WORLD TRADE
ORGANIZATIONTN/DS/W/9
8 July 2002
(02-3770)
Dispute Settlement Body
Special SessionOriginal:  Spanish
CONTRIBUTION OF ECUADOR TO THE IMPROVEMENT OF THE
DISPUTE SETTLEMENT UNDERSTANDING OF THE WTO
Communication from Ecuador
The following communication, dated 28 June 2002, has been received from the Permanent
Mission of Ecuador.
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The experience of the banana dispute confronted the Members of the WTO with a number of
unprecedented situations that drew attention to serious shortcomings in the DSU and disclosed
systemic flaws in the dispute settlement mechanism that put its credibility at risk.
The most important of these aspects is undoubtedly the sequence of Articles 21.5 and 22 of
the DSU.  Progress has been made since 1999 with a proposed amendment co-sponsored by
14 Members of the WTO, including Ecuador, which we will refer to as the co-sponsors' proposal.
Pursuant to the mandate given in the Doha Ministerial Declaration and the progress made, this
proposal represents a major contribution to clarifying and improving the DSU by May 2003.
It only represents an initial stage in resolv ing the sequence issue, however, even though it
suggests mechanisms to determine compliance and terminate the procedure, because it does not touch
on a substantial part of the effectiveness of the so-called "last resort" aimed at achieving "prompt
compliance".  It is thus a very important modification albeit incomplete because the very essence of
the sequence is directly linked to prompt compliance.  The draft amendment clarifies the procedurefor initiating implementation of the last resort, namely suspension of concessions, but does not
propose ways of improving the effectiveness of this instrument, which has prov ed to be of  little use.
Along the same lines, we should like to share with members some thoughts regarding how the
last resort in the system could be improved in order to foster prompt compliance, which is thecornerstone of the DSU's credibility.
Basic elements of the DSU
In order to put our proposal in context, it is necessary to recall the basic principles
underpinning the dispute settlement mechanism, which are set out in the General Provisions of
Article 3 of the DSU as follows:
(a) To provide security and predictability to the multilateral trading system;(b) prompt settlement;TN/DS/W/9
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(c) settlement that is compatible with the covered agreements;
(d) preference to be given to mutually acceptable solutions;(e) voluntary compensation should only apply if the immediate withdrawal of the
measure is impracticable;
(f) the last resort is the possibility of suspending the application of concessions subject to
authorization by the DSB;
(g) presumption of nullification or impairment;
(h) good faith, it being understood that use of the dispute settlement procedure is not
intended or considered to be a contentious act;
(i) special attention should be paid to the problems and interests of developing country
Members.
Consequently, there needs to be fair and adequate strengthening so as to find better ways of
achieving prompt compliance.  This means that the pur pose of strengthening must not be to punish the
Member that is the subject of the complaint but to achieve a prompt settlement when all prior
procedures have been exhausted.
Time-frame and effectiveness of last resort
It is important to highlight the time-frame for compensation and withdrawal of concessions,
provided in Article 22.1 of the DSU, in order to reach a better understanding of how to promote theirimplementation.  It must be borne in mind that the basic objective is to allow the multilateral system
to eliminate a measure that weakens it and to ensure that payment of compensation does not result in
continued violation of the system.  The purpose is also to ensure that the suspension of concessions
has the effect of ending the inconsistency and is not to make retaliation so ineffective that non-
compliance with the system can continue indefinitely or that obligations are not even suspended
because this would cause even greater injury to the economy of the complaining Member.
It is sensible to seek more effective implementation of retaliation that does not involve
suspending concessions because, by their very nature, trade relations work both ways, with one party
importing and another exporting, so suspension would injure the economic agents of the complaining
party who have nothing to do with the dispute, as occurred in the banana dispute with the
United States.  This did not happen in Ecuador precisely because it did not apply the retaliationmeasures authorized by the DSB.
The problem, therefore, is not that a developing country cannot take retaliatory measures but
that they were not effective in the case of the most developed economy in the world.  In the banana
dispute, despite the withdrawal of concessions, the party concerned took a further 30 months tocomply with the ruling after the expiry of the re asonable period of 15 months established by the DSB
and easily withstood 27 months of retaliatory measures.
It is useful to refresh one's memory regardin g this ineffectiveness, recalling that the only
suspension of obligations authorized by the GATT Contracting Parties in 1952 in favour of theNetherlands against the United States was not implemented either.  Mention could also be made of the
recent disputes on beef hormones and aircraft export subsidies, in which there was no "prompt
compliance" either despite the time that elapsed.TN/DS/W/9
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It should also be noted that on the two occasions on which concessions were suspended their
time-frame was not on the agenda so the complaining party invoked the carousel provision in order to
rotate sanctions, essentially not in order to punish the party concerned twice over, as was generally
assumed, but to help its traders who had suffered serious economic injury.  There are also other cases
in which obligations were not suspended because it was clear from the outset that suspension wouldnot ensure prompt compliance.
The alternative to compensation
The procedure prior to the last resort is compensation, but as it has been considerably
weakened it could not even be considered as the "penultimate" resort.  This is obvious from the fact
that, to date, there have been very few cases in which it has been approved and applied, evenunofficially, because the DSB has not been officially informed of its application.  This exception
confirms the rule that compensation is simply an embellishment of the system and Members prefer
not to apply it because it is not beneficial to any party.  The incentive for granting compensation
would be to avoid the last resort, but as it is not very effective it is obvious that there is no interest in
applying it.  It is hardly realistic to pay in order to avoid something that does not function or, asoccurred in those few cases in which compensation was approved to pay but not achieve compliance.
It is now time to consider the basic objective of compensation, which is also to restore the
balance between the benefits and obligations that changed as a result of the inconsistent measure,
because this does not only involve the suspension of concessions.  The essential difference betweencompensation and retaliation is that one is voluntary and the other mandatory, but the two share
similar objectives, namely, to encourage prompt compliance and temporarily restore the balance in the
mutual obligations of the complaining party and the pa rty that is the subject of the complaint, as well
as the inviolability of the multilateral system.
This situation makes it necessary to strengthen the application of compensation so as to
prevent a system of retaliation which in trade relations is not an eye for an eye or a tooth for a tooth
and does not restore the balance lost, nor does it encourage compliance, but rather tends to inflict
greater injury on the complaining party, as occurred in the banana dispute.
Negotiation is the most appropriate instrument for reaching solutions until full compliance
comes into effect, consequently, the possibility of negotiating a compensation package must bepreserved at all stages of the sequence in which compliance is at risk.
The most appropriate approach would be to give compensation all it needs to become viable.
There should be a first stage in which compensation is voluntary but based on the panel's valuation of
the nullification or impairment caused to the complaining party.  In order to remain consistent withthe main objective of prompt compliance, the mandate or terms of reference on arbitration set out in
Article 21.3(c) of the DSU should be broadened, by determining an annual level of nullification or
impairment in addition to fixing a reasonable period of time for prompt compliance.
Just as implementation of Article 21.3 serves to determine the reasonable period, by means of
an amendment to its provisions the Member concerned could propose the annual level of nullification
or impairment when determining the reasonable period according to Article 21.3(a) or when it is
mutually agreed by the parties, Article 21.3(b).  In the absence of agreement, the arbitration referred
to in Article 21.3(c) would apply.
If differences between the parties regarding the consistency of the compliance measures with
the covered agreements still remain at the end of the reasonable period, this disagreement would be
resolved through recourse to a panel that would verify compliance, as proposed in Article 21 bis of
the co-sponsors' proposals.TN/DS/W/9
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If this panel finds that the recommendations adopted by the DSB have not been complied
with, at the time of adoption of the report of the panel that verified non-compliance the Member
concerned must propose a compensation package equivalent to the level of nullification or impairment
suffered by the complaining party.  The level is  already known because it was determined by the
arbitrator when the reasonable period was established.
In this connection, the provisions of Articl e 22 of the DSU could be implemented either
through voluntary compensation within 20 days foll owing the expiry of the reasonable period or, in
cases of disagreement on the implementation of the compliance measures, at the time of adoption of
the report of the panel which concluded that there had been non-compliance.
Regarding the type of compensation, the Member concerned could offer a package of trade
benefits or any other form of compensation that does not affect other Members under the agreements
concerned.  For developing countries, the MFN clause could be waived temporarily in order to allow
compensation.
If no agreement can be reached despite all these measures, there is no other alternative but to
use the last resort.
Last resort
Implementation of Article 22 of the DSU would be allowed subject to the following criteria:
(a) There is no disagreement regarding the fact that the Member concerned has not
complied;
(b) compensation has not been granted;  and
(c) if there is disagreement regarding non-compliance, the panel has found that the party
concerned did not comply with the DSB's recommendations.
At this stage, it has to be recognized that prompt compliance has been an illusion and it is
now simply a case of achieving compliance "in extremis".  If we also bear in mind the fact that all thedisputes that have reached this point have not achieved compliance or have with difficulty achieved
delayed compliance, it becomes obvious that the last resort needs to be modified.
In order to understand the new situation fully, we should emphasize that the device of not
allowing a new period for compliance is yet another concern because a party reluctant to comply withthe DSB may take another totally illegal but perfectly feasible period that greatly exceeds the
reasonable period that has already expired.
Because compensation must be viable as it is preferable to the suspension of concessions, the
Member concerned must be discouraged from deciding to avoid compliance and accepting thealternative of retaliation, especially when the complaining Member is a developing country.
Ecuador therefore proposes that Article 21.8 of the DSU, which contains a compulsory
provision on special and differential treatment, be made more effective and authorize developing
countries, when they suspend concessions to a developed country, also to take into account the impacton their economies and not only on the level of nullification or impairment.TN/DS/W/9
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The level of nullification or impairment determined in the arbitration should be multiplied by
a factor that is at least twice the amount authorized by the DSB for the suspension of concessions or
other obligations.
Another alternative to be considered would be the possibility of making compensation
compulsory, so it would become a sanction imposed by the multilateral system on Members that fail
to comply with their obligations.
Instead of authorizing the suspension of concessions or other obligations, the DSB, when
adopting the report of the panel responsible for ve rifying compliance, could decide that the Member
concerned must obligatorily compensate the complaining party.  The non-complying Member must
submit a compensation package to the next session of the DSB for its approval.  If the Memberconcerned submits such a proposal to the DSB, the latter would adopt it if it covers the amount of the
nullification or impairment, in conformity with the verification to be carried out by the WTO
Secretariat.  If no compensation package is submitted, on the assumption that it is acting in good faith,
it will be understood that the Member concerned intends to compensate in cash and the DSB will
decide, unless otherwise agreed by consensus, that it should immediately pay in cash an amountequivalent to the value of the nullification or impairment determined during arbitration as of the date
of expiry of the reasonable period for prompt compliance and will determine the corresponding
monthly amount to be paid for a maximum period of six months until the Member concerned meets its
obligations to the DSB.
If compensation is made compulsory, it becomes a sanction, but not of the same nature as the
suspension of concessions or other obligations because these do not restore the balance lost in
bilateral and multilateral trade relations.  Retaliation leads to the temporary waiver of certain WTO
Agreements in favour of the complaining party, which affects the whole system and not only the
Member concerned, or 100 per cent are fixed tariffs, even though these did not previously exist intrade between the two parties to the dispute.  This disproportionate effect makes retaliation ineffective
and turns it into a boomerang for the Member that adopted the measure.
Compensation, on the other hand, restores the trade balance and does not suspend
implementation of certain multilateral commitments in  favour of the complaining party.  As its name
suggests, it means giving something equivalent to the nullification or impairment but without
affecting the implementation of the system or jeopardizing the economic interests of trade operatorswho have nothing to do with the dispute and belong to both parties to it.
In order to achieve the essential objective of  compliance, it is necessary to ensure that
compensation does not become a way of paying in order to maintain a situation of non-compliance.
This objective can be achieved by providing that compensation should be paid for a period ofsix months, after which the DSB will have no other alternative but to consider extreme measures.
In conclusion, the last resort would no longer be the suspension of concessions or other
obligations but compulsory compensation after suffic ient time has been given for compliance and for
the negotiation of compensation on the basis of the adequate valuation of nullification or impairmentmade during arbitration, with the additional advantage of providing a new maximum reasonable
period of six months during which the Member concerned must necessarily pay compensation.
If the Member concerned still does not comply after being given such a broad range of
possibilities, in order to preserve the mechanism's credibility, there is no alternative but to imposestricter conditions in order to encourage compliance through suspension of the right of the Member
concerned to invoke the DSU or authorize large-scale retaliation.TN/DS/W/9
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Final comments
It is true to say that, in general terms, the dispute settlement mechanism operates
satisfactorily.  It is equally true that it constitutes the most precious jewel in the crown of the
multilateral trading system, precisely because in the former GATT it finally became an ineffectivetool because the conclusions and recommendations of panels were not even adopted.  This mechanism
is undoubtedly a fundamental element in the WTO system's credibility.  It is also true, however, that
all the positive elements are to be found in the new part of the regime incorporated into the DSU, in
other words, the negative consensus for the adoption of the DSU's recommendations is based on the
consideration that weakening the obligations laid do wn in the WTO Agreements is a multilateral and
not a bilateral matter.
The fact that the mechanism functions does not inevitably lead to the conclusion that the
DSU is sacred and virtually perfect, and therefore does not need to be modified.  This statement is not
correct because the Members themselves at the Doha Ministerial Conference decided by consensus
that the DSU should be improved and clarified.  What needs to be pointed out, however, is that this
improvement could lead to a deterioration if the aim is global reform or the introduction of changes toaspects that have been functioning satisfactorily.  It is perfectly clear that it is a good system but it
suffers from an obvious systemic shortcoming relating to the sequence.  The sequence proceeds
satisfactorily up to a certain point, but from thereon the system becomes weaker and jeopardizes its
credibility, although not all disputes reach this stage.   Consequently, this should be the focus for the
efforts to make the DSU much better and clearer.
Ecuador considers that the co-sponsors' proposal resolves almost all the issues in the sequence
problem, although it leaves open the fundamental question of achieving prompt compliance.  The
ideas set out are aimed at achieving the required strengthening, but we must recognize that, in the long
run, compliance cannot be guaranteed because it will always depend on the goodwill of the Membersconcerned.  Nevertheless, compliance should be given more encouragement and, for this purpose,
compensation could be an extremely useful tool.  The suspension of concessions or other obligations,
which is based on the principle of an eye for an eye and a tooth for a tooth, is commercially disruptive
and acts against the objectives of the multilateral trading system.  Nevertheless, however necessary
and ineffective, it remains the last resort of an imperfect system.
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