Some of the legal analysis in this study derives from joint work between Robert Howse and Susan Esserman on this ruling, “Trade disputes quire fairer arbitration,” FT.com, Sep 12, 2002

Introduction

This chapter discusses the decision by the arbitrator on suspension of concessions (“retaliation”) in the dispute between the US and the EU regarding the tax treatment of offshore corporate income under US legislation. By way of background, the first part of the chapter (section 2) describes the operation of the US scheme, including as revised after the first round of WTO rulings.

We observe that the arbitrators have adopted an unconventional approach with respect to the notion of countermeasures, which emphasizes the incentive to induce compliance while largely jettisoning proportionality between the countermeasure and the injury suffered by the wronged state as a meaningful normative constraint. Section 4 considers this approach from the perspective of established principles of inter-national law and highlights a number of important shortcomings. Section 5 takes this approach for granted and asks whether countermeasures could actually be relied upon in order to induce compliance. We conclude with respect to export subsidies, the incentives of complainants are such that under-enforcement can often be expected.

The prospect of inducing compliance through countermeasures thus appears to be somewhat poor and at odds with established principles of international law.