Thursday, December 15, 2011

Dispute Settlement in the WTO - An economic study of their impact on member countries

The economic analysis of the law is a major,specialised field. This analysis has relevance more so in International Trade law. Using econometric models to understand the impact of laws/legal measures may throw up interesting, hitherto unknown, insights.

A recent paper titled "What is litigation in the World Trade Organisation worth?" by Michael M.Bechtel and Thomas Sattler is a brilliant exposition of the economic impact of the dispute settlement mechanism on the trade of the parties concerned. The purpose of the paper was, inter alia,

"To explore the value of WTO litigation, this paper examines its economic e ects on countries' bilateral trade relations. We argue that third party status in the WTO litigation process provides a valuable opportunity to freeride on other countries' legal e orts while bene ting from the economic value of a verdict that declares trade barriers by the defendant country as illegal. According to the logic of Mancur Olson's \exploitation of the large by the small",the country that expects the largest net gains from a panel ruling will let a formal complaint as principal parties. Other countries can subsequently join the dispute as third parties. This functions as a signal to the defendant country and the WTO community as a whole that its trade barriers hurt a variety of countries' exports, as third parties are formally heard by the WTO panel. At the same time, they do not have to proactively take legal action as a principal party, which is not only costly in terms of legal e orts, but could also provoke painful retaliatory measures by the defendant. If a country decides not to le a formal complaint in the WTO even though it is a ected by the defendant's trade barriers, this reduces public pressure thereby decreasing international audience costs to the defendant country."

In normal legal discourse, the dispute settlement reports are viewed for their legal interpretation of Agreements, the decision as well as the measures needed to be taken by the parties to the dispute as a result of the ruling. International law in general is considered to be "soft law" as compared to domestic legislation due to the inherent weakness of non-enforceability. 

This paper, however, argues that the WTO dispute settlement mechanism (part of international law) has positive side affects on trade of the parties to the dispute and even on third parties who are considered "free-riders" in the system. It concludes by stating,


Our results suggest that such positive side e ects in fact exist. Sectoral exports from the complainant to the defendant increase substantially after a panel ruling. At the same time, we fi nd that third parties that are also negatively a ected by the disputed trade barrier do not reap less of the economic bene ts that a WTO ruling provides than complainants. Moreover, our results suggest that third parties that align with the complainant gain considerably more than third parties that remain neutral. These results are consistent with previous research and provide additional empirical support for prominent arguments put forward in recent studies.

For example, the economic value of WTO litigation and its redistributive e ects lend additional support to previous work that highlights the role of third parties in dispute settlement (Busch and Pelc, 2010). Also, the existence of positive economic externalities of WTO panel rulings incentivizes incentivizes third parties to lobby for the establishment of a panel, which is consistent with the nding that third party involvement increases the probability of a panel ruling (Busch and Reinhardt, 2006).

Our results also shed light on strategic interactions in international institutions. We provide an estimate of the economic consequences of WTO litigation and therefore identify the incentives that guide strategic behavior in international institutions. The ndings suggest that international judicial institutions may reduce the role of power in international trade, and therefore, power-based discrimination against poorer countries with low legal capacity. Even if these countries are unable to proactively use the dispute settlement mechanism, they can bene t from the positive economic spillover e ects that WTO litigation provides. At the same time, realizing these externalities still require that another country expects large enough bene ts to make carrying the costs of litigation attractive. Therefore, even if we accept that judicial institutions may reduce the importance of power in international trade, some power-based distortions will likely remain."

The paper is an interesting study of using economic theories and methods (Matching Strategy, Treatment Indicators, and Confounding Variables, covariate balance) to understand the impact of a legal decision! 

The heady mix of law and economics is here to stay!


Mediation Experts said...

Dispute settlement has very positive feedback across the globe.

Srikar said...
This comment has been removed by the author.
Srikar said...

I have never disputed that. The WTO Dispute Settlement Mechanism establishes the efficacy of International law!