Assessing the possibility of winning a WTO dispute before being involved.
| Autor | Klishch, Nikolai |
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Introduction
This study examines which factors affect the probability of winning a trade dispute with the data available at the consultation stage. Participation in the World Trade Organization (WTO) allows countries to defend their trade interests by using the WTO mechanism to resolve such disputes. Private companies cannot directly become members of a trade dispute, and they are excluded from the process according to WTO regulations [1]. By initiating trade disputes, the government signals to enterprises that it supports them (Betz and Kerner, 2016). The choice of the optimal strategy for participating in a trade dispute and the ensuing result determine the level of trust between the government and economic agents participating in international trade. It is significant to optimize the country's participation strategy in WTO trade disputes.
Trade disputes are initiated when one WTO member believes another member has violated a WTO agreement or commitment. The protection of domestic producers in the WTO can help to prevent companies from sustaining losses and guard against trade barriers on the international level. Countries regularly use this method of resolving trade disputes. Even during the COVID-19 pandemic, there were eight trade disputes in 2021 and five trade disputes in 2020 (WTO, 2020a). For example, the latest DS606 trade dispute is related to Saudi Arabia requesting consultations with the European Union (EU) concerning EU anti-dumping duty on imports of mono-ethylene glycol by Saudi Arabia. The applied trade measures systematically restrict the development of economic relations between different categories of entities. This harms economic development by limiting the impact of free competition between national producers. The high diversification of trade cooperation within the WTO determines the need to improve approaches to protecting the trade interests of countries and the system of multilateral trade regulation within the WTO (Prazeres, 2020). Maintaining countries' trust in the mechanism for resolving trade disputes within the WTO, which should be ensured through political consensus between countries, is also important (Isachenko and Saveliev, 2019). The development of methodological approaches to the settlement of trade disputes contributes to the development of the whole WTO system.
Countries can participate in trade disputes in three main capacities: as a respondent, complainant or third party. In modern practice, countries can use a variety of theoretical and practical approaches to develop optimal strategies for the resolution of trade disputes. For example, participation as a third-party gives a country the right to receive information about the trade dispute (Dimulen, 2012; Johns and Pelc, 2016). This right is crucial for new members of the WTO to get information, which is usually confidential, instead of experience and to be more effective in future trade disputes. The participation as respondent and complainant makes it possible to protect or abolish trade barriers if they do not meet WTO rules. Understanding the prospects of WTO trade disputes helps to optimize the costs of participating in the trade dispute resolution system. Countries should participate in those trade disputes which bring them the maximum economic benefit.
Several studies elucidate the inefficient organization of the WTO trade dispute mechanism. The mechanism is not effective because of poor organization in trade compensation for the complainant (Mercurio, 2009). The current system does not provide trade dispute members with effective reparation for damages (Bronckers and Broek, 2005). The respondent gains more by breaking WTO rules rather than by adhering to them. We assume that the WTO trade dispute mechanism is effective, and the respondent is afraid of being punished. In practice, a country that regularly breaks the WTO rules loses its reputation and the opportunity to negotiate. Nobody wants to be labelled as an "outlaw" in the WTO. Overall, the most experienced complainants tend to achieve reconciliation (Conti, 2010). The violation of WTO rules harms the reputation and trade position of a country.
From this point of view, taking part in a trade dispute is a liability, particularly for the respondent. If there is little chance of success for the complainants, sometimes it is better not to become embroiled in a trade dispute. An example of one of the longest series of trade disputes is the 20-year EU-Latin American banana dispute, finally resolved in 2012. This series of trade disputes included: DS16, DS27, DS105, DS158, DS361 and DS364, each of which took significant financial resources and was the object of close attention from different countries (WTO, 2012). If the participating countries had known that the disputes would continue for 20 years, they would have tried to reach an agreement at an early stage. The respondent needs to analyse the possibility of winning at the consultation stage. The complainant should also decide if it is worthwhile initiating a trade dispute. Before initiating a trade dispute, countries try to negotiate using bilateral diplomacy outside the WTO (Gray and Potter, 2020). Our research determines the main factors that can predict the result at the consultation stage of a trade dispute.
Maggi and Staiger (2018) examine the same issue. They predict the outcome and duration of trade disputes. They consider factors leading to an early resolution of a trade dispute, a Dispute Settlement Body (DSB) decision or a conclusion at other stages. They use factors related to uncertainty and the subject of the trade dispute, which are also available at the consultation stage. Our study is based on the previous results but formulates all hypotheses in predicting the outcome of a trade dispute at the consultation stage. We focus on the consultation stage because at this stage countries can optimize the costs of participation in WTO trade disputes. If they decide to conclude a bilateral agreement, the DSB can deal with disputes that cannot be resolved at the bilateral level and can become more efficient.
Our model is applied at the consultation stage. The complainant starts a consultation with the respondent. The respondent must decide whether to accept the requirements or contest them, also estimating the probability of winning based on the data available at the consultation stage: macroeconomic and institutional factors. International studies confirm the significance of macroeconomic parameters for predicting the outcome of a trade dispute (Bown, 2004b). In this regard, our model focuses on assessing the significance of institutional parameters. We find that the number of third parties, the subject matter of the trade dispute and previous experience influence the outcome of a trade dispute.
The remainder of this paper is organized as follows: Section 2 provides a literature review on the factors that influence the result of a trade dispute. Section 3 describes the empirical strategy and the data of the model. Section4 provides the econometric estimations. It describes the factors affecting the result of a trade dispute. Section 5 demonstrates the practical implication of the model and describes further directions for research. Section 6 concludes.
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Literature review
A trade dispute contains several stages. The first one is consultation. According to WTO rules, the consultation stage can continue for up to 60 days (WTO, 2020b). This stage is necessary for parties to talk to each other to understand if there is a possibility of settling the problem without the participation of the other members of the WTO. If the consultation stage fails, the DSB organizes a trade dispute resolution. The DSB creates a commission of experts who prepare a panel report. This report should be prepared within six months, and for urgent disputes, this period could be reduced to three months. After the report submission, there are two possibilities: the first is that the report conclusion identifies that the trade measures break WTO rules. In this case, the panel of experts should recommend how to harmonize the inappropriate trade measures according to WTO rules. The second possibility is that these measures comply with the WTO rules. After this stage, the DSB can adopt or reject the panel's report and can impose the final report as recommendations to the counterparties. Each side has the possibility to appeal the panel's recommendations. The appeals can modify or reject the recommendations. The period of appeal is 60-90 days. After this, both parties should apply the panel's recommendations. Parties determine a reasonable period for such implementation. Trade disputes are costly for the participants and damage the economy of the complainant. The complainant could not carry out fair trade in the respondent's internal market because of measures that are inconsistent with WTO rules, sustaining real losses (Disdier and Fontagne, 2010). Because of the inability to abolish the measures before the DSB's decision, they continue to affect the complainant's trade. As a result, the complainant could lose the competitive advantage for three to four years. Finally, the DSB monitors the implementation of the final decision. If the complainant wins a trade dispute, there are several possible consequences. The first includes the abolishment of trade measures violating WTO rules. The second is the application of countermeasures authorized by the DSB. The abolishment of trade measures is applied most often. It is especially important to complete it at the consultation stage owing to the length of a trade dispute finalization process.
Research in trade disputes focuses on the prediction of the result and length of a trade dispute (Maggi and Staiger, 2018). The research estimates different factors affecting this process (Kuenzel, 2017). Most studies attempt to estimate the result by using macroeconomic and trade factors...
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