The WTO’s Legal Institutions Are Failing. What Can Save It

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Since 1995, the World Trade Organization (WTO) has been the backbone of our modern rules-based trading system, offering an international legal framework for states to resolve trade disputes in a predictable and institutionalized manner. At the center of this framework is the Dispute Settlement Understanding (DSU). The DSU transformed international trade from a domain of power politics (in which informal negotiations and non-binding panel decisions deterred great powers from changing their behavior) into one of legalized adjudication (in which a legally binding enforcement mechanism restrained the great powers). In recent years, however, the international trading system has plunged into crisis. The collapse of the WTO’s Appellate Body, coupled with the increasing use of restrictive trade measures justified on national security and industrial policy grounds, has exposed deep tensions between the legal discipline of the WTO (itself a disciple of the liberal international order) and geopolitical reality. These challenges suggest that the WTO’s dispute settlement system cannot fully constraining state behavior in an era of increasing economic statecraft, and that meaningful reform will require recalibrating the balance between legalism and the need for strategic flexibility.

The WTO’s dispute settlement mechanism, codified in the Understanding on Rules and Procedures Governing the Settlement of Disputes, represented a significant departure from prior trade regimes. Under the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, dispute resolution mechanisms were relatively weak, relying on informal consultations, negotiations, and consensus. Although Article XXIII of GATT outlined how disputes could be processed, it did not establish formal procedures for handling those disputes. While panels could be established to review cases, panel decisions did not establish binding precedents, which weakened GATT’s ability to enforce compliance. As a result, The WTO created a more “legalistic,” rule-oriented judicial system; all disputes would be heard by professional panels, could be appealed to an Appellate Body, and ultimately resulted in binding rules enforceable through authorized retaliation. That is, a party who won a WTO case was legally entitled to sanction the losing party if that party failed to obey the WTO’s ruling). 

At first, this system proved remarkably effective. Member states (which constitute over 98% of global trade) frequently brought cases (over 640 to date) and largely complied with rulings. Scholars and policymakers alike credited the system with reducing unilateral trade wars and enhancing the credibility of international trade law, promoting trade agreements and fostering economic integration and development. By embedding trade relations within a more legal framework, the WTO helped ensure that even powerful states were subject to rules rather than discretion.

However, the WTO’s early success depended on a critical assumption: states were willing to subordinate their short-term political interests to long-term legal (and multilateral) commitments. As geopolitical tensions have intensified, this assumption has grown fragile.

The first cracks in the system began to form as early as 2001, when China joined the WTO. Former U.S. President, Bill Clinton, endorsed the decision, arguing that the WTO’s liberal rules and emphasis on openness would force China to liberalize its economy and democratize. Rather than conform, however, China exploited the WTO, benefitting from the rules that furthered its interests, while evading “inconvenient” restrictions. Consequently, the U.S. quickly turned against China’s participation in the WTO, bringing 43 cases against China over the course of 2 decades. The majority of those cases fell into three broader categories: providing illegal state subsidies, discriminating against foreign goods and suppliers, and controlling supply chains. The fact that not all of these cases have been ruled in favor of the U.S., as well as the lackluster actions China has taken in response to the cases it has lost, has eroded U.S. trust in the capabilities of the WTO as an effective legal institution.

U.S. disputes with other states have furthered the erosion of confidence in the WTO. As developing countries came to constitute a majority in the WTO, the power of developed states to set the agenda for WTO negotiations waned. This phenomenon contributed to the collapse of the Doha Round of negotiations. At Doha, U.S. disagreements with India, China, and other developing states over proposed industrial tariffs, agricultural subsidies, and special trade protections for farmers put into question whether the WTO could effectively accommodate the diverse interests of its members. Although Doha failed to further liberalize trade, it did not immediately impact the underlying apparatus of the WTO; trade simply continued without the reforms discussed at Doha. Thus, even as the U.S. (and other states) began to see the WTO as prioritizing the interests of other states over its own, the legal mechanisms of the WTO continued to function effectively.

Unfortunately, the WTO’s organizational structure provided the U.S. the power necessary to turn its discontent with the WTO into an institutional crisis, beginning with the paralysis of its Appellate Body. During his first term in office, President Donald Trump began blocking the appointment of new judges. Trump argued that, by creating new binding obligations not explicitly agreed on by member states, the Appellate Body had exceeded its mandate and engaged in “judicial overreach.” By December 2019, the body lacked the quorum necessary to hear appeals, effectively halting the final stage of dispute resolution.

The consequences of this breakdown have been profound. Without a functioning appellate mechanism, losing parties can appeal panel decisions “into the void.” That is, losing parties could essentially void unfavorable rulings by sending them to a dysfunctional Appellate Body, stalling final rulings and thus preventing them from becoming binding. Conveniently, this decision has enabled the U.S. to sidestep any undesirable WTO rules. However, this also means that the enforcement capacity of the WTO has been significantly weakened.

After the Appellate Body collapsed, an emergency Multi-Party Interim Appeal Arbitration Arrangement (MPIA) was established as an emergency arbitration body to carry out the functions of the Appellate Body. Such an arrangement is perfectly legal under Article XXV of the WTO’s DSU, which permits arbitration as “an alternative means of dispute settlement” when the Appellate Body is unable to hear appeals. Although the MPIA is subject to less onerous procedures and regulations, and therefore more efficient in theory, it has been largely ineffective. Participation in the MPIA is voluntary and case-by-case, so its decisions are not binding on states such as the U.S. and India (which have not joined the MPIA). Thus, there exists a growing backlog of unresolved disputes and concerns about the long-term viability of the system.

Legal scholars have debated whether the U.S. critique of the Appellate Body is justified. On the one hand, the Appellate Body stretched WTO provisions beyond their intended scope, particularly in areas such as anti-dumping, subsidies, and trade remedies. On the other hand, some interpretive flexibility was needed to maintain coherence and compliance in a complex and evolving legal regime. Regardless of where one stands in this debate, the Appellate Body crisis underscores a fundamental point: the legitimacy of international adjudication ultimately depends on the consent of powerful states. When that consent erodes, legal institutions struggle to function.

Beyond institutional paralysis, the WTO faces a deeper substantive challenge: the increasing invocation of national security to justify trade restrictions. This issue centers on Article XXI of GATT (a provision that still holds under the WTO), which permits states to take “any action which it considers necessary for the protection of essential security interests.” In other words, Article XXI provides a national security exemption from usual WTO rules.

For decades, Article XXI was treated as effectively “self-judging,” meaning that states could invoke it without meaningful external review. However, this understanding was challenged in the landmark WTO dispute DS512: Russia – Measures Concerning Traffic in Transit. In that case, the WTO panel held that, while states retain discretion in defining their security interests, their invocation of Article XXI is not entirely beyond scrutiny. The panel asserted a limited role for adjudication, allowing the panel to assess whether the conditions for invoking the exception (such as the existence of an “emergency in international relations”) were met.

The panel’s decision to limit the national security defense marked a significant shift in WTO jurisprudence. On the one hand, it preserved a role for legal oversight, preventing states from invoking national security as a blanket justification for trade protectionism. On the other hand, it exposed the limits of adjudication in politically sensitive contexts, such as national security. Attempts to judicialize national security risk either provoking backlash from states or producing decisions that are too deferential to meaningfully constrain behavior.

The implications of this tension are evident in recent trade disputes; the U.S. has invoked national security to justify tariffs on steel and aluminum, while other countries have responded with retaliatory measures. These actions blur the line between economic policy and security policy, making it increasingly difficult for the WTO to maintain a clear legal boundary. Furthermore, the growing use of security-based justifications reflects a broader shift toward viewing trade as a tool of strategic competition rather than mutual gain. In other words, the political pendulum is swinging from liberalism to realism; rather than viewing trade as a collaborative process, states are now seeing it as a zero-sum game.

A parallel challenge arises from the resurgence of industrial policy. In recent years, governments have increasingly intervened in semiconductors, clean energy, and advanced manufacturing. Policies like the U.S. CHIPS and Science Act and the E.U.’s state aid programs reflect a renewed emphasis on domestic production and technological leadership. This form of strategic competition, in which global powers vie for economic security and technological dominance, has further eroded the system of cooperation established by the WTO.

These developments strain the WTO’s subsidy rules, codified in the Agreement on Subsidies and Countervailing Measures. The subsidy rules, created in the 1990s, distinguish between permissible and prohibited subsidies to prevent international trade distortions. However, they were not crafted with modern industrial policy in mind, particularly policies motivated by concerns over national security or supply chain resilience.

Disputes such as the 17-year long Airbus-Boeing litigation (in which Boeing accused the E.U. of granting illegal “launch aid” subsidies for Airbus) highlight the limitations of the current framework. While WTO panels have issued detailed rulings on the legality of various subsidies, the broader trend toward state intervention suggests that existing rules no longer reflect the realities of global economic competition.

Taken together, these developments point to a fundamental transformation in the role of WTO law. The system’s original design – premised on strong adjudication and broad legal constraints – is increasingly at odds with a world in which states prioritize strategic autonomy and economic security. And while many may argue these struggles have made the WTO become obsolete, this need not be the case. Rather, they suggest the need for a recalibrated approach that balances legal discipline with political flexibility.

One channel for reform is the restructuring of the Appellate Body. Addressing concerns about judicial overreach, such as clarifying interpretive limits or imposing stricter procedural timelines, could help restore confidence among member states while also increasing the efficiency of the Appellate Body. At the same time, some argue that preserving an appellate mechanism is essential for maintaining coherence and predictability in WTO jurisprudence.

Another priority should be to clarify key substantive rules. With respect to national security, member states could develop more precise guidelines for invoking Article XXI, reducing ambiguity while preserving necessary discretion. Similarly, updating subsidy rules to account for modern industrial policies would help align legal standards with modern economic realities.

An alternative solution is to develop a new plurilateral framework, centered around “coalitions of the willing,” where coalitions of countries with shared interests adopt higher standards on key trade issues. The coalitions could focus on a multitude of areas of congestion, including further tariff reductions, standardizing production and technical guidelines (regulatory harmonization), AI, technology transfer, and industrial policy. While such a system would certainly prove more complex than the WTO, it would maintain the WTO’s ideals of multilateral trade, while proving more politically sustainable by overcoming the legal shortcomings of the current rules-based system.

Ultimately, the challenge is not simply technical but conceptual. The WTO must navigate the tension between two competing visions of the international order: one grounded in legalism and multilateral cooperation, and another shaped by geopolitical rivalry and strategic competition. As the global economy becomes increasingly fragmented, the viability of the WTO will depend on its ability to adapt to this new landscape without abandoning its principles.

Alex Goldfarb is a sophomore concentrating in Applied Mathematics - Economics and Political Science. He is a staff writer for the Brown Undergraduate Law Review and can be contacted at alexander_goldfarb@brown.edu.

Priyanka Nambiar is a sophomore concentrating in Cognitive Neuroscience. She is a staff editor for the Brown Undergraduate Law Review and can be contacted at priyanka_nambiar@brown.edu.

Alice Kovarik is a sophomore concentrating in Economics and International and Public Affairs. She is an editor for the Brown Undergraduate Law Review and can be contacted at alice_kovarik@brown.edu.