Optimal Sanctions in the WTO: The Case for Decoupling (and the Uneasy Case for the Status Quo)

Various commentators have suggested that the current system of trade sanctions for violation of WTO obligations be replaced with financial compensation. The details of these proposals vary, but one option is to allow firms injured by violations to recover damages. This paper questions the wisdom of such proposals, and argues that the current system in which those injured by violations do not reap the benefit of sanctions – a “decoupled” sanctions regime in economic parlance – may well be superior for a number of reasons. The paper also reviews and refines the view of current WTO practice as an analogue to expectation damages in private contracts. The original version of this paper was prepared for the interdisciplinary workshop on The Calculation and Design of Trade Sanctions in WTO Dispute Resolution, at the Graduate Institute in Geneva, 2008. The revised version will appear in The Law, Economics and Politics of Retaliation in WTO Dispute Settlement, forthcoming from Cambridge University Press.