Problems with WTO Dispute Settlement

The open multilateral trading system that has been part of the international economic architecture of the last six decades has brought unparalleled growth and economic well-being to a larger proportion of the world than in any prior era. Those who care about preserving and enhancing this progress should be concerned about the serious systemic problems that threaten to undermine the legitimacy of the system's institutions. One such institution-arguably the most important one-is the dispute settlement mechanism established in 1994 under the World Trade Organization ("WTO") agreements. Claude Barfield has written a timely and important analysis of the WTO dispute settlement regime, its recent use, its shortcomings, and its possible salvation. This response follows Barfield's headings and comments on several of his major conclusions and proposals. 1. THE NATURE OF THE PROBLEM A. TRADE RELATIONS AMONG NATIONS Something has gone terribly wrong in the conduct of international trade relations. Ironically, the problem stems from a well-meaning attempt in the Uruguay Round to increase the role of the rule of law among trading nations. This development was the creation of binding dispute settlement as part of the new WTO. As with other instances in which idealism has been allowed to overwhelm more practical approaches, unintended consequences have caused what the military would call extensive collateral damage. Promising a new era of carefree, automatic resolution of differences, in reality the new system has increased animosity among the major trading nations, has brought about the imposition of trade sanctions, and threatens to further limit trade. The highest profile examples are well known. For instance, the EU brought a case against the US tax measure known as the Foreign Sales Corporation ("FSC").' It did this although there are no known trade distorting effects of this measure and despite the fact that the EU agreed to the United States putting this tax provision into place two decades ago. In fact, the FSC addresses a defect in the General Agreement on Tariffs and Trade ("GATT")/WTO rules, which allow for border adjustment-that is, rebating on export and levying on import-only for "indirect" taxes (taxes on goods) and not for "direct" taxes (taxes on producers and other persons). There is no economic justification for this distinction, as producers will absorb some portion of indirect taxes and some portion of direct taxes will be shifted forward to purchasers. The economic disadvantage to the United States of the GATT rules was great, as the United States, in contrast to its trading partners, does not have a value-added tax, but relies very heavily on income taxes for revenue. A negotiated settlement between the United States and the EU was necessary. This was achieved in 1981 and duly notified to the GATT. This was an example of successful trade diplomacy on an issue that had been debated and left unresolved throughout the 1960s and 1970s. Why then did the EU bring the FSC case? Solely because binding dispute settlement had given the United States two supposedly unrelated wins against the EU and a right of retaliation against European products, which the United States exercised. These two major cases stimulated the European response. One involved a longstanding fight over whether Europe could, without scientific evidence showing any hazard to health, ban imports of US beef raised with the assistance of hormones.2 The United States clearly had a meritorious WTO case against the EU, pressed it, and achieved a legal, if hollow, victory. The EU had repeatedly informed the United States that the beef issue posed a domestic political problem that it could not solve. It remained steadfast-obstinate, in the US view-and the United States imposed trade sanctions. In practical terms, neither side has won. No US beef that was the subject of the case has been allowed into the EU, and there is a range of agricultural products barred entry into the United States as retaliation. …