James McCall Smith. 2000. The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts

James McCall Smith. 2000. "The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts." International Organization 54(1): 137-80.

This paper investigates the conditions under which member states adopt legalistic mechanisms for resolving disputes and enforcing compliance in regional trade accords. To account for variable levels of legalism, he offers a theory of trade dispute settlement design based on the domestic political trade-off between treaty compliance and policy discretion.

I. Introduction

• Parallel trends in international trade:
1. Rise of regionalism and new integration initiatives drawn along geographical lines
2. Move toward legalism in the enforcement of trade agreements; trading states have given impartial third parties the authority to review and issue binding rulings on alleged treaty violations, at times based on complaints led by non-state or supranational actors.

II. Defining the Spectrum: From Diplomacy to Legalism

• Level of legalism depends on (see Table 1 on page 143):
1. Third-party Review - an explicit right to third-party review of complaints regarding treaty application and interpretation is more legalistic (as opposed to diplomatic). 
2. Third party Ruling - (secondary concern if there is an automatic right to third-party review) - if judicial rulings are formally binding in international legal terms, then it is more legalistic.
3. Judges - how legalistic each treaty is depends on the the number, term, and method of selecting arbitrators or judges. 
• Standing tribunals are likely to be more consistent over time with their rulings—and thus more legalistic—ad hoc panels whose membership and rulings changes with each dispute.
4. Standing - whether actors have standing to file complaints and obtain rulings is the measure of legalism. 
• In general, the more expansive the definition of standing, the more legalistic the dispute settlement mechanism. 
5. Remedies in cases of treaty violation. 
• The most legalistic remedy is to give direct effect in domestic law to dispute settlement rulings made at the international level. Where rulings are directly applicable, government agencies and courts have a binding obligation under national law to abide by and enforce their terms.
• Where treaties have no direct domestic effect, another remedy is the authorization of retaliatory trade sanctions by the complaining state. 

III. The Model Scope

• Model assumptions:
1. The model takes as unproblematic the motivation and capacity of domestic political leaders to negotiate a trade pact.
2. The substantive terms of a trade agreement are exogenous; the model focuses only on the procedures chosen by parties to enforcement commitments.
3. There is only one bargaining forum.
4. Regime type does not affect preferences.
5. Trade policy changes over time are external to the strategic interaction of disputants and independent third parties.

IV. The Actors and their Motivations

• Actors: political leaders
• Why the actors might be wary of legalistic trade dispute settlement: the threat that legalistic trade dispute settlement poses to policy discretion of political leaders is threefold. 
1. It may constraint their ability to manage the unforeseen costs of adjustment, making it more costly to provide relief or protection to specific groups injured by trade liberalization.
2. It may limit their general policy autonomy across a range of domestic regulations, which it judges against treaty commitments to eliminate nontariff barriers to trade.
3. The delegation of authority to third parties may constraint their ability to pursue trade policy bilaterally, a strategy with distinct political advantages. 
• Why the actors might want legalistic trade dispute settlement: legalistic dispute settlement improves the value of trade agreements through two principal channels:
1. By defining, monitoring, and enforcing compliance, it constraints the opportunistic behavior of foreign governments that are tempted to provide protection to their constituents. 
2. As an institutional commitment to policy stability, it promotes the confidence of the private sector, inducing traders and investors to take risks that increase the aggregate benefits of liberalization. These activities improve the rates of unemployment, inflation, and growth.

V. How Governments Specify Determine Dispute Settlement Preferences Ex Ante 

• How political leaders assess the trade-off between policy discretion and treaty compliance happens in two stages:
1. National preference formation
2. International bargaining
• The level of legalism preferred by a particular government in a specific trade negotiation depends on:
1. Intrapact trade-dependency - the extent to which its economy depends on trade with other signatories in the accord. The more trade-dependent the economy , the more legalistic the dispute settlement mechanism its government will tend to favor. Legalistic dispute settlement is more valuable politically where trade with prospective partner countries accounts for a larger share of the domestic economy. 
2. Relative economic power. The more powerful the country in relative terms, the less legalistic the dispute settlement mechanisms the government will favor. 
3. The proposed depth of liberalization. The more ambitious the level of proposed integration, the more willing political leaders should be to endorse legalistic dispute settlement because deeper integration promises to generate larger economic gains.

V. Hypotheses

• Observations suggest that the relative value of liberalization--and, by implication, of legalistic dispute settlement--is usually lower to larger economies than to smaller economies. So the signatory state with the largest economy is most likely to wield the unit veto that determines the level of legalism in a given agreement.
• Legalistic dispute settlement is expected only in accords among parties whose relative size and bargaining leverage are more symmetrical; when there is a hegemon, it can impose its preferences can more effectively use unilateral trade measures. 
• In settings of low economic asymmetry--provided the proposed legislation is sufficiently deep--all member governments have an incentive to improve treaty compliance through impartial third parties. 

VI. Results from Empirical Data

• Levels of economic asymmetry and legalism are inversely related given the preferences and negotiating leverage of regional hegemons. Highly legalistic forms of dispute settlement generally do not occur in highly asymmetric settings. 
• When asymmetry is low, high levels of legalism occur only where the proposed level of integration is high. 
• Evidence generally confirms a positive relationship between the level of proposed integration and legalism.
• Anomalous combinations of high integration and low legalism in trade agreements share high asymmetry.
• The most robust predictor of dispute settlement design is the interaction of asymmetry and proposed integration. If the level of proposed integration is relatively low, there is less legalism in the appointment of judges. 

VII. Conclusion

• This approach is grounded in a political calculation of costs and benefits in the domestic arena, not in expectations about absolute or relative gains internationally. 
• Given a regional trade initiative, negotiations over dispute settlement design are driven by domestic political concerns.