A cruel trilemma: the flawed political economy of remedies to WTO subsidies disputes.

Author:Showalter, J. Michael
Position:World Trade Organization


This Note examines the effectiveness of the World Trade Organization at remedying disputes involving trade subsidies. The WTO as created in the Uruguay Round was the first multilateral trade institution that included prohibitions against trade subsidies of a more-than-aspirational nature that were agreed to by most states in the world community. The WTO was thus envisioned as ushering in an era where subsidies had significantly less detrimental effects on the international economic community.

This Note seeks to evaluate the effectiveness of the WTO's subsidy provisions through analyses of decisions in early WTO jurisprudence. These decisions will be evaluated, in part, through recourse to economic and public choice theories. Ideally, remedies to government-granted subsidies should attempt to cure the sort of underlying rent-seeking behavior that causes subsidies without fostering the coalescence of anti-WTO constituencies that over the long term could meaningfully undermine principles of free trade. Following this discussion, several proposals for WTO reform will be evaluated in the light of this Note's underlying analysis.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. The General WTO Framework B. An Introduction to the SCM and Its Role in the WTO System III. THE ECONOMICS OF SUBSIDIES AND REMEDIES IMPOSED BY THE WTO APPELLATE BODY IN EARLY CASES A. Subsidies Are Different Than Other Trade "Barriers" B. The Composition of the SCM Shows the Political Compromises Necessary to Secure Its Ratification C. Problematic Decision Making in Subsidy Remedy Decisions 1. United States-Foreign Sales Corporations and the Myth of the Persistently Dumb Legislature 2. Australia-Leather Goods and Problems with Traditional Notions of Due Process 3. Brazil-Aircraft: Of Political Economy and the Possibility of Punitives D. The Continued Dumping & Subsidy Offset Act of 2000 and the Byrd Bill: Subsidies as Politically Necessary Trade-offs IV. CONCLUSION I. INTRODUCTION

This Note is intended to do two things. Foremost, it is intended to discuss remedies the World Trade Organization (WTO) has imposed in the first three disputes it has decided involving subsidies. It will also attempt to show, through recourse to economic and public choice theory, whether the remedy imposed caused the country to comply, and finally, why the remedy was or was not effective.

The prime goal of international trade law needs to be the avoidance of a "protectionist summum malum". (1) Such a situation would occur where domestic or social pressures in a particular country lead a state to increase or reinstate barriers to trade, thus triggering a reaction in other states that would end in a so-called "race to the bottom" leading to global economic disaster. (2) This Note, through an examination of WTO case law, concludes that the WTO has found no truly effective, theoretically justifiable way to remedy disputes involving subsidies and that the ways it has found are either ineffective or run the risk of being counterproductive in the long-term. All things considered, this is not surprising: subsidies endemically are difficult to deter, and this difficulty is compounded by trying to do this in a supranational context where governments bring conflicting agendas to negotiations promising comprehensive solutions.

Prior to the 1994 Marrakesh Agreement, commentators stated that one of the major problems plaguing the General Agreement on Tariffs and Trade (GATT) did not deal effectively with subsidies. (3) Since the ratification of the WTO Agreement containing improvements to the GATT, this relative ineffectiveness has continued: subsidy cases have been among the most difficult to remedy. (4) When the WTO Agreement was signed in Marrakesh in 1994, its dispute settlement procedures were thought of as a "decisive improvement" over the procedures codified and practiced under the GATT. (5) Of the first 185 disputes that came before the WTO, only twenty-six reached the points where the Understanding on Rules and Procedures Governing the Settlement of Disputes apply. (6) "In fourteen of those, the offending member either fully implemented or agreed to implement in a manner acceptable to the winning party." (7) Six of the disputes led to non-compliance procedures, and six more are still either awaiting implementation or the establishment or expiration of their reasonable period to implement. (8) These procedures have been less effective regarding subsidies than with other issues: Three of these initial six are the basis of much of this Note. In addition, a "later" case, United States-Foreign Sales Corporations, will be discussed in detail. (9) This Note will attempt to explain why these disputes have been harder to remedy.

The structure of this Note is as follows: Section II generally outline the WTO system and discusses the basic history of the regulation of subsidies under the world trading system. Section III of this Note will attempt to outline a number of reasons why the two sections of the WTO Agreement that regulate subsidies are problematic to remedy. It will then seek to evaluate various proposals for reform of the WTO Agreement in light of the discussion included in this Note.


    A. The General WTO Framework (10)

    The WTO provides the institutional and legal foundation for the multilateral trading system that came into being on January 1, 1995. (11) It has become the major international body that deals with the rules of trade between nations. (12) The agreement that founded it and set out its role, structure, and powers, was also the first text in the package of Uruguay Round agreements signed in Marrakesh on April 15, 1994. (13)

    These documents are basically contracts between countries that are intended to help facilitate private trade amongst them. (14) With the Marrakesh Declaration, the Ministers of the Member States of the WTO declared the Uruguay Round of trade negotiations formally concluded. (15) In the Uruguay Round, the Ministers believed that they had provided a "stronger and clearer legal framework ... for the conduct of international trade, with a more effective and reliable dispute settlement mechanism," that would result in a forty percent reduction of tariffs and wider market-opening agreements on goods. (16) The Ministers believed "that the trade liberalization and strengthened rules achieved in the Uruguay Round would lead to a progressively more open trading environment" which would lead toward a more balanced and integrated global trade partnership. (17) As part of the Uruguay Round of negotiations, the Member States of the WTO adopted a number of agreements that went far beyond the scope of the GATT that had been adopted in 1947. (18) The Agreement sought to perform a number of functions, among them to achieve greater coherence of trade policy with respect to agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial sanitation, food sanitation regulation, and intellectual property. (19)

    The WTO Agreements are enforced through a WTO-specific dispute settlement system. (20) This system is outlined in the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). (21) The judicial portions of the DSU consists of three, or possibly five, member Dispute Settlement Panels (Panels) and a standing Appellate Body. (22) To gain legal status, both the Board and Panel reports are referred to the Dispute Settlement Body (DSB) of the WTO, in which only a unanimous vote by all Members can stop such reports from becoming law. (23) Thus, the dispute resolution process in the WTO is in a sense automatic because rarely if ever will the "winning party" vote against having the remedy imposed. (24) In the event of a breach of the WTO rules, the DSB recommends that the Member concerned bring the breach into conformity with the WTO Agreement that has been violated. (25) Typically, "withdrawal" of the measure is required. (26) "In addition, both the Panel and the Appellate Body may suggest methods in which the Member concerned could implement the recommendations." (27) Prompt compliance with the recommendations and the rulings of the DSB is explicitly dictated. (28) If it is impracticable to comply immediately Members are to be given reasonable periods of time to comply. (29) These are determined either through agreement or through binding arbitration. (30) If compliance is still not achieved, countermeasures are awarded to all WTO members. (31) These countermeasures entail the winning party raising trade barriers vis-a-vis the losing party, a move which is detrimental to free trade principles. (32) The "constitutional" case law of the WTO has deepened of late through disputes involving the United States and EU over bananas, (33) hormone-treated beef, (34) and regarding their disputes over U.S. tax structures, such that parties now are fully aware of procedures under the WTO. (35)

    B. An Introduction to the SCM and Its Role in the WTO System

    GATT 1947 allowed countries to use export subsidies on agricultural primary products, though it prohibited them in situations on industrial products. (36) The GATT prohibited export subsidies only when the result was an export price lower than comparable domestic price; the Subsidies Code, Reporters' Note 1, prohibited export subsidies without regard to differential effects on prices. (37) Neither the GATT nor the Subsidies Code accompanying it prohibited domestic or production subsidies, though the Code recognized that such subsidies could cause or threaten injuries in other states. (38) The Code then admonished parties to "seek to avoid causing such effects." (39) As the failure to establish the International Trade Organization (ITO) in part resulted from fear current at the time of negotiation on the part of constituent nations of giving up such powers, the prospect was not good of finding success in the uphill charge necessary...

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