Punishments and Dispute Settlement in Trade Agreement

Wilfred J. Ethier
2001 Social Science Research Network  
This paper interprets dispute settlement procedures and punishments as responses to the fact that trade agreements are incomplete contracts. If no weight is given to the adjudication phase and if the degree of trade relatedness is known with certainty, the negotiated trade agreement will feature commensurate punishments, will induce violation of the dispute settlement ruling, and will deliver optimal liberalization and optimal unilateral trade-related action. With the adjudication phase of
more » ... rn, the trade agreement will feature less liberalization, but still with a presumption of at least approximate commensurate punishment. The optimal trade agreement will likely induce abiding by the ruling when negotiators attach more importance to the adjudication phase, and violating it when they attach less. NEGOTIATED TRADE LIBERALIZATION under the auspices of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) has been the big international economic story of the last sixty years. The GATT contained a dispute settlement procedure (DSP) which proved to be of only spasmodic significance. The Uruguay Round of multilateral trade negotiations, which established the WTO, significantly changed this procedure in the hopes of increasing its use. These hopes, at least, have not been frustrated. But the recent vociferous (and sometimes violent) protests of environmentalists and social activists have been motivated to a significant (and perhaps dominant) degree by the decisions of the WTO DSP. This paper addresses, in such a context, the economic role of a system of punishments and dispute settlement.
doi:10.2139/ssrn.273212 fatcat:ownmc7tbfjfcno4rzh3kdkjaqy