To control for variation across disputed product import volume growth explained by differences in bilateral retaliation capacities, we introduce a newly constructed and institutionally-motivated variable defined as the ratio of the value of the complainant’s total ‘actionable’ goods imports from the respondent over which the complainant could potentially retaliate relative to the value of imports at stake in the dispute. Construction of the denominator draws on insights from Bagwell and Staiger (1999) and Bown and Ruta (2010).<sup>38</sup> The numerator for this retaliation capacity variable on ‘actionable’ imports focuses on bilateral trade in differentiated products using the measure first proposed by Rauch (1999).<sup>39</sup> We expect the growth of disputed product import volumes to be increasing in this ratio, i.e., increasing in the level of actionable imports and decreasing in the value of disputed product trade that is at stake in the case.

We consistently find evidence of a statistically significant and positive relationship between the retaliation capacity variable and the growth of disputed product import volumes. I.e., the larger is the ratio of complainant’s imports from the respondent relative to the value at stake in the dispute, the more capacity the complainant has to find and exert some meaningful trade retaliation threat to help facilitate respondent country compliance, policy reform, and trade liberalizing import growth as an outcome of the dispute negotiations. The impact is also economically significant; the coefficient estimate of 0.078 from Column (1) of Table 4 implies that a one standard deviation increase in this variable will result in an 17 percentage point increase in disputed product import volume growth; i.e., more than doubling import growth from the baseline prediction (at the means of the data) of 11 percent to 28 percent. Finally, and as will become clear from the discussion below, we also rule out that this retaliation capacity variable is instead capturing only a size effect - i.e., that larger countries get more trade liberalization than smaller countries, regardless of retaliation capacity - because we separately control for complainant and respondent market sizes through inclusion of measures of each country’s real GDP.

A second important political-economic variable of interest is motivated by the Ludema and of the respondent country to comply with adverse WTO legal rulings involves the tiny islands nation of Antigua and Barbuda dispute over Internet gambling brought against the United States. While there have been proposals that countries implement retaliation by something other than goods (tariff) retaliation, the reality is that as of this writing, there has yet to be a case in which a country actually _imposed_ retaliation in some form other than tariff retaliation, partially because there are substantial implementation difficulties in doing so. For an extensive discussion of these issues, see the contributions in Bown and Pauwelyn (2010). For an important theoretical contribution examining the role of bilateral trade asymmetries and enforcement of cooperative low tariffs in a repeated game model of trade agreements, see Maggi (1999).

> 38Bown and Ruta (2010, p. 159) identify one version of the Bagwell and Staiger (1999) definition of reciprocity as the retaliation being limited to that value which makes the absolute change in the complainant’s import volume from the respondent resulting from the retaliation (evaluated at the initial world price) equal to the absolute change in the respondent’s import volume from the complainant resulting from the WTO violation (evaluated at the initial world price). The measure used here in the denominator (the value of imports at the initial world price, _p_<sup>_w,BR_</sup> _grc_<sup>_−_2</sup> _Mgrc_<sup>_BR−_2</sup> ) is a proxy for this relationship that serves as the upper bound measure for the amount of trade over which the WTO might authorize retaliation. I.e., if the imposed best response policy were to be prohibitive, so that _Mgrc_<sup>_BR_=0,then</sup> _pgrc_<sup>_w,BR−_2</sup> _Mgrc_<sup>_BR−_2</sup> is the level of retaliation defined in Bown and Ruta (2010, p. 159).

> 39Our measure of actionable imports thus strips out trade in homogeneous goods. See, for example, Evenett (2010). Homogeneous goods may not be targeted because they are lower profile and because losses to the respondent would be smaller due to the possibility of arbitrage via the respondent shifting sales to third markets. For more on the anecdotal evidence of the products that retaliating (complainant) governments place onto their retaliation lists, see again the contributions in Bown and Pauwelyn (2010).

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