WTO dispute determinants

The notion of dispute resolution is central to WTO theory, which emphasizes country size and the ability to retaliate against trading partners as major determinants of WTO disputes. But these explanations cannot account for the steady drop in trade quarrels since the early 2000s and are silent on the link between trade policy and dispute initiations. This paper presents a new theory to show that “tariff overhangs”, the difference between WTO members' bound and applied tariffs, are the key to understanding the WTO dispute pattern. In the model, lower tariff overhangs constrain WTO members' legal policy options when responding to adverse shocks. Moreover, countries are more likely to gain from dispute filings through WTO-administered tariff retaliation when applied tariff rates are close to their bindings. Guided by this framework, the paper presents empirical evidence that tariff overhangs are an essential determinant of WTO disputes.