Using economics

The use of economics is not granted amongst WTO litigants. The message the author is sending with respect to the qualitative and quantitative approaches can be explained using a metaphor. Figure 1 above presents an optical illusion comprising a double arrow and a double inverted arrow. Let us assume that the legal test is whether the two lines have the same length. Looking at the two, one might conclude that the line with two arrows is shorter than the one with the two inverted arrows. But when one uses a ruler and actually measures the two lines, the conclusion is that they have the same length. The author implies that that the ruler represents the use of economics, which seems logical and positive. He explores how it can be used and points out its limitations.

Figure 1.

Optical Illusion

Using economics as the legal test and the potential use of the SSNIP test

Among others, the author examines whether each Border Tax (plus one) criterion – i.e., the current WTO legal test – makes sense from the economic perspective, and whether each criterion is qualitative or quantitative in nature. He argues that consumers' tastes and habits (the door usually used to insert some economics into case law under Article III of GATT) should not be a stand-alone criterion. Rather, it should be the guiding principle against which to assess physical characteristics, end-uses, and any other relevant qualitative element.

Furthermore, in a section entitled ‘A price increase test for Article III of the GATT’ the author delves into the issue of whether WTO courts should use the economic test of ‘small but significant non-transitory increase price (SSNIP)’, relied on in antitrust cases, in applying GATT Article III. The author recognizes that other scholars have rejected this approach. Yet, he explains that the rejection might be shortsighted because the SSNIP test goes ‘to the heart of the matter of most protectionist cases’. In particular, he adds, once the test is translated into the context of national treatment, ‘the extent to which the domestic firm can raise the price could serve as proxy for the protection conferred to the domestic firm’. Thus, if a discriminatory measure allows an increase in the price of the domestic product, this would point to the existence of competition between the domestic and the imported product.

One may object that it is not clear that the opposite holds. If the price of the domestic product does not increase (or its marginal cost is not affected) as a result of a governmental measure affecting imported products, it is not at all clear that the domestic and imported products are not like or in competition from the perspective of Article III – i.e., that the national treatment obligations should not apply to the measure in question. For instance, in an extreme simplification, Mexico could be exporting pens to the US, but not in sufficient quantities so as to modify the pricing behaviour of pen producers in the US. Furthermore, the US price might be maintained by competition with pens imported from the EU, even when the US regulation discriminates only against pens coming from Mexico. The author's emphasis on the fact that the test would relate to the hypothetical ability to increase the price partly pre-empts such objections. But the difficulties remain if the SSNIP test is based on real trade data, such as that of our hypothetical example. Thus, in the context of adjudicating on governmental measures that are alleged to afford protection, an SSNIP analysis might not be enough to put to rest the question of whether the products are like/directly competitive and therefore whether the national treatment provisions must apply. As the author himself accepts, ‘there is no single completely satisfactory answer to the trade market definition question’. From this point of view as well, the author's exploration of different possible economic approaches is of value.

Using economics as evidence in WTO courts

Throughout the book the author takes care to describe some of the difficulties in using evidence based on economics from the perspective of the parties, the court, and experts. In one particularly useful section, for example, he explains the rationale behind cross price elasticity, guiding the reader on the main steps and lessons that can be learned from multivariate regressions. His descriptive style is very useful for the non-economist and he identifies a number of issues a litigant may face when confronted with cross price elasticity as evidence in a dispute. The author also describes the evidence presented in actual WTO disputes, most of them consumer surveys of qualitative nature. He describes the few cases where an economic analysis has been presented as evidence, explaining how in one case the evidence backfired on the disputing party submitting it (Philippines–Distilled Spirits).Footnote ¹

Melischek also discusses the burden of proof associated with economic evidence and observes that both tribunals and litigants tend to have exacting standards when it comes to quantitative evidence in particular. He observes that these actors tend to be more flexible in their acceptance of qualitative evidence. Yet as the author points out, the burden of proof should be the same regardless of the kind of evidence used.

Final remarks

Consistent reliance on economics in WTO disputes under GATT Article III does not appear to be in sight. First, complainants prepare claims based on the level of evidence presented in previously successful complaints, and many successful WTO claims on national treatment were not sustained using economics. Accordingly, potential complainants would not necessarily rely on economic evidence when bringing a national treatment challenge. Second, contrary to antitrust authorities, the Appellate Body does not, outside the context of individual cases, issue guidelines on how to read the legal tests embodied in WTO provisions. Therefore, a relevant appeal of a Panel Report would be necessary in order for the Appellate Body to take a definite stance on whether the legal tests in Article III require ‘more economics’. Third, the legislative process of the WTO (e.g., through the Doha Round) is certainly not close to accepting the use of economics. Hence, it is very much up to academia to provide the laboratory to test the possible evolution of economics in WTO dispute settlement, and Dr Melischek's work is a step in that direction. Perhaps a useful further exercise could be to measure, in practice, the competitive relationship between real world products (e.g., local and imported spirits) in various WTO Members (e.g., the US, India and Ecuador) with a view to shedding further light on sound approaches to the question of likeness in WTO adjudication.

If reading a book is like conversing with the author, I have enjoyed and learned a lot from the conversation with Dr Melischek.