Trade Agreements and Enforcement: Evidence from WTO Dispute Settlement

Abstract

This paper examines implications of the terms-of-trade theory for the determinants of outcomes arising under the enforcement provisions of international agreements. Like original trade agreement negotiations, formal trade dispute negotiations are modeled as potentially addressing the terms-of-trade externality problem that governments implement import protection above the globally-efficient level so as to shift some of the policy's costs onto trading partners. The approach first extends the Staiger (1999, 2011) model from trade agreement accession negotiations to the setting of enforcement negotiations, and the resulting theory guides the empirical assessment. The model is estimated using instrumental variables on trade volume outcomes from WTO disputes over 1995-2009. The evidence is consistent with theoretical predictions that larger import volume outcomes are associated with products that have smaller increases to foreign exporter-received prices (terms-of-trade losses) as a result of the dispute, larger pre-dispute import volumes, larger import demand elasticities, and smaller foreign export supply elasticities. Dispute settlement outcome differences are also explained by variation in institutionally-motivated measures of retaliation capacity and the severity of the free rider problem associated with foreign exporter concentration.

Trade Gains from Legal Rulings in the WTO Dispute Settlement System

“…Previous empirical studies analyze whether a WTO dispute ruling achieves a distinguishable judicial efficacy in trade flows (Bown, 2004; Bown and Reynolds, 2015, 2017; Chaudoin et al , 2016; Shin and Ahn, 2017). From a complainant's point of view, the expansion of an export market through the removal of trade restrictive measures could be the fruition of participating in judicial proceedings of the dispute.…”

“…Identifying import penetration as the key trade liberalization effect for measuring changes in the growth rate of imports before and after the WTO panel rulings, Bown (2004) finds that the effects of WTO DSB's rulings are somewhat limited. More recently, Bown and Reynolds (2017) examine whether outcomes of WTO dispute negotiations fit with Bagwell and Staiger's (1999) terms-of-trade theory. They empirically show that larger post-dispute import volume outcomes are associated with products that have smaller terms-of-trade losses, larger pre-dispute trade volumes, larger import demand, and smaller foreign export supply elasticities.…”

“…Another significant factor in evaluating the success of the WTO DSB is the system's judicial efficacy against trade-restrictive measures: whether the legal rulings of the DSB lead to trade liberalization. If the judicial efficacy of the WTO dispute settlement lies in resolving problems by winning a case against a country that has violated the rules of international trade, it is crucial to examine the nexus between outcomes of legal resolutions and economic consequences (Bown, 2004, Bown and Reynolds, 2017, Chaudoin et al , 2016; Kucik, and Pelc, 2016; Shin and Ahn, 2017). The central idea of this argument, drawing on Bagwell and Staiger (1999, 2001), is that GATT/WTO agreements rely on their self-enforcing nature to address the ‘terms-of-trade externalities’ problem.…”

“…In relevant empirical studies, however, this trade effect of the WTO DSB has not yet been thoroughly explored; literature considering the multilateral effects of the legal outcomes remains scarce. Previous studies, such as Bown (2004, Bown and Reynolds, 2017), conduct this type of empirical study, employing ‘bilateral trade liberalization’ as a measure to study the effects of GATT/WTO dispute settlements. This empirical framework focuses on changes in trade flows between disputing countries (respondent versus complainant); however, it overlooks the ‘multilateral nature (MFN: Most Favored Nation) of the WTO DSB effect’ which creates an adjustment in the respondent's imports from all WTO members, as opposed to imports merely from direct legal stakeholders, such as the complainants and third party countries.…”

How do countries respond to anti‐dumping filings? Dispute settlement and retaliatory anti‐dumping

“…For example, while the average complainant filing a dispute at the WTO suffered a 21% decrease in exports associated with the alleged violation, over 25% of the complainants in their sample experienced an increase in exports to the respondent country following the alleged violation. Bown and Reynolds (2017) found evidence that countries may use the WTO dispute settlement system to address terms of trade externalities associated with trade policy shifts such as new AD orders.…”