Dispute Settlement and Power Asymmetries in International Trade: Regional Trade Agreements and the WTO

Regional trade agreements (RTAs) have become increasingly common in the international trading system. Notwithstanding the recent surge in regionalism, dispute settlement mechanisms (DSMs) are much less utilized in RTAs than in the World Trade Organization (WTO). We argue that power asymmetries between countries in dispute can explain why RTA dispute settlements are rarely used. We first develop a formal model of dispute settlement mechanisms extending Rosendorff’s (2005). Using the formal model, we derive that RTA-DSMs increase the power disparity of countries in dispute by providing more flexibility to stronger countries at the expense of weaker countries. We show that RTA-DSMs generate a trade-off in gains between large and small countries in RTAs, whereas WTO-DSMs generate a trade-off between rigidity and stability. We test our theoretical implication with the originally collected data on the institutional forums that countries chose to settle their trade disputes. We find that a country-dyad with a high power asymmetry is more likely to choose a WTO-DSM to settle a trade dispute. Less powerful countries can insulate themselves from power politics by choosing the ground they fight.