1. Introduction
The term cross-retaliation refers to the suspension of concessions or other obligations in a sector (‘cross-sector retaliation’) or under an agreement (‘cross-agreement retaliation’) other than that in which benefits accruing to the complainant have been ‘nullified or impaired’.Footnote 1 The possibility of cross-retaliation is provided for in Article 22 of the Dispute Settlement Understanding (DSU), which is widely regarded as one of the major achievements of the Uruguay Round of trade negotiations. The rules and procedures codified in this ‘Understanding’ constitute the heart of the World Trade Organization (WTO) dispute settlement system. To evoke a cliché, the DSU can be seen as one of the main features of the move towards a more ‘rule-oriented’ multilateral trading system, as opposed to the more ‘diplomacy-oriented’ or ‘power-oriented’ system commonly associated with the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT).
From the point of view of developing countries,Footnote 2 a strengthened rule-based system seems to be very positive. A legally stronger system to settle disputes should be helpful in guaranteeing that even the most powerful Members comply with the multilateral trade rules and, in case these are breached, with the reports adopted by the Dispute Settlement Body (DSB). Although some developing countries are quite active in the system,Footnote 3 their participation is, in general, constrained by several factors. Problems usually mentioned include, among others, high litigation costs, lack of qualified human resources to identify and defend the national interests, and the ineffectiveness of clauses favourable to developing countries in the WTO agreements.Footnote 4
Another constraint involves the means to enforce compliance with an adopted report. If a respondent Member decides not to comply, the last resort for the affected countries is to suspend concessions previously negotiated (or, in other words, to retaliate). In order to be effective as a tool to induce compliance, the threat of retaliation of course has to be credible. A serious concern among developing countries is that effective retaliatory measures are not available to countries with little economic power. In recognition of these problems, several proposals to improve the remedial system emerged in the still ongoing negotiations to review the DSU. While some proposals may be interesting and deserve to be studied, their practical relevance will ultimately depend on the results of the negotiations.
One possible way of overcoming to some extent this problem of ineffectiveness of remedies in the DSU for developing countries, nonetheless, may already exist in the system. That is precisely cross-retaliation, which was included in the DSU at the instance of developed countries, following an initiative of the United States. They felt that in case of non-compliance by developing countries in the area of intellectual property rights (IPRs), withdrawal of concessions could only be effective if it affected goods or services, because most of these countries would have few, if any, trademarked or patented products of their nationality.Footnote 5 Interestingly, though, the only experiences so far with cross-retaliation in WTO dispute settlement have worked the other way round. The first country to obtain authorization to cross-retaliate was Ecuador, a small developing country, in the long and well-known Bananas dispute between the United States and some Latin American nations against the European Communities. The nullified or impaired benefits accruing to Ecuador were related to goods and services, but it was authorized to suspend TRIPS obligations. Ecuador has not made use of the authorization, but its initiative gave the impression that the developed countries' push for the incorporation of cross-retaliation in the DSU could have in a way backfired: it could also function as an enforcement device in favour of developing countries.Footnote 6 Even a few years before the successful ending of the Uruguay Round, at least one scholar had noted that ‘a possibility to withdraw “concessions” in the IPR field considerably increases the negotiating power of [developing countries] in trade disputes related to goods or, possibly, services’.Footnote 7
Subsequently, in US–Upland Cotton, Brazil requested authorization to suspend concessions and obligations under the TRIPS Agreement and the General Agreement on Trade in Services (GATS).Footnote 8 The United States opposed and the matter was referred to arbitration, which was suspended pending a definition on the issue of compliance. The ‘shadow’ of cross-retaliation may already have a role in this dispute and the issue may again have to be decided by arbitrators in WTO dispute settlement, if compliance or a mutual solution is not reached before that. Finally, and more recently, in US–Gambling, Antigua and Barbuda (hereinafter referred to simply as Antigua) managed to obtain authority for cross-retaliation involving intellectual property rights belonging to American nationals.Footnote 9
Countless pages have been written about the WTO dispute settlement mechanism and a lot has been discussed about the (inadequacy of the) remedies in such a mechanism, but very little has been written in detail about cross-retaliation. To my knowledge, there are less than a handful analyses about the topic. This might be due to the fact that cross-retaliation has been allowed only twice as of now, it was not implemented, and it will probably remain as something very exceptional. However, the topic still deserves careful attention, as cross-retaliation is part of the rules of the game and new authorizations might be obtained in the future, be it in the Upland Cotton or in other disputes. If this happens, its influence as an enforcement device will perhaps be increased. In any case, the very presence of cross-retaliation in the system is already significant as one of the factors to be taken into account by a Member when giving thought to the consequences of not complying with an adopted report.
Here, a cautionary note is in order. Even if cross-retaliation or the threat thereof can be effective as an enforcement mechanism, it is obviously only one of several factors that may contribute to induce compliance in particular disputes and in the world trading system generally.Footnote 10 The importance of factors other than sanctions – such as reputation costs, self-interest of governments (which may have international and domestic facets), and legitimacy perceptions, to name but a few of the ones usually identifiedFootnote 11 – should never be disregarded by the actors interested in achieving greater levels of compliance in the system.Footnote 12 In fact, other factors may arguably be more important than sanctions in most cases (although it is difficult to isolate the relevancy of each one).Footnote 13 The importance of other factors is therefore to be recognized, but this does not mean that cross-retaliation should be overlooked.Footnote 14
In order to address the central question here proposed, the article proceeds as follows. Section 2 examines the DSU procedures related to implementation and the available remedies. It also examines in detail the requirements to obtain authorization to cross-retaliate on the basis of DSU Article 22 and the experiences of Ecuador and Antigua. Section 3 discusses the potential merits and limits of cross-agreement retaliation as an enforcement mechanism for developing countries. Section 4 presents concluding remarks.
2. Implementation and enforcement in WTO dispute settlement: from rulings to cross-retaliation
The WTO dispute settlement procedures may be divided in four key phases:Footnote 15 (1) consultations, (2) panel procedures, (3) appellate procedures, and (4) implementation and enforcement. This section addresses the procedures related to the fourth phase. First, the implementation procedures and the remedies available are examined. The second part examines the procedures and requisites to obtain authorization to cross-retaliate.
As cross-retaliation is a measure of (double) last resort, a proper understanding of its role as an enforcement mechanism should bear in mind the prior possibilities for settling a dispute. While the procedures related to the first three main phases mentioned above will not be reviewed,Footnote 16 it should be noted that the system is designed to allow for several opportunities for amicable settlement. A very large percentage of (potential) disputes are resolved before reaching the panel stage, during consultations.Footnote 17 A number of disputes are also settled after a panel is established but before a ruling is issued.Footnote 18 There is also provision for alternative methods of dispute resolution and arbitration, although these are not commonly utilized.Footnote 19
2.1 Implementation and remedies
Once a panel or Appellate Body report is adopted by the DSB, the implementation stage starts and remedies come into play. Regarded as one of the important innovations in the WTO dispute settlement system – given, for instance, their ‘automatic’ enforcement due to the reversal of the consensus practice of the GATT – but also as a ‘major area of criticism’ of such system,Footnote 20 remedies have received considerable scholarly attention. Four kinds of remedies may be identified at WTO law: recommendations, suggestions, compensation, and suspension of concessions or obligations.Footnote 21 A surveillance mechanism, which strengthens these remedies, is also provided for.
Recommendations
The primary remedy for breaches of WTO obligations is the recommendation prescribed in Article 19 of the DSU. This provision determines that when a panel or the Appellate Body concludes that a measure violates a covered agreement, ‘it shall recommend that the Member concerned bring the measure into conformity with that agreement’. Hudec (Reference Hudec and Weiss2000: 377) observes that despite the softer connotation of the word ‘recommendation’, the traditional understanding of it in GATT/WTO jurisprudence has been that, once approved by a body acting for the full membership (i.e. by the DSB in the WTO), it is a legally binding order.Footnote 22
Suggestions
In addition to its recommendations, the panel or Appellate Body may, as determined also by DSU Article 19, suggest ways in which the Member concerned could implement the recommendations. Suggestions are not considered binding in WTO practice,Footnote 23 but, following a suggestion, a losing party would be certain that it has corrected the violation.Footnote 24 Panels and the Appellate Body have been reluctant to make specific suggestions, often limiting themselves to the standard recommendation to bring the measure concerned into conformity with the covered agreements.Footnote 25
The prevailing view about recommendations and suggestions (as well as about the remaining remedies) seems to be that their function is to preserve future trading opportunities rather than to redress past injury.Footnote 26 But the issue is not entirely clear. The debate about retrospective remedies goes back to the GATT system, where some panel decisions in the 1980s and 1990s ordered refunds of antidumping and countervailing duties imposed in violation of GATT rules. The WTO panel in Guatemala – Cement took note of this issue, but did not express a legal opinion on it.Footnote 27 The debate was further complicated by the decision of the Article 21.5 panel in Australia – Automotive Leather. The panel considered that the term ‘withdrawal of the subsidy’ in Article 4.7 of the Agreement on Subsidies and Countervailing Measures (SCM) could be interpreted to entail reimbursement of the subsidy.Footnote 28 The decision was strongly criticized by several Members and apparently has not been followed by panels in subsequent disputes.Footnote 29
The surveillance mechanism
Once a recommendation (possibly with suggestions) is adopted by the DSB, a surveillance mechanism is enacted, in accordance with Article 21 of the DSU.Footnote 30 The concerned Member is required to inform the DSB of its intentions in respect of implementation. If it is impracticable to comply immediately, the Member shall have a ‘reasonable period of time’ in which to do so. Such period may be (1) proposed by the Member concerned and approved by the DSB, or (2) established by agreement between the disputants, or (3) if these methods fail, determined by binding arbitration. As a guideline for the arbitrator, the reasonable period of time should not exceed 15 months from the date of adoption of the final report. It seems to be well established in arbitral decisions that the reasonable period of time should be the ‘shortest period possible’ in view of the particular circumstances of each case. The period defined has varied in practice from six to 15 months.Footnote 31 If the disputants disagree as to the existence or consistency with a covered agreement of measures taken to comply with recommendations, a compliance review panel (where possible the original one), in accordance with Article 21.5, shall resolve the issue within 90 days of referral of the matter to it. Issues of law and legal interpretations in this panel's report may be appealed.
Another important aspect of the surveillance mechanism is the placement on the DSB agenda of the issue of implementation after six months following the date of establishment of the reasonable period of time. The issue shall remain on the DSB's agenda until it is resolved. Prior to each such DSB meeting, the Member concerned is required to provide the DSB with a ‘status report’ on its progress in implementation.Footnote 32
Compensation
Article 22 of the DSU prescribes the available remedies – which are intended to be temporary and not preferred to full implementation – where a Member fails to bring an inconsistent measure with the covered agreements as required by a DSB recommendation. The first of these is compensation. If so requested, and no later than the expiry of the reasonable period of time for compliance, the Member concerned shall enter into negotiations with the complainant ‘with a view to developing mutually acceptable compensation’. Compensation is voluntary and it normally takes the form of additional trade concessions, although nothing in the DSU seems to prevent monetary reparation from being agreed upon.Footnote 33 Trade concessions granted in compensation need to be consistent with the covered agreements, which means that they must be offered on a most-favoured-nation (MFN) basis, for example. Compensation is economically preferable to suspension of concessions, since it may liberalize rather than restrict trade. It is rare, however, because it presents certain drawbacks for both complainants and defendants. As Palmeter and Mavroidis (Reference Mavroidis, Ortino and Petersmann2004: 266) explain:
From the complainant's point of view, compensation by way of lower barriers in other areas does nothing to eliminate non-compliance in the area that was the subject to the dispute. Particularly from the perspective of the concerned industry in the territory of the complaining Member, compensation does nothing. By the same token, Members whose measures are found not to be in compliance have difficulty ‘volunteering’ a sector of the economy for increased foreign competition for the explicit reason of protecting another sector that benefits from that violation.
Suspension of concessions or other obligations (retaliation)
If compensation is not agreed upon within 20 days of expiry of the reasonable period of time for compliance, a complainant may request authorization from the DSB to suspend concessions or other obligations (retaliate) under the covered agreements. A party should first seek to suspend concessions within the same sector(s) in which a violation or other nullification or impairment has been found. The requirements to suspend concessions in other sectors will be examined in the next subsection.
The level of suspension of concessions or other obligations shall be equivalent to the level of nullification or impairment suffered by the complainant.Footnote 34 The DSB will grant authorization upon request within 30 days of the expiry of the reasonable period of time. However, if the Member concerned objects to the level of suspension proposed by the complainant, the matter shall be referred to arbitration, to be carried out by the original panel if possible or by one or more arbitrators appointed by the Director-General. The arbitration shall be completed within 60 days after the expiry of the reasonable period of time (DSU Article 22.6).Footnote 35 The arbitrators shall not examine the nature of concessions or other obligations suspended. Their task is limited to determining whether the level of suspension is equivalent to the level of nullification or impairment (Article 22.7). The decision shall be accepted as final. A request to suspend concessions that is consistent with such decision will then be approved by the DSB. The suspension shall be terminated when the inconsistent measure is removed or a mutually satisfactory solution is reached.
Suspension of concessions (retaliation) is, from an economic perspective, harmful to the retaliating country. The majority of scholars notice that suspending concessions often amounts to shooting oneself in the foot, as it might increase prices for consumers and reduce general welfare in the country that retaliates. Retaliation can only be justified, therefore, as Hudec (Reference Hudec and Weiss2000: 387) observes, to the extent that it (or a threat thereof) will help achieve the goal of removing the violation, or at least of obtaining other equivalent trade opportunities in compensation.Footnote 36
In his excellent analysis of WTO sanctions, Charnovitz (Reference Charnovitz, Kennedy and Southwick2002: 604–615) seeks to demonstrate that the primary aim of the instrument of suspending concessions or other obligations has shifted from the GATT to the WTO. He argues that in the GATT, Article XXIII, trade measures were conceived primarily as a rebalancing tool to be used when the agreed-upon balance of benefits and obligations were altered by a challenged measure (although analysts already recognized a sanction potential).Footnote 37 In the WTO, on the other hand, the suspension is ‘conceived primarily as a sanction, while the rebalancing idea retains vestigial influence’, and the purpose of this sanction is to induce compliance with the rules.
As the WTO system completes its first decade, scholars still debate on which is – rebalancing concessions or inducing compliance with the rules – the actual purpose of retaliation. The debate seems to be a corollary of the discussion on whether DSB recommendations are truly binding.Footnote 38 As many others,Footnote 39 I consider that the main purpose of the suspension of concessions or obligations must be to induce compliance.Footnote 40 A different goal would undermine the system and would not make economic sense.Footnote 41 The requirement that the suspension be ‘equivalent’ to nullification or impairment, which some see as a clear signal of a rebalancing purpose,Footnote 42 may be better understood as a means of restraining possible ‘demands for punitive retaliation’Footnote 43 or as a reflection of the general international law principle of proportionality.Footnote 44
In any case, it should be noted that analysing the role of cross-retaliation is interesting regardless of whether one considers its primary purpose as being to induce compliance or to rebalance benefits. On the one hand, cross-retaliation may be important as a tool to induce compliance if it can increase the leverage of developing countries in the system. On the other hand, cross-agreement retaliation (under TRIPS) curiously makes more economic sense as a rebalancing mechanism than retaliation in goods. Contrary to the latter, it can actually increase welfare in the country that retaliates (see section 3.1 infra), therefore ‘compensating’ for the loss of trade opportunities caused by the challenged protectionist measure.
There are several problems with retaliation, which affect both developed and developing countries. It goes against the underlying objective of the WTO, it provides no relief to the injured private economic actors, and past wrongs go uncompensated.Footnote 45 Sometimes, in politically sensitive disputes (Hormones is a good example), retaliation may simply not work to induce compliance. Moreover, even if it can hurt the Member in breach of WTO obligations, it will usually be harmful as well to the retaliating complainant, in terms of overall welfare, as already mentioned.Footnote 46
For developing countries in particular, the problems related to retaliation as a mechanism to induce compliance are yet more acute. Bronckers and van den Broek (Reference Bronckers and van den Broek2005: 104) capture them well:
Trade retaliation is easily more counterproductive for them. The effects of ‘shooting yourself in the foot’ with retaliatory measures hurt countries with already weak economies disproportionately. They cut themselves off from access to foreign goods or make those goods more expensive for their domestic customers. They do so at the peril of their own economic development and position in world markets. If, nevertheless, they would want to retaliate, their markets are too small to exercise retaliatory pressure on non-complying WTO Members, with the possible exception of the largest among them, such as the so-called new Quad (Brazil, China, India, South Africa). Furthermore, as in the case of developed countries, trade retaliation does not offer any relief to their exporters who suffer from WTO-illegal measures, and whose performance itself can be a centrepiece to their country's development achievements.
Economist Robert Lawrence (Reference Lawrence2003: 96) likewise observes that ‘[t]heir limited market power … gives small WTO members less capacity to induce compliance through retaliation’.Footnote 47 Thus, the observation of the eminent Consultative Board to the WTO Director-General in the Sutherland Report (WTO, 2004: 54)Footnote 48 that ‘poorer WTO Members … normally cannot effectively use the weapon of retaliation’ is certainly justified.Footnote 49
Instead of simply lamenting for the status quo and claiming abstractly and in vain for justice and equality in the WTO, it may be more useful for developing countries to, on the one hand, seek for intelligent and feasible ways of reforming the DSU remedial system. Developing countries have in fact brought some interesting proposals to the DSU review negotiations.Footnote 50 Academics have also presented several ideas for reform of the DSU.Footnote 51 The proposals include negotiable remedies, interim relief, retrospective damages, financial compensation, withdrawal of certain WTO rights from defaulting Members, and collective retaliation, among many others. I will not address them here, but careful analyses of their limits and merits should be important for the dispute settlement system. As Pauwelyn (Reference Pauwelyn2000: 347) notes, ‘one of the objectives of legal research is to prepare the ground for change’.
On the other hand, and at least as importantly, developing countries should seek to understand the rules of the game properly so that they can be used in their favour.Footnote 52 While changes do not occur, possibilities within the system might be found to make a better use of it. Analysing how cross-agreement retaliation may work to their benefit is an important task in this sense.
Unfortunately, the analysis might not be as relevant for the group of least-developed countries (LDCs). These countries are virtually excluded from the dispute settlement system. In 2004, Bangladesh brought (against India) the so far only case involving an LDC Member as principal party to a dispute (although a panel was not established). While this could be encouraging for other LDCs and some initiatives, such as the Advisory Centre on WTO Law, may be helpful, the reality is that much still needs to be done for these countries in terms of, for instance, technical assistance before any dispute settlement remedies can be of any use for them.
2.2 Cross-retaliation
The principles and procedures to be followed by a complainant when considering what concessions or other obligations to suspend are described in Article 22.3 of the DSU. There are three categories of retaliation,Footnote 53 which should be considered in the following order:
(1) Parallel retaliation: the complaining party should first seek to suspend concessions or other obligations in the same ‘sector’ as that in which a violation or other nullification or impairment was found (subparagraph ‘a’).
(2) Cross-sector retaliation: if that party ‘considers that it is not practicable of effective to suspend concessions or other obligations with respect to the same sector(s)’, it may seek the suspension in ‘other sectors under the same agreement’ (subparagraph ‘b’).
(3) Cross-agreement retaliation: if the party considers that the suspension with respect to these other sectors is ‘not practicable or effective’ and that ‘the circumstances are serious enough’, it may seek to retaliate ‘under another covered agreement’ (subparagraph ‘c’).
In applying these principles, the complainant ‘shall take into account’ (subparagraph ‘d’):
(i) ‘The trade in the sector or under the agreement’ where a violation or other nullification or impairment was found, and ‘the importance of such trade to that party’;
(ii) The ‘broader economic elements related to the nullification or impairment’ and the ‘broader economic consequences’ of the suspension of concessions or other obligations.
Article 22.3 also defines ‘sector’ and ‘agreement’, for the purposes of retaliation. ‘Sector’ means (subparagraph ‘f’):
(a) ‘with respect to goods, all goods’;
(b) ‘with respect to services, a principal sector as identified in the current “Services Sectoral Classification List”’;Footnote 54
(c) ‘with respect to trade-related intellectual property rights, each of the categories of intellectual property rights covered’ in Sections 1, 2, 3, 4, 5, 6, or 7 of Part II, or the obligations under Part III or IV of the TRIPS Agreement.Footnote 55
‘Agreement’ means (subparagraph ‘g’):
(a) ‘with respect to goods, the agreements listed in Annex 1A of the WTO Agreement, taken as a whole as well as the Plurilateral Trade Agreements’;
(b) ‘with respect to services, the GATS’;
(c) ‘with respect to intellectual property rights, the Agreement on TRIPS’.
A Member seeking authority for cross-sector or cross-agreement retaliation ‘shall state the reasons therefor in its request’ (subparagraph ‘e’). In such case, not only may the responding party object that the level of suspension proposed is not equivalent to the level of nullification or impairment, but it may also claim that the principles and procedures referred above have not been followed. The matter will then be referred to arbitration (Article 22.6).
Up to now, decisions allowing cross-retaliation were made only twice in WTO dispute settlement. The first authorization was granted to Ecuador against the EC in the Bananas case.Footnote 56 Although nullification and impairment had been found only in goods and distribution services, part of Ecuador's request involved the suspension of TRIPS obligations (namely on copyrights, geographical indications, and industrial designs).Footnote 57 The EC opposed to the level of nullification and impairment proposed and also claimed that the principles of Article 22.3 had not been followed, and so the matter was referred to arbitration. The arbitrators' interpretation of such principles is relevant for the present analysis, as it is certainly going to be taken into account – with approval or not – if future requests to obtain authorization to cross-retaliate are arbitrated, as has already happened in the Gambling dispute (see below).Footnote 58
A first important point to be noted in the arbitrators' report is the clarification of their ‘margin of review’ (see paras. 52–57), which basically includes the authority to review whether the requesting party followed all the requirements of Article 22.3.Footnote 59 If a request for cross-agreement retaliation is challenged on the basis of the principles set forth in such provision, the arbitrators will analyse (see para. 69):
(a) whether parallel retaliation is not practicable or effective;
(b) whether cross-sector retaliation is not practicable or effective, if nullification or impairment was found under GATS or TRIPS;
(c) whether the circumstances are serious enough to seek suspension under another agreement;
(d) whether the trade in the sector(s) that suffered nullification or impairment and the importance of such trade to the requesting party were taken into account;
(e) whether broader economic elements related to nullification or impairment and the broader economic consequences of the requested suspension were taken into account.
Ecuador's arguments in support of the assertion that parallel (or cross-sector) retaliation was not practicable or effective were a reflection of the ‘long-maintained claim that trade retaliation was an inadequate legal remedy for developing countries’.Footnote 60 The arbitrators' report was ‘less illuminating than it might have been, but on the whole it gave a certain degree of official approval to that argument’.Footnote 61 They started their analysis by looking at the ordinary meaning of ‘practicable’ and ‘effective’. They concluded that practicability concerns the question of whether an alternative ‘is available for application in practice as well as suited for being used in a particular case’ (para. 70). As an example of something impracticable, the arbitrators referred to the suspension of commitments in service sectors that a particular complaining party has not bound in its GATS Schedule (para. 71). As for effectiveness, the arbitrators considered that it refers to whether a type of retaliation is suited to achieve the ‘desired result, namely to induce compliance’ by the defaulting Member (para. 72). Importantly, the arbitrators recognized that this objective may be difficult to be achieved ‘in a situation where a great imbalance in terms of trade volume and economic power exists’ between the parties to the dispute. They noted that in such cases ‘it may happen that the suspension … entails more harmful effects for the party seeking suspension than for the other party’, and concluded (para. 73):
In these circumstances, a consideration by the complaining party in which sector or under which agreement suspension may be expected to be least harmful to itself would seem sufficient for us to find a consideration by the complaining party of the effectiveness criterion to be consistent with the requirement to follow the principles and procedures set forth in Article 22.3.Footnote 62
The arbitrators also noted that it suffices for the complaining party to consider that parallel (or cross-sector) retaliation is either not practicable or not effective (para. 74). Another important observation was that the requesting party does not have to establish positively that cross-retaliation in TRIPS would be practicable and effective (para. 78). The requirement is simply to consider objectively that parallel (or cross-sector) retaliation is not.
When considering Ecuador's argumentation that parallel retaliation under the GATT was not practicable or effective, the arbitrators decided to examine the issue with respect to the same two categories referred to in Ecuador's request, namely ‘primary and investment goods’ and ‘consumer goods’. With respect to primary and investment goods, which are used as inputs in domestic manufacturing, the arbitrators found that the EC failed to show that parallel retaliation would be practicable and effective for Ecuador (para. 96). They considered that imposing tariffs on those types of goods ‘would increase the cost of domestic production in the absence of alternative sources of supply at similar prices’ (para. 91). They also affirmed that, given the fact that Ecuador accounts only for ‘a negligible proportion of EC's exports of these products’, the suspension would be ‘unlikely to have any significant effect on demand for these EC exports’ (para. 95), being therefore ineffective. With respect to consumer goods, however, the arbitrators affirmed that retaliation could not cause ‘any direct adverse effects on Ecuador's domestic manufacturing and processing industries’ (para. 100). They further recognized that it ‘could cause welfare losses to end-consumers in the country suspending concessions’, but ‘lacking further argumentation by Ecuador’ concluded that the latter ‘could not plausibly arrive at the conclusion that suspension of concessions on consumer goods is not practicable and effective’. Consequently, Ecuador would have to suspend concessions on consumer goods before being allowed to retaliate on other agreements.
This part of the decision was rightly criticized as based on ‘a very artificial distinction’ that ‘can only make sense if viewed from a purely mercantilist perspective … that harm to producers equals or is more important than harm to consumers’.Footnote 63 Moreover, the arbitrators simply ignored the issue of ‘why Ecuador's similarly “negligible” proportion of the EC market for consumer goods was not as probative’ as the negligible proportion related to primary and investment goods.Footnote 64
Regarding the practicability and effectiveness of cross-sector retaliation under the GATS, the arbitrators implied (para. 118) that a decision will always depend on the ‘particular, country-specific structure in terms of service sectors and modes of supply bound’ in each country's specific schedule of GATS commitments. The arbitrators noted that a withdrawal of some of the already limited GATS commitments made by Ecuador could be significantly harmful to its economy, as it would deviate foreign direct investment from the country, which in its developing condition is highly dependent on it. They also took note of some legal and practical difficulties related to the implementation of suspension of concessions under certain service sectors. Essentially in view of these considerations, the arbitrators concluded that Ecuador duly followed the Article 22.3 principles in considering that cross-sector retaliation was not practicable or effective (see paras. 105–120).
The arbitrators found in subparagraph ‘d’ of Article 22.3 the context for interpreting whether the circumstances were serious enough to authorize cross-agreement retaliation. They considered, for instance, that the term broader economic consequences is related not only to the defaulting Member, but also to the one requesting authority to suspend concessions, particularly in cases where there is a great economic imbalance between the parties and retaliation may also entail adverse effects for the latter (para. 86). Fundamentally in consideration of the economic differences between the parties and of the importance of trade in bananas and related distribution services for the Ecuadorian economy, the arbitrators concluded that the circumstances were indeed serious enough and that Ecuador took into account the relevant factors as required by Article 22.3(d) (para. 137).
Finally, the arbitrators made some suggestions concerning the implementation of the suspension of TRIPS obligations,Footnote 65 which will be referred to in section 3 below. The level or nullification or impairment was arbitrated at US$201.6 million per year. In light of the above conclusions, the arbitrators suggested to Ecuador to submit a new request to the DSB for suspension of concessions or other obligations. Ecuador could request and obtain authorization to retaliate on the ‘consumer goods’ category (where the suspension was deemed effective and practicable) at least in the amount identified by Ecuador of yearly imports of consumer goods from the EC (US$60.8 million, see para. 99). Ecuador could also request and obtain authorization to retaliate under the GATS with respect to ‘wholesale trade services’. Furthermore, ‘to the extent that suspension requested under the GATT and the GATS … is insufficient to reach the level of nullification or impairment’ (para. 173(d)), Ecuador could request and obtain authority to retaliate under the TRIPS Agreement with respect to copyrights and related rights, geographical indications, and industrial designs.
In spite of the authorization that was then granted by the DSB (see WT/DSB/M/80), Ecuador has not in fact suspended any concessions or obligations. After the US retaliatedFootnote 66 against the EC (pursuant to a previous DSB authorization), these two Members reached an understanding. Ecuador was discontent about being excluded from this bilateral solution. In response, the EC negotiated with the latter a settlement to address its concerns, and the scheme agreed with the US was slightly modified.Footnote 67
Following Ecuador, the only country to obtain an arbitral award allowing cross-retaliation has been Antigua. After winning a dispute concerning gambling and betting services against the United States, Antigua requested authorization to suspend its obligations under the TRIPS Agreement.Footnote 68 The US objected and the matter was referred to arbitration under DSU Article 22.6. The level of suspension authorized (US$21 million annually) was much more modest then the level requested (an annual value of US$3.443 billion), but the arbitrators found that Antigua had fully observed the principles and procedures set forth in DSU Article 22.3 in determining that parallel and cross-sector retaliation would be ineffective or impracticable and that the circumstances were serious enough to warrant a cross-agreement retaliation request.
The Gambling arbitrators generally agreed with the determinations of the Bananas arbitrators with respect to their margin of review and to the abovementioned principles and procedures, which reinforces the WTO case law in this regard.Footnote 69 Antigua is yet to present a new request for retaliation, reducing the level previously requested, in accordance with the findings of the arbitrators. It is uncertain whether Antigua will do that and then truly implement a suspension of intellectual property rights belonging to US nationals.Footnote 70
Moreover, and contrary to Ecuador (see section 3.2 below), Antigua chose not to provide any explanations as to how it would eventually apply such suspension. The arbitrators regretted this, but rightly considered that it was not within their mandate to question the choice of obligations to be suspended or the means of doing so, by virtue of DSU Article 22.7 (see paras. 5.8–5.9). In spite of that, they considered that the suggestions presented by their counterparts in Bananas would also be ‘pertinent to the manner in which Antigua might implement a suspension of obligations under the TRIPS Agreement’ (para. 5.11).Footnote 71
Apart from Ecuador and Antigua, only Brazil has so far requested authorization for cross-retaliation, in the context of the Upland Cotton subsidies dispute with the United States. The success of this and eventual future requests by developing countries to obtain authority for cross-agreement retaliation in TRIPS will of course depend on the particular circumstances of each case. However, some lessons may be drawn from the previous experiences. Hudec's conclusions (Reference Hudec, Hoekman, Mattoo and English2002: 90) about the arbitrators' decision in Bananas are useful. He affirms that the ‘rather superficial and inconsistent answers’ related to the issue of effectiveness suggest that the arbitrators ‘did not have enough time to develop a fully coherent analysis of the long-standing developing country claims about the inadequacy of trade retaliation’. He continues:
But the answers do show the panel's inclination to support those claims of inadequacy, and they also show that the support may be limited to the clearer case of retaliation against industrial inputs. It would not be wise to read much more into the decision than this … On balance, the panel's rather unclear response was encouraging enough to make it worthwhile for developing country officials to think about the possibility of cross-retaliation in dispute settlement cases involving uncured violations.
Indeed, the experience of Ecuador has probably been encouraging for Antigua. Furthermore, and importantly, the Article 22.6 award of the arbitrators in Gambling appears to have strengthened the principle that, in cross-agreement retaliation cases where there are significant economic disparities between the disputants, this circumstance weighs considerably in favour of a finding that the requirements of DSU Article 22.3 have been followed by the economically weaker country. It seems that in such cases the findings related, in particular, to the ineffectiveness of parallel or cross-sector retaliation, to the broader economic elements and consequences, and to the seriousness of the circumstances will be significantly influenced.Footnote 72
Notwithstanding that, an additional point should be made. If even Ecuador – a rather small developing country that suffered huge losses due to the EC banana import regime – had some difficulty and only partially convinced the arbitrators that it had met the requirements of Article 22.3 for cross-agreement retaliation in TRIPS,Footnote 73 it can be expected that developing countries with large economies – such as Brazil, India, and China – would have a much harder time doing so, particularly in view of the ‘practicability and effectiveness’ criteria.Footnote 74 Arguably, in any case, these countries may be less in need of additional leverage in the system than smaller developing countries.
Finally, the proposals that were tabled at the DSU review negotiations with respect to cross-retaliation are worthy of note. In 1999, Pakistan suggested that the possibility of cross-retaliation against developing countries should be eliminated.Footnote 75 In 2002, a little less radically, some developing countries, including India, Cuba, Indonesia, and again Pakistan, tabled a proposal for an amendment to DSU Article 22.3 that would permit developing countries to retaliate in the sectors and agreements of their choice, without the need to fulfil the requirements related to cross-retaliation, which are presently included in such provision.Footnote 76 Apparently, these proposals have not received much support. In light of the above analysis, the second of them would be highly interesting for developing countries. In my view, however, it is very unlikely that developed countries would accept a proposal that would potentially allow large developing countries – some of which always expressed strong discontentment about the TRIPS Agreement – to suspend IPRs whenever a developed country failed to comply with a DSB ruling.
3. Cross-agreement retaliation (under TRIPS) as an enforcement mechanism for developing countries
As seen in the earlier sections, parallel retaliation will usually not be of much assistance to developing countries challenging developed countries that fail to bring a contested measure into compliance.Footnote 77 Is cross-agreement retaliation under TRIPSFootnote 78 a useful and feasible option to shake that balance by increasing the leverage of developing countries in the system? What are its main merits and limits as an enforcement mechanism for these countries? This section addresses first the merits and then the problems and some possible solutions. Contrary to remedies in general, there are very few academic contributions on this topic, but the existent studies – notably the one by Subramanian and Watal (Reference Subramanian and Watal2000) – have in my view identified the main issues that can be raised at least until there is ‘more practical experience’ with retaliation under TRIPS.Footnote 79 The Bananas arbitrators, as already mentioned, have also made some suggestions on the topic that are useful.
Before proceeding, I should first clarify why the analysis focuses on TRIPS and not GATS. Although one author affirms that retaliation ‘in the service or intellectual property sectors’ would have a ‘totally different’ effect compared to retaliation in goods,Footnote 80 I fail to see how retaliation in services would be much different from retaliation in goods, at least from an economic perspective. It would likely be as damaging to overall welfare in the retaliating country, since prices for consumers would probably increase (and even services' quality and range of choice could be lowered). Developing countries, as Hoekman (Reference Hoekman, Sauvé and Stern2000: 133) notes, are the ones who need liberalization in services the most, even though they have made the fewest commitments. Precisely this point leads to a second significant problem. With notoriously few commitments in services, most developing countries would not have many concessions to retaliate on.Footnote 81 It would also be difficult to suspend some GATS general obligations, such as transparency and domestic regulatory requirements, without affecting Members other than the defaulting one.Footnote 82 Yet an additional problem, which affects mainly the ‘commercial presence’ mode of supply of services, is that retaliation could detrimentally affect foreign direct investment (see EC – Bananas (Ecuador), paras. 110–112). Finally, there are also many implementation problems with retaliation under GATS,Footnote 83 but since I do not see it as particularly advantageous to developing countries, I will not discuss them here. If anything, therefore, cross-agreement (and cross-sector) retaliation under GATS only provides (few) additional sector options for developing countries wishing to induce compliance, but it does not seem at all to be as attractive as the TRIPS path.Footnote 84
3.1 Merits: a well-targeted shot
Many developing countries were strongly opposed to the inclusion of TRIPS in the Uruguay Round package. They considered that ‘stronger IPRs would be detrimental to their welfare and development prospects’.Footnote 85 The TRIPS Agreement is indeed costly for poorer countries, which are ‘imitators rather than innovators of technology’.Footnote 86 If the protection of IPRs is costly for them, suspending it must entail benefits. This is the principal advantage of suspending TRIPS obligations. Contrary to retaliation in goods or services, it may result in ‘assets being made available to developing countries at cheaper prices, which is usually a benefit to economic development rather than a burden on it’.Footnote 87 In other words, retaliation under TRIPS is well aimed: one's own foot is not shot.Footnote 88
The second also important merit of cross-agreement retaliation under TRIPS is that it can target some very powerful economic sectors. The main reason why the TRIPS Agreement is one of the WTO agreements is that certain IPR owners in developed countries, especially the pharmaceutical and information technology industries, are very powerful lobbyists.Footnote 89 As previously seen, the underlying rationale behind retaliation, properly understood, is that it should have such a political impact that the defaulting Member will be induced to comply with the rules. If IPRs are withdrawn from those and other also politically powerful sectors in developed countries – such as, inter alia, phonographic industries and owners of well-known marks – because of illegal protectionist measures in favour of another economic sector, it can be assumed that the former would do their best to lobby their governments into compliance.Footnote 90 The amount of retaliation under TRIPS that developing countries are able to implement will probably be ‘negligible’ in most cases, if contrasted with the economic power of large developed countries. Nonetheless, ‘at this time in the WTO's history the ripple effects of even small-scale denial of intellectual property protection could cause considerably more political discomfort than the usual small-scale case of trade retaliation’.Footnote 91
The combination of these two advantages can only lead to the conclusion that the suspension of TRIPS obligations can potentially be much more effective as an enforcement mechanism for developing countries than retaliation in goods or services. It may be a credible threat, since it should not hurt the retaliating country, and it targets certain very appropriate sectors if the idea is to exert political pressure.Footnote 92 Of course, its degree of effectiveness will vary depending on several particular circumstances of each case, especially the political strength of the industries affected and the ‘amount’ of suspension that the developing country will actually be able to implement.Footnote 93
3.2 Problems (and possible solutions)
In spite of the referred merits and apart from the above-discussed difficulties in obtaining authority for cross-agreement retaliation, a suspension of TRIPS obligations presents several legal, economic, and administrative difficulties. It is far from being as simple as raising tariffs. Suspending private rights temporarily, and protecting them again as soon as there is compliance with the DSB ruling that led to sanctions, is a much more complicated task. In my view, all of the problems that arise may theoretically be overcome, although some of them are obviously more challenging than others and may present a greater obstacle for smaller developing countries. The limitations addressed below are probably the main ones that can be identified so far, at least until a country actually puts such type of retaliation into practice. Likewise, some of the solutions discussed can only be tentative. A future experience would probably provide answers and new questions as well.
Domestic legal issues
In 1994, Kuyper affirmed that it was ‘barely imaginable’ that ‘a selective suspension of certain [IPRs] in respect of nationals of a particular State’ would occur because such a remedy was ‘too close to a discriminatory confiscation of property to be easily acceptable’.Footnote 94 The nationals affected could arguably bring a case before national courts challenging the suspension as illegal or maybe even unconstitutional.Footnote 95 The suspension would be temporary by definition, but indefinite in time. An IPR owner could thus argue that it would amount to de facto expropriation, for instance.Footnote 96
The solution devised by Subramanian and Watal (Reference Subramanian and Watal2000: 411) is simply the enactment of a provision in the domestic legislation implementing TRIPS that would reserve the right of the country's executive to suspend IPRs in view of a DSB authorization for retaliation.Footnote 97 Even without such provision, national courts could, for example, consider that WTO law – including a DSB authorization on the basis of which IPRs could be suspended, inasmuch as this is provided for in the DSU – is directly applicable.Footnote 98 Much would depend on the judges: but it is not unreasonable to suggest rather pragmatically that in most cases courts would look sympathetically at their government's attempt to induce compliance by a WTO Member whose failure to abide by the rules is negatively affecting national economic interests.
Conflict with WTO law and other international law obligations
As noted by the Bananas arbitrators (para. 148), there was disagreement between the disputants as to whether the TRIPS Agreement permits the suspension of IPRs that are related to the conventions administered by the World Intellectual Property Organization (WIPO). Article 2.2 of the TRIPS Agreement determines that ‘nothing in Parts I to IV … shall derogate from existing obligations that Members have to each other under’ the Paris, Berne, and Rome Conventions and the Washington Treaty. Thus, in a dispute between two Members that are also parties to the WIPO-administered conventions,Footnote 99 a suspension of patents, for example, could infringe the Paris Convention (see e.g. its Article 2) and a suspension of copyrights could breach the Berne Convention (e.g. its Articles 9, 13, 14, 16) or the Rome Convention (e.g. its Articles 2, 10, 13, 14).Footnote 100
The first relevant point here was noted by the arbitrators, even though they considered it was not within their jurisdiction to pass judgment on the issue (paras. 150–152). Article 2.2 does not mention Part V of the TRIPS Agreement, which refers to dispute settlement and to the applicability of the DSU. DSU Article 22.3, by its turn, explicitly mentions TRIPS as an ‘agreement’ where a suspension of obligations may be sought. Hence, nothing in the DSU or in the TRIPS Agreement suggests that a suspension of IPRs authorized by the DSB would be prohibited under WTO law. The remaining question – a question that could be posed to domestic courtsFootnote 101 – is therefore how to resolve an apparent conflict of norms between WTO law and other rules of international law, i.e. those contained in the WIPO-administered treaties.Footnote 102 In my view, it is likely that such conflict would be resolved in favour of WTO law, either because a DSB authorization to suspend IPRs, as provided for in DSU Article 22, is a more specific rule in relation to the general protection of IPRs (lex specialis derogat generali), or maybe because the later treaties (i.e. WTO law) should prevail (lex posteriori derogat priori), as determined by the customary rules of interpretation laid out in the Vienna Convention on the Law of Treaties (Article 30).Footnote 103
Another potential conflict could occur between a WTO-authorized suspension of IPRs and provisions of bilateral investment treaties (BITs) that protect these rights and establish expropriation requirements, if the Members involved in the WTO dispute happen to be also parties to such kind of bilateral treaty. The outcome of this hypothetical conflict of norms would depend on the text of the BIT. However, assuming that the BIT would provide for general rules of property protection, the authorization for cross-retaliation could prevail as regulated by lex specialis.
Nationality targeted
The Bananas arbitrators noted that in relation to all WTO Members not involved in its request, Ecuador continued ‘to be bound by its obligations under the TRIPS Agreement’ (para. 147). Of course, the suspension of obligations must not target nationals of Members that did not violate the rules.Footnote 104 This creates a problem for the suspension of certain categories of IPRs in which it is not easy to distinguish the nationality of the owners.Footnote 105 For example, companies holding patents and trademarks might have ‘multiple identities’,Footnote 106 and the performers and producers of a single phonogram might not have the same nationality. This indeed might make difficult the suspension of obligations related to certain patented products, trademarks, and so on. However, there are legal criteria for defining the nationality of companies that can be referred to. As for the IPRs that actually have owners of more than one nationality, the problem may be solved by not selecting such rights as targets of the suspension.Footnote 107
Obligations of third-country WTO Members
An authorization for a Member to suspend TRIPS obligations obviously does not exonerate other WTO Members from abiding by their own obligations. As observed by the Bananas arbitrators (paras. 153–154), these obligations ‘include those in respect of action against imports of goods which involve other infringements of intellectual property rights’ (see e.g. TRIPS Articles 51 and 28.1). In practice, this means that the suspension of obligations may permit the retaliating Member to, say, authorize the domestic production of counterfeit goods, but it does not authorize other Members to de-restrict the importing of such goods from the former against the will of the trademark holder. The obligation in question involves therefore other WTO Members, and not the Member suspending concessions. Nevertheless, in order to avoid problems for its own businesses, the retaliating Member should suspend IPRs ‘only for the purposes of supply destined for the domestic market’ (para. 156). In my view, this can prove to be a significant limit for the effectiveness of retaliation under TRIPS for small developing countries, especially when seen together with the risks associated with the temporary nature of a suspension of IPRs. The perspective of supplying only a small domestic market, and temporarily (see below), may discourage businesses in these smaller countries from taking advantage of the suspended IPRs.Footnote 108
The level of suspension of TRIPS obligations
Calculating in monetary terms the value of IPRs can be rather complicated.Footnote 109 As illustrated in US – Copyright, different methods of calculation can lead to dramatically different results.Footnote 110 If a suspension of TRIPS obligations is implemented in the future, controversies between the disputants might arise on the issue of whether the level of suspension goes beyond the level of nullification or impairment. The problem may be minimized if the retaliating Member adopts a transparent method, as would have been done by Ecuador against the EC. It should be noted, moreover, that calculating the level of nullification or impairment is usually very complicated as well, since it involves estimating losses of actual and potential trade opportunities, on the basis of sometimes many possible counterfactuals, and yet arbitrators find methods to do that. The Bananas arbitrators indicated that it would ‘facilitate’ to similarly take into account ‘actual and potential effects’ of the suspension of IPRs when implementing it (para. 160, fn.52), but did not discuss exactly how.
Possible methods of calculation will depend on the category of IPR that is suspended. In Ecuador's ‘licensing scheme’ (see below) for copyrights (para. 161), each sound recording reproduced would correspond to a ‘suspension value’ equivalent to the ‘related right value’ (as estimated by the International Federation of the Phonographic Industry) of new, commercially interesting albums. Should the level of suspension risk reaching the level authorized by the DSB (which would be unlikely for Ecuador in that case), the licensing scheme would be stopped. As for geographical indications (para. 162) ‘the test for determining the level of suspension would be the extent to which protected EC products would be replaced by non-protected products from other sources’. In conclusion, this issue may be problematic, but in relation to most IPR categories, it should not per se bar a developing country from implementing the suspension.
Adverse economic consequences
One concern that has been raised by Subramanian and Watal (Reference Subramanian and Watal2000: 414) is whether retaliatory measures under the TRIPs Agreement would discourage foreign investment in IP-intensive areas. The authors conclude that ‘a lot will depend on how and how often such retaliation is actually applied’, but ‘well-designed retaliatory measures that are, by definition, transitory and limited to a narrow and rare set of pre-specified circumstances should not unduly deter such investors’. Indeed, although protection of IPRs may be one of the factors that influence business decisions on foreign investment, the relationship between a temporary suspension of obligations and the deviation of foreign investment does not seem to be as clear as in the case of a retaliation related, for example, to the ‘commercial presence’ mode of supply of services, as previously discussed.
Temporary nature of the suspension of obligations and uncertainty for domestic businesses
According to DSU Article 22.8, the suspension of obligations must be temporary, pending compliance or a mutually satisfactory solution to the dispute. Thus, the retaliating Member needs to create a mechanism for the suspension of obligations that can be quickly interrupted when its objective (of inducing compliance or a solution) is achieved. The licensing system proposed by Ecuador, for instance, seems to be a good way to address this issue (Bananas (Ecuador), paras. 161–164). In relation to the suspension on copyrights, for example, the Ecuadorian government would grant licenses for the production of sound recordings corresponding to a determined value, quantity, and time. The government would reserve the right to revoke such licenses at any time. The mechanism devised for geographical indications and industrial designs was similar to the one for copyrights. Thus, the problem of the temporary nature of the suspension, as a legal issue, does not seem to be so difficult to overcome.
However, such temporary nature gives rise to a significant practical difficulty. As the arbitrators said with respect to Ecuador (para. 165), ‘economic actors … should be fully aware of the temporary nature of the suspension of certain TRIPS obligations so as to minimise the risk of them entering into investments and activities which might not prove viable in the longer term’. In other words, domestic suppliers might be discouraged from taking any advantage of the suspended IPRs because they will not be able to predict for how long they could benefit from the suspension.Footnote 111 If domestic businesses do not become alternative sources of supply of the products whose IPRs are suspended, the legal monopoly associated with such IPRs will not be dilutedFootnote 112 and the benefits of the suspension of TRIPS obligations may not ensue. I concur with Vranes (Reference Vranes, Breuss, Griller and Vranes2003: 128) that ‘this perhaps constitutes the greatest problem in practical terms’ for cross-retaliation under TRIPS. Retaliatory action, however, may potentially take some forms that minimize or even eliminate such a problem, as discussed below.
Options for implementing the suspension
A developing country wishing to suspend TRIPS obligations will have to devise a system to do it in a way that adequately addresses the problems discussed above. In my view, the mechanism that Ecuador intended to implement serves as a useful reference for future cases. The granting of licenses seems to be an appropriate mechanism for retaliation with respect to most of the IPR categories. It may target the correct products, avoiding the problem of nationality, and it facilitates transparency in the calculation of the level of suspension. The problem that remains is that the government has to reserve the rights to revoke the licenses at any time, which may contribute to uncertainty.
In the case of IP categories such as copyrights and trademarks, however, uncertainty may be less important because the initial investments are probably not too high.Footnote 113 Reproducing sound recordings, for example, is rather cheap and easy. As for patents, an interesting proposed option is to ‘choose products that are reaching the end of their patent life and … terminate their protection so that competitors can quickly enter the market’.Footnote 114 Such an option seems to be superior to suspending patents that still have a long life, since the initial investments to produce patented goods tend to be high, and therefore the risks could prevent national businesses from using the license.
Another interesting suggested type of IPR suspension would be to ‘freeze the transfer of royalty fees to nationals of the non-compliant country’.Footnote 115 This could avoid the problems of nationality and uncertainty for domestic businesses, and it would facilitate the calculation of the level of suspension. The point to be made, for the purposes of the present paper, is simply that there seem to be viable options – and a lot of room for legal creativity – for implementing a suspension of TRIPS obligations, in spite of the several obstacles involved.
4. Concluding remarks
The ineffectiveness of conventional remedies is one of the problems that developing countries face and that may be affecting their performance in the WTO dispute settlement system. The suspension of IPRs potentially provides them with an important additional leverage in such system, but there are some difficulties. My conclusion about the role of cross-agreement retaliation under TRIPS as an enforcement mechanism is not as pessimistic as that reached by Vranes (Reference Vranes, Breuss, Griller and Vranes2003: 128), who believes that it is ‘rather obvious that a small (developing) country still has little potential of inducing a reluctant major trading power … to promptly comply with WTO decisions’. Nor am I as enthusiastic as Subramanian and Watal (Reference Subramanian and Watal2000: 415) in affirming that the suspension of TRIPS obligations is ‘feasible, effective, legal’ and ‘its very threat – its very presence in domestic legislation – could lead to improved compliance by developed countries who would typically be the targets of such action’. My conclusion is somewhere in between these two.
In my view, retaliatory suspension of TRIPS obligations is certainly legal in international law, but it may give rise to domestic legal battles. It can be feasible, but its implementation involves many technical difficulties that some developing countries, particularly smaller ones, might not be prepared to face. It may be effective and indeed it could lead to improved compliance, but that will largely depend on whether new authorizations are requested and obtained and successfully implemented. In this respect, a problem may arise.
On the one hand, larger developed countries, which are the ones likely to be able to actually inflict harm by effectively suspending TRIPS obligations in important sectors such as pharmaceutical patents,Footnote 116 might have difficulty in obtaining authorization to cross-retaliate. This will naturally depend on the circumstances of each dispute, but the fact that even a small developing country suffering huge losses only obtained partial authorization has something to say in this regard. If future Article 22.6 arbitrators decide to refer to something similar to the ‘distinct’ effectiveness of retaliation in ‘consumer’ and ‘primary’ goods – as unconvincingly did the arbitrators in Bananas Footnote 117 – large developed countries, which might import a large amount of consumer goods, would likely not be granted authority for cross-agreement retaliation at significant levels.
On the other hand, smaller developing countries, which might obtain authorizations more easily (as the case of Antigua suggests), are the ones that will have a harder time to suspend TRIPS obligations effectively, either because of practical difficulties or because the obligations suspended may not be significant enough to shake the political dynamics of retaliation.Footnote 118 But this again will vary according to the circumstances involved in particular cases and also depending on the categories of IPRs suspended.Footnote 119
Finally, with respect to LDCs, much has to be done for them in terms of access to the dispute settlement system before any remedies can be significant. Moreover, since they have until 1 July 2013Footnote 120 to implement the TRIPS Agreement (and until 2016 with respect to pharmaceutical patents), they do not have IPR-related obligations that can be suspended yet.Footnote 121
As for a reform of the DSU that would facilitate the authorization of cross-agreement retaliation for developing countries when acting as complainants against a developed country, this would be particularly favourable for the larger developing countries that could have some difficulty in obtaining such authorization. However, since it does not seem likely that this proposal will gain support among developed country Members, it might be wiser for developing countries to concentrate political capital on other reforms related to remedies. Although not addressed in this article, some studies have argued that express provision in the DSU for financial compensation and ‘renegotiable remedies’ may be interesting options for improving the system, for example.
In the system as it is now, the suspension of TRIPS obligations remains as a valid hope for developing countries seeking to obtain greater leverage. In spite of the several difficulties, even the shadow of cross-agreement retaliation may function well as an enforcement mechanism, particularly if new authorizations are obtained. The fact that Brazil requested authority for cross-retaliation against the United States therefore deserves attention, and the outcome of the Upland Cotton dispute should be followed closely.
As the late Robert Hudec (Reference Hudec, Hoekman, Mattoo and English2002: 90) said a few years ago, in a statement that remains valid, ‘a great deal more analysis, and considerably more practical experience, will be needed before it is clear whether TRIPS retaliation is the key to this long-troubling problem’ of the inadequacy of trade retaliation for developing countries.Footnote 122 Ideally, new practical experiences with any sort of retaliation would not be needed because compliance or mutually (really) satisfactory arrangements would be achieved in every case. But since the real world of international trade is no wonderland, non-compliance and disagreement in certain disputes will be inevitable. This being the case, let us wait and see what will happen in future instances of cross-agreement retaliation under TRIPS.
