The Economics of Permissible WTO Retaliation

WTO Staff Working Paper ERSD-2008-04

54 Pages Posted: 7 Oct 2008

See all articles by Chad P. Bown

Chad P. Bown

Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Michele Ruta

Economic Research Division, WTO; Columbia University - Columbia Business School, Economics; International Monetary Fund (IMF)

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Date Written: September 2008


WTO arbitrators rely on economics to establish the permissible retaliation limits authorized by the Dispute Settlement Understanding (DSU) which arguably serves to enforce the overall agreement. We examine how theoretical and quantitative economic analysis has and can be used in this stage of the DSU process. First, we identify, characterize, and categorize the major classes of disputes - e.g., those affecting import protection versus export promotion - and use the Bagwell and Staiger interpretation of the WTO principle of reciprocity to provide a theoretical framework that arbitrators can use to identify the maximum level of retaliatory countermeasures. Second, we allocate each of the ten DSU arbitrations that have taken place thus far into one of these categories and compare the arbitrators' actual approach with the theory. Third, we use this framework to identify three crucial elements to the arbitrators' decision-making process for each case: i) the formula that they decide to adopt for identifying appropriate countermeasures, ii) their political-legal-economic decision on a WTO-consistent counterfactual to use to implement the formula, and iii) the quantitative methods they use to necessarily construct the (unobserved) WTO-consistent counterfactual. We examine not only the arbitrations that have taken place thus far, but our approach also illustrates a template for many additional types of arbitrations likely to take place under the DSU. Finally, in the disputes in which this reciprocity approach has not been used, we identify procedural difficulties that arbitrators confront thus highlighting the constraints that hinder their use of economic analysis in practice.

Keywords: WTO, DSU, arbitrations, reciprocity, retaliation, market access, terms-of-trade externality

JEL Classification: F13, F51, K33

Suggested Citation

Bown, Chad P. and Ruta, Michele, The Economics of Permissible WTO Retaliation (September 2008). WTO Staff Working Paper ERSD-2008-04, Available at SSRN: or

Chad P. Bown

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

Michele Ruta (Contact Author)

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva


Columbia University - Columbia Business School, Economics ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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