Sore Losers? Gatt/WTO Disputes and Exchange Rate Policy

Abstract

In recent years, many IPE scholars have focused on the determinants of state decisions to initiate and/or settle trade disputes through the WTO's dispute settlement mechanism. Furthermore, some have suggested that these multilateral trade decisions themselves inform a state's trade policy: losing a WTO dispute, for example, has been shown to increase the likelihood of joining a preferential trade agreement (PTA). To date, however, this body of literature has paid little attention to the effects of GATT/WTO membership and disputes on governments’ other economic policy choices, such as monetary policy and the choice of exchange rate regimes. In this paper, we argue that states that have suffered GATT/WTO defeats are more likely to act as 'sore losers' - that is, to pursue exchange rate policies as a substitute for trade protection in order to improve the terms of trade. Using data on up to 57 countries from 1974-2000 we find robust evidence of such behavior over the last three decades. Countries that have suffered more defeats in GATT/WTO disputes are less likely to choose fixed exchange rate regimes and more likely to shift their exchange rate policy toward a more flexible regime. These countries are also more likely to 'fear pegging' (i.e., to adopt de facto floating exchange rates despite their de jure commitments to fixed rates) and more likely to experience real exchange rate depreciations in the aftermath of their defeats. These findings shed light on the complex relationship between trade and exchange rate policies. More broadly, they suggest that compliance with multilateral commitments may be 'in name only' when close policy substitutes allow states to circumvent these obligations.