widening access for third parties may make it more difficult to negotiate a settlement. Thus, the apparent advantages on greater inclusion and ‘multilateralization’ of disputes may come at the cost of fewer early settlements and more disputes. This matters because early settlements tend to be ‘better’ not just in the sense of generating compliance at lower cost but also result in greater concessions than if a case is litigated (Busch and Reinhardt, 2001).

_<u>Remedies</u>_ **_<u>.</u>_** A government found to be in violation of the WTO is generally told to bring its measures into compliance with the rules. This may not provide enough incentive to the private sector to pursue a dispute given the length of time associated with the process—some 3 years—and the lack of any prospect for compensation for damages incurred. WTO members have been unwilling to go down the compensation track, due to uncertainty regarding the possible repercussions (potential liability). Some countries have also argued that their legal systems prohibit compensation. Historically, developing countries have favored the introduction of rules that would allow for claims for monetary damages to be paid to them in instances where illegal measures are imposed against them by industrialized nations. Not surprisingly, GATT contracting parties always rejected this. ‘Money damages, said the developed countries, were simply outside the realm of the possible. In effect, they were saying, GATT was never meant to be taken seriously’ (Hudec, 2002).<sup>24</sup> _<u>Enforcement capacity.</u>_ There are asymmetric incentives for countries to deviate from the WTO, as the ultimate threat that can be made against a member that does not comply with the DSB is retaliation. Small countries cannot credibly threaten this because raising import barriers will have little impact on the target market while being costly in welfare terms. A possible way out of this dilemma is for small trading nations affected by a dispute to form alliances and retaliate as a group whenever one of the members is affected. More generally, one can conceive of the rules being enforced through retaliation by all WTO members, not just affected members. However, under WTO rules only countries with a trade interest may bring a case. Those not affected cannot participate.

Collective retaliation – a standard recommendation by economists for many years – has always been resisted by WTO members on the basis that the objective is not to punish but to maintain a balance of rights and obligations (the reciprocal bargain). A practical problem with collective retaliation is that it implies a direct intrusion in sovereignty– the WTO would be requiring its members to raise tariffs. This explains why proposals along these lines (e.g., Pauwelyn, 2005b) have not gone anywhere.

A number of suggestions have been made in the DSU review and in the literature to address both the asymmetric retaliation capacity constraint and the economic inefficiency/costs of raising tariffs. An innovative proposal to address both problems was suggested by Mexico in 2003: permit WTO members to trade their rights for retaliation in instances where a losing party refuses to implement a ruling. Bagwell, Mavroidis and Staiger (2006) argue this makes sense from the perspective of developing countries as long as the non‐complying party can also bid for the rights. However, they stress that their analysis does not imply that introducing the possibility of tradable remedies into the WTO system is necessarily a good idea given the likely political ramifications of a government imposing WTO‐ sanctioned retaliatory tariffs against other governments with whom it has no unresolved WTO dispute.

A basic problem with retaliation is that it involves raising barriers to trade, which is generally detrimental to the interests of the country that does so. Lawrence (2003) has suggested a shift to trade compensation and proposed adoption of what he terms contingent liberalization commitments. In a trade round WTO members would designate sectors or methods for liberalization in the event they

> 24 The DSU review generated a number of proposals by developing countries for retroactive remedies, including payment of legal costs by the losing party. However, such proposals were all limited to situations where a WTO member does not implement a DSB ruling.

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