1.1 Cooperation and Discord in the International Trade Regime
In an era where economic populism has been threatening the global trade order, sustaining multilateral cooperation is becoming increasingly difficult. From the unilateral protectionist measures adopted by the Trump administration in the United States (US) to the British exit from the European Union (EU) that has fueled the mobilization of domestic isolationist interests, world trade regime is witnessing a number of challenges to maintaining previously made multilateral trade commitments. This book aims to shed light upon the conditions under which such challenges can be met and examine political-economic factors that explain World Trade Organization (WTO) members’ behavior at the judicial arm of the WTO—i.e., the dispute settlement mechanism (DSM).
The decline of the WTO as a forum for negotiated trade liberalization, epitomized by the long-lasting impasse of the Doha Round, has increased the importance of the WTO’s judicial arm as a tool to maintaining a liberal trade regime. Even in the face of blatant attacks on the legitimacy and the functioning of the WTO at the world stage, WTO Members increasingly rely on the DSM to resolve trade-related grievances—the number of disputes launched in 2017 and 2018 by the US, the EU, and other small and middle-sized economies is indicative of this trend.
Yet, as the need to sustain an open world economy is becoming more pressing, we know surprisingly little about WTO Members’ behavior in response to international litigation. When are states more cooperative at the WTO? If they spend years drafting, ratifying, and implementing multilateral trade agreements, why do they sometimes refuse to abide by them? The literature on the institutional foundations of international cooperation suggests that the existence of mechanisms for the credible enforcement of agreed-upon rules is key to overcoming problems of cooperation that are typical of international trade relations (Keohane 1984; Martin 1992). A quasi-judicialized system of enforcement, such as the WTO DSM, should therefore be capable of performing the twofold function of preventing first and second-order compliance problems: creating disincentives for policies incompatible with WTO rules being adopted in the first place, and compelling members to bring their policies back into compliance with WTO rules whenever their wrongdoing is ascertained by the adjudicative body (Von Stein 2012).
However, we observe quite often that even in the face of authorized retaliation and direct financial penalties, WTO Members refuse to meet the demands of their trade partners. In other instances, the same WTO Members remarkably comply with their commitments in a swift manner without undue delays.
Consider the following examples: While the EU resisted to comply with the decision of the WTO panels in its long-standing dispute regarding imports of bananas from the African, Caribbean, and Pacific regions for some 15 years, a hotly debated dispute on imports of solar panels from China was resolved in less than two years (Chen 2015). It cost the EU approximately €200 million to keep the trade restrictions of bananas in place for so long and damaged its reputation as a law abiding WTO Member, creating a number of diplomatic tensions (Patterson 2001).1 Similarly, in response to a dispute launched in 2001, the US resisted to meet the demands of its long time trade partner—Canada—regarding exports of softwood lumber for almost 5 years, despite authorized retaliation by the WTO. It costs Americans millions in legal fees, up to $200 million in retaliatory sanctions, and created a significant source of political tension with its Canadian neighbors (Lawrence 2007). In contrast, the US complied with the adverse panel ruling of the WTO regarding imports of steel products in 2002 in a matter of few months after the panel’s decision was adopted, avoiding prolonged disputes and the risk of further economic and political damage.2
WTO Members’ decisions to prolong disputes or quickly comply with the rulings of the dispute settlement panels have significant economic consequences. When raising protectionist trade barriers or eliminating existing trade restrictions, the distributive impact of such decisions empowers certain groups while hindering the political clout of others, both domestically and internationally. Following the example given above, when the US government decided to raise trade barriers in the steel sector in 2004, in a matter of months the US steel producers had a sharp surge in demand and almost doubled their revenue (Read 2005). In contrast, consumers of steel such as automotive parts makers were suddenly cut off from their overseas supply lines and started to buy domestic steel at a higher price, increasing their cost of production some 20% (Francois and Baughman 2001). In the meantime, exporters of steel to the US from Europe or elsewhere lost an important part of their revenue stream.
This transfer of economic resources also has far-reaching political consequences. Domestically, empowered groups will find it easier to mobilize with their expanded resources, potentially shifting the domestic balance of interests in their favor. Thus, WTO Members’ behavior at the WTO DSM would have direct implications for domestic societal interests. However, refusing to uphold international rules at the WTO DSM may have severe systematic repercussions on a global scale. One of the current debates on international trade raises the question of whether or not the current US administration under President Trump continuous its zealously protectionist behavior at the expense of US commitments at the WTO.3 Indeed, policies that involve raising WTO-incompatible trade barriers or resisting to comply with the rulings of the panels would have far-reaching consequences for the global trade governance regime. For one, raising trade barriers can continue to invoke retaliatory threats from US trade partners, inciting a spiral of retaliation. Secondly, and more importantly, refusing to cooperate in the WTO DSM might heavily undermine the legitimacy of the WTO itself; the institution may be questioned due to its inability to deter opportunism, which would be regrettable since it was successful in preventing protectionism during the 2007–2008 financial crisis (Baccini and Kim 2012).
Examining the conditions under which WTO Members are more likely to comply with dispute settlement decisions is also theoretically interesting. Understanding how economic resources are distributed among societal groups due to international trade policies can shed light on how these groups may yield political influence with their resources. This in turn will help examine further developments in international political economy (IPE). Moreover, analyzing the conditions of sustained cooperation versus discord in international trade governance can give us a general clue about cooperation in international relations.
Accordingly, this book aims to answer the following research question: under what conditions do WTO Members swiftly comply with adverse WTO panel rulings?
In order to account for such variation in WTO Member behavior, a broad examination of trade policymaking is needed, one that takes into account societal trade-related interests as wel...