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Developing Countries and GATT/WTO Dispute Settlement

Developing Countries and GATT/WTO Dispute Settlement. Marc L. Busch, Georgetown Eric Reinhardt, Emory. Motivation. Developing countries seldom used GATT dispute settlement WTO’s greater “legalism” expected to boost their effective use of dispute settlement Question :

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Developing Countries and GATT/WTO Dispute Settlement

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  1. Developing Countries and GATT/WTO Dispute Settlement Marc L. Busch, Georgetown Eric Reinhardt, Emory

  2. Motivation • Developing countries seldom used GATT dispute settlement • WTO’s greater “legalism” expected to boost their effective use of dispute settlement Question: • Has legalization helped developing countries make more effective use of WTO dispute settlement?

  3. Argument • New hurdles under the more “rules-oriented” WTO Dispute Settlement Understanding (DSU) • Poor complainants hampered by their lack of legal capacity, not by their inability to retaliate • The gap is in the form of less “early settlement,” rather than fewer legal wins or less compliance

  4. Findings • Poor countries not more likely to win concessions under the WTO than under GATT, but rich ones are • Gap takes the form of less early settlement in cases involving poor, rather than rich, complainants • There is no apparent gap in verdicts or compliance rates for poorer versus wealthier complainants • This gap is not a function of market size, but rather income as a proxy for legal capacity

  5. Roadmap • Argument: Negotiating in the Shadow of the Law • Models: Outcomes by Stage of Dispute Settlement • Results: The Gap in Dispute Settlement Outcomes • Implications: Reforming the DSU: What will Help?

  6. Dispute Settlement: GATT vs. WTO GATT WTO Request for Consultations Request for Consultation Request for Panel Request for Panel Panel Ruling Panel Ruling Appellate Body Compliance Panel Retaliation Arbitration Panel

  7. The Need for Legal Capacity • New premium on legal capacity disproportionately hurts poorer countries • WTO delegations and dedicated staff inadequate or missing for most developing countries • Vast majority of countries lack experience (US+EC+Canada>50% all complaints 1980-2002)

  8. The Logic • A poor complainant’s higher relative litigation costs decrease credibility of its threat to pursue the case • Defendants with weak cases less likely to concede early, which is when most full concessions made • But the probability of a pro-plaintiff ruling, if issued, may not be lower for a poor complainant

  9. Hypotheses • Wealthy complainants are more likely than poor complainants to induce concessions under the WTO, as compared to the GATT period • This widening gap should be most evident in disproportionate rates of early settlement, rather than in the pattern of pro-plaintiff verdicts or compliance ex post

  10. Empirical Tests • Dataset of 380 concluded GATT/WTO disputes initiated between 1980 and 2000, inclusive. • Ruling direction (no, partial, or full support for complaint, net of first Appellate Body decision) • Level of concessions by defendant (none, partial, full) • Early settlement (if full concessions occur before ruling issued)

  11. Variables WTO, Complainant’s and Defendant’s per capita income (constant 1995 $US, logged), WTO*Complainant’s per capita income, Complainant’s and Defendant’s market size (GDP in constant 1995 $US, logged), Panel, Multilateral, Agriculture, Discriminatory Measure, Sensitive Case (i.e., SPS) Data Model 1: 380 GATT/WTO Disputes Model 2: 154 WTO Disputes Robustness Check: US-EC Control Concessions

  12. Full Concessions Under the GATT/WTO .63-.78 .41-.64 .33-.48 .27-.49 NOTE: Displays predicted probabilities from Model 1, holding all other variables at their sample means, moving WTO from 0 to 1 and Complainant’s Per Capita Income from its 10th percentile value ($2,152) to its 90th ($29,251), with 90 percent confidence intervals.

  13. Legal Capacity and Concessions • India and Australia have nearly identical GDPs in 2000, but per capita income $459 v. $23,837 • Under WTO, India’s predicted odds of getting the average defendant to concede is 41% … • … versus Australia, which is predicted to have a 73% chance of gaining concessions

  14. Not All Developing Countries Are Alike • 17 of 24 “full” WTO victories for developing countries won by 4 LA states, Korea, Singapore, Thailand & India • Under GATT, developing country winners and losers had equal average incomes • Under WTO, developing country winners have 50% higher incomes than their losing counterparts • Thus, the apparent gains under the WTO apply only to a handful of the largest, richest developing countries

  15. Variables WTO, Complainant’s and Defendant’s per capita income (constant 1995 $US, logged), WTO*Complainant’s per capita income, Complainant’s and Defendant’s market size (GDP in constant 1995 $US, logged), Panel, Multilateral, Agriculture, Discriminatory Measure, Sensitive Case (i.e., SPS) Data Model 3: 154 WTO Disputes Model 4: 41 WTO Disputes ending with a ruling Robustness Check: US-EC Control Early Settlement and Compliance

  16. Legal Capacity and Concessions • India and Australia have nearly identical GDPs in 2000, but per capita income $459 v. $23,837 • Under WTO, India’s predicted odds of inducing early settlement is 13% … • … versus Australia, which is predicted to have a 49% chance of inducing early settlement

  17. Is early settlement really a big deal?

  18. Concessions and Legal Escalation 61% of all instances of full concessions under WTO occur prior to ruling Source: Busch and Reinhardt 2000

  19. Legal capacity is not the only hurdle …

  20. Third Parties and WTO Dispute Settlement Consultations DSU 4 “substantial trade interest” informal third parties Panel DSU 10 “substantial interest” formal third parties Appellate Body DSU 17

  21. Third Parties and Rates of Early Settlement • With no third parties, predicted probability of early settlement is 70% • With mean number of third parties, no systemic issues, probability drops to 31% • Add systemic issues, and probability drops to 3%

  22. Implications for Developing Countries • Average developing country complaint has twice as many third parties joining in • In these complaints, third parties twice as likely to side with the defendant • Negative impact of third parties on early settlement appears stronger for poor countries

  23. Legal capacity and deterrence of protection

  24. Deterrence of Protection Does legal capacity deter US AD duties? • Sample: 1,000 US AD investigations, 1978-2002 • Sample: 3,000 non-named suppliers of products

  25. US AD Outcomes by Target Income Level

  26. DS Experience and US ADs • Contrast a country with no disputes (Sri Lanka) with one filing 7 per year (EU) • Odds of the more experienced country being hit with a US AD is fully 1/3 less

  27. Conclusions

  28. Conclusions • Poor countries not more likely to win concessions under the WTO than under GATT, but rich ones are • Gap takes the form of less early settlement,not rate of legal victories or compliance • Third party participation hurts prospects of achieving early settlement (forum shopping?) • Being WTO member, and having DS experience, can deter protectionism in the first place

  29. Implications for the WTO • Rules-oriented system does not necessarily level the playing field • Inequity in system’s workings encourages illiberal policies on all sides, both rich and poor • Capacity-building targeted at pre-litigation negotiations can help considerably

  30. Regression Tables

  31. Selection Bias? • Are poor countries filing more frivolous cases? No…. • poor complainants not losing more verdicts under the WTO • type of cases brought under WTO make them easier to win • Are rich countries filing better cases? No…. • rich complainants not winning more verdicts under the WTO • Coverage of intellectual property under WTO is not the key

  32. GATT/WTO Dispute Outcomes Note: * denotes one-tailed p < 0.05; **, p < 0.01 Per capita income and GDP figures in logs. Robust standard errors clustered across dyads.

  33. WTO Dispute Escalation and Outcomes Note: * one-tailed p < 0.05; **, p < 0.01 *** All but three of this subsample of 41 cases meet our definition of “multilateral.” Because it varies so little, we accordingly exclude MultilateralCase from this column’s regression. Per capita income and GDP figures in logs. Robust standard errors clustered across dyads.

  34. Endogeneity? • Direct stakes: third parties v. co-complainants • Indirect stakes: third party’s “systemic issues” • Nature of dispute: control for defendant’s GDP

  35. Do third parties impact rulings?

  36. Variables Third Party Participation or Third Party Direction System Issues US-EU Dispute Complainants’ GDP Defendants’ GDP Litigating Complainants’ GDP Litigating Defendants’ GDP Sensitive Case Article XXII Data 1st Stage: 200 WTO Disputes 2nd Stage: 65 WTO Disputes ending with a ruling Selection Model of Ruling Direction

  37. Third Parties and Ruling Direction • For average “politically sensitive case,” likelihood of pro-complainant ruling is 13% • This rises to 46% with only pro-complainant third parties, and 67% with systemic issues • Likelihood drops to 53% if we add pro-defendant third parties to the mix

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