both parties that shall act as chairperson of a panel (AA, Art. 323). Where parties agree on two arbitrators, the remaining member shall be selected by lot from the individuals on the list to act as chairperson. If parties agree only on one member, another 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 (AA, Art. 307). The selection by lot is performed by the chair of the Trade Committee within 5 days of the request to perform the drawing.

The effectiveness of the selection by lot could depend on whether the respondent has any control over the procedure (Chase et. al., 2016). Some FTAs, such as NAFTA, do not specify who is responsible for the selection by lot, this lack of clarity making the procedures prone to blockages. The DCFTA provides expressly who is responsible for this selection – the chair of the Trade Committee. A representative of each party is entitled to be present during the selection by lot, ensuring that the procedures are not fraudulent. The Trade Committee is composed of representatives of each party that are senior officials of the European Commission and of Ukraine who are responsible for trade and trade-related matters. The Committee is chaired in turn by one representative of the EU and one of Ukraine for periods of 12 months (Decision No 1/2014, Annex II, Art. 1, 2). Therefore, it could be that when a request for the establishment of a panel was made, the chair of the Trade Committee would be an official of the respondent. Even if the timeframe established for the selection by lot is 5 days, there is no mechanism that could force the chair to select the arbitrators. This aspect could cause significant delays to the expeditious procedures envisaged in the DCFTA. However, the delays should not last longer than the maximum 12 months during which the Trade Committee could be chaired by an official of the respondent. As soon as the Committee would be chaired by a representative of the complainant, the panel selection process could continue without being indefinitely paralyzed by the respondent, as was the case with NAFTA. Yet, these possible delays could be considered a significant drawback for parties that rely on the apparent speedy procedures provided by the DCFTA.

The EU – Ukraine DCFTA also provides for a default mechanism to be implemented in case the list of arbitrators was not adopted at the time a request to establish a panel was made. In such a case, the arbitrators shall be drawn by lot from the individuals which have been formally proposed by one or both parties (AA, Art. 307). This provision ensures that, as long as the complainant proposed individuals for the lists, it could be confident of the panel selection. Having all three arbitrators in an arbitration panel proposed by only one party could raise questions regarding the impartiality of the procedures. However, by not proposing its own candidates, the respondent would assume such a risk.

The EU – Ukraine DCFTA provides that the list of arbitrators should be established by the Trade Committee within 6 months after the entry into force of the Agreement. Therefore, it should have been established by 1 July 2016. Ukraine, however, severely missed the deadline for submitting its proposal for the list. The approval of the selected candidates was reported as a priority of the Ukrainian Government only for 2017 (Government Office for European and Euro-Atlantic Integration, 2017). In November 2018 an EU Council Decision was published on the position to be taken on behalf of the EU within the Trade Committee regarding the adoption of the list of individuals to serve as arbitrators (Council Decision, 2018). The position of the EU was based on the draft of a decision of the Trade Committee that contained a list of 14 Arbitrators: 5 being proposed by the EU, 4 by Ukraine,and 5 individuals agreed by both parties that are non-nationals of either of them and shall serve as chairperson. Hence, it is apparent that both parties made proposals for their own arbitrators and agreed on the list for chairpersons. Since a Decision of the Trade Committee on the list of arbitrators was not published,it was unclear whether the list was officially established yet. The Public Information Service, General Secretariat of the Council of the EU confirmed that the decision of the Trade Committee containing the list was not adopted.10 Nevertheless, since parties made the necessary proposals, the mechanism to be applied for this situation can be used and no blockage should be expected.

Conclusion

With the EU’s request for consultations with Ukraine, the DSM under the EU – Ukraine DCFTA could be soon tested in practice, if parties cannot reach a mutually agreed solution. This post described the stages through which the disputes could go through and assessed whether the procedures could be paralyzed at the stage of panel selection, as it happened in the case of NAFTA. Based on the analysis of the DCFTA dispute settlement procedures, it can be concluded that even though the respondent could cause delays to the process of selection by a lot when it holds the chair of the Trade Committee during the establishment of the panel, it could not entirely block the procedures. Moreover, the DSM is designed to be automatic and proceed without being indeterminately paralyzed even if an established list of arbitrators is absent.

References

Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part, (‘AA’) OJ L 161, 29.05.2014, p. 3–2137.

Chase, C. et. al. (2016) ‘Mapping of Dispute Settlement Mechanisms in Regional Trade Agreements: Innovative or Variations on a Theme?’ in Rohini Acharya (ed), Regional Trade Agreements and Multilateral Trading System.

Council Decision (EU) 2018/1838 of 19 November 2018 on the position to be taken on behalf of the European Union within the Association Committee in Trade configuration established by the Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Ukraine, of the other part. OJ L 298, 23.11.2018, p. 11-14.

Decision No 1/2014 Of The EU-Ukraine Association Council of 15 December 2014 adopting its Rules of Procedure and those of the Association Committee and of Subcommittees, OJ L 157, 23.06.2015, p. 99-109.

European Commission (2019) ‘EU Requests Bilateral Dispute Settlement Consultations with Ukraine over Wood Export Ban’, 16.01.2019.

Lester, S. et. al.  (2018) ‘Access to Trade Justice: Fixing NAFTA’s Flawed State-to-State Dispute Settlement Process’ World Trade Review.

North American Free Trade Agreement Implementation Act (‘NAFTA’) Public Law No. 103-182, 107 Stat. 2057 (1993).

Government Office for European and Euro-Atlantic Integration (2017) ‘Report on Implementation of the Association Agreement between the European Union and Ukraine in 2016’.

Vidigal, G. (2017) ‘Why Is There so Little Litigation Under Free Trade Agreements? Retaliation and Adjudication in International Dispute Settlement’ CTEI Working Paper No. CTEI-2017-14.

WTO (2019) ‘Trade Topics: Dispute Settlement’. 

Endnotes 

[1] According to Art. 35 of the AA‘[n]o Party shall adopt or maintain any prohibition or restriction or any measure having an equivalent effect […] on the export or sale for export of any good destined for the territory of the other Party’. With almost an identical text, Art. XI of the GATT provides that ‘[n]o prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party […] on the exportation or sale for export of any product destined for the territory of any other contracting party’.

[2] For a list of disputes initiated under regional trade agreements see the website of Porges Trade Law.

[3] The last round of multilateral negotiations, called ‘the Doha round’ was initiated in 2001. However, talks failed and to this day the round has not been concluded.  See Lester, S. (2016) ‘Is the Doha Round Over? The WTO’s Negotiating Agenda for 2016 and Beyond’ Free Trade Bulletin No. 64 CATO Institute. 

[4] The US administration is blocking the appointment and reappointment of AB Members. The AB should be composed of seven Members, while for hearing a dispute three Members are needed. Because of the expiry of the term of several Members and the blockage of appointments and reappointments, the number of Members is currently down to three – the minimum required to allow the system to function. However, by December 2019 the terms of two of the remaining Members will expire and if there are no appointments, no appeal could be heard. Moreover, even with having three Members, if one of them needs to recuse in a dispute, there will be no possibility to have the appeal stage and disputes in which an appeal was filed will remain unsolved for an indeterminate period. See Reuters (2018) ‘U.S. blocks WTO Judge Reappointment as Dispute Settlement Crisis Looms’, 27.08.2018.

[5] A similar opinion was recently expressed in Dreyer, I. (2019), ‘Comment: EU trade dispute settlement will increasingly go bilateral’, Borderlex, 22.01.2019 

[6] Art. 35 of the AA concerned in the dispute for which the EU requested consultations is part of the Chapter on National Treatment and Market Access for Goods. Therefore, parties can avail themselves of the mediation mechanism to solve the dispute at issue.

[7] The rules on panel selection were not changed in the USMCA, therefore the DSMs is still prone to blockages. In this respect see Lester, S. (2018) ‘Panel Appointments and Rosters in the New NAFTA’, International Economic Law and Policy Blog, 26.10.2018. 

[8] In order to ensure the proper functioning of the Agreement, it was considered appropriate to establish without further delay a list of only 14 individuals. Ukraine proposed only four individuals. The Council Decision from 2018 provides that the fifth candidate should be proposed by Ukraine as soon as possible.

[9] The Decision of the Trade Committee enters into force on the date of its adoption and not on the date of publication (Decision No 1/2014, Annex II, Art. 11(3)). Moreover, publication is not mandatory, it is to be decided by each party if it is to be made public. According to the adopted EU position, the Decision of the Trade Committee on the establishment of the list of arbitrators is to be published in the Official Journal of the European Union (Council Decision, 2018). Nevertheless, in case of other Trade Committee Decisions the publication occurred several months from the actual adoption. See for example Decision No 2/2018 of the EU-Ukraine Association Committee in Trade Configuration of 14 May 2018 that was published on 25.07.2018. 

[10] Reply to the request of the author offered by the Public Information Service, General Secretariat of the Council of the European Union.