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There is nearly unanimous consent among WTO practitioners and scholars that the remedy of tariff compensation is legally superior, economically more efficient and socially more beneficial than retaliatory suspension of tariff concessions (tariff retaliation). This article argues in favour of a revitalization of tariff compensation. However, under the current regime compensation is a thoroughly unattractive policy instrument for decision makers having to temporarily opt out of a WTO Agreement in reaction to domestic shocks. Hence, tariff compensation is vastly underused. We examine reasons for the relative unattractiveness of this policy instrument and propose a substantial reform agenda of the WTO agreements and the dispute settlement system, so as to make compensation a policy tool of choice for trade policymakers. Most importantly, we suggest breaking with the presumption of legal and calculative equivalence of tariff compensation on the one hand and retaliatory suspension of concessions on the other. Making use of the fact that the true scope of nullification and impairment awards has never been legally exhausted in WTO arbitration, we suggest that by deliberately discriminating between the amount of compensation and that of retaliation, policymakers in violation of WTO Agreements can be induced to choose offering compensation to the injured party - an outcome that is economically and socially superior to embracing tariff retaliation.
Keywords: WTO Dispute Settlement. Political Economy, Trade Sanctions, Antidumping, Safeguards.
JEL Codes: F02, F13, K33.
"Consult before you legislate Negotiate before you litigate Compensate before you retaliate And comply - at any rate."
PASCAL LAMY (then EU Commissioner for Trade) "Hymn to Compliance".1
1 Introduction
In this paper we are concerned with systemic issues of the enforcement mechanisms pursuant a trade dispute in the WTO, with flaws of the Organization's dispute settlement body (DSB), and with avenues of institutional reform.2 More precisely, we are examining the relationship between and hierarchy of the two core DSB enforcement tools (termed "remedies", "countermeasures" or "punishments"3) at hand, namely tariff compensation and retaliatory suspension of tariff concessions (retaliation). Our aim is to encourage use and application of tariff compensation as the remedy of choice for policymakers.
In the recent past there have been some propositions by policymakers, lawyers and economists to stimulate the use of tariff compensation in the realm of the WTO. Most...