Law and Economics at the WTO - A tense but necessary relationship

I have blogged about the relationship of economics and law in the interpretation of international trade law here and here. What is the relevance of economic principles, complex econometric models and economic analysis in WTO litigation. As lawyers one tends to ignore or sidetrack principles of economics while interpreting legal provisions.

Joost Pauwelyn in this piece titled "The Use, Nonuse and Abuse of Economics in WTO and Investor-­State Dispute Settlement" has a brilliant exposition of the complex relationship between economics and the law especially in relation to WTO litigation and Investor-State disputes. It traces the tense relationship, possible areas of application and the caveats required to have a meaningful combination.

Especially in relation to WTO disputes, the author states that the increasing use of economics is found in the determination of "like products", an analysis of "less favorable" treatment under various Agreements, definition and impact of "subsidies" as required by the ASCM, interpretation of the ever expanding "general exceptions" clause under Article XX of the GATT. he also prescribes some caveats in the unbridled use of economic principles like economics must be filtered through legal criteria, methodological discipline, for communication purposes, ‘keep it simple’, due process and avoiding or disclose value judgments.

He concludes with these words:

“Legal certainty and economic principles are not substitutes but complements”.100 Economics has a role in WTO and investor-­‐state dispute settlement. Economics provides insights not only in lawmaking but also in law application, both fact establishment and legal interpretation. The influence of economic evidence and arguments, including quantitative studies, is on the rise in both fields (in contrast to, for example, the practice of the International Court of Justice). It spans far beyond damage calculations and decisions on appropriate trade retaliation. In the WTO: like products (where quantitative studies could be used more prominently), less favorable treatment (where a tension is emerging between “detrimental impact” which must be shown, and “actual trade effects” which are not required), subsidies (e.g. assessing anticipated export shares for de facto export contingency or ex post serious prejudice for actionable subsidies) and general exceptions. In investor-­‐state arbitration: economic necessity (where the infamous Enron award was annulled for being based on economics rather than law). And in both regimes many more provisions lend themselves to input from economics. For example, in the WTO: causation and exceptions; in investment: definition of investment, fair and equitable treatment. Such input can provide more robust, empirically sound and predictable outcomes and better connect trade and investment law to the ‘real world’. It improves the output and effectiveness of both litigating parties and adjudicators. This, in turn, can broaden the support and legitimacy of both the trade and investment regimes. 

At the same time, reliance on economics does not come without risks. “Economic evidence is a powerful but also a dangerous tool”. Core caveats and limits are: (1) at least in litigation, economics must be filtered through legal criteria; (2) methodological discipline, to be respected by both the parties and the adjudicator (to avoid collective action problems, these disciplines must be imposed ex ante on both parties, which is not the case today); (3) for communication purposes, ‘keep it simple’; (4) due process (e.g. in respect of input by WTO staff economists; the independence and cross-­‐examination of party-­‐appointed experts; and participation of poor countries or small investors); and (5) avoid or disclose value judgments. The cases and controversies discussed in this contribution indicate the progress made on all five scores but highlight that a lot of work must still be done to conform to ‘best practices’. Appropriate use of economics surely tops nonuse. At the same time, given the risks involved, nonuse may eventually be wiser than misuse or abuse." 

The theme of the relationship between law and economics has a long standing one, especially in the context of trade law. Economics and its quantitative analysis has a bearing on judicial interpretation. Infact, this blog has a rich source list of blogs that believe in this inextricable relationship - Law and Economics and The Becker-Posner blog. What does this mean for litigation and negotiation at the WTO - more interdisciplinary teams of trade lawyers, economic experts to handle such complex situations. The question perhaps is not whether law or economics should prevail - the issue is how each could supplement the other in understanding realities of trade and business.