The Legal and Economic Analysis of the WTO/FTA System

The following sections are included:

• Dedication
• Table of Contents
• Acknowledgments
• About the Author
• Preface

This article focuses on a less scrutinized aspect of the WTO dispute settlement system – non-litigated disputes. Legal rules concerning consultation and settlement during the panel proceedings are analysed with the case laws. We then propose, and empirically analyse, several key economic determinants of non-litigation in the WTO dispute settlement system that are motivated by the theory of bargaining with informational asymmetry. In particular, our logistic regressions show that a greater difference in the size of the pair of disputing countries reduces the likelihood of voluntary settlement or non-litigation. WTO members also tend to prefer non-litigation when the respondent is smaller than the complainant, has less reputational concern, and faces less retaliatory capacity of the complainant. Our findings suggest a case for reforming the legal rules of the consultation process towards mitigating informational asymmetry or improving communication between disputing parties in the WTO.

Korea's economic development saga, which amazed economists and policy-makers, has been filled with numerous trade disputes with its major trading partners. Despite the prevalence of such bilateral trade disputes, Korea had shown unequivocal resistance to resorting to the multilateral dispute settlement forum under the GATT system. Since the inception of the WTO, however, Korea has dramatically changed its attitude toward trade dispute settlement. The Korean experience of trade dispute settlement, therefore, seems a salient example of how the newly augmented system under the WTO is perceived and how it has been effectively utilized by average WTO Member countries in order to address international trade problems.

Causation requirement in trade remedy investigations has produced significant controversy in terms of legal interpretation and economic analysis. Deficient treaty texts and confusing legal ruling have exacerbated practical difficulty for investigating authorities to ensure World Trade Organization (WTO) consistency. Various analytical models that were proposed on the basis of more articulated economics often turn out to be too complicated to apply in broader cases or critically contingent on data availability. We suggest an alternative approach that utilizes firm production costs to complement the previous models.

Third country anti-dumping actions were envisioned at the very inception of the General Agreement on Tariffs and Trade (GATT) and yet almost completely neglected by most governments throughout the GATT/World Trade Organization (WTO) history. The requirement for prior approval by multilateral trade institutions became a formidable procedural obstacle for any country seeking third country anti-dumping duty (AD) actions. Despite such difficulties, there were only few attempts to effectively employ such actions and several legal arrangements to refine the rules for third country AD actions. This article investigates the origin and historical development concerning third country AD actions and examines their implications for the current WTO system that is congested with numerous Free Trade Agreements (FTAs).

The following sections are included:

• Introduction
• Problems in the Structure of the WTO Safeguard System
• Problems in Implementing the WTO Safeguard Agreement
• China Specific Safeguard Action: Transitional Product-Specific Safeguard Mechanism
• Conclusion
• Appendix 1. WTO Disputes Relating to the Safeguard Agreement
• Appendix 2. WTO Panel/Appellate Body Reports Relating to the Safeguard Agreement (1 January 1995 – 20 June 2005)
• Appendix 3 “Transitional Product-Specific Safeguard Mechanism” in the China's WTO Accession Protocol

While the WTO Member countries continue to increase their FTA arrangements with divergent frameworks, they have begun to adopt modified WTO trade remedy systems in FTAs. Although the content and degree of these modified systems may not be significant yet, they still set very important precedents, or ‘seeds’, for ‘rule diversification’ in the world trading system. Such modification typically aims to further liberalize mutual trade between FTA parties and thereby contribute to a freer world trading system. However, such rule diversification appears to be inconsistent with the mandate of Article XXIV of GATT by worsening economically inferior trade diversion. The reinterpretation of the legal obligations in Article XXIV commensurate with economically more reasonable structures implies that trade remedy rules in FTAs should be applied on a non-discriminatory basis. Moreover, an FTA safeguard measure must precede a WTO safeguard measure to ensure optimal competitive conditions among trading partners. In sum, the right channel for improving the current WTO trade remedy systems is not the FTA forums but the WTO negotiation.

In this article, we trace the jurisprudential history of the applicability of US countervailing duty (CVD) law to non-market economies (NMEs). We describe how, since the USA reversed its long-standing policy of not imposing CVDs on NMEs, concurrent application of antidumping (AD) duties and CVDs has become the country's major trade remedy action against China. Although the WTO panel rejected China's claim of WTO-inconsistency regarding the current US practices, the US Court of International Trade firmly ruled that the Department of Commerce's double counting of AD duties and CVDs against China violates domestic regulation. Finally, the WTO Appellate Body ruled that this ‘double remedy’ violates the rule to levy CVDs ‘in the appropriate amounts’ under Article 19.3 of the Agreement on Subsidies and Countervailing Measures. We will argue that, although the Appellate Body's ruling is praiseworthy in preventing an illogical practice, its legal reasoning may give rise to some doubts and controversy when the negotiating history of Article 19 is examined. We will also analyze key features of current double remedy practices in the USA and Canada.

Despite many legal rulings to clarify the WTO inconsistency of zeroing practices, in practically all aspects of antidumping proceedings, the United States declined to categorically rectify the illegal antidumping duties based on zeroing calculation methods. This dispute is merely example of a number of disputes where the US government had to exhaust the whole process for proper implementation of the WTO rulings under its domestic legal system. The US approach is starkly contrasted with the position taken by the European Union that categorically terminates zeroing practices pursuant to the WTO rulings. While the WTO system indeed recognizes individual Member's peculiar regulatory systems and policies during implementation phases, the current situation in which WTO Members must individually resort to the dispute settlement system in order to rectify the US zeroing practices raises a serious concern regarding the legitimacy and integrity of the WTO dispute settlement system. Maybe it is time for WTO Members to agree on better implementation mechanisms before more Members try to develop overly burdensome and complicated regulatory processes for compliance.

In 2005 Canada became the first country to impose countervailing duties on Chinese products under the World Trade Organization (WTO) system, which raised the whole new issue of the permissibility in WTO law of using such duties against nonmarket economies, particularly when the United States decided to join Canada by imposing its own countervailing duties against China. In so doing, the U.S. Department of Commerce suddenly reversed its longstanding policy not to use countervailing duties against nonmarket-economy countries—China is still treated as such for purposes of trade remedy actions—pursuant to the 1986 Georgetown Steel decision by the United States Court of Appeals for the Federal Circuit. In response to the U.S. imposition of countervailing duties in all seven investigations initiated against China in 2007, China brought the first four U.S. measures before the WTO dispute settlement system as soon as they were actually implemented in 2008. China's complaint can be categorized broadly as comprising three issues: (1) how to define subsidies in the unique economic structure of China; (2) how to calculate countervailing duties; and (3) whether to permit the concurrent application of countervailing duties and antidumping duties against China's alleged subsidies—that is, a double remedy. As regards these three issues, the panel ruled that the Commerce Department had not been WTO inconsistent in determining that state-owned enterprises and state-owned commercial banks are public bodies; that the department's calculation of countervailing duties was largely WTO consistent; and that use of the double remedy did not violate the WTO Agreements. The Appellate Body reversed the panel on many crucial elements of these rulings, including the public-body determinations regarding state-owned enterprises and the findings on the U.S. imposition of double remedies…

The following sections are included:

• INTRODUCTION
• HISTORICAL REVIEW OF COEXISTENCE UNDER THE GATT
• WTO AGREEMENTS WITH THE IMF AND THE WORLD BANK
• IMF AND BOP COMMITTEE IN WTO DISPUTE SETTLEMENT
• ANCILLARY PROPOSALS ON CONGRUENCE
• CONCLUSION
• ANNEX I: AGREEMENT BETWEEN THE INTERNATIONAL MONETARY FUND AND THE WORLD TRADE ORGANIZATION
• ANNEX II: AGREEMENT BETWEEN THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT, THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE WORLD TRADE ORGANIZATION

The following sections are included:

• STRUCTURE OF IMF PROGRAMS AND SOURCE OF PROBLEMS
• TRADE LIBERALIZATION BY THE KOREAN GOVERNMENT UNDER THE IMF PROGRAM
• GOVERNMENTAL ROLE IN THE CORPORATE RESTRUCTURING PROGRAM
• ALTERNATIVE SOLUTIONS
• CONCLUDING REMARKS

How might the US take action through the WTO over China's alleged currency manipulation? This paper analyses three potential legal issues: legality of exchange-rate policy under the GATT rules, legality under the subsidy rules and feasibility of non-violation complaints. It concludes that any WTO resolution will be difficult to achieve because the organisation is not designed to deal with alleged exchange-rate manipulation.

Serious academic efforts to reconsider the legitimacy and integrity of international financial systems followed in the wake of the 1997–98 Asian financial crisis, which originated in developing economies but threatened global financial stability. Scholars and practitioners identified a host of structural problems in the international financial markets that hampered rational and efficient operations, and offered a variety of reform proposals— albeit mostly from a strictly economics perspective. Only a few legal studies tackled the fundamental issues of the international financial system, such as externality problems of regulatory discrepancy, systemic gaps between domestic regulations and international markets, and, most importantly, the lack of effective multilateral treaties. And in 2007–09, before any significant reform measures were incorporated into the international financial system, the world economy experienced an even greater crisis; the structural problems of international financial markets, the result of weak regulatory frameworks, were made well apparent. The question confronting the world economy is no longer whether the international financial system demands “hard” law; instead, we need to determine how international economic law can be brought to bear on increasingly fluid financial and monetary affairs…

Asian countries have actively engaged in global FTA races and led rule development in terms of FTA negotiations. While proliferating FTAs raise concern for growing inconsistency problems between the WTO and FTAs, this paper shows diverging approaches in Asian FTAs in relation to dispute settlement systems that are the core element of the legal basis for FTAs. Broadly speaking, many Asian FTAs adopt a “WTO type” dispute settlement system. Asian FTAs involving the United States, however, have invariably employed the “NAFTA type “ dispute settlement system that puts more emphasis on prompt implementation by unilateral retaliation, monetary settlement, and numerical limit for special disputes typically concerning labor and the environment. Since more Asian countries are negotiating FTAs with the United States, this divergent approach toward dispute settlement systems in FTA should be thoughtfully realigned to ensure a coherent development between WTO and FTA systems.

Proliferating free trade agreements (FTAs) in recent years may have conflicting effects on anti-dumping (AD) uses among PTA parties. On the one hand, an FTA may increase a country's AD activities to protect its domestic industries from the increased import flows from other parties. On the other hand, an FTA supposedly helps reduce the use of AD measures to accomplish the purpose of free trade. Which effects prevail can shed important lights on the question of whether an FTA can be a stumbling block or a building block.

This article examines the effects of FTAs on AD activities based on comprehensive empirical analysis. Using longitudinal data of major AD user countries from 1995 to 2009, we found that there is clearly an inverse relationship between an FTA and AD activities. This finding represents the user's tendency to trigger less AD filings against FTA membership, regardless effacing more imports from FTA partners. This article also captured dynamic FTA effects based on a series of distribution of time dummies. The estimation results from the dynamic model show that the FTA enactment year clearly has significant effect, suggesting substantial reduction of AD investigations in that year.

The following sections are included:

• Introduction
• Economic Relations between South and North Korea
• GATT Accession by South Korea
• North-South Trade Issue
• Concluding Remarks
• APPENDIX I: ACCESSION OF THE FEDERAL REPUBLIC OF GERMANY
• APPENDIX II: SPECIAL LAW ON IMPLEMENTATION OF THE WORLD TRADE ORGANIZATION AGREEMENT