The Role of Pre-trial Settlement in International Trade Disputes

To analyze the role of pre-trial settlement in international trade dispute resolutions, this paper develops a simple model of trade and trade disputes in which a government is subject to private political pressure for protection, of which its trading partner receives imperfect private signal. As a way to enforce an optimal contingent protection agreement that maximizes the expected joint payoff of governments of trading countries, it considers and compares three alternative enforcement schemes, namely the automatic DSB-ruling scheme, the on-demand DSB-ruling scheme with pre-trial settlement possibility, and the on-demand DSB-ruling scheme without pre-trial settlement possibility. If the private signal of the political pressure for protection is accurate enough, allowing pre-trial settlements increases the expected joint payoff of governments that try to enforce the optimal contingent protection agreement.