consistent with those found here, that concerns for retaliation appear to affect government trade
policy decisions.11 On the other hand, Horn et al. (1999) do not find evidence of a bias in the pattern
of disputes that have been initiated under the WTO. They use a probabilistic model to illustrate that
the pattern of disputes can be explained fairly well by the value of trade and the diversity of trading
partners. They conclude that even though the U.S., E.U., Canada and Japan initiate over 60% of all
complaints, these two factors cause them to be involved in more formal trade disputes and therefore
that measures of ‘power’ do not affect dispute initiation. As we discuss below, these results contrast
with our findings that ‘power’ measures, including the threat of retaliation, matter when considering
the economic outcome of disputes.
As a preview of our results, we find substantial evidence that the threat of retaliation is an
important influence determining a defendant country’s ability to credibly commit to liberalization.
Our results imply that, ceteris paribus, a plaintiff country that receives a one percentage point greater
share of the defendant country’s exports will receive a 2% to 3% increase in trade liberalization. We
also find the somewhat surprising result that the threat of retaliation does not appear limited to
the disputes in which the U.S. is the plaintiff country, as non-U.S. plaintiffs also obtain greater
liberalization, the greater is their ability to threaten retaliation against the defendant, should the
defendant refuse to liberalize. On the other hand, we find only limited evidence that the costs
imposed by “international obligation” are sufficiently large to give defendant countries commitment
power. Thus even if the Uruguay Round reforms did create a more efficient “legalized” system, our
results suggest that these reforms may have minimal economic impact on the resolution of disputes.
The rest of this paper proceeds as follows. Section 2 presents the basic theory of the tradeoffs
facing a defendant country in a trade dispute and its liberalization decision, as well as a review
of the GATT/WTO institutional background. Section 3 discusses the trade dispute data and our
econometric framework. Section 4 illustrates the empirical results, and Section 5 concludes with a
discussion of additional caveats and areas for further research.
2 Theory and Institutional Background
In this section we briefly discuss the underlying theory and the institutional background of the
GATT/WTO dispute settlement process that serves to motivate our empirical analysis.