Originally from: The WTO: Governance, Dispute Settlement & Developing Countries
The WTO: Governance, Dispute Settlement & Developing Countries-Electronic
Chapter 40 - Preview Page
Remedies in the World Trade Organization: An Economic Perspective
The WTO dispute settlement system represents a major achievement of the Uruguay Round. By most accounts, this system has worked very well. In the ongoing DSU review, WTO Members are considering proposals that might lead to further improvements in the functioning of the dispute settlement system. Many of these proposals concern different kinds of remedies that might be used in response to a violation of WTO obligations.
An evaluation of proposals for remedy reform requires a perspective as to the purpose of the WTO. In this essay, I describe and then apply the terms-of-trade theory of trade agreements. I argue that this theory offers a coherent interpretation of the purpose and design of the WTO. The theory also offers novel insights with respect to proposed reforms of the WTO remedy system.
In Section I, I argue that the terms-of-trade theory provides a rationale for trade agreements and an interpretation of key GATT/WTO design features. Next, in Section II, I apply this theory and consider the extent to which WTO remedies facilitate efficient breach. I conclude that a theoretical argument can be made in favor of a modified dispute settlement system that allows for disproportionate retaliation, particularly in response to serious violations. At a practical level, however, I argue that important measurement problems would significantly limit the feasibility of such an approach. The current system, which is based on commensurate retaliation—that is, the suspension of equivalent concessions—may sometimes allow for inefficient breach, but arguably works well in an overall sense. I suggest as well that rule changes that encourage greater use of monetary compensation may be attractive.
About the Author:
Kyle Bagwell is Kelvin J. Lancaster Professor of Theory in the Department of Economics and Professor of Finance and Economics in the School of Business at Columbia University.