Under the WTO’s dispute settlement procedures, a party that has been injured by a scofflaw state’s failure to comply with its trade obligations may retaliate against the scofflaw state by withdrawing equivalent trade concessions. Legal and economic commentators generally view retaliation as an economically perverse strategy for enforcing freetrade norms. This Article explores an alternative explanation, arguing that retaliation may provide the optimal enforcement mechanism for trade liberalization given the prevalence of low compliance incentives and high enforcement costs in international cooperation agreements. The Article argues that retaliation is superior to other remedial options because it enables an injured state to inflict maximum political costs on the scofflaw state by mobilizing powerful export groups in the scofflaw state against protectionist policies. Furthermore, this Article shows how the presence of significant protectionist groups in the injured state, which stand to benefit from retaliatory measures, also improves the injured state’s ability to commit to retaliation. Even if states have asymmetric preferences about protectionist policies, retaliation threats can still be credible since there is uncertainty about each state’s retaliation costs. Finally, the Article concludes that contrary to the conventional wisdom, the substantial role of uncertainty in this model indicates that specific performance, and not compensation, ought to be the goal of the WTO’s enforcement mechanism.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston