Calculating Trade Damages in the Context of the World Trade Organization's Dispute Settlement Process

Since its inception in 1995, the World Trade Organization (WTO) dispute settlement system has received over 250 notifications of trade disputes. While most have been settled, in a few cases the WTO arbitrators had to approve damage awards. This paper will use one of these cases ( Hormones ) to explain the methodology arbitrators use to calculate damages and how this methodology differs from an efficiency-based measure of welfare that economists would instinctively provide. Yet, there are rational reasons for this difference and the arbitrator's methodology does a better job of providing incentives for countries not to violate trade agreements.