International trade rules are effective when they are properly applied. Therefore, dispute settlement mechanisms are set up in most trade agreements to ensure the agreements can be enforced and that disputes can be settled.
Dispute settlement in a nutshell
- Provides a rapid and effective means of settling disagreements on whether a country has acted in conformity with its international obligations;
- Applies the agreements, and develops the interpretative understanding of the agreements
- By preventing retaliation before a dispute settlement procedure has been completed, trade damaging unilateral action is avoided
- The system of dispute settlement at the WTO has worked very well.
- The European Union has included dispute settlement mechanism based on the WTO dispute settlement mechanism in all of its Free Trade Agreements since 2000
- Since 2009 the European Union also includes investor-to-state dispute settlement mechanisms in trade and investment agreements
- Since 2015 the European Commission has been working to establish a Multilateral Investment Court project. The overall objective for creating a Multilateral Investment Court is to set up a permanent body to decide investment disputes.
Establishment of a Multilateral Investment Court for investment dispute resolution
EU trade policy and dispute settlement
Implementing dispute settlement policy
The Trade Barriers Regulation permits EU companies to request that the Commission conduct an investigation into alleged breaches by third countries of international trade rules. For more information on TBR complaints.
As of July 2014, the International Trade Rules Enforcement Regulation lays down new internal rules allowing for more effective enforcement of international trade agreements. Where a third country has not complied with its international obligations, the Commission can adopt commercial policy measures restricting access to the EU market of goods or services supplied by that third country until such time as compliance with the relevant international trade rules is achieved.
There are three types of dispute settlement used in EU trade policy:
Dispute settlement at the World Trade Organisation
The Understanding on Dispute Settlement at the WTO provides WTO Members with a set legal framework for resolving disputes that arise in implementing WTO agreements.
Ideally disputes are resolved through negotiations. If this is not possible, WTO Members can request a Panel to settle the dispute. The Panel’s report can also be appealed before the WTO Appellate Body on questions of law. If a Member does not comply with the recommendations from dispute settlement, then trade compensation or sanctions, for example in the form of increases in customs duties, may follow.
Many WTO members, including the EU, make active use of this system so that violations of trade rules are corrected. However, the EU only initiates a dispute settlement case where other ways of finding a solution have not been productive.
Resolving differences between States under international trade agreements
Often known as bilateral dispute settlement, the EU includes a mechanism in all its trade agreements concluded after 2000 so that the countries concerned can resolve their differences on the basis of this mechanism. This mechanism allows these countries to use a dispute settlement mechanism specifically designed to deal with disputes arising under the agreement. The system allows for the rapid settlement of disputes and is modelled on the WTO dispute settlement system.
Investment dispute settlement
The Treaty of Lisbon included foreign direct investment as part of the EU common commercial policy. As a consequence, the European Commission now negotiates on behalf of the EU on both the liberalisation and protection of investment.
The EU is gradually negotiating investment provisions in certain Free Trade Agreements (FTAs) or in self-standing investment agreements.
These provisions on investment set up a legally binding level of protection for investment. They are accompanied by so-called investor-to-state dispute settlement (ISDS) mechanisms, which permit investors to bring claims alleging that one of the investment protection obligations has been breached. These provisions create a specific procedure for an investor to bring a case before an international tribunal.
In order to stay up-to-date with the highest standards of legitimacy, transparency and neutrality, in November 2015 the EU agreed on a reformed investment dispute settlement approach. In a nutshell, this new policy envisages the institutionalisation of the dispute settlement mechanism through the creation of a permanent Investment Court System (ICS) and the introduction of clearer and more precise rules on investment protection.
The EU has made significant progress in implementing this new policy, now included in the Comprehensive Economic and Trade Agreement (CETA) with Canada and the EU-Vietnam FTA, and proposed in the ongoing negotiations with all partners, including the Transatlantic Trade and Investment Partnership (TTIP) with the United States. The EU is also working toward the possible creation of a multilateral mechanism for the settlement of investment disputes.
On 23 July 2014 the European Parliament and Council adopted a regulation to establish a legal and financial framework for investor-to-state dispute settlement. It manages any possible financial responsibility deriving from investor-to-state dispute settlement by allocating between the EU and the Member States the financial responsibility on the basis of who adopted the treatment responsible for a breach of the agreement. It also deals with who would defend a particular case.
For further information:
- Factsheet on the investor-to-state dispute settlement mechanism
- Investor-State dispute settlement at ICSID and UNCITRAL
- Concept Paper Investment in TTIP and beyond – the path for reform
- EU textual proposal in TTIP. Chapter II – Investment
- Consolidated CETA text (including Chapter 8 – Investment)
- EU-Vietnam FTA Chapter 8: Trade in Services, Investment and E-Commerce
More on dispute settlement
- WTO disputes which the EU has launched, where the complaint is against the EU and where the EU is a third party and documents filed in those cases
- Flow chart of the procedures behind a dispute
- The Dispute Settlement Understanding at the WTO
- Ongoing work in the WTO on improving the WTO dispute settlement system