EVENTS

Date:	Monday, January 30, 2006
Time:	4:00 PM -- 5:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

January 2006

The WTO Dispute Settlement System and Developing Countries

One of the main goals of the new World Trade Organization (WTO) dispute settlement system, established during the Uruguay Round, was to diminish the power disparities between large developed economies and smaller developing ones by giving the less developed countries a more accessible forum to air their trade grievances. At a January 30 AEI panel discussion, Marc Busch of Georgetown University and Eric Reinhardt of Emory University presented their research on the impact of the new WTO dispute settlement system on developing countries.

Marc L. Busch and Eric Reinhardt
Georgetown University and Emory University

The GATT dispute settlement process was typically open to the influence of power politics. Because this arrangement favored developed countries over developing ones, the WTO implemented a more rules-oriented system that was designed to give developing countries greater opportunity to carry out successful litigation. Contrary to expectations, however, Mr. Busch and Mr. Reinhardt found that under the new system, poor countries are not more likely to win concessions under the WTO dispute settlement system, but rich countries are. The main reason for this gap is not due to a gap in verdicts or compliance rates for poorer versus wealthier complainants, but in the fact that developing countries benefit from early settlement at a far lower rate than their wealthier counterparts. This gap in early settlement is not a function of market size, but rather income as a proxy for legal capacity.

Under the old GATT dispute settlement system, a complainant country began the process by making a request for consultation. If the consultation did not yield a satisfactory outcome, the complainant could request a panel. However, a defendant could block a request for a panel by simply withholding its consensus. If the defendant did not block the request, the complainant could await a ruling, unless the defendant was able to block the ruling. While defendants were rarely able to block rulings, they were fairly successful in blocking panel requests. This deterred developing countries from making use of the system. In addition, even if the panel ruled in favor of the complainant, the defendant could decide not to abide by the decision. Then, if the complainant attempted to request authorization to retaliate, the defendant could block the request for retaliation. Thus, under the old system, there were veto points that could work against a complainant country.

Under the WTO system, it is impossible to block the various steps of the dispute settlement system: the request for a panel, panel rulings, appellate review, the compliance panel, and arbitration. This institution of the rule of law over power politics was meant to entice the developing countries to make greater use of the system, but have they really?

The new system puts a premium on legal capacity, which disproportionately hurts developing countries. Lawyers, diplomats, and economists are essential for presenting a good case, but many developing countries have either no permanent delegation in Geneva or their delegations are woefully understaffed. Further, since the United States, Canada, and the European Union carried out 50 percent of dispute cases between 1980 and 2002, most countries lack dispute settlement experience. Therefore, a poor complainant’s higher relative litigation costs decrease the credibility of its threat to pursue the case. Consequently, even defendants with weak cases against developing countries are less likely to concede early, and this is when most early settlements take place. Mr. Busch and Mr. Reinhardt define early settlement as a concession won during the consultation phase or before the ruling of the panel.

The hypothesis of Mr. Busch and Mr. Reinhardt’s study was that wealthy complainants are more likely than poor complainants to induce concessions under the WTO, as compared to the GATT period. Further, this widening gap should be most evident in disproportionate rates of early settlement, rather than in the pattern of pro-plaintiff verdicts or compliance ex post.

Mr. Busch and Mr. Reinhardt tested their hypothesis by examining 380 concluded GATT and WTO disputes between 1980 and 2000. The data showed that due to the transition from the GATT system to the WTO system, the rate of concessions for developing countries went from approximately 38 percent to 53 percent. Success for developed countries, on the other hand, went from about 41 percent under the GATT system to about 71 percent under the WTO system. Also, 61 percent of all instances of full concessions under the WTO occurred prior to the ruling. For more specific data, see the accompanying power point presentation.

Furthermore, the apparent gains of developing countries are typically only experienced by those developing countries that have higher incomes. Whereas under GATT developing country winners and losers had equal average incomes, under the WTO developing country winners have 50 percent higher incomes than their losing counterparts.

However, Mr. Busch and Mr. Reinhardt also found that legal capacity is not the only obstacle for the developing countries. They found that the involvement of a third party diminishes the probability of early settlement. With no third parties, predicted probability of early settlement is 70 percent. With a mean number of third parties and no systemic issues, the probability drops to 31 percent. This is particularly harmful for developing countries because when they are the complainants, third parties are twice as likely to side with the defendant.

The implications for the WTO are that the rules-oriented system does not necessarily level the playing field. Inequity in the workings of the system encourages illiberal policies on all sides, for both the rich and the poor. To help the developing countries, it is important to target capacity building at pre-litigation negotiations.

Jay Smith
Institute of International Economic Law, Georgetown University Law Center

A great contribution of the work of Mr. Busch and Mr. Reinhardt is that it focuses attention on early settlement, an area that the legal community tends to disregard in favor of analyzing actual verdicts. Further, when political scientists analyze trade disputes, they tend to emphasize power but neglect pure legal capacity.

However, Mr. Busch and Mr. Reinhardt have embarked on a remarkably difficult task in trying to codify the outcomes of all cases. Although their methodology of simply examining whether or not the parties obtained their desired outcomes is valuable, it does neglect certain factors. For example, whereas Mr. Busch and Mr. Reinhardt focus primarily on whether or not the objectives were met, it is worth noting that governments might tend to make maximal claims, not expecting to have full concession on everything they demand. Thus, under the category of partial concession there are many different types of cases.

An alternative approach to the study under consideration would be to look not at the nominal policy concessions, but at actual market effects. Further, it would be useful to examine whether certain markets have become more liberalized as a result of the case or other macroeconomic factors. It would also be useful to examine how the degree of liberalization depends on retaliatory capacity as well. While examining the issue of trade dispute settlement by employing these factors would not contradict the results of Mr. Busch and Mr. Reinhardt, doing so might provide greater clarity.

In addition, it is worth noting that whereas Mr. Busch and Mr. Reinhardt approach the WTO dispute settlement system as a nexus of bilateral contracts and negotiations, most of the legal community tends to view it more as a rules-oriented system. Further, it is interesting to point out that during the Uruguay Round, when the countries were negotiating the new system, the developing countries that were supposed to benefit, like India, opposed the new rules, while developed countries like the United States were in favor. Thus, many countries were able to anticipate the ultimate effects of the system. Lastly, along with devoting resources to boost the legal capacity of poorer countries in actual dispute settlement cases, developing countries might be better off if they had greater legal capacity in negotiating the actual dispute settlement rules in the Doha Round.

Timothy M. Reif
House Ways and Means Committee

Given the problems that have faced the Doha Round negotiations, the work of Mr. Busch and Mr. Reinhardt comes at an appropriate time. Many developing countries are dissatisfied with the WTO, and the current workings of the dispute settlement system probably factor highly in that dissatisfaction.

There are several issues that should be taken into account in conjunction with the research of Mr. Busch and Mr. Reinhardt. First, it might be beneficial to analyze the strength of the cases that reach early settlement, in that the strength of the cases might have an effect in whether or not they reach early settlement. Second, despite the flaws of the new system, it is important to realize that developing countries have had greater participation in the WTO dispute settlement process than they did under the GATT. Third, even if the countries themselves are poor, industries within those countries can sometimes pay for legal services. Furthermore, because the WTO system is rather young, there is likely the problem of limited data.

Beyond these issues, as developing countries make proposals to fix the system, it will be important for them to consider the rise of China. If it appears that they might have future cases against China, as well as other developing countries, they will have to reevaluate how to propose rule changes. In addition, it might be useful to consider a proposal known as “binding arbitration,” in which there would be a stage in dispute settlement in which every consultation phase would involve a professional arbitrator that would present a proposal to the parties. While either party could reject the proposal, having that option could help solve the leverage deficit that developing countries face in that level. Lastly, on a practical level, despite its problems, there is no system in the world that processes these sorts of cases faster than the current WTO dispute settlement system.

AEI staff assistant Dan Geary prepared this summary.