Suspension of Concessions in the Services Sector: Legal, Technical and Economic Problems

By Arthur E. Appleton

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The creation of the WTO dispute settlement system has been called a major achievement by observers and its importance has been echoed from all sides of the multilateral trading system. The Dispute Settlement Understanding (DSU), the agreement that governs the WTO dispute settlement mechanism, seeks to ensure an improved prospect of compliance, given its provisions on compensation and retaliation and thus constitutes a central element in providing security and predictability to the multilateral trade system.
 
Now in its second decade, the mechanisms and jurisprudence of the World Trade Organization continue to develop as Members gain experience applying the various provisions of the DSU. Although formal provisions exist whereby members may attempt to compel compliance of offending countries, many observers repeatedly identify implementation and enforcement as a continued source of frustration. Of those, one of the most equivocal methods of compelling compliance is the suspension of concessions.
 
With relatively few arbitral decisions and a notable lack of definitional guidance, member states attempting suspension have been forced to proceed with uncertainty in a continually evolving body of law. Concepts such as equivalence in retaliatory suspensions are not defined by the DSU, while standards of review and evidentiary weight have only been developed through the literal trial and error of members.
 
Presenting concise legal analysis as well as general overview, this study will assist both experienced practitioners and newcomers with the process of suspension of concessions in the services sector, with particular focus on GATS concessions. This publication provides clear guidance through doctrinal scrutiny and reference to the most recent jurisprudence, with particular reference on the instructive decisions of EC-Bananas (III) and US-Gambling.
 
This study additionally provides useful discussion on the mechanics of suspending concessions, describing in clear language the exact structure and procedures characterizing the body of law, with particular examination of suspension of specific commitments across the different modes of supply. Furthermore, the study explores the legal, technical and economic problems of retaliatory and cross retaliatory actions, presenting both practical guidance and strategic considerations for those wishing to employ this method of inducing compliance.
 
Of particular importance is the insight this publication provides to developing nations.
 
Historically, problems of compliance have often been most poignantly experienced by these countries, which often lack trade leverage over developed nations, and there is a sense among many that formal provisions for inducing DSU compliance continue these systemic inequities.
 
This study examines the potential reasons developing nations avoid compelling compliance, while offering considerations for those nations wishing to enforce suspension of concessions against the largest trading nations. Noting that in most situations, retaliation is likely to hurt complaining parties, this study identifies the cross-retaliatory suspensions most likely to compel enforcement among developed nations. Arguing that high profile and politically influential service sectors are most vulnerable to trade pressure, this study identifies the potential utility of suspending concessions against the financial service sector through taxation measures.
 
However, this study extends a message of caution to developing nations attempting to suspend concessions, concluding that in most cases cross-retaliation in services is unlikely to be successful and can be detrimental to the complaining party - particularly to those from developing countries.
 
This paper is produced under ICTSD’s research and dialogue program on Dispute Settlement and Legal Aspects of International Trade which aims to explore realistic strategies to maximize developing countries’ capability to engage international dispute settlement systems to defend their trade interest and sustainable development objectives. The author is Dr. Arthur E. Appleton, a partner at Appleton Luff law firm.

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