Value Chains and WTO Disputes

In an era where economic nationalist policies have been threatening the global trade order, the ability of the World Trade Organization (WTO) to maintain a liberal trade regime has come under intense scrutiny. Considering the decline of the WTO as a forum for negotiated trade liberalization, epitomized by the long-lasting impasse of the Doha Round, the importance of the WTO’s judicial arm as a tool to maintaining a liberal trade regime has increased. In this backdrop, this chapter offers an overview of a novel theory that explains why and when governments are more likely to cooperate at the WTO dispute settlement and faster in complying with the rulings of the WTO panels. At the heart of this theory lies internationalization of production and cross-border value chains that shape the preferences domestic actors in trade policymaking—i.e., firms and sectors. I start by laying out the puzzle addressed in the book, give the readers an overview of how value chains pose a systemic counter force to the protectionist interests, and conclude by providing an outline of the book.

What is the impact of firms’ value chain integration on their trade preferences? In this chapter, I review the scholarship on trade policy, value chains, and compliance at the WTO dispute settlement. I theorize on the potential impact of value chains on firms’ and sectors’ political mobilization over trade policies in general, and over WTO dispute settlement rulings in particular. I propose that WTO Members’ cooperative behavior at the dispute settlement is shaped by domestic interests’ demands, which in turn is significantly shaped by their integration into value chains. Firms that are integrated into value chain networks have clear preferences over free trade to avoid disruption to their production processes and imports that they rely on. All things being equal, the combination of exporters that seek market access and the integrated import-dependent firms’ mobilization changes the domestic balance of interests in favor of trade liberalization and swift compliance with WTO panel rulings.

Under what conditions do WTO Members change domestic policies or measures that are challenged in WTO litigation? This chapter tests the hypotheses put forward in the previous chapter and argues that the degree of integration into value chains of the economic sectors affected by a WTO dispute influences members’ propensity to change domestic policies when targeted in WTO litigation. I propose that compliance with WTO rulings is faster when a domestic coalition consists of pro-trade liberalization groups composed of exporters seeking to avoid the imposition of retaliatory measures and import-dependent firms integrated into value chains wishing to exploit the opportunity to access cheaper imports. Under these circumstances, trade-liberalizing responses to WTO legal challenges are therefore more likely. I test this theory by relying on a novel database of WTO trade disputes and by estimating a Cox proportional hazard model. The results support my hypothesis and indicate that indeed when WTO-targeted measures involve sectors highly integrated into value chains, compliance with WTO panel rulings is faster.

Under what conditions do defendant WTO Members swiftly implement adverse rulings of WTO panels? In this chapter, I bring forth an argument relying on qualitative evidence. I demonstrate that when a dispute touches upon the interests of firms and sectors integrated into value chains and targets import-restricting measures, these private actors are triggered to mobilize and press for compliance. The mobilization of these firms changes the domestic political conditions in favor of timely implementation. I show the plausibility of my argument in a comparative design with four case studies in which the US and Canada acted as defendants in WTO disputes. I control for a number of political factors and also consider legal sources of variation—i.e., the complexity of the form of implementation—that may impact WTO Members’ record of compliance. This chapter thus complements the quantitative evidence presented and supports my theoretical proposition regarding firms’ and sectors’ value chain integration and mobilization over WTO dispute settlement rulings.

This chapter outlines the main findings of the book and proposes further research avenues. In doing so, it also provides an overview of the implications of its findings for trade politics in general, especially considering the growing economic nationalist rhetoric that have led to rising trade tensions across the globe. The primary finding of the book is that value chains shape preferences of firms and sectors toward open trade policies. This can be observed at the WTO dispute settlement and in response to WTO litigation, through which organized interests have mobilized for swift compliance with the rulings of the WTO panels. Moreover, we can observe such international firms’ and sectors’ mobilization beyond the WTO and opposing trade-restrictive measures enacted in the context of trade tensions across the globe. These observations indicate that even without a fully functioning WTO dispute settlement mechanism, there may be less to worry about backtracking an open world economy.