Indisputably Essential: The Economics of Dispute Settlement Institutions in Trade Agreements

Abstract

Economic theory has made considerable progress in explaining why sovereign countries cooperate in trade. Central to most theories of trade cooperation are issues of self-enforcement: The threat of reprisal by an aggrieved party maintains the initial balance of concessions and prevents opportunism. However, economic scholarship has been less coherent in explaining why countries choose to settle and enforce their trade disputes with the help of an impartial third party, a "trade court". Typically, economists focusing on the purpose of trade agreements have assumed away the very reasons why institutions are needed, since under standard assumptions, neither defection from the rules nor disputes are expected to occur. This paper is a step towards the formulation of a coherent economic theory of dispute settlement. It challenges traditional models of enforcement (primarily concerned with acts of punishment) for being insufficient in explaining the existence of dispute settlement institutions. We perform a comprehensive analysis of the economics of dispute settlement institutions and demonstrate to what extent the literatures of trade cooperation and dispute institutions are (and should be) interlinked. On the basis of these theories, we show that dispute settlement institutions in trade agreements may assume a variety of roles, including that of an information repository and disseminator, an honest broker, an arbitrator and calculator of damages, an active information gatherer or an adjudicator.

Trade Gains from Legal Rulings in the WTO Dispute Settlement System

“…The WTO agreements though, as international contracts, are endogenously incomplete due to various uncertainties and country-specific contingencies (Maggi and Staiger, 2011). Nevertheless, many believe that the WTO DSB and its rulings fill up lacunae in the endogenous incompleteness of the judicial WTO system (Ceva and Francasso, 2010; Keck and Schropp, 2008; Maggi and Staiger, 2011). In practice, various factors affect dispute settlements and enforcement of rulings for subsequent economic outcomes under the WTO DSB.…”

Institutional factor in international economic activity of region and its socio-economic development

“…Both native [10,20,21] and foreign [22,23] researchers underline a high role of international economic agreements. But they are studied as a rule on the state level.…”

Rice Age: Comments on the Panel Report in Turkey – Measures Affecting the Importation of Rice

“…The second premise on which L&E approaches to judicial activism are founded is that dispute settlement is more than simply punishment. 89 Whereas traditional formal economic analysis of trade agreements tends to focus on the self-enforcement capability of contracting parties, 90 various L&E contributions have advocated a more nuanced stance : Keck and Schropp (2008), future environmental contingencies, bounded rationality, limited resources, or simply mishap -or a mix of the above -make the WTO an inherently incomplete contract. Schropp (2009: section 4.3) assesses in detail the sources of contractual incompleteness in the WTO.…”

“…It wrongly prohibits nonperformance in situations where a complete contingent contract would mandate welfare-enhancing ex post adjustment (gaps of this sort are ‘Type-II errors’ or ‘false negatives’).The second premise on which L&E approaches to judicial activism are founded is that dispute settlement is more than simply punishment 89 . Whereas traditional formal economic analysis of trade agreements tends to focus on the self-enforcement capability of contracting parties, 90 various L&E contributions have advocated a more nuanced stance: Keck and Schropp (2008), for example, contend that enforcement really is a function of two variables: enforcement capacity and enforceability , whereby enforcement capacity is the ability to reciprocate credibly against a violation of the terms of the contract 91 . Enforceability of a contract is another vital determinant of enforcement.…”