Effective Compliance in the DSU: The Mechanics of Monetary Compensation as a Form of Reparation

Effective Compliance in the DSU: The Mechanics of Monetary Compensation as a Form of Reparation

This Memorandum by Jordan Shepherd, Maria V. Sokolova and Wagari Negassa Wakjira focuses on improving the limitations of the World Trade Organization’s (WTO) dispute settlement mechanism through development of the remedy of monetary compensation into the Dispute Settlement Understanding (DSU).

Executive Summary

This Memorandum focuses on improving the limitations of the World Trade Organization’s (WTO) dispute settlement mechanism through development of the remedy of monetary compensation into the Dispute Settlement Understanding (DSU). It explores possible approaches for applying monetary compensation in the WTO framework and inspects different substantive and procedural aspects of its implementation. The basis for the remedy of monetary compensation is the concept of “reparation” in general international law. Comparison between existing WTO remedies and the remedies accepted in general international law indicates that there is no analogue of “reparation” under the prevailing view of WTO law. The prevailing view is critically examined, and options for introducing or improving monetary compensation in the DSU are considered. This remedy may make a form of either “full” reparation or “partial” reparation into the DSU, and provide a solution for cases when the current remedial structure is not effective for certain WTO Members. This is especially true in the cases of “ineffective retaliation” and the “remedy gap.” In the former problem, the small size of the complaining Member’s economy relative to the violating Member’s economy may make the suspension of concessions ineffective to induce compliance by the violating Member, but still harmful to the complaining Member’s economy. In the latter problem, the prolongation of the dispute settlement process or a “hit-and-run” measure cause damage during WTO litigation that cannot be adequately addressed by trade compensation or suspension of concessions.

These two problems can be remedied by any of multiple options for partial or full reparation. Partial reparation is distinguished from full reparation by reference either to the differences in amount of monetary compensation awarded, or alternatively, by reference to the two relevant dates in repairing the injury of an internationally wrongful act: 1) the date on which the obligation of reparation arises, and 2) the date from which the calculation of the level of injury begins. For full reparation, these two dates are one and the same—namely, the original date of the act that gave rise to the breach of the international wrong (or, when the WTO- inconsistent measure was imposed). In cases of partial reparation, as understood in this Memorandum, the two dates are separated. The date on which the obligation arises is after the completion of the dispute resolution process (in the case of the WTO, that date is one day following the end of the reasonable period of time for implementation, or RPT). The date from which the calculation of the level of injury (or, in the WTO context, the level of nullification or impairment) begins can be found earlier than the date the obligation arises. Partial reparation also can refer to situations where the two dates are not separated, but do not go all the way back to the date the measure was imposed. This distinction in dates creates a system of remedies that can be either full or partial reparation. This Memorandum provides the theoretical and practical foundation for a remedy of monetary compensation that can be designed either as partial reparation or as full reparation.

To introduce or improve the remedy of monetary compensation, this Memorandum addresses a number of relevant substantive and procedural aspects. To provide an efficient solution to current limitations in a form of the monetary compensation, the calculation of monetary compensation is proposed to be dependent on three criteria. Effective combination of 1) the date of calculation, 2) the applicable level of monetary compensation, and 3) adjustments made over the course of time (i.e. interest rates and periodic review) provides the basis of a solution the limitations to the current WTO remedial system. The effective combination of these three criteria provides the solution for the ineffective retaliation and remedy gap because the procedures to calculate the level of monetary compensation would be closely related to the calculation of the amount of concessions that could be suspended.

In addition to the important question of amount or level of monetary compensation, the Memorandum analyzes the technical questions of implementation such as procedural access to the remedy and enforcement challenges. Considering the current structure of remedies under the DSU, monetary compensation could be an aspect of “compensation” or a replacement for retaliation or an additional option available under certain circumstances. This Memorandum considers procedural mechanisms to make monetary compensation available to those Members that would be denied an effective remedy while simultaneously making this remedy an exceptional one. This could be accomplished by certain procedural limitations on a generally available remedy, or by making it available only as an aspect of Special and Differential (S&D) Treatment.

Enforcement issues provide another level of implementation challenges for the remedy of monetary compensation. While many suggestions have been made by Members and commentators, this Memorandum compiles and analyzes those proposals as well as providing some additional possibilities. Regarding enforcement generally, this Memorandum discusses a number of potential options available to both WTO Members and private parties. It concludes that a system of negotiable rights to monetary compensation, whether sold to and ultimately enforced by other Members or private parties, may provide a useful way forward to ensure the payment of monetary compensation when coupled with the recognition and enforcement of those monetary compensation awards in Members’ domestic courts. Members can enforce these  awards in a manner analogous to that provided by the 1958 New York Convention, just as is currently allowed under the ICSID.

The introduction of monetary compensation must be aimed at inducing compliance with WTO obligations, the ultimate goal of the WTO dispute settlement system. To provide some oversight and avoid unfounded claims to monetary compensation, the Dispute Settlement Body should provide monitoring of this system. The issues of who would be entitled to monetary compensation and how it would be determined or distributed would essentially be matters for the sovereign discretion of the complaining Member. However, rules and monitoring mechanisms from the Dispute Settlement Body (DSB) can ensure that the Member provides the monetary compensation to the parties that should receive it. A balance between sovereignty and oversight must be struck.

A related issue is whether monetary compensation would have similar effects to those of actionable subsidies. This Memorandum concludes that, from both legal and economic standpoints, monetary compensation can be designed and implemented so as to avoid such subsidy-like effects. Finally, all of the sections of this Memorandum are enhanced by reference  to other areas of international law, especially practice under Free Trade Agreements (FTAs) and in the field of investment arbitration.

Although the Memorandum contains some technical economic and legal discussions, it is meant to be a generally accessible document for a broad audience. This Memorandum provides an introductory discussion of the theoretical and practical implications of the development of monetary compensation in the WTO. It can be used by practitioners, diplomats and interested parties to develop the substantive and procedural mechanisms of monetary compensation to  solve the limitations and increase the effectiveness of the WTO dispute settlement system.



Click this link to download the full memorandum in pdf format.


Related Guides