Imagine that two countries (A & B) are involved in a trade dispute. The dispute arose because country B refused to accept shoes that country A's shoemakers produced. B's reason for refusal is that A's producers use a chemical to enhance the soles of the shoes, thereby allowing the wearer to run faster. Controversy has arisen, however, regarding the chemical's safety. B's scientists believe that this chemical causes detrimental side effects, such as flat-footedness. A's scientists, on the other hand, do not believe that there is any causal connection between the chemically enhanced shoe and its country's instances of flat-footedness.
Based on B's scientists' concerns, B refuses to accept any shoes A produces with this chemical, despite the shoes' apparent superiority. A, therefore, brings a nullification and impairment action (1) in the World Trade Organization (WTO) against B for B's refusal to accept A's shoes, and, after completely exhausting the WTO dispute resolution process without convincing B to accept its shoes, (2) A, acting completely within WTO rules, retaliates against B. A does this by raising tariffs on several different goods it imports from B, goods which A's domestic consumers previously purchased because of their physical and price superiority.
This hypothetical is loosely based on the Beef Hormone dispute between the United States and the European Union (EU). (3) As in this hypothetical, the parties in the Beef Hormone dispute incurred the economic consequences of retaliatory tariffs because they could not reach a satisfactory agreement (4) pursuant to existing WTO dispute resolution process procedures. (5)
Although the measures introduced in the WTO are a vast improvement on previous dispute procedures, (6) from a Ricardian economic perspective this outcome is entirely inefficient. (7) WTO rules that allow a country to raise tariffs in order to "strike back" at uncooperative countries not only cause diplomatic strife but also prevent countries from attaining the benefits of international trade.
Instead of using this draconian approach to dispute settlement, (8) this Note proposes that the WTO use pecuniary damages to resolve trade disputes. (9) This would go much further in attaining the underlying objectives and benefits of international trade. This Note will begin with a historical description of free trade to illustrate why it remains an important subject. Following this overview, Part II will describe the current WTO Dispute Settlement Procedure, with particular focus on its inherent inefficiencies. Finally, in Part III, this Note will attempt to encourage debate on the efficacy and efficiency of the current system by proposing changes which illustrate that current trade enforcement is completely out of line with the underlying goals of free trade.
THE CASE FOR FREE TRADE
Adam Smith, in his seminal book, The Wealth of Nations, was one of the first to analyze the economic importance of international trade. (10) Smith argued that the key to national wealth and power is economic growth. A country's growth, in turn, is primarily a function of the division of labor. (11)
When Smith spoke of international trade, he did so in terms of absolute advantage. (12) It was David Ricardo, however, who built upon Smith's theories and established the concept upon which the WTO was founded: comparative advantage. (13) He noted that although any one country may have an absolute advantage in the production of many goods, (14) every country is likely to have a comparative advantage in the production of at least some goods. (15) All countries theoretically have something to contribute, and, through the process of multilateral exchange, benefit from trade. It is "[through] exploiting [this] comparative advantage [that] liberal trade policies permit the unrestricted flow of the best goods and services at the lowest prices, thereby increasing total world wealth." (16)
One can easily trace the importance of international trade throughout world history. (17) An excellent example of the benefits realizable through trade is the initial growth (18) and development of the high performance Asian economies (HPAEs). (19)
Academics have viewed the HPAEs as an illustration of how modernization and increased economic well-being are encouraged by free exportation of goods. (20) The HPAEs have achieved very high growth rates at an average of eight to nine percent since the mid-1960s. Such growth is incredible when compared with the two to three percent growth the United States and Western Europe realized during this same period. (21)
The HPAEs all have one identical feature: They are open to international trade. (22) Following from this and other examples of trade-induced growth, experts have noted that in today's world, international trade, dependent on growing adherence to free trade principles, should be even more of a priority than it has been in the past. (23) Both the GATT and the WTO are based on the underlying benefits of liberal trade policies. (24) Accordingly, it is from this perspective that this Note addresses international trade disputes. (25)
DISPUTE SETTLEMENT IN THE WTO
Enforcement procedures are a necessity within any legal framework. They provide the way in which societies encourage compliance with existing rules, thereby giving certainty to those operating within it. (26) The goal of enforcement should be to implement efficient administration devices because rules based on efficiency considerations will lead to the correct incentive and risk allocations for those operating within the system. (27) From an economic perspective, upon which the Members constructed the WTO, (28) the WTO dispute resolution process falls far short of this objective.
To fully explain this failure to achieve efficiency, it is necessary to give both a brief introduction to the history of the GATT's original dispute resolution process and a description of its transformation, following the Uruguay Round, into the present process.
GATT did not authorize retaliation by an injured country unless a party obtained the consent of all GATT contracting parties. (29) This unanimity rule shockingly required the affirmative vote of the country that had lost its case. (30) The not too surprising result was that retaliation presented no more than an idle threat. GATT's inability to deter improper behavior, despite a functioning legal framework, led to huge losses in efficiency.
To illustrate, in the years between 1948 and 1990, many disputes never lasted long enough to warrant retaliation. More than seventy-seven percent of the rulings found that the complaint was justified, but the disputes were either partially or completely settled through means other than retaliation. (31) At first glance, this would appear to demonstrate that the system was working efficiently despite the disquieting veto power GATT gave to each contracting party. The failure of countries who violated GATT rules to follow GATT rulings, however, is more illustrative of the problems inherent in a system without a sufficient deterrence mechanism. For example, in a dispute between the United States and Nicaragua, GATT declared a United States discriminatory sugar quota illegal. (32) Despite this ruling, the United States refused to alter its trade stance until Nicaragua met United States political demands. Even though the United States eventually removed the discriminatory sugar quotas, the case was a clear-cut illustration of legalistic inefficiency.
The failure of GATT's ruling to compel the United States to remove its sugar quotas led to substantial losses. These injuries included not only the lost sugar sales for Nicaragua, (33) but also the disputing parties' wasted expenditures in arriving at an alternative outcome. (34) These "inefficiencies" became apparent to countries operating within the GATT framework and pushed some nations to revert to self-help procedures. (35)
From GATT to WTO
As the GATT contracting parties became aware of GATT's enforcement shortcomings, compliance with its rulings began to suffer. (36) During the first twenty years of GATT's existence, contracting parties implemented its rulings about eighty percent of the time. In the following years, however, party compliance fell to less than sixty percent. (37) The contracting parties recognized that there were serious problems with GATT mechanisms and attempted to remedy them in the Uruguay Round of Multilateral Trade Negotiations. The Uruguay Round of negotiations began in 1986 and continued through 1994. These negotiations resulted in the creation of the WTO. (38)
The WTO was not, however, a replacement of previous GATT substantive law; instead, the WTO agreement consisted of "institutional" changes. (39) Though the WTO changed little of GATT substantive law, it created a vast amount of new law. (40) This was accomplished through a series of detailed annexes.
The Dispute Understanding was included in one of these annexes. (41) The Dispute Understanding made several important changes to GATT dispute rules and procedures. (42) One of the most important new rules for the purposes of this Note is that disputing parties must adopt a WTO panel report (43) unless a party notifies the Dispute Settlement Body (DSB) that it plans to appeal or unless the DSB decides by consensus not to adopt the report. (44) This drastically modifies GATT's earlier practice of giving any losing country the ability to veto an unfavorable panel holding. (45) A second important change is that the Dispute Understanding now provides for appeals from DSB decisions. (46) Third, the Dispute Understanding prohibits unilateral action by its Members intended to redress what they see as violations of obligations, requiring instead that winning parties use WTO settlement procedures. (47) Finally, the WTO presents an injured country with strengthened means with which to enforce trade...