B. Remedy: Trade Sanctions and Money Damages
Regardless of the rules governing the standing of private parties, some remedy
must be made available to parties who have standing. We thus return to the puzzle of
why trade agreements such as NAFTA and the WTO select the seemingly inefficient
remedy of trade sanctions with their attendant deadweight costs, in preference to a
remedy like money damages that is a mere “transfer.”
As noted at the outset, nothing in the current law of NAFTA or the WTO
precludes the use of monetary payments to resolve disputes. “Compensation” is
allowable (and indeed preferred) to trade retaliation, and nothing restricts the form that
compensation might take. Yet, with very rare exception, WTO and NAFTA cases are not
settled in this fashion (putting aside NAFTA investor rights cases). Thus, by “revealed
preference” of sorts, we must infer that trade retaliation is preferred in general by violator
states to the alternative option of money compensation, at least given the implicit
reservation prices of complainants. This section suggests a few considerations that may
help explain this state of affairs. Before turning to those issues, however, I wish to rebut
one argument that has appeared elsewhere.
Are Trade Sanctions Preferred Because They Better Induce Compliance with
Trade Agreements? As noted earlier, some scholars, most notably Nzelibe (2005), have
argued that trade agreements utilize trade sanctions rather than money damages because
the sanctions mechanism is more effective at inducing parties to comply with their
commitments. Trade retaliation can be targeted at powerful export groups in the violator
country, the argument runs, which will motivate them to encourage their government to
cease the violation. Likewise, trade retaliation provides at least temporary benefits to
import-competing firms that compete with the imports that are targeted. Their political
support for retaliation makes the use of the retaliatory sanction a credible threat. Money
damages, it is argued, are inferior in both respects. Their costs are borne by a diffuse
group of taxpayers in the violator state, who will not organize to lobby their government
to avoid monetary liability—money is too “cheap” from the perspective of the violator
state for monetary penalties to be an effective deterrent to misconduct. Further, the
beneficiary of a monetary sanction will be the national treasury of the complaining state,
and no interest group in that state will have much interest in pushing for its government
to pursue the sanction.
I find this line of reasoning unconvincing for two reasons. First, to the degree that
damages are a “cheap” penalty from the perspective of violators, they can always be
increased. At some point, monetary penalties would become a sufficient burden on the
treasury of even the wealthiest trading nations that a violator nation would prefer to
comply with its commitments rather than to pay damages, and the prospect of collecting
the money would be an appealing prospect for potential complainants. The claim that
damages will not induce compliance, therefore, must be modified to something like the
following: compensatory damages (perhaps measured by the loss of rents to foreign
exporters injured by the violation) will not suffice to induce nations to comply with their
commitments.