China lost its appeal in Rare Earths last week. The main issue on appeal: the availability of GATT XX exceptions to paragraph 11.3 of China’s Accession Protocol (AP), which contains China’s WTO-plus commitment to eliminate export duties and does not refer to GATT XX exceptions. This may be a pure legal issue in WTO treaty interpretation, but it is also one of systemic import.
The AB decision was much anticipated, because the views on this issue were deeply divided: the Panel below ruled 2:1 on this issue, with two Panelists siding with the complainants (US, EU and Japan) and one dissenting Panelist supporting China’s position; of the eight third parties that expressed their views on this issue, four supported the position of China and the dissenting Panelist (Argentina, Brazil, Columbia, and Russia) and three opposed (Canada, Norway and Saudi), with one (Korea) believing that the AB should look into the negotiating history per VCLT Article 32. This close-to-even split among the participating Members is highly significant, considering that the AB had ruled on the same issue not long ago: in early 2012 the AB ruled in China–Raw Materials that GATT XX is not available to paragraph 11.3 of China AP on the ground that there is no explicit textual link between the two provisions. Since then, more people have come to realize that AB’s narrow textualist approach was seriously flawed. (In this regard, it is particularly interesting to observe how Columbia, as a third party first in Raw Materials and then in Rare Earths, has completely changed its view on this issue.) The Rare Earths appeal, therefore, was seen as an opportunity for the AB to revisit this systemic issue and come to a more carefully considered conclusion.
In light of this background, one cannot help but feel thoroughly disappointed by the result of this appeal. It turns out that China did not wish to challenge AB’s previous ruling directly. Instead, China raised a number of new arguments to support its position that GATT XX should be available to its export duty commitments. Thus, para. 2.27 of the AB Report reads:
China reiterates that it is not seeking reversal of the Panel's finding that Article XX of the GATT 1994 is not available to justify a breach of Paragraph 11.3 of China's Accession Protocol. Moreover, China is not requesting the Appellate Body to depart from the same finding it made in China – Raw Materials. China expresses the view that the Appellate Body can, and should, find a way to endorse fully China's arguments in the present disputes "in a manner that stands in harmony with" the Appellate Body's decision in China – Raw Materials.
But was China expecting a miracle? How could the AB fully endorse China’s view without departing from its previous ruling?
China’s new arguments (“new” in the sense that they were not made in China-Raw Materials) focused on the relationship between the WTO agreements and the accession protocols. All of China’s arguments were rejected by the AB,some after detailed analysis, some out of hand without elaboration (see para. 5.70).
Having rejected China’s arguments, the AB did devote an entire subsection (126.96.36.199.) to discuss the relationship between China’s AP and the WTO Agreement (including the Multilateral Trade Agreements annexed to it). It first cited extensively its previous decisions in Argentina-Footwear and China-Publications, and then made this intriguing statement (para. 5.61):
Notably, under the approach adopted by the Appellate Body, express textual references, or the lack thereof, to a covered agreement (such as the GATT 1994), a provision thereof (such as Article VIII or Article XX of the GATT 1994, or “the WTO Agreement” in general, are not dispositive in and of themselves. (emphasis original)
Now, compare this statement to AB’s finding in Raw Materials (para. 306):
In the light of China’s explicit commitment contained in Paragraph 11.3 to eliminate export duties and the lack of any textual reference to Article XX of the GATT 1994 in that provision, we see no basis to find that Article XX of the GATT 1994 is applicable to export duties found to be inconsistent with Paragraph 11.3. (emphasis added)
The contrast between the two statements is clear. Yet, in the next three paragraphs, the AB went on to defend its record in Raw Materials, declaring that its conclusion in that case was reached “on the basis of a holistic analysis of all elements” and “was not limited to the text of Paragraph 11.3 alone.” (paras. 5.63; 5.65)
In the end, the AB made the following finding on the issue (para. 6.1.d):
[Q]uestions concerning the specific relationship between an individual provision in China's Accession Protocol and provisions of the Marrakesh Agreement and the Multilateral Trade Agreements annexed thereto, including whether exceptions under those agreements may apply to a breach of the Protocol provision, must be answered through a thorough analysis of the relevant provisions on the basis of the customary rules of treaty interpretation and the circumstances of the dispute. The analysis must start with the text of the relevant provision in China's Accession Protocol and take into account its context, including that provided by the Protocol itself and by relevant provisions of the Accession Working Party Report, and by the agreements within the WTO legal framework. The analysis must also take into account the overall architecture of the WTO system as a single package and any other relevant interpretative elements, and must be applied to the circumstances of each dispute, including the measure at issue and the nature of the alleged violation.
No one would disagree with these generally stated principles of treaty interpretation. The question remains however: Did the AB actually follow these principles and apply these elements in Raw Materials? Many would say “no”. But since China did not directly challenge AB’s ruling in Raw Materials, the AB “see[s] no reason to revisit” its ruling in Raw Materials. (para. 5.65)
And in case you are wondering what happened to the dissenting Panelist’s opinion: the AB summarily dismissed it in footnote 504: “For these reasons, we also see no basis for the opinion of the dissenting panelist …”
As mentioned in this Blog before, AB members are human beings and cannot be expected to be free from mistakes. The increasingly complex questions raised in appeals and the extremely short period of time imposed on the AB only work to increase the chance of errors. The trillion-dollar question is how AB’s mistakes should be dealt with. Given the lack of any effective mechanism under the DSU to review AB’s decisions, the burden falls on the AB itself to self-correct. In its 19-year history, however, the AB has never admitted committing any legal error (although some of its views have evolved which have led to inconsistent statements from time to time). Contrary to the assumption that DSB rulings are binding only between the parties to a particular dispute, the AB has practically turned its decisions into stare decisis. But even in the stare decisis system, the Supreme Court always has the power and ability to correct itself. Hence, sooner or later the AB will have to find the courage to correct itself openly. Such a move is not only desirable but also necessary in order to maintain the legitimacy of WTO dispute settlement. The willingness of the AB to reverse its own erroneous decisions is a matter of “constitutional” importance to the WTO system.
Because the issue on appeal in Rare Earths is sufficiently narrow and precise, and because the views on the issue are so split among the participating Members and the Panelists below, the Rare Earths appeal provided a great opportunity for the AB to set a new precedent: the AB can and is willing to revise or reverse itself by reconsidering all sound legal arguments, whether or not they have been made anew. The need to self-correct should be a “cogent reason” in itself for the AB to depart from its previous rulings. Yet, this great opportunity was completely lost.
Why did China choose not to challenge AB’s previous ruling directly? While only the insiders (MOFCOM officials and China’s legal counsel) can answer this question, it is not too hard to surmise the reason. China did not expect that AB would be willing to reverse itself directly. But it had hoped that its new arguments could serve as a face-saving mechanism via which the AB could effectively reverse itself without having to say so explicitly. It turns out to have been wishful thinking. One wonders what lessons Members might draw from this experience.