The United States is a leading producer and exporter of cotton. Its market share in world cotton trade has averaged 37% since the year 2000, and some 70% of US production on average has been exported. The US cotton industry has also long been the beneficiary of various forms of government support, averaging some $3.55 billion per year since 2000, as compared with average annual cotton output in the United States of $4.26 billion. These statistics alone suggest that US government programs for cotton production have had a sizeable impact on the competitive position of US cotton growers.

In 2002, Brazil requested consultations with the United States regarding various US government programs benefiting producers of upland cotton.

Introduction

This volume concerns the calculation and design of trade retaliation in response to continued non-compliance with the WTO treaty. In subsequent chapters, detailed questions related to this broad topic are examined. One red line that frequently runs through these assessments of legal or economic detail (be it the application of the ‘equivalence’ standard, the choice of ‘counterfactual’, the benchmark to determine ‘nullification’ or the selection of products to target) regards the purpose or goal(s) of suspending WTO concessions. When the WTO permits, or a WTO member engages in, trade retaliation in response to continued non-compliance, what is it trying, or can it legitimately hope, to achieve? This question, as we examine it here, does not relate to what the retaliating country's preferences are in this situation (obviously, as complainant, its first goal is most likely to be compliance by the defendant). The question is rather what the drafters of the Dispute Settlement Understanding (DSU) as a whole (drafting as both potential complainants and potential defendants) intended with the instrument of WTO retaliation. Although clarification of this purpose or goal surely does not solve all problems, nor is it able to provide exact numbers, 4 it can offer crucial insights as a contextual element.

My contribution to this volume falls under the rubric “problems and options for reform.” As shall quickly become clear, however, I am not an advocate of any particular improvements or new approaches. In general, I believe that the WTO dispute resolution system has evolved in a reasonably defensible and satisfactory fashion in response to a number of competing pressures. The overall level of compliance with WTO obligations is high (though by no means perfect), disputes are reasonably modest in number and formal sanctions are comparatively rare. The system is not broken and does not require fixing.

I do not mean to suggest that everything about the WTO dispute system functions perfectly. Certainly, one can quibble with the details of dispute resolution in individual cases, as a number of other contributors to this volume do quite persuasively. No doubt more can be done in cases that proceed to a formal suspension of concessions, for example, to devise better compliance counterfactuals and to measure their trade implications more accurately. But nothing in these thoughtful critiques makes out a case for any fundamental change in the design and operation of the dispute resolution process.

Rather than advocate for particular reforms, therefore, I take this opportunity to raise doubts about some that have been proposed. In particular, the burgeoning commentary on the dispute settlement system includes much criticism of trade sanctions as the “punishment” for breach of WTO obligations. Among other things, critics point out that trade retaliation is economically costly and may harm the nation that retaliates.

During the 1940s, as Chapter 1 described, the United States wanted to establish a new multilateral institutional architecture, a component of which would be devoted to the reconstruction of world trade. After the release of its proposed Charter in December 1945, the United States took concrete steps to bring this about: in February 1946, the U.S. delegate to the United Nations proposed that a resolution be adopted in order to convene a United Nations Conference on Trade and Employment, the purpose of which would be to draft the Charter for an International Trade Organization (ITO), also referred to as the Havana Charter. The General Agreement on Tariffs and Trade (GATT) would be an off-shoot of the broader and more ambitious ITO project.

The GATT was drafted in a series of negotiations of the so-called Preparatory Committee for the ITO held between 1946 and 1948 in London, New York, Geneva, and finally in Havana. The Preparatory Committee was established pursuant to the 1946 UN resolution mentioned above. The Havana Charter was supposed to regulate government policy with respect to trade (e.g., trade in goods and commodity agreements), as well as establish rules regarding domestic employment, investment, economic development, and restrictive business practices (RBP). The ITO was negotiated subsequent to the Bretton Woods negotiations, which led to the creation of the World Bank (WB), and the International Monetary Fund (IMF).

After the First World War

To understand the origins of the GATT, one must appreciate the traumatic events of the 1920s and 1930s. The period between World War I and World War II was a political and economic disaster, scarred by the Great Depression and the rise of fascism. A strong desire to avoid repeating this experience after World War II, along with the abandonment of isolationism by the United States in favor of a leadership role in world affairs, fostered support around the world for a new approach to international economic cooperation.

The outbreak of World War I in 1914 interrupted what had been a period of growing worldwide economic prosperity with moderate tariffs and expanding world trade supported by a well-functioning international monetary system (the gold standard). After the shock of World War I, the international trade and payments system recovered very slowly during the 1920s. Most countries only gradually phased out wartime controls on trade, while tariff levels remained higher than before the war. The United Kingdom did not return to the gold standard until 1925, and other countries waited even longer before restoring the convertibility of their currencies. Under the auspices of the League of Nations, the World Economic Conference of 1927 aimed to return the world economy to its previous state of vigor. But the Conference only started an international discussion of matters such as tariff levels, most-favored-nation clauses, customs valuation, and the like.

In light of the difficulties that recent multilateral trade negotiating rounds have encountered, trade officials, sometimes with nostalgia, reflect back on the easier trade negotiations of the past. Yet, although the 1940s was a golden age of international institution building, the negotiations that led to the GATT were never easy. The path from James Meade's draft plan for an “International Commercial Union” in 1942 to the Geneva conference in 1947 was fraught with pitfalls, delays, and obstacles. The ambitious plans for an International Trade Organization were eventually abandoned. In its place remained a smaller and shorter agreement on commercial policy that had many weaknesses. Yet the GATT survived the test of time.

The delegates entrusted with the task of rebuilding the multilateral system of world trade and payments were a rare breed. It is unusual to see some of the greatest economic minds actively participate in national delegations, and work together with the political establishment towards the institutionalization of international cooperation and the constraint of economic unilateralism. It is to Henry Cabot Lodge that the phrase “the U.N. system is designed to avoid taking us to hell, but it cannot take us to heaven” is attributed. The Bretton Woods institutions and the GATT were designed as the first steps towards the other way.

The negotiating record amply supports the view that the GATT is very much the end product of a transatlantic negotiation.

1. General Provisions for Inclusion in Trade Agreements, as revised to December 13, 1941, National Archives II, Lot File 57D-284, Box 89.

2. A Proposal for an International Commercial Union (James Meade), July 25, 1942, Public Records Office, T 230/14.

3. Anglo-American Discussions under Article VII: Section on Commercial Policy, November 1943, Public Records Office, BT 11/2215.

4. Proposed Multilateral Convention on Commercial Policy: Summary of Significant Provisions, U.S. State Department, October 1944, National Archives II, Lot File 57D-284, Box 24.

5. Excerpts from “Proposals for Expansion of World Trade and Employment,” State Department Publication No. 2411, December 1945.

6. Preparations for Preliminary International Meeting on Trade and Employment, February 6, 1946, FRUS (1946, I, 1280-1289).

7. U.S. Delegation Report on First Preparatory Meeting for an International Conference on Trade and Employment (London), December 27, 1946, FRUS (1946, I, 1360-1366).

8. Report on the Geneva GATT Negotiations, Memorandum from State Department to President Truman, October 17, 1947, FRUS 1947, I, 1015-1024.

Annex A-1

From National Archives II, Lot File 57D-284, Box 89

General Provisions for Inclusion in Trade Agreeements

As revised to December 19, 1941

Preamble

Provisions Relating to Treatment of Trade in General

1. (1) Most-favored-nation clause

2. (2) Internal taxes

3. (3) Quotas in general

4. (4) Exchange Control

5. (5) Monopolies and government purchases

6. (6) Customs administrative matters, advances in duties, and customs pen-alties

Provisions Relating to Concessions

1. (7) Duty concessions by foreign country

2. (8) Duty concessions by the United States

3. (9) Compensating taxes

4. (10) Dutiable value and conversion of currencies

5. (11) Quotas on scheduled products

6. (12) Withdrawal or modification of concessions

7. (13) General provision to safeguard concessions

The two previous chapters examined the origins and evolution of the GATT as a text. In this brief chapter, we turn to the broad question of how the historical evidence relates to existing academic theories of why countries seek to negotiate and join multilateral trade agreements. The classical theory of international trade and commercial policy examines the benefits of trade and the impact of trade-policy measures, but not, until recently, the value of international trade agreements. This has prompted economists and political scientists to search for the deeper economic and political rationales for trade agreements such as the GATT. These theories seek to answer questions such as: Why do we have the GATT? What is the underlying objective of the agreement, and what purpose does it serve?

The preamble (chapeau) of the GATT sets out the major purposes of the agreement, at least in the eyes of the founders: