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
EU trade policy and dispute settlement
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, than 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.
Investor-to-State dispute settlement within international trade agreements
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 or in self-standing investment agreements.
These new provisions on investment will set up a legally binding level of protection for investment. They will be accompanied by investor-to-state dispute settlement 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.
The EU is currently preparing legislation dealing with the potential financial consequences flowing from investor-to-state dispute settlement.
In June 2012 the Commission proposed 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. Follow the progress through the legislative process.
For further information:
- Factsheet on the investor-to-state dispute settlement mechanism
- Investor-State dispute settlement at ICSID and UNCITRAL
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.
The Commission has recently proposed legislation which would permit more effective enforcement of international trade agreements where the third country has not complied with its international obligations.
Follow the progress through the legislative process.
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