The Economics of Permissible WTO Retaliation

Abstract

WTO arbitrators rely on economics to establish the permissible retaliation limits authorized by the Dispute Settlement Understanding (DSU) which arguably serves to enforce the overall agreement. We examine how theoretical and quantitative economic analysis has and can be used in this stage of the DSU process. First, we identify, characterize, and categorize the major classes of disputes -e.g., those affecting import protection versus export promotion -and use the Bagwell and Staiger interpretation of the WTO principle of reciprocity to provide a theoretical framework that arbitrators can use to identify the maximum level of retaliatory countermeasures. Second, we allocate each of the ten DSU arbitrations that have taken place thus far into one of these categories and compare the arbitrators' actual approach with the theory. Third, we use this framework to identify three crucial elements to the arbitrators' decisionmaking process for each case: i) the formula that they decide to adopt for identifying appropriate countermeasures, ii) their political-legal-economic decision on a WTOconsistent counterfactual to use to implement the formula, and iii) the quantitative methods they use to necessarily construct the (unobserved) WTO-consistent counterfactual. We examine not only the arbitrations that have taken place thus far, but our approach also illustrates a template for many additional types of arbitrations likely to take place under the DSU. Finally, in the disputes in which this reciprocity approach has not been used, we identify procedural difficulties that arbitrators confront thus highlighting the constraints that hinder their use of economic analysis in practice.

Trade Agreements and Enforcement: Evidence from WTO Dispute Settlement

“…And while stare decisis and binding precedent are not as robust a feature of WTO law as other legal settings, Bown and Ruta (2010) show that the interpretations of the arbitrators in the EC -Banana Regime and EC -Beef Hormones disputes that limited retaliation to the level defined by the Bagwell and Staiger interpretation of reciprocity were not one-time events. They provide a detailed examination of the decisions in the 10 formal WTO disputes taking place between 1995 and 2008 that led to the phase in which the WTO arbitrators authorized and articulated retaliation levels and suggest that WTO arbitrators have consistently sought to define limits to authorized retaliation in a manner similar to this interpretation of reciprocity.…”

“…The subsequent analysis is therefore motivated by insights from the underlying Staiger (1999, 2011) theory on reciprocity and its empirical implications for original trade agreement negotiations combined with recognition that WTO jurisprudence interpreted retaliation limits similarly in formal dispute settlement (Bown, 2002;Bown and Ruta, 2010). Our approach examines whether the empirical evidence of the Bagwell and Staiger (2011) trade agreement setting extends to the empirical setting of trade agreement enforcement.…”

Dispute Settlement at the WTO: Impacts of a No Deal in the US‐Brazil Cotton Dispute

“…Source: Bown and Ruta (2008). 11 Note that the analysis in Figure 3 is based on partial equilibrium assumptions and thus might not be best suited for determining reciprocity compensation in this case.…”

“…C. LAKATOS AND T. WALMSLEY As pointed out above, based on the principle of equivalence, retaliation by Brazil has to equal the damage caused by the prohibited export subsidy. More specifically, permissible Brazilian retaliation should correspond to the volume of distorted trade (Q 1 ÀQ 0 ) at the original export price P 0 , represented by the shaded area in Figure 3 (Bown and Ruta, 2008). Now assume that Brazil chooses to retaliate by introducing prohibitive tariffs against US exports.…”

“…Now assume that Brazil chooses to retaliate by introducing prohibitive tariffs against US exports. Equation (1) defines the value of permissible retaliation under the principle of equivalence (Bown and Ruta, 2008):…”