The WTO's Dispute Settlement Understanding ("DSU") provides that disputes are to be resolved in adversarial proceedings before impartial panels of experts. These panels have authority to decide whether members' laws conform to WTO requirements; members may appeal rulings to a permanent Appellate Body within the organization, which has the final say on questions of law and legal interpretation. Under the DSU, if a member fails to comply with a final ruling in a dispute, the prevailing party may retaliate by suspending trade concessions that it owes the offending member. This retaliation can continue until the offending member implements the WTO's decision.
Judging by the frequency with which members resort to it, the new mechanism is a stunning success. Still, WTO dispute settlement has drawn great criticism, much of it focusing on the new enforcement mechanism. Several commentators argue that the retaliation remedy is too weak and unpredictable to be of any real use. By contrast, other critics contend that the present enforcement regime is too coercive and inflexible. To them, retaliation seems high handed, an attempt to force sovereign states to repeal laws that were enacted by democratically elected governments. Suspending trade concessions, they point out, hurts innocent firms that find their products subject to higher tariffs. Moreover, the retaliation remedy undercuts the WTO's own first principles by creating a situation where two countries—the offending member that has enacted the protectionist measure and the injured member that has responded with trade sanctions—have departed from free trade commitments. These critics argue that the WTO should consider "softer" enforcement mechanisms with fewer "teeth.”
In this essay, I defend the existing enforcement mechanism. I do so by explaining the mechanism in terms of interest group theory. Even though protectionist measures injure consumers as a whole, countries often adopt such measures to satisfy the demands of domestic interest groups that suffer because of free trade. By imposing burdens on the products of countries that adopt such measures, the retaliation remedy creates incentives for another set of domestic interest groups—exporters—to lobby against them. Over time, if retaliation is correctly calibrated, the domestic groups that favor free trade can neutralize the effect of the domestic groups that oppose it.
The retaliation remedy thus promotes compliance with WTO rulings without intruding directly on domestic institutions. In this way, the mechanism is superior to suggested reforms, like direct effect, that would commandeer courts or other national governmental bodies. Indeed, the genius of the retaliation remedy lies in its ability to use the domestic political process to achieve the public interest. By setting one collection of interest groups against another, the retaliation remedy encourages the adoption of free trade policies that benefit a nation's consumers as a whole.
This essay proceeds as follows. First, I explain the interest group theory of trade restrictions, showing how interest groups can secure the adoption of protectionist measures that work to the detriment of consumers as a whole. I then describe the WTO's enforcement mechanism and demonstrate how it can overcome the problems posed by protectionist groups and promote compliance with a nation's free trade commitments. Next, I discuss the two disputes to date in which prevailing parties have resorted to the retaliation remedy, Bananas and Hormones. Finally, I show how the retaliation remedy is superior to one suggested reform that has drawn a great deal of attention, namely, giving WTO rulings direct effect in national courts.