Solving a WTO dispute with algebra

Use­ful things are some­times found in unex­pect­ed places. Just as you can learn, from Chap­ter 35 of “Anna Karenina”: how to make straw­ber­ry jam with­out water, so you can get a pret­ty good intro­duc­tion to the sta­t­ic eco­nom­ic analy­sis of trade poli­cies from the WTO’s lat­est annu­al World Trade report. It includes sev­er­al “the­mat­ic essays”, one of which pos­es the ques­tion whether you can solve a dis­pute over WTO rights with a spread­sheet. I’m late in my recog­ni­tion of the Report’s appear­ance: “Daniel Drezner”:, for exam­ple, praised the essay on “out­sourc­ing” a cou­ple of days back. But, emerg­ing from the com­pi­la­tion of my own essay on “trade advocacy”:, I took the oppor­tu­ni­ty to browse through the chap­ter on the use of eco­nom­ic mod­els in WTO dis­putes. Well worth read­ing. The con­clu­sions on the use of quan­ti­ta­tive analy­sis are pret­ty con­ser­v­a­tive: * WTO dis­pute set­tle­ment is “above all about deter­min­ing well-rea­soned out­comes on the basis of agreed legal texts” * But “quan­ti­ta­tive analy­sis may strength­en par­ties’ argu­men­ta­tion before pan­els and increase the com­fort lev­el of arbi­tra­tors in mak­ing an award … ” This is a view I share. There is just a whiff, how­ev­er, of the exas­per­a­tion that econ­o­mists must feel when faced with the intu­itions of eco­nom­i­cal­ly naive lawyers and oth­er “prac­ti­cal men”: about the mar­kets. “Quan­ti­ta­tive eco­nom­ics”, the essay­ist adds “can help to avoid mis­in­ter­pre­ta­tion when eco­nom­ic ratio­nal­i­ty is counter-intu­itive and less than obvi­ous, but nev­er­the­less per­ti­nent to the sub­stance or direc­tion of legal rea­son­ing.” Those intu­itions have, after all, giv­en us eco­nom­ic abom­i­na­tions of “fair­ness” and “due process” such as anti-dump­ing (and the infa­mous “Byrd amendment”:, mer­can­tilist “concession”-bargaining, and the the­o­ry of Spe­cial and Dif­fer­en­tial treat­ment, that holds the equi­table way to deal with trade adjust­ment costs for devel­op­ing coun­tries is to elim­i­nate both the costs and the ben­e­fits of adjust­ment. You don’t need to read too close­ly between the lines of this essay to dis­cov­er that the WTO Eco­nom­ics Divi­sion has less inter­est in ana­lyz­ing the his­to­ry of dis­putes than in shap­ing their future course.  Their expla­na­tion of what “cross price elas­tic­i­ties” real­ly mean—and under what con­di­tions they mean anything—and their illus­tra­tion of the use of regres­sion analy­sis with detailed warn­ings about mul­ti­collinear­i­ty and auto­cor­re­la­tion are intend­ed, I sus­pect, as a warn­ing to trade pol­i­cy mak­ers who believe that you can build the new jerusalem in Gene­va with a spread­sheet and access to the GTAP data­base. This may be a fond hope but it’s an impor­tant mes­sage. In the past decade, the dra­mat­ic improve­ment in the avail­abil­i­ty of trade data (on mer­chan­dise trade, at least) and the fall in the cost of com­put­ing pow­er has led to a rapid esca­la­tion in the num­ber and scale of eco­nom­ic mod­els of world trade. Fas­ci­nat­ing as they are, and valu­able in their place, there is a ter­ri­ble temp­ta­tion to use eco­nom­ic mod­els to devel­op coun­ter­fac­tu­al con­tentions in dis­pute cas­es: “had X com­plied with the Agree­ment, then it’s share of the mar­ket would have been no larg­er than Y …” This weak, and fre­quent­ly mis­lead­ing, use is actu­al­ly encour­aged by the pro­vi­sions of e.g. Art.XVI:3 on sub­si­dies (the seri­ous prej­u­dice rule).

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