Crying Foul: The Impact of Utilizing Dispute Settlement Mechanisms on Trade Flows in Preferential Trade Agreements

Abstract

This paper aims to contribute to the body of research analyzing how Preferential Trade Agreements (PTAs), and specifically the institutional design of those agreements, impact global trade flows. Recent research has focused on the role of dispute settlement mechanisms (DSM) in determining how PTAs impact trade and investment flows. Since, an estimated 87% of PTAs possess some form of DSM or another it is not surprising that they have garnered such attention. DSMs have typically been used as proxies for scholars to show how “deep” a PTA goes towards liberalizing trade, as well as a piece of institutional design that helps PTA signatories signal the credibility of their commitment to the agreement. While such research has suggested that the presence of a DSM in a PTA may well have positive impacts on increasing trade flows within PTAs, it does not comment on how the actual functioning of the DSM impacts those trade flows. This is to say there is a paucity of research addressing how states actually filing disputes in a PTA DSM impacts the bilateral import-export flows between the concerned parties. Furthermore, the paper argues that, as considerable theoretic evidence exists to suggest that frequent utilization of DSMs may well have deleterious effects to trade liberalization among PTA members, it should not be assumed that DSM utilization promotes further intra-PTA trade liberalization. The paper thus aims to fill a gap in the literature on PTAs and DSMs by investigating a data set covering bilateral international trade flows between 1948 and 2006 to demonstrate the impact of frequent DSM utilization on trade flows between PTA members. The analysis finds evidence to suggest that more frequent utilization of DSMs in PTAs results in deeper trade liberalization among PTA member states. This suggests that DSMs are effective as mechanisms to bring states back into treaty compliance and as mechanisms to enforce and deepen liberalizing PTAs.