Why most trade disputes in the World Trade Organization (WTO) end in a friendly settlement, despite the existence of a sophisticated dispute settlement mechanism? How can we explain the complainant's preference for a friendly settlement when we know that the WTO decides 64% of the cases in favor of the complainant? In this article I discuss patterns of settlement in the GATT/WTO system using theory of moves (BRAMS, 1994) to study the strategic choices available to disputants. I suggest that in the WTO system complainants act magnanimously, thereby bypassing their best outcome in a game. This is rational on their part because it offers defendants more opportunity to settle, which is beneficial to both sides. This behavior is not well explained by the myopic equilibrium concepts of standard game theory. By contrast, theory of moves incorporates non-myopic reasoning into its model of decision-making. In particular, I explain why it is rational for players to act non-myopically on occasion and move to their second-best outcome in a game. Three case studies illustrate the analysis (i) when settlement follows magnanimity, (ii) when settlement occurs regardless of magnanimity, and (iii) when there is no settlement. These three outcomes exhaust the empirical record of WTO disputes.
Theory of Moves; World Trade Organization; Trade Disputes; Alternative Dispute Resolution; Magnanimity; Myopic Equilibrium
