Regarding the first question, Figure I hints at a potentially important general
concern. Many violations of trade agreements result in large transfers—tax revenue for
the government at the expense of foreign producers and domestic consumers, quota rents
to domestic importers who hold importation rights at the expense of foreign producers
and domestic consumers, producer surplus for favored trading partners at the expense of
other trading partners who are discriminated against, and so on. Deadweight losses arise
in all of these scenarios to be sure, but they may be much smaller than the transfers away
from injured foreign exporters. Such situations present a clear danger of socially
excessive litigation costs. The problem is all the more acute, of course, to the degree that
nations would prefer to pay damages in perpetuity than to conform their behavior, a
possibility that cannot be completely discounted.
Regarding the second question, it is questionable whether trading nations can
avoid litigation costs by simply “complying” with the rules. Flagrant cheating occurs in
the system to be sure, but many disputes involve good faith disputes over the
interpretation of legal obligations or the application of legal principles to the facts. Many
violations may simply be “accidental,” especially by developing countries with limited
compliance capacity. In other cases, the law is unclear or its application under the
circumstances is fairly debatable—trading nations can then “comply” with the rules only
by abandoning potentially legitimate policies, and they may be unlikely to do so in many
cases.
Money Damages and Developing Countries. Developing countries might be quite
threatened by a system of monetary damages, at least if they were calibrated to
compensate foreign exporters for the damages they suffer due to illegal acts. Many developing countries regularly suffer severe shortages of hard currency, and will be hardpressed
to pay significant damages in any currency that they cannot print. And because
their legal infrastructure is often weak, their ability to avoid damages judgments by
simply “complying” with the law is limited as noted above—indeed, within the WTO,
developing countries often complain that they do not fully understand how to implement
their obligations, and seek assistance for “capacity-building” in this regard. Monetary
damages might thus produce a significant chill on their domestic regulatory initiatives,
and expose them to considerable liability for inadvertent violations.
Although some developing countries have nevertheless suggested that a monetary
remedy be introduced into WTO law as noted earlier, Davey (2001) explains the nature
of the remedy that they have in mind. They do not advocate a system of “compensatory
damages,” but a sliding scale system of fines set on the basis of factors such as GDP and
per capita income. Mexico’s proposal for auctioned retaliation rights provides similar
protection to the treasuries of developing countries, in that no nation would be compelled
to participate in any auction. Existing proposals for monetary remedies, therefore, are
aimed at imposing substantial monetary costs on violations by wealthier states while
imposing small costs on violations by developing countries. It is thus possible that no
system of monetary damages lies in the “core” of the bargaining game between North
and South, at least not as the game has been structured so far. The problem might be
overcome in future bargaining by some sort of issue linkage, but the opportunity for such
an arrangement perhaps has not yet arisen.