Trade Policy Flexibility and Enforcement in the WTO: A Law and Economics Analysis

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The World Trade Organization (WTO) is an incomplete contract among sovereign countries. Trade policy flexibility mechanisms are designed to deal with contractual gaps, which are the inevitable consequence of this contractual incompleteness. Trade policy flexibility mechanisms are backed up by enforcement instruments which, allow for punishment of extra-contractual conduct.

This book offers a legal and economic analysis of contractual escape and punishment in the WTO. It assesses the interrelation between contractual incompleteness, trade policy flexibility mechanisms, contract enforcement, and WTO Members' willingness to cooperate and to commit to trade liberalization. It contributes to the body of WTO scholarship by providing a systematic assessment of the weaknesses of the current regime of escape and punishment in the WTO, and the implications that these weaknesses have for the international trading system, before offering a reform agenda that is concrete, politically realistic, and systemically viable.

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Editorial Reviews

From the Publisher
'Do WTO agreements allow for 'efficient breach?' What purpose is served by WTO instruments regarding flexibility and escape? Are these instruments structured as well as possible? These are the central themes that Schropp examines in this important study. Scholars and policymakers alike will find his analysis valuable and illuminating.' Alan O. Sykes, Stanford University

'First-rate economists and trade lawyers have been increasingly turning their attention to understanding the nature of the WTO 'contract' and its implications for the working of its institutions such as the Dispute Settlement Mechanism. Simon Schropp, who uniquely combines both superb analytical expertise and legal experience in trade litigation, has written an invaluable book that offers novel insights that no serious student of the WTO can afford to ignore. Read, learn and enjoy.' Jagdish Bhagwati, Columbia University

'Schropp's work … is a very welcome input to an ongoing discussion regarding the shaping of the multilateral trading system. Simon Schropp is on top of the literature, and this volume displays it in excellent manner.' Petros C. Mavroidis, Columbia Law School, New York, University of Neuchâtel, and Research Fellow at the Centre for Economic Policy Research (CEPR)

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Product Details

Meet the Author

Simon Schropp is an International Trade Policy Analyst for Sidley Austin LLP, a leading law firm in international trade law and WTO litigation. He has previously worked for the WTO Secretariat and as a research fellow investigating legal and economic issues of the WTO.
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Table of Contents

List of figures xi

List of abbreviations xii

Acknowledgements xiv

Foreword xvii

1 Introduction: trade policy flexibility in the WTO - vice or virtue? 1

1.1 Trade policy flexibility in the WTO: a system at fault 3

1.2 Some definitional groundwork: connecting issues of breach, remedies, and commitment level in incomplete contracts 7

1.3 Objectives of the study 12

1.4 A reader's guide to this study 14

1.5 A brief survey of the literature on trade policy flexibility and enforcement in the WTO 20

Part I An Introduction to incomplete contracting 27

2 Complete contracts and the contracting ideal 29

2.1 Contracts: enforceable commitment over time 29

2.1.1 Timing 30

2.1.2 Commitment: cooperative intent and assurance 30

2.1.3 Effective enforcement and the link between commitment and enforcement 32

2.1.4 Concluding remarks on the definition of contracts 41

2.2 Basics of contracting: creating rules 43

2.2.1 Primary rules of contracting: exchange of entitlements 43

2.2.2 Secondary rules of contracting: entitlement protection 46

2.2.3 Tertiary rules of contracting: enforcement of entidements 49

2.2.4 Mixed regimes of entitlement and entitlement protection 50

2.3 Types of contracts and alternatives to contracting 54

2.3.1 Collaboration vs. coordination 54

2.3.2 Complexity of contracts and alternatives to contracting 56

2.4 The contracting ideal: the Pareto-effident complete contingent contract 57

3 Incomplete contracting and the essence of flexibility 60

3.1 A categorization of contractual incompleteness 61

3.1.1 What makes contracts incomplete? Transaction costs and bounded rationality 62

3.1.2Contractual incompleteness: a taxonomy 65

3.1.3 Effects of incompleteness on contracting behavior 77

3.2 How to deal with contractual incompleteness: strategies of gap-filling 84

3.2.1 Circumnavigating incompleteness; comprehensive contracting 85

3.2.2 Seizing regret: drafting flexibility mechanisms 87

3.2.3 Minimizing room for disputes: the principle of precaution 94

3.2.4 Delegating responsibility: using courts as gap-fillers 95

3.2.5 Summary: dealing with contractual incompleteness and the significance of contractual rules of default 98

3.3 Crafting rules of flexibility; inalienability, specific performance, orliability? 101

3.3.1 Inalienability or efficient non-performance? 105

3.3.2 Liability or property rule? 107

3.3.3 Additional modalities of default rule design 122

3.4 The efficient "breach" contract as the incomplete-contracting ideal 124

3.5 A first step towards a general theory of disputes? 128

Part II Theorizing about the WTO as an incomplete contract 131

4 Adding context: the WTO as an incomplete contract 133

4.1 Players, preferences, and contractual intent 134

4.1.1 Players and preferences: political economy theories of endogenous trade policy-making 135

4.1.2 Contractual intent: what is the rationale for trade cooperation? 143

4.1.3 A tentative conclusion1, trade agreements based on market access externalities and minimum standards 1816

4.2 Primary rules of contracting: basic entitlements in the WTO 190

4.2.1 Bilateral market access entitlement 191

4.2.2 Minimum standard entitlements 193

4.2.3 Basic auxiliary rules of entitlement 194

4.2.4 Prominent role of the market access entitlement 196

4.3 Establishing the WTO as an incomplete contract 199

4.3.1 Contingencies and uncertainly affecting the market access entitlement 202

4.3.2 Contingencies, uncertainty, and incompleteness affecting minimum standard entitlements and other multilateral entitlements 210

4.4 Conclusion: the WTO - an incomplete contract based on market accessexternalities and minimum standards 211

5 Analyzing the system of non-performance in the WTO 213

5.1 Trade policy flexibility and protection of the market access entitlement 214

5.1.1 De iure protection of the market access entitlement 215

5.1.2 De facto protection of the market access entitlement 222

5.2 De iure and de facto protection of the coordination entitlements 228

5.2.1 De iure protection of multilateral entitlements 228

5.2.2 De facto protection of multilateral entitlements 230

5.3 Rules of enforcement 230

5.4 Does the current system of trade policy flexibility and entitlement protection make sense? 234

5.4.1 Flawed protection of the market access entitlement 234

5.4.2 Flawed protection of multilateral coordination entitlements 247

5.4.3 Conclusion and consequences 249

Part III Flexibility and enforcement in the WTO: towards an agenda for reform 255

6 Theorizing about the WTO as an efficient "breach" contract 257

6.1 The "trade game" 260

6.2 Organizing protection of the market access entitlement 264

6.2.1 Focusing on default rules 265

6.2.2 Inalienability or ex post discretion? 266

6.2.3 A property or liability rule of escape? A question of transaction costs 280

6.2.4 Specifics of the default rule 286

6.2.5 Conclusion: an unconditional liability rule as optimal protection of the market access entitlement 288

6.3 Organizing the protection of multilateral entidements 289

6.3.1 Focusing on default rules 289

6.3.2 Optimal design of default rules protecting multilateral entidements 290

6.3.3 Conclusion: mixed default rules of protection for multilateral entitlements 295

6.4 A two-tier system of enforcement 295

6.5 The vWTO as an efficient "breach" contract: a "better" trade agreement? 300

6.5.1 How do the WTO and the vWTO differ? 301

6.5.2 Efficiency edge of the vWTO over the WTO 303

6.5.3 The vWTO: a "better" contract? 305

7 Towards an efficient "breach" contract: an agenda for reform 308

7.1 The shortlist of reform 308

7.1.1 Establish a revised GATT Art. XIX 309

7.1.2 Add Art. Xbis to the WTO Agreement 312

7.1.3 Revise DSU Art. 22 313

7.2 Long-term reform proposals 317

7.2.1 Reforming the protection of the market access entitlement 317

7.2.2 Reforming the protection of multilateral entidements 319

7.2.3 Reforming the WTO enforcement regime 320

7.3 Final remarks and future research 320

Bibliography 324

Index 347

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