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Enforcing WTO Commitments: Dispute Settlement and Developing CountriesSomething Happened on the Way to Heaven

Bernard M. Hoekman World Bank and CEPR and Petros C. Mavroidis University of Neuchtel and CEPR


June 26, 2000

An early version of this paper was presented at the conference Developing Countries and the Millennium Round Geneva, September 20-21, 1999. We are grateful to Bill Davey, Marco CEJ Bronckers, Mike Finger, Henrik Horn af Rantzien, Rob Howse, Bob Hudec, Phil Levy, Aaditya Mattoo, Claudia Orozco, David Palmeter, Arvind Panagariya, Andr Sapir, Lorenzo Sigismondi, Joel Trachtman and Diana Tussie for helpful comments and discussions. The views expressed are personal and should not be attributed to the World Bank.

Enforcing WTO Commitments: Dispute Settlement and Developing Countries

Introduction One of the features of the World Trade Organization (WTO) that attracts a lot of attention is its dispute settlement system. The WTO is unique among international organizations in embodying what is perceived to be an effective enforcement mechanism. The system is based on the procedures that were developed under the auspices of the General Agreement on Tariffs and Trade (GATT), but goes beyond it in a number of important ways.1 It is a decentralized system in that there is no provision for ex officio complaints. Enforcement occurs at the initiative of WTO members. The only ex officio instrument is the Trade Policy Review Mechanism (TPRM), a rather toothless institution which stricto sensu does not have close links to enforcement. Consequently, enforcement is inherently an asymmetric affair that depends on the importance of an issue to individual members and their ability to defend their interests. Although asymmetries between WTO members are a fact of life, in the context of dispute settlement we argue that measures need to be taken to enhance participation by developing countries. In particular, we believe there is a need to re-think the current system of remedies at the WTO. We also argue that much can and should be done at the domestic/national level to make enforcement more effective. However, the payoffs to such actions depend importantly on re-shaping the WTO remedies system. The paper has five parts. In Section 1 we discuss a number of fundamental dimensions of dispute settlement as it occurs in the WTO system (the Dispute Settlement UnderstandingDSU). In Section 2 we identify what to our mind are key reform areas from a developing country perspective, and compare our wish list with the issues that have been raised in the (still ongoing) DSU review. In Section 3 we explore what might be done moving forward, distinguishing between options that can be pursued unilaterally (that is, in the absence of an international agreement) and reforms that require action at the multilateral level. Section 4 concludes.

1: Developing Countries and the DSU Without effective enforcement mechanisms, agreements have little value. The standard device used within a country a central authority: the apparatus of the State is not available internationally. The WTO model is similar to most international agreements in that enforcement is essentially decentralized: there is no scope to bring ex officio complaints and compliance ultimately rests on the persuasive force of multilaterally authorized bilateral countermeasures. The absence of a supra-national watchdog that can bring complaints against violators of the international contract means that the functioning of the

See Hudec (1993) for a comprehensive analysis of how the GATT system functioned and evolved from its inception to the early 1990s.

system depends on the incentives of the various players to use the system. What matters then from a systemic perspective is whether all players have the same capacity to make good use of the system. Two factors are particularly important in this connection: access to information on illegal trade practices;2 and the ability (likelihood) of obtaining a satisfactory outcome. In quest of information WTO members currently obtain information regarding possible illegal foreign trade practices through three routes: the TPRM; national state mechanisms to collect information; and private complaints. The TPRM is the primary multilateral mechanism. Although the WTO secretariat is not permitted to judge whether observed practices comply with the WTO, TPRs can provide WTO members with relevant information. The larger traders are subject to a TPR every 2 or 4 years depending on their share in world trade. Most developing countries are reviewed only once every six years or more. It can be argued that the frequency of surveillance is the inverse of what is required, given that private export interests have the greatest incentives to monitor the policies that are applied by the largest trading countries. The counter argument is that high-income nations obtain relevant information from their commercial attaches around the world and their private sector, whereas developing country networks of commercial attaches are much more limited, and their private sector export interests will tend to be concentrated in fewer markets. Thus, the payoff to multilateral surveillance of major markets may be more important for them. Whatever the case may be, as conceived and applied, the TPRM process is inherently limited in terms of what it can achieve from an enforcement perspective. In practice, TPRs tend to focus on broad trade policies, and not on the impact of (clusters of) measures at the level of individual products. It is therefore not surprising that very little, if any, use is made of the TPRM in the context of litigation before the WTO adjudicating bodies.3 A precondition for defending WTO rights is therefore the availability of information compiled at the national level. One traditional vehicle for this are commercial representatives and attaches stationed in embassies. However, many developing countries do not have a substantial government presence overseas. Even high-income countries do not rely extensively on diplomatic channels. The primary source of information tends to be the private sector. Some countries have implemented formal mechanisms that foster communication and interaction between industry and government. The United States is the leading example, but the EC and Japan also follow this track. All three produce annual compilations of complaints expressed by their national firms regarding discriminatory foreign policies.4 Although the information that is contained in these compilations is ad hoc, with no attempt being made to rank order the issues that are identified on the basis of a national welfare criterion, they reflect a proactive stance on the part of both industry and the government.

Two other forms of complaints exist as well, non-violation and situation complaints. The latter have never been used, while the former are used quite infrequently. What follows is applicable to all forms of complaint. 3 The infrequent review of developing countries means that small markets (poor countries) attract less scrutiny than large (rich) ones. This has a downside, as it can reduce the value of WTO membership for developing countries by creating greater uncertainty that a government will maintain a WTO-consistent policy stance. 4 E.g., the National Trade Barriers Report (USTR) or the annual Report on U.S. Barriers to Trade and Investment prepared by the European Commission (DG-I).

Many developing country governments are not well-equipped to collect information from their private sectors about what is going on in export markets. Expertise in the area of WTO rules is thin in almost all developing countries, and in many cases export interests are not aware of WTO rights and obligations. All in all, with respect to detecting illegalities (gathering information), developing countries are in a substantially worse position than developed countries. Many are essentially forced to free ride on the enforcement activities of other WTO members. Remedies in the WTO Much of post-Uruguay round literature on dispute settlement has concluded that the changes made in moving from GATT to WTO has led to greater efficiency and effectiveness of multilateral dispute settlement. The recent avalanche of Art. 21.5 DSU compliance panels gives food for thought.5 Add to this the great increase in requests for countermeasures. Not a single case in the GATT years, 6 compared to three cases to date under the WTO (in Bananas and Hormones, the United States has imposed countermeasures against the EC, whereas Ecuador is about to do the same against the EC in the context of the Bananas litigation). Another request is pending (Canada has requested authorization to adopt countermeasures against Brazil in the context of their long-standing dispute on export subsidies to the aircraft sector). A frequent argument used to be that because GATT contracting parties respected the contract, they did not need to have recourse to countermeasures (retaliation). Recent practice casts considerable doubt on this argument. The adoption of a more formal legal framework revealed weaknesses in multilateral enforcement that were previously hidden behind the veil of national sovereignty (the need for positive consensus to establish a panel, to adopt a report, and to be granted authorization to adopt countermeasures). A key problem is that the remedy that tends to be proposed by a panel is not specific and does not involve any compensation for the loss that has been incurred by a firm or industry. The government found to be in violation is simply told to bring its measures into compliance with WTO rules.7 Imagine for example a case where a Panel/Appellate Body has recommended a remedy with a prospective function.8 At most, some three years after initiating the consultation process, a WTO Member can expect that the author of the illegal act will stop it,9 or choose to be subjected to countermeasures. The

Not all observers were equally enthusiastic. Hoekman and Mavroidis (1996) cast doubt on a remedies system based on recommendations and argued in favour of extensive use of specific suggestions to limit the discretion of respondents in bringing measures into compliance. 6 Although the Netherlands were authorized to take retaliatory measures against the United States in the 1950s, they never invoked the right. The EC also decided not to adopt countermeasures in the Superfund case 7 Reimbursement of duties paidi.e., a limited form of financial compensationhas only been recommended in the case of a few antidumping related cases prior to the creation of the WTO. See Palmeter and Mavroidis (1999). 8 Although the recent Art. 21.5 compliance panel report on Australia Leather makes it clear that retrospective remedies remain very much an option in the WTO, the overwhelming majority of panel reports opt for prospective remedies, see Mavroidis (2000). 9 Criticism is often voiced concerning the length in time the WTO dispute settlement procedures (DSP) takeover 30 months for a definitive conclusion on a given issue . Rapid resolution of a problem is not in the cards if consultations do not lead to a settlement, reducing the present discounted value of winning a case that goes to a panel. At the same time, it must be pointed out that the time-limits in the current DSP fare pretty well in comparison not only to

latter, in accordance with Art. 22.4 DSU, must be substantially equivalent to the injury caused. If a WTO member can afford countermeasures against it (that is, any time the payoff obtained from the domestic lobby supporting the illegal act is larger than the political cost that is incurred by having some exporters subjected to retaliatory measures), why should it comply at all? Countermeasures are the ultima ratio of the system. WTO members will eventually be persuaded to abandon their WTO-inconsistent practices if countermeasures (or threat thereof) are a credible threat. Unless countries lose more by keeping their illegal practices intact than vice versa, they will hardly have an incentive to comply. On the other hand, some governments may put greater weight on the profits of certain segments of society over the national welfare and act accordingly. A decision by a WTO adjudicating body calling for cessation of an illegal trade practice implies a decision to re-distribute wealth within a particular society. This may be difficult to implement given electoral politics or the power of rent-seeking interest groups.10 The point here is that by linking the level of countermeasures (the procedural mechanism to induce compliance with the WTO contract) to the damage done (rather than to the profit made), WTO members may not have an incentive to comply at all. Although formally there is symmetry among the various WTO players when it comes to adopting countermeasures (since countermeasures are limited to the value of damage incurred), the effectiveness of countermeasures depends on the relative economic importance of the party adopting them. Being locked out of the EC or the US market is much more costly than being locked out of Ecuador. Moreover, countries highly dependent on international trade will be hurt more by imposing countermeasures than large countries that are less dependent on imports. The extent of export diversification also matters. If a country constitutes a major export market for a WTO member found to be in violation, the threat of countermeasures will be much more effective than if the country is just one of many markets. Most importantly, countermeasures are bad economic policyraising trade barriers is costly to the economy. Interestingly, the Bananas arbitration acknowledges this point.11 Adoption of countermeasures is simply not an option poorer WTO members should consider. Thus, those WTO members that can afford to either take countermeasures or to incur the costs of action being taken against them are in a better position. When acting as complainants they will use threat and/or imposition of countermeasures in order to induce compliance; when acting as defendants, they will have at least the luxury of weighing the pros and cons between changing the domestic policies at stake (in order to avoid imposition of countermeasures) or simply keeping the domestic policies at stake intact (and see countermeasures imposed against them). In a recent interview, Pascal Lamy, the EC Commissioner responsible for international trade issues, illustrated this point as follows: As long as you pay the penalties, you can go on as you are.12
other international instances (indeed, the average litigation before the ECJ takes almost two and a half years, whereas cases before the ICJ over three years) but also to many domestic instances as well. Hence, length of the process is not the real problem.
10 11 12

See on this issue, the excellent paper by Busch (2000). See the Bananas arbitration, op. cit., at 86. See Press and Communication Service Brussels, No 3036, Tuesday May 23, 2000.

The foregoing suggests that countermeasures are often ineffective and most importantly do not always guarantee paritas armis among the WTO players. It is true that following the events in the Bananas arbitration some balance has been restored. Ecuador, by requesting authorization for countermeasures on TRIPs, accomplished two things: it identified European Community interests where retaliation could be imposed at limited (perhaps zero) cost to domestic consumers, and it signaled the possibility that TRIPs could evolve as the preferred area for developing countries to take retaliatory action against developed ones. The latter signal could prove quite effective given that developed WTO members are the demandeurs in the TRIPs context and any effort to undermine the reach of the TRIPs agreement will not be easily tolerated by domestic IP lobbies in Brussels and Washington DC. That said, it is highly unlikely that the European Community will change its bananas import regime because of Ecuadorian countermeasures in TRIPs. 2: What Should Be Done? The foregoing suggests that proposals for reform of WTO dispute settlement mechanisms should centre on improving information on to detecting illegalities in export markets and ensuring that the regulation of remedies guarantees paritas armis among WTO members. Better mechanisms to detect illegalities would contribute to increased transparency with respect to national trade policies. One option to consider in this regard is to outsource part of the enforcement function by creating a special prosecutor entity that can act on an ex officio basis (Hoekman and Mavroidis, 2000). However, it is quite unrealistic that supranational watchdogs will be introduced in the WTO system in the foreseeable future. Hence, enforcement will remain predominantly de-centralized. This implies that much depends on creating a WTO culture at home: there is a need for WTO expertise, which in turn requires the investment of resources in training and the development of institutions to compile and process relevant information (more on this below). At the multilateral level, a re-negotiation of the remedies at the WTO should be a priority. The DSU review has devoted attention to one aspect of the issue: how to ensure that findings of illegality will always and unequivocally be a multilateral competence (the famous sequencing issue of Arts. 21.5 and 22 DSU). The next issue to address should be a re-negotiation of the ultimate remedy as such. It is simply not good enough for a developing country to have to ultimately rely on obtaining authorization to impose countermeasures, thereby adding new injury to old (by adding on costs to on to those incurred by exporters). A re-negotiation of remedies should help serve the objective function assigned to remedies: to ensure that the contract will always be respected and to serve as a procedural vehicle to ensure that ultimately illegal practices will be eliminated. Art. 22.1 DSU reflects the institutional acknowledgement of this point. An auxiliary remedy-related concern is the need to better enforce Art. 3.6 DSU on bilateral settlements. Art. 3.6 DSU requires all bilaterally reached solutions to be notified to the WTO and to be compatible with the multilateral rules (Art. 3.5 DSU). Any member that perceives this not to be the case can question a settlement before the Dispute Settlement Body. Such bilateral deals can hide MFNinconsistent behaviour and be detrimental to non-participating WTO members. As the vast majority of

developing countries do not participate in dispute settlement procedures, by definition they do not participate in such deals. By addressing this issuewhich can be achieved without formal amendment of the WTO rulesgreater transparency would be achieved with respect to national trade policies, reducing the cost of detecting illegal trade barriers. Our wish list could be extended to other issues, but these are all subordinated to the remedies question. Pursuing other issues could detract attention away from the main issue, and are therefore best left off the table for the time being. What Has Been Done to Date? In 1999 a review of the WTO DSU was initiated. Given the failure to launch a new round of talks in Seattle, the results of the DSU review were not presented for adoption. Informally, the DSU review continues. Since both the information and remedy issues fall under the DSU, they could have been raised by WTO members. However, neither issue figured prominently in the 1999 review. Instead, developing countries emphasized concerns relating to the current architecture of the DSP and the ensuing de facto discrimination against them. One reflection of this perceived bias is the fact that no least developed countries (LDCs) have been a participant in WTO dispute settlement. The empirical evidence regarding the prevalence and magnitude of bias in DSP is ambiguous. Horn, Mavroidis and Nordstrmm (HMN) (2000) conclude that if one uses the share of a countrys exports in world trade as a predictor of likely participation in WTO DSP, the picture is not substantially biased. The major divergences are that the United States is slightly over-represented, and Japan is underrepresented. The fact that LDCs do not participate can largely be explained by their very small share in global trade. HMN recognize that the observed pattern of cases may not reflect what actually happens. For example, they note that their dataset does not include cases that are settled bilaterally and where bargaining power may easily bias outcomes. Objections can also be raised regarding the assumptions of the model that is used. The probability of a country imposing trade barriers (which is assumed constant for all players in the HMN model) may differ across countries. In practice, the probability of filing a case is likely to be non-linear: (developing) countries that export a relatively large share of their output to a single market, or are dependent on only a few commodities, should have a greater incentive to contest perceived violations of WTO rules. Conversely, more diversified (high-income) exporting nations, have greater opportunities to divert to other markets, lowering the relative payoff to initiating dispute settlement. Developing countries may also confront higher information collection costs. Finally, as noted earlier, the existing remedies that can be obtained at the WTO may give developing countries less of an incentive to bring cases. Clearly much more research is required to determine whether the system is biased. The issue raised most frequently by developing countries in the DSU review concerned modifications of the WTO contract with respect to provision of technical assistance to developing countries. The argument runs as follows: rich countries such as the United States, the EC or Canada the major players in terms of dispute settlement activity have extensive resources on which they can draw.

They are well equipped with legal talent and are well briefed by export interests. Developing countries, in contrast, have limited national expertise available and find it difficult to bring or defend cases. Instead, they must rely on (expensive) third-party expertise.13 The cost of bringing cases to the WTO is considered an important factor restraining invocation of dispute settlement. These costs, which are not only financial but also related to scarcity of administrative resources, prevent many developing countries from using the system to their full advantage (ACWL, 1999; Michalopoulos, 1999). Article 27:2 DSU provides for technical assistance to be given to developing countries by the WTO. The Secretariat has only a very limited ability to advise developing countrieslegal technical assistance services are provided by two academic experts on a part-time basis. The adequacy of the assistance on offer is further reduced by the DSU requirement that such assistance can only be provided after a Member has decided to submit a dispute to the WTO. Thus, assistance in evaluating whether practices are inconsistent and determining what might be winning cases cannot be given. This requires expertise at the level of the national administrations, something many developing countries do not have. Technical assistance therefore is mostly used when developing countries are respondents. The consensus among developing (and many OECD) countries is that the available assistance is inadequate. What more will be done is not quite clear at this point. Because of the confusion surrounding the post-Seattle situation, the DSU review has effectively been extended, although no formal framework has been established. An important question is how much good strengthened technical assistance (indeed, an army of lawyers) can do if not accompanied by measures aiming at strengthening WTO-expertise on the domestic plane. At the end of the day, a client hires a lawyer based upon information that an illegality has been committed. In domestic legal systems detection of most illegalities is trivial (anti-contractual behaviour; theft, etc.). This is not necessarily the case at the international plane. Another issue concerns facilitation of developing country participation in panel/Appellate Body proceedings as third parties. An argument can be made to the effect that, if the WTO adjudicating bodies are repeatedly confronted with a point of view, they will eventually have to 'internalize' it in their argument (either through acceptance or through rejection). In both cases uncertainty is reduced in that agents know what to expect next time. However, this pre-supposes coherence in the formulation of a point of view which can only be the outcome of a well-thought domestic debate. And this domestic dimension is simply lacking. Otherwise, ad hoc points of view in a third-party context are irrelevant: a third party does not care so much about the outcome of a particular case; indeed, if it did, it would have participated more actively in the proceedings. A third party cares more about systemic issues. And policy recommendations (or the ensuing legal argument) on systemic issues must by definition be the outcome of a domestic debate, which in most developing countries is simply non-existent.


Until Bananas III countries also were impeded from bringing non-government, private legal counsel before the panel, but an Appellate Body decision to allow representation by private lawyers removed this constraint as far as the Appellate Body was concerned. A subsequent panel then decided there were no provisions in the WTO or the DSU that prevented a WTO member from determining the composition of its delegation to panel meetings (Palmeter and Mavroidis, 1999).

Summing up, there is an obvious discrepancy between our wish-list and what has been discussed in the DSU review. In particular, the remedies issue does not figure at all in the demands of developing countries (although it does figure in other, unofficial proposals, e.g., South Centre, 1999). More generally, it appears that developing country-related concerns regarding participation constraints have not occupied the forefront of discussions.14 3: What Can Be Done? There is an upstream and a downstream dimension of enforcement. They are linked to each other in the sense that in the absence of the upstream inputs, downstream enforcement at the WTO will be severely impeded. In the case of developing countries, weak upstream enforcement may lead not only to reduced participation in the WTO but also to a de facto isolation. Unless a WTO culture is somehow instituted in developing countries, they will not be in a position to fully profit from their participation in the WTO. The upstream and downstream dimension of enforcement To use the dispute settlement mechanisms embodied in the WTO effectively, governments need to be able to bring cases to the WTO. To do that, there must be domestic mechanisms through which export interests can channel information to the government. For export interests to have an incentive to do this, they need to be aware of what the WTO rules are and have confidence that the expected return to submitting cases exceeds the costs of doing so. This in turn will depend in part on the probability that the government will pursue the case, and conditional on that, the expected payoff associated with winning the case. In short, the effectiveness of mechanisms to enforce multilateral commitments depends importantly on the efficiency of upstream input activities which comprise a complex interlocking chain. The domestic upstream dimension of defending WTO rights identification of potential cases, transmission of information to the government, and getting the government to act is in turn just one determinant of the relevance of the WTO for domestic stakeholders. As important is the feasibility and effectiveness of using national legal mechanisms to enforce commitments made by governments. Inspired by the public choice and transactions cost literature, it is sometimes argued that a major potential benefit of GATT (now WTO) membership is that the multilateral commitments made by a government have a constitutional function. They safeguard the interests of a diffuse majority by increasing the cost of adopting policiescertain types of import barriersthat benefit only small but powerful interest groups (e.g., Tumlir, 1985).15 For this to be the case, it is necessary that multilateral commitments can be the basis of claims by individuals before national tribunals or courts. The greater the feasibility and effectiveness of enforcement at the national level, the greater the incentive for traders to defend their WTO rights before national courts.

Apparently, most of the discussions revolved around the institutional establishment of a 'compliance' Panel aimed at avoiding future repetitions of the Bananas saga. 15 See also Roessler (1985), Petersmann (1998), and the contributions in Hilf and Petersmann (1993).

Enforcement of WTO rules depends on countries with an export interest invoking DSP in cases where a government is alleged to violate a WTO commitment. Foreign entities with export interests can only be relied on to pursue this path in the case of markets that are large enough to be worthwhile. This is the main reason why Quad countries are usually involved in WTO cases on one side or another. Foreign exporters will not have strong incentive to contest a WTO violation by a small poor country: the market is simply too small. If import interests in developing countries are not able to contest actions by their own government that violate WTO commitments, developing country governments may have de facto exempt status in terms of implementation of their WTO obligations. Absence of mechanisms at the domestic level to overcome problems of asymmetric information will also imply that developing countries find it more difficult to use either the WTO or foreign national court systems to enforce WTO rights. This suggests that efforts to assist developing countries use WTO DSP (e.g., an advisory centre, technical assistance and capacity building) must be supplemented by strengthening the domestic upstream parts of the enforcement chain, and by allowing national courts to be used to contest actions by government that violate WTO obligations. Pursuing these two tracks is vital if one believes (as we do) that a major role of the WTO is to be a credibility instrument, an anchor, for domestic policy. Strengthening domestic enforcement mechanisms can help make the WTO a more relevant instrument from an economic development perspective by increasing the ownership of negotiated commitments. Absent domestic enforcement mechanisms, the primary burden of ensuring compliance is put on external entities. This may have negative political repercussions, augment ownership problemsalready an important issue (Finger and Schuler, 2000) and often will be ineffective in any event. Strengthening the upstream dimension at home Knowledge of the prevailing rules of the game is clearly a prerequisite for commitments to be enforced. The private sector has to know what governments have committed to. Government must have the inhouse capacity to interact with and support private sector efforts to enforce commitments. In many developing countries there is a great need for education and training on the WTO and on national commitments made under WTO auspices that is tailored to the background of the audience. CEOs need to be convinced there is value to devoting resources to training and co-operating in the delivery of training e.g., through chambers of commerce or industry associations. Governments must acquire not just trained legal expertise to pursue/defend cases, but more generally educate staff in all potentially affected Ministries how their work relates to the WTO. This is an area where much is already being done, often through training supported by bilateral and multilateral donor agencies. But it is clear that this needs to be complemented by the development of mechanisms that generate information and reduce transactions costs. The prevailing type of firm-government-WTO interaction implies that a firm has two options in contesting foreign government policies that restrict its ability to contest a market. First, it can petition the foreign government, either through direct lobbying and/or through its legal system if a WTO obligation has been violated (more on this below). Second, it can lobby its own government to take up the issue

with the foreign government in question and the WTO if necessary. From the firm's perspective the second route often will not be attractive. Convincing the government that the case is worth bringing from a national interest perspective may require considerable resources. And, if the case is pursued, the outcome of dispute settlement may not do much to address the concerns of the firm. Thus, many violations are unlikely to be addressed through the WTO. This is not necessarily bad. High entry barriers or thresholds may be beneficial in ensuring that only major cases are brought, ones that cannot be resolved through alternative, private mechanisms. It is difficult to make a judgement, however, because the available data on the prevalence and effect of discriminatory policies (whether or not these violate the WTO) are quite limited. Violations of the WTO often are not contested because firms and industry associations do not know what a government committed to or lack the incentive to do so. Company employees involved in sales, forwarding or intracompany trade that are most likely to know what government agencies are doing on the ground may not have an interest in documenting and reporting trade restrictions or discriminatory policies. Indeed, they will often find it difficult to determine whether a given measure is a WTO violation. There is therefore a collective action problem (Olson, 1965) that may lead to an inefficient outcome, both for individual firms and for the trading system as a whole. Solutions to the problem require increasing the benefits to firms of collecting data on potentially WTO illegal policies; and reducing the costs of doing so. The former can be pursued by establishing mechanisms to facilitate private sector cooperation within and across countries. What is needed is a system whereby information will be compiled by devising mechanisms to facilitate identification of potential violations and reducing the need to involve governments in the enforcement of WTO commitments through increased reliance on domestic enforcement mechanisms. One option to deal with the information problem is for the private sector to co-operate in collecting data on trade-related barriers. This could be realized through periodic surveys of a representative sample of companies that is undertaken by an independent entity on a fee basis. The types of firms covered by the survey should encompass both multinationals that have plants in multiple countries and engage in substantial intra-firm trade, national firms that produce for export, trade associations, and consumer organizations. Ideally, an independent transparency body can be envisaged that would co-ordinate national efforts and assist in the identification of potential WTO violations, lobby for joint actions to be brought to the WTO, and generate publicity (some sort of a domestic WTO Ombudsman). This would help complement the TPRM mechanism by bringing in the private sector more directly into the enforcement process. Although at the margin better information may induce governments to be more pro-active, political realities asymmetric distribution of power; threats of cross-issue linkages will always be a powerful force constraining governments to assist firms to pursue their rights. This suggests that dispute settlement should be a collective endeavour not only for the reasons emphasized by economists (to increase the credibility of the threat of retaliation), but also to ensure that individual firms or governments do not end up bearing the brunt of an offending governments displeasure. Although business associations have become more aware of the potential payoff of investing resources to influence


international negotiations to reduce barriers to trade and investment, they have done relatively little to compile the type of information and undertake the analysis that would help policymakers identify the key constraints to competition and provide an input into better enforcement of WTO agreements. More and better information can not only help identify potential WTO violations but also assist in overcoming unwillingness on the part of governments to pursue cases motivated by foreign policy reasons or by concerns about possible repercussions in other areas of co-operation (e.g., development aid flows). If firms from a large number of nationalities are involved in the information collection and analysis effort and a number of governments are petitioned to take (joint) action, an individual governments incentive not to take up a complaint may be reduced.16 A problem associated with DSP is the need to assess the legality of an observed practice or situation. Information collection efforts must be complemented by creation of capacity to advise the private sector of the legality of observed trade practices. Advisory centres to do this could be public-private partnerships, and have a regional dimension e.g., build on the institutions that are created in the context of creating and implementing regional integration agreements (Weston and Delich, 1999). Cooperation across countries can allow economies of scale to be captured and reduce the unit costs of analysis and information processing. Advisory centres that are geared towards the private sector could also help to give stakeholders a greater incentive to take an interest in the functioning of the multilateral trading system. Strengthening the Downstream Dimension of Enforcement in National Fora WTO rules and commitments are valuable in part because they provide assurances to investors in and citizens of a country that a given trade policy stance will be maintained. When states enter into international treaty regimes what is guaranteed ipso facto is external accountability: i.e., they are accountable vis--vis the other signatories of the agreement (Art. 27 Vienna Convention on the Law of Treaties, pacta sunt servanda). The question of internal or national accountability vis--vis domestic citizens is a question of domestic constitutional law. Thus, there is a separation between the international and the national legal orders. This dichotomy greatly reduces the relevance of international treaty obligations to national constituencies. In principle, two options are available: first, acknowledgement of the direct effect of international agreements;17 and second, creation of mechanisms that allow private parties to challenge WTO inconsistent behaviour by government entities before domestic courts or specialized tribunals. Direct effect has the obvious merit of seeing the international contract challenged by a larger number of potential plaintiffs. In this case, the interpretative limits of the contract will be tested in a much more

There are a variety of free-rider problems that must be overcome for cooperation to be feasible. In practice what is likely to be required is the formation of a privileged group of large firms and trade/industry associations that is willing to bear the costs of cooperation and tolerate free riding by smaller firms. 17 Direct effect allows private litigants to raise relevant points of WTO (international public) law before national courts. This is a matter that is determined by domestic constitutional law. Whether direct effect applies is not dependent on whether or not implementing legislation is needed, or whether international treaties enter into force automatically. In both cases, domestic courts retain the discretion to decide whether a particular norm has direct effect.


meaningful manner than if governments only can act as plaintiffs. However, a number of arguments can be made against this option. Direct effect is a constitutional matter with serious implications for the legal system of a country. If country A accepts direct effect of the WTO contract, citizens of this country will be in a position to challenge anti-WTO behaviour of their own government before domestic courts. This will not, however, allow citizens of A to challenge country B before As courts. The latter, or its agents, or even private parties forced to act in an anti-WTO manner by B, will be able to employ convenient legal means to hide, e.g., by invoking a foreign sovereign compulsion argument. This is why direct effect is often linked to non-legal considerations (reciprocity). Traditionally, GATT rules have not had direct effect in national legal orders, including the US and the EC.18 This has denied the real users of the multilateral system (firms, consumers) the opportunity to contribute to its development. Antitrust law, for example, has developed to a large extent because of invocation by private parties. As a result, law in this area has developed to reflect changing conditions. The process in the WTO has been much less direct. As argued by Tumlir (1985), this is a weakness of the multilateral trading system, as it impedes the mobilization of a strong constituency that supports the development of multilateral rules guaranteeing non-discriminatory access to markets. On the other hand, as noted by Levy and Srinivasan (1996), complete absence of government discretion to determine whether a dispute should be submitted to the WTO is not necessarily in the national interest. Because private parties will not balance their own interest against the wider national interest, they may submit cases which could prove to be detrimental to the national interest. Finally, it should be noted that WTO law, in both sides of the Atlantic, is not only denied direct effect; it is, for all practical purposes often denied relevance as well. The European Court of Justice judgments in Germany v Council (Bananas)19 and Portugal v Council (December 1999) hold for the proposition that not only private parties but EC member states cannot (if not for very limited cases) challenge EC legislation for being contrary to the relevant WTO rules. On the other side of the Atlantic, the Suramerica judgment of the California Circuit reflects a very similar point of view, essentially arguing that the hands of the Federal Government are not necessarily tied because of commitments made in exotic places like Marrakech and Punta del Este, or because three panelists in Geneva interpret the WTO contract in a manner which does not coincide with US views. This means that direct effect cannot get you very far, and that political reasoning (reciprocity) can be expected to push developing countries to oppose direct effect of the WTO law as well.

The status of GATT law in both sides of Atlantic has raised questions regarding the seriousness of both the US and EC when it comes to implementing their international obligations. In the Suramerica litigation (Jackson, Davey, and Sykes, 1995) a US court of appeals essentially accepted that a subsequent domestic statute prevails over GATT law. In the Bananas litigation, the European Court of Justice (ECJ), responding to a complaint by Germany, refused to examine the compatibility of the EC bananas regime with its WTO obligationsin effect denying that Germany has standing. Some hope was restored in the EC with the recent Hermes case, which on an optimistic reading appears to be a promise by the ECJ to start to interpret EC trade policy in the light of WTO obligations. Direct effect is a far cry for both transatlantic partners: the immediate priority is to ensure that the WTO is taken seriously through faithful implementation at the domestic level. 19 See on this issue, the excellent account provided by Bronckers (1996).


A less far-reaching approach to incorporate domestic enforcement mechanisms into international agreements is to require challenge mechanisms to be created that allow some WTO disciplines to be invoked against the government before national fora. In some sense this is a halfway house to full direct effect (Davey, 1999a, b). A first step in this direction was made at the WTO level in the (plurilateral) Agreement on Government Procurement (GPA), which requires signatories to give private parties access to mechanisms that allow them to contest actions by procuring entities that are alleged to violate the GPA before domestic courts (see Hoekman and Mavroidis, 1997). A potential downside of generalizing the use of domestic challenge mechanisms to enforce WTO commitments is that it could give rise to diverging interpretations of WTO law, with domestic tribunals rulings being inconsistent with those of WTO panels. This can be avoided through the use of advisory opinions by the Appellate Body on the correct interpretation of particular terms. Another option would be to oblige national courts to defer to the WTO under conditions similar to those prescribed in Art. 177 Treaty of Rome. While formal agreement that WTO members will adopt challenge mechanisms would be beneficial, this is not required. Any government can decide to do this unilaterally. A complement to enhancing the legal enforceability of WTO agreements in domestic fora is to create national institutions that have the mandate to monitor and contest government actions. Examples are a national ombudsman or a competition authority-cum-transparency agency. While such agencies may be prohibited from taking direct action against the government, they can facilitate debate on the magnitude and distribution of the benefits and costs of government policies, and help transmit information to affected parties, which can then be used in the political process.20 Strengthening the upstream dimension at the multilateral level Financial and human resource constraints reduce the ability of a developing country government to participate in the multilateral dispute settlement process. Least developed countries in particular are at a disadvantage in bringing cases and defending their rights because of the absence of representation in Geneva and a severe scarcity of both financial resources and relevant expertise (Michalopoulos, 1999; South Centre, 1999). A noteworthy development in this connection has been the formation of a group of countries that has agreed to seek to establish an Advisory Centre on WTO Law with resources to finance assistance for dispute settlement cases on a cost-sharing basis (ACWL, 1999). Analogous to the role a public defender can play in domestic legal systems to ensure that all citizens are able to defend themselves, an international mechanism to subsidize the ability of poor nations to bring and defend cases can help to level the playing field to some extent. But, as discussed above, there is also an urgent need to develop home-grown resources, which requires resources for training and education. Many governments do not have the trade experts they need in order to maximize the benefits of WTO membership. Outside experts can help when there is case to be fought, but before this can be done there must be a capacity to determine if a case is worth bringing. A useful proposal in this perspective

For an early proposal along these lines, see Finger (1982).


would be to require the WTO Secretariat and WTO members with substantial capacity and expertise in WTO-related issues to accept officials from administrations of developing countries dealing (or aiming to deal) with WTO-related issues. Existing programs that do this are either too short in duration, too general or addressed to too broad a range of people. Officials benefiting from such exposure would in turn be obliged to spend a specified period of time with their national administration. Strengthening Downstream Enforcement at the WTO Level: Remedies As mentioned previously, the ultima ratio of the WTO dispute settlement system, countermeasures, leads to asymmetries as developing countries often will not have an interest in pursuing such policies. Bhagwati (1999) has advanced the view that greater reliance by WTO members on re-negotiation of concessions would be beneficial in cases where a member finds it difficult to comply with a panel ruling. This would ensure that compensation is provided to affected parties and to all WTO members via the MFN principle. In practice, this option is of course built into the WTO. Arts. XXVIII GATT and XXI GATS allow for re-negotiation, which involves a member compensating members affected by the withdrawal of a concession through a reduction in other trade barriers. Thus, a losing party that finds it difficult to comply with a panels suggestions could offer compensation by lowering its tariffs on sectors of interest to the winning party.21 While re-negotiation is not helpful for the negatively affected export interests that brought a complaintwho clearly are best served by direct compensation for damages incurredit is superior to retaliation (counter-measures). At the end of the day such a remedy will have a beneficial effect to the system as such: recalcitrant states will readjust their trade protection but will not be more protectionist post- the commission of a WTO illegal act. That said, the recent Panel report on Australia Subsidies on Exports of Automotive Leather (Art. 21.5 DSU) illustrates that remedies with a retroactive (ex tunc) function are perfectly legitimate and feasible under the current WTO rules. Requesting panels to suggest such remedies is important since otherwise the threat against potential and actual violators of the WTO contract substantially diminishes in credibility. What about the option of reducing the cost of retaliation, a proposal that is often made in the economic literature? One way to do this that has been suggested is that developing countries bring some form of class action by acting as co-complainants in the same dispute. This would make the threat of collective countermeasures more credible. Although a logical argument, in practice it confronts difficulties. The DSU does not permit the use of counter measures by third parties. However, there is no requirement that a country bringing a case have a direct trade interestall that is required is a potential trade interest or even (as established by the Appellate Body in the Bananas litigation, echoing the public international law concepts of State Responsibility) its mere legal interest to see the WTO contract observed (Palmeter and Mavroidis, 1999, p. 24). Thus, there is nothing to prevent multiple countries from initiating a joint action; indeed, in principle, all developing (and other) countries can join together to prosecute a case. This in turn suggests that the threat of joint retaliation can already be made within the

Compensation is an option in the DSU, but only as an interim measure if panel recommendations are not implemented within a reasonable period of time (Art. 22.1 DSU).


existing systemalthough there are clearly costs associated with overcoming potential free rider problems, and not all WTO members will be willing to join. But given that the costs of participating in a case are low (assuming the primary interested party (parties) carries the cost of prosecuting the case), in principle a large number of developing countries could bring a joint case. A possible reason explaining why this is not done is that a defendant can refuse to hold joint consultations with more than one potential plaintiff (Art. 4.11 DSU) and can manipulate the calendar to oblige the DSB to establish more than one panel on essentially the same issue. Moreover, it cannot be guaranteed that the same panelists will be selected to adjudicate the various (essentially identical) cases. If this is the case, there is no way one will end up with one panel that is competent to adjudicate multiple complaints on the same subject. However, the basic problem that arises regarding joint action concerns the magnitude of the threat that can be exercised. If a country has no trade interest, it is quite difficult (if not impossible, given the way arbitrators tend to measure damage in WTO law)22 to determine the level of the appropriate counter measure that can be taken in the event of non-compliance with a panel recommendation. Indeed, if a WTO member is found to be discriminating against a particular country or set of countries, this may benefit other countries. Thus, pursuing the joint action path requires agreement that the basis for retaliation be changed.23 The same conclusion holds for suggestions to continue to rely on a system where the main affected parties pursue the dispute, but changing the rules to extend the MFN principle to retaliation, if this becomes necessary.24 A mandatory requirement that all WTO members participate in the retaliation will avoid free rider problems, but will require agreement on how to determine the magnitude of retaliation. The recent Ecuadorian request to cross-retaliate against the EC import regime for Bananas in the field of TRIPs illustrates that developing countries are exploring ways of increasing the credibility of retaliatory threats. The damage done to European interests from non-enforcement of IPRs will not directly harm domestic consumers. However, such retaliation is not necessarily costless in the longer run. It may result in higher prices to cover higher risk premia, discourage FDI in IPR-sensitive activities, etc. It is too early to pronounce on the effectiveness of such cross-retaliation. At the time of writing, Ecuador is still considering whether to pursue this route (although it has been approved by the WTO). Bilateral settlements The fact that many cases are settled informally is potentially problematical for developing countries. Settlements are essentially non-transparent. No rules dictate how they should occur, no control over the merits of settlement exists. The only obligation of WTO Members is to notify the outcome of the settlement under Art. 3.6 DSU and the ensuing obligation that all settlements must be MFN-friendly in

In both the Bananas and the Hormones arbitration, a counterfactual was constructed (how much exporters would have exported in the absence of the WTO inconsistent action, based on previous trade flows). This became the basis for quantification of the amount of damage caused by the WTO inconsistent practice. 23 To some extent a basis for this may already exist. Art. 21.8 DSU states that in cases brought by developing countries, the DSB shall take into account not only the trade coverage of measures complained of, but also their impact on the economy of developing country Members concerned. 24 For a recent proposal along these lines on behalf of developing countries, see South Centre (1999).


accordance with 3.5 DSU. However, the notification record of 3.6 DSU settlements is very poor and does not allow a determination of whether 3.5 DSU has been complied with. Since many developing countries have never participated in WTO DSP they might be negatively affected by bilateral deals that have never been notified to the WTO. Settlements occur behind closed doors. In the absence of a proper discovery process, the WTO is helpless to deal with non-compliance. Since enforcement of WTO obligations is de-centralized, affected developing countries are left with the burden of finding out what actually happened behind the closed doors. Lack of administrative resources generally guarantees that this will rarely occur. Moreover, the closed door nature of the process may facilitate the negotiation of settlements that are not in the best interest of developing country parties that are involved in the dispute, since this is typically a case where asymmetries in bargaining power among negotiators can dictate a particular result. In this respect, developing countries might find it useful to consider proposing adoption of a rule that bilateral settlements will not enter into force unless first cleared through the DSB. Such an approach would induce the parties involved to think twice before entering into settlements that are inconsistent with their multilateral obligations.

4: Concluding Remarks The incentive for governments to negotiate and abide by international trade agreements depends in part on the effectiveness of enforcement provisions. Effective enforcement is particularly important for developing countries, as they will rarely be able to exert credible threats against large trading entities that do not abide by the negotiated rules of the game and often will not appear on the radar screen of the WTO. Domestic enforcement is a vital dimension in enhancing the relevance of multilateral commitments to domestic stakeholders (importers, exporters, consumer groups). In most countries, including highincome nations, domestic interests are restricted in their ability to contest actions by national government agencies that violate WTO commitments. Civil society has a strong interest in seeking to maximize the extent to which international treaty obligations can be invoked in national legal systems. This will remove a number of layers of uncertainty and complexity associated with bringing cases to the WTO. Strengthening national enforcement mechanisms can help make the WTO a more relevant instrument from an economic development perspective by increasing the ownership of negotiated commitments. It also relaxes the constraint of having to convince ones government to bring a case to the WTO and will reduce the burden of DSP at the WTO level. The easiest way of making WTO commitments enforceable nationally is to expand on the type of challenge mechanisms that have been introduced in the GPA. The private sector must play a much greater role in enforcement. In part this can be achieved by designing domestic legal mechanisms that increase the incentive for them to collect, compile and transmit information on the measures that are being applied by governments, both their own and foreign. Thus, there is a close link to our first point giving private interests standing in domestic fora (via a general


challenge procedure) can be expected to be a great motivator for greater involvement in both the development and enforcement of multilateral disciplines. But greater private sector participation is also vital in order to ensure that developing countries can defend their rights at the WTO level. This upstream dimension of DSP at the WTO is as important as the efficacy of the downstream panel and Appellate Body process. Developing countries have an interest in re-negotiating the existing legal framework for remedies. Remedies in the WTO do not guarantee paritas armis among the various players and unless corrective action is taken, developing countries might have even less incentive to submit cases. On this particular issue we side with Bhagwatis (1999) proposal to opt for re-negotiation of concessions (instead of keeping it as an option) any time a developing countrys claim prevails before the WTO but implementation raises serious political problems. Finally, we argued in favour of a formal amendment of the DSU with respect to notification of bilateral agreements to the effect that no such agreement will be applied unless previously cleared through the DSB. The reason for this proposal is twofold: when developing countries participate in such deals along with developed countries, because of the inequality of power between the two, they might be forced to non WTO-compatible solutions. On the other hand, when they do not (which is the vast majority of cases) they might see their rights under the WTO contract diminished since the parties to such deals hardly have the incentive to respect MFN.


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