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22 Dispute Settlement Amelia Porges

The past 15 or so years have seen the emergence and elaboration of ever more complex preferential trade agreements (PTAs), forming multiple and rapidly proliferating networks. Almost all of these PTAs include a dispute settlement clause of some sort. Indeed, dispute settlement provisions have become a sine qua non for PTA negotiators, even though the number of actual government-government disputes within PTAs is only a fraction of the hundreds of existing agreements. Governments enter into PTAs expecting to secure economic benefits. In particular, estimates of the welfare benefits of PTAs normally assume that the parties will faithfully implement their market access commitments. If private investors doubt that the partners to a PTA will actually keep their commitments, they will not engage in the type of risk-taking investment that the PTA could otherwise generate. If a PTA is to be fully implemented and to yield the expected benefits, the agreement should, at a minimum, be equipped with institutions that facilitate information exchange among the parties, help the parties monitor implementation, and provide an incentive structure that meaningfully supports compliance. A dispute settlement arrangement is part of this necessary structure because there will inevitably be disagreements in a PTA concerning the scope and nature of the commitments that the parties have made. The PTA must provide an orderly way for its members to settle disputes and move on, or else the disputes will poison bilateral relations, reduce the PTA’s benefit, and perhaps even lead to the demise of the agreement. Dispute settlement mechanisms are also needed to ensure that the promises in a PTA are kept. Economic studies on PTAs teach that where the parties’ tariffs are low ex ante, a PTA between them will only produce gains if it involves deep integration provisions. Those provisions need to be backed up by enforcement. Every economic projection of the gains from a PTA is based on the assumption

of 100 percent compliance with the PTA’s obligations. Ensuring compliance through enforcement is essential if the gains are to materialize. PTAs therefore typically include some mechanism incorporating elements of both compliance enforcement and dispute settlement. By participating in a PTA with strong dispute settlement provisions, a government signals its level of commitment to private and public interests at home and abroad. Each PTA competes with other PTAs for investment, jobs, and economic growth, in a field that becomes more crowded every year. Even if no disputes are anticipated, enforcement provisions in a PTA reinforce the precommitment of the governments, make their promises more credible, and signal that the PTA is a solid platform for investment that will create jobs and economic growth. Solid dispute settlement is even more important in North-South (or South-South) PTAs with asymmetrical power relations. Recently concluded PTAs in Latin America, Europe, and Asia demonstrate to a striking extent that as PTA obligations deepen, become more complex, and provide more value, PTA partners seek more certainty than purely diplomatic dispute settlement can provide. In theory, the parties to a PTA are the masters of their own treaty and could design an original dispute settlement mechanism from the ground up, or have no dispute settlement mechanism at all. In practice, almost all PTAs rely on one of the three general types of dispute settlement mechanisms: diplomatic settlement by negotiation; judgments by standing tribunals; or the World Trade Organization (WTO) model, in which an ad hoc panel is convened to hear the dispute. Many recent PTAs have adopted the third system, based on the WTO’s Dispute Settlement Understanding (DSU). The WTO model has provided a useful focal point for bargaining; its familiarity means that negotiators and stakeholders understand how it works and what trade-offs can be made. This chapter, the last in the volume, discusses the options available for dispute settlement and enforcement 467


Preferential Trade Agreement Policies for Development: A Handbook Part 2