Berkeley Program in Law and Economics

In 1995, following the Uruguay Round of trade talks, the World Trade Organization (WTO) came into being. Included in the infrastructure of the WTO was the Dispute Settlement Understanding (DSU), a mandatory dispute resolution system. From its inception in 1995 through July 2002, the DSU handled 262 cases and affected the content of international trade obligations.

Despite its central role in the trading system, however, we are only just beginning to understand how the DSU affects state behavior and litigation patterns. Of particular note, we do not have a coherent model of litigation and settlement at the WTO that can explain why some cases settle while others do not. This paper provides such a model.

In the domestic context, models of litigation and settlement turn on informational asymmetries. At the WTO, however, the informational assumptions required to explain the observed pattern of settlement are unrealistic, so an alternative approach must be explored. The relevant costs and benefits for a state involved in WTO litigation are political in nature. As such, benefits enjoyed by one party are unlikely to equal the costs borne by the other. This is true of both the impact of a panel ruling, and the impact of the delay that is built into the WTO system. Both of these factors affect the payoffs received by a state's political leaders. This paper show how these asymmetric political payoffs affect the pool of cases that proceeds to a panel. Of the 82 cases that have generated a panel ruling, 90% have resulted in a complainant win. Combining this remarkably high win rate with the theory developed in this article allows us to draw inferences about the political costs and benefits facing states as they decide whether to settle or proceed to a panel.