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Trade brief on

  1. 1. Trade brief on...The WTODispute SettlementPublished by Sida 2004Department for Infrastructure and Economic CooperationAuthors: Marc L. Busch and Eric ReinhardtPrinted by Edita Sverige AB, 2004Art. no.: SIDA3600enThis publication can be downloaded/ordered from www.sida.se/publicationsTrade briefs is a Sida publication serie on trade and developmentissues. The briefs consist of three parts: a description of the content ofthe subject, why the subject is important from a development perspectiveand the issues raised in the debate, and the role of trade-relatedtechnical assistance and capacity building. The purpose is to increasethe general understanding about issues related to trade and development.The serie includes:1. Trade and poverty by Constantine Michalopoulos2. TRIPS and development by Keith Maskus3. Trade in agriculture, the WTO and developing countries by Harryde Gorter4. The GATS and developing countries – at the service of development?by Pierre Sauvé5. Standards as barriers to trade – and how technical assistance canhelp by Digby Gascoine6. Trade, development and the environment by Scott Taylor7. The WTO dispute settlement mechanism and developing countriesby Marc L. Busch and Eric Reinhardt8. Regional integration and developing countries by Jaime de MeloThe views expressed in these trade briefs are those of the authors anddo not necessarily represent those of Sida.1The WTO DisputeSettlement Mechanismand DevelopingCountries1Developing countries need accessto foreign markets if they are toreap the benefits of globalization.Multilateral negotiations under the
  2. 2. World Trade Organization (WTO)play a pivotal role in facilitatingmarket access.2 Yet, throughout theglobal economy, pressures forprotectionism abound, threateningto roll back these gains. As a result,the WTO’s dispute settlementmechanism is widely seen as oneof the most critical – and successful– features of the trade regime.Using this mechanism, WTOmember-states can shine thespotlight of international legalscrutiny on the protectionistpractices of their trading partners.This rule-of-law system is especiallyimportant for developingcountries, which typically lack themarket size to exert much influencethrough more power-orientedtrade diplomacy. Indeed, somepoorer countries have used theWTO dispute settlement system togreat effect, proving the system’sworth from a development perspective.3 Nonetheless, the technicaland legal complexity of thisregime makes it difficult for otherdeveloping countries to effectivelyuse the system, many of whichhave never filed a WTO dispute,despite having repeated grounds todo so. In this issues brief, weelaborate this point by describing:(a) how WTO dispute settlementworks; (b) the prospective benefitsand hurdles to effective use of theregime by developing countries;and (c) some potential directionsfor technical assistance and capacity-building, focusing on WTOdispute settlement, in particular.1. How WTO DisputeSettlement WorksA WTO dispute proceeds throughthree main stages: consultation;formal litigation; and, if necessary,implementation (figure 1). Alldisputes start with a request forconsultations, in which the membergovernment bringing the case
  3. 3. 1 This note was written by Marc L. Busch, Associate Professor, Queen’s School of Business, Queen’s University, Kingston,Ontario, Canada and Eric Reinhardt, Associate Professor, Department of Political Science, Emory University, Atlanta,Georgia, USA, February 2004.2 For example, the largest developed countries have tended to reserve their deepest concessions on agriculture, a sector ofcentral interest to many developing country exporters, for the multilateral forum, not bilateral trade agreements.3 Of course, some developing countries also have access to dispute settlement procedures in preferential trade agreements.Such bilateral or regional mechanisms, however, have yielded fewer benefits in practice. This is because they cover fewerpartners, and often do not have the same in-depth coverage of areas that are especially salient for developing countries, likeagriculture.2to the WTO (the complainant) setsout its objections to the trademeasure(s) of another membergovernment (the defendant). The twosides are then required to consultfor 60 days with the goal of negotiatinga mutually satisfactorysolution to the dispute. Interestingly,a large proportion of casesare successfully resolved duringconsultations; 46% of all disputesbrought to the WTO end at thisstage, and three-quarters of thoseyield at least partial concessionsfrom the defendant.4If consultations do not result ina mutually satisfactory solution,the complainant can request apanel proceeding, marking thestart of the formal litigation stage.Panels are comprised of three tofive persons with a background intrade law, agreed to by the partieson a case-by-case basis. There aretypically two rounds of testimony,including from other countries(third parties) that notify the WTOof a “substantial” interest in thecase. The panel then circulates an“interim report,” offering bothsides an opportunity to commentand seek clarification. The complainantand defendant can stillnegotiate a settlement at this point.In fact, another 13% of all casesend at this stage before a ruling isrendered. If not, the panel issuesits final report, which is thenadopted by the WTO, unless oneof two things happens. First, thetwo sides can agree not to adopt thepanel report for whatever reason,although to date this has nothappened. Second, one or bothsides (but not third parties) can
  4. 4. appeal the panel’s report, whichhappens frequently (i.e., in 73% ofpanel rulings).The Appellate Body (AB)handles these appeals. Unlikepanels, the AB is a standing bodyof jurists which is designed toensure greater consistency acrossits rulings. The AB is tasked withhearing testimony from the parties,and any third parties, on how thepanel may have erred in its legalreasoning. The AB can uphold oroverturn the panel in whole or inpart, and its decision is final. If thisverdict favors the defendant, thecase typically ends. If this verdict,instead, favors the complainant,the dispute may proceed to theimplementation stage.When a defendant is ruledagainst, the panel and (or) AB callsfor it to bring its measures intoaccordance with its WTO obligations.What this means in practiceis, itself, often contested. If thecomplainant feels that the defendanthas not taken appropriatesteps, it can subsequently request a“compliance” panel. This panel,which is often comprised of theoriginal panel members, mustdetermine whether the defendant’sefforts have, in fact, brought itsmeasure(s) into compliance. If not– a judgment the defendant canappeal to the AB – the complainantcan request a second panel toset the level at which it can “retaliate”against the defendant. Thistypically involves imposing tariffson the defendant’s exports. It isessential to note two things aboutretaliation. First, requests forauthorization to retaliate are rare.Indeed, complainants have askedfor authorization to retaliate in justseven of the hundreds of caseshandled by the WTO. Second, it isup to the complainant, and not theWTO, to follow through on this
  5. 5. 4This and all subsequently cited figures on WTO dispute participation, escalation, and outcomes, are derived from the dataseton WTO disputes maintained by the authors, as updated and reported most recently in Busch and Reinhardt (2003). Fulldefinitions of the means of counting disputes and coding outcomes are in Busch and Reinhardt (2002).3authorization to retaliate, and thisis rarer still. Of the six requestsauthorized to date (the seventh ispending at the time of this writing),complainants have retaliatedin only three cases.What is remarkable is that,despite its blend of law and politics,the system works, and worksquite well. In fact, two-thirds ofthe disputes brought for adjudicationin Geneva are resolved to thefull satisfaction of the complainant.But is this true for all members?In particular, is the systemuseful for developing countries,most notably in disputes againstdeveloped countries? The answeris clearly “yes,” although more canbe done to help developing countriesmake better use of the system.2. WTO Dispute Settlementfrom a DevelopmentPerspectiveTrade liberalization promisesconsiderable returns, but comeswith risks. One such risk is thepossibility that a foreign governmentwill succumb to lobbying byits own domestic producers andgrant them protection. This canundermine a developing country’sinterest in reallocating resources tothe affected export sector, sincepoor countries tend to have feweralternative export markets, andfewer export goods. As a result, themere anticipation of such protectionismcan deter or dilute muchneededtrade reform in developingcountries. The WTO disputesettlement system can help insureagainst this risk by maintainingmarket access once it is won,thereby encouraging developingcountries to embark on an opentradegrowth strategy.The conventional wisdom, of
  6. 6. course, is that developing countriesface substantial hurdles in usingWTO dispute settlement.5 Foremostamong these is their lack ofmarket size with which to crediblythreaten retaliation for noncompliance.In other words, the concernis that even with a legal victory inhand, a developing country maynot be able to compel the defendantto liberalize, since its threat toretaliate lacks credibility. This maydeter developing countries fromfiling complaints in the first place.A developing country might alsobe reluctant to initiate a disputebecause of fears of reprisals, suchas the suspension of foreign aid orunilateral trade preferences.In addition to these difficulties,which in fact are true for smalldeveloped countries as well, developingcountries face a unique problem:the lack of legal capacity. Totake full advantage of WTO law,developing countries need thefacility to aggressively pursue theirrights in the increasingly complexlegal trade regime. For suchcapacity, a country must haveseveral things. It needs experiencedtrade lawyers to litigate a case, butalso seasoned politicians andbureaucrats to decide whether it isworth litigating a case, which isarguably the most critical stage ofthe process. It needs a staff tomonitor trade practices abroad,but also the domestic institutionsnecessary to participate in internationalnegotiations on complexissues, like health and safetystandards, which figure so prominentlyon the WTO’s agenda. Thetruth of the matter is that manydeveloping countries lack even asingle full-time WTO representa-5 Hoekman and Mavroidis (2000).4tiveness of WTO dispute settlementderives more from these
  7. 7. intangibles than from trade sanctions,which are rare, and whichcould never have been a crediblefactor in the dozens of cases inwhich wealthy defendants haveconceded to poor complainants.Viewed from this perspective,the emphasis on retaliation at theWTO is misplaced. While it is truethat larger countries can morecredibly threaten to retaliate,threats of retaliation are not the keyto the system. As Robert Hudecexplained, other provisions of theWTO “make legal complaintswithout retaliation quite a bit moreeffective than they were” underGATT. He further observed thatthe inability of poor countries toretaliate “is a problem, but it is aseparate problem that has nothingto do with the utility of the disputesettlement procedure for a developingcountry complainant.”6 Theevidence, to which we now turn,bears out Hudec’s discerninginsight.In looking at the evidence, thefirst thing to note is that mostWTO disputes are among a fewmembers that account for the bulkof international trade, mostnotably the US and Europe. Bycomparison, developing countrieshave had little experience withdispute settlement. But, as Table 1indicates, this disparity is largelyexplained by differences in tradevolumes. Consistent with thisexplanation, a few developingcountries, such as Brazil and India,have launched a relatively largenumber of disputes, while others,like China, are increasingly activein dispute settlement as thirdparties, seeking to gain experiencewith the system.tive, let alone the necessary dedicatedtrade negotiation bureaucracyat home.With these obstacles in mind, it
  8. 8. might seem that developing countriesstand to benefit little fromWTO dispute settlement. But thisis far from true. Poorer complainantshave filed and won concessionsfrom large industrializedstates in a wide variety of disputes,with millions of dollars at stake.These cases have involved exportsof underwear (Costa Rica v. US),shrimp (Thailand and Pakistan v.US), wool shirts (India v. US),gasoline (Venezuela and Brazil v.US), sardines (Peru v. EuropeanCommunities) and poultry (Brazilv. European Communities), amongother products.Why, despite their lack of acredible threat to retaliate, havethese developing countries succeededin making effective use ofWTO dispute settlement? Thereason is that these complainants,like their wealthier counterparts,have benefited from the fact thatdefendants worry about thenormative condemnation that goesalong with a legal defeat, ratherthan threats of direct retaliationper se. In other words, defendantsprefer to avoid being found “noncompliant”because such a labelmay damage their prospects ofgaining compliance when they, inturn, file as complainants. In thisway, defendant governments mayvalue the integrity of the multilateraltrade regime over the outcomeof a single case. This means thatpoor complainants can use legalvictories at the WTO to weigh inon the domestic political debatesover free trade within defendantcountries, as they look to gainmarket access. In short, the effec-6 Hudec (2002), p. 84. Emphasis added.5Nonetheless, the record of disputeoutcomes testifies to the acutenessof the legal capacity problem forthe smaller and poorer countries in
  9. 9. the developing world. Table 2displays the data on dispute outcomessince 1995. To be sure,despite their weak market power,the poorest complainants havenonetheless managed to get largerdefendants to concede fully in over40% of their cases. Yet their developedcounterparts gain full concessionsin nearly three-quarters oftheir complaints. As we show in arecent study (Busch and Reinhardt2003), this is not just an artefact ofdifferences in economic size.Rather, while the system is clearlyworking for all complainants, it isworking better for those with theknow-how and savvy to take maximumadvantage of the legal opportunitiesthe system affords.Note: Row percentages shown in parentheses. The table includes all WTO disputes begun from 1995 through 2000 andconcluded by early 2003. Too few disputes with low income complainants occurred in this period for them to be countedseparately. The association here is statistically significant (c 2=11.96, 4 d.o.f., p=0.02).Sources: World Bank (2003); Busch and Reinhardt (2003).Table 2. WTO Dispute Outcomes by Complainant’s Level of DevelopmentLevel of ConcessionsNone Partial Full TotalLow and Lower-Middle 8 8 12 28(29%) (29%) (43%)Upper-Middle 4 3 8 15(27%) (20%) (53%)High 20 10 82 112(18%) (9%) (73%)Total 32 21 102 155Complainant’sIncome CategoryTable 1. WTO Dispute Participation by Members’ Level of DevelopmentMember Number Number Number Percent ofIncome of WTO of WTO of WTO WTO Members’Category Members Disputes as Disputes as Total ExportsComplainant DefendantLow 44 (34%) 20 (7%) 20 (7%) 3.8%Lower-Middle 33 (26%) 48 (17%) 35 (12%) 12.4%Upper-Middle 26 (20%) 35 (12%) 46 (16%) 10.2%High 26 (20%) 183 (64%) 185 (65%) 73.6%Total 129 (100%) 286 (100%) 286 (100%) 100%Note: Dispute counts include all filed from 1995 through the end of 2002. Trade figures are from 2000 and count both goodsand services but only external trade in the case of the European Community (EC). World Bank country classifications for2002 are used. The “Number of WTO Members” column reports the 2002 figure and does not include the 15 members ofthe EC, as apart from the EC itself. Sixteen of the 20 “low income” complaints were filed by India alone; the other four wereinitiated by Indonesia and Pakistan.Sources: World Bank (2003); Busch and Reinhardt (2003).6This is not to say that the legaldecisions handed down by theWTO are politically biased againstdeveloping countries. Far from it.Developing countries, as it turnsout, are no less likely to win aruling than wealthier complainants.7 Moreover, defendants arejust as likely to comply with a
  10. 10. ruling won by a developing countryas they are with a ruling wonby a wealthier complainant.Rather, the problem is thatdeveloping countries are far lesslikely than richer ones to induce asettlement before a ruling is issued.In other words, wealthier countriestend to resolve their disputesthrough negotiation, either inconsultations or at the panel stagebefore a verdict, whereas poorercomplainants are unable to getcomplainants to offer substantialconcessions at these points in theprocess. In trade disputes betweenthe United States and the EuropeanUnion, for example, all casesyielding concessions have endedbefore the panel rules. In short, thebenefits of adjudication disproportionatelyhappen before formallitigation is complete, and oftenbefore it even commences. This iswhy it is especially important fordeveloping countries to close thegap in “early settlement.”3. Priorities for Capacity-Building and TechnicalAssistance on DisputeSettlementThere are several priorities forcapacity-building and technicalassistance. First, developing countriesneed more access to informationon the WTO-legality of themeasures employed by their majortrade partners. This information is7Both groups win rulings about 60% of the time, with only a little variation from that figure depending on how you define the“development” categories.vital not just in thinking about howto prosecute a case, but whether toprosecute a case. Institutions likethe Agency for International TradeInformation and Cooperation offerassistance to developing countriesin interpreting trends in the globaleconomy, and the Advisory Centreon WTO Law provides subsidizedlegal assistance. To close the earlysettlement gap, developing countriesneed to bridge the important
  11. 11. contributions of these and otherinstitutions, particularly withrespect to evaluating the merits ofa case before it is filed in Geneva,and articulating a negotiatingstrategy to win concessions before alegal verdict is issued. The longtermgoal, of course, is to build-upthis expertise in the capitals ofdeveloping countries, but in theshort-term the focus might be onfunding institutions like the AdvisoryCentre to increase staff andtackle this broader mandate, ordevelop others to fill this role.Second, developing countries alsorequire assistance monitoring compliancewith the WTO verdicts that theywin. Both domestic and foreign tradeassociations and consumer groupscan play a key role in this respect.Indeed, these organizations havestrong incentive to keep track ofprotectionist practices on behalf oftheir constituents, and often haveinformation that governments needto monitor compliance. The challengefor developing countries is notonly to sponsor domestic tradeassociations and consumer groups,but to forge contacts with foreignones. Peru, for example, was assistedby a British consumer group inchallenging Europe’s trade restrictionson sardines, an ally that willprove crucial in monitoring future7compliance.8 Forging alliances withforeign trade associations and consumergroups is also a highly costeffectivestrategies for making betteruse of WTO dispute settlement, sinceresources are shared across a widevariety of organizations with localexpertise.Why should wealthy countriesinvest in capacity building andtechnical assistance for developingcountries? The answer is simple: it isin their own best interest to do so. Ifdeveloping countries are less success-
  12. 12. 8 Shaffer and Mosoti (2002), p. 16.ful in WTO dispute settlement, thisonly incites cheating in the systemmore generally, which in turn hurtswealthier countries, not just poorerones. Lesser success in disputesettlement would also have achilling effect on the willingness ofdeveloping countries to negotiatefuture trade rounds. Investing incapacity building and technicalassistance should thus be a priorityfor the WTO membership as awhole, particularly as a means toclosing the early settlement gap.8Figure 1A Schematic of the WTO DisputeSettlement ProcessConsultation StageFormal Litigation StageImplementation StageConsultationsPanelProceedingsAppellate BodyCompliancePanelArbitrationPanel9ReferencesBusch, Marc L., and Eric Reinhardt (2002), “Testing International TradeLaw: Empirical Studies of GATT/WTO Dispute Settlement”, in DanielM. Kennedy and James D. Southwick (eds.), The Political Economy ofInternational Trade Law: Essays in Honor of Robert Hudec, Cambridge UniversityPress, NY and Cambridge.Busch, Marc L., and Eric Reinhardt (2003), “Developing Countries andGATT/WTO Dispute Settlement”, Journal of World Trade 37(4), pp. 719-735.Hoekman, Bernard M., and Petros C. Mavroidis (2000), “WTO DisputeSettlement, Transparency, and Surveillance”, World Economy 23(4), pp.527-542.Hudec, Robert E (2002), “The Adequacy of WTO Dispute SettlementRemedies”, in Bernard Hoekman, Aaditya Mattoo and Philip English(eds.), Development, Trade, and the WTO, World Bank, Washington, DC.
  13. 13. Shaffer, Gregory and Victor Mosoti (2002), “EC Sardines: A New Modelfor Collaboration in Dispute Settlement?”, Bridges 6 (7) October, pp. 15–22.World Bank (2003), World Development Indicators, World Bank, Washington,DC, www.worldbank.org10Halving poverty by 2015 is one of the greatestchallenges of our time, requiring cooperationand sustainability. The partner countries areresponsible for their own development. Sidaprovides resources and develops knowledge andexpertise, making the world a richer place.SWEDISH INTERNATIONALDEVELOPMENT COOPERATION AGENCYSE-105 25 Stockholm SwedenPhone: +46 (0)8 698 50 00Fax: +46 (0)8 698 56 15sida@sida.se, www.sida.se

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