Dispute Resolution as a Catalyst for Economic Integration and an Agent for Deepening Integration: NAFTA and MERCOSUR?

Taylor, Cherie O'Neal | January 1, 1997

An economic integration arrangement between nations cannot exist without the creation of the necessary institutions. Any free trade, customs union or common market agreement1 must have, at a minimum, political institutions and a dispute settlement mechanism. The political institutions are necessary to allow the countries to reach decisions about how to implement the treaty obligations and objec- tives and to oversee that implementation. The dispute settlement mechanism is needed to resolve disputes that may arise over the meaning and application of the agreement’s legal obligations and objectives. A dispute settlement mechanism is crucial to the viability of an economic integration arrangement because the traditional method by which states resolve disputes is through negotiations.2 Since not all negotiations lead to politically acceptable solutions for the disputing countries, some conflicts would never be resolved unless they turned to a form of third-party dispute resolution. The goal of this article is to examine why regional economic inte- gration arrangements create and deploy certain types of dispute settle- ment systems. In order to evaluate dispute settlement systems, it is necessary to consider them in context. The best designed system may not be the most complex or most powerful. Instead, it may be the one which contributes most to the achievement of the agreement’s objec- tives.3 A well designed dispute settlement system will inevitably be responsive to, and reflective of, the economic goals being sought (the depth of economic integration desired by the participating countries), the political constraints (limitations imposed by the governments or domestic politics of the participating countries), as well as perceptions about the proper role of international institutions, particularly dispute settlement mechanisms. Each of these factors must be considered when examining the structure of a dispute settlement mechanism and how it operates, or was intended to operate, within the integration arrangement. By comparing two systems, it may be possible to arrive at some conclusions about whether different dispute settlement sys- the general GATT obligation of most favored nation – free trade areas and customs unions. Most existing regional economic agreements are notified to the GATT (now WTO) as free trade areas or common markets. The customs union, as defined by Article XXIV, has, to date, gener- ally been a stage of integration on the way to a common market. One of the standard descrip- tions of free trade areas, customs unions and common markets explains that: In a free trade area, tariffs and quantitative restrictions between the participating countries are abolished, but each country retains its own tariffs against nonmembers. Establishing a customs union involves, besides the suppression of discrimination in the field of commodity movements within the union, the equalization of tariffs in trade with nonmember countries. A higher form of economic integration is attained in a common market, where not only trade restrictions but also restrictions on factor movements are abolished.