Abstract: As is well-known, under the World Trade Organization (WTO) legal framework, when a violation of the covered agreements is deemed to occur, Members have recourse to a quasi-automatic dispute settlement system. If the breach persists after the WTO Dispute Settlement Body (DSB) has adopted a ruling, Members hurt by the illegal measures may be authorized to ‘retaliate’ against the scofflaw Member. Rights and obligations are, thus, centrally enforced within the WTO.

This article focuses on a particular dimension of enforcement, which we call the ‘Community enforcement’ of WTO law. By ‘Community enforcement’ we mean the possibility for private parties to use DSB rulings as the parameters of the legality of a Community measure. The European Courts, however, have consistently refused to act
as enforcers of WTO law. Having sound financial reasons to challenge the EC measures before the Court, private parties attempted to circumvent the dearth of case law on the direct effect of WTO law to have a Community measure annulled or to make a claim for damages caused by such a measure, emphasizing that the contested Community legislation had been declared unlawful by a DSB decision.

It is not surprising that private parties have often challenged EC legislation infringing WTO law, since they directly suffer the consequences of the misapplication of WTO law. The most recent case, FIAMM & Fedon, well illustrates these problems. In this case, two Italian companies, FIAMM and Fedon, claimed compensation for damages suffered because of retaliatory measures (‘suspension of concessions’) imposed by the US. The US was authorized by the WTO Dispute Settlement Body (DSB) to suspend tariffs concessions up to ca. $ 191.4 million annually as a consequence of the EC import regimes for bananas from African Caribbean and Pacific (ACP) countries, found to be in violation of WTO law; accordingly, the US raised tariffs to 100% (from as low as 3.5%) on a number of products, including the spectacle cases produced by Fedon and industrial batteries, produced by FIAMM. Such producers, having nothing to share with the EC bananas import regime, are often referred to as collateral victims of ‘trade wars’.

The damages allegedly suffered by specific companies and the related jurisprudence of the Luxemburg Courts have made more visible the fact that international law may have serious and tangible consequences for private parties. This turns the seemingly highly theoretical question of WTO law’s status in the Community legal order into a politically sensitive issue, calling for more detailed scrutiny.

Against this background, the paper aims at exploring whether it is in the European Community (EC) as well as in the WTO’s interests to ensure that these acts are enforced before the Luxembourg Courts. What are the costs and benefits of different rules in this area? Is it beneficial to enhance WTO compliance by introducing a form of Community enforcement? Should ‘collateral victims of trade wars’ such as Fedon and FIAMM be compensated?

To answer these questions we develop a legal-economic framework. To this end, we apply the property vs. liability rules framework (also known as the Cathedral), originally developed by Calabresi and Melamed.1 We submit that to fully understand the legal complexity of the WTO legal framework, the model needs to be refined; accordingly we conceptualize a rule that we call ‘aspirational property rule operating through a temporary liability rule.’ We show that by introducing community enforcement, this rule would be transformed into a pure property rule, which we demonstrate to be inefficient and, eventually, counterproductive for the system of trade liberalization.

We test our conclusions also against Joost Pauwelyn’s study,2 who has charted the evolution of WTO law through the exit and voice theoretical framework (originally articulated by economist Albert Hirschman). Under this framework we conceptualize increasing compliance by means of community enforcement, as the closure of an exit
option. We conclude that given the current high degree of legalization of the WTO system, the marginal costs of community enforcement are likely to outweigh its benefits.

Contrary to the findings of several legal scholars, the main conclusion of this article is that the costs of Community enforcement of DSB decisions outweigh the benefits.

1 Guido Calabresi and A. Douglas Melamed, Property Rules, Liability Rules and Inalienability: One
View of the Cathedral, 85(6) Harvard Law Review 1089 (1972).
2 Pauwelyn, Joost (2005) ‘The Transformation of World Trade’ 104(1) Michigan Law Review, 1-65. In a similar fashion, the exit and voice theoretical framework was earlier applied by Joseph Weiler to study the evolution of the European Community (EC). Weiler, J.J. (1991), ‘The Transformation of Europe,’ 100 Yale Law Journal, 2403