World Trade Organization: U.S. Experience in Dispute Settlement System:
The First Five Years (Testimony, 06/20/2000, GAO/T-NSIAD/OGC-00-202).

Member countries of the World Trade Organization (WTO) have actively
used the WTO dispute settlement system during the first five years and
filed 187 complaints as of April 2000. The United States and the
European Union were the most active participants, both as plaintiffs and
defendants. Out of 25 cases in which the United States was a plaintiff,
the United States prevailed in a final WTO dispute settlement ruling in
13 cases, resolved the dispute without a ruling in 10 cases, and did not
prevail in two cases. As a defendant in 17 cases, the United States
prevailed in one case, resolved the dispute without a ruling in 10
cases, and lost in six cases. Overall, GAO's analysis shows that the
United States has gained more than it has lost in the WTO dispute
resolution system so far. WTO cases have resulted in a large number of
changes in foreign trade practices, while their effect on U.S. laws and
regulations has been minimal. This testimony summarizes the June 2000
report, GAO/NSIAD/OGC-00-196BR, June 14 (36 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD/OGC-00-202
     TITLE:  World Trade Organization: U.S. Experience in Dispute
	     Settlement System: The First Five Years
      DATE:  06/20/2000
   SUBJECT:  Dispute settlement
	     Tariffs
	     Foreign trade agreements
	     International trade regulation
	     Foreign trade policies
	     International relations
	     Restrictive trade practices
	     Import restriction
IDENTIFIER:  WTO Dispute Settlement System
	     European Union
	     Philippines
	     Korea
	     Japan
	     General Agreement on Tariffs and Trade

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GAO/T-NSIAD/OGC-00-202

I am pleased to be here today to provide some observations about the World
Trade Organization's (WTO) dispute settlement system since its founding in
1995. Specifically, my testimony will address (1) how WTO members have used
the new dispute settlement system, focusing primarily on cases involving the
United States; and (2) the impact of these cases on foreign trade practices
and U.S. laws and regulations, and their overall commercial effects. We
issued an overview report on this subject on June 14 and plan to provide a
more comprehensive report in August.

My observations are based on our past and ongoing work; our review of WTO
and U.S. executive branch documents and related literature; discussions with
U.S. government officials, members of nongovernmental organizations, trade
attorneys, and industry experts; and analyses of WTO data.

SUMMARY

WTO member countries have actively used the dispute settlement system during
its first 5 years, filing about 200 complaints. The United States and the
European Union (EU) have been the most active participants, both as
plaintiffs and defendants. In the 42 cases involving the United States that
had either reached a final WTO decision or were resolved without a ruling,
the United States served as a plaintiff in 25 cases and a defendant in 17
cases. As a plaintiff, the United States prevailed in a final WTO dispute
settlement ruling in 13 cases, resolved the dispute without a ruling in 10
cases, and did not prevail in 2 cases. As a defendant in 17 cases, the
United States prevailed in one case, resolved the dispute without a ruling
in 10, and lost in 6 cases.

Overall, our analysis shows that the United States has gained more than it
has lost in the WTO dispute settlement system to date. WTO cases have
resulted in a substantial number of changes in foreign trade practices,
while their effect on U.S. laws and regulations has been minimal. In about
three-quarters of the 25 cases filed by the United States, other WTO members
agreed to change their practices, in most instances providing commercial
benefits to the United States. For example, in a dispute involving barriers
to U.S. exports of pork and poultry in the Philippine market, the United
States challenged how the Philippines administered its tariff rate quota
system for these products. Following consultations, the Philippines agreed
to modify its system in 1998. U.S. poultry exports to the Philippines
subsequently increased by about $16 million in 1999 and pork exports
increased by about $1 million that year. As for the United States, in 5 of
the 17 cases in which it was a defendant, two U.S. laws, two U.S.
regulations, and one set of U.S. guidelines were changed or subject to
change. These changes have been relatively minor to date, and the majority
of them have had limited or no commercial consequences for the United
States. For example, in one case challenging increased U.S. duties on Korean
semiconductor imports, the United States took action to comply with the WTO
ruling, while still maintaining the duties. However, the commercial effects
of one recently completed case involving tax exemptions for U.S. foreign
sales corporations are potentially high, but the United States has not fully
determined how it will implement the WTO ruling. Moreover, there are several
ongoing WTO cases whose outcomes could be problematic for the United States.

BACKGROUND

The World Trade Organization provides the institutional framework for the
multilateral trading system. Established in January 1995 as a result of the
Uruguay Round of international trade negotiations, the WTO administers rules
for international trade and provides a forum for conducting trade
negotiations. For the first time, the 1994 Uruguay Round agreements brought
agriculture, services, intellectual property rights, textiles and apparel,
and trade-related investment measures under the discipline of multilateral
trade rules. In addition, the Uruguay Round agreements established a new
dispute settlement system, replacing that under the General Agreement on
Tariffs and Trade, the predecessor to the WTO.

The WTO dispute settlement system provides a multilateral forum for
resolving trade disputes among WTO members in four major phases:
consultation, panel review, appellate body review (when parties appeal the
panel ruling), and implementation of the ruling. The new system has several
important features. It discourages stalemate by not allowing losing parties
to block decisions; sets firm timetables for completing litigation of cases;
and establishes a standing appellate body, which helps make the dispute
settlement process more stable and predictable. Finally, it allows losing
parties to accept retaliation or provide compensation as alternatives to
complying with WTO rulings. While the new dispute settlement system
facilitates the resolution of specific trade disputes, it also serves as a
vehicle for upholding trade rules, preserving the rights and obligations of
members under the WTO agreements. Finally, the system clarifies the
provisions of specific WTO agreements and provides a climate of greater
legal certainty in which trade can occur.

WTO MEMBERS HAVE ACTIVELY USED DISPUTE SETTLEMENT SYSTEM

WTO members have used the WTO dispute settlement system frequently over the
past 5 years, bringing before it 187 complaints. The United States and the
European Union (EU) were the most active participants, both as plaintiffs
and defendants. The United States filed 56 complaints, or almost a third of
the total number of complaints brought as of April 2000. The EU was the next
most frequent filer, with 49 complaints (see fig. 1). Over a third of the
U.S. and EU cases were against each other.

Figure 1: WTO Members' Share of 187 Complaints Filed, 1995-2000

Legend: EU = European Union

Note: This chart covers 187 complaints. It excludes five cases in which
there were co-complainants (more than one country filing a complaint on the
same case).

Source: WTO data.

The United States was the most frequent defendant in WTO dispute settlement
cases. The 187 complaints filed pertained to 150 distinct matters; in some
cases, multiple complaints were filed against the same defendant. Of these
150 matters, 38 cases were filed against the United States, a number of
which are still pending. The EU was the second most frequent defendant, with
26 cases filed against it (see fig. 2).

Figure 2: WTO Members as Defendants in 150 Distinct Matters, 1995-2000

Note: Percents do not add up to 100 percent because of rounding.

Source: WTO data.

Of the 150 matters WTO members brought to the WTO, 42 cases involving the
United States were completed as of March 2000. Completed cases include those
that have gone through WTO litigation with a panel or appellate body ruling
and cases that were resolved without a WTO ruling. The United States was a
plaintiff in 25 of these cases and a defendant in 17 cases (see fig. 3).

Source: Office of the U.S. Trade Representative.

IMPACT OF COMPLETED DISPUTE SETTLEMENT CASES INVOLVING THE UNITED STATES

About three-fourths of the 25 cases that the United States filed resulted in
some agreed change in foreign laws, regulations, or practices such as the
removal of discriminatory taxes or other import barriers. Fourteen of these
cases also resulted in commercial benefits for U.S. industry, either greater
market access or increased intellectual property protection. As for the
United States, in 5 of the 17 cases in which it was a defendant, two U.S.
laws, two U.S. regulations, and one set of U.S. guidelines were changed or
subject to change. These changes have been relatively minor to date, and the
majority of them have had limited or no commercial consequences for the
United States, although one recently completed case, where the WTO ruling
has not yet been implemented, may have potentially large commercial effects.

Changes in Foreign Practices Resulting from WTO Cases

The 25 cases that the United States filed with the WTO resulted in several
types of changes in foreign laws, regulations, or practices. For example, in
one case involving a tax on imported liquor, Japan began lowering taxes and
tariffs on distilled spirits in 1998 after a WTO ruling found that Japan had
discriminated against imports. In another case, Japan lifted a varietal
testing requirement for imports of apples, cherries, and other fruits at the
end of 1999 after a WTO ruling found that the requirement was maintained
without sufficient scientific evidence. As a result, U.S. exports of these
fruits recently entered the Japanese market, with shipments in December 1999
and March 2000.

In a case the United States filed with the WTO challenging inadequate
intellectual property protection for pharmaceuticals and agricultural
chemicals, India passed legislation in March 1999 to establish a filing
system for patent applications on these products and to grant exclusive
marketing rights to the patent applicant. The WTO ruled that these changes
were called for under the Uruguay Round agreement on intellectual property
rights. Pakistan agreed to make similar changes to settle another WTO case
filed by the United States. In a case involving investment measures that may
limit or distort trade in the auto sector, Indonesia eliminated local
content requirements and other trade-restricting measures in 1999 after a
WTO ruling found Indonesia had discriminated against foreign investors.

Commercial Effects of Foreign Changes

Of the 25 cases that the United States filed, 14 resulted in commercial
benefits to the United States, either through greater market access or
stronger intellectual property protection. For example, in a case involving
Korean standards for food imports, Korea made changes in its food code in
1995 and 1996 after a WTO case was filed. Korea's standard had previously
kept out approximately $87 million of U.S. chilled beef exports and $79
million of U.S. pork exports, according to Department of Agriculture
estimates. Also, in a case challenging Japan's inadequate time period for
protecting copyrights on sound recordings, Japan changed its copyright law
in 1996 after a WTO ruling. As a result of this change, U.S. sound
recordings will be protected for a 50-year period, including retroactively.
The U.S. recording industry estimated that these protections are worth about
$500 million annually, based on lost sales in 1995.

In the 11 other cases that the United States filed with the WTO dispute
settlement body, 9 had limited commercial benefits, either because (1) other
barriers existed; (2) implementation of the WTO ruling was incomplete or
disputed; or (3) the case was brought mainly to uphold trade principles. For
example, in a case involving Canadian fluid milk imports, Canada changed its
tariff-rate quota system, which the U.S. dairy industry estimated could
increase U.S. exports by $45 million a year. However, the U.S. dairy
industry cannot take advantage of these changes until the United States and
Canada conclude separate, ongoing negotiations on fluid milk standards.

Regarding WTO rulings whose implementation is incomplete or disputed, in two
high-profile cases the EU decided not to fully comply with WTO rulings
involving imports of bananas and hormone-treated beef and instead face U.S.
retaliation of almost $310 million for non-compliance. In addition, as of
mid June, Australia had not complied with a 1999 WTO ruling that maintained
that Australia had provided an improper export subsidy grant to a leather
manufacturer; the WTO had recommended that the grant be repaid. The United
States and Australia have been negotiating a compliance plan.

In a case primarily involving trade principles rather than commercial
interests, the United States filed a case against Hungary involving
agricultural export subsidies, although U.S. products do not directly
compete with the affected Hungarian exports. According to the Office of the
U.S. Trade Representative, the case was brought to protect the integrity of
the Uruguay Round Agreement on Agriculture. The Office maintained that
Hungary was in violation of the agreement's provisions limiting these
subsidies.

The United States initiated two WTO cases with high commercial stakes that
it lost. In the first case, involving alleged trade restrictions in Japan's
film and photographic supplies market, the United States failed to gain
greater access to this market as a result of the loss. In the other case,
the United States challenged an EU change in customs classification of local
area network equipment that resulted in higher tariffs for U.S. exports.
Although the United States lost the case, the effects of the loss were
mitigated by the WTO's 1997 Information Technology Agreement, which made
U.S. exports of this equipment duty free.

Changes in U.S. Laws Resulting from WTO Cases

Out of the 17 WTO cases in which U.S. practices were challenged, only one
resulted in a change in U.S. law and that change was relatively minor. In
another case, the United States pledged to seek from Congress legislation
providing the President authority to waive certain provisions of a law.
However, Congress has yet to grant the President this authority.

Regarding the one change in U.S. law, the United States amended a 1996 law
for determining the country of origin of U.S. textile and apparel imports.
The United States made this change in May 2000 in response to a WTO case
filed by the EU. The amendment changed the country of origin of certain
fabrics including silk, and of certain goods such as scarves, from where the
raw fabric was made, to where the product was both dyed and printed with two
additional finishing operations. The EU maintained that the 1996 law's
criteria for determining country of origin affected its quota-free access to
the United States. This is because raw fabric is often produced in countries
subject to U.S. quotas, such as China. According to Department of Commerce
data, the affected EU exports to the United States are relatively small.

In the other case, the EU challenged certain aspects of a U.S. law involving
trade sanctions against Cuba. The United States and the EU reached an
agreement in 1997 before a WTO dispute settlement panel ever met. Among
other things, the EU agreed to drop the dispute settlement case in return
for a U.S. pledge to seek from Congress legislation providing the President
authority to waive title IV of Helms-Burton Act, which authorizes denial of
U.S. visas to persons involved in trafficking in confiscated Cuban property
when certain conditions are met. Congress has yet to grant the President
authority to waive title IV.

Changes in U.S. Regulations and Guidelines Resulting from WTO Cases

Two U.S. regulations and one set of guidelines have been changed as a result
of WTO rulings. First, in a case brought by Venezuela and Brazil, the
Environmental Protection Agency (EPA) changed a regulation implementing the
1990 Clean Air Act pertaining to the cleanliness of gasoline. EPA modified
the regulation in 1997 to give foreign suppliers the option of using a
baseline for gas cleanliness, based on their own performance rather than on
an EPA-established baseline (this treatment was already afforded to domestic
suppliers). EPA also put in place a mechanism to adjust the requirements if
the overall cleanliness of gas imports declines. Brazil and Norway, which
account for 0.18 percent of U.S. gas supplies, are currently the only
countries exporting to the United States under this option.

Also, as a result of a case brought by Korea involving dynamic random access
memory (DRAM) semiconductors, the Department of Commerce in 1999 changed its
standard for lifting an antidumping order to conform to WTO antidumping
provisions. The WTO found that the previous U.S. standard placed too high a
burden of proof on the party contesting an antidumping order. After the U.S.
regulation was changed, Commerce conducted another review of Korean DRAM
imports and still found the likelihood of continued dumping and kept the
antidumping order in place. At Korea's request, a panel is now examining
U.S. compliance with the WTO ruling.

Finally, as a result of a WTO case challenging a U.S. ban on imports of
shrimp harvested in a manner harmful to endangered sea turtles, in July 1999
the State Department revised a set of certification guidelines. The revision
provided more transparency (openness) and due process in making decisions to
grant countries' certification to export shrimp to the United States. This
change was very minor and, throughout the case, U.S. restrictions on shrimp
imports remained in effect. However, one of the plaintiffs --Malaysia -- has
reserved its right to challenge U.S. compliance with the WTO ruling.

Commercial Effects of U.S. Changes

In the 17 cases in which the United States was a defendant, the United
States lost 6 cases, 5 of which had limited commercial consequences. The
sixth case, challenging provisions of U.S. tax law regarding foreign sales
corporations, has potentially very high commercial stakes. The United States
provides tax exemptions to a wide variety of companies on exported products
used abroad. In this case, a February

2000 WTO ruling found that the U.S. tax provisions constituted prohibited
export subsidies. The United States has not fully determined how it will
implement the WTO ruling.

In the 11 other WTO cases filed against the United States that were resolved
without a panel ruling or that the United States won, 5 had potentially high
commercial stakes. However, the outcomes of all 11 cases had a limited or no
commercial effect. For example, one of these high-stakes cases involved a
challenge by Mexico to the initiation of a U.S. antidumping investigation on
imports of certain fresh tomatoes. The U.S. International Trade Commission
reported that imports of Mexican fresh tomatoes were $452 million, or almost
36 percent, of the $1.3 billion U.S. market in 1995. The Commerce Department
and the U.S. International Trade Commission made preliminary determinations
that the Mexican imports were being sold at less than their fair value and
were causing material injury to the U.S. industry. If the final
investigations upheld these findings, the Commerce Department could have
placed duties on these imports to raise their price up to the fair market
value. Mexico requested WTO consultations about this issue. However,
Commerce resolved the matter with a formal commitment by Mexican growers not
to sell their exports below a certain price. This agreement was reached to
eliminate the injurious effects of the dumped imports on the U.S. industry.

The remaining six cases resulted in some U.S. government action with minimal
commercial effect. For example, in a case challenging U.S. duties on imports
of urea (primarily used as a fertilizer) from the EU, the United States
removed the duties after it found that U.S. industry was not interested in
maintaining them.

CONCLUSIONS

Overall, the United States has gained more than it has lost in the WTO
dispute settlement system to date, for several reasons. First, the United
States has been able to effect changes in a substantial number of foreign
laws, regulations, and/or practices that it considered to be restricting
trade. Further, most of the cases that the United States filed provided
commercial benefits to U.S. exporters or investors. In addition, WTO rulings
have upheld trade principles that are important to the United States, such
as the patent protection provisions of the Uruguay Round agreement on
intellectual property rights and provisions in the Agreement on Agriculture
to eliminate export subsidies.

The dispute settlement system's impact on the United States should not be
evaluated solely on the basis of U.S. wins and losses. First, some winning
cases do not result in the desired outcomes. For example, the EU decided not
to fully comply with two WTO decisions involving bananas and hormone-treated
beef and instead face U.S. retaliation. Conversely, some losses are only
partial, as in the case regarding Korean DRAM semiconductors where the U.S.
antidumping order being challenged was maintained despite an adverse WTO
ruling. In addition, some losing cases actually may uphold WTO principles
important to the United States, as in the case involving endangered sea
turtles, which expressly upheld provisions that protect the conservation of
natural resources, including sea turtles. Moreover, the United States
derives systemic benefits from a well-functioning multilateral dispute
settlement system, even if it does lose some cases.

It is important to note, however, that there have not yet been a sufficient
number of WTO dispute settlement cases to fully evaluate the system. In
addition, the outcomes of some important pending WTO cases could be
problematic for the United States, including several cases that challenge
various aspects of U.S. trade laws, such as U.S. antidumping laws.

Mr. Chairman and Members of the Subcommittee, this concludes my prepared
remarks. I will be happy to respond to any questions you may have.

CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Susan Westin or
Beth Sirois at (202) 512-4128. Individuals making key contributions to this
testimony included Nina Pfeiffer, Tim Wedding, and Richard Seldin.
*** End of document ***