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The WTO Dispute Settlement Mechanism: Battlefield or Cooperation?

EU-US trade disputes have recently caught much attention, because they have involved lasting non-compliance coupled with WTO-authorized retaliation. A recent paper by Breuss (2004) shows that the outcome in most cases has probably involved economic damage on both sides. Does this testify to a general weakness, or even failure, of the WTO Dispute Settlement Mechanism? This paper develops a theoretical framework, based on the Bagwell-Staiger (2002) theory of the GATT/WTO, that helps us explain why the DSM might lead to mutually harmful non-compliance cum sanctions. If this happens, we should still not jump to concluding failure of the DSM. Interpreting the DSM as a political cooperation device, the framework allows us to identify conditions under which the outcome is efficient in political economy terms, even though it might involve economic harm on both sides. In addition to a better understanding of the empirical results reported by Breuss (2004), the framework also allows us to identify certain general weaknesses and flaws of the DSM that should be recognized when reviewing the Dispute Settlement Understanding in the Doha round negotiations.