The Transformation of the World Trading System through the 1994 Agreement Establishing the World Trade Organization

II. Constitutional Problems of International Trade Law and Policy

The evolution of both national laws and international law shows a common trend towards three basic kinds of rules and of social order:

- general rules are a necessary precondition for decentralized `spontaneous order' among individuals as well as among states (e.g., freedoms and property rights enabling a spontaneous international division of labour based on private commercial law, as it existed already in the Middle Ages in the trade relations among the Italian city republics and among the cities belonging to the Hanseatic League); but they also give rise to `spontaneous disorder' (such as environmental pollution);

- `result-oriented' rules and national as well as international organizations are therefore needed to correct `market failures' and achieve non-economic political goals (e.g., `collective security' and the supply of other `public goods');

- constitutional rules are necessary to protect the equal rights of states and their citizens and to contain abuses of government powers through a `constitutional order' based on a coherent set of long-term national and international rules of a higher legal rank (e.g., guarantees of freedom, non-discrimination, separation of power and rule of law in national constitutions, EC law, UN law and GATT law).

The parallels in the historical evolution of these different kinds of national and international rules are no coincidence but are due to the similarity of the `constitutional problems' of national and international societies. For instance:

- In both national and international law there is a need for rules to transform the self-interested utility-maximization by individuals and governments, and the resultant ubiquity of `market failures' and `government failures', into mutually beneficial cooperation.

- And in both national and international law, the asymmetries in information and in the political influence of interest groups - such as the lower information costs, organization costs and larger resources of concentrated `rent-seeking producer interests' compared to the dispersed `general interests' of consumers and tax-payers in liberal trade - lead to `protectionist biases' in the exercise of discretionary regulatory powers of governments.

- Finally, in view of the worldwide trend towards democracy and market economies, it is also important to note that constitutional democracy and market economics proceed from the same premises: that individuals are the only sources of values; that conflicts among separate individual values should be reduced to the maximum extent possible; that the satisfaction of diverse individual preferences (e.g., through spontaneous coordination of demand and supply in competitive markets) carries therefore positive normative weight, and the object of politics should be the furtherance of the separate individual preferences; and that effective legal and political equality of the citizens, as the operative principle of democracy and of undistorted competition, can be secured only if the scope for collective political majority decisions is limited by constitutional boundaries. Yet, the definition of the constitutional limits for the collective supply of `public goods' remains a value decision, dependent also on the relative productivity and welfare of a society, on which individual voters may disagree.

There is today universal agreement among economists that liberal trade increases the welfare of domestic consumers (e.g., their choice and purchasing power to buy more, better or less expensive goods from abroad), forces producers to make a more productive use of domestic resources, creates new and more stable employment opportunities in the export sector, and enhances macro-economic gains from trade (such as price stability, technological progress and competition as a decentralized information, allocation and antitrust mechanism). The modern economic theories on `property rights', `public choice' and `constitutional economics' further concur that private rights, and their judicial protection, are the most effective decentralized incentive and enforcement mechanism to ensure that legal guarantees of freedom and non-discrimination will be actually observed by governments, and that discretionary government powers will not be abused for the benefit of `rent-seeking' interest groups.²³ The worldwide trend towards deregulation and democracy reflects also an increasing political consensus that economic liberty presents a constitutional value in itself, regardless of any economic or other utilitarian justification, and is a condition for the exercise of many other liberties. Thus, the EC Court of Justice has held that

the principle of free movement of goods and freedom of competition, together with freedom of trade as a fundamental right, are general principles of law of which the Court ensures observance.²⁴

Article 5 of the 1989 Lomé Convention between the EC and the 69 African, Caribbean and Pacific Countries emphasizes the indivisibility of economic and other freedoms in the following terms:

The rights in question are all human rights, the various categories thereof being indivisible and interrelated, each having its own legitimacy: non-discriminatory treatment; fundamental human rights; civil and political rights; economic, social and cultural rights.

Why then has it been so difficult to reach agreement among 124 governments and the EC on the liberalization of trade in goods and services through the 1994 Uruguay Round Agreement establishing the WTO? Why have the two previous attempts at establishing a worldwide trade organization - the 1948 Havana Charter for an International Trade Organization and the 1955 Agreement on the Organization for Trade Cooperation - failed?²⁵ Why do governments need international trade agreements at all if economists rightly agree that unilateral trade liberalization also tends to increase the productivity and economic welfare of trading countries?

A. The Need for Regulating `Market Failures': The Constitutional Problem of the `Optimal Level' of Legal Regulation

Standard economics proceeds from the assumption that the individual is the best judge of his own welfare and, in a world with limited resources in relation to human wants, will tend to act as a rational maximizer of his self-interests. Voluntary trade transactions will therefore come about only if both the seller and the purchaser consider the exchange of goods or services to be mutually beneficial. The reason for their differing valuation of the traded goods or services is due to their differing specialization, comparative advantages, preferences and `opportunity costs'. Even though the economic explanation of the `absolute advantages' (A. Smith) and `comparative advantages' (D. Ricardo) underlying international trade dates back only to the 18th century, the mutually beneficial nature of voluntary trade transactions has prompted traders, producers and consumers ever since to engage in mutually profitable trade transactions. Similarly, private commercial law emerged spontaneously more than 3,000 years ago because contract law, the exchange of property rights and legal methods of dispute settlement enable traders to reduce their transaction costs in a mutually beneficial manner. One of the major discoveries of Adam Smith's `Inquiry into the Nature and Causes of the Wealth of Nations' (1776) was that the economic welfare of England was mainly due to its legal guarantees of individual freedoms, property rights and self-interested private market competition under the rule of law:

That security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labour, is alone sufficient to make any country flourish, notwithstanding ... twenty other absurd regulations of commerce... The natural effort of every individual to better his condition, when suffered to exert itself with freedom and security, is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations.²⁶

Economists have long since recognized the existence of `market failures' and `public goods' which may call for governmental interventions. For example:

- If private anti-competitive business practices, such as price-fixing cartels and other abuses of `market power' (e.g., in case of monopolies or asymmetries in information), distort market prices so that they no longer reflect the marginal benefits and costs of producers and consumers, the micro-economic assumptions of welfare-maximizing competition may no longer apply.²⁷

- Competitive distortions and inefficient over-production or under-production of private goods may likewise occur if one individual's actions make others worse off (negative externalities such as environmental pollution) or better off (positive externalities e.g., in case of environmental protection), and if a decentralized `internalization' of such `external effects' is impeded by transaction costs or by other obstacles to market exchanges (e.g., inadequate assignment of property rights).

- Private markets do not ensure `social justice' and the supply of other public goods. Especially if the latter cannot be adequately produced by private markets because of their `non-excludability' (i.e. non-paying individuals cannot be prevented from enjoying the benefits of the good), government intervention may be warranted.

This need for government intervention raises a number of constitutional problems. Which policy instruments should governments use? At what level of legal regulation should they intervene? How can abuses of government powers be avoided? The economic theory of `optimal intervention'<sup>28</sup> emphasizes the need for ranking the alternative governmental policy instruments according to their efficiency. In order to avoid governmental `by-product distortions', market failures should be corrected directly at their source. For instance, `many public goods and externalities problems are actually property rights problems' which may be corrected most efficiently by the reassignment and judicial protection of property rights.<sup>29</sup> Domestic anti-competitive business practices or environmental pollution may be corrected most efficiently through domestic non-discriminatory competition rules (e.g., a prohibition of cartels) and environmental rules (e.g., a tax, production or product standard based on the `polluter-pays principle'). A production subsidy may be the efficient instrument for correcting a `production distortion' (e.g., in case of `infant industries' with positive externalities), a consumption tax may be the optimal instrument for correcting `consumption distortions' (e.g., in case of socially harmful products), taxes and income subsidies are the optimal instruments for income redistribution policies. Only in the rare case of `trade distortions' at the trade level (rather than at the production or consumption level) may trade policy border measures be optimal.

Modern trade theory concludes from this that `free trade remains the optimal policy in those many cases where the market failure arises domestically and is, therefore, appropriately corrected through domestic policy intervention targeted at the source of the failure'.³⁰ From a national perspective, liberal trade is likely to induce the most productive use of domestic resources and to maximize national welfare regardless of whether other countries follow free trade or not. Unilateral free trade plus domestic intervention may cease to be the optimal policy only if the distortion is foreign, not domestic, notably:

(1) if import protection (or the threat of it) is necessary to pry open foreign markets and, as stated already by Adam Smith, `the recovery of a great foreign market will ... more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods';³¹ or

(2) if monopoly power plus `optimal tariffs' or `rent-shifting' can extract greater gains from trade by improving the terms of trade at the expense of other countries (provided governments are able to `pick out the winners' and such `beggar-thy-neighbour policies' do not provoke mutually welfare-reducing retaliation by the exploited countries).

But, given the likelihood that special-interests will distort the discretionary government measures and `strategic trade restrictions' will trigger mutually impoverishing trade retaliation, government intervention may often produce worse outcomes than the imperfect markets they seek to fix. If import protection is indeed justifiable, production subsidies or non-discriminatory import tariffs are less distortive than quantitative import or export restrictions.

GATT/WTO law cannot be understood without these economic theories underlying it. Why does GATT law rank the alternative trade policy instruments in the manner indicated in Table 1?

What criteria does GATT law employ to rank its alternative trade policy instruments? Why does it allow border adjustment measures for non-discriminatory internal taxes and product standards, but not for production or labour standards (except prison work) if they are unrelated to the product qualities? Why does the WTO Subsidy Agreement allow production subsidies and environmental subsidies but not export subsidies or `import substitution subsidies'? Why does the WTO Agreement on Agriculture require `export subsidy reduction commitments' and `domestic support reduction commitments' but allows `green box policies' with a minimal impact on trade (such as income support `decoupled' from production assistance, cf. Article 6)? The future development of GATT/WTO law will continue to be shaped by the economic objective of limiting abuses of trade policy instruments (e.g., anti-dumping duties) in favour of optimal domestic policy instruments (e.g., competition rules). For instance, the introduction of a new `necessity requirement' for non-discriminatory domestic regulations of trade in goods (cf. Article 2 of the 1994 Agreement on Technical Barriers to Trade = TBT) and trade in services (cf. Article VI of the General Agreement on Trade in Services = GATS) reflects the economic insight that, following the increasing legal limitations on discriminatory trade policy border measures, WTO law must provide for additional legal disciplines also on unnecessarily trade-restrictive domestic policy instruments.

The economic principle of `optimal interventions directly at the source of market distortions', which underlies many GATT provisions, serves functions similar to those of the `subsidiarity principle' in EC law or the `rectification at source' and `polluter-pays' principles in environmental law. For instance, the declared objective of the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) is to secure `adequate standards and principles concerning the availability, scope and use of trade-related intellectual property rights' in the domestic laws of member countries so as to `reduce distortions and impediments to international trade' (Preamble), as they result e.g., from international trade in counterfeit goods and unilateral trade sanctions in response to foreign violations of intellectual property rights. The numerous environment-related provisions in the WTO Agreement³² likewise focus on domestic policy instruments (like technical regulations, sanitary and phytosanitary standards, environmental subsidies) rather than discriminatory trade policy border measures. Likewise, one of the major reasons behind the recent proposals for strengthening domestic competition rules in WTO member countries is the concern that e.g., per-se-prohibitions of horizontal `hard core cartels' with an international dimension (such as price fixing, output restraints, market sharing and bid-rigging) in the domestic laws of WTO member countries would be a more efficient and more effective policy approach than the alternative `extra-territorial' application of EC and US competition and unfair trade laws to anti-competitive practices abroad.³³

Perhaps the greatest challenge to the future of the GATT/WTO world trade and legal system arises from the following two `constitutional questions'. To what extent should the GATT and GATS principles of `national sovereignty' and `competition among regulatory systems' (which underlie GATT Article III and GATS Article VI) be maintained? To what extent should the WTO aim at further harmonization or mutual recognition of technical regulations and standards (as envisaged e.g., in Article 2 of the TBT Agreement and Article VII GATS) so as to reduce transaction costs and promote `level playing-fields'? The experience of EC integration suggests that, on the worldwide level of WTO law even more than on the regional EC level, mankind is not rich enough to ignore economic efficiency and the resultant need for adjusting `optimal interventions' to the particular circumstances, divergent preferences and opportunity costs of individual countries.

B. The Need for Regulating `Government Failures': `Constitutional Functions' of GATT/WTO Law

If the `public interest hypothesis' of traditional lawyers and welfare economists were true and governments could act like `benevolent dictators' maximizing the `general interest' of their citizens, unilateral free trade should prevail and a liberal international trade order should develop spontaneously. But empirical evidence shows that most governments lack political support for unilateral liberalization, and appreciate the political advantages of unilateral protectionism (e.g., as a means of avoiding unpopular adjustment costs and of distributing `protection rents' in exchange for political support). Modern `public choice theories' list a number of reasons why unilateral domestic trade policy-making processes have `protectionist biases'.³⁴ For instance:

- As most citizens earn their income in one area but spend it in many areas, it is rational for them to remain uninformed on many consumer issues (`rational ignorance') and to invest `information costs' and `organization costs' to exert political influence in their role as income receivers (producers) rather than in their role as income spenders (consumers).<sup>35</sup> It follows that, while trade theory focuses on consumer interests, trade policy and foreign trade laws (e.g., the `safeguard clauses' in GATT Articles VI, XVIII and XIX on the protection of import-competing producers against `injurious imports') tend to be influenced much more by producer interests.

- Small groups representing concentrated producer interests are easier to organize and politically more influential than large groups representing dispersed `general interests' (e.g., of consumers and tax-payers) because `lobbying for protection rents' offers producers much higher financial rewards at lower organization costs, information costs and private adjustment costs compared to `lobbying for liberal trade' by consumers.³⁶

- Periodically elected governments depend on political support and, in order to survive, must maximize their `political support function'. Trade liberalization tends to be opposed by import-competing producers who have to bear the adjustment costs. This political opposition can often be overcome only through reciprocal trade liberalization agreements which, in contrast to unilateral liberalization, offer export industries secure export opportunities abroad and, hence, incentives for supporting reciprocal liberalization and for opposing protectionist pressures at home. Reciprocal trade liberalization agreements have not only a `domestic policy function' for helping governments to overcome the asymmetries in domestic policy-making processes and for helping export industries to overcome their political weakness in influencing the trade policy decisions of foreign governments; they also have a much stronger `domestic policy foundation' due to their political support by export industries confronting protectonist pressures at home.³⁷

- Trade bureaucracies may likewise pursue self-interests in accommodating protectionist pressure groups in exchange for political support, increased regulatory powers, additional staff and better career prospects.³⁸

In view of these asymmetries in decision-making processes about trade policy, trade protectionism represents not only a `government failure' in the `political market', similar to `market failures' in private markets, but also a `constitutional failure'. Due to inadequate constitutional safeguards, governments cannot pursue national consumer welfare as the dominant trade policy objective. Import restrictions not only operate by taxing domestic traders and consumers in a welfare-reducing manner. They also limit the liberties and property rights of domestic citizens and redistribute their income in favour of protectionist pressure groups without effective parliamentary and judicial control. Moreover, trade policy measures (such as `voluntary export restraints' and anti-dumping measures) can serve as a substitute for prohibited domestic policy measures (such as cartels and subsidies) and thereby undermine the effectiveness of the `domestic policy constitution' (e.g., the competition and subsidy rules of the EC Treaty). Both national constitutions and the EC's `treaty constitution' remain therefore incomplete without a constitutional theory of foreign policy and its legal control. Due to their inadequate constitutional constraints, discretionary foreign policy powers are therefore among the most dangerous regulatory powers of governments.

If discretionary regulatory powers act as an incentive for power-oriented `rent-seeking', and if the same asymmetries in decison-making processes about trade policy, which favour trade protectionism, also favour the maintenance of discretionary trade policy powers, how can this `rent-seeking trap' and `constitutional dilemma' of discretionary foreign policies be overcome? Constitutional theory proceeds from the insight that the `anarchy' of conflicting short-term self-interests among individuals and among governments in `pre-constitutional societies' needs to be restrained by long-term `constitutional rules' of a higher legal rank, whose prospective, general and permanent nature acts as an incentive for individuals to concentrate on their common long-term interests (the `public interest') rather than on the short-term distributional implications of the rules. Such `constitutional choices' are facilitated if they are to be taken behind a `veil of uncertainty' (J. Buchanan), as existed after World War II, because the redistributive effects of general long-term rules are then more difficult to identify, and general constitutional rules induce people to accept general criteria of equal treatment, due process and fairness. Global economic `package deal negotiations', such as those in the successive `GATT Rounds' and notably the `Uruguay Round', create a similar `veil of ignorance' (J. Rawls) of governments regarding their future positions. Moreover, as indicated above, the reciprocity principle underlying such negotiations acts as a powerful incentive for export industries to reduce their political weakness in influencing foreign governments by pressing their own governments to accept reciprocal guarantees of market access, non-discrimination and rule of law.

It is for these reasons that, paradoxically, general long-term guarantees of a higher legal rank for freedom, non-discrimination, undistorted competition, rule of law and peaceful settlement of disputes in international economic relations are to be found in international trade agreements such as GATT (see Table 2), but hardly ever in national constitutions. The 1994 WTO Agreement has strengthened these `constitutional functions' of GATT law in many respects. Thus, the various WTO agreements on trade in goods - such as the Anti-dumping Agreement, the Subsidies Agreement, the Safeguards Agreement, the Agreements on TBT and on Sanitary and Phytosanitary Standards (SPS), the Agreements on Import Licensing, Customs Valuation and `Preshipment Inspection', and also the sectoral trade agreements on agriculture, textiles and clothing - all aim at limiting protectionist abuses.

The GATS Agreement extends, at least in part, guarantees of market access, non-discrimination, transparency and rule of law to the ever more important field of international trade in services, including the supply of services through foreign direct investments and cross-border movements of natural persons. The WTO Agreement on TRIPS is the most ambitious attempt in history so far to strengthen the worldwide protection of private intellectual property rights. And the WTO `Understanding on Rules and Procedures Governing the Settlement of Disputes' has established the most comprehensive mandatory dispute settlement system for international economic relations, with almost global membership and prohibitions of unilateral reprisals.

C. GATT and the WTO as Institutional Frameworks for Overcoming the `Prisoners' Dilemma' and `Constitutional Dilemma' of International Cooperation

Since ancient times, international relations tend to be conceived as power politics where, according to Thucydides' account of the words of the Athenians to the Melians during the Peleponnesian war, the `strong do what they can and the weak suffer what they must'.<sup>39</sup> Modern `realist theories'(see Table 3) still emphasize that - in contrast to domestic politics, which takes place in a context of shared values, legal order and hierarchic government structures - international relations are characterized by the lack of these elements and are dominated by states maximizing their `national interest' in an unstable decentralized system based on hegemonic power politics and self-help. From such a `realist' perspective, international values, rules and organizations have marginal significance at best, and international anarchy and `relative gains concerns' profoundly inhibit the willingness of states to cooperate even when they have common interests. According to realists, international trade policy, GATT law and the various `GATT Rounds' are also best explained by the national interests of the powerful trading countries, and by their concerns about cheating and about relative achievements of gains.⁴⁰

Neoliberal `regime theories' (see Table 3) note that, contrary to the `realist' predictions, the rise of new trading powers (such as the EC and Japan) and the erosion of the political hegemony of the USA did not lead to a breakdown of international economic cooperation or of the GATT. They compare international trade diplomacy with a `prisoners' dilemma'<sup>41</sup>: governments act as if only reciprocal trade liberalization would improve national welfare and as if, without international coordination, unilateral protectionism and `cheating' (e.g., by circumventing GATT rules) would be preferable despite their welfare-reducing effects. Regime theories rightly stress that international rules, institutions, `regimes'<sup>42</sup> and `game iteration' (e.g., in the periodic `GATT Rounds') can help to overcome the `prisoners' dilemma', and to promote `cooperation without hegemony' among `rational egoists',⁴³ by reducing uncertainty and asymmetries in information, inducing states to keep their promises and cooperate on a conditional basis so long as partners do, and by monitoring rule-compliance. Cheating may be attractive in a single play of `prisoners' dilemma' if each player believes that cheating can maximize his own reward. But the periodic GATT Rounds, GATT's `Trade Policy Review Mechanism' and the GATT dispute settlement system increase the costs of rule-infringements and induce countries to focus on the long-term advantages of reciprocal rule-compliance.⁴⁴

Functional integration theory (see Table 3) shares the belief that international rules and organizations are necessary for overcoming the anarchy of the international `self-help system', and can induce egoists to cooperate even in the absence of a hegemonic power. Functionalism emphasizes the importance of transnational economic and social cooperation among sub-national and supranational actors (`low politics') for promoting an `attitude change' and dynamic `spill-overs' into interdependent areas of cooperation. The success of the new trading powers, Germany and Japan, after the failure of their political-military strategies of territorial expansion during World War II, is seen as evidence that a `new trading world of international relations' offers the possibility of escaping from the aggressive zero-sum thinking of the `Westphalian system' and to enhance national welfare and peaceful cooperation through `non-territorial trading strategies'.<sup>45</sup> Not only functional market integration in the framework of the EC rules and institutions, but also trade and economic integration in the worldwide GATT framework seem to have brought about an `attitude change' (reflected e.g., in the mandatory global WTO dispute settlement system and in its prohibitions of unilateral reprisals) and `spill-overs' into new areas of global cooperation (reflected e.g., in the GATS and TRIPS Agreements).

The various theoretical approaches to the analysis of international trade relations offer a number of insights for a better understanding of the conditions under which international organizations can achieve their `legislative', `executive' and `dispute settlement functions': the failure of the 1948 Havana Charter for an International Trade Organization and of the 1955 Agreement on an Organization for Trade Cooperation, after the USA had declined to ratify these agreements, confirms the `realist' insight that the collective good of liberal world trade rules and institutions may not be produced, or may be underproduced, without hegemonic leadership. Also the Uruguay Round Agreements would not have come about without the `leadership' by the USA, the EC and certain `alliances' among negotiating countries (such as the `Cairns Group' of agricultural export countries), or if the `aggressive unilateralism' of US trade policy during the 1980s⁴⁶ had not convinced less-developed countries of the advantages of multilaterally agreed legal disciplines (e.g., for the protection of intellectual property rights and for international dispute settlement mechanisms) compared to the alternative of unilateral power politics.

The WTO Agreement also confirms the neoliberal insight that it is possible to go `beyond anarchy', and even beyond the `UN system', if the lack of information, communication and trust - which underlies the prisoners' dilemma and the `free-riding dilemma' of international cooperation - can be overcome through reciprocal `global package deals', multilateral rules and institutions, monitoring and game iteration. For instance, the `mediating role' of the GATT Secretariat was crucial for bringing about the final consensus on the Uruguay Round results. And the GATT dispute settlement system will remain crucial for the necessary monitoring of rule-compliance during the `post-constitutional' phase of implementing the GATT/WTO obligations. The `single undertaking method' of the WTO Agreement - which requires full membership of all WTO members in all `multilateral trade agreements' listed in the WTO Agreement (Annexes 1-3) and acceptance of a `GATT schedule of concessions' as well as of a `GATS schedule of concessions' by each member country (cf. Articles XI, XII, XIV of the WTO Agreement) - has finally succeeded in putting an end to the previously fragmented `GATT à la carte' system and to the previous `free-riding' notably by less-developed GATT member countries, many of which had never undertaken substantial trade liberalization commitments.

Public choice theory (see Table 3) explains why `constitutional rules', once agreed upon, risk to be undermined in the `post-constitutional' policy processes by `rent-seeking' interest groups, bureaucrats and politicians. The successive expansion of the Short-Term Cotton Textiles Arrangement of 1962 into a Long-Term Arrangement (1963) and into ever more comprehensive Textiles and Multifibre Arrangements (since 1974), or the secretive management of the various Anti-dumping Agreements by the anti-dumping bureaucracies assembled in GATT's Anti-dumping Committee, are illustrative of the risk that asymmetries in decision-making processes about trade policy may favour `protectionist collusion' also in international organizations at the expense of the citizens and of parliamentary and judicial control at the national level.⁴⁷ Separation and limitation of powers and other constitutional restraints on decision-making processes are therefore no less needed at the level of international organizations than at the state level.

From such a constitutional perspective (see Table 3), the WTO dispute settlement system and the various guarantees in WTO law of access to domestic courts discretely enhance `separation of powers' between international and domestic rule-making, administrations and (quasi)judicial dispute settlement mechanisms. Of course, the regular adoption and implementation of most dispute settlement `rulings' under GATT Article XXIII:2 was often not due to the `sanctioning powers' of the GATT, but to the insight of the offending country that its compliance with GATT rules and with the GATT dispute settlement system are in its own self-interest and strengthen governments not only against protectionist pressures at home but also against power politics by any of the 128 GATT contracting parties. The interrelationships between the international and domestic decision-making and dispute settlement systems, the `constitutional functions' of the WTO Agreement, and the `right to countermeasures' under the WTO dispute settlement system against offending member countries reinforce rule of law, individual rights (notably intellectual property rights) and transparency in domestic trade policy-making processes. Because they serve functions similar to domestic constitutional rules and strongly influence domestic policy-making processes, they should no longer be neglected by `realist' and other political science analyses.

23 For a survey of these theories, and on the need for an `economic analysis of law', see Petersmann, supra note 10, e.g., at 24 seq., 73 seq., 112 seq.

24 Case 240/83, ADBHU, [1985] ECR 531, at 548.

25 On the lack of ratification of the ITO and OTC Agreements by the USA, and the constitutional defects of GATT, see, e.g., J. Jackson, Restructuring the GATT System (1990), Chapter 2.

26 A. Smith, An Inquiry into the Nature and the Causes of the Wealth of Nations (reprint Liberty Classics 1976), Book IV, Chapter V, at 540.

27 Micro-economics often assumes that (1) buyers and sellers are so numerous that none can individually affect the price (perfect competition); hence (2) market prices act as an incentive for the efficient allocation of production factors and coordinate supply and demand in a manner satisfying consumer preferences; (3) welfare can therefore be measured in terms of real income and the utility individuals derive therefrom, such as consumption of a larger variety of cheap quality goods at lower prices and the opportunity of redistributing part of the additional income (gains from trade) in order to compensate the losers of trade.

28 For a summary and survey of the literature see Petersmann, supra note 10, at 57 seq.

29 Cowen, Introduction to T. Cowen (ed.), The Theory of Market Failure (1988), at 20.

30 Bhagwati, `Fair Trade, Reciprocity and Harmonization: The New Challenge to the Theory and Policy of Free Trade', in A.V. Deardorff, R.M. Stern (eds), Analytical and Negotiating Issues in the Global Trading System (1994), at 547 seq., 549.

31 A. Smith, supra note 25, at 468, who rightly added: `When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them'. Bhagwati, supra note 29, lists a number of reasons (at 553ff) why the closing of one's own market in order to pry open others is likely to be welfare-reducing.

32 They are reproduced in Annex II of E.-U. Petersmann, International and European Trade and Environmental Law after the Uruguay Round (1995).

33 See, e.g., Petersmann, `Proposals for Negotiating International Competition Rules in the GATT-WTO World Trade and Legal System', in H. Hauser, E.-U. Petersmann (eds), International Competition Rules in the GATT/WTO System, Aussenwirtschaft (Swiss Review of International Economic Relations) (1994) 169-424, at 231 seq.

34 For a summary of the `public choice analysis' of trade protectionism and a survey of the literature see Petersmann, supra note 10, at 112 seq.

35 See, e.g., A. Downs, An Economic Theory of Democracy (1957).

36 See, e.g., M. Olson, The Logic of Collective Action (1965).

37 See, e.g., Hauser, `Foreign Trade Policy and the Function of Rules for Trade Policy-Making', in D. Dicke, E.-U. Petersmann (eds), Foreign Trade in the Present and in a New International Economic Order (1988) 18-38.

38 See, e.g., P. Dunleary, Democracy, Bureaucracy and Public Choice (1992).

39 Thucydides, The Peleponnesian War (ca. 400 B.C.), Book V, Section 89.

40 See, e.g., J.M. Grieco, Cooperation among Nations - Europe, America and Non-Tariff Barriers to Trade (1990), who concludes `that realism is superior to neoliberalism in explaining ... US-EC relations in the Tokyo Round regime on NTBs, and their impact of the effectiveness of that regime during the 1980s' (at 12). For instance, the Tokyo Round `codes varied in effectiveness and ... this variance was largely a function of the level of US-EC cooperation' (at 26). R. Gilpin, US Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (1975), notes: `The essential fact of politics is that power is always relative; one state's gain in power is by necessity another's loss. Thus, even though two states may be gaining absolutely in wealth, in political terms it is the effect of these gains on relative power positions which is of primary importance' (at 34).

41 The game of the Prisoners' Dilemma (PD) is used in order to exemplify why cooperation is often difficult to achieve without adequate information and confidence even though all players would benefit from such cooperation. The PD relates to the tale of two guilty prisoners suspected of a major crime. If the public prosecutor has only enough evidence to convict them of a misdemeanor, each prisoner will benefit if neither confesses the crime. To elicit confessions, the public prosecutor can create the PD by separating the prisoners (i.e. preventing information and cooperation among them) and offering each the following deal: if either prisoner confesses while the other does not, all charges against the confessor will be dropped, while the non-confessor will receive the maximum possible sentence. Game theory shows that these incentives will typically induce confession by both prisoners, resulting in high prison sentences which could have been avoided by cooperation and silence. For an explanation of why `the law of international trade functions to help public officials resolve this PD-like conflict in favor of the more desirable long-term outcome by changing the payoffs for decisions on protection' (at 521) see Abbott, `The Trading Nation's Dilemma: The Functions of the Law of International Trade', Harv. Int'l L.J. (1985) 501-532.

42 They are generally defined as `sets of implicit or explicit principles, norms, rules and decision-making procedures around which actors' expectations converge in a given area of international relations' (R. Keohane, After Hegemony. Cooperation and Discord in the World Political Economy (1984) at 57).

43 R. Keohane, supra note 41, at 10 and 78, who also notes: `International regimes are valuable to governments not because they enforce binding rules on others (they do not), but because they render it possible for governments to enter into mutually beneficial agreements with one another. They empower governments rather than shackling them' (at 13).

44 For an application of `regime theory' to GATT see Finlayson, Zacher, `The GATT and the Regulation of Trade Barriers: Regime Dynamics and Functions', International Organization (1981) 273-314.

45 See R. Rosecrance, The Rise of the Trading State. Commerce and Conquest in the Modern World (1986).

46 See J. Bhagwati, H.T. Patrick (eds), Aggressive Unilateralism. America's 301 Trade Policy and the World Trading System (1991).

47 For a critical assessment of the traditional justifications of the establishment of international organizations (e.g., to avoid `international externalities' leading to underproduction of international public goods or to overexploitation of common resources; to exploit international economies of scale in the international supply of national public goods; and to overcome `prisoner dilemmas' of non-cooperative behaviour), and of abuses of the regulatory powers of international organizations (e.g., due to inadequate `principal-agent control', insufficient representation of consumer interests, bureaucratic rent-seeking), see R. Vaubel, T.D. Willet (eds), The Political Economy of International Organizations. A Public Choice Approach (1991).

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