Dispute settlement

Economic theory has made considerable progress in explaining why sovereign countries cooperate in trade. Central to most theories of trade cooperation are issues of self-enforcement: The threat of reprisal by an aggrieved party maintains the initial balance of concessions and prevents opportunism. However economic scholarship has been less coherent in explaining why countries choose to settle and enforce their trade disputes with the help of an impartial third party a “trade court”. Typically economists focusing on the purpose of trade agreements have assumed away the very reasons why institutions are needed since under standard assumptions neither defection from the rules nor disputes are expected to occur. This paper is a step towards the formulation of a coherent economic theory of dispute settlement. It challenges traditional models of enforcement (primarily concerned with acts of punishment) for being insufficient in explaining the existence of dispute settlement institutions. We perform a comprehensive analysis of the economics of dispute settlement institutions and demonstrate to what extent the literatures of trade cooperation and dispute institutions are (and should be) interlinked. On the basis of these theories we show that dispute settlement institutions in trade agreements may assume a variety of roles including that of an information repository and disseminator an honest broker an arbitrator and calculator of damages an active information gatherer or an adjudicator.

In this paper interpretation and application dispute settlement provisions of European Union (EU) Free Trade Agreements (FTAs) signed between 1963 and 2006 are analysed. This will be through the two models of Dispute Settlement in International Law: the political and adjudicative. Political elements of dispute settlement mechanisms in Public international Law and General Agreement of Tariffs and Trade (GATT) served to establish those of the EU FTAs. Adjudicative and quasi-adjudicative elements of dispute settlement mechanisms of Public International Law and World Trade Organization (WTO) Law were used as parameters to set up those of the EU FTAs. These parameters also helped to define a new and unique hybrid model. The features of this model were found in Agreements with trade issues other than FTAs. It is possible however for future FTAs to incorporate them. The hybrid model is based on an adjudicative framework and includes both political and adjudicative elements. In conclusion it was found that even though WTO Members incorporated adjudicative elements in the Dispute Settlement Understanding (DSU) the EU did not incorporate them bilaterally for a further five years. Furthermore since the creation of the DSU in 1995 the EU has established more FTAs based on a political model than on a quasi-adjudicative. Consequently the quasi-adjudicative dispute settlement model has not represented a clear trend in EU FTAs.

The WTO's Dispute Settlement Mechanism (DSM) has been hailed as a fundamental aspect of the Multilateral Trading System for developing countries. At the same time developing countries face many challenges to ensure their effective participation in the mechanism. This paper presents statistical evidence of how Latin-American countries have been very active in their use of the DSM especially when their use of the mechanism is compared to their participation in world trade. This paper also analyses why to a large extent Latin American countries have overcome the challenges of participating in the DSM; and have done so by coming up with innovative and creative solutions without deviating from the guidelines established by WTO rules.