Free-riding on enforcement in the WTO

Johns, Leslie ; Pelc, Krzysztof J.

Geneva : The Graduate Institute, Centre for International Environmental Studies, 2017 . - 44 p. : ill.

CTEI Working Paper ; 2017-04

Abstract: Countries can challenge potential trade violations using the WTO's dispute settlement system, yet many policies that appear to violate WTO rules remain unchallenged, even when they have a significant economic impact. Why is this? We argue that the likelihood that a country challenges a protectionist policy is linked to how concentrated or diffuse the policy is. When a policy is concentrated|because it affects only one country|litigation is a private good, meaning that a country that pays the cost of litigation receives the full benefit of litigation. But when a policy is "diffuse" - because it affects many countries - litigation is a public good and countries face a collective action problem: many countries can benefit from litigation, but each country wants to free-ride by having another country pay the cost. The resulting selection effect has two consequences. First, the free-rider problem reduces the likelihood that a diffuse policy will be challenged in any given period, generating a longer "enforcement delay" for diffuse trade violations. Second, cases must have higher odds of success in order for countries to overcome the collective action problem, meaning that conditional on being filed, cases that challenge concentrated policies will be less likely to succeed in litigation than cases that challenge diffuse policies. We leverage selection effects to test our argument using data on the timing and outcomes of trade disputes. The evidence, which considers all WTO disputes from 1995 to 2013, bears out these beliefs.

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 Record created 2017-06-26, last modified 2017-06-26

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