Another impediment to U.S. manufacturing competitiveness is the expense of defending against tort claims.  Overall, tort claims and the attendant litigation cost more than $260 billion a year, or almost 2 percent of GDP.  Almost two-thirds of this amount is for commercial tort claims (such as product liability and business-related property losses) and medical malpractice claims.  Even though the explosive growth of tort claims in the past 10 years has subsided, the fact remains that—scaled to GDP—the U.S. tort system is more than twice as expensive as its major competitors, such as Japan, France, Canada, and the UK.  Everyone pays as a result of these costs: healthcare costs rise, investment and new product development is deferred, and—in some extreme cases—plants are closed when insurance fees jump.

Legislation in the mid-2000s limited some of the more problematic areas of the U.S. tort system (such as linking attorney compensation to amounts claimed rather than amounts awarded in class action suits and preventing “jurisdiction shopping” to plaintiff-friendly courts), and this has changed behavior.  Commercial tort costs in the United States have decreased by 3 percent from their 2004 peak of $173.5 billion.  In the context of growing manufacturing output, the share of manufacturing value-added devoted to litigating tort claims fell to 2.9 percent in the 2011 costs study, compared with a peak estimated at nearly 5 percent in 2006.

Nevertheless, the U.S. tort system is fundamentally different from most systems elsewhere in the industrialized world in that each party pays its own legal costs.  In almost all other countries, the plaintiff must pay all or part of the defendant’s legal costs in case of judgment in the defendant’s favor.  Because of the strong disincentives for groundless lawsuits in such systems, it is unlikely that the foreign advantage will disappear entirely without more fundamental changes to the incentive structure in the U.S. system.

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