The WTO’s dispute settlement understanding (DSU) sought to provide recourse to smaller countries in the global trading system. But poorer nations tend to bring fewer cases than expected. Instead, the WTO’s docket has been dominated by cases like the endless back-and-forth between the United States and the European Union over aircraft production. Diplomatic side deals are the norm. In fact, countries resolve more than 40 percent of cases via private settlements.
The free-trade regime produced benefits — for a few countries
The WTO is a successor to the General Agreement on Tariffs and Trade (GATT), “an exclusive country club” of mostly rich countries. Over the course of 45 years, these developed countries liberalized tariffs on manufactured goods, giving members the benefits of freer trade. The GATT’s system for settling disputes mostly involved backroom “gentlemen's agreements.” That system lacked transparency, but it worked well enough for close trading partners with similar interests.
The more inclusive WTO set out to share the gains of trade with the developing world. In theory, the DSU would help level the playing field between poorer countries and richer ones. The idea was that if developing countries could bring their trade grievances to an impartial court, big countries would behave better. The shadow of the law would lead not only to fewer violations of the trading system overall, but it also would provide recourse for smaller countries if those breaches did occur. That’s not quite how it worked out.
The WTO’s notion of economic justice was shaky
From the beginning, the DSU never worked exactly as intended. Legal recourse is expensive. Though the WTO offered technical assistance to poorer countries, the tribunal saw fewer cases from poor countries than anticipated. Instead, cases brought by rich countries clogged the dispute system.
Countries with the resources to use the DSU for their own means brought cases simply to establish legal precedents for subsequent, more-controversial rulings. Other cases centered on some varying aspect of the same underlying trade issues. More often than not, rich countries just took turns suing and countersuing each other.
Even if poorer countries spent the money and the tribunal ruled in their favor, the WTO lacked the enforcement capacity to ensure that the offending country stepped back in line. The best it could do was to give permission for the harmed country to retaliate, for example, by imposing tariffs. This was a toothless remedy for an economically weak country. Compliance with DSU judgments was low, and trade between the disputants was usually unaffected. This shortcoming helps explain why diplomacy and side deals came to dominate the process.
The future looks a lot like the past
What’s next for the WTO? There is a “Plan B” with tentative endorsement from the E.U.’s 28 member states as well as Australia, Argentina, Brazil, Chile, Japan, Turkey and, crucially, China. This plan centers on the DSU’s Article 25, which allows countries to settle their disputes through voluntary arbitration.
Our research suggests that what comes next will probably look a lot like the old GATT. As we argue in a forthcoming paper, which examines the effect of diplomacy on the settlement of U.S. trade disputes, this system also echoes how the WTO’s DSU actually worked in practice. Even under the legalistic DSU, some 44 percent of cases involving the United States never made it to judgment. Instead, countries settled these disputes by mutual agreement or withdrew the disputes altogether.
In practice, this system depended on bilateral diplomacy, but these diplomatic efforts only worked at the margins. When close partners like the United States and the E.U. took the trouble to sue each other, it meant that the parties could not resolve the dispute without the judgment of the tribunal.
At the other extreme, countries with very different views on trade and free markets — such as the United States and China — also tended to see cases through to judgment. Diplomacy tended to help countries in the middle of that spectrum to reach settlement. This mirrors the “gentlemen’s agreements” of the GATT system.
With a precedent for private settlement essentially in place for the E.U.-backed Plan B, the latest developments may not be the collapse of the liberal order that the headlines suggest. The new system, instead, may be more of a reminder that the DSU never really worked as intended.
Julia Gray is an associate professor of political science at the University of Pennsylvania and is the co-director of the Joseph H. Lauder Institute of Management and International Studies. She is working on a book on how international organizations survive crises.
Philip Potter is an associate professor in the department of politics at the Frank Batten School of Leadership and Public Policy at the University of Virginia. He is director of the National Security Policy Center.