Possibility of Inefficient Breaches under WTO Dispute Settlement Procedures: Analysis from the Viewpoint of Law and Economics

Author Name SHIMIZU Takashi  (Associate Professor, the University of Tokyo)
Creation Date/NO. January 2007 07-J-001
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This paper attempts to reexamine the dispute settlement procedures under the World Trade Organization (WTO) from the viewpoint of incentive design. The WTO dispute settlement procedures are aimed not only to resolving disputes but also at securing compliance of obligations under WTO agreements. It is therefore necessary to analyze the dispute settlement procedures focusing on their aspect as a mechanism for deterring non-compliance with WTO rules. In this regard, Warren F. Schwarz and Alan O. Sykes (2002) distinguish between two types of non-compliance: "efficient breaches," or non-compliance that increases the total sum of benefits to all WTO members, and "inefficient breaches," or non-compliance that decreases the total sum of benefits to all WTO members, defining the WTO dispute settlement procedures as a mechanism for encouraging the former and deterring the latter. Yet in doing so, they did not conduct detailed substantive analysis of the WTO dispute settlement procedures.

In this paper, a simple game theoretic model has been used to analyze the current framework of the WTO dispute settlement procedures. It has been found that not only effective breaches but also ineffective breaches cannot be deterred under the existing framework. In this sense, the procedures are not functioning in the manner postulated by Schwarz and Sykes. In other words, under the current framework, WTO member countries have an incentive to intentionally engage in conduct that might or would constitute an ineffective breach, and would remove or correct the questioned measure if and only after it has been found to be inconsistent with the relevant WTO agreement. Such an incentive is not weakened by criticism from other members of the international community or by retaliatory measures. Furthermore, the fact that retroactive compensation - remedies for previously incurred damages - is not allowed under the current system, which increases the incentive for non-compliance, particularly, inefficient breaches. In this sense, the current WTO dispute settlement system is insufficient at deterring violations.

There have been discussions about increasing the level of retaliation winning parties are allowed to take in the event of non-implementation. However, addressing the problem described above would require other measures, which may include allowing winning parties to seek, at the stage of implementation, monetary compensation for past damages, the grant of interlocutory injunction, or approval for limited retaliation. Yet each of these measures is not without problems and further study will be required.