"The Case Against Reforming the WTO Enforcement Mechanism"

Simon Lester over at the International Economic Law and Policy Blog reports (Public International Law and Economics, January 14, 2008) that the Illinois Law Review has published the papers from a December 2006 symposium on "Public International Law and Economics."   There are an introduction, eight papers and, in many cases, comments on the papers - all online.

Jide Nzelibe of the Northwestern School of Law, argues against reforming the WTO's procedures for enforcing trade commitments made by its members:

"In The Case Against Reforming the WTO Enforcement Mechanism, Jide Nzelibe refutes two leading proposals for altering WTO enforcement. He argues that both “incentive-compatible” and “user-friendly” enforcement reforms threaten to introduce dangers of its own which outweigh the problems of the present enforcement mechanism.  Comments by Ernst-Ulrich Petersmann and Christian Tietje follow."

Here's Nzelibe's abstract:

This essay states the public choice case against reforming the current WTO enforcement mechanism, which allows parties that prevail in an international trade dispute to retaliate against the scofflaw state by suspending equivalent trade concessions.

Currently, there are two distinct kinds of proposals floating around to change this mechanism to make it more incentive-compatible for all member states and user-friendly to developing nations: the first is the use of collective or third-party sanctions; the second is the imposition of monetary compensation.  This essay argues that both these proposed reform schemes introduce potential pathologies of their own that are likely to dwarf those of the current enforcement mechanism.

First, it argues that under a collective or third-party sanction scheme, the administering third-party states will have no incentive to choose a retaliation strategy that maximizes compliance because they will not face any export group pressures to do so. Rather, such states will have an incentive to choose a retaliation strategy that maximizes the returns to their protectionist groups. In other words, collective or third-party sanctions are likely to increase the global level of protectionism without any offsetting compliance benefits.

Second, it argues that the costs associated with monetary damages—including the likelihood they will lead to socially undesirable litigation levels—are likely to be higher than their putative benefits to developing countries.

Finally, the essay suggests that proreform advocates tend to rely on empirical assumptions that might overstate the extent to which the current enforcement scheme actually hurts developing states’ interests.

A quick look at Nzelibe's web site turns up this related 2005 paper: The Credibility Imperative: The Political Dynamics of Retaliation in the World Trade Organization's Dispute Resolution Mechanism .  Here's the abstract:

Under the WTO's dispute settlement procedures, a party that has been injured by a scofflaw state's failure to comply with its trade obligations may retaliate against the scofflaw state by withdrawing equivalent trade concessions.

Legal and economic commentators generally view retaliation as an economically perverse strategy for enforcing free trade norms. This Article explores an alternative explanation, arguing that retaliation may provide the optimal enforcement mechanism for trade liberalization given the prevalence of low compliance incentives and high enforcement costs in international cooperation agreements.

This Article argues that retaliation is superior to other remedial options because it enables an injured state to inflict maximum political costs on the scofflaw state by mobilizing powerful export groups in the scofflaw state against protectionist policies. Furthermore, this Article shows how the presence of significant protectionist groups in the injured state, which stand to benefit from retaliatory measures, also improves the injured state's ability to commit to retaliation. Even if states have asymmetric preferences about protectionist policies, however, retaliation threats can still be credible since there is uncertainty about each state's retaliation costs.

Finally, this Article concludes that contrary to the conventional wisdom, the substantial role of uncertainty in this model suggests that specific performance, and not compensation, ought to be the goal of the WTO's enforcement mechanism.

Comments

[Jonathan Dingel]

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