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date: 18 November 2019

The Law and Political Economy of International Trade Agreements

Summary and Keywords

While economists overwhelmingly favor free trade, even unilateral free trade, because of the gains realizable from specialization and the exploitation of comparative advantage, in fact international trading relations are structured by a complex body of multilateral and preferential trade agreements. The article outlines the case for multilateral trade agreements and the non-discrimination principle that they embody, in the form of both the Most Favored Nation principle and the National Treatment principle, where non-discrimination has been widely advocated as supporting both geopolitical goals (reducing economic factionalism) and economic goals (ensuring the full play of theories of comparative advantage undistorted by discriminatory trade treatment).

Despite the virtues of multilateral trade agreements, preferential trade agreements (PTAs), authorized from the outset under GATT, have proliferated in recent years, even though they are inherently discriminatory between members and non-members, provoking vigorous debates as to whether (a) PTAs are trade-creating or trade-diverting; (b) whether they increase transaction costs in international trade; and (c) whether they undermine the future course of multilateral trade liberalization.

A further and similarly contentious derogation from the principle of non-discrimination under the multilateral system is Special and Differential Treatment for developing countries, where since the mid-1950s developing countries have been given much greater latitude than developed countries to engage in trade protectionism on the import side in order to promote infant industries, and since the mid-1960s on the export side have benefited from non-reciprocal trade concessions by developed countries on products of actual or potential export interest to developing countries.

Beyond debates over the strengths and weaknesses of multilateral trade agreements and the two major derogations therefrom, further debates surround the appropriate scope of trade agreements, and in particular the expansion of their scope in recent decades to address divergences or incompatibilities across a wide range of domestic regulatory and related policies that arguably create frictions in cross-border trade and investment and hence constitute an impediment to it.

The article goes on to consider contemporary fair trade versus free trade debates, including concerns over trade deficits, currency manipulation, export subsidies, misappropriation of intellectual property rights, and lax labor or environmental standards. The article concludes with a consideration of the case for a larger scope for plurilateral trade agreements internationally, and for a larger scope for active labor market policies domestically to mitigate transition costs from trade.

Keywords: multilateralism, non-discrimination, preferential trade agreements, developing countries, unfair trade, plurilateralism, active labor market policies

Introduction

The case for international trade which was famously made by Adam Smith in the Wealth of Nations in 1776 and by David Ricardo in The Principles of Political Economy in 1817, at least in its classical form, with its emphasis on the gains from specialization and the exploitation of comparative advantage, has broadly over time commanded a very substantial consensus of support among professional economists, with surveys indicating that around 97% of professional economists support free trade (see, e.g., Bhagwati, 2007; Wolf, 2004). As Paul Krugman once remarked, “If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case—that is to say that a country serves its own interests by pursuing free trade regardless of what other countries may do” (Krugman, 1997). However, instead, an extremely complex body has emerged of both multilateral trade agreements and preferential trade agreements that structure in great detail countries’ trading relationships with other countries. This contribution seeks to describe and explain this apparent dissonance between economic theory and real-world policymaking.

Why Trade Agreements at All?

A variety of economic and political rationales for trade agreements have been advanced (Irwin, Mavroidis, & Sykes, 2008, ch. 3). A compelling political economy argument for such agreements is that they enable countries to enlist export-oriented industries, through improved access to foreign markets, as a counterweight to domestic political constituencies in import-impacted industries through the reciprocal exchange of binding trade concessions or commitments with other countries. Including these commitments in international treaties, which are not easily revoked, provides security and certainty (credible commitments) to investors who will be shielded, to some extent, from the shifting winds of domestic politics (a form of hands-tying strategy) and help resolve terms-of-trade-driven Prisoners’ Dilemma problems in international trading relationships where major trading powers engage in mutually destructive beggar-my-neighbor trade policies (Bagwell & Staiger, 2002).

Such agreements historically have also been sensitive to the fact that while international trade is a positive sum game on balance for countries that engage in it, typically there are also losers from trade liberalization commitments whose domestic political opposition needs to be mitigated if broadly social welfare-enhancing trade liberalization policies are not to be undermined. Hence, for example, the General Agreement on Tariffs and Trade (GATT) from its inception in 1947 sought to mitigate adjustment costs from increased international trade through three mechanisms: the first and most important mechanism is reciprocity, where, as noted above, export interests could be enlisted as a political counterweight to import-impacted sectors and adjustment costs in the latter mitigated over time as resources and jobs migrated from contracting import-impacted sectors to expanding export-oriented sectors, despite the fact that reciprocity has been described by classical and neoclassical economists as a form of economically illiterate mercantilism and by other critics as substituting exchange value for use value (Lamp, 2016). The second mechanism is gradualism, whereby tariff concessions were phased in over extended periods of time both within and across successive negotiating rounds, so that over the intervening period tariffs on industrial products have fallen worldwide from close to 50% in 1947 to under 5% on average in 2019. The third mechanism is reversibility, where under various safeguard provisions (in effect force majeure provisions) trade restrictions could be temporarily reinstated to mitigate the impact of unforeseen import surges on domestic industries and their workforces, even though such measures are often very costly to consumers relative to the value of jobs saved, but provide flexibility in the system and reduce the political risks associated with negotiating trade liberalization commitments in the first place. None of these three factors are captured in the one-sentence trade policy that Krugman suggests many classical and neoclassical economists subscribe to.

Given the Case for Trade Agreements, Why Multilateral Trade Agreements and the Non-Discrimination Principle That They Embody?

The architects of the Bretton Woods Agreement in 1944, in contemplating a new post-war international economic architecture, proposed the formation of the International Trade Organization (ITO) to oversee a new multilateral system of liberalized international trade, along with the International Monetary Fund to stabilize international exchange rates and the World Bank to provide development assistance. However, the ITO never came into existence due to opposition to it in the U.S. Congress, reflecting concerns that it would encroach excessively on domestic sovereignty. Instead, a provisional agreement negotiated in 1947 among 23 major trading countries as a prelude to the ITO (the GATT) became by default the institutional basis for the post-World War II trade regime, and has evolved over time into the World Trade Organization (WTO), created in 1995, now comprising 164 member nations (Mavroidis, 2016, vol. 1, ch. 1; Trebilcock, Howse, & Eliason, 2013, ch. 1).

Under the GATT, nine rounds of negotiations have now been undertaken. The first six of these rounds, up to and including the Kennedy Round, which concluded in 1967, focused mainly on reciprocal reduction in tariffs on manufactured goods and to a much lesser extent on agricultural products (which remain heavily protected in many countries). More recent rounds, including the Tokyo Round ending in 1979 and the Uruguay Round ending in 1993, have increasingly focused on within-the-border measures that affect international trade and investment such as government procurement policies, measures affecting foreign direct investment, trade in services, subsidy policies, customs valuations policies, intellectual property rights, and health and safety and technical standards. The Doha Round, which was launched in 2001, appears to have largely petered out without substantial progress on any of the key negotiating issues, in part no doubt reflecting the increasing entrenchment of the so-called Consensus Principle among member countries, which requires that no new commitments can be adopted without the consensus of all member states (i.e., lack of explicit objections by any single member state).

A key feature of the multilateral trading regime from the outset has been its adoption of a principle of non-discrimination, enshrined in two doctrines: the Most Favored Nation (MFN) principle and the National Treatment principle. The Most Favored Nation principle, set out in Article I of the GATT, requires that any advantage, favor, privilege, or immunity granted by any member country to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other member countries. The centrality of the MFN principle to the multilateral system reflected both geopolitical and economic considerations that the architects of the Bretton Woods Agreement viewed as central to the post-war international economic order. From a geopolitical point of view, the idea that all countries in the world, in principle, should be able to trade with each other under a common set of ground rules was seen as an important counterweight to the economic factionalism that characterized the interwar years and that was widely seen as contributing to the outbreak of World War II (Frieden, 2006). From an economic perspective, a set of common ground rules was seen as most consistent with the full play of theories of comparative advantage, in that trade flows would be dictated by underlying relative efficiencies, rather than sui generis rules that structure each bilateral trading relationship. The MFN principle was complemented from the outset by the National Treatment principle, set out in Article III, which Article I incorporates and which prohibits countries from adopting internal taxes or regulations that treat domestic producers more favorably than foreign producers of like products (a source of many formal GATT/WTO disputes over its interpretation and application as well as its relationship with Article XX, which provides general exceptions to GATT obligations).

While in many respects a noble vision, two major derogations from the MFN principle were recognized from the early in the history of the GATT: first, bilateral free trade agreements and customs unions subject to certain conditions set out in Article XXIV of the original GATT, which were never strictly enforced, and second, dispensations provided to the rapidly increasing number of developing country members of the GATT, which on the import side permitted unilateral trade restrictions to promote infant industries and to address balance-of-payments problems (1955), and which on the export side exhorted developed countries to provide unilateral, non-reciprocal trade preferences to developing countries with respect to products of actual or potential export interest to them (1965).

What Is the Case for Preferential Trade Agreements?

The exception for free trade areas and customs unions has proven particularly salient in permitting the proliferation of such arrangements from the early 1900s onwards (up from about 100 in 1990 to nearly 400 in 2019). In 1990, GATT/WTO members had an average of two preferential trade agreement partners. This has increased to almost 13 in the intervening years.

The literature debating the merits and disadvantages of PTAs is wide ranging and contentious (Bagwell & Mavroidis, 2011; Mavroidis, 2016, vol. 1, ch. 6). Three central issues dominate debates relating to the welfare effects of PTAs: (1) Are PTAs trade-creating or trade-diverting, given that they are inherently discriminatory in favor of members and against non-members? (2) Does the proliferation of PTAs and their sui generis rules increase transaction costs, especially for smaller firms in poorer developing countries, and therefore inhibit trade? (3) How does the proliferation of PTAs affect the future course of international trade liberalization and the roles and scope of these agreements relative to multilateral agreements?

The WTO, in a review of the evidence on trade creation and diversion in PTAs, found that, although the empirical evidence is not conclusive, PTAs are likely to create more trade among members, and while trade diversion may play a role in some agreements and in some sectors, it is not the key effect of most preferential trade agreements (World Trade Organization Report, 2011). As to the transaction costs for firms engaging in trade with other countries governed by sui generis trade rules, while Bhagwati likens the global web of PTAs to a “spaghetti bowl” that adds substantial complexity and transaction costs to international trade (Bhagwati, 2008), other authors argue that the scale of these transaction costs is constrained by virtue of the fact that producers always have the option of exporting under the MFN tariff rate, meaning that at worst the spaghetti bowl cannot diminish welfare beyond the original MFN starting point. As to the dynamic effects of PTAs on the international trading system at large, views widely differ as to whether they are building blocks or stumbling blocks to freer international trade in the long run. Some authors argue that PTAs offer the potential for deeper and broader liberalization, given that negotiations occur within or among smaller numbers of parties and that PTAs enable countries to advance the liberalization agenda into new issue areas and in this respect may function as laboratories of integration, serving as a pathfinder for possible future multilateral disciplines (Reich, 2010) and minimizing the free-rider effects associated with the MFN principle. Other authors argue that the WTO multilateral system performs functions in promoting freer international trade that PTAs can never replicate and may in some cases undermine (Bagwell, Bown, & Staiger, 2016). While some commentators argue that the proliferation of PTAs over the past two decades or so is, in part, a consequence of the increasing paralysis of the WTO as a negotiating forum, other commentators argue the converse: that the proliferation of PTAs has reduced the political commitment of many member countries to multilateral negotiations and hence in part explains the relative failure of the Doha Round (causation may run both ways) (Johnston & Trebilcock, 2013). The recent emergence of actual or potential mega-regional trade agreements raises particularly acute questions relating to their compatibility with the multilateral system (Bown, 2016).

What Is the Case for Special and Differential Treatment for Developing Countries?

The special dispensations granted to developing countries from GATT disciplines (often referred to as Special and Differential Treatment—SDT) have been almost as controversial as the proliferation of PTAs (Mavroidis, 2016, vol. 1, ch. 5; Thomas & Trachtman, 2009). Early in the history of the GATT, many developing countries and indeed many mainstream development economists in developed countries and international agencies argued that developing countries had often inherited truncated economies from their colonial overseers, where they had been largely restricted economically to the role of “hewers of wood and drawers of water,” leaving them with large, traditional, and inefficient agricultural sectors. As with most developed countries earlier in their histories, a major transformation was called for in reallocating resources from traditional agricultural sectors to industrial or manufacturing sectors, reflecting dynamic rather than static conceptions of comparative advantage that received little recognition in classical trade theories (Chang, 2008; Lin, 2012; Stiglitz, 2006). To facilitate and encourage this, it came to be widely accepted that at least temporary protectionism was required for these fledgling manufacturing industries in order to enable them to achieve minimum efficient scale and become competitive in both domestic and export markets. However, subsequent research has found that import substitution policies were often not achieving their goals and led to more or less indefinite support for high cost, inefficient manufacturing industries and the rise of rent-seeking behavior and corruption that accompanied highly discretionary protectionist trade policies and related policies such as foreign exchange controls. These findings are often contrasted with the trade policies pursued by the so-called East Asian high growth economies (and some other developing economies), which have pursued policies of export-led growth (outward-oriented rather than inward-oriented policies), although it must be acknowledged that there is unresolved controversy as to the extent to which this export-led growth has been promoted by interventionist trade and related industrial policies designed to protect infant industries in their early stages and to support selective export-oriented industries (Baldwin, 2010; Radelet, 2015).

On the export dimension of special and differential treatment, that is, non-reciprocal trade preferences implemented through the Generalized System of Preferences (GSP), recent research suggests that they have not proved as valuable to developing countries as many had hoped. First, the benefits of the preferences seem to be concentrated on the more advanced developing countries who have needed them least. Second, these preferences have tended to become less valuable over time as margins of preference have been eroded through reductions in MFN tariff levels. Third, preferences have often proven not to be durable, since they are often tied to the level of a country’s economic development. Fourth, donor countries often reserve the right to withdraw preferences if imports become too competitive with domestic products. Finally, many import-sensitive products of major export interest to developing countries have been excluded from these preferential schemes (Trebilcock et al., 2013, ch. 16).

In summary, while an overwhelming consensus of professional economists favors free trade, there is much less consensus as to whether this is facilitated by trade agreements, and in particular whether it is most effectively facilitated through the multilateral trading regime or bilateral or regional preferential trade agreements. Moreover, the second major derogation from the MFN principle—special and differential treatment for developing countries—has proven almost as controversial as the PTA exception.

What Is the Appropriate Scope of Trade Agreements?

However these foregoing issues are resolved, another set of controversies relate to the appropriate scope of trade agreements or broader economic integration agreements. Historically, the focus of the GATT was on international trade in goods. The first six negotiating rounds under the GATT focused overwhelmingly on reducing tariffs and other border restrictions, such as quotas, relating to goods. More recent multilateral negotiations have focused on divergences in a wide range of domestic policies, which have proven much more contentious. In this respect, it is often argued that divergences or incompatibilities across a wide range of domestic regulatory and related policies create frictions in cross-border trade and investment and hence are a significant impediment to it. Thus, the Uruguay Round focused on impediments to trade arising from divergent food safety standards and other technical standards, divergent domestic regulations pertaining to cross-border trade in services, harmonizing intellectual property standards to largely Western norms, prohibiting discrimination in the treatment of foreign direct investment, and restricting discrimination in government procurement.

However, as Rodrik has persuasively argued, pursuing high levels of regulatory harmonization in such areas proposes major challenges to the rationales for nation states and democratic decision-making on a wide range of domestic policy issues within such states (Rodrik, 2011, 2017). Thus, it is difficult to sustain the position that the more regulatory harmonization, the better, without threatening the integrity of nation states and the legitimacy of domestic democratic decision-making. Not surprisingly, attempts at achieving some minimum level of harmonization in most of the areas noted above have led to major controversies. Some PTAs have gone farther and sought to either harmonize or stipulate minimum standards in areas such as labor standards, basic human rights more generally, and environmental standards, again generating predictable controversies over whether international trade or economic integration regimes that aspire to reducing impediments to trade and investment resulting from regulatory policy diversity are an unacceptable intrusion on national political sovereignty. This raises issues that sharply divide economists (and other commentators), with some economists arguing for a more modest scope for international trade and economic integration agreements, while other economists argue that in a world with relatively low tariffs, non-tariff barriers to trade are the principal impediment to global welfare-enhancing freer international trade. Indeed, an ambitious globalization agenda would take equally seriously the so-called four economic freedoms enshrined in the EU: freedom of movement of goods across borders, freedom of movement of services across borders, freedom of movement of capital across borders, and freedom of movement of people across borders.

Liberalizing cross-border trade in services poses major problems, in that services tend to be regulated profession by profession or occupation by occupation in many countries, often at the sub-national level in the case of federal states, so that the challenges of harmonizing regulatory standards or agreeing on minimum standards are immense, as slow progress in liberalizing service markets under the General Agreement on Trade in Services (GATS) negotiated during the Uruguay Round has underscored. Moreover, in the case of some classes of services, particularly financial services, the global financial crisis of 2007–2008 and the cross-border contagion effects that it exemplified raised fundamental concerns over the appropriate regulation of financial markets both within countries and across borders (Trebilcock et al., 2013, ch. 13).

With respect to cross-border movement of capital more generally, legitimate concerns have been raised about the effect of short-term cross-border capital flows in destabilizing recipient countries’ macroeconomic policies by inducing rapid asset appreciation, higher inflation and interest rates, and appreciation of the domestic currency, with converse effects in the event that these short-run capital flows are suddenly reversed. With respect to longer-term foreign direct investment, legitimate concerns arise on both sides of this relationship. Foreign direct investors are often concerned that once major investments have been sunk in a host country, they are susceptible to hold-up by host country governments through opportunistically changing the fiscal or regulatory environment, while host countries are predictably concerned about being drawn into bidding wars to attract and retain foreign direct investment and being induced to relax prevailing and legitimate regulatory or fiscal policies in this bidding process. Hence, the proliferation of bilateral investment treaties (up from 400 in 1990 to more than 3,000 in 2019) has engendered vigorous controversies over whether an appropriate balance has been struck between the interests of foreign investors and the interests of host countries and their citizens (Trebilcock et al., 2013, ch. 15).

Finally, with respect to the free movement of people across borders, very few countries, at least formally, permit free movement of people across their borders, with the prominent exception of the European Union, which enshrines the right of free movement of citizens and permanent residents among its currently 28 member states. The economic evidence suggests that reasonably open immigration policies are generally welfare-enhancing, in an economic sense, for recipient countries, with perhaps an exception in the case of the least skilled domestic workers competing with immigrants for jobs, and obviously welfare-enhancing for most immigrants (Trebilcock, 2014, ch. 7). However, free cross-border movement of people has proven vastly more controversial than any of the other three freedoms and appears in large part to explain the Brexit vote in the U.K. referendum in June 2016 and is central to many of the U.S. Trump administration’s policies designed to radically reduce immigration in general and to restrict certain classes of immigrants in particular.

Hence, once the focus shifts from the case for trade agreements in general, and from the more particular issues raised by the case for and against multilateral versus bilateral trade agreements and special trading arrangements for developing countries, the scope of international trade and broader economic integration agreements becomes intensely controversial, not only among commentators and interested or affected citizens generally, but among economists as well. Thus the initial overwhelming consensus among economists in favor of free trade provides limited insight once one turns to the appropriate scope and particularities of these agreements.

The Contemporary Political Divide Over International Trade

The Economist magazine in a cover story of July 30, 2016 describes a new political divide, where political contests are not left versus right, but open versus closed (drawbridges down or drawbridges up). However, free trade (and, by extension, immigration policy) has always provoked controversies, from the Ancient Greeks onwards, as described insightfully by Douglas Irwin in his intellectual history of free trade, Against the Tide: An Intellectual History of Free Trade (Irwin, 1996). Even in more recent decades, from the 1990s onwards, international trade has engendered a series of controversies, in many cases reflecting critiques from the left rather than critiques from the right that are reflected in contemporary forms of economic nationalism. Controversies from the 1990s onwards (exemplified dramatically by the Battle of Seattle in the fall of 1999) have ranged over many issues. These include: (1) trade restrictions aimed at protecting the environment (reflected in a firestorm of criticism by environmental groups of GATT decisions in the early 1990s in the Tuna–Dolphin cases; (2) the TRIPs Agreement, which critics have argued imposed Western intellectual property standards on developing countries and in particular impeded their access to essential medicines; (3) the Sanitary and Phyto-sanitary Standards Agreement, which critics argue has inhibited countries from setting standards for food products that reflect their particular risk preferences; (4) the General Agreement on Trade in Services, which critics argue unduly constrains governments in regulating local service markets or in providing services directly to their citizens; (5) concerns over adherence to basic or core labor standards as a pre-condition to international trade in goods; (6) criticisms of the proliferation of bilateral investment treaties that provide special protections to foreign direct investors against policy changes in host countries, especially developing countries; (7) controversies surrounding international trade in agriculture and food products in particular, following sharp spikes in food prices in 2007–2008; and (8) concerns that the dispute settlement regime of the WTO has become too strong and autonomous relative to the political organs of the WTO (Lang, 2011).

However, few of these controversies centrally challenged the virtues of a relatively liberal international trading regime, and for the most part could be accommodated with refinements to this regime. Contemporary manifestations of economic nationalism, with which the Economist is concerned in its description and critique of the new political divide, more squarely challenge the central premises of a liberal international trading regime by resurrecting previously discredited claims about the virtues of economic autarchy, that is, keeping economic production and jobs relating thereto at home. In this respect, these contemporary challenges represent a more critical threat to the future of a liberal trading regime and globalization more generally than some of the earlier controversies noted above.

Focusing on these contemporary challenges to the premises of a liberal international trading regime, it should be noted again that the GATT (WTO) multilateral trading regime from its inception in 1947 was not insensitive to the transition costs associated with trade liberalization through the incorporation of the three mechanisms of reciprocity, gradualism, and reversibility. Notwithstanding this sensitivity to the transition costs associated with trade liberalization, it is obvious that contemporary manifestations of economic nationalism (or tendencies to autarchy) have not been assuaged by these provisions. This raises the question: what more should be done to moderate the transition costs associated with a liberal trading regime (and globalization more generally)? The following discussion addresses contemporary concerns that seek to distinguish fair trade from free trade. It then outlines two more general policy directions—one internationally focused and one domestically focused—that seem crucial imperatives in muting the contemporary rise of economic nationalism.

Fair Trade Versus Free Trade

It is commonly argued that some forms of contemporary international trade may constitute a form of “unfair” trade or unfair competition (Bhagwati & Hudec, 1996) and hence economic dislocations induced by unfair trade may be normatively unacceptable. First, trade deficits are often cited as evidence of unbalanced trade commitments. However, such concerns are often misplaced, with empirical evidence revealing that trade deficits often rise with a booming domestic economy where consumers have more resources to spend on imports. Moreover, as Irwin points out, if a foreign country is exporting more than it imports from another country, the overall balance of payments is divided between the current account and the financial account, which includes all portfolio and direct investments. Foreign countries can either use their export earnings to purchase imports or invest the surplus in acquiring assets or investments in the country with which they are running a trade surplus (e.g., China’s investment in U.S. Treasury Bills and other securities). According to Irwin,

If the US adopted protectionist measures to reduce the trade deficit, then capital inflows from abroad would necessarily have to fall (i.e., China would no longer buy Treasury bills and the renminbi would appreciate and the dollar would depreciate), and domestic investment would have to be financed by domestic savings, implying higher interest rates, which would reduce the number of jobs created by business investment. In the end, the positive impact of a lower trade deficit on employment might be offset by the negative impact of lower domestic investment and higher interest rates.

(Irwin, 2015, p. 162)

Beyond the issue of trade deficits, unfair trade concerns often focus on claims that foreign exporters are deliberately manipulating their currency to induce an undervaluation and hence render their exports cheaper and imports more costly. It is difficult to evaluate as an analytical matter the “true” value of a country’s currency, but in any event, in the case of the principal target of such complaints in recent years, that is, China, it now seems widely accepted that China has allowed its currency (the renminbi) to appreciate significantly and that it may no longer be significantly undervalued (Trebilcock et al., 2013, ch. 6). A related complaint of unfair trade concerns foreign subsidization of exports, which renders them artificially competitive in importing countries’ markets and leads to job displacement in these markets. This is again a difficult complaint to evaluate analytically, especially in the case of economies in transition from command to market economies (like China’s), with large numbers of state-owned enterprises and extensive use of regulated or directed pricing (Wu, 2016), but as with currency manipulation, it is a complaint that cannot be dismissed out of hand and is subject to detailed disciplines in the WTO’s Subsidies and Countervailing Measures Agreement. However, there are legitimate concerns over the appropriateness and enforceability of a number of these disciplines, nor do they address at all the increasingly salient issue of tax and subsidy competition among host jurisdictions to attract foreign direct investment. A further complaint is that foreign exporters often “dump” goods in the markets of importing countries at lower prices than prevail in their home markets. While anti-dumping actions are often initiated by importing countries on this or related bases, beyond the very narrow category of cases involving predatory pricing by foreign exporters designed to achieve a monopoly, most dumping cases lack any coherent economic rationale and simply reflect geographic price discrimination (Mavroidis, 2016, vol. 2, ch. 2; Trebilcock et al., 2013, ch. 9). Nevertheless, anti-dumping actions have proliferated around the world in recent years and have often become the protectionist instrument of choice, despite their lack of any convincing economic rationale in most cases, and dominate by orders of magnitude the two other principal trade remedy regimes, countervailing duties and safeguards, which have more plausible rationales (although unfortunately the latter regime has been so restrictively interpreted by the WTO Appellate Body as to make legal invocation almost impossible) (Sykes, 2004).

A further claim of unfair trade relates to foreign countries improperly appropriating the intellectual property of firms based in other countries through either lax laws or lax enforcement thereof, hence conferring on them an artificial comparative advantage in international trade and unfairly prejudicing these firms and their workforces. While the Trade-Related Intellectual Property Agreement (TRIPs) negotiated during the Uruguay Round seeks to address many of these concerns, there may still be legitimate concerns relating to the lax enforcement of these commitments. Moreover, TRIPs does not apply to the controversial issue of technology-sharing agreements imposed on foreign investors as a condition of investment in host countries (Wu, 2016).

A yet further set of “unfair” trade complaints relate to lax labor or environmental laws in foreign countries that enable them to reduce costs unfairly, rendering their products artificially competitive in international trade (Trebilcock et al., 2013, chs. 17 and 18). With respect to concerns over lax labor standards, while it may well be the case that insisting that all trading countries adhere to core labor standards such as those promulgated by the International Labour Organization (ILO) in its 1998 Declaration on Fundamental Principles and Rights at Work, that is, freedom of association; the elimination of forced labor; the elimination of child labor; and the elimination of discrimination in employment (and perhaps also basic workplace safety standards) is normatively defensible on non-economic rationales, it is important to recognize (as the ILO does) that lower wage levels in some foreign countries (especially developing countries) are not a source of unfair trade but indeed a key source of their comparative advantage (due account being taken of differences in labor productivity across countries) (Singer, 2016, pp. 107–108). Similarly, lax environmental standards in some foreign countries may be a legitimate concern for other countries where these involve transboundary externalities or threats to the global commons (such as climate change) and justify trade sanctions (Singer, 2016, ch. 2), but where their effects are purely local it is not nearly as obvious that other countries have any legitimate basis for insisting on adherence to their own environmental standards as a precondition to international trade.

Providing More Flexibility in the Multilateral Trading System

In terms of the international economic architecture, the one-size-fits-all, all-or-nothing negotiating modalities adopted during the Uruguay Round, particularly in addressing a wide range of impediments to trade in goods and services which implicate idiosyncratic features of many countries’ internal domestic policies, seriously discounts the widely divergent states of development, economic particularities, and political and economic philosophies of the 164 member countries of the WTO (Rodrik, 2011, 2017), and in part is responsible for the proliferation of preferential trade agreements since the 1990s (paralleling the proliferation of bilateral investment treaties over the same period). The proliferation of PTAs risks serious fragmentation of the international trading system and an abandonment of the ideal of the key framers of the Bretton Woods Agreement in 1944 out of which the GATT emerged, where in principle every country in the world would trade with every other country under a common set of ground rules, mitigating the tendency to economic factionalism that many commentators believe was a contributing factor to the outbreak of World War II.

However, this vision of the post-war international economic architecture, while noble in many respects, was insensitive to the distinctive needs of many newly independent developing countries and emerging economies. While, as noted above, some accommodations for the special needs of developing countries were made in the mid-1950s and mid-1960s, the Uruguay Round all-or-nothing negotiating modality was a serious derogation from the spirit of these accommodations. Instead, there is a compelling case for much greater scope within the multilateral system for plurilateral agreements among “coalitions of the willing” that would be open over time to accession by other members on a conditional MFN basis and could accommodate quite ambitious multi-country agreements and would invoke the widely respected dispute settlement regime of the WTO in the interpretation and enforcement of such agreements. This has a strong precedent in the Tokyo Round Codes on various non-tariff barriers, and would recognize that a stark dichotomy between developed and developing countries is insufficiently sensitive to the manifold differences and participants in states of economic and social development across the entire spectrum of WTO members (Pauwelyn, 2005; Trebilcock, 2015).

The present WTO rule requiring consensus of all members for the incorporation of plurilateral agreements into the WTO is much too inflexible and should be repealed or relaxed. This seems preferable to attempting to unlock the paralyzing consensus rule of decision-making within the WTO by moving to some form of majority voting, where large trading blocs would routinely be outvoted by aggregations of smaller countries, or alternatively trade-weighted voting regimes, where smaller countries would be routinely outvoted by large trading blocs, neither of which would be acceptable to the membership as a whole.

Providing greater scope for plurilateral agreements within the GATT/WTO regime would provide something of an intermediate option between strict multilateralism where all countries operate under the same set of international trading rules, and one-on-one preferential trading agreements and the concomitant risk of international trade degenerating into a “spaghetti bowl” of sui generis rules governing every trading relationship and the attendant increase in transaction costs that such rules would engender (Bhagwati, 2008), as well as serious concerns about asymmetric bargaining power inherent in many one-on-one bilateral trade negotiations, which are mitigated by coalition bargaining within the multilateral regime. While some commentators are skeptical of the virtues of a multi-speed multilateral system, it has many virtues compared with the alternatives: one-size-fits all multilateralism, bilateralism, and (worst of all) unilateralism, with the concomitant risk of a major trade war and global recession.

The Importance of Active Labor Market Adjustment Policies

The second policy priority that commands serious attention is strengthening active labor market adjustment policies in many developed countries, especially the United States, which, relative to many other developed countries, spends a paltry amount of resources on active labor market adjustment policies (ALMPs). A review of comparative experience across many developed countries with labor market adjustment policies reveals that some developed countries have done much better than others in actively assisting displaced workers to re-engage with the labor force (Trebilcock & Wong, 2018). In this respect, it is crucial to note that while the United States and other developed economies have experienced a substantial decline in manufacturing employment in recent years, only a small percentage of such job losses (at most about 20%) are attributable to trade, notwithstanding a dramatic expansion of imports from China and other low-wage countries, with the bulk of such job displacements attributable instead to technology and the substitution of capital for labor. Indeed, in the United States, manufacturing output in real terms has increased in the 2010s, while employment has declined substantially (World Trade Organization Report, 2017).

One implication of these data is that labor market adjustment policies that are tied to the impact of international trade on local labor markets (such as the US Trade Adjustment Assistance (TAA) Program initiated following the Kennedy Round of GATT negotiations in the 1960s) are seriously misconceived. The U.S. experience with the TAA suggests that it is practically impossible to determine whether particular workers are being displaced by trade or by technology, and even if this were practically possible it is ethically impossible to defend more generous treatment of workers displaced by trade relative to those displaced by technology (Alden, 2017, ch. 5). Moreover, recent empirical studies show that TAA benefits play a relatively inconsequential role in moderating the consequences of job displacement, whether caused by trade or technology (Autor, Dorn, & Hanson, 2016).

Without a much more concerted emphasis on labor market adjustment policies generally, and active labor market adjustment policies in particular, there is a serious risk that drawbridges-up will become the default option. The temptation to scapegoat the “barbarians at our gates” with foreign faces from foreign places (e.g., foreign traders, investors, and immigrants) rather than faceless forces within our gates (especially technology) for all sources of stress on our labor markets and social safety nets is almost certainly a recipe for serious policy misdiagnosis and misprescription. While as a matter of political economy generous labor market adjustment policies may not fully mute demands for protectionism by trade-impacted sectors, they provide a principled basis for other constituencies to resist these demands by demonstrating a commitment to taking seriously the losers from economic transitions more generally. History cautions against assuming the inevitability of a liberal international economic order, especially when the interests of the losers from such an order are ignored or discounted (Frieden, 2006).

Further Reading

Bagwell, K., & Staiger, R. (2002). The Economics of the World Trading System. MIT Press.Find this resource:

Baldwin, R. (2010). The Great Convergence: Information Technology and the New Globalization. Harvard University Press.Find this resource:

Bhagwati, J. (2007). In Defence of Globalization. Oxford University Press.Find this resource:

Irwin, D. (1996). Against the Tide: An Intellectual History of Free Trade. Princeton University Press.Find this resource:

Irwin, D. (2015). Free Trade Under Fire (4th ed.). Princeton University Press.Find this resource:

Mavroidis, P. (2016). The Regulation of International Trade (2 vols.). MIT Press.Find this resource:

Pauwelyn, J. (2005). The Transformation of World Trade. Michigan Law Review, 104, 1.Find this resource:

Rodrik, D. (2011). The Globalization Paradox: Democracy and the Future of the World Economy. W. W. Norton.Find this resource:

Trebilcock, M. (2015). Advanced Introduction to International Trade. Cheltenham, U.K./Northampton, MA: Edward Elgar.Find this resource:

Trebilcock, M., Howse, R., & Eliason, A. (2013). The Regulation of International Trade (4th ed.). Routledge.Find this resource:

Wolf, M. (2004). Why Globalization Works. Yale University Press.Find this resource:

Wu, M. (2016). The China Inc. Challenge to Global Trade Governance. Harvard International Law Journal, 57, 261.Find this resource:

References

Alden, E. (2017). Failure to Adjust: How Americans Got Left Behind in the Global Economy. Lanham MD: Rowman and Littlefield.Find this resource:

Autor, D., Dorn, D., & Hanson, G. (2016). The China Shock: Learning from Labour Market Adjustment to Large Changes in Trade. National Bureau of Economic Research Working Paper No. 21906.Find this resource:

Bagwell, K., Bown, C., & Staiger, R. (2016). Is the WTO Passé? Journal of Economic Literature, 54, 1125–1231.Find this resource:

Bagwell, K., & Mavroidis, P. (Eds.). (2011). Preferential Trade Agreements: A Law and Economic Analysis. Cambridge University Press.Find this resource:

Bagwell, K., & Staiger, R. (2002). The Economics of the World Trading System. MIT Press.Find this resource:

Baldwin, R. (2010). The Great Convergence: Information Technology and the New Globalization. Harvard University Press.Find this resource:

Bhagwati, J. (2007). In Defence of Globalization. Oxford University Press.Find this resource:

Bhagwati, J. (2008). Termites in the Trading System: How Preferential Trade Agreements Undermine Free Trade. Oxford University Press.Find this resource:

Bhagwati, J., & Hudec, R. (Eds.). (1996). Fair Trade and Harmonization: Prerequisites for Free Trade? (2 vols.). MIT Press.Find this resource:

Bown, C. (2016). Regional Trade Agreements and the Future of the WTO. U.S. Council on Foreign Relations.Find this resource:

Chang, H. (2008). Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. NY: Bloomsbury Press.Find this resource:

Frieden, J. (2006). Global Capitalism: Its Fall and Rise in the Twentieth Century. NY: W.W. Norton.Find this resource:

Irwin, D. (1996). Against the Tide: An Intellectual History of Free Trade. Princeton University Press.Find this resource:

Irwin, D. (2015). Free Trade Under Fire (4th ed.). Princeton University Press.Find this resource:

Irwin, D., Mavroidis, P., & Sykes, A. (2008). The Genesis of the GATT. New York: Cambridge University Press.Find this resource:

Johnston, A., & Trebilcock, M. (2013). The Proliferation of Preferential Trade Agreements: The Beginning of the End of the Multilateral Trading System? In R. Hofmann, S. Schill, & C. Tams (Eds.), Preferential Trade and Investment Agreements: From Recalibration to Reintegration. Baden-Baden: Nomos.Find this resource:

Krugman, P. (1997). What Should Trade Negotiators Negotiate About? J. of Economic Literature, 35, 113.Find this resource:

Lamp, N. (2016). Value and Exchange in Multilateral Trade Law Making, London Review of International Law, 4, 7.Find this resource:

Lang, A. (2011). World Trade Law After Neo-liberalism: Reimagining the Global Economic Order. Oxford University Press.Find this resource:

Lin, J. (2012). The Quest for Prosperity: How Developing Economies Can Take Off. Princeton University Press.Find this resource:

Mavroidis, P. (2016). The Regulation of International Trade (2 vols.). MIT Press.Find this resource:

Pauwelyn, J. (2005). The Transformation of World Trade. Michigan Law Review, 104, 1.Find this resource:

Radelet, S. (2015). The Great Surge: The Ascent of the Developing World. NY: Simon & Schuster.Find this resource:

Reich, A. (2010). Bilateralism versus Multilateralism in International Trade. University of Toronto Law Journal, 60, 263.Find this resource:

Rodrik, D. (2011). The Globalization Paradox: Democracy and the Future of the World Economy. W. W. Norton.Find this resource:

Rodrik, D. (2017). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press.Find this resource:

Singer, P. (2016). One World Now: The Ethics of Globalization. New Haven: Yale University Press.Find this resource:

Stiglitz, J. (2006). Making Globalization Work. NY: W. W. Norton.Find this resource:

Sykes, A. (2004). The Persistent Puzzles of Safeguards: Lessons from the Steel Dispute. J. of International Economic Law, 7, 523.Find this resource:

Thomas, C., & Trachtman J. (Eds.). (2009). Developing Countries in the WTO Legal System. Oxford University Press.Find this resource:

Trebilcock, M. (2014). Dealing with Losers: The Political Economy of Policy Transitions. Oxford University Press.Find this resource:

Trebilcock, M. (2015). Between Theories of Trade and Development: The Future of the World Trading System. J. of World Investment and Trade, 16, 122.Find this resource:

Trebilcock, M., Howse, R., & Eliason, A. (2013). The Regulation of International Trade (4th ed.). Routledge.Find this resource:

Trebilcock, M., & Wong, S. (2018). Trade, Technology, and Transitions: Trampolines or Safety Nets for Displaced Workers? J. of International Economic Law 21:509.Find this resource:

Wolf, M. (2004). Why Globalization Works. Yale University Press.Find this resource:

World Trade Organization. (2011). World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-existence to Coherence. Geneva, World Trade Organization, 2011.Find this resource:

World Trade Organization. (2017). World Trade Report 2017: Trade, Technology, and Jobs.Find this resource:

Wu, M. (2016). The China Inc. Challenge to Global Trade Governance. Harvard International Law Journal, 57, 261.Find this resource: