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Title
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World Trade Organization and Judicial Enforcement of International Trade Law
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Author
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Pelc, Krzysztof J.
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Research Area
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Social Processes
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Topic
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International Relations
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Abstract
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The Dispute Settlement Understanding (DSU) of the World Trade Organization (WTO) is an international court of unprecedented ambition. This essay examines why countries agreed to delegate as much power as they did to this international legal body, by looking to the rise of US unilateralism during the 1970s. I then offer an overview of the DSU's functioning, which concludes that its effectiveness derives more from the way it forces countries to negotiate in the shadow of the law than from the threat of material sanctions following noncompliance. Finally, I assess some widespread concerns about how developing countries fare in the system. I show that while there does exist a cleavage between rich and poor countries in dispute settlement, it does not lie where conventional wisdom often has it.
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Identifier
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etrds0390
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extracted text
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World Trade Organization
and Judicial Enforcement
of International Trade Law
KRZYSZTOF J. PELC
Abstract
The Dispute Settlement Understanding (DSU) of the World Trade Organization
(WTO) is an international court of unprecedented ambition. This essay examines
why countries agreed to delegate as much power as they did to this international
legal body, by looking to the rise of US unilateralism during the 1970s. I then offer
an overview of the DSU’s functioning, which concludes that its effectiveness derives
more from the way it forces countries to negotiate in the shadow of the law than
from the threat of material sanctions following noncompliance. Finally, I assess
some widespread concerns about how developing countries fare in the system. I
show that while there does exist a cleavage between rich and poor countries in
dispute settlement, it does not lie where conventional wisdom often has it.
INTRODUCTION
It is invariably described as the workhorse, the crown jewel, and the cornerstone of the international trade regime. The Dispute Settlement Understanding (DSU), which is the legal body at the center of the World Trade
Organization (WTO), has become the poster child for the concept of legalization in international politics. And, with good reason. There is arguably
no other example of as many countries delegating as much decision-making
power to an international legal body over the enforcement of binding country commitments. Since its creation in 1995 alongside the WTO, the DSU
has developed a sophisticated jurisprudence, leading some to argue that in
contradistinction to the common belief about international law, the WTO features de facto binding precedent, whereby past rulings constrain current ones
(Bhala, 1998–1999). The rate of country compliance is high, and most cases
are resolved before even making it to a ruling (Busch & Reinhardt, 2000). At a
time when the Doha Round is at a standstill, and multilateral negotiations are
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.
1
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
effectively dead, litigation through the DSU may be the only means countries
still have at their disposal to further liberalization (Goldstein & Steinberg,
2008; Steinberg, 2009).
Yet, the DSU is not free of criticism. Observers have denounced the dispute
mechanism for implicitly excluding poor countries, and for being a weapon
of the powerful (Steinberg, 2002; Heisenberg, 2007). Similarly, others have
claimed that the DSU limits internal transparency within the membership,
by holding proceedings behind closed doors, insulated from other member
countries, let alone nongovernmental organizations (NGOs) (Smythe &
Smith, 2006). In short, the greatest complaint against the DSU has been over
a participation deficit.
This essay is concerned with accounting for both the successes and critiques of this unique legal body. Specifically, the author asks, how has such
an ambitious international enforcement mechanism come about? Why have
powerful countries agreed to delegate power to foreign judges deciding over
the legality of their trade policies? What are the factors accounting for the
DSU’s effectiveness, as measured by its impact on country behavior? And
finally, to what extent are the prevalent concerns about the DSU warranted?
To offer a preview of the author’s claims, it is argued that the success of the
WTO lies in its least heralded functions. Having no true enforcement power
of its own, the DSU relies entirely on self-enforcement. The reason this is possible in an anarchic international environment is that countries have a strong
incentive to avoid a court’s legal condemnation. Countries settle disputes so
as to avoid being branded violators within a forum of countries with whom
they interact continuously.
By contrast, the institution’s last resort, retaliation, has drawn disproportionately much attention in the literature. Yet, it is not the threat that compels
compliance with trade rules. Retaliation is necessarily flawed; the strength
of the system lies in how it allows countries to bargain in the shadow of
the law (Busch & Reinhardt, 2000). This view is borne out by the success
of dispute settlement during the General Agreement on Tariffs and Trade
(GATT) period (1947–1994), where the legal function of the institution was
much weaker, yet still met with considerable success.
And, while critics are right to worry about the distributional effects of the
DSU, the sources of these disparities are often not found where they are
thought to be. Rather than a lack of market power, it is poor legal capacity
that hampers the participation of developing countries (Busch, Reinhardt, &
Shaffer, 2009; Davis & Bermeo, 2009). Not only are these two variables not
perfectly correlated, but the solutions to addressing the issue naturally differ
according to which is at fault, and so the distinction is a valuable one. Similarly, the litigation record shows no disadvantage for poor countries: poor
countries win as many of their cases as do rich states. The difference, rather,
World Trade Organization and Judicial Enforcement of International Trade Law
3
is in their settlement record (Busch & Reinhardt, 2003). And, as in most court
systems, litigation is inefficient, and the greatest concessions tend to be made
before the panel is ever convened. In other words, developing countries do
less well on average, not because they win fewer cases, but because they settle too few of them. As a result, they bring cases with high legal merit to
litigation, yet they are likely to get fewer concessions, on average.
Attention to the DSU peaked over a period during which the political
science literature attempted to account for why sovereign states would
ever tie their hands at the international level (Keohane, 1982; Milner,
1997; Ikenberry, 1999). When scholars began testing their claims on real
institutions, they naturally turned to the GATT/WTO, and its dispute
resolution organ. The trade regime offered them a case where countries
were making deep, credible commitments, and more importantly, it offered
data. Scholars have access to highly disaggregated product-level data on
countries’ commitments (e.g., maximum tariff levels) and their subsequent
behavior (trade volume), the likes of few other issue areas can offer. While
the result has been a rich body of work, the availability of data has been both
a boon to analysis and its greatest challenge. Often, the wide availability of
data leads to a search for correlational findings that do little justice to the
institution itself and to the complexity of its rules.
This essay proceeds as follows. The author begins by offering a historical
overview of the development of the DSU, which is where the answer to how
such an ambitious international legal system came about really lies. In Part 2,
the author outlines the anatomy of the contemporary DSU, and ask: where
does the effectiveness of the DSU as a legal body come from? Part 3 addresses
the most common criticism of the DSU, namely how it limits access to rich
countries. Finally, in Part 4, the author concludes by taking a step back to
assess the most progressive strands of the literature on dispute settlement
and the possible challenges this literature faces in the years to come.
A BRIEF HISTORICAL ACCOUNT
Dispute settlement procedures in the trade regime had been envisaged since
negotiations over a multilateral trade agreement in the late 1940s. Yet, the
entire legal function of the trade regime under the GATT was described in a
couple of short clauses. These have been expanded into a sophisticated mechanism in the WTO’s DSU, the full meaning of which has been further clarified
in a large body of rulings by WTO panels and the Appellate Body (AB).1 In
this essay, the author offers an overview of the passage from the GATT to the
1. For an overview of WTO jurisprudence, see https://www.wto.org/english/res_e/booksp_e/
analytic_index_ e/analytic_index_e.htm, last accessed 10 May 2013.
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
WTO and attempts to address this fundamental puzzle: how did countries
agree to delegate such power to the highly legalistic court in place today?
The GATT’s dispute settlement mechanism was effective—a point the
author returns to—yet it suffered from considerable weaknesses in its
design. Although recommendations of the panel were considered “binding”
once they were adopted by the membership, this concealed a flaw. Most
decisions taken in the organization from the beginning of the institution
were arrived at by consensus, and dispute settlement was no exception.
This meant that both litigants, including the “losing” state, could block
the proceedings at any point. While countries were obliged to consult, the
request for a panel could be blocked; if the panel was allowed to convene,
parties could block the results of the panel’s recommendations if they did
not like what was coming. In such a case, they were not bound by the panel’s
recommendation in any way. Procedures became less ad hoc through time,
and emerging practices were first codified during the Tokyo Round, and
continued to evolve incrementally thereafter.2 Yet, few countries would
have predicted the shape and ambition of the legal body that in 1995 would
replace the GATT dispute settlement mechanism.
The option to block unfavorable legal proceedings went away with the
inception of the DSU. The GATT’s positive consensus rule, which required
everyone to agree for the proceedings to continue, now shifted to negative
consensus, where everyone, including the winning party, would have to disagree with the ruling for the proceedings to halt. Such “automaticity” in the
formation of panels ensures that countries taken to court today cannot openly
spurn challenges to the legality of their trade policies. Similarly, if a request
for retaliation is granted, it cannot be blocked by a recalcitrant defendant. The
WTO’s DSU also added a standing body of judges, the AB, which reviews the
rulings of panels, and enforces the continuity of legal reasoning across cases.
How might we explain a series of such significant institutional changes? How
did an institution go from a diplomatic club to a hard law institution, with
automatically adopted rulings, tight deadlines, precise rules, and a higher
court with great authority? The answer lies most clearly in a now largely
defunct piece of US legislation from the 1970s.
The 1970s were precarious times for the US economy. An overvalued dollar,
in combination with independent economic growth in Asia, led to a growing
US trade deficit. Japan, especially, was seen as a looming threat on the horizon, one that was bringing about the deindustrialization of the United States.
There was widespread perception in Congress that US trade partners were
cheating, by enacting unfair trade barriers and subsidizing production. The
2. Culminating in what is referred to as the 1989 “improvements,” which ushered some of the changes
that would be featured more formally in the DSU 6 years later, on an experimental, provisional basis
(Stewart and Callahan, 1993).
World Trade Organization and Judicial Enforcement of International Trade Law
5
playing field had to be leveled, and the trade regime was not up to the task.
The United States was principally frustrated with the lax timelines for GATT
cases and the ever-present possibility of blocked panels.3 The resulting frustration led to the adoption in Congress of Section 301 of the 1974 Trade Act.
Section 301 was a domestic legislative tool that mimicked the procedures of
a formal GATT complaint, yet did so entirely within the United States, and
on a faster clock. Following either petitions by a domestic industry alleging
illegal trade barriers, or self-initiation by the United States Trade Representative (USTR), the government would launch an investigation. If the investigation led to a finding of violation against a trade partner, the executive was
expected to automatically retaliate against the violating country by raising
US trade barriers.
Section 301 held obvious advantages from the point of view of the United
States. It was fast, playing out on a much swifter schedule than the analogous
GATT procedures; it was not prone to blocked legal findings by the defendant; and retaliation was largely unconstrained. On the downside, it enjoyed
none of the legitimacy flowing from GATT multilateralism—this is the aspect
of Section 301 that trade partners reviled the most. It is difficult to overstate
just how appalled US trade partners were at the US policy. GATT representatives branded the US legislation as a “Damocles’ sword,” an “irreparable act
of folly,” a “commercial nuclear bomb,” and “war against all” (Pelc, 2010, 69).
Hudec, the leading American theorist of the GATT, described Section 301 as
a mechanism where “the United States plays both prosecutor and judge …
in which the defendants are tried in absentia” (Hudec, 1990, 114).
Not coincidentally, just as negotiations over the DSU got underway in
1987, the United States sharpened Section 301, openly targeting presumed
violations in countries that held persistent trade surpluses with the United
States.4 The United States was pushing both the unilateral and the multilateral options simultaneously, which may come as some surprise. Indeed, the
United States was the greatest proponents of a formal dispute settlement
mechanism that would address the shortcomings of the GATT.5 Yet in
hindsight, the two positions are not only compatible—they can be said to
have reinforced one another.
The eagerness of the United States to adopt a hard law enforcement mechanism came from its conviction that it would most often be sitting in the
complainant seat (Elsig, 2013). There was a strong belief in Congress that the
United States was upholding the rules that its trade partners were flouting.
3. See GATT 1987 doc MTN.GNG/NG13/W/3, where the US representative complains about
“stalling,” “delaying tactics,” and the ever-present risk of blocked panels.
4. This change was formally contained in the 1988 Omnibus Trade and Competitiveness Act.
5. GATT doc MTN.GNG/NG13/W/3, April 1987. See also Elsig (2013).
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
This prevalent view can account both for the United States’ position on an
ambitious DSU, and for its resorting to unilateral means of enforcement.
US trade partners, for their part, faced a clear trade-off. Many countries
were uneasy with the legalism of an ambitious DSU, yet they were far more
uneasy with unchecked US unilateral enforcement. In the end, WTO members accepted the ambitious legal character of the DSU in exchange for the
United States renouncing the unilateral option it had built up before over
two decades (Pelc, 2010). In a sense, the creation of the DSU amounts to a
small-scale rendering of the kind of “strategic restraint” that Ikenberry (1999)
describes the United States going through in the wake of the Second World
War—with the notable difference that in this case, the United States itself built
up the unilateral threat, making clear to its trade partners what the alternative
to deep multilateral cooperation would have been.
On this basis, one could even view the threat of unilateralism as a vital
ingredient to the success of the multilateral court. In this vein, Hudec (1990)
wrote of a possible case for Section 301 as “justified disobedience,” if it could
jolt useful GATT reform, or obtain globally beneficial trade liberalization.
Not surprisingly, such views were most prevalent among US scholars and
policy-makers. Whether or not the normative argument for Section 301 is
defendable, these arguments offer a misleading impression. While in hindsight, Section 301 may be justified by its outcome, it is unlikely that this was
its original motivation, which is more likely found in Congress seeking quick
solutions to provide market access to special interests. When a multilateral
dispute settlement mechanism that fixed the GATT’s flaw became a possibility,6 American legislators progressively abandoned their unilateral fallback
weapon.7 The widespread legitimacy of the DSU may have appeared the better option, compared against a reviled US legislative tool. The outcome was
an ambitious international court that few observers could have predicted a
decade before.
AN ANATOMY OF THE DISPUTE SETTLEMENT UNDERSTANDING
How does dispute settlement at the WTO actually work? Its defining feature is that it is decentralized. This distinguishes the WTO from domestic
courts, or supranational enforcement, such as one finds in the European context, which feature some centralized prosecutorial function. By contrast, no
WTO dispute begins unless a member-country initiates it. As a result, all disputes start when a country considers that its rights under an agreement have
6. Automaticity was sold to Congress in testimony over the Uruguay Round as leading to faster retaliation (Elsig, 2013).
7. As it turns out, precisely because of the pushback that Section 301 inspired, it was less than fully
effective at changing trade partners’ policies, as countries dug in their heels to resist American unilateralism (Pelc, 2010).
World Trade Organization and Judicial Enforcement of International Trade Law
7
been flouted, or that its interests have been otherwise harmed as a result of
the trade concessions it has offered under the WTO. For the most part, disputes are responses to domestic interest groups that lobby to demand better
market access abroad (Davis, 2011). States can be brought to dispute settlement if they are thought to be illegally subsidizing production for export; if
they have raised trade barriers in excess of their allowed ceilings; if they have
erected health and safety standards that favor domestic producers over foreign exporters; if they have offered preferential treatment to one trade partner
over others; or if they have favored domestic firms in government contracts.
Yet, the biggest portion—nearly half—of all WTO disputes is concerned with
the use of trade remedies (Pelc, 2011). These include antidumping and countervailing duties, and safeguards. They are broadly termed “flexibility provisions,” and they effectively specify the circumstances under which countries
can temporarily flout WTO obligations when failing to do so would cause
harm to domestic industries (Pelc, 2009). The use of trade remedies is governed by specific rules, and when countries misapply these rules, they can be
taken to task at the DSU. This often occurs.
In keeping with its decentralized character, the WTO has no enforcement
power to speak of. It merely produces legal rulings, which are referred to
as “recommendations,” which are considered binding on states. Yet, it cannot
force compliance with them. The institution itself cannot punish persistent
violators—in a way that other international institutions, such as the International Monetary Fund (IMF), can, for example, by modifying conditions
for subsequent loans. All that the institution can do is authorize the complainant country to “suspend concessions,” by raising barriers to the level of
harm incurred.
CONSULTATIONS
Few disputes—less than 1%—ever result in retaliation. In fact, a minority of
cases (about 45% of all filed disputes) even make it to the panel. Disputes start
with a mandatory 60-day period of “consultations.” Consultations existed
during the GATT period as well, and they attest to how the DSU is still primarily concerned with settlement. Consultations occur behind closed doors,
and this is essential to their success. Indeed, countries are much more likely
to reach an agreement if they do not need to pander to powerful domestic
interest groups while negotiating. Much of the DSU is the recognition of the
fact that governments must negotiate as much with their domestic groups as
with one another. In this way, consultations shield negotiators from domestic
demands. There is a cost to this insulation, to which the author returns below.
Consultations are not completely closed off to nonlitigants. Other WTO
members can enter the room as “third parties” if they have a substantial trade
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
interest in the dispute at hand, as when they are affected by the barrier at issue
(Busch and Reinhardt, 2006). Yet, this only happens if both the complainant
and the defendant agree to have those other countries present. Complainants
welcome such third parties in about half of all cases, and defendants rarely
block them, for the good reason that a blocked third party can always bring
a suit of its own, which leads to greater trouble for the defendant (Johns and
Pelc, forthcoming). The one most telling finding about the effect of privacy
on negotiations is that the greater the number of third parties present in the
room, the less likely the odds of an agreement are (Busch and Reinhardt, 2006;
Davey and Porges, 1998). Indeed, third parties add voices and issues to the
disputes, and they may also create an incentive on the part of litigants to posture, to “act tough,” and demonstrate resolve with an eye toward subsequent
disputes (Stasavage, 2004).
The high settlement rate within the DSU is good news. Litigation is an inefficient outcome (Gilligan, Johns and Rosendorff, 2010): it entails considerable
legal and bureaucratic costs, and from the point of view of litigants, it throws
a spotlight on the underlying issue. Litigants no longer enjoy insulation from
domestic interests, as the outcome of litigation, the panel report, is always
made public, together with both litigants’ full arguments. Governments can
no longer claim that they wrought a “hard won deal,” and misrepresent any
losses as wins. The panel report lays it out for all to see. For these reasons,
concessions on the part of the defendant are most likely to take place prior
to the ruling. This, indeed, is the sign of a functioning legal system: most of
the action takes place in the shadow of the law.
These beliefs are empirically supported. On average, complainants are
more likely to obtain concessions if they can reach a settlement than if the
case moves onto litigation and results in a ruling, even if the complainant
wins that ruling on all counts (Busch and Reinhardt, 2000). Indeed, what
pushes respondents to concede is the benefit of doing so privately, which
allows governments to shape the perception of these concessions domestically. That, together with governments’ desire to avoid the condemnation
that comes with a ruling by a legitimate court, explains why the odds of
agreement are greatest before the panel hands down a ruling. And, herein
lies the force of the DSU.
LITIGATION: PANEL AND AB REPORT
The trade regime effectively relies on self-enforcement. One reason this
is achievable in an “anarchic” international realm is that countries have a
wealth of information about each other’s behavior. When there is reason
for ambiguity over the legality of a given country’s policies, litigation is a
means of resolving it. Indeed, one of the main functions of panel and AB
World Trade Organization and Judicial Enforcement of International Trade Law
9
reports is to clarify the meaning of WTO rules in a way that leads to greater
predictability.
Another reason why self-enforcement is achievable is that governments
continually interact with one another: the trade regime, after all, is nearly
70 years old. And, while it remains the prerogative of a sovereign country to
ignore a WTO ruling if it chooses, it does so at the risk that a subsequent ruling favoring it may be spurned in turn; that its demands will grow less likely
of being given into; and that the concessions it offers during trade rounds
will grow devalued. In short, countries join the institution knowing that in
some cases, its rules will work against it, but that on average, they will favor
the country—otherwise there would have been little sense in making binding
commitments in the first place. This is also the reason why despite the ability to block unfavorable rulings during the GATT, surprisingly few countries
availed themselves of this option over that half-century period. Just as countries can spurn rulings now, countries could block rulings then. In both cases,
they avoid doing so for analogous reasons.
What the desire to avoid normative condemnation entails is that defendants
will dig in their heels once an unfavorable ruling is handed down. Indeed,
there is little left to lose at that point. As Schelling had it, a threat that needs
to be exercised has lost all potency; it is an ineffective threat. As a result, concessions are most likely to occur at the prelitigation stage (Schelling, 1960).
Of course, whether cases proceed to litigation and result in a panel report
is not a random event. Some cases stand no chance of settling. Key disputes
such as US—Cotton, EC—Hormones, and US—Steel Safeguards are all disputes
where settlement was known to be unlikely: these disputes touch on such
sensitive issues that the domestic political costs of conceding, even behind
closed doors, would have been forbidding. Some disputes, in other words,
are launched knowing they will not settle. Moreover, it is likely that countries
sometimes file cases not principally for the sake of the aggrieved domestic
industry, but rather because they are seeking a favorable interpretation of
the rules (Pelc, 2013). Indeed, while international law does not recognize formally binding precedent, or stare decisis, there is growing reason to believe
that both countries and judges within the WTO act as though precedent were
binding, resulting in some form of de facto stare decisis (Bhala, 1998–1999). If
this is true, then countries may want to initiate cases with the sole objectives
of modifying their meaning in a way that favors them in the future.
Most cases that make it to a ruling are then appealed by one or the other
party. This is a step that did not exist during the GATT. It tells that countries
that “win” the panel ruling will often appeal it: once again, what matters is
not only the direction of the panel ruling, but the implications of its legal
reasoning for subsequent jurisprudence. The AB is the dispute settlement
mechanism’s thinking organ. While panelists are selected ad hoc from a pool
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
of some 400 individuals (Busch and Pelc, 2009), AB judges are a standing
body. As a result, the same individual judges see disputes over a long period
of time and are able to enforce continuity and coherence in panel rulings.
Insofar as precedents can be set in the WTO, they are most likely of being set
by AB judges, rather than panelists. The AB is dedicated entirely to assessing the validity of the appealed portion of a given panel report. It has no
fact-finding or remand power: it cannot collect additional information or ask
questions, and it cannot send a case back to a panel to do so.
If the defendant loses net of appeal, and the complainant perceives that the
policy at fault has not been remedied, the next step is a compliance panel,
where the same panelists from the panel report now assess a single question:
has the defendant followed the panel’s recommendations?8 If the defendant
is found not to have complied, then the complainant can ask for the authorization to retaliate.
RETALIATION
This final step, the DSU’s last resort, has preoccupied much of the literature
on dispute settlement in trade. One thing is readily agreed on: retaliation
serves no balancing function, insofar as it does not remedy the harm done
(Hudec, 2000, p. 22). In economic terms, it amounts to shooting oneself in
the foot. Indeed, there is considerable irony in a system built on the belief
that free trade is the optimal policy, which then allows aggrieved countries
to offset injury by raising tariffs in turn.
Adam Smith foresaw retaliation for what it was: economic folly in service
of potentially rational politics, belonging “not … so much to the science of
a legislator, … as to the skill of that insidious and crafty animal, vulgarly
called a statesman or politician” (Smith, 1937, p. 435). In other words, Smith
saw retaliation as justified only if it procured the desired change of policy
abroad, and having in and of itself no desirable effect at home. Although
nearly 250 years old, this view is not out-of-date. As the representative from
Ecuador put it recently, retaliation at the WTO “does not restore the balance
lost, [ … ] but rather tends to inflict greater injury on the complaining party,
as occurred in the banana dispute.”9 This is not the position of developing
countries alone. The EU has declared that “the use of suspension of trade
concessions involves a cost not only for the defending party, but also for the
economy of the complaining Member.”10
8. DSU Article 21.
9. Contribution of Ecuador to the Improvement of the Dispute Settlement System of the WTO, 2002,
TN/DS/W/9. The dispute being referred to is EC—Bananas, WTO/DS27.
10. WTO doc TN/DS/W/1.
World Trade Organization and Judicial Enforcement of International Trade Law
11
Despite these considerations, there has been disproportionately much
attention given to retaliation in the trade regime. This is perhaps not surprising. The self-proclaimed weakness of all of international law is a lack of teeth.
The avowed lack of “bail bondsmen, … blue helmets, … truncheons or tear
gas” (Bello, 1996) has meant that international courts had no real power to
affect state behavior. Retaliation is as close as the trade regime comes to such
power: the prospect of retaliation arms the WTO, albeit in a decentralized
manner. This has led to a focus on which countries have retaliatory capacity,
and which do not. In this view, countries that lack markets of value to the
defendant would be unable to compel a defendant to back down. And to
be sure, developing countries have long claimed that power asymmetry
means that they are unable to avail themselves of dispute settlement in
the same way as rich countries, since their final threat is not credible. Yet,
several factors should lead us to doubt that this is the whole story. First, the
possibility of cross-retaliation, where a complainant suspends concessions
in an area distinct from the one at issue in the dispute, has opened doors
to effective retaliation by poor countries against rich countries. Specifically,
the WTO has started allowing developing countries, such as Ecuador in a
complaint against the European Union, and Antigua in a dispute against
the United States, to suspend concessions in intellectual property rights,
making threats of retaliation far more potent. More importantly, the threat
most likely to drive behavior is that of an unfavorable ruling, rather than
the suspension of concessions, no matter how credible the latter may be.
The GATT period, where the trade system successfully resolved trade
conflicts, serves as a good evidence on this count. Despite any credible threat
of retaliation—since defendants could always block a case—the system
worked. It did so because it led countries to settle their disagreements, to
avoid being branded as violators.
CRITICISMS OF DISPUTE SETTLEMENT: PARTICIPATION
While the DSU has earned praise for its ability to enforce deep country commitments in an anarchic international environment, the institution has also
weathered its share of criticism. One of these critiques has been of particular concern: observers have claimed that developing countries are effectively
excluded from the system.11 One reason is that because they lack the capacity to retaliate, they have little power to compel rich country defendants to
concede, and thus seldom challenge their trade partners’ policies in court.
11. In a 2011 WTO meeting, the representatives of Bolivia, Cuba, Ecuador, and Nicaragua complained that “In practice, the WTO has become an organization that is not led by its Members, in which
decision-making based on facts is not governed by consensus, and negotiation meetings are not open to
participation by all Members.”
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Others claim that developing countries are at a disadvantage during litigation itself, since the complexity of trade law has meant that countries with
large, sophisticated legal teams hold an advantage. A related criticism is that
the institution lacks internal transparency. Just as with multilateral negotiations during trade rounds, most countries are kept outside of the room during WTO legal proceedings, even if their interests are at stake (Smythe and
Peter, 2006; Steinberg, 2002; Heisenberg, 2007). And neither domestic interest groups nor non-NGOs have any access to DSU hearings.12 Scholars have
begun to assess these beliefs empirically, and have come to some surprising
conclusions.
It is first worth mentioning that in many ways, the WTO compares favorably in terms of its transparency with, for instance, the other Bretton Woods
institutions. The public access to panel reports, and to the exact legal reasoning that motivated judicial decisions, constitutes a unique window on
decision-making in the institution. The comparison is less favorable with
other courts, such as the European Court of Justice, where hearings are open
to the public.
Partly in reaction to such criticism, the WTO has championed the possibility
of third party participation. Third party status, whereby nonlitigant countries
can join a dispute from its very beginning, is one means of allowing developing and least-developed countries, especially, to be in the room when an
issue they may have a stake in is being negotiated. It is also a means for countries to learn the intricacies of trade law, and build up their legal capacity in
so doing (Busch, Reinhardt and Shaffer, 2009). And there is evidence that the
presence of third parties has a positive effect on the content of settlements.
While complainants are found to capture a disproportionate portion of gains
from settlement when consultations are conducted entirely in private, this is
not the case when third parties are present (Kucik and Pelc, 2013). In those
instances, the complainant, on average, gains no more than the remainder
of the membership. Third parties, in other words, play an enforcement function, by ensuring that any gains reached in a settlement are extended to the
remainder of the membership, as per DSU rules.13
There is a catch. This beneficial effect of third parties pertains to those disputes where a settlement is reached. Yet, it turns out that the presence of third
parties also affects the odds of that settlement ever being reached. Despite
all the benefits of third party participation, this step toward greater inclusivity thus comes at a cost. The presence of an audience makes settlement
significantly less likely (Busch and Reinhardt, 2006; Davey and Porges, 1998;
12. Oxfam International, WWF International, together with eight other NGOs, released a 2003 memo
claiming that the WTO features “proliferation of ‘informal’, undocumented and exclusive meetings,
amounting to lack of transparency and inability of many countries to participate.”
13. See Article 3.2 of the DSU.
World Trade Organization and Judicial Enforcement of International Trade Law
13
Stasavage, 2004). There is enough incentive to posture for the sake of these
other member-states that the odds of reaching agreement between the litigants decline precipitously as the number of other countries in the room
rises. In fact, beyond five third parties, the odds of agreement are effectively
nil (Busch and Reinhardt, 2006). In other words, if settlement is the goal of the
system, then greater inclusiveness through third party participation exerts a
cost. And this is the case even when the audience in the room is made up of
other countries, rather than NGOs and domestic interest groups.
The effect of third parties on the odds of prelitigation settlement, it turns
out, is a special concern for developing countries, who tend to attract the
greatest number of third parties. And, herein lies one of the true cleavages
between rich and poor countries in dispute settlement. Strikingly, it does not
lie in the odds of winning a case, which are statistically indistinguishable for
rich versus poor countries. The true difference, which is often overlooked,
is that on average, developed countries settle, and developing countries litigate. And given what we know about the odds of concessions in each of these
two outcomes, developed countries end up doing better, on average.
Overall, it appears that the main obstacle to recognizing legal merit, choosing the correct cases to file, and reaching settlement during consultations,
comes down to legal capacity, more than to market power, or income. Legal
capacity corresponds to the human and bureaucratic resources a country has
to invest in dispute settlement, and such questions as whether a country has
a permanent delegation in Geneva. And while developed countries naturally
tend to have greater legal capacity and experience, this is something that a
country can develop. Davis and Bermeo (2009) find that the odds of filing a
case grow as a country gains experience, and that such experience is gained
not only by acting as a complainant, but also by being taken to court as a
respondent. What this means is that certain countries are likely to emerge as
disproportionately active players in dispute settlement. Brazil, for instance,
ranks as the fourth most active initiator of disputes in the system, ahead of
far bigger and wealthier countries. It has invested a great deal in its legal
capacity, with powerful effects.
In sum, cleavages between rich and poor countries exist. Yet, they do not lie
where we often think. Success in dispute settlement hinges most of all on the
ability to assess the legal merit of potential cases, and to settle disputes in the
shadow of the law, before a ruling is handed down. Developing countries are
at a disadvantage in this respect, as they tend to settle less and litigate more.
Yet, scholars have shown that countries can learn to use dispute settlement
rapidly. Gaining legal capacity is more easily achievable than growing one’s
market power or retaliatory capacity. Finally, there are institutional solutions
to the participation deficit. The option of joining as a third party is beneficial,
as it allows poor countries to be present and participate in proceedings, to
14
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
voice their views and potentially affect legal outcomes, and to protect their
trade interests in so doing. Yet, third party participation also comes at a cost
to the institution: as diplomats know, audiences make agreement less likely.
There exists an observable trade-off between inclusiveness and the odds of
settlement, meaning that there is no easy solution to the participation deficit.
The challenge of the institution is to balance these competing objectives.
CONCLUSION
WTO dispute settlement is a success story of global governance. That,
together with the fact that there is a wealth of available data about country
commitments and their subsequent behavior, has naturally meant that the
institution has received a great deal of scholarly attention. In this respect,
the availability of rich data, at a highly disaggregated level, has been both a
boon and a challenge for scholarship.
Studies of the WTO have become especially prone to simple correlational
stories, where legal outcomes are regressed on country characteristics, with
little regard for the actual rules at issue. What this has also meant is that there
has been relatively little dialog between political science and legal scholarship. In this way, the promise of WTO research is still falling short of its mark.
As the notion that precedent in trade law can bind both countries and
judges gains greater acceptance, we are likely to see more attention being
paid to words. Law, after all, is a fundamentally rhetorical exercise: the
currently available datasets abstract from the richness of the legal texts and
the judicial rulings that interpret them. Political scientists, especially, need
to recognize that beyond the direction of a ruling, judges’ choice of words
is likely to matter for political outcomes. Judges’ use of judicial economy
(Busch and Pelc, 2010), countries’ appeals of favorable rulings, and the
importance paid to the WTO’s Analytical Index are all signs that the relevant
actors have recognized this fact14 ; scholars will gain from doing so as well.
Similarly, if the study of other international courts is any sign, greater
attention is likely to be paid to individual judges, especially appellate
judges (Voeten, 2008, 2007). In this respect, governments already appear to
know more than scholars, since a majority of disputes now end in deadlock
between the litigants over what panelists to agree on, and the Director
General routinely has to step in to make that choice for countries. In other
words, countries are acting on a past history of rulings in a way that scholars
have yet to recognize.
The WTO, and its dispute settlement body, is a rare example of a functioning international institution that appears to successfully bind country
14. https://www.wto.org/english/res_e/booksp_e/analytic_index_e/analytic_index_e.htm,
last accessed May 10th, 2013.
World Trade Organization and Judicial Enforcement of International Trade Law
15
behavior. This often makes it prone to misperception and resulting suspicion among popular audiences. Moreover, liberalization inevitably produces
winners and losers, and the latter often have an incentive to misrepresent the
institution’s function. As a result, students of international courts such as the
dispute settlement body of the WTO have a double mission. Not only must
they produce innovative research that can offer clues to improving the institution’s effectiveness and addressing its shortcomings, but they must also
communicate to popular audiences, to convey how constraints on government action can be welfare-enhancing, and to demarcate between misleading
concerns and real ones.
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KRZYSZTOF J. PELC SHORT BIOGRAPHY
Krzysztof J. Pelc is William Dawson Scholar and Associate Professor in the
Department of Political Science at McGill University.
His research examines the international political economy, with a focus on
international rules. He has written on participation in institutions, privacy
and publicity, optimal ambiguity, the impact of hard times on cooperation,
and the circumstances under which actors are allowed to break formal rules.
Much of this research looks specifically at the rules of the World Trade Organization (WTO). His work appears, among others, in International Organization, the American Political Science Review, World Politics, the International
Studies Quarterly, the World Trade Review, the British Journal of Political Science, the Journal of International Economic Law, and the Journal of Conflict
Resolution. His book manuscript, “Making and Bending International Rules”
addresses the means by which actors resolve the “architectural challenge” of
legal flexibility: how can we attain the benefits of flexibility, whereby countries are allowed to temporarily break the rules in hard times, while curbing
its abuse?
RELATED ESSAYS
Lawmaking (Political Science), Jamie L. Carson and Mark E. Owens
Judicial Independence (Political Science), Tom S. Clark
The Evolving View of the Law and Judicial Decision-Making (Political Science), Justine D’Elia-Kueper and Jeffrey A. Segal
Why Do States Sign Alliances? (Political Science), Brett Ashley Leeds
Economics and Culture (Economics), Gérard Roland
-
World Trade Organization
and Judicial Enforcement
of International Trade Law
KRZYSZTOF J. PELC
Abstract
The Dispute Settlement Understanding (DSU) of the World Trade Organization
(WTO) is an international court of unprecedented ambition. This essay examines
why countries agreed to delegate as much power as they did to this international
legal body, by looking to the rise of US unilateralism during the 1970s. I then offer
an overview of the DSU’s functioning, which concludes that its effectiveness derives
more from the way it forces countries to negotiate in the shadow of the law than
from the threat of material sanctions following noncompliance. Finally, I assess
some widespread concerns about how developing countries fare in the system. I
show that while there does exist a cleavage between rich and poor countries in
dispute settlement, it does not lie where conventional wisdom often has it.
INTRODUCTION
It is invariably described as the workhorse, the crown jewel, and the cornerstone of the international trade regime. The Dispute Settlement Understanding (DSU), which is the legal body at the center of the World Trade
Organization (WTO), has become the poster child for the concept of legalization in international politics. And, with good reason. There is arguably
no other example of as many countries delegating as much decision-making
power to an international legal body over the enforcement of binding country commitments. Since its creation in 1995 alongside the WTO, the DSU
has developed a sophisticated jurisprudence, leading some to argue that in
contradistinction to the common belief about international law, the WTO features de facto binding precedent, whereby past rulings constrain current ones
(Bhala, 1998–1999). The rate of country compliance is high, and most cases
are resolved before even making it to a ruling (Busch & Reinhardt, 2000). At a
time when the Doha Round is at a standstill, and multilateral negotiations are
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.
1
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
effectively dead, litigation through the DSU may be the only means countries
still have at their disposal to further liberalization (Goldstein & Steinberg,
2008; Steinberg, 2009).
Yet, the DSU is not free of criticism. Observers have denounced the dispute
mechanism for implicitly excluding poor countries, and for being a weapon
of the powerful (Steinberg, 2002; Heisenberg, 2007). Similarly, others have
claimed that the DSU limits internal transparency within the membership,
by holding proceedings behind closed doors, insulated from other member
countries, let alone nongovernmental organizations (NGOs) (Smythe &
Smith, 2006). In short, the greatest complaint against the DSU has been over
a participation deficit.
This essay is concerned with accounting for both the successes and critiques of this unique legal body. Specifically, the author asks, how has such
an ambitious international enforcement mechanism come about? Why have
powerful countries agreed to delegate power to foreign judges deciding over
the legality of their trade policies? What are the factors accounting for the
DSU’s effectiveness, as measured by its impact on country behavior? And
finally, to what extent are the prevalent concerns about the DSU warranted?
To offer a preview of the author’s claims, it is argued that the success of the
WTO lies in its least heralded functions. Having no true enforcement power
of its own, the DSU relies entirely on self-enforcement. The reason this is possible in an anarchic international environment is that countries have a strong
incentive to avoid a court’s legal condemnation. Countries settle disputes so
as to avoid being branded violators within a forum of countries with whom
they interact continuously.
By contrast, the institution’s last resort, retaliation, has drawn disproportionately much attention in the literature. Yet, it is not the threat that compels
compliance with trade rules. Retaliation is necessarily flawed; the strength
of the system lies in how it allows countries to bargain in the shadow of
the law (Busch & Reinhardt, 2000). This view is borne out by the success
of dispute settlement during the General Agreement on Tariffs and Trade
(GATT) period (1947–1994), where the legal function of the institution was
much weaker, yet still met with considerable success.
And, while critics are right to worry about the distributional effects of the
DSU, the sources of these disparities are often not found where they are
thought to be. Rather than a lack of market power, it is poor legal capacity
that hampers the participation of developing countries (Busch, Reinhardt, &
Shaffer, 2009; Davis & Bermeo, 2009). Not only are these two variables not
perfectly correlated, but the solutions to addressing the issue naturally differ
according to which is at fault, and so the distinction is a valuable one. Similarly, the litigation record shows no disadvantage for poor countries: poor
countries win as many of their cases as do rich states. The difference, rather,
World Trade Organization and Judicial Enforcement of International Trade Law
3
is in their settlement record (Busch & Reinhardt, 2003). And, as in most court
systems, litigation is inefficient, and the greatest concessions tend to be made
before the panel is ever convened. In other words, developing countries do
less well on average, not because they win fewer cases, but because they settle too few of them. As a result, they bring cases with high legal merit to
litigation, yet they are likely to get fewer concessions, on average.
Attention to the DSU peaked over a period during which the political
science literature attempted to account for why sovereign states would
ever tie their hands at the international level (Keohane, 1982; Milner,
1997; Ikenberry, 1999). When scholars began testing their claims on real
institutions, they naturally turned to the GATT/WTO, and its dispute
resolution organ. The trade regime offered them a case where countries
were making deep, credible commitments, and more importantly, it offered
data. Scholars have access to highly disaggregated product-level data on
countries’ commitments (e.g., maximum tariff levels) and their subsequent
behavior (trade volume), the likes of few other issue areas can offer. While
the result has been a rich body of work, the availability of data has been both
a boon to analysis and its greatest challenge. Often, the wide availability of
data leads to a search for correlational findings that do little justice to the
institution itself and to the complexity of its rules.
This essay proceeds as follows. The author begins by offering a historical
overview of the development of the DSU, which is where the answer to how
such an ambitious international legal system came about really lies. In Part 2,
the author outlines the anatomy of the contemporary DSU, and ask: where
does the effectiveness of the DSU as a legal body come from? Part 3 addresses
the most common criticism of the DSU, namely how it limits access to rich
countries. Finally, in Part 4, the author concludes by taking a step back to
assess the most progressive strands of the literature on dispute settlement
and the possible challenges this literature faces in the years to come.
A BRIEF HISTORICAL ACCOUNT
Dispute settlement procedures in the trade regime had been envisaged since
negotiations over a multilateral trade agreement in the late 1940s. Yet, the
entire legal function of the trade regime under the GATT was described in a
couple of short clauses. These have been expanded into a sophisticated mechanism in the WTO’s DSU, the full meaning of which has been further clarified
in a large body of rulings by WTO panels and the Appellate Body (AB).1 In
this essay, the author offers an overview of the passage from the GATT to the
1. For an overview of WTO jurisprudence, see https://www.wto.org/english/res_e/booksp_e/
analytic_index_ e/analytic_index_e.htm, last accessed 10 May 2013.
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
WTO and attempts to address this fundamental puzzle: how did countries
agree to delegate such power to the highly legalistic court in place today?
The GATT’s dispute settlement mechanism was effective—a point the
author returns to—yet it suffered from considerable weaknesses in its
design. Although recommendations of the panel were considered “binding”
once they were adopted by the membership, this concealed a flaw. Most
decisions taken in the organization from the beginning of the institution
were arrived at by consensus, and dispute settlement was no exception.
This meant that both litigants, including the “losing” state, could block
the proceedings at any point. While countries were obliged to consult, the
request for a panel could be blocked; if the panel was allowed to convene,
parties could block the results of the panel’s recommendations if they did
not like what was coming. In such a case, they were not bound by the panel’s
recommendation in any way. Procedures became less ad hoc through time,
and emerging practices were first codified during the Tokyo Round, and
continued to evolve incrementally thereafter.2 Yet, few countries would
have predicted the shape and ambition of the legal body that in 1995 would
replace the GATT dispute settlement mechanism.
The option to block unfavorable legal proceedings went away with the
inception of the DSU. The GATT’s positive consensus rule, which required
everyone to agree for the proceedings to continue, now shifted to negative
consensus, where everyone, including the winning party, would have to disagree with the ruling for the proceedings to halt. Such “automaticity” in the
formation of panels ensures that countries taken to court today cannot openly
spurn challenges to the legality of their trade policies. Similarly, if a request
for retaliation is granted, it cannot be blocked by a recalcitrant defendant. The
WTO’s DSU also added a standing body of judges, the AB, which reviews the
rulings of panels, and enforces the continuity of legal reasoning across cases.
How might we explain a series of such significant institutional changes? How
did an institution go from a diplomatic club to a hard law institution, with
automatically adopted rulings, tight deadlines, precise rules, and a higher
court with great authority? The answer lies most clearly in a now largely
defunct piece of US legislation from the 1970s.
The 1970s were precarious times for the US economy. An overvalued dollar,
in combination with independent economic growth in Asia, led to a growing
US trade deficit. Japan, especially, was seen as a looming threat on the horizon, one that was bringing about the deindustrialization of the United States.
There was widespread perception in Congress that US trade partners were
cheating, by enacting unfair trade barriers and subsidizing production. The
2. Culminating in what is referred to as the 1989 “improvements,” which ushered some of the changes
that would be featured more formally in the DSU 6 years later, on an experimental, provisional basis
(Stewart and Callahan, 1993).
World Trade Organization and Judicial Enforcement of International Trade Law
5
playing field had to be leveled, and the trade regime was not up to the task.
The United States was principally frustrated with the lax timelines for GATT
cases and the ever-present possibility of blocked panels.3 The resulting frustration led to the adoption in Congress of Section 301 of the 1974 Trade Act.
Section 301 was a domestic legislative tool that mimicked the procedures of
a formal GATT complaint, yet did so entirely within the United States, and
on a faster clock. Following either petitions by a domestic industry alleging
illegal trade barriers, or self-initiation by the United States Trade Representative (USTR), the government would launch an investigation. If the investigation led to a finding of violation against a trade partner, the executive was
expected to automatically retaliate against the violating country by raising
US trade barriers.
Section 301 held obvious advantages from the point of view of the United
States. It was fast, playing out on a much swifter schedule than the analogous
GATT procedures; it was not prone to blocked legal findings by the defendant; and retaliation was largely unconstrained. On the downside, it enjoyed
none of the legitimacy flowing from GATT multilateralism—this is the aspect
of Section 301 that trade partners reviled the most. It is difficult to overstate
just how appalled US trade partners were at the US policy. GATT representatives branded the US legislation as a “Damocles’ sword,” an “irreparable act
of folly,” a “commercial nuclear bomb,” and “war against all” (Pelc, 2010, 69).
Hudec, the leading American theorist of the GATT, described Section 301 as
a mechanism where “the United States plays both prosecutor and judge …
in which the defendants are tried in absentia” (Hudec, 1990, 114).
Not coincidentally, just as negotiations over the DSU got underway in
1987, the United States sharpened Section 301, openly targeting presumed
violations in countries that held persistent trade surpluses with the United
States.4 The United States was pushing both the unilateral and the multilateral options simultaneously, which may come as some surprise. Indeed, the
United States was the greatest proponents of a formal dispute settlement
mechanism that would address the shortcomings of the GATT.5 Yet in
hindsight, the two positions are not only compatible—they can be said to
have reinforced one another.
The eagerness of the United States to adopt a hard law enforcement mechanism came from its conviction that it would most often be sitting in the
complainant seat (Elsig, 2013). There was a strong belief in Congress that the
United States was upholding the rules that its trade partners were flouting.
3. See GATT 1987 doc MTN.GNG/NG13/W/3, where the US representative complains about
“stalling,” “delaying tactics,” and the ever-present risk of blocked panels.
4. This change was formally contained in the 1988 Omnibus Trade and Competitiveness Act.
5. GATT doc MTN.GNG/NG13/W/3, April 1987. See also Elsig (2013).
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
This prevalent view can account both for the United States’ position on an
ambitious DSU, and for its resorting to unilateral means of enforcement.
US trade partners, for their part, faced a clear trade-off. Many countries
were uneasy with the legalism of an ambitious DSU, yet they were far more
uneasy with unchecked US unilateral enforcement. In the end, WTO members accepted the ambitious legal character of the DSU in exchange for the
United States renouncing the unilateral option it had built up before over
two decades (Pelc, 2010). In a sense, the creation of the DSU amounts to a
small-scale rendering of the kind of “strategic restraint” that Ikenberry (1999)
describes the United States going through in the wake of the Second World
War—with the notable difference that in this case, the United States itself built
up the unilateral threat, making clear to its trade partners what the alternative
to deep multilateral cooperation would have been.
On this basis, one could even view the threat of unilateralism as a vital
ingredient to the success of the multilateral court. In this vein, Hudec (1990)
wrote of a possible case for Section 301 as “justified disobedience,” if it could
jolt useful GATT reform, or obtain globally beneficial trade liberalization.
Not surprisingly, such views were most prevalent among US scholars and
policy-makers. Whether or not the normative argument for Section 301 is
defendable, these arguments offer a misleading impression. While in hindsight, Section 301 may be justified by its outcome, it is unlikely that this was
its original motivation, which is more likely found in Congress seeking quick
solutions to provide market access to special interests. When a multilateral
dispute settlement mechanism that fixed the GATT’s flaw became a possibility,6 American legislators progressively abandoned their unilateral fallback
weapon.7 The widespread legitimacy of the DSU may have appeared the better option, compared against a reviled US legislative tool. The outcome was
an ambitious international court that few observers could have predicted a
decade before.
AN ANATOMY OF THE DISPUTE SETTLEMENT UNDERSTANDING
How does dispute settlement at the WTO actually work? Its defining feature is that it is decentralized. This distinguishes the WTO from domestic
courts, or supranational enforcement, such as one finds in the European context, which feature some centralized prosecutorial function. By contrast, no
WTO dispute begins unless a member-country initiates it. As a result, all disputes start when a country considers that its rights under an agreement have
6. Automaticity was sold to Congress in testimony over the Uruguay Round as leading to faster retaliation (Elsig, 2013).
7. As it turns out, precisely because of the pushback that Section 301 inspired, it was less than fully
effective at changing trade partners’ policies, as countries dug in their heels to resist American unilateralism (Pelc, 2010).
World Trade Organization and Judicial Enforcement of International Trade Law
7
been flouted, or that its interests have been otherwise harmed as a result of
the trade concessions it has offered under the WTO. For the most part, disputes are responses to domestic interest groups that lobby to demand better
market access abroad (Davis, 2011). States can be brought to dispute settlement if they are thought to be illegally subsidizing production for export; if
they have raised trade barriers in excess of their allowed ceilings; if they have
erected health and safety standards that favor domestic producers over foreign exporters; if they have offered preferential treatment to one trade partner
over others; or if they have favored domestic firms in government contracts.
Yet, the biggest portion—nearly half—of all WTO disputes is concerned with
the use of trade remedies (Pelc, 2011). These include antidumping and countervailing duties, and safeguards. They are broadly termed “flexibility provisions,” and they effectively specify the circumstances under which countries
can temporarily flout WTO obligations when failing to do so would cause
harm to domestic industries (Pelc, 2009). The use of trade remedies is governed by specific rules, and when countries misapply these rules, they can be
taken to task at the DSU. This often occurs.
In keeping with its decentralized character, the WTO has no enforcement
power to speak of. It merely produces legal rulings, which are referred to
as “recommendations,” which are considered binding on states. Yet, it cannot
force compliance with them. The institution itself cannot punish persistent
violators—in a way that other international institutions, such as the International Monetary Fund (IMF), can, for example, by modifying conditions
for subsequent loans. All that the institution can do is authorize the complainant country to “suspend concessions,” by raising barriers to the level of
harm incurred.
CONSULTATIONS
Few disputes—less than 1%—ever result in retaliation. In fact, a minority of
cases (about 45% of all filed disputes) even make it to the panel. Disputes start
with a mandatory 60-day period of “consultations.” Consultations existed
during the GATT period as well, and they attest to how the DSU is still primarily concerned with settlement. Consultations occur behind closed doors,
and this is essential to their success. Indeed, countries are much more likely
to reach an agreement if they do not need to pander to powerful domestic
interest groups while negotiating. Much of the DSU is the recognition of the
fact that governments must negotiate as much with their domestic groups as
with one another. In this way, consultations shield negotiators from domestic
demands. There is a cost to this insulation, to which the author returns below.
Consultations are not completely closed off to nonlitigants. Other WTO
members can enter the room as “third parties” if they have a substantial trade
8
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
interest in the dispute at hand, as when they are affected by the barrier at issue
(Busch and Reinhardt, 2006). Yet, this only happens if both the complainant
and the defendant agree to have those other countries present. Complainants
welcome such third parties in about half of all cases, and defendants rarely
block them, for the good reason that a blocked third party can always bring
a suit of its own, which leads to greater trouble for the defendant (Johns and
Pelc, forthcoming). The one most telling finding about the effect of privacy
on negotiations is that the greater the number of third parties present in the
room, the less likely the odds of an agreement are (Busch and Reinhardt, 2006;
Davey and Porges, 1998). Indeed, third parties add voices and issues to the
disputes, and they may also create an incentive on the part of litigants to posture, to “act tough,” and demonstrate resolve with an eye toward subsequent
disputes (Stasavage, 2004).
The high settlement rate within the DSU is good news. Litigation is an inefficient outcome (Gilligan, Johns and Rosendorff, 2010): it entails considerable
legal and bureaucratic costs, and from the point of view of litigants, it throws
a spotlight on the underlying issue. Litigants no longer enjoy insulation from
domestic interests, as the outcome of litigation, the panel report, is always
made public, together with both litigants’ full arguments. Governments can
no longer claim that they wrought a “hard won deal,” and misrepresent any
losses as wins. The panel report lays it out for all to see. For these reasons,
concessions on the part of the defendant are most likely to take place prior
to the ruling. This, indeed, is the sign of a functioning legal system: most of
the action takes place in the shadow of the law.
These beliefs are empirically supported. On average, complainants are
more likely to obtain concessions if they can reach a settlement than if the
case moves onto litigation and results in a ruling, even if the complainant
wins that ruling on all counts (Busch and Reinhardt, 2000). Indeed, what
pushes respondents to concede is the benefit of doing so privately, which
allows governments to shape the perception of these concessions domestically. That, together with governments’ desire to avoid the condemnation
that comes with a ruling by a legitimate court, explains why the odds of
agreement are greatest before the panel hands down a ruling. And, herein
lies the force of the DSU.
LITIGATION: PANEL AND AB REPORT
The trade regime effectively relies on self-enforcement. One reason this
is achievable in an “anarchic” international realm is that countries have a
wealth of information about each other’s behavior. When there is reason
for ambiguity over the legality of a given country’s policies, litigation is a
means of resolving it. Indeed, one of the main functions of panel and AB
World Trade Organization and Judicial Enforcement of International Trade Law
9
reports is to clarify the meaning of WTO rules in a way that leads to greater
predictability.
Another reason why self-enforcement is achievable is that governments
continually interact with one another: the trade regime, after all, is nearly
70 years old. And, while it remains the prerogative of a sovereign country to
ignore a WTO ruling if it chooses, it does so at the risk that a subsequent ruling favoring it may be spurned in turn; that its demands will grow less likely
of being given into; and that the concessions it offers during trade rounds
will grow devalued. In short, countries join the institution knowing that in
some cases, its rules will work against it, but that on average, they will favor
the country—otherwise there would have been little sense in making binding
commitments in the first place. This is also the reason why despite the ability to block unfavorable rulings during the GATT, surprisingly few countries
availed themselves of this option over that half-century period. Just as countries can spurn rulings now, countries could block rulings then. In both cases,
they avoid doing so for analogous reasons.
What the desire to avoid normative condemnation entails is that defendants
will dig in their heels once an unfavorable ruling is handed down. Indeed,
there is little left to lose at that point. As Schelling had it, a threat that needs
to be exercised has lost all potency; it is an ineffective threat. As a result, concessions are most likely to occur at the prelitigation stage (Schelling, 1960).
Of course, whether cases proceed to litigation and result in a panel report
is not a random event. Some cases stand no chance of settling. Key disputes
such as US—Cotton, EC—Hormones, and US—Steel Safeguards are all disputes
where settlement was known to be unlikely: these disputes touch on such
sensitive issues that the domestic political costs of conceding, even behind
closed doors, would have been forbidding. Some disputes, in other words,
are launched knowing they will not settle. Moreover, it is likely that countries
sometimes file cases not principally for the sake of the aggrieved domestic
industry, but rather because they are seeking a favorable interpretation of
the rules (Pelc, 2013). Indeed, while international law does not recognize formally binding precedent, or stare decisis, there is growing reason to believe
that both countries and judges within the WTO act as though precedent were
binding, resulting in some form of de facto stare decisis (Bhala, 1998–1999). If
this is true, then countries may want to initiate cases with the sole objectives
of modifying their meaning in a way that favors them in the future.
Most cases that make it to a ruling are then appealed by one or the other
party. This is a step that did not exist during the GATT. It tells that countries
that “win” the panel ruling will often appeal it: once again, what matters is
not only the direction of the panel ruling, but the implications of its legal
reasoning for subsequent jurisprudence. The AB is the dispute settlement
mechanism’s thinking organ. While panelists are selected ad hoc from a pool
10
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
of some 400 individuals (Busch and Pelc, 2009), AB judges are a standing
body. As a result, the same individual judges see disputes over a long period
of time and are able to enforce continuity and coherence in panel rulings.
Insofar as precedents can be set in the WTO, they are most likely of being set
by AB judges, rather than panelists. The AB is dedicated entirely to assessing the validity of the appealed portion of a given panel report. It has no
fact-finding or remand power: it cannot collect additional information or ask
questions, and it cannot send a case back to a panel to do so.
If the defendant loses net of appeal, and the complainant perceives that the
policy at fault has not been remedied, the next step is a compliance panel,
where the same panelists from the panel report now assess a single question:
has the defendant followed the panel’s recommendations?8 If the defendant
is found not to have complied, then the complainant can ask for the authorization to retaliate.
RETALIATION
This final step, the DSU’s last resort, has preoccupied much of the literature
on dispute settlement in trade. One thing is readily agreed on: retaliation
serves no balancing function, insofar as it does not remedy the harm done
(Hudec, 2000, p. 22). In economic terms, it amounts to shooting oneself in
the foot. Indeed, there is considerable irony in a system built on the belief
that free trade is the optimal policy, which then allows aggrieved countries
to offset injury by raising tariffs in turn.
Adam Smith foresaw retaliation for what it was: economic folly in service
of potentially rational politics, belonging “not … so much to the science of
a legislator, … as to the skill of that insidious and crafty animal, vulgarly
called a statesman or politician” (Smith, 1937, p. 435). In other words, Smith
saw retaliation as justified only if it procured the desired change of policy
abroad, and having in and of itself no desirable effect at home. Although
nearly 250 years old, this view is not out-of-date. As the representative from
Ecuador put it recently, retaliation at the WTO “does not restore the balance
lost, [ … ] but rather tends to inflict greater injury on the complaining party,
as occurred in the banana dispute.”9 This is not the position of developing
countries alone. The EU has declared that “the use of suspension of trade
concessions involves a cost not only for the defending party, but also for the
economy of the complaining Member.”10
8. DSU Article 21.
9. Contribution of Ecuador to the Improvement of the Dispute Settlement System of the WTO, 2002,
TN/DS/W/9. The dispute being referred to is EC—Bananas, WTO/DS27.
10. WTO doc TN/DS/W/1.
World Trade Organization and Judicial Enforcement of International Trade Law
11
Despite these considerations, there has been disproportionately much
attention given to retaliation in the trade regime. This is perhaps not surprising. The self-proclaimed weakness of all of international law is a lack of teeth.
The avowed lack of “bail bondsmen, … blue helmets, … truncheons or tear
gas” (Bello, 1996) has meant that international courts had no real power to
affect state behavior. Retaliation is as close as the trade regime comes to such
power: the prospect of retaliation arms the WTO, albeit in a decentralized
manner. This has led to a focus on which countries have retaliatory capacity,
and which do not. In this view, countries that lack markets of value to the
defendant would be unable to compel a defendant to back down. And to
be sure, developing countries have long claimed that power asymmetry
means that they are unable to avail themselves of dispute settlement in
the same way as rich countries, since their final threat is not credible. Yet,
several factors should lead us to doubt that this is the whole story. First, the
possibility of cross-retaliation, where a complainant suspends concessions
in an area distinct from the one at issue in the dispute, has opened doors
to effective retaliation by poor countries against rich countries. Specifically,
the WTO has started allowing developing countries, such as Ecuador in a
complaint against the European Union, and Antigua in a dispute against
the United States, to suspend concessions in intellectual property rights,
making threats of retaliation far more potent. More importantly, the threat
most likely to drive behavior is that of an unfavorable ruling, rather than
the suspension of concessions, no matter how credible the latter may be.
The GATT period, where the trade system successfully resolved trade
conflicts, serves as a good evidence on this count. Despite any credible threat
of retaliation—since defendants could always block a case—the system
worked. It did so because it led countries to settle their disagreements, to
avoid being branded as violators.
CRITICISMS OF DISPUTE SETTLEMENT: PARTICIPATION
While the DSU has earned praise for its ability to enforce deep country commitments in an anarchic international environment, the institution has also
weathered its share of criticism. One of these critiques has been of particular concern: observers have claimed that developing countries are effectively
excluded from the system.11 One reason is that because they lack the capacity to retaliate, they have little power to compel rich country defendants to
concede, and thus seldom challenge their trade partners’ policies in court.
11. In a 2011 WTO meeting, the representatives of Bolivia, Cuba, Ecuador, and Nicaragua complained that “In practice, the WTO has become an organization that is not led by its Members, in which
decision-making based on facts is not governed by consensus, and negotiation meetings are not open to
participation by all Members.”
12
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Others claim that developing countries are at a disadvantage during litigation itself, since the complexity of trade law has meant that countries with
large, sophisticated legal teams hold an advantage. A related criticism is that
the institution lacks internal transparency. Just as with multilateral negotiations during trade rounds, most countries are kept outside of the room during WTO legal proceedings, even if their interests are at stake (Smythe and
Peter, 2006; Steinberg, 2002; Heisenberg, 2007). And neither domestic interest groups nor non-NGOs have any access to DSU hearings.12 Scholars have
begun to assess these beliefs empirically, and have come to some surprising
conclusions.
It is first worth mentioning that in many ways, the WTO compares favorably in terms of its transparency with, for instance, the other Bretton Woods
institutions. The public access to panel reports, and to the exact legal reasoning that motivated judicial decisions, constitutes a unique window on
decision-making in the institution. The comparison is less favorable with
other courts, such as the European Court of Justice, where hearings are open
to the public.
Partly in reaction to such criticism, the WTO has championed the possibility
of third party participation. Third party status, whereby nonlitigant countries
can join a dispute from its very beginning, is one means of allowing developing and least-developed countries, especially, to be in the room when an
issue they may have a stake in is being negotiated. It is also a means for countries to learn the intricacies of trade law, and build up their legal capacity in
so doing (Busch, Reinhardt and Shaffer, 2009). And there is evidence that the
presence of third parties has a positive effect on the content of settlements.
While complainants are found to capture a disproportionate portion of gains
from settlement when consultations are conducted entirely in private, this is
not the case when third parties are present (Kucik and Pelc, 2013). In those
instances, the complainant, on average, gains no more than the remainder
of the membership. Third parties, in other words, play an enforcement function, by ensuring that any gains reached in a settlement are extended to the
remainder of the membership, as per DSU rules.13
There is a catch. This beneficial effect of third parties pertains to those disputes where a settlement is reached. Yet, it turns out that the presence of third
parties also affects the odds of that settlement ever being reached. Despite
all the benefits of third party participation, this step toward greater inclusivity thus comes at a cost. The presence of an audience makes settlement
significantly less likely (Busch and Reinhardt, 2006; Davey and Porges, 1998;
12. Oxfam International, WWF International, together with eight other NGOs, released a 2003 memo
claiming that the WTO features “proliferation of ‘informal’, undocumented and exclusive meetings,
amounting to lack of transparency and inability of many countries to participate.”
13. See Article 3.2 of the DSU.
World Trade Organization and Judicial Enforcement of International Trade Law
13
Stasavage, 2004). There is enough incentive to posture for the sake of these
other member-states that the odds of reaching agreement between the litigants decline precipitously as the number of other countries in the room
rises. In fact, beyond five third parties, the odds of agreement are effectively
nil (Busch and Reinhardt, 2006). In other words, if settlement is the goal of the
system, then greater inclusiveness through third party participation exerts a
cost. And this is the case even when the audience in the room is made up of
other countries, rather than NGOs and domestic interest groups.
The effect of third parties on the odds of prelitigation settlement, it turns
out, is a special concern for developing countries, who tend to attract the
greatest number of third parties. And, herein lies one of the true cleavages
between rich and poor countries in dispute settlement. Strikingly, it does not
lie in the odds of winning a case, which are statistically indistinguishable for
rich versus poor countries. The true difference, which is often overlooked,
is that on average, developed countries settle, and developing countries litigate. And given what we know about the odds of concessions in each of these
two outcomes, developed countries end up doing better, on average.
Overall, it appears that the main obstacle to recognizing legal merit, choosing the correct cases to file, and reaching settlement during consultations,
comes down to legal capacity, more than to market power, or income. Legal
capacity corresponds to the human and bureaucratic resources a country has
to invest in dispute settlement, and such questions as whether a country has
a permanent delegation in Geneva. And while developed countries naturally
tend to have greater legal capacity and experience, this is something that a
country can develop. Davis and Bermeo (2009) find that the odds of filing a
case grow as a country gains experience, and that such experience is gained
not only by acting as a complainant, but also by being taken to court as a
respondent. What this means is that certain countries are likely to emerge as
disproportionately active players in dispute settlement. Brazil, for instance,
ranks as the fourth most active initiator of disputes in the system, ahead of
far bigger and wealthier countries. It has invested a great deal in its legal
capacity, with powerful effects.
In sum, cleavages between rich and poor countries exist. Yet, they do not lie
where we often think. Success in dispute settlement hinges most of all on the
ability to assess the legal merit of potential cases, and to settle disputes in the
shadow of the law, before a ruling is handed down. Developing countries are
at a disadvantage in this respect, as they tend to settle less and litigate more.
Yet, scholars have shown that countries can learn to use dispute settlement
rapidly. Gaining legal capacity is more easily achievable than growing one’s
market power or retaliatory capacity. Finally, there are institutional solutions
to the participation deficit. The option of joining as a third party is beneficial,
as it allows poor countries to be present and participate in proceedings, to
14
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
voice their views and potentially affect legal outcomes, and to protect their
trade interests in so doing. Yet, third party participation also comes at a cost
to the institution: as diplomats know, audiences make agreement less likely.
There exists an observable trade-off between inclusiveness and the odds of
settlement, meaning that there is no easy solution to the participation deficit.
The challenge of the institution is to balance these competing objectives.
CONCLUSION
WTO dispute settlement is a success story of global governance. That,
together with the fact that there is a wealth of available data about country
commitments and their subsequent behavior, has naturally meant that the
institution has received a great deal of scholarly attention. In this respect,
the availability of rich data, at a highly disaggregated level, has been both a
boon and a challenge for scholarship.
Studies of the WTO have become especially prone to simple correlational
stories, where legal outcomes are regressed on country characteristics, with
little regard for the actual rules at issue. What this has also meant is that there
has been relatively little dialog between political science and legal scholarship. In this way, the promise of WTO research is still falling short of its mark.
As the notion that precedent in trade law can bind both countries and
judges gains greater acceptance, we are likely to see more attention being
paid to words. Law, after all, is a fundamentally rhetorical exercise: the
currently available datasets abstract from the richness of the legal texts and
the judicial rulings that interpret them. Political scientists, especially, need
to recognize that beyond the direction of a ruling, judges’ choice of words
is likely to matter for political outcomes. Judges’ use of judicial economy
(Busch and Pelc, 2010), countries’ appeals of favorable rulings, and the
importance paid to the WTO’s Analytical Index are all signs that the relevant
actors have recognized this fact14 ; scholars will gain from doing so as well.
Similarly, if the study of other international courts is any sign, greater
attention is likely to be paid to individual judges, especially appellate
judges (Voeten, 2008, 2007). In this respect, governments already appear to
know more than scholars, since a majority of disputes now end in deadlock
between the litigants over what panelists to agree on, and the Director
General routinely has to step in to make that choice for countries. In other
words, countries are acting on a past history of rulings in a way that scholars
have yet to recognize.
The WTO, and its dispute settlement body, is a rare example of a functioning international institution that appears to successfully bind country
14. https://www.wto.org/english/res_e/booksp_e/analytic_index_e/analytic_index_e.htm,
last accessed May 10th, 2013.
World Trade Organization and Judicial Enforcement of International Trade Law
15
behavior. This often makes it prone to misperception and resulting suspicion among popular audiences. Moreover, liberalization inevitably produces
winners and losers, and the latter often have an incentive to misrepresent the
institution’s function. As a result, students of international courts such as the
dispute settlement body of the WTO have a double mission. Not only must
they produce innovative research that can offer clues to improving the institution’s effectiveness and addressing its shortcomings, but they must also
communicate to popular audiences, to convey how constraints on government action can be welfare-enhancing, and to demarcate between misleading
concerns and real ones.
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KRZYSZTOF J. PELC SHORT BIOGRAPHY
Krzysztof J. Pelc is William Dawson Scholar and Associate Professor in the
Department of Political Science at McGill University.
His research examines the international political economy, with a focus on
international rules. He has written on participation in institutions, privacy
and publicity, optimal ambiguity, the impact of hard times on cooperation,
and the circumstances under which actors are allowed to break formal rules.
Much of this research looks specifically at the rules of the World Trade Organization (WTO). His work appears, among others, in International Organization, the American Political Science Review, World Politics, the International
Studies Quarterly, the World Trade Review, the British Journal of Political Science, the Journal of International Economic Law, and the Journal of Conflict
Resolution. His book manuscript, “Making and Bending International Rules”
addresses the means by which actors resolve the “architectural challenge” of
legal flexibility: how can we attain the benefits of flexibility, whereby countries are allowed to temporarily break the rules in hard times, while curbing
its abuse?
RELATED ESSAYS
Lawmaking (Political Science), Jamie L. Carson and Mark E. Owens
Judicial Independence (Political Science), Tom S. Clark
The Evolving View of the Law and Judicial Decision-Making (Political Science), Justine D’Elia-Kueper and Jeffrey A. Segal
Why Do States Sign Alliances? (Political Science), Brett Ashley Leeds
Economics and Culture (Economics), Gérard Roland
World Trade Organization
and Judicial Enforcement
of International Trade Law
KRZYSZTOF J. PELC
Abstract
The Dispute Settlement Understanding (DSU) of the World Trade Organization
(WTO) is an international court of unprecedented ambition. This essay examines
why countries agreed to delegate as much power as they did to this international
legal body, by looking to the rise of US unilateralism during the 1970s. I then offer
an overview of the DSU’s functioning, which concludes that its effectiveness derives
more from the way it forces countries to negotiate in the shadow of the law than
from the threat of material sanctions following noncompliance. Finally, I assess
some widespread concerns about how developing countries fare in the system. I
show that while there does exist a cleavage between rich and poor countries in
dispute settlement, it does not lie where conventional wisdom often has it.
INTRODUCTION
It is invariably described as the workhorse, the crown jewel, and the cornerstone of the international trade regime. The Dispute Settlement Understanding (DSU), which is the legal body at the center of the World Trade
Organization (WTO), has become the poster child for the concept of legalization in international politics. And, with good reason. There is arguably
no other example of as many countries delegating as much decision-making
power to an international legal body over the enforcement of binding country commitments. Since its creation in 1995 alongside the WTO, the DSU
has developed a sophisticated jurisprudence, leading some to argue that in
contradistinction to the common belief about international law, the WTO features de facto binding precedent, whereby past rulings constrain current ones
(Bhala, 1998–1999). The rate of country compliance is high, and most cases
are resolved before even making it to a ruling (Busch & Reinhardt, 2000). At a
time when the Doha Round is at a standstill, and multilateral negotiations are
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.
1
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
effectively dead, litigation through the DSU may be the only means countries
still have at their disposal to further liberalization (Goldstein & Steinberg,
2008; Steinberg, 2009).
Yet, the DSU is not free of criticism. Observers have denounced the dispute
mechanism for implicitly excluding poor countries, and for being a weapon
of the powerful (Steinberg, 2002; Heisenberg, 2007). Similarly, others have
claimed that the DSU limits internal transparency within the membership,
by holding proceedings behind closed doors, insulated from other member
countries, let alone nongovernmental organizations (NGOs) (Smythe &
Smith, 2006). In short, the greatest complaint against the DSU has been over
a participation deficit.
This essay is concerned with accounting for both the successes and critiques of this unique legal body. Specifically, the author asks, how has such
an ambitious international enforcement mechanism come about? Why have
powerful countries agreed to delegate power to foreign judges deciding over
the legality of their trade policies? What are the factors accounting for the
DSU’s effectiveness, as measured by its impact on country behavior? And
finally, to what extent are the prevalent concerns about the DSU warranted?
To offer a preview of the author’s claims, it is argued that the success of the
WTO lies in its least heralded functions. Having no true enforcement power
of its own, the DSU relies entirely on self-enforcement. The reason this is possible in an anarchic international environment is that countries have a strong
incentive to avoid a court’s legal condemnation. Countries settle disputes so
as to avoid being branded violators within a forum of countries with whom
they interact continuously.
By contrast, the institution’s last resort, retaliation, has drawn disproportionately much attention in the literature. Yet, it is not the threat that compels
compliance with trade rules. Retaliation is necessarily flawed; the strength
of the system lies in how it allows countries to bargain in the shadow of
the law (Busch & Reinhardt, 2000). This view is borne out by the success
of dispute settlement during the General Agreement on Tariffs and Trade
(GATT) period (1947–1994), where the legal function of the institution was
much weaker, yet still met with considerable success.
And, while critics are right to worry about the distributional effects of the
DSU, the sources of these disparities are often not found where they are
thought to be. Rather than a lack of market power, it is poor legal capacity
that hampers the participation of developing countries (Busch, Reinhardt, &
Shaffer, 2009; Davis & Bermeo, 2009). Not only are these two variables not
perfectly correlated, but the solutions to addressing the issue naturally differ
according to which is at fault, and so the distinction is a valuable one. Similarly, the litigation record shows no disadvantage for poor countries: poor
countries win as many of their cases as do rich states. The difference, rather,
World Trade Organization and Judicial Enforcement of International Trade Law
3
is in their settlement record (Busch & Reinhardt, 2003). And, as in most court
systems, litigation is inefficient, and the greatest concessions tend to be made
before the panel is ever convened. In other words, developing countries do
less well on average, not because they win fewer cases, but because they settle too few of them. As a result, they bring cases with high legal merit to
litigation, yet they are likely to get fewer concessions, on average.
Attention to the DSU peaked over a period during which the political
science literature attempted to account for why sovereign states would
ever tie their hands at the international level (Keohane, 1982; Milner,
1997; Ikenberry, 1999). When scholars began testing their claims on real
institutions, they naturally turned to the GATT/WTO, and its dispute
resolution organ. The trade regime offered them a case where countries
were making deep, credible commitments, and more importantly, it offered
data. Scholars have access to highly disaggregated product-level data on
countries’ commitments (e.g., maximum tariff levels) and their subsequent
behavior (trade volume), the likes of few other issue areas can offer. While
the result has been a rich body of work, the availability of data has been both
a boon to analysis and its greatest challenge. Often, the wide availability of
data leads to a search for correlational findings that do little justice to the
institution itself and to the complexity of its rules.
This essay proceeds as follows. The author begins by offering a historical
overview of the development of the DSU, which is where the answer to how
such an ambitious international legal system came about really lies. In Part 2,
the author outlines the anatomy of the contemporary DSU, and ask: where
does the effectiveness of the DSU as a legal body come from? Part 3 addresses
the most common criticism of the DSU, namely how it limits access to rich
countries. Finally, in Part 4, the author concludes by taking a step back to
assess the most progressive strands of the literature on dispute settlement
and the possible challenges this literature faces in the years to come.
A BRIEF HISTORICAL ACCOUNT
Dispute settlement procedures in the trade regime had been envisaged since
negotiations over a multilateral trade agreement in the late 1940s. Yet, the
entire legal function of the trade regime under the GATT was described in a
couple of short clauses. These have been expanded into a sophisticated mechanism in the WTO’s DSU, the full meaning of which has been further clarified
in a large body of rulings by WTO panels and the Appellate Body (AB).1 In
this essay, the author offers an overview of the passage from the GATT to the
1. For an overview of WTO jurisprudence, see https://www.wto.org/english/res_e/booksp_e/
analytic_index_ e/analytic_index_e.htm, last accessed 10 May 2013.
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
WTO and attempts to address this fundamental puzzle: how did countries
agree to delegate such power to the highly legalistic court in place today?
The GATT’s dispute settlement mechanism was effective—a point the
author returns to—yet it suffered from considerable weaknesses in its
design. Although recommendations of the panel were considered “binding”
once they were adopted by the membership, this concealed a flaw. Most
decisions taken in the organization from the beginning of the institution
were arrived at by consensus, and dispute settlement was no exception.
This meant that both litigants, including the “losing” state, could block
the proceedings at any point. While countries were obliged to consult, the
request for a panel could be blocked; if the panel was allowed to convene,
parties could block the results of the panel’s recommendations if they did
not like what was coming. In such a case, they were not bound by the panel’s
recommendation in any way. Procedures became less ad hoc through time,
and emerging practices were first codified during the Tokyo Round, and
continued to evolve incrementally thereafter.2 Yet, few countries would
have predicted the shape and ambition of the legal body that in 1995 would
replace the GATT dispute settlement mechanism.
The option to block unfavorable legal proceedings went away with the
inception of the DSU. The GATT’s positive consensus rule, which required
everyone to agree for the proceedings to continue, now shifted to negative
consensus, where everyone, including the winning party, would have to disagree with the ruling for the proceedings to halt. Such “automaticity” in the
formation of panels ensures that countries taken to court today cannot openly
spurn challenges to the legality of their trade policies. Similarly, if a request
for retaliation is granted, it cannot be blocked by a recalcitrant defendant. The
WTO’s DSU also added a standing body of judges, the AB, which reviews the
rulings of panels, and enforces the continuity of legal reasoning across cases.
How might we explain a series of such significant institutional changes? How
did an institution go from a diplomatic club to a hard law institution, with
automatically adopted rulings, tight deadlines, precise rules, and a higher
court with great authority? The answer lies most clearly in a now largely
defunct piece of US legislation from the 1970s.
The 1970s were precarious times for the US economy. An overvalued dollar,
in combination with independent economic growth in Asia, led to a growing
US trade deficit. Japan, especially, was seen as a looming threat on the horizon, one that was bringing about the deindustrialization of the United States.
There was widespread perception in Congress that US trade partners were
cheating, by enacting unfair trade barriers and subsidizing production. The
2. Culminating in what is referred to as the 1989 “improvements,” which ushered some of the changes
that would be featured more formally in the DSU 6 years later, on an experimental, provisional basis
(Stewart and Callahan, 1993).
World Trade Organization and Judicial Enforcement of International Trade Law
5
playing field had to be leveled, and the trade regime was not up to the task.
The United States was principally frustrated with the lax timelines for GATT
cases and the ever-present possibility of blocked panels.3 The resulting frustration led to the adoption in Congress of Section 301 of the 1974 Trade Act.
Section 301 was a domestic legislative tool that mimicked the procedures of
a formal GATT complaint, yet did so entirely within the United States, and
on a faster clock. Following either petitions by a domestic industry alleging
illegal trade barriers, or self-initiation by the United States Trade Representative (USTR), the government would launch an investigation. If the investigation led to a finding of violation against a trade partner, the executive was
expected to automatically retaliate against the violating country by raising
US trade barriers.
Section 301 held obvious advantages from the point of view of the United
States. It was fast, playing out on a much swifter schedule than the analogous
GATT procedures; it was not prone to blocked legal findings by the defendant; and retaliation was largely unconstrained. On the downside, it enjoyed
none of the legitimacy flowing from GATT multilateralism—this is the aspect
of Section 301 that trade partners reviled the most. It is difficult to overstate
just how appalled US trade partners were at the US policy. GATT representatives branded the US legislation as a “Damocles’ sword,” an “irreparable act
of folly,” a “commercial nuclear bomb,” and “war against all” (Pelc, 2010, 69).
Hudec, the leading American theorist of the GATT, described Section 301 as
a mechanism where “the United States plays both prosecutor and judge …
in which the defendants are tried in absentia” (Hudec, 1990, 114).
Not coincidentally, just as negotiations over the DSU got underway in
1987, the United States sharpened Section 301, openly targeting presumed
violations in countries that held persistent trade surpluses with the United
States.4 The United States was pushing both the unilateral and the multilateral options simultaneously, which may come as some surprise. Indeed, the
United States was the greatest proponents of a formal dispute settlement
mechanism that would address the shortcomings of the GATT.5 Yet in
hindsight, the two positions are not only compatible—they can be said to
have reinforced one another.
The eagerness of the United States to adopt a hard law enforcement mechanism came from its conviction that it would most often be sitting in the
complainant seat (Elsig, 2013). There was a strong belief in Congress that the
United States was upholding the rules that its trade partners were flouting.
3. See GATT 1987 doc MTN.GNG/NG13/W/3, where the US representative complains about
“stalling,” “delaying tactics,” and the ever-present risk of blocked panels.
4. This change was formally contained in the 1988 Omnibus Trade and Competitiveness Act.
5. GATT doc MTN.GNG/NG13/W/3, April 1987. See also Elsig (2013).
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
This prevalent view can account both for the United States’ position on an
ambitious DSU, and for its resorting to unilateral means of enforcement.
US trade partners, for their part, faced a clear trade-off. Many countries
were uneasy with the legalism of an ambitious DSU, yet they were far more
uneasy with unchecked US unilateral enforcement. In the end, WTO members accepted the ambitious legal character of the DSU in exchange for the
United States renouncing the unilateral option it had built up before over
two decades (Pelc, 2010). In a sense, the creation of the DSU amounts to a
small-scale rendering of the kind of “strategic restraint” that Ikenberry (1999)
describes the United States going through in the wake of the Second World
War—with the notable difference that in this case, the United States itself built
up the unilateral threat, making clear to its trade partners what the alternative
to deep multilateral cooperation would have been.
On this basis, one could even view the threat of unilateralism as a vital
ingredient to the success of the multilateral court. In this vein, Hudec (1990)
wrote of a possible case for Section 301 as “justified disobedience,” if it could
jolt useful GATT reform, or obtain globally beneficial trade liberalization.
Not surprisingly, such views were most prevalent among US scholars and
policy-makers. Whether or not the normative argument for Section 301 is
defendable, these arguments offer a misleading impression. While in hindsight, Section 301 may be justified by its outcome, it is unlikely that this was
its original motivation, which is more likely found in Congress seeking quick
solutions to provide market access to special interests. When a multilateral
dispute settlement mechanism that fixed the GATT’s flaw became a possibility,6 American legislators progressively abandoned their unilateral fallback
weapon.7 The widespread legitimacy of the DSU may have appeared the better option, compared against a reviled US legislative tool. The outcome was
an ambitious international court that few observers could have predicted a
decade before.
AN ANATOMY OF THE DISPUTE SETTLEMENT UNDERSTANDING
How does dispute settlement at the WTO actually work? Its defining feature is that it is decentralized. This distinguishes the WTO from domestic
courts, or supranational enforcement, such as one finds in the European context, which feature some centralized prosecutorial function. By contrast, no
WTO dispute begins unless a member-country initiates it. As a result, all disputes start when a country considers that its rights under an agreement have
6. Automaticity was sold to Congress in testimony over the Uruguay Round as leading to faster retaliation (Elsig, 2013).
7. As it turns out, precisely because of the pushback that Section 301 inspired, it was less than fully
effective at changing trade partners’ policies, as countries dug in their heels to resist American unilateralism (Pelc, 2010).
World Trade Organization and Judicial Enforcement of International Trade Law
7
been flouted, or that its interests have been otherwise harmed as a result of
the trade concessions it has offered under the WTO. For the most part, disputes are responses to domestic interest groups that lobby to demand better
market access abroad (Davis, 2011). States can be brought to dispute settlement if they are thought to be illegally subsidizing production for export; if
they have raised trade barriers in excess of their allowed ceilings; if they have
erected health and safety standards that favor domestic producers over foreign exporters; if they have offered preferential treatment to one trade partner
over others; or if they have favored domestic firms in government contracts.
Yet, the biggest portion—nearly half—of all WTO disputes is concerned with
the use of trade remedies (Pelc, 2011). These include antidumping and countervailing duties, and safeguards. They are broadly termed “flexibility provisions,” and they effectively specify the circumstances under which countries
can temporarily flout WTO obligations when failing to do so would cause
harm to domestic industries (Pelc, 2009). The use of trade remedies is governed by specific rules, and when countries misapply these rules, they can be
taken to task at the DSU. This often occurs.
In keeping with its decentralized character, the WTO has no enforcement
power to speak of. It merely produces legal rulings, which are referred to
as “recommendations,” which are considered binding on states. Yet, it cannot
force compliance with them. The institution itself cannot punish persistent
violators—in a way that other international institutions, such as the International Monetary Fund (IMF), can, for example, by modifying conditions
for subsequent loans. All that the institution can do is authorize the complainant country to “suspend concessions,” by raising barriers to the level of
harm incurred.
CONSULTATIONS
Few disputes—less than 1%—ever result in retaliation. In fact, a minority of
cases (about 45% of all filed disputes) even make it to the panel. Disputes start
with a mandatory 60-day period of “consultations.” Consultations existed
during the GATT period as well, and they attest to how the DSU is still primarily concerned with settlement. Consultations occur behind closed doors,
and this is essential to their success. Indeed, countries are much more likely
to reach an agreement if they do not need to pander to powerful domestic
interest groups while negotiating. Much of the DSU is the recognition of the
fact that governments must negotiate as much with their domestic groups as
with one another. In this way, consultations shield negotiators from domestic
demands. There is a cost to this insulation, to which the author returns below.
Consultations are not completely closed off to nonlitigants. Other WTO
members can enter the room as “third parties” if they have a substantial trade
8
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
interest in the dispute at hand, as when they are affected by the barrier at issue
(Busch and Reinhardt, 2006). Yet, this only happens if both the complainant
and the defendant agree to have those other countries present. Complainants
welcome such third parties in about half of all cases, and defendants rarely
block them, for the good reason that a blocked third party can always bring
a suit of its own, which leads to greater trouble for the defendant (Johns and
Pelc, forthcoming). The one most telling finding about the effect of privacy
on negotiations is that the greater the number of third parties present in the
room, the less likely the odds of an agreement are (Busch and Reinhardt, 2006;
Davey and Porges, 1998). Indeed, third parties add voices and issues to the
disputes, and they may also create an incentive on the part of litigants to posture, to “act tough,” and demonstrate resolve with an eye toward subsequent
disputes (Stasavage, 2004).
The high settlement rate within the DSU is good news. Litigation is an inefficient outcome (Gilligan, Johns and Rosendorff, 2010): it entails considerable
legal and bureaucratic costs, and from the point of view of litigants, it throws
a spotlight on the underlying issue. Litigants no longer enjoy insulation from
domestic interests, as the outcome of litigation, the panel report, is always
made public, together with both litigants’ full arguments. Governments can
no longer claim that they wrought a “hard won deal,” and misrepresent any
losses as wins. The panel report lays it out for all to see. For these reasons,
concessions on the part of the defendant are most likely to take place prior
to the ruling. This, indeed, is the sign of a functioning legal system: most of
the action takes place in the shadow of the law.
These beliefs are empirically supported. On average, complainants are
more likely to obtain concessions if they can reach a settlement than if the
case moves onto litigation and results in a ruling, even if the complainant
wins that ruling on all counts (Busch and Reinhardt, 2000). Indeed, what
pushes respondents to concede is the benefit of doing so privately, which
allows governments to shape the perception of these concessions domestically. That, together with governments’ desire to avoid the condemnation
that comes with a ruling by a legitimate court, explains why the odds of
agreement are greatest before the panel hands down a ruling. And, herein
lies the force of the DSU.
LITIGATION: PANEL AND AB REPORT
The trade regime effectively relies on self-enforcement. One reason this
is achievable in an “anarchic” international realm is that countries have a
wealth of information about each other’s behavior. When there is reason
for ambiguity over the legality of a given country’s policies, litigation is a
means of resolving it. Indeed, one of the main functions of panel and AB
World Trade Organization and Judicial Enforcement of International Trade Law
9
reports is to clarify the meaning of WTO rules in a way that leads to greater
predictability.
Another reason why self-enforcement is achievable is that governments
continually interact with one another: the trade regime, after all, is nearly
70 years old. And, while it remains the prerogative of a sovereign country to
ignore a WTO ruling if it chooses, it does so at the risk that a subsequent ruling favoring it may be spurned in turn; that its demands will grow less likely
of being given into; and that the concessions it offers during trade rounds
will grow devalued. In short, countries join the institution knowing that in
some cases, its rules will work against it, but that on average, they will favor
the country—otherwise there would have been little sense in making binding
commitments in the first place. This is also the reason why despite the ability to block unfavorable rulings during the GATT, surprisingly few countries
availed themselves of this option over that half-century period. Just as countries can spurn rulings now, countries could block rulings then. In both cases,
they avoid doing so for analogous reasons.
What the desire to avoid normative condemnation entails is that defendants
will dig in their heels once an unfavorable ruling is handed down. Indeed,
there is little left to lose at that point. As Schelling had it, a threat that needs
to be exercised has lost all potency; it is an ineffective threat. As a result, concessions are most likely to occur at the prelitigation stage (Schelling, 1960).
Of course, whether cases proceed to litigation and result in a panel report
is not a random event. Some cases stand no chance of settling. Key disputes
such as US—Cotton, EC—Hormones, and US—Steel Safeguards are all disputes
where settlement was known to be unlikely: these disputes touch on such
sensitive issues that the domestic political costs of conceding, even behind
closed doors, would have been forbidding. Some disputes, in other words,
are launched knowing they will not settle. Moreover, it is likely that countries
sometimes file cases not principally for the sake of the aggrieved domestic
industry, but rather because they are seeking a favorable interpretation of
the rules (Pelc, 2013). Indeed, while international law does not recognize formally binding precedent, or stare decisis, there is growing reason to believe
that both countries and judges within the WTO act as though precedent were
binding, resulting in some form of de facto stare decisis (Bhala, 1998–1999). If
this is true, then countries may want to initiate cases with the sole objectives
of modifying their meaning in a way that favors them in the future.
Most cases that make it to a ruling are then appealed by one or the other
party. This is a step that did not exist during the GATT. It tells that countries
that “win” the panel ruling will often appeal it: once again, what matters is
not only the direction of the panel ruling, but the implications of its legal
reasoning for subsequent jurisprudence. The AB is the dispute settlement
mechanism’s thinking organ. While panelists are selected ad hoc from a pool
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
of some 400 individuals (Busch and Pelc, 2009), AB judges are a standing
body. As a result, the same individual judges see disputes over a long period
of time and are able to enforce continuity and coherence in panel rulings.
Insofar as precedents can be set in the WTO, they are most likely of being set
by AB judges, rather than panelists. The AB is dedicated entirely to assessing the validity of the appealed portion of a given panel report. It has no
fact-finding or remand power: it cannot collect additional information or ask
questions, and it cannot send a case back to a panel to do so.
If the defendant loses net of appeal, and the complainant perceives that the
policy at fault has not been remedied, the next step is a compliance panel,
where the same panelists from the panel report now assess a single question:
has the defendant followed the panel’s recommendations?8 If the defendant
is found not to have complied, then the complainant can ask for the authorization to retaliate.
RETALIATION
This final step, the DSU’s last resort, has preoccupied much of the literature
on dispute settlement in trade. One thing is readily agreed on: retaliation
serves no balancing function, insofar as it does not remedy the harm done
(Hudec, 2000, p. 22). In economic terms, it amounts to shooting oneself in
the foot. Indeed, there is considerable irony in a system built on the belief
that free trade is the optimal policy, which then allows aggrieved countries
to offset injury by raising tariffs in turn.
Adam Smith foresaw retaliation for what it was: economic folly in service
of potentially rational politics, belonging “not … so much to the science of
a legislator, … as to the skill of that insidious and crafty animal, vulgarly
called a statesman or politician” (Smith, 1937, p. 435). In other words, Smith
saw retaliation as justified only if it procured the desired change of policy
abroad, and having in and of itself no desirable effect at home. Although
nearly 250 years old, this view is not out-of-date. As the representative from
Ecuador put it recently, retaliation at the WTO “does not restore the balance
lost, [ … ] but rather tends to inflict greater injury on the complaining party,
as occurred in the banana dispute.”9 This is not the position of developing
countries alone. The EU has declared that “the use of suspension of trade
concessions involves a cost not only for the defending party, but also for the
economy of the complaining Member.”10
8. DSU Article 21.
9. Contribution of Ecuador to the Improvement of the Dispute Settlement System of the WTO, 2002,
TN/DS/W/9. The dispute being referred to is EC—Bananas, WTO/DS27.
10. WTO doc TN/DS/W/1.
World Trade Organization and Judicial Enforcement of International Trade Law
11
Despite these considerations, there has been disproportionately much
attention given to retaliation in the trade regime. This is perhaps not surprising. The self-proclaimed weakness of all of international law is a lack of teeth.
The avowed lack of “bail bondsmen, … blue helmets, … truncheons or tear
gas” (Bello, 1996) has meant that international courts had no real power to
affect state behavior. Retaliation is as close as the trade regime comes to such
power: the prospect of retaliation arms the WTO, albeit in a decentralized
manner. This has led to a focus on which countries have retaliatory capacity,
and which do not. In this view, countries that lack markets of value to the
defendant would be unable to compel a defendant to back down. And to
be sure, developing countries have long claimed that power asymmetry
means that they are unable to avail themselves of dispute settlement in
the same way as rich countries, since their final threat is not credible. Yet,
several factors should lead us to doubt that this is the whole story. First, the
possibility of cross-retaliation, where a complainant suspends concessions
in an area distinct from the one at issue in the dispute, has opened doors
to effective retaliation by poor countries against rich countries. Specifically,
the WTO has started allowing developing countries, such as Ecuador in a
complaint against the European Union, and Antigua in a dispute against
the United States, to suspend concessions in intellectual property rights,
making threats of retaliation far more potent. More importantly, the threat
most likely to drive behavior is that of an unfavorable ruling, rather than
the suspension of concessions, no matter how credible the latter may be.
The GATT period, where the trade system successfully resolved trade
conflicts, serves as a good evidence on this count. Despite any credible threat
of retaliation—since defendants could always block a case—the system
worked. It did so because it led countries to settle their disagreements, to
avoid being branded as violators.
CRITICISMS OF DISPUTE SETTLEMENT: PARTICIPATION
While the DSU has earned praise for its ability to enforce deep country commitments in an anarchic international environment, the institution has also
weathered its share of criticism. One of these critiques has been of particular concern: observers have claimed that developing countries are effectively
excluded from the system.11 One reason is that because they lack the capacity to retaliate, they have little power to compel rich country defendants to
concede, and thus seldom challenge their trade partners’ policies in court.
11. In a 2011 WTO meeting, the representatives of Bolivia, Cuba, Ecuador, and Nicaragua complained that “In practice, the WTO has become an organization that is not led by its Members, in which
decision-making based on facts is not governed by consensus, and negotiation meetings are not open to
participation by all Members.”
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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Others claim that developing countries are at a disadvantage during litigation itself, since the complexity of trade law has meant that countries with
large, sophisticated legal teams hold an advantage. A related criticism is that
the institution lacks internal transparency. Just as with multilateral negotiations during trade rounds, most countries are kept outside of the room during WTO legal proceedings, even if their interests are at stake (Smythe and
Peter, 2006; Steinberg, 2002; Heisenberg, 2007). And neither domestic interest groups nor non-NGOs have any access to DSU hearings.12 Scholars have
begun to assess these beliefs empirically, and have come to some surprising
conclusions.
It is first worth mentioning that in many ways, the WTO compares favorably in terms of its transparency with, for instance, the other Bretton Woods
institutions. The public access to panel reports, and to the exact legal reasoning that motivated judicial decisions, constitutes a unique window on
decision-making in the institution. The comparison is less favorable with
other courts, such as the European Court of Justice, where hearings are open
to the public.
Partly in reaction to such criticism, the WTO has championed the possibility
of third party participation. Third party status, whereby nonlitigant countries
can join a dispute from its very beginning, is one means of allowing developing and least-developed countries, especially, to be in the room when an
issue they may have a stake in is being negotiated. It is also a means for countries to learn the intricacies of trade law, and build up their legal capacity in
so doing (Busch, Reinhardt and Shaffer, 2009). And there is evidence that the
presence of third parties has a positive effect on the content of settlements.
While complainants are found to capture a disproportionate portion of gains
from settlement when consultations are conducted entirely in private, this is
not the case when third parties are present (Kucik and Pelc, 2013). In those
instances, the complainant, on average, gains no more than the remainder
of the membership. Third parties, in other words, play an enforcement function, by ensuring that any gains reached in a settlement are extended to the
remainder of the membership, as per DSU rules.13
There is a catch. This beneficial effect of third parties pertains to those disputes where a settlement is reached. Yet, it turns out that the presence of third
parties also affects the odds of that settlement ever being reached. Despite
all the benefits of third party participation, this step toward greater inclusivity thus comes at a cost. The presence of an audience makes settlement
significantly less likely (Busch and Reinhardt, 2006; Davey and Porges, 1998;
12. Oxfam International, WWF International, together with eight other NGOs, released a 2003 memo
claiming that the WTO features “proliferation of ‘informal’, undocumented and exclusive meetings,
amounting to lack of transparency and inability of many countries to participate.”
13. See Article 3.2 of the DSU.
World Trade Organization and Judicial Enforcement of International Trade Law
13
Stasavage, 2004). There is enough incentive to posture for the sake of these
other member-states that the odds of reaching agreement between the litigants decline precipitously as the number of other countries in the room
rises. In fact, beyond five third parties, the odds of agreement are effectively
nil (Busch and Reinhardt, 2006). In other words, if settlement is the goal of the
system, then greater inclusiveness through third party participation exerts a
cost. And this is the case even when the audience in the room is made up of
other countries, rather than NGOs and domestic interest groups.
The effect of third parties on the odds of prelitigation settlement, it turns
out, is a special concern for developing countries, who tend to attract the
greatest number of third parties. And, herein lies one of the true cleavages
between rich and poor countries in dispute settlement. Strikingly, it does not
lie in the odds of winning a case, which are statistically indistinguishable for
rich versus poor countries. The true difference, which is often overlooked,
is that on average, developed countries settle, and developing countries litigate. And given what we know about the odds of concessions in each of these
two outcomes, developed countries end up doing better, on average.
Overall, it appears that the main obstacle to recognizing legal merit, choosing the correct cases to file, and reaching settlement during consultations,
comes down to legal capacity, more than to market power, or income. Legal
capacity corresponds to the human and bureaucratic resources a country has
to invest in dispute settlement, and such questions as whether a country has
a permanent delegation in Geneva. And while developed countries naturally
tend to have greater legal capacity and experience, this is something that a
country can develop. Davis and Bermeo (2009) find that the odds of filing a
case grow as a country gains experience, and that such experience is gained
not only by acting as a complainant, but also by being taken to court as a
respondent. What this means is that certain countries are likely to emerge as
disproportionately active players in dispute settlement. Brazil, for instance,
ranks as the fourth most active initiator of disputes in the system, ahead of
far bigger and wealthier countries. It has invested a great deal in its legal
capacity, with powerful effects.
In sum, cleavages between rich and poor countries exist. Yet, they do not lie
where we often think. Success in dispute settlement hinges most of all on the
ability to assess the legal merit of potential cases, and to settle disputes in the
shadow of the law, before a ruling is handed down. Developing countries are
at a disadvantage in this respect, as they tend to settle less and litigate more.
Yet, scholars have shown that countries can learn to use dispute settlement
rapidly. Gaining legal capacity is more easily achievable than growing one’s
market power or retaliatory capacity. Finally, there are institutional solutions
to the participation deficit. The option of joining as a third party is beneficial,
as it allows poor countries to be present and participate in proceedings, to
14
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
voice their views and potentially affect legal outcomes, and to protect their
trade interests in so doing. Yet, third party participation also comes at a cost
to the institution: as diplomats know, audiences make agreement less likely.
There exists an observable trade-off between inclusiveness and the odds of
settlement, meaning that there is no easy solution to the participation deficit.
The challenge of the institution is to balance these competing objectives.
CONCLUSION
WTO dispute settlement is a success story of global governance. That,
together with the fact that there is a wealth of available data about country
commitments and their subsequent behavior, has naturally meant that the
institution has received a great deal of scholarly attention. In this respect,
the availability of rich data, at a highly disaggregated level, has been both a
boon and a challenge for scholarship.
Studies of the WTO have become especially prone to simple correlational
stories, where legal outcomes are regressed on country characteristics, with
little regard for the actual rules at issue. What this has also meant is that there
has been relatively little dialog between political science and legal scholarship. In this way, the promise of WTO research is still falling short of its mark.
As the notion that precedent in trade law can bind both countries and
judges gains greater acceptance, we are likely to see more attention being
paid to words. Law, after all, is a fundamentally rhetorical exercise: the
currently available datasets abstract from the richness of the legal texts and
the judicial rulings that interpret them. Political scientists, especially, need
to recognize that beyond the direction of a ruling, judges’ choice of words
is likely to matter for political outcomes. Judges’ use of judicial economy
(Busch and Pelc, 2010), countries’ appeals of favorable rulings, and the
importance paid to the WTO’s Analytical Index are all signs that the relevant
actors have recognized this fact14 ; scholars will gain from doing so as well.
Similarly, if the study of other international courts is any sign, greater
attention is likely to be paid to individual judges, especially appellate
judges (Voeten, 2008, 2007). In this respect, governments already appear to
know more than scholars, since a majority of disputes now end in deadlock
between the litigants over what panelists to agree on, and the Director
General routinely has to step in to make that choice for countries. In other
words, countries are acting on a past history of rulings in a way that scholars
have yet to recognize.
The WTO, and its dispute settlement body, is a rare example of a functioning international institution that appears to successfully bind country
14. https://www.wto.org/english/res_e/booksp_e/analytic_index_e/analytic_index_e.htm,
last accessed May 10th, 2013.
World Trade Organization and Judicial Enforcement of International Trade Law
15
behavior. This often makes it prone to misperception and resulting suspicion among popular audiences. Moreover, liberalization inevitably produces
winners and losers, and the latter often have an incentive to misrepresent the
institution’s function. As a result, students of international courts such as the
dispute settlement body of the WTO have a double mission. Not only must
they produce innovative research that can offer clues to improving the institution’s effectiveness and addressing its shortcomings, but they must also
communicate to popular audiences, to convey how constraints on government action can be welfare-enhancing, and to demarcate between misleading
concerns and real ones.
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KRZYSZTOF J. PELC SHORT BIOGRAPHY
Krzysztof J. Pelc is William Dawson Scholar and Associate Professor in the
Department of Political Science at McGill University.
His research examines the international political economy, with a focus on
international rules. He has written on participation in institutions, privacy
and publicity, optimal ambiguity, the impact of hard times on cooperation,
and the circumstances under which actors are allowed to break formal rules.
Much of this research looks specifically at the rules of the World Trade Organization (WTO). His work appears, among others, in International Organization, the American Political Science Review, World Politics, the International
Studies Quarterly, the World Trade Review, the British Journal of Political Science, the Journal of International Economic Law, and the Journal of Conflict
Resolution. His book manuscript, “Making and Bending International Rules”
addresses the means by which actors resolve the “architectural challenge” of
legal flexibility: how can we attain the benefits of flexibility, whereby countries are allowed to temporarily break the rules in hard times, while curbing
its abuse?
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