WTO trade disputes, big and small

Chad Bown, Kara Reynolds

WTO dispute settlement is well-known for its high-profile cases – e.g., US-EU clashes over bananas, hormone-treated beef, genetically modified organisms, subsidies to Boeing and Airbus, etc. – some of which cover annual trade in the billions of dollars. Are the trade stakes from such disputes representative of the WTO caseload? This column presents evidence from a newly available data set and reveals some surprising facts about the prevalence of both large and small WTO disputes.

WTO disputes are now a media mainstay. During one week-long stretch in May, reporters from The New York Times, Wall Street Journal, Financial Times, Le Monde, Frankfurter Allgemeine, and even USA Today published articles about ongoing disputes. The frictions ranged from the EU’s challenge to Russia’s new import restrictions on commercial vans, the US receiving a legal ruling on Chinese barriers to autos, and the WTO announcing findings on a Canada- and Norway- initiated dispute to an EU ban on trade in seal products.1

Despite its elevated public profile and a recent resurgence in theoretical research (e.g., Maggi and Staiger 2011, forthcoming), relatively little is known empirically about the product coverage and market access at stake in cases litigated under the WTO system.2 To begin and to encourage further study, we have made available a new data set of the product-level trade involved in WTO disputes for roughly three quarters of all cases initiated between 1995 and 2011. In Bown and Reynolds (2014) we provide a more complete analysis – here we highlight some of the patterns that have emerged.

Some disputes are big …

Given the hype, it is not surprising that the data confirm that member countries entrust the WTO to legally scrutinise policies that affect large bilateral trade flows. In particular, one measure of the potential market access at stake in a dispute is the defendant (‘respondent’) country’s dollar value of imports in the disputed product from the plaintiff (‘complainant’) in the year prior to implementation of the allegedly WTO-inconsistent policy. Figure 1 illustrates the distribution of such potential market access at stake in disputes initiated between 1995 and 2011.

Figure 1. Levels of bilateral trade and scope of products subject to WTO Dispute, 1995-2011

Source: Bown and Reynolds (2014, Figure 2). [††] indicates that, for ease of exposition and due to the long right tails, we truncate the right tail at $1 billion (for the value of trade) and at 50 products (for the count of HS-06 products).

We estimate that 15% of the caseload involves bilateral trade in disputed products of more than $1 billion per year. Examples of such large stakes cases include multiple disputes in the automotive sector between the US, Japan, EU, and China; in the information technology sector between the US, EU, Japan, and South Korea, and in the steel sector between the US, Japan, and EU, amongst others.3

… and some disputes are small

Less expected is that almost as many WTO disputes cover much smaller trade stakes. For example, roughly 14% of the caseload involves trade in disputed products of less than $1 million per year. And to be clear, this $1 million trade stakes is a rough proxy for export sales revenue and not profit. Examples of these small stakes disputes include lesser-known challenges – e.g., to India’s restrictions on batteries from Bangladesh, to Trinidad and Tobago’s barriers on pasta from Costa Rica, to Turkey’s duties on steel pipe fittings from Brazil, to South Africa’s limits on paper from Indonesia, and to Armenia’s measures on alcohol and cigarettes from Ukraine.4

The high frequency of small stakes disputes is intriguing, for one because the private-sector law firms that some developing country governments would rely on to litigate WTO disputes are relatively expensive. The start-up cost of using the private sector to litigate even a relatively simple dispute through to a legal decision is estimated to range from $250,000 to $750,000, depending on the law firm involved. Nevertheless, some subsidised legal assistance is available, including through the highly utilised Advisory Centre on WTO Law. The WTO system’s chief publicly subsidised legal assistance program estimates charges to middle income developing country members at roughly $200,000 for the provision of work up to a legal decision (ACWL 2007), and progressively lower fees are available for poorer countries.5

The scope of product coverage is also diverse across policies under dispute

This heterogeneity is not limited to trade values, as there is also evidence of vast diversity in the scope of products affected by the policies being challenged under WTO disputes. One useful metric to illustrate this relies on the Harmonised System’s 6-digit classification into roughly 5,000 imported products, which is both consistently defined across countries and relatively stable over time.

Thus Figure 1 also illustrates that nearly 20% of WTO disputes have a complainant focused on the market access of a single product, and another 20% of disputes feature a complainant challenging a policy that is so broad that it affects over 50 different products at once. These distributions in Figure 1 – i.e., for the scope of targeted products and also the level of trade – are each monotonically decreasing. The right tail of each distribution is long – resulting in mean values that are much larger than the medians – and so long that, for ease of exposition, we trim them at 50 products and $1 billion, respectively.

Future research on determinants of which potential WTO-violating policies that trading partners choose to challenge under dispute settlement may find it useful to include measures related to the count of products affected by policies, given that political economists have long conjectured trade policy to be subject to the problem of collective action (Olson 1965). For example, in a related setting examining trade liberalisation outcomes, Ludema and Mayda (2013) provide evidence that free-riding among foreign exporters limits the extent to which importing country governments have been able to find partners with which to coordinate negotiated tariff reductions.

Do WTO disputes add up?

Here we present two simple ways of aggregating these trade stakes data to begin to address whether WTO dispute settlement is merely a media-friendly sideshow, or if countries use it to scrutinise policies that collectively impact significant amounts of trade.

One approach is to add up the value of imports in the respondent countries’ disputed products taken from the year prior to implementation of the policy that is ultimately subject to the WTO dispute. This reveals WTO dispute settlement over 1995-2011 as scrutinising nearly $1 trillion in imports (in 2005 constant US dollars). Put differently, member countries requested that WTO adjudicators examine trade in products affected by disputed policies at an average rate of $55 billion per year, which was roughly 0.5% of the level of world imports in 2011.

A second approach is to add up the value of ‘lost imports’, which we define conservatively as the simple difference between the level of trade in the disputed products in the year after the policy change – that is the subject of the WTO litigation – relative to the level of trade in the year prior to the change. Without controlling for any other factors that would also affect trade flows during this period, this works out to WTO dispute settlement investigating policies that cover imported products that were collectively $60.4 billion less than their levels prior to policy implementation.

These two statistics indicate that member countries are asking the WTO to use dispute settlement to address policies that cover economically sizeable amounts of trade. And clearly the trade that is directly at stake is only the tip of the dispute settlement iceberg. Jurisprudence resulting from these cases is likely to have an even longer reach via the ‘shadow of the law’ extending the indirect impact of WTO dispute settlement to hundreds of billions of dollars in trade each year.

References

ACWL (2007), “Billing Policy and Time Budget”, ACWL/MB/D/2007/7, 19 November, last accessed July 28, 2014.

Bown, Chad P (2009), Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement, Washington DC: Brookings Institution Press.

Bown, Chad P and Rachel McCulloch (2010), “Developing Countries, Dispute Settlement, and the Advisory Centre on WTO Law”, Journal of International Trade and Economic Development 19 (1): 33-63.

Bown, Chad P and Kara M Reynolds (2014), “Trade Flows and Trade Disputes”, World Bank Policy Research Working Paper No. 6979, July.

Busch, Marc L and Krzysztof J Pelc (forthcoming), “Dispute Settlement in the WTO”, In Lisa L. Martin (ed.) Handbook of the Politics of International Trade, Oxford: Oxford University Press.

Caron, Julien (2014), “Les produits dérivés du phoque resteront interdits en Europe”, Le Monde, 28 May.

Dalton, Matthew (2014a), “EU Files WTO Complaint Over Russian Import Duties on Vans”, Wall Street Journal, May 21.

Dalton, Matthew (2014b), “WTO Upholds Ruling That Allows EU to Ban Seal Products”, Wall Street Journal, May 22.

Davis, Christina L (2012), Why Adjudicate? Enforcing Trade Rules in the WTO, Princeton, NJ: Princeton University Press.

Frankfurter Allgemeine (2014), “Amerika gewinnt Auto-Handelsstreit gegen China”, May 24, last accessed July 28, 2014.

Horn, Henrik, Petros C Mavroidis, and Hakan Nordstrom (2005), “Is the Use of the WTO Dispute Settlement System Biased?” in Petros C. Mavroidis and Alan O. Sykes (eds.) The WTO and International Trade Law/Dispute Settlement, Cheltenham, UK: Edward Elgar.

Lowrey, Annie and Keith Bradsher (2014), “U.S. Gains in a Spat with China Over Tariffs”, The New York Times, May 23.

Ludema, Rodney and Anna Maria Mayda (2013), “Do Terms-of-Trade Effects Matter for Trade Agreements? Theory and Evidence from WTO Countries”, Quarterly Journal of Economics 128(4): 1837-1893.

Maggi, Giovanni and Robert W Staiger (2011), “The Role of Dispute Settlement Procedures in International Trade Agreements”, Quarterly Journal of Economics 126(1): 475-515.

Maggi, Giovanni and Robert W Staiger (forthcoming), “Optimal Design of Trade Agreements in the Presence of Renegotiation”, American Economic Journal: Microeconomics.

Olson, Mancur (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge, MA: Harvard University Press.

Politi, James and Shawn Donnan (2014), “US claims victory over China in WTO Car Dispute”, Financial Times, May 23.

Woodyard, Chris (2014), “U.S. automakers win WTO trade victory over China”, USA Today, May 23.

WTO (2014), “Dispute Settlement: Chronological list of disputes cases”, last accessed July 28, 2014.

Footnotes

See, for example, Lowrey and Bradsher (2014), Dalton (2014a,b), Politi and Donnan (2014), Caron (2014), Frankfurter Allgemeine (2014), and Woodyard (2014).

2 The empirical literature assessing WTO dispute settlement began with Horn, Mavroidis, and Nordstrom (2005). Much of the new theory examining the implications of dispute settlement provisions arising in trade agreements is modeled as an incomplete contract. Recent contributions to an overlapping literature from political scientists include Davis (2012) and Busch and Pelc (forthcoming).

3 These cases are each estimated to have at least $2 billion in bilateral trade at stake and include disputes DS6 and DS339 (autos), DS62, DS296, DS299 and DS336 (information technology), and DS184, DS214, DS244, DS248 (steel). For more information on these disputes, see WTO (2014).

4 Respectively, these are disputes DS306, DS187, DS208, DS374, and DS411. For more information on these disputes, see WTO (2014).

5 The Advisory Centre on WTO Law’s costs to clients are subsidised by revenue generated from its endowment and membership fees. Most of the use of the ACWL to date in formal litigation has been by relatively higher-income emerging economies. The least developed country members of the WTO rarely use dispute settlement at all, even though they do have free access to ACWL services. For a discussion of the ACWL and developing countries in WTO dispute settlement, see Bown and McCulloch (2010) and Bown (2009).