Mostafa Beshkar

Trade Skirmishes and Safeguards: A Theory of the WTO Dispute Settlement Process

I propose a framework within which to interpret and evaluate the major reforms introduced to the GATT system in its transition to the WTO. In particular, I examine the WTO Agreement on Safeguards that has replaced the GATT escape clause (Article XIX), and the Dispute Settlement Process (DSP) that resembles a court of law under the WTO. Using this framework, I interpret the weakening of the reciprocity principle under the Agreement on Safeguards as an attempt to reduce efficiency-reducing trade skirmishes. The DSP is interpreted as an impartial arbitrator that announces its opinion about the state of the world when a dispute arises among member countries. I demonstrate that the reforms in the GATT escape clause should be bundled with the introduction of the DSP, in order to maintain the incentive-compatibility of trade agreements. The model implies that trade agreements under the WTO lead to fewer trade skirmishes but this effect does not necessarily result in higher payoffs to the governments. The model also implies that the introduction of the WTO court, which has no enforcement power, can in fact improve the self-enforceability of trade agreements.

Tariff Binding and Overhang: Theory and Evidence

Most market access commitments under the WTO are in the form of bindings on applied tariff rates. We observe two important regularities in the data. First, applied tariffs are often lower than the bound tariffs, providing governments with substantial policy flexibility. Second, the extent of flexibility varies substantially across sectors and countries. In a sharp contrast to the prediction of standard trade agreement models, we observe a strong negative correlation between tariff commitments and measures of import market power. We model the trade-off between discipline and flexibility in the design of trade agreements, and argue that recognizing this trade-off is the key to explain the observed patterns in the tariff binding commitments and applied tariffs under the WTO.

Cap and Escape in Trade Agreements

We characterize the optimal tariff bindings and the escape clause in a trade agreement among asymmetric countries that are subject to idiosyncratic political-economy shocks. We assume that shocks are private information, and that escape clauses allow the use of a costly monitoring technology to reveal the true value of the private information. We define a concept of convergence of tariff preferences, and show that bindings are higher for countries whose preferences are less convergent and for countries with a lower degree of market power. We also show how the introduction of contingent protection will substitute for tariff overhang, and establish that a sufficient condition for contingent protection to eliminate the use of tariff overhang is that tariff preferences be globally convergent.

Estimating a Model of Settlement Bargaining in the World Trade Organization

Small and large countries show divergent behavior in the dispute settlement process of the WTO. Disputes that involve larger economies are more likely to result in litigation. Moreover, in a dispute between a large country and a small country, litigation is more likely if the small country is the complaining party. I modify canonical models of settlement bargaining under asymmetric information (namely, Bebchuk 1984, and Reinganum and Wilde 1986) by assuming that governments are restricted to use policy adjustment, rather than cash payments, as a means of compensation in their settlement negotiations. A key theoretical prediction of the modified models is that the likelihood of settlement is more sensitive to the defendants litigation costs than to the complainants litigation costs. This theoretical prediction combined with the assumption that smaller countries face higher costs of litigation explains the divergent behavior of small and large countries in the dispute settlement process.

Trade Skirmishes and Safeguards: A Theory of the WTO Dispute Settlement

I propose a framework within which to interpret and evaluate the major reforms introduced to the GATT system in its transition to the WTO. In particular, I examine the WTO Agreement on Safeguards that has replaced the GATT escape clause (Article XIX), and the Dispute Settlement Process (DSP) that resembles a court of law under the WTO. Using this framework, I interpret the weakening of the reciprocity principle under the Agreement on Safeguards as an attempt to reduce efficiency-reducing trade skirmishes. The DSP is interpreted as an impartial arbitrator that announces its opinion about the state of the world when a dispute arises among member countries. I demonstrate that the reforms in the GATT escape clause should be bundled with the introduction of the DSP, in order to maintain the incentive-compatibility of trade agreements. The model implies that trade agreements under the WTO lead to fewer trade skirmishes but this effect does not necessarily result in higher payoffs to the governments. The model also implies that the introduction of the WTO court, which has no enforcement power, can in fact improve the self-enforceability of trade agreements.

Settlement with Second-Order Uncertainty

The literature on pretrial dispute settlement has studied the effect of first-order uncertainty on pre-trial settlement bargaining while assuming away any uncertainty about higher-order beliefs. We propose a settlement bargaining model in which one player receives a private and noisy signal of another players private type, thereby generating second-order uncertainty. We find that a private signal improves the efficiency of settlement bargaining. However, if the noisy signal of types is publicly observable, thereby eliminating the second-order uncertainty, the informational value associated with the signal of types completely disappears.

Safeguards and Investigations

We characterize the optimal safeguard policy for a small country under two types of safeguard mechanisms: one in which tariff changes are triggered by changes in import prices or import volumes and one in which an investigation is required to obtain increased protection. We assume the government uses a weighted social welfare function to evaluate policies, and that an investigation represents the use of resources to reveal the value of private information regarding income of producers. The safeguards we consider correspond to the WTOs special safeguard mechanism for agricultural and the WTOs safeguard agreement, respectively.

Chapter 12 The Theory of Dispute Resolution with Application to Intellectual Property Rights

We survey several of the theoretical models that have been applied to the analysis of the GATT/WTO dispute settlement process. These include repeated game models, which emphasize the punishment aspect of dispute settlement, and incomplete contracting models, which emphasize the “gap-filling” aspect. Our analysis emphasizes the implications of these models for the strengthening of the dispute settlement process under the WTO and for its application to the TRIPS agreement. We also discuss how models of settlement bargaining can be applied to obtain empirical predictions about which cases will actually proceed to an actual finding by the dispute panel.