Trade flows and trade disputes

We do not examine any data on outcomes of WTO dispute settlement, and our comparisons are drawn only from the product markets that are subject to actual WTO disputes. Therefore, we limit our discussion to what can be learned from such an exercise, and we deliberately attempt not to extrapolate from our results to inform understanding of policies imposed by WTO members that have gone unchallenged by formal dispute settlement.

See, for example, Broda, Limão and Weinstein (2008), Bagwell and Staiger (2011), Ludema and Mayda (2013), and Bown and Crowley (2013). Bagwell and Staiger (2002) provide a book-length treatment of the terms-of-trade theory and its implication for trade agreements.

Other theoretical contributions to the literature on enforcement, trade agreements, and WTO dispute settlement include Beshkar (2010a,b) and Park (2011).

Some attempts to summarize results of this empirical literature can be found in Bown (2009, chapter 4), Busch and Reinhardt (2002), and Davis (2012). Busch and Pelc (forthcoming) survey research on the cross-country concerns over limited legal capacity affecting WTO dispute settlement.

Beginning with the 427 disputes initiated over 1995–2011 according to the standard WTO definition, an expansion that accounts for multiple complainants results in 455 bilateral pairs of countries engaged in those disputes. However, the elimination of redundant filings coincidentally reduces the total to 427 disputes under the bilateral-pairs definition over this period.

Specifically, we classify all disputes over alleged export subsidies, or violations of the Agreement on Subsidies and Countervailing Measures Article 3.1(a), as disputes over policies affecting exports, under the assumption that the complainant is concerned with the subsidy’s impact on common exported products to third-country markets. We also classify as export policy disputes the much smaller number of cases over export restrictions, such as the disputes filed in 2009 against Chinese export restrictions on raw materials. The complainants in these disputes argued that Chinese export restrictions increased world prices for these commodities while at the same time subsidizing Chinese producers that use these as inputs. Although such policies are also likely to have market access implications for foreign producers (e.g., complainant exporters) in China by raising their input costs for raw materials, the resulting market access at stake would be in downstream (user) products, such as steel, and not the raw material inputs. Examination of the downstream market access implications of such policies requires input–output mapping and data on the specific downstream products affected by the export restrictions on the inputs. While it would be interesting to examine both these types of (excluded) disputes as well as an extended analysis of our import policy (included) disputes to assess their indirect and downstream market access implications, such an exercise is beyond the scope of the current paper.

These 67 cases also include all of the violations over the WTO’s intellectual property rights agreement (TRIPS); these disputes can be associated with lack of protection for a wide variety of services (i.e., movie and sound recordings) in addition to merchandise (i.e., pharmaceuticals and chemicals) products.

Such a reference would not be possible for all of the disputes in our sample given that not all of them move beyond the consultations stage to the formal Panel stage in which complainants must fully articulate their allegations of respondent misconduct. Furthermore, the two allegations are also not mutually exclusive. For a discussion of some of the key economic aspects of National Treatment in the GATT and WTO, see Horn (2006). For a discussion of the role of MFN Treatment, see Horn and Mavroidis (2001).

For disputes involving allegations of WTO-inconsistent use of antidumping, countervailing duties, and safeguards, we also rely on information from the World Bank’s Temporary Trade Barriers Database (Bown 2013).

Cross-country comparisons of counts of products beyond the HS-06 level are not meaningful because countries have discretion in how to establish their HS-08, HS-10 (etc.) lines.

We define unit values as the ratio of the constant dollar value of disputed imports to the volume of disputed imports, with volume data defined in kilograms from UN Comtrade made available via WITS. In order to make this variable meaningful across disputes that have different products, we report these bilateral data relative to the average unit value of imports for the disputed products. As a specific example, let M(V _ijk ) be respondent i’s volume (value) of imports of disputed product k from exporting country j. We then define the relative unit value between i and j of product k as \( {p}_{ijk}\equiv \left(\frac{V_{ijk}}{M_{ijk}}\right)/\left(\left({\displaystyle \sum_j}{V}_{ijk}\right)/\left({\displaystyle \sum_j}{M}_{ijk}\right)\right) \). In the analysis below, we use this variable to describe potential differences in the price of respondent imports when exporting country j is the complainant versus when exporting country j is an interested third party or even a non-participant in the formal dispute.

Note that because trade volumes are not always reported in the HS-06 data from UN Comtrade, we are able to calculate unit values for only 84% of our sample of disputes alleging newly imposed policies. Logit-based tests suggest that missing volume data may not be randomly distributed across 2-digit HS Chapter, with products from the stone and glassware HS sections, for example, being more likely than others to have missing data on volumes. However, this should not bias our results given that only five of the 308 disputes in our sample involved these products. Similar tests for potential differences of availability of volume data across different respondent (importing) countries reveal no evidence of bias.

The timing distinction matters empirically as in two-thirds of the disputes these two years are not the same; one-quarter of the disputes in our sample are filed 1 to 2 years after the actual violation has occurred, while other disputes are filed as many as 18 years after the alleged violation.

It is important to note in our penultimate section that provides a comparison of price levels across exporters of products under dispute that we cannot rule out that differences arise due to c.i.f. differences across export sources.

There are 17 disputes, or roughly 6% of this sample, for which bilateral trade in the disputed product is zero in the year prior to the alleged policy violation under dispute. We are generally able to rule out the potential concern that these are disputes with sizeable imports that are simply being unreported in the data, perhaps due to miscoding of the disputed products. For example, in 8 of these disputes, the data reveal positive respondent imports in the disputed product from some other exporting country. Furthermore, in 7 other disputes we observe positive levels of bilateral trade for the disputed product in the year of the violation (just not the year before), suggesting that the violation is occurring in the same year that the complainant starts exporting to the respondent. Finally, the other disputes also appear related to issues of market entry; e.g., Argentina initiated a dispute attempting to remove policies that would allow it to enter the Indian pharmaceutical market, New Zealand initiated a dispute attempting to remove strict phytosanitary barriers so as to enter the Australian apple market, and the Ukraine initiated a dispute against Moldova’s environmental restrictions.

This is based on confidential interviews with a small sample of private sector lawyers based at different law firms with significant experience working on WTO litigation. Each was given the following identical hypothetical scenario, “Suppose your firm were to litigate from inception through the Panel Report (only, no appeal) a relatively straightforward WTO dispute between two transparent and small countries. As a more concrete example, suppose the litigants are two Central American countries and you are hired by the complainant to pursue a formal dispute over the other country's allegedly WTO-inconsistent application of an antidumping duty. Assume furthermore that this particular dispute did not involve supplemental costs such as hiring expert economic witnesses or providing other outside technical expertise. What is your best estimate for what the minimum charge to the client in litigation fees would be for the work?” This is in line with what we note is even the Advisory Centre on WTO Law’s estimated charges of $200,000 to its Category B members (ACWL 2007); i.e., the true costs to the Advisory Centre for legal services provided are also subsidized by its endowment (established from high-income country donors) and membership fees.

The level of trade is frequently used as a proxy for the size of the economic profits associated with the trade; i.e., higher economic profits implies more resources that would be available to pay for the litigation costs associated with enforcement. For a greater discussion of these issues in the context of WTO dispute settlement, see Bown (2009, chapter 5).

Between its inception in 2001 and 2011, the ACWL provided the legal services on behalf of either a complainant or respondent in more than 35 WTO disputes, or almost 20% of all disputes filed during that period. If the ACWL itself were a WTO member country, it would be the third most frequent litigant during the period trailing only the US and EU and ahead of China. Bown and McCulloch (2010) provide an empirical exploration into a number of different margins along which the introduction of the ACWL into WTO dispute settlement may be affecting the pattern of the subsequent caseload. Busch, Reinhardt, and Shaffer (2009) provide a broader review of the WTO legal capacity concerns of low-income countries.

Alternatively, an interpretation of the simultaneous Boeing-Airbus disputes is that they were part of a prisoner’s dilemma-like subsidy-setting game, whereby the US and EU used dispute settlement as an attempt to coordinate (or self-enforce) a reciprocal reduction of subsidies.

This $937.5 billion includes bilateral imports between the complainant and respondent in disputes associated with ‘partial’ policies, and all respondent imports in the disputed products when the dispute is associated with an alleged ‘global’ policy. For ‘policy change’ disputes, the pre-dispute year is the year prior to the implementation of the disputed policy. The subsequent back of the envelope calculation is derived by using the WTO's world import figure in 2011 (excluding intra-EU trade) of $14,485 billion, which we use our price deflator to convert to $10,882 billion (in 2005 dollars); i.e., $55 billion is 0.5% of total world imports in 2011.

For the “no policy change” category of WTO disputes, we are forced to rely on data from the year prior to the initiation of the WTO dispute, since we have not observed a pre-dispute year in which an arguably WTO-consistent policy had been in effect. In these disputes, the product coverage and the import market share variables may contain some useful information; nevertheless, the data on import values are only likely to reveal a lower bound for the level of the complainant’s market access interests. The count of HS-06 products defined in the dispute is likely to be unbiased; however, estimates of even the complainant’s share of the respondent’s import market are not likely to accurately reflect the relative importance of the complainant to the import market if the respondent’s policy (that has never been made WTO consistent) had been imposed on a basis that violates basic MFN treatment.

At the upper end of the distribution, there are also some disputes in which bilateral trade in the disputed products and the complainant’s import market share actually increase after imposition of the policy.

Some import demand and foreign export supply elasticity estimates are available in the literature from, for example, Kee, Nicita, and Olarreaga (2008) and Broda, Limão, and Weinstein (2008), respectively.

This value includes the change in bilateral imports in the disputed product between the complainant and respondent in disputes associated with partial policies, and the change in all respondent imports in the disputed products when the dispute is associated with an alleged global policy.

Kernel density estimation is essentially a non-parametric method of estimating probability density functions that operates much like a histogram but incorporates a weighting function (known as the kernel) to smooth the density. The densities in Fig. 3 employ an Epanechnikov kernel function.

Disputes over antidumping account for 62% of our subsample of partial policies, and a large share of these antidumping disputes challenge US-imposed antidumping. While not reported in the table, a comparison between antidumping and other partial policy disputes indicates that antidumping violations are associated with even larger decreases in trade volumes (46.2% compared to 34.1% on average) and increases in unit prices (1.9% increase compared to a 0.9% decrease on average), although these differences are not statistically significant.

Blonigen and Haynes (2002, 2010), for example, provide a discussion and empirical analysis of US antidumping duties and implications for export prices based on an Canadian steel exports. See also Kelly (2010).

Examples of research examining various aspects of non-complainant activity in formal WTO dispute settlement include Bown (2004c, 2005a), Busch and Reinhardt (2006), and Johns and Pelc (2013).

We code all imports classified in the Comtrade dataset as coming from “Asia, not elsewhere specified” as coming from Taiwan.

The WITS database is missing trade data for a number of European Union members prior to 1993, thus for the four disputes in which the violation occurred in 1993 the European Union is defined as imports from a 7 country subset of members (Germany, Portugal, Greece, Denmark, Ireland, Spain and the Netherlands), while for the single dispute in which the violation took place in 1991, the European Union data includes imports from Germany, Greece and Denmark. We are clearly underestimating the volume and value of trade involved in these disputes.