The treaty creating the WTO replaced the GATT dispute resolution
system, which contained no formal sanctions for breach of agreement as a practical matter,
with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system, and argue that the institutionalization of a
sanctioning mechanism was not motivated by a perceived need to increase the penalty for
violations, but rather by a need to decrease the penalty. In particular, the GATT system relied
on unilateral retaliation and reputation to police the bargain, and toward its end unilateral
retaliation became excessive, interfering with opportunities for efficient breach. The WTO
mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under
WTO law, and ensures that sanctions are not set too high.