The Economics of Trade Disputes, the Gatt's Article Xxiii, and the Wto's Dispute Settlement Understanding

Abstract

Economic theory has yet to provide a convincing argument that can explain why the threat of retaliation under the GATTsWTO dispute settlement procedures is not sufficient to prevent countries from violating the agreement. We consider the question of why countries violate the agreed-upon rules in the face of explicit provisions which allow them to legally adjust their trade policy. Using the GATTsWTO institutional structure and the guiding principle of reciprocity, we provide a theory suggesting when countries will choose to implement protection in violation of GATTsWTO rules, as opposed to under the relevant safeguards provisions, when trade policy adjustments are necessary between "negotiating rounds." Copyright Blackwell Publishers Ltd 2002.