The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization

The treaty creating the World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) dispute resolution system, which contained no formal sanctions for breach of agreement as a practical matter, with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system and argue that the institutionalization of a sanctioning mechanism was not motivated by a perceived need to increase the penalty for violations, but rather by a need to decrease the penalty. In particular, the GATT system relied on unilateral retaliation and reputation to police the bargain. Toward its end, unilateral retaliation became excessive and interfered with opportunities for efficient breach. The WTO mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under WTO law and ensures that sanctions are not set too high.