Trade Disputes and the Dispute Settlement Understanding of the WTO: An Interdisciplinary Assessment: Volume 6

Cover of Trade Disputes and the Dispute Settlement Understanding of the WTO: An Interdisciplinary Assessment
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(29 chapters)
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Introduction

Pages xv-xx
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A principle reason for the inability of the General Agreements on Tariffs and Trade (GATT) to serve as the vehicle for international trade liberalization was that it was the protocol for the establishment of the International Trade Organization. It was never intended to become a functioning institution. As such, it did not have a well-designed system for the settlement of trade disputes. At least partially because the GATT was not intended to function as an institution, an arguably excessive reliance on consensus emerged as the vehicle for the resolution of trade disputes. A consensus to accept the recommendations of a dispute panel became the standard for resolution under the GATT. Because the defendant could always object to implementation of the panel's recommendation, thus denying consensus, successful resolution of disputes were relatively infrequent. In the 47 years, during which the GATT was the principle international trade forum, 101 panel reports were adopted. Given that it is possible to file disputes on the basis of nullification and impairment of expected benefits, which is a considerably weaker standard than the allegation of a legal breach, it is apparent that the ineffectiveness of the dispute resolution mechanism was a deterrent to the filing of complaints. As the GATT increased in membership and pressures to address increasingly complex trade issues (intellectual property rights and agricultural subsidies, for example) emerged, it became apparent that the GATT could be undermined by an inability to resolve disputes.

The purpose of this chapter is to report some initial findings based on the WTO Dispute Settlement Data Set (Ver. 2.0) that the authors have compiled for the World Bank. The data set contains approximately 28 000 observations on the workings of the Dispute Settlement system. It covers all 351 WTO disputes initiated through the official filing of a Request for Consultations from January 1, 1995, until October 25, 2006; and for these disputes it includes events occurring until December 31, 2006. Each dispute is followed through its legal life via the panel stage, the Appellate Body stage, to the implementation stage.

The descriptive statistics in the chapter points to three observations. The first and obvious observation is the almost complete absence of least developed countries. Second, less poor and developing countries are much more active and successful than the authors would have expected. Third, the EU and the United States dominate less than expected, being much more often the subject of complaints, than a complaining party, and they have a very low share of all panelists.

We first discuss what fairness may mean in the context of the dispute settlement process, noting the crucial relation between fairness in dispute settlement and the functioning of the trading system as a whole. We explore this relation further through an analysis of three main groups of dispute settlement cases. These are cases that turn around the question of defining fair competition; cases that arise from the use of contingency measures; and cases that draw the boundaries between domestic regulatory measures and the trade-related norms and rules of the WTO. There follows an analysis of experience with compliance and with the use of countermeasures in various cases. Finally, taking together the rulings of the Dispute Settlement Body and the procedures for compliance and the use of countermeasures, we conclude that while the present dispute settlement process serves to protect the fairness of the trading system as a whole, there are some aspects of dispute settlement that remain problematic from the standpoint of fairness.

In this chapter, I discuss the manner in which the Appellate Body (AB) has been completing the WTO contract through its case law. To do that, I first briefly examine the mandate given to the AB. Having established that, I move to discuss the manner in which the AB has handled its mandate. The AB is called to settle disputes among WTO members by following a certain methodology for interpreting the WTO contract. The main conclusions that I draw are that the AB has not, as a general remark, overstepped its authority and that it has, with few outliers, traditionally followed an (overly) textualist interpretative approach. This attitude is probably consistent with the incentive structure of a risk averse agent who can always turn back and request from its principals to write a more complete contract next time. It has led, nonetheless, to some unfortunate results. Assuming that the current WTO agreement and the interpretative tools are not negotiable (although a re-weighing of the various factors included in the latter is both feasible and warranted), it is the institutional design of the AB and its supporting Secretariat that should probably be re-thought.

This chapter provides a theoretical framework of dispute settlement to explain the surge in blocking incidence of GATT panel reports during the 1980s and the variations in withdrawn incidence versus total disputes across different decades of the GATT regime. The study first suggests the role of the degree of legal controversy over a panel ruling in determining countries' incentives to block (appeal) a panel report under the GATT (WTO) regime. The study then analyzes the effects of political power on countries' incentives to use, and their interactions in using, the dispute settlement mechanism, given two-sided asymmetric information regarding panel judgement.

This essay investigates the role of WTO Member States’ political institutions in their decision to comply with adverse rulings. In the end, implementation of these rulings is a political act that Member States must undertake on their own. The decision to comply will thus be affected by domestic political pressures and institutions, including who wins and who loses if the decision is implemented, the locus of decision-making necessary to comply, and the overall structure of government. In this chapter, we explore the impact that domestic partisan preferences have on compliance rates among OECD countries. We construct a formal model of WTO implementation, predicting that when left-leaning parties, those who tend to favor protection for domestic labor and markets, control government, compliance rates should tend to fall. In contrast, right-leaning governments, those who weigh highly market access and returns to capital, should be more willing to comply with adverse WTO rulings. We test these hypotheses using data from WTO trade disputes involving twenty-five advanced industrialized countries and the European Union from 1970 to 2000, and find consistent support for our theory.

Many functionalist models of international cooperation rely on punishment by states to enforce cooperation. However, the empirical record suggests that such state-based accounts offer an incomplete explanation of international trade cooperation. We argue that when theoretical approaches are adjusted to incorporate aspects of domestic politics and institutions, two key insights emerge. First, political pressure from domestic industries can be key in creating demand for violations of trade agreements. Since such pressure is affected by stochastic shocks, the temptation of leaders to commit trade violations can vary over time. The presence of a dispute settlement procedure (DSP) provides flexibility that allows leaders to respond to such pressure by occasionally committing violations and then compensating their trading partners, if the DSP finds that the violation was not subject to exceptions in the trading agreement. This flexibility enhances the willingness of leaders to sign cooperative agreements in the first place. Second, domestic politics can function as an enforcement mechanism for ensuring compliance with international trade agreements and DSP rulings. Voters can condition their electoral decisions on whether their leader complies with socially beneficial trade agreements. The DSP plays an important role in this account as an information-provider. For voters to hold their leaders accountable, they need information about what choices their leader has made and whether his actions constitute compliance with an international agreement. The DSP provides transparency and reduces uncertainty about these factors.

This chapter examines the barriers posed for smaller and poorer World Trade Organization (WTO) members to challenge trade barriers under the WTO's dispute settlement understanding. It first addresses the implications of the judicialization of the WTO's dispute settlement system. It next examines reasons why participation in the WTO's dispute settlement system matters. It then summarizes the results of studies of the system's use and, in light of these findings, posits explanations for smaller developing countries' lack of engagement.

Previous research on the success of the WTO dispute-settlement system may miscalculate the true benefits of the dispute process due to the nature of the datasets used. Approximately 33 percent of all disputes filed at the WTO are classified as pending or inactive and thus omitted from most studies. Further investigation reveals that many of these inactive cases were actually settled by the countries involved or considered in a similar WTO dispute, and, as a result, no further WTO action was taken. This suggests that the WTO dispute settlement process may be more effective in resolving disputes than otherwise thought. For those disputes not successfully resolved, I empirically estimate why countries may choose to initiate WTO dispute settlement action but fail to follow through, thus allowing the offending party to continue with the alleged WTO illegal activities. The results suggest that developing countries are less likely to resolve their complaints in the WTO dispute settlement system, a troubling implication for the equity of the system.

The usage of the WTO Dispute Settlement System (DSS) is dominated by high-income countries. Since the ultimate enforcement threat of the system is based on retaliation, countries may take their economic size as well as their specific bilateral retaliatory capacity into account when deciding whether or not to respond to a detrimental infringement of a trade agreement by filing a costly complaint. Hence, various scholars conjecture that lawsuits surfacing in the record of the WTO constitute only the biased tip of an iceberg of trade disputes. In order to investigate such a potential bias, this chapter sets up a sequential game of the DSS. Subsequently, a binary choice model is employed to empirically explain a country's decision whether or not to litigate against a trading partner. The results suggest that a country is more likely to file a complaint if (i) it is large, (ii) its trading partner is small, (iii) the trade value of the commodity at stake is large, and (iv) its retaliatory capacity is large.

Agricultural trade has generated more than its share of disputes in the past fifty years. Lack of a clear structure of rules to constrain government activity in these markets, coupled with the particularly sensitive nature of trade in basic foodstuffs, has been the main cause of this disproportion. New rules agreed in the Uruguay Round provided an improved framework for government policy in this area, and a temporary exemption was given to certain subsidies from challenge in the WTO (the Peace Clause). However, the expiry of the Peace Clause in 2003 and a growing willingness on the part of exporters to challenge domestic farm programs in other countries through action under the Dispute Settlement Understanding has once again stirred the agricultural pot. Now trade disputes are frequently leading to litigation, encouraged by the slow progress in the Doha Round of trade negotiations. In particular, the scope for domestic subsidies, under the Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures, has increasingly become the subject of litigation. Countries may have to further modify their domestic policies so as to reduce their vulnerability to challenge in the WTO.

There are several agreements within the framework of the World Trade Organization that have an impact on the issue of food safety. These include the prohibition against quantitative restrictions of GATT 94, the general exceptions of Article XX, the Agreement on Sanitary and Phytosanitary Measures, the Agreement on Technical Barriers to Trade, and the Agreement on Trade-Related Aspects of International Property Rights. This chapter analyzes the primary disputes pertaining directly or tangentially to matters of food safety and representation under each of these agreements that were impaneled under the dispute settlement understanding. Particular attention is given to the EC/Hormones and the EC/genetically modified organisms (GMO) cases.

A somewhat underappreciated aspect of the burgeoning rush to regional trade agreements (RTAs) is a discrepancy between the dispute settlement procedure (DSP) embodied in the original World Trade Organization (WTO) Dispute Settlement Understanding (DSU) and that found in the language of many RTAs. This chapter explores the issue in the context of a dynamic repeated game of trade agreements. As is well known, the institutional alternatives available in negotiating multilateral freer trade agreements – regional agreements, side agreements, trade dispute settlement punishments, and so on – can proscribe the limits and shape the nature of self-enforcing trade agreements. Here, we suggest the extent to which deviations from the WTO DSP embodied in RTAs – for example, “private interest access,” “third party procedures,” and “choice of forum” – can not only work against the interests of “weaker parties” but furthermore undermine multilateral agreements closer to free trade.

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Beginning with the assumption that antidumping laws are used to address adverse shocks in import-competing industries, this chapter provides an explanation for the infrequent utilization of the Dispute Settlement Understanding under the Antidumping Agreement. It does so with a very simple model that represents the shock by a one-dimensional random variable. This is found on an interpretation of the ADA as a de facto escape clause. ADA signatories are homogeneous, which enables the representation of the expected frequency of shocks over each member's import-competing sectors by the binomial distribution with identical parameters. The explanation for the infrequency of utilization of the DSU invokes a repeated Prisoners’ Dilemma with two levels of cooperation in an infinite horizon game. The high level is free trade in all sectors. The low level is the application of ADA duties in sectors incurring the shock in a manner that is consistent with the ADA. The high level of cooperation in all sectors in every period is not sustainable for any degree of patience. A convex combination of the high and low levels of cooperation is sustainable for some degrees of patience under the folk theorem. However, this combination of cooperation is attainable only with the support of the DSU. The extent of importance of the DSU depends on the completeness of information with which signatories are endowed. With complete information, dispute resolution does not occur in equilibrium. However, its presence supports cooperation through its mandate to sanction retaliation. If filing were prohibitively costly, disputes would never arise, and cooperation would be expected to evaporate. In the instance of incomplete information with costless filing, disputes would occur in equilibrium whenever an AD action was taken. In the most realistic circumstance, that of incomplete information and nonprohibitive filing costs, disputes would arise only when the number of AD actions exceeded their (common) expectation. This provides a conceptual explanation for the observations of Tarullo (2002) and Bown (2005) that ADA disputes are infrequent.

This paper develops a theory, consistent with empirical evidence, of trade agreements as the exchange of market access. The WTO dispute settlement process is discussed in this context. The role of that process is neither to deter nor to punish violations of trade agreements, but to maintain reciprocity.

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The WTO dispute settlement process is an improvement to the original GATT dispute settlement mechanism. However, it fails to assure a timely implementation and enforcement of the dispute settlement body (DSB) recommendations. To this date, the issue of mandatory enforcement is still open to interpretation. The number of ‘matters’ that have been subject to WTO dispute settlement stands at 266 over the 1995–2006 period. The number of implementation disputes has increased since 1998 and stand at 34 as of January 1, 2007. This chapter reviews the process of dispute settlements and enforcements since 1995 and to argue for the interpretation of ‘WTO agreements’ as ‘binding contracts’ whose breach must be evaluated as either ‘efficient’ or ‘non-efficient’ when discussing enforcement. In this context the non-compliance issue may be viewed as an ‘efficient breach’ where the only efficient remedy is a ‘fine’ rather than the usual practice of ‘suspension of concessions or other obligations’ to the Respondent. What sets our approach apart from earlier discussion is that it does not view ‘suspension of concessions’ as a sufficiently burdensome and efficient sanction. A ‘fine’ on the other hand may serve as a ‘buy out’ of a Respondents WTO obligations, and can be transferred to the negatively affected domestic producers in the Complainant's market as compensation for losses.

The appropriateness of retaliatory trade measures in the World Trade Organization dispute settlement process have increasingly come under scrutiny in recent years. Several Members and commentators alike have recommended large-scale amendments to the Dispute Settlement Understanding (DSU) to provide alternatives to retaliatory measures, with the most notable including compensation, collective retaliation, and increased special and differential treatment for developing countries and/or widespread loss of privileges for non-conforming respondents.

Unfortunately, many of the proposals failed to first identify the aims and objectives of the retaliatory phase, or even of dispute settlement more generally. This chapter takes a more holistic approach in its analysis of whether any of the current proposals will improve (or harm) the system. In doing so, this chapter will first assess the effectiveness and appropriateness of retaliatory trade measures by evaluating the goals and objectives in which it is designed to achieve. It will then evaluate some of the more prominent proposals for amending the DSU under the same framework. Taking such an approach will allow for a more comprehensive review and will reveal not only the problems with retaliatory trade measures, but also its positive aspects, and not only the positive aspects of the suggested alternatives but also where they may be detrimental to the system.

Limited participation of least developed countries (LDCs) in the WTO's dispute settlement system has been the focus of intensive debate among WTO scholars, diplomats and, in particular, WTO lawyers. Central to this debate are the major hurdles (financial and political) that LDCs are generally perceived to face in using the existing system of remedies in the WTO system to enforce compliance. Of the two existing compliance enforcement mechanisms, the first – compensation – is often unrealistic because the WTO Member whose measures have been found to be WTO inconsistent has to agree with it; while the second – retaliation (i.e., the suspension of concessions with regard to the non-complying Member) – is a costly and in many ways counter-productive “shooting oneself in the foot” remedy that LDCs in particular can usually ill afford.

This chapter briefly discusses proposals for reform that have been proposed to alleviate these problems. The chapter then reviews two additional instruments that LDCs could pursue to improve their ability to enforce compliance and make the WTO dispute settlement system a more viable instrument: limited use of direct effect; and increased use of the instrument of publicity and public relations, including through civil society. These instruments, whether independently, or in combination with existing mechanisms and other new compliance enforcement measures, could provide useful tools for the WTO's poorest Members to increase the chances for pay-off from WTO litigation and for compliance with WTO law by larger and more powerful trading partners.

Among the primary suggestions for reform of the Dispute Settlement Understanding (DSU) of the WTO has been remedies for noncompliance. Prior literature has considered remedies in the context of deliberate breach of commitments. The WTO increasingly has, however, been negotiating commitments in subjective areas of policy. Thus, we provide a model of the DSU under which members' interpretations of concessions differ. This induces disputes regarding violation of commitments.

The Dispute Settlement Body (DSB) has promoted compliance primarily through authorization of retaliation (prospective punishment) after expiration of a reasonable period of time for the implementation of a verdict. As has been noted, this does not compensate a complainant for a violation of obligations and enables the respondent to circumvent punishment for imposing a cost upon a member of the WTO by reforming its offending policy reasonably promptly. We consider retrospective penalties (compensation for a loss) with and without reinforcement by retaliation as alternative enforcement mechanisms and find that a simple retaliatory punishment scheme is preferable. A penalty is unenforceable, as a member that is unwilling to reform its policy after an adverse judgment can decline to provide compensation. A penalty reinforced by retaliation can reduce compliance relative to a simple prospective punishment by raising the cost of abiding by the judgement.

Remedies also affect the negotiation of commitments. Members are more willing to make and less willing to accept unenforceable commitments. In this regard, the simple prospective punishment scheme is preferable.

Subject Index

Pages 483-489
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Cover of Trade Disputes and the Dispute Settlement Understanding of the WTO: An Interdisciplinary Assessment
DOI
10.1108/S1574-8715(2009)6
Publication date
2009-02-01
Book series
Frontiers of Economics and Globalization
Editor
Series copyright holder
Emerald Publishing Limited
ISBN
978-1-84855-206-7
eISBN
978-1-84855-207-4
Book series ISSN
1574-8715