Legal and Economic Principles of World Trade Law


An American Law Institute project


The World Trade Organization (WTO) Agreement covers the vast majority of international commerce in goods and services, and also contains an agreement on the protection of intellectual property. Close to 160 countries are Members of the WTO, the majority of which are developing countries. The Agreement covers not only measures that directly affect trade, such as tariffs and import quotas, but potentially almost any type of internal measure with an impact on trade. 

The WTO legal texts are by necessity expressed in vague terms, and in need of continuous interpretation.  To this end, the WTO contains a rarity in international relations – a compulsory third-party adjudication system. While there is an expressed preference for bilateral resolutions of trade conflicts, the system embodies the idea that when trade conflicts that cannot be resolved bilaterally, they should be resolved through multilateral adjudication rather than through unilateral actions. This two-level system of legal adjudication – the Dispute Settlement (DS) system – plays a core role in the WTO by determining the practical ambit of the legal obligations in the various Agreements comprising the WTO Agreement.

The WTO Agreement, and its interpretation by WTO adjudicating bodies, is subject to intensive policy debate, conducted largely by politicians and non-governmental organizations. There is also an ongoing debate among trade law practitioners and legal scholars concerning the appropriate interpretation of the law. Academic economists, on the other hand, rarely intervene in these discussions.

The overarching aim of the project Legal and Economic Principles of World Trade Law was to bridge this divide by providing systematic analysis of WTO law based in both Economics and Law. Such an interdisciplinary approach is in our view necessitated by the fact that WTO Agreement has inherently economic objectives. For instance, its Preamble states that the objectives of the Agreement are to contribute in:

…raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development…

A fundamental methodological problem facing a joint economic and legal analysis of the WTO contract is that there is yet no field “The Economics of Trade Law” that could be leaned against for such analysis. Instead, the relevant specialized fields, such as International Trade Law and International Economics, differ widely, both in terms of aims and methods. Lawyers and economists are also typically too specialized in their respective fields to be able to undertake legal-cum-economic analyses of the law alone. Caricaturing (but not very much), lawyers take the legal text for granted, and seek to interpret it without taking account of the economic objectives it aims to achieve. Economists, on the other hand, are concerned with the aims of trade agreements in general. But they very rarely care about how the understanding they may have concerning the desirable structure of trade and trade policy, should be implemented in practice through a legal text. (Actually, most of the theoretical economic literature is silent on the question of why a written agreement is required at all). There is therefore clearly a need for economists and lawyers to join forces when analyzing the appropriate regulation of the multilateral trading system. A main idea behind this endeavor was to develop such collaboration.

The project has from its inception been conducted under the auspices of the American Law Institute (ALI), with Henrik Horn and Petros C. Mavroidis (Columbia Law School and University of Neuchatel, Switzerland) as Chief Reporters. The ALI is a leading academic, non-partisan, non-profit organization with approximately 4 000 elected members.  The main product of the ALI is a series of Restatements of Law, and Principles of Law. These are careful studies of, respectively, existing laws, and suggestions for improvements. 

The project has worked along two parallel, complementary paths. The first part consists of economic/legal analyses of the emerging case law from the adjudicating bodies of the WTO. Recently adjudicated disputes are jointly evaluated by an economist and a lawyer. Their general task is to evaluate whether the ruling “makes sense” from an economic as well as from a legal point of view, and if not, whether the problem lies in the legal text, or in the interpretation thereof. Typically, the teams of lawyers and economists do not cover all issues discussed in a case, but discuss procedural and substantive issues that they find to constitute the core of the disputes.

Almost 90 reports have been written so far in this case law leg of the project, covering all disputes that came to an end during the years 2001 to 2013. The disputes have concerned all three major WTO agreements – the GATT and the other Annexes forming the multilateral regulation of trade in goods, the services agreement GATS, as well as the agreement on intellectual property protection, the TRIPs. But reflecting the use of the Dispute Settlement system, most cases have involved trade in goods.

These reports are presented and discussed in yearly meetings with an external advisory group, comprising both lawyers and economists. The analyses are published by Cambridge University Press, and reports are also regularly published in the World Trade Review. A list of reports written in the project can be found here.

The analysis of the emerging WTO case law is meant to serve several purposes. First, and as emphasized above, the adjudication plays a central role by shaping the practical ambit of the agreement. This task is complicated by the amorphous nature of the legal texts, by an often inconsistent case law, and by the political sensitivity of many of the issues at stake. It thus cannot be expected that a few judges always “get it right”. A first purpose of this case law project is to contribute to the discussion concerning the appropriate interpretation of the WTO agreements, with analyses that are well-grounded in both law and in economics.

While it is hard to summarize the findings in the large number of reports written so far, it is clear that in a significant proportion of the disputes, the authors disagree with the outcome of the dispute. Also, even if accepting the outcome as such, the authors often voice severe concerns regarding the adjudicating bodies’ economic and/or legal reasoning.

Another important purpose of the examination of the case law has been to support work along the second path of this project, the purpose of is to study more directly the text of main provisions of the WTO Agreement affecting goods trade. The ALI appointed four Reporters to work on this project, in addition to Horn and Mavroidis: Kyle Bagwell (Columbia University), Gene M. Grossman (Princeton University), Robert W. Staiger (Stanford University), and Alan O. Sykes (Stanford Law School).

The first study from this leg of the project, The Genesis of the GATT, coauthored by Douglas Irwin (Dartmouth College), Petros C. Mavroidis and Alan O. Sykes, and published by the Cambridge University Press, highlights the negotiating history of what became the GATT 1947-48. The study was meant to serve as a legal background for the subsequent work on the principles of WTO law.

A second background study—Why the WTO? An Introduction to the Economics of Trade Agreements—by Gene M. Grossman and Henrik Horn, lays out the perspective that most trade economists bring to the study of trade agreements. It focuses on the main approach in the literature, which sees trade agreements as means to address negative international externalities that would arise from unilateral determination of trade policies. The study argues that this approach may help explain salient features of trade agreements in general, and of the GATT in particular, such as their reciprocal nature, the need for trade agreements to be self-enforcing, and the inevitable contractual incompleteness of trade agreements. The study also discusses some of the critique that has been directed against this main approach.

A third study—Economic and Legal Principles of World Trade Law: Border Instruments—by Kyle Bagwell, Robert W. Staiger and Alan O. Sykes, discusses legal and economic aspects of the GATT regulation of border policy instruments, such as import tariffs, and import quotas. It draws on the economic theory of international trade and relevant aspects of economic history, to explain the legal treatment of border instruments in the WTO/GATT system, as it has evolved over time. From a normative perspective, the study builds on an economic understanding of the function of the various legal disciplines to critique elements of the treaty text and the case law. The study focuses on the core provisions regulating border instruments, such as e.g. tariff bindings, restrictions on quantitative, and the "most-favored-nation" (MFN) obligation.

The main objective of most trade agreements is to restrict members' use of trade policies for protectionist purposes. But it would be meaningless to bind border instruments without restrictions on the possibility to use domestic policy instruments for protectionist purpose. To this end, most agreements include a National Treatment (NT) obligation. The NT provision in the GATT appears in Art. III, which applies to most government decisions with trade impact, requiring that imported products are given as favorable policy treatment as similar domestic products. The purpose of a fourth study—Economic and Legal Principles of World Trade Law: National Treatment—is to propose how to interpret this vaguely formulated provision.  The study is written by Gene M. Grossman, Henrik Horn and Petros C. Mavroidis.

The study first examines the purpose of the Art. III, as it appears from an economic point of view, as well as from its negotiating record. It also examines the case law, arguing that the absence of a coherent methodology implies that it is often unclear whether case law interpretations of the key terms promote the purpose of the provision. The study then identifies two alternative approaches to interpret Art. III, and its interplay with the general exceptions clause in Art. XX GATT. The first approach only requires that the products are in sufficiently close potential or actual competition in the market, in a case where an imported product is given a less favorable treatment than a domestic product). The second approach requires additionally that the importing country has no policy rationale other than protectionism for treating the two products differently. The main difference between the two approaches is that under the former, the protectionism test occurs if/when an Art. XX exception is requested, while the latter approach requests this to be done as part of the evaluation of the alleged violation of Art. III. As discussed in the study, the second, and favored, approach can be expected to impose a more permissive regime for domestic policy instruments.

The studies in this second leg have been published as Horn, Henrik and Petros C. Mavroidis (eds), Legal and Economic Principles of World Trade Law, by Cambridge University Press in 2013.