Trade Agreements and Enforcement: Evidence from WTO Dispute Settlement

This paper examines implications of the terms-of-trade theory for the determinants of outcomes arising under the enforcement provisions of international agreements. Like original trade agreement negotiations, we model formal trade dispute negotiations as potentially addressing the terms-of-trade externality problem that governments implement import protection above the globally efficient level so as to shift some of the policy's costs onto trading partners. We first extend earlier theoretical models from trade agreement accession negotiations to the setting of enforcement negotiations, and the resulting theory guides our empirical assessment. We use instrumental variables to estimate the model on trade volume outcomes from WTO disputes over 1995-2009. Our evidence is consistent with theoretical predictions that larger import volume outcomes are associated with products that have smaller increases to foreign exporter-received prices (terms-of-trade losses to the importer) as a result of the dispute, larger pre-dispute import volumes, larger import demand elasticities, and smaller foreign export supply elasticities. Dispute settlement outcome differences are also explained by variation in institutionally-motivated measures of retaliation capacity and the severity of the free rider problem associated with foreign exporter concentration.