The Effectiveness of WTO Dispute Settlement: An Evaluation of Negotiation Versus Adjudication Strategies

In the context of overlapping bilateral, regional, and multilateral trade agreements, states face a wide array of options for market opening strategies. This paper examines why states choose to adjudicate some trade disputes in the WTO dispute settlement process while negotiating or ignoring others. It then compares outcomes given the choice among alternative strategies. I argue that governments use choice of negotiation forum to signal commitment to resolve a dispute. This choice provides information that contributes to settlement by reducing uncertainty about government resolve to defend or challenge a given trade barrier. The argument is tested with statistical analysis of an original dataset of potential trade disputes coded from U.S. government reports on foreign trade barriers. Evidence shows that U.S. selection of WTO disputes follows a political logic favoring industries that are highly mobilized in the United States and where there is strong support for protection by the foreign trade partner. Taking into account the factors that push politicized cases into WTO adjudication, the legal forum is shown to be effective to resolve trade conflict in terms of policy change and dispute duration. Increasing levels of trade that accompany globalization generate both wealth and conflict as states confront each other with demands for market access and protection for sensitive industries. States established the World Trade Organization in order to manage this conflict through a common set of negotiated multilateral rules and a formal dispute settlement system. Although recent studies focus on the role of the WTO to liberalize bilateral trade flows (Rose, 2004; Gowa and Kim, 2005; Goldstein et al., 2007), it is also important to evaluate the WTO as a conflict resolution mechanism. Theories of the GATT/WTO emphasize the role of dispute settlement to make multilateral liberalization sustainable (Kovenock and Thursby, 1992; Maggi, 1999; Rosendorff, 2005). An effective dispute mechanism can prevent trade wars and lay the foundation for liberalization commitments. This paper evaluates how well the WTO dispute mechanism achieves the goal to resolve trade disputes. Problems of selection bias and endogeneity are an important challenge to the evaluation of institutional effectiveness (Martin and Simmons, 2001; Simmons, 2000). One must examine why states choose to use an institution in order to understand the effect of the institutional context on state behavior. I address this problem here by first conducting a systematic analysis of the decision to file a complaint for adjudication using an original trade barrier dataset. The selection model informs the analysis of effectiveness. In order to take into account the fact that adjudication cases are substantially different from the general population of trade barriers, I use matching methods to improve the validity of inference. I compare the progress to resolve the dispute for barriers raised in dispute settlement with the progress for barriers that were otherwise similar on key covariates but were negotiated without use of dispute settlement. While a growing literature examines WTO adjudication, few compare adjudication with alternative strategies. Since its establishment in 1995, the dispute settlement system of the WTO has been used for litigation of over three hundred trade disputes. Research has focused largely on explaining outcomes for these cases (e.g. Busch, 2000; Reinhardt, 2001; Guzman and Simmons, 2002; Bown, 2004b). Positive assessments of WTO adjudication as an effective means of dispute settlement in its early years have since given way to more cautious evaluations as several prominent cases have dragged on with extended compliance problems (Butler and Hauser, 2000; Iida, 2004). The complaints filed for adjudication, however, represent a small fraction of the total number of policies in violation of WTO agreements. In trade policy, the parallel process of creating