UPDATE 2-EU to propose workaround to avoid U.S. block on WTO judges -document

The European Union is set to propose creating a shadow system to get around a U.S. block on appeals in disputes at the World Trade Organization (WTO), according to a draft proposal circulated to national lawmakers. U.S. President Donald Trump is blocking appointments to the WTO's Appellate Body, saying its judges have overstepped their mandate and ignored their instructions. Trump's critics say he resents their power over U.S. law.

Unless the block is lifted, the world's top trade court will have only one of its seven members left by December, leaving it unable to hear appeals in international trade disputes. That could leave disputes in legal limbo and undermine global defences against trade protectionism. Trade experts have put forward various ideas for keeping the system working without the Appellate Body, although agreeing terms for a removal of the U.S. block is seen as the best way forward.

The proposal, seen by Reuters on Thursday, would allow the EU and any other WTO member with which it had a dispute to use the WTO's arbitration rules to set up a new judicial procedure, an "interim solution" until the U.S. veto on the appointment of new judges is lifted. The disputants would effectively copy and paste the existing system to create an ad hoc process overseen by former WTO appeals judges.

By moving ahead with alternative arrangements, the EU has signalled it does not expect to resolve the crisis before December. PARTIAL FIX

It is a positive sign that WTO members are seeking creative solutions to the problem, said trade expert Chad P. Bown from the Peterson Institute for International Economics in Washington. The EU proposal can be a solution for WTO members willing to voluntarily sign on, but only a "partial fix" as it is unlikely to get Washington to once again commit itself to an enforceable, rules-based trading system, he added.

The proposal needs support from EU member state governments before it can be formally used at the WTO. "The German government must fully support the EU in this project. It's the only way to defend the prosperity created by Germany's export-oriented industry," said Gerald Ullrich from Germany's business friendly Free Democrats (FDP).

The proposal would "replicate as closely as possible all substantive and procedural aspects" of the Appellate Body's work, with "appropriate administrative and legal support" from the Appellate Body Secretariat, the EU text said. It would be up to the WTO director-general to choose three former Appellate Body judges to rule on each dispute, it said.

Almost 600 disputes have been taken to the WTO since it was set up in 1995, and the majority involved the EU directly or as a third party. (Reporting by Michael Nienaber Writing by Tom Miles Editing by Madeline Chambers and Frances Kerry)

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