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Running head: Critiques of the World Trade Organization 1

Critiques of the World Trade Organization:

An Analysis of the Dispute Settlement System from the Perspective of the Caribbean

Rachel Laguerre

Eastern Connecticut State University


Critiques of the World Trade Organization 2

Introduction

The field of international economics is dominated by the study and implementation of

multilateral trade agreements. One of the largest multilateral trade agreements is the General

Agreement on Trade and Tariffs, abbreviated as GATT. Post Uruguay round, it is now known as

the World Trade Organization and its policies are very relevant to the countries being examined

in this paper. In multilateral trade agreements there is often a disconnect between policies that

benefit larger, more developed countries and policies that are supposed to benefit smaller, less

developed countries. The purpose of this essay is to discuss the actual benefits and costs of

membership to the World Trade Organization to specific countries.

The principal argument is that, in providing guidelines that benefit the larger trading

powers more, the World Trade Organization has made a misstep in one of its main organizational

promises. In recognizing that, this paper aims to prove that the enforcement and implementation

of settlements for disputes by the World Trade Organization is flawed and can be exploited by

larger powers to the detriment of the countries that need the backing that the World Trade

Organization is supposed to offer. The methodology used to prove the argument made is a

mixture of archival data from the World Trade Organization and other sources. The sections of

this paper include the discussion on trade theory, a summary of the disputes to be analyzed, and

an analysis of those disputes in economic and legal contexts.

Discussion of Trade Theory

In discussing the World Trade Organization, a key place to start is the basics of the

discipline of international trade theory. Therein lie the basics of the concept of free trade, created

by David Ricardo and Adam Smith in their respective texts, “On the Principles of Political

Economy, and Taxation” and “The Wealth of Nations”. The need for free trade and trade, in
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general, is based on the idea of advantages, first absolute advantage and then comparative

advantage.

Comparative advantage is the Ricardian idea that it is best for a country to produce the

good that takes the least opportunity cost to produce. Absolute advantage is the idea that a

country should export the good that takes the least resources to produce. Exporting the

comparative advantage good works because it allows a country to produce on its Production

Possibilities Frontier (PPF) and consume above it. Ricardo’s ideas on comparative advantage fed

into his support of free trade, he believed that if a country had free trade, it would be free to put

more resources into the good it had a comparative advantage in and produce efficiently. Ricardo

also put stock into the idea that the freer trade is, the more beneficial it is to people in both

countries. His model is the basis of classical trade theory based on comparative advantage.

A comparative or absolute advantage in a good means nothing if you cannot export it to

another country. At the time of his writing “The Wealth of Nations”, Adam Smith was arguing

for a “liberal system” or free trade between countries. This is due to the protectionism that

economists favored at the time. Smith believed that hoarding commodity money and keeping

exports high and imports extremely low was a bad idea and that the high tariffs placed on

imported goods were unnecessary. Free trade was a better idea in his eyes because it let the

people choose the cheapest good to consume while allowing producers to sell on more markets

earning more profits in the process. Everybody was supposed to benefit somewhat from free

trade, whether as a producer or a consumer.

The idea of mutual gains from trade is what the work of the World Trade Organization is

based on. As stated before, free trade in theory should benefit the most people and hurt the least

amount of people. However, due to the number of countries implementing protectionist policies
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being on the rise, getting to the condition of free trade is a lot more complicated than it is on

paper.

However, protectionist policy is what spurred the creation of free trade theory. David

Ricardo was arguing against the Corn Laws of 1815, which were tariffs and non-tariff barriers to

trade designed to bolster the price of grain (“corn” in the nomenclature of the time) after the

Napoleonic Wars. These laws were of the same type of mercantilism that Smith had argued

against in his works. Those laws pushed the price of grain up and limited the export of British

grain elsewhere in the world, making production inefficient.

Ricardo argued that instead of the high tariffs, the government should drop trade barriers

and move to make trade easier, rather than harder. This is the idea upon which the World Trade

Organization is built on. Starting with the idea of openness that Ricardo proposed, the GATT

began as a measure to lower trade barriers and provide a way for countries to further the idea of

free trade. However, there have been some criticisms of the idea of free trade, especially with

respect to developing countries. Free trade in the short run can damage domestic economies

when goods flood into a market, which was not seen by Ricardo in his time. Criticisms of the

WTO and its dispute system are easy to comprehend especially in modern contexts. Critiquing

its policy towards smaller nations in dispute settlement, “Its reliance on complex litigation and

trade retaliation raises questions of fairness and legitimacy and all too often exacerbates tensions

between members.” (Patterson, 2016). The reliance on the dispute settlement system has inspired

critiques of the organization’s policies in general.

Trade Disputes

Once the discussion of the basis of free trade theory has been outlined with respect to the

World Trade Organization, the discussion turns to the 2 disputes, the effects of which will be
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reviewed. Those disputes are designated as DS285 and DS418. In DS285, Antigua and Barbuda

as the complainant and the United States as the respondent. DS418 involves the Dominican

Republic as the respondent and El Salvador as the complainant. These cases were chosen

because they have both been resolved in some way, and measures have been taken. Moreover,

they cover different agreements that fall under the WTO. This section will cover the basics of

these cases.

Antigua and Barbuda vs. The United States (Case 1)

The first case reviewed, “United States – Measures Affecting the Cross-Border Supply of

Gambling and Betting Services” was started by the complainant Antigua and Barbuda in March

of 2003 over laws in the United States that could violate the General Agreement on Trade in

Services (GATS) in specific. In July of 2003, the Dispute Settlement Body established a panel

and the EU, Canada, Mexico, Japan, and Chinese Taipei reserved their third-party rights. By the

end of August, the Panel was composed and began the proceedings. Because of the sheer

complexity of the issue being debated, there were many delays and stoppages of the proceedings

causing the timetable to stretch into late 2004. By November of 2004, the Panel circulated its

findings.

The Panel found that; 3 United States federal laws and the provisions of 4 US state laws

violated some or all means of delivery in mode 1 of GATS, the US could not invoke any of the

GATS exceptions provisions for any of those laws, and Antigua “failed to demonstrate that the

measures at issue are inconsistent with Articles VI:1 and VI:3 of the GATS” (World Trade

Organization, 2013) that deal with domestic regulation. After the Panel’s findings were reported,

the United States and Antigua both notified their intentions to appeal issues they found in early
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January of 2005. The Appellate Body began its work shortly after those intentions were made

clear.

In April of 2005, the Appellate Body found that: “the United States acts inconsistently

with Article XVI:1 and sub-paragraphs (a) and (c) of Article XVI:2” (World Trade Organization,

2013) of the GATS, and found that the Panel should not have ruled on claims made by Antigua

on 8 United States laws because the country did not make a case of inconsistency with the

GATS. On April 20th, 2005, the Dispute Settlement Body adopted the Appellate Body report and

the modified Panel report. Antigua requested a binding arbitration by a third party due to the US

estimate of its implementation time. The Arbitrator gave the United States 11 months to

implement the changes needed to get in line with GATS.

In May of 2006, due to disagreements between both member countries involved in the

dispute, both parties notified the DSB that actions would be taken to remedy the compliance

issues. By July of 2006, another panel was established and in March of 2007, the second Panel’s

findings were circulated to Member countries and adopted by the DSB that May. In those

findings, the US “had failed to comply with the recommendations and rulings of the DSB.”

(World Trade Organization, 2013) thus, was open to recourse by the complainant as suggested

by an arbitrator.

The solution recommended by the appointed Arbitrator was to give Antigua the ability to

nullify the obligations and concessions they had to the US under TRIPS and GATS not

exceeding 21 million US dollars annually. In 2013, Antigua took the measures and requested to

suspend those obligations embedded in those agreements. The DSB granted authorization to

“suspend the application to the United States of concessions or other obligations consistent with

the Decision by the Arbitrator.” (World Trade Organization, 2013)


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El Salvador vs. The Dominican Republic (Case 2)

The second case covered. “Dominican Republic — Safeguard Measures on Imports of

Polypropylene Bags and Tubular Fabric” was started by the complainant El Salvador in October

of 2010 on the topic of importing polypropylene bags and tubular fabrics specifically the ones

classified under the Dominican Republic General Tariff. El Salvador was concerned that those

measures were inconsistent with article 19 of the GATT 1994 and some articles of the

Agreements on Safeguards. In late October of 2010, Panama, Costa Rica, Guatemala, and

Honduras also requested to join the consultations and the Dominican Republic accepted. In

December of 2010, El Salvador requested a panel to be formed by the Dispute Settlement Body.

The DSB agreed to establish one panel for all those countries in February of 2011.

The Panel was established, and by January of 2012, the findings of the panel were

published to the member countries. The panel concluded that the Dominican Republic was in

violation of Article XIX of the GATT 1994 by “excluding certain products from the definition of

the domestic directly competitive product” (World Trade Organization, 2012) as well as

violating some articles of the Safeguards Agreements. Those violations included articles 2.1 and

9.1 of the Safeguards Agreements. The panel found that the Dominican Republic did not break

any of its obligations under Article XIX:2 of the GATT 1994.

In February of 2012, the DSB adopted the panel report without any deference. No

appellate panel was established by any of the involved countries nor was an arbitrator needed in

this case. By March of 2012, the Dominican Republic alerted the DSB of its intent to implement

the DSB’s recommendations immediately. The DSB recommended that the Dominican Republic

should lift the safeguard that was the subject of the dispute as well as establish a Most Favored
Critiques of the World Trade Organization 8

Nation tariff at the level before the safeguard was implemented. The Dominican Republic input

these measures in April of 2012.

Critical Analysis

Free trade only works when both countries agree to the terms of trade, in the case of the

World Trade Organization, free trade will only work when all countries involved agree on those

terms. A consensus from member countries is what the WTO bases most of its decision-making

on. Moreover, trade liberalization can only occur if the countries involved want to liberalize their

trade policy. In the original comparative advantage model, there was no need to factor in

negative externalities. In this context, one of those negative externalities is the political processes

of the countries involved, specifically in DS285. In the arbitration of DS285, the United States

proposed that getting the laws that were noncompliant with GATS would take at least 2 years to

amend due to the complexities of the US system.

In writing summaries of the trade disputes, it is important to take notice of the amount of

delay involved in starting and settling a trade dispute. In Case 1, even the establishment of the

Panel took more than 6 months and their research took until late November of 2004 to complete

and circulate to the Member countries. This timetable extension did not help Antigua in settling

the disputes or boosting its economy. Moreover, it does not help that the United States has not

paid the settlement that the World Trade Organization recommended they pay to Antigua should

the US choose to not to comply with the DSB rulings.

In that same area, when writing up the summaries and reading the communications

between countries and the DSB, an observer can recognize the speed at which smaller countries

brought themselves back into line as opposed to larger countries. Contrasted with DS418, DS285

seems like it extended itself unnecessarily even after the Appellate Body and the appointed
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Arbitrator made their decisions. Moreover, a critique of the World Trade Organization that

reveals itself when reading cases involving developing countries, is the lack of actual

enforcement power that the WTO has. In the correspondence, it seemed that there was no real

recourse for wronged parties should another country ignore the ruling by the DSB, as seen in

DS285.

The WTO is not an international policing organization, nor does it claim to be. Its most

effective way to keep compliance from member countries is through economic sanctions. This

works very well for smaller countries, because their economies could not survive under the

duress of widescale economic sanctions. However, the largest countries that can take the hit to

seemingly less important markets by not following the suggestions of the DSB and having

measures imposed on them. Because of the lack of an enforcement arm, cases like DS285 can

continue to drag on until more drastic measures are taken.

In the same vein of enforcement issues, there is no skirting the economic consequences of

the DS285 decision made by the United States. In a letter to the WTO dispute settlement body

from the delegation of Antigua and Barbuda states that “An industry that was once the second

largest employer in Antigua and Barbuda, employing over 5% of the population, now lies in

ruin.” (Sanders, 2013). It would be dishonest not to note that the recovery of Antigua’s economy

does coincide with the suspension of the GATS concessions for the US. Considering that the US

is one of Antigua’s largest trading partners (World Bank Group, 2016), it is no surprise that there

was an increase in revenue for the Antiguan government.

Contrasting with DS285, the measures taken by the Dominican Government in DS418

were swift, well balanced and had a trivial effect on the industry in question. That could be

attributed to the relatively small amount of space El Salvador uses in the polypropylene bags and
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tubular fabrics market. It could also be attributed to the Dominican legislature being willing to

change its laws without the threat of force from the DSB or without the recommendations of an

arbitrator. A correspondence from the Dominican government shows that the necessary measures

to change its laws only took a month from panel report to implementation of most favored nation

tariffs.

In the analysis of these case studies, there has been an inequality that has been neglected

the share of a market relative to the amount imported by a country, i.e. how much of a foreign

country’s imports take up space in a market that could be used by a domestic industry. Applying

that idea to the different disputes can explain why the WTO’s dispute system works well for

some countries and not as well for others. In DS285, Antigua starts the dispute on the needful

side, the sale of services to foreigners from richer countries accounts for over 60% of their GDP

(World Bank Group, 2016). Specifically, exporting online gambling services was very lucrative

for the Antiguan economy. In 2000, 61% of the global online gambling market was held by

Antigua-based companies (Quarterly eGaming Statistics Report (May 2007), 2007). This made

the issue more important to the Antiguan delegation. This is not true for the US economy, which

doesn’t rely as heavily on exports of services. To Antigua, the cost of not filing a dispute is

higher than letting go of that piece of their economy.

Contrast this needfulness with the amount of space exports from El Salvador take up in

the Dominican economy. The cost of not following the suggestions of the WTO for the

Dominican government was higher than just being compliant. In DS418, one of the countries

involved was markedly larger than another (The Dominican Republic) but acquiesced to the

demands of the WTO faster. This can be explained by the effectiveness of the sanctions that

could’ve been levied against them. The Dominican economy, much like Antigua relies heavily
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on services and intermediate goods in trade. This leads to them having relatively more to lose by

not being compliant in comparison to the US in DS285. Sanctions against them would take

longer to recover from. This train of logic means that the incentives for compliance are higher

for a less developed country in the respondent role than for a more developed country, provided

that the complainant is relatively less developed and has a smaller share of the domestic market

involved in the dispute.

The above graph shows the amount of imports from El Salvador that the Dominican

Republic takes in. For comparison, the Dominican Republic imports from the United States in

intermediate goods. By this logic, sanctions by the World Trade Organization in the defense of

El Salvador would hit the Dominican economy harder than compliance.


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Contrast the Dominican graphs to the figures of Antiguan exports to the United States in

consumer goods and Antiguan exports to the United Kingdom. By the logic of the previous

statements, the cost of not filing a complaint to the WTO is higher than letting the United States

continue its prosecution of Antigua-based online gambling companies.

Conclusion

In conclusion, the WTO is a useful organization that has net benefits for the countries

involved. The foundations of the organization are strong, and the way it has evolved over the

years shows that it is flexible. The premise of free trade with respect to the developing country

needs more work. However, that does not mean the WTO is without flaws. At the time of

writing, Antigua has taken the measures to suspend its GATS obligations to the US. The effects

of this action are yet to be seen but the Antiguan government has expressed feelings of

disappointment with the way the dispute has gone. The sheer length of that dispute and its

complexity has become a staple in discussions of the legal aspect of World Trade Organization.

The case analyses show that larger countries can decide not to follow the settlements that the

WTO has prescribed, provided that the market is small enough in the large country.
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The analyses have also shown that smaller countries are more willing to comply with the

rulings of the Dispute Settlement Body due to the consequences of sanctions. The Dominican

Republic case shows how the WTO does right by smaller countries in disputes with other small

countries. It showcases the speed at which a dispute can be settled by both parties without any

economic damage to either country. If the claims of the WTO to “be better for developing

countries” it needs to work on its enforcement arm to better fit sanctions to the individual

country that needs to be put into order with its agreements.


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