Hoffmann

Should Trade Disputes be Handled in The World Trade Organization or in a Unilateral Way?

--Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations (1776: 467).

Ever since man has been engaged in international commerce, trade disputes have existed. Adam Smith observed trade disputes over 220 years ago in The Wealth of Nations. In Smith’s eyes, if a trading partner imposed restrictions on your exports, then you had the right to retaliate and impose restrictions on their imports. He felt that unilateral trade dispute settlement was the right thing to do. However, Smith's answer to settling trade disputes was shortsighted. In an era where his home country, England, was the superpower of its time, Smith could not foresee the creation of an international organization to regulate trade and commerce around the world. With the creation of the General Agreement on Tariffs and Trade (GATT) in 1947 and its successor, the World Trade Organization (WTO) in 1995, the world is capable of handling trade disputes between nations. The creation of the WTO and its improvements upon the GATT framework have proven that trade disputes are better settled through a multilateral system and not unilaterally.

The creation of the General Agreement on Tariffs and Trade (GATT) in 1947 was a step in the right direction for handling trade disputes. At that time there was no international dispute settlement system in effect. Countries handled disputes either bilaterally or unilaterally. However, the GATT dispute settlement system was rather weak and not used effectively. More than often countries abused it or simply ignored it. Even with these faults, the GATT provided a strong foundation for the WTO to be built upon after the Uruguay Round.

The United States took advantage of the weakness of the GATT dispute settlement system use its own unilateral methods to handle disputes. Based on the ideas of retaliation and reciprocity, the United States would handle disputes in a sort of vigilante manner. If there was something the United States didn't like they just took care of it. In reality they consulted and negotiated, but in the end they could act with complete disregard for other nations.

Finally, the WTO has picked up and fixed the problems of the GATT system. The dispute settlement system is much more effective and efficient. There is no longer any need for the United States to handle trade matters on their own.

In the following discussion I will explain the origins of the GATT and WTO trade dispute settlement processes. In between I will demonstrate the creation of Section 301, America’s "home grown" dispute settlement system, and its use to unilaterally settle trade disputes. To better understand why the multilateral system of the dispute settlement process is best it is important to understand the origins of the GATT/WTO system and the origins of the unilateral approach

The General Agreements on Tariffs and Trade, signed by twenty-three parties in 1947, was the predecessor of today’s World Trade Organization. Two provisions in the original agreement evolved into today’s dispute settlement process. However, neither "dispute settlement nor the ad hoc independent tribunal or panel that some herald as the GATT’s finest achievement" are mentioned in the provisions according to Rosine M. Plank-Brumback (Plank-Burmback, 1997: 367). Ironically, these articles that form the basis of the WTO’s dispute settlement process are what led the unilateral frenzy the United States partook in during the 1970s and 80s.

Articles XXII and XXIII are the central provisions to the GATT dispute settlement process. Article XXII of GATT 1947 refers to consultation and Article XXIII calls for nullification or impairment of a benefit. Together these two articles provide a procedure for disputing states to try to resolve the dispute through bilateral consultations. A request for consultations is the first step in the dispute settlement process. A party can request consultations with any other party "with respect to any matter affecting the operation" of the Agreement (GATT 1947 Art. XXII).

Whereas Article XXII lays out the principle of consultation, Article XXIII is the provision in GATT that explains what needs to occur for consultations to occur. Article XXIII can be invoked

If bilateral consultations do not solve the situation, then the complaining country may lodge a formal complaint if it feels that benefits it deserves are being nullified and/or impaired under Article XXIII. GATT practice dictated that for a dispute to be heard before a panel there had to be consensus in the council to move forward with the hearing. The panel procedure in the early history of the GATT was very informal. A chair of the plenary meeting of the contracting parties received the cases and issued the rulings. However, as the caseload grew disputes were referred to a "working party" that consisted of the disputants and other parties who had an interest in the matter.

After 1952, the dispute settlement procedure became more formalized, with disputes being referred to a panel of independent experts acting in their own capacities, and not as representatives of the member states. The panels issued rulings based on a legal interpretation and examination of evidence submitted by the disputing parties, and could make recommendations about what policy steps, if any, should be taken to bring the offending policies into compliance with GATT rules, or what compensatory measures would be sufficient to make restitution to the complainant. Under the old GATT system, any contracting party, including the defendant, could exercise a "veto power" over the decision to establish a panel to hear a case as well as the decision to adopt a panel report (Sevilla, 1998). Therefore, countries could easily choose what reports it did and did not want to follow. This measure alone rendered much of the GATT dispute settlement process ineffective because it could not be binding on nations.

Michael Valihora discusses that a "myriad of complaints and frustrations about the GATT (1947) dispute resolution mechanism" existed (Valihora, 1998). Among these complaints were: long and unproductive consultation phases; blocking of the establishment of panels, panel reports, and enforcement of the reports; and unsound panel decisions. Carolyn Rhodes says that these problems and the difficulty to gain multilateral authorization for settling a dispute and led to countries using unilateral measures. Robert Hudec dubbed these more far-reaching, but technically GATT-illegal measures "homemade retaliation" (Hudec, 1975: 497-510). In most cases GATT parties turned their backs to these actions because the GATT has always encouraged settlements in a bilateral manner over the multilateral machinery. Most of these unilateral actions brought countries to the negotiating table and eventually resulted in bilateral consultations over the matter. Countries argued that, in the end, the result in these measures was free and equal trade.

The GATT’s dispute settlement process was very inefficient and ineffective. Countries could block a complaint from even going before even being heard. At the same time, countries found in violation of GATT could disregard the judgement. In effect, a nation could choose and pick the judgements it would follow to fit its trade policy. In this ineffectiveness, countries began to go on and battle dispute settlements on their own. The "homemade retaliation" that Hudec describes was born from this notion. In the United States, "homemade retaliation" was ushered in with the signing of the Trade Act of 1974 creating Section 301.

The Trade Act of 1974 provided the United States with a tool to be used for "homemade retaliation." Known as Section 301, its primary objective is to provide the United States with

Section 301 is the principal statutory authority for the United States to impose retaliatory measures on "countries that maintain an act, policy or practice that: (a) violates, or denies U.S. rights or benefits under, trade agreements; or (b) is unjustifiable, unreasonable or discriminatory and burdens or restricts U.S. commerce" (International Trade Administration, 1996). The Office of the United States Trade Representative (USTR) is responsible for investigating a claim, under Section 301, that a foreign state is denying U.S. rights or benefits under a trade agreement or is discriminating against U.S. products. It is then the responsibility of the USTR to recommend the implementation of retaliatory actions such as increased tariffs, countervailing duties, etc.

Adam Smith felt that unilateral measures in the form of reciprocity were the most effective way to handle disputes. If he were alive today he would have supported the use of Section 301 actions against a country. When one country would impose restrictions on foreign goods, another would reciprocate and raise its tariffs on goods from the offending country. "Nations, accordingly seldom fail to retaliate in this manner," he says (Smith, 1776: 467). Not only does he feel that unilateral action is needed to settle a dispute, but it should be automatic.

Since rulings and panels in the GATT system required consensus of the contracting parties, this was often hard to obtain because the defendants could easily block the process. The United States however chose to go its own route and institute Section 301 as a method of handling the disputes on their own. If a country would object to the Section 301 implementation, they could raise in the GATT. However, the United States could easily block the motion from moving forward.

However, the unilateral trade dispute settlement is ineffective and inefficient. What would the American legal system look like if the judge and jury was the same as either the defendant or plaintiff? No matter what the case, it would be extremely difficult to win the case when you are opposing those who are deciding the case.

Unilateral trade measures are in most cases political and not economic. When big businesses are arguing for policies to protect them from foreign competition, their money often speaks louder than the voices of the opposing economists. For example, during the 1970s and 1980s, the U.S. steel industry argued for protection against European and Asian steel imports. The U.S. firms were less efficient and had higher costs than the European and Asian firms. Section 301 was invoked not to provide consumers with less-expensive and better quality products but to protect the domestic firms from going out of business. In the end, because Section 301 actions threatened to cut them off from the American market, foreign steel producers implemented voluntary restraint agreements.

Section 301 actions result in creation of trade barriers for foreign countries as opposed to the lowering of foreign barriers to trade. According to the classical school of free trade, any barrier to trade causes inefficiencies in the economy and a net cost to the country producing it. Steel producers protected by Section 301 actions now have no incentive to streamline and produce more efficiently. Meanwhile, domestic consumers have to pay more for steel to support the inefficient domestic producers. Therefore reductions in barriers to trade are the logical step. A rational government would prefer to unilaterally reduce trade barriers (Curzon and Curzon, 1976: 156-156).

The United States threatened the world trade system by using 301 to work outside the set rules of the system. The credibility of GATT was threatened first of all with the ineffectiveness of the dispute settlement system. Just like a successful vigilante undermines the credibility of the police force, the United States was shaking up the GATT. Countries in reality could not stop the United States from overzealously using its unilateral methods. If they did, they risked further retaliation, and loss of the U.S. market was too much for them. In the end, the U.S. policy of unilateralism went unchecked.

Throughout the 1970s and the 1980s, the United States regularly used Section 301 to bypass the GATT system. The United States felt it could accomplish more by handling trade disputes on its own. Both protectionist and free-trading points of view were satisfied with the use of Section 301. Protectionists were happy because 301 could impose anti-dumping measures or countervailing duties to protect less efficient industries such as steel. Free traders liked 301 because it was leverage for other companies to liberalize their markets. However, Carolyn Rhodes warns that, potential leverage is a necessary but not sufficient requisite for a more favorable settlement" (Rhodes, 1993: 153).

International trade law expert Michael Valihora says that, "Section 301's successful application by the United States induced foreign capitals around the world to see the GATT dispute settlement procedures in a new light, as a way to discipline the United States unilateralism" (Valihora, 1998). The result was a climate of widespread political support for changes to the GATT dispute settlement system. Valihora continues that,

The use of Section 301 adversely affected more than just trade relations with other countries. American unilateralism heavily strained the transatlantic relationship between the United States and Europe. The Europeans were frustrated by the United States acting alone, imposing sanctions and other commercial barriers in order to protect its supposed security interests, regardless of established multilateral trade rules and procedures (Frost, Transatlantic Trade, 1997: 16). "Related EU grievances include export, import, procurement, and investment restrictions, many of which the European Union perceives as excessive and only tangentially related to protecting U.S. national security" (Blackwill and Archick, 1998).

Ellen Frost best sums up the "corrosive" effect of U.S. unilateralism had on relations with Western Europe. It went well beyond business interests: "such sanctions violate transatlantic norms and expectations, thus undercutting the encouraging trend toward a widely accepted, rules-based, market-oriented trade and investment system." (Frost, Prepared Statement, 1997)

It is easy to see that unilateral actions through Section 301 simply do not yield the best results for the United States. Even though Adam Smith liked them, they cause many problems. Even Smith himself noted in The Wealth of Nations that when France unilaterally imposed higher tariffs on Dutch goods, the Dutch retaliated with unilateral action by raising tariffs on French goods. "The war of 1672 seems to have been in part occasioned by this commercial dispute," says Smith (Smith, 1776: 467).

Aside from adverse political consequences, unilateral actions to settle disputes are not economically feasible. The unilateral actions impose higher costs and less efficiency for American consumers and producers. There is no other way to unilaterally settle a dispute without raising duties and restrictions on foreign goods. It does not make sense for consumers to pay more money now so that we could sell more goods later.

Changes to the old GATT dispute settlement system were implemented during the Uruguay Round negotiations in the early 1990s. The world community was becoming increasingly upset with the unilateral actions of the United States through its use of Section 301. The results were a much more efficient and effective trade dispute settlement system. The WTO system is now better at settling disputes than both the GATT system and Section 301 measures.

Through the "Understanding on Rules and Procedures Governing the Settlement of Disputes," the Uruguay Round introduced a more structured approach to the dispute settlement process that includes clearly defined states. The length of time to settle a case has been more structured, but there are flexible deadlines throughout the procedure. For the WTO to work effectively, the Understanding emphasizes prompt settlement of disputes. A case, which runs a full course to first ruling, should take about a year and 15 months if it has been appealed. There are provisions for shorter deadlines for cases that are considered urgent, such as perishable goods. These could take three months or less (WTO, "Settling Disputes: The WTO’s ‘most individual contribution’").

How long to settle a dispute? These approximate periods for each stage of a dispute settlement procedure are target figures - the agreement is flexible. In addition, the countries can settle their dispute themselves at any stage. Totals are also approximate.
60 days	Consultations, mediation, etc
45 days	Panel set up and panelists appointment
6 months	First panel report to parties
3 weeks	Final panel report to WTO members
60 days	Dispute Settlement Body adopts report (if no appeal)
Total = 1 year	(without appeal)
60-90 days	Appeals report
30 days	Dispute Settlement body adopts appeals report
Total = 1y 3m	(with appeal)
Source: WTO, "Settling Disputes: The WTO’s ‘most individual contribution’"

Already, the WTO system has gained the credibility the GATT lacked. The very first WTO case tested the world's confidence in the WTO. Just weeks after the WTO entered into existence, Venezuela complained to the Dispute Settlement Body on January 23, 1995, that the United States was applying rules that discriminated against gasoline imports. At that time Venezuela formally requested consultations with the United States. Roughly a year later the dispute panel completed its final report and found the United States in violation of its WTO obligations. The United States appealed the ruling and the Appellate Body completed its report. The Dispute Settlement Body adopted the report one year and four months after the complaint was first lodged. The United States and Venezuela then took a half year to agree on what the United States should do to settle the dispute. The agreed period for implementing the solution was 15 months from the date the appeal was concluded (May 20, 1996 to August 20, 1997).

The dispute developed because the United States applied stricter rules on the chemical characteristics of imported gasoline than it did for domestically-refined gasoline. However, U.S. gasoline did not have to meet the same standards and Venezuela felt this was unfair. Venezuela felt it violated the "national treatment" principle where imported and domestic goods should be treated equally (GATT, 1947 Article IIIa) and could not be justified under exceptions to normal WTO rules for health and environmental conservation measures. The appeal report upheld the panel's conclusions with a few small changes and the United States agreed with Venezuela that it would amend its regulations within 15 months. On August 26, 1997 the United States reported that a new regulation had been signed a few days earlier (WTO, "Case study - the timetable in practice").

The large number of cases that have been brought forward shows further confidence in the WTO system. There have been more cases brought up in the first four years of the WTO than in the entire history. The increased number of cases does not mean that the wold trading order is breaking down. It means that countries have more confidence in the WTO system and are utilizing it rather than taking matters into their own hands.

In the early days of the WTO, then-U.S. Trade Representative Mickey Kantor testified before the House Ways and Means Committee on the WTO dispute settlement mechanism. He lauded it as "proving to be a very effective tool to open other nation’s markets" (Kantor, 1996). Kantor continued by explaining how the United States initiates and wins a significant number of cases, and even more are settled bilaterally.

U.S. Trade Representative Charlene Barshefsky recently testified on September 29, 1999 before the U.S. Senate Finance Committee. In her testimony she reported that in the WTO, "the rule of law has advanced, as the strong dispute settlement system created by the Uruguay Round has allowed [the United States] to improve enforcement of the trading rules significantly" (Barshefsky, 1999). Ambassador Barshefsky went on to explain that the United States has filed more cases than any other member and has a very strong record of victories or favorable settlements in the cases that were filed. In fact, to date the United States has filed XXX cases. Of those cases we have won XXX and lost XXX.

The WTO system is better because it is more effective and has more powers. No longer can one specific country "veto" panel decisions that are against them. The long, drawn-out hearings and discussions are now a thing of the past. The WTO system has strict timelines for hearing and deciding disputes.

Most importantly the WTO system is an economic, not political process. Countries can no longer implement political protectionist measures. The United States can no longer, under its WTO obligations, impose restrictions or higher imports to protect inefficient industries. Unlike the unilateral method where the United States uses costly duties as leverage, the multilateral WTO system allows the United States to keep low duties while the other nation automatically lowers their duties if they are found guilty. Disputes can be settled while U.S. producers work towards efficiency, and consumers can still buy cheap foreign goods. It does make sense for consumers to continue paying cheap prices while the U.S. government argues for the access to sell more goods abroad.

The U.S. textile industry supports the new system because disputes are actually settled and not just discussed and that it promotes fair and equitable trade. Carlos Moore, executive vice president of the American Textile Manufacturers Institute (ATMI) briefly explained how when Argentina began to shut out American and other foreign textiles, ATMI complained. The U.S. government took up and filed the complaint in the WTO, and hearings where held. "Argentina was found to be in violation of WTO rules and it was given a year to fix it. That could have never happened in the GATT" (Morrissey, 1999: 23).

Adam Smith thought unilateralism was the ideal way to solve a trade dispute. In his day, retaliation was the key instrument to open foreign markets and to protect your own. However, with the advent of international organizations, trade disputes are better resolved in a multilateral manner. Surly if Smith were alive today, he would welcome the WTO dispute settlement process for its efficiency, effectiveness, and peaceful manner to settle disputes.

Unilateral measures to settle disputes have been in existence for hundreds of years. In the absence of a international body to settle disputes, they appear to be the best method to solve trading problems. The creation of the GATT took a step in the right direction to solve the problems of trade disputes. As we have seen, however, the GATT was ineffective and weak. Nations like the United States quickly found loopholes to circumvent the GATT.

In bypassing the GATT, the United States heavily used Section 301 to unilaterally settle trade disputes. Adam Smith says, "there may be good policy in retaliations of this kind, when there is a probability that they will produce the repeal of the high duties or prohibitions complained of" (Smith, 1776: 468). But in order to secure these repeals of high duties, domestic manufacturers and consumers suffer with lower efficiency and higher import costs.

The WTO system solved all of these problems. The WTO is stronger and more effective than the GATT. Loopholes have been filed and specific rules exist to settle disputes. Consumers are enjoying more efficiency and lower costs while their country fights for even better opportunities abroad. The WTO’s credibility is growing daily and more and more nations are using the system, demonstrating that it indeed works. Not only has the WTO system proven to be economically better than unilateral action for all parties involved, but also it has proven one of the greatest economists of all time, Adam Smith wrong.

Curzon, Gerad and Victoria Curzon. 1976. "The Management of Trade Relations in the GATT." In Andrew Schonfield, ed. 1991. International Economic Relations of the Western World, 1959-1971. Oxford: Oxford University Press.

Frost, Ellen. 1997. Transatlantic Trade: A Strategic Agenda. Washington, D.C.: Institute for International Economics.

Frost, Ellen. July 23, 1997. Prepared Statement before the House Ways and Means Committee, Subcommittee on Trade. Quoted in Blackwill and Archick.

Hudec, Robert. 1975. "Retaliation against ‘Unreasonable’ Trade Practices: The New Section 301 and GATT Nullification and Impairment." Minnesota Law Review. Volume 59, pages 497-510. Quoted in Rhodes.

Morrissey, James. 1999. "Government, U.S. Mills Prefer WTO to GATT." Textile World. Volume 149, number 2, pages 23-24.

Plank-Brumback, Rosine M. 1998. "The GATT/WTO Dispute Settlement System and Negotiations for a Free Trade Area of the Americas." In Miguel Rodríguez Mendoza, Patrick Low, and Barbara Kotschwar, eds. 1999. Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations. Washington, D.C.: Brookings Institution Press.

Rhodes, Carolyn. 1993. Reciprocity, U.S. Trade Policy, and the GATT Regime. Ithaca, New York: Cornell University Press.

Smith, Adam. 1776 (1981 reprint). An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty Fund.

Valihora, Michael S. Spring/Summer 1998. "NAFTA Chapter 19 or the WTO’s Dispute Settlement Body: A Hobson’s Choice for Canada?" Case Western Reserve Journal of International Law. Volume 30 Numbers 2, 3, pages 447-487.