Bite the Bullet: Trade Retaliation, EU Jurisprudence and the Law and Economics of ‘Taking One for the Team’

Abstract

This paper discusses the Fedon case law of the European Court of Justice (ECJ), which involved a claim for compensation by Fedon (an Italian producer of eye glass cases) from the EU for the imposition of WTO-authorized retaliatory trade barriers by the United States following the failure by the EU to comply with an adverse ruling by the WTO regarding its import-regime for bananas. As a result of the EU non-compliance, European banana distributors and some bananas producers benefitted from WTO-illegal protection, at the expense of a set of EU exporters, including Fedon, that were hit by US countermeasures. By not complying with its international (WTO) obligations, the EU redistributed income across producers in different sectors as well as between suppliers and consumers of bananas. Fedon contested the non-compliance by the EU before the ECJ and sought compensation. This paper assesses the ECJ ruling against Fedon and argues that the ECJ got it wrong, both in terms of legal principle and as a matter of legal technicalities. An alternative approach is proposed that would better balance individual rights to property against the ‘general’ EU interest whether or not to comply with adverse WTO rulings.

Keywords: dispute settlement, EU law, trade agreements, trade retaliation, WTO

JEL Classification: F13, K41, K42