An economic analysis of the WTO's dispute settlement system

Under the World Trade Organization's (WTO) current dispute settlement system (DSS) the utmost threat to a non-complying offender of a trade agreement is posed by the retaliation of the victorious complainant. Several scholars argue that the smaller and poorer a country is, the more difficult a country finds it to implement retaliatory measures and to bear the costs of a lawsuit. Hence, it may be conjectured that this retaliation based enforcement exhibits a disadvantage for smaller and poorer countries who seek to enforce a larger trading partner's compliance. Moreover, larger and wealthier countries may anticipate their less powerful trading partners' inability to retaliate effectively. The issue is taken up in a tripartite analysis of this dissertation. Initially, an empirical chapter explores the link between a country's economic power and its participation in the WTO's DSS. Therefore, a simple sequential game of dispute settlement is employed in order to set the stage for a binary regression model. The regression uses an array of variables of economic power to explain a country's decision whether or not to file a complaint. The results show that a country is more likely to file a complaint if (i) it has a high income, (ii) its trading partner has a low income,(iii) the trade value of the commodity at stake is significant, and (iv) its retaliatory capacity is substantial. The subsequent chapter sets up a two country model in order to analyze the comparative static effects of a reduction in litigation costs. The results are mixed. While the compliance of less powerful countries may be improved, more powerful countries may be led to committing even more severe offenses than before. Another proposal for reform suggests to allow retaliatory rights to be traded between countries. The effects of this proposal are analyzed in Chapter 4 (joint work with Mathis Klepper) by means of a three country model. The results show that tradable retaliation is able to improve WTO members' compliance with their trade policy commitments, especially towards less powerful trading partners.


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