What Is Litigation in the World Trade Organization Worth?

Abstract

Conventional wisdom holds that the creation of international, court-like institutions helps countries to peacefully settle trade conflicts, thereby enhancing overall welfare. Many have argued, however, that these institutions remain ultimately ineffective because they merely reflect the distribution of power in the anarchic international system. We argue that international litigation provides economic spillovers that create opportunities for judicial freeriding and explore empirically how litigation in the World Trade Organization affects bilateral trade between countries involved in a trade dispute. We use a matching approach to compare the dynamics of trade flows between countries that experienced a panel ruling with trade relations of observably similar country pairs that did not experience a ruling. Based on this comparison we find that sectoral exports from complainant countries to the defendant increase by about $7.7 billion in the three years after a panel ruling. However, countries that have proactively filed a complaint and carried the main costs of litigation do not systematically gain more than less active third parties that merely joined an existing trade dispute. We conclude that international judicial institutions can provide positive economic externalities and may thereby lead to a less power-based distribution of the gains from trade.

Keywords: International institutions, trade disputes, trade barriers, WTO, positive externalities

JEL Classification: P16, F13, F4