A strong rules-based international trade system is an indispensable condition to address global inequalities. Brexit, the U.S.-China trade war, and the North American Free Trade Agreement’s (NAFTA) renegotiation have triggered a conversation on the future of the international trade system. Next month the World Trade Organization’s (WTO) appellate body will effectively cease to operate after the Trump administration blocked all new appointments.

The future of the system appears grim.

Free trade is an essentially contested concept. Trade skepticism has been fueled by the emergence of inequality as a cornerstone of public debate. Inequality has come to be seen as a direct consequence of free trade. However, as imperfect as it is, openness is more desirable than the alternative.

Since the conclusion of the WTO’s Kennedy Round in 1967, trade global governance has not been about tariffs, but rather about principles and disciplines. Harvard Kennedy School economist Dani Rodrik states that there is no clear-cut answer on whether trade agreements can systematically alter domestic political equilibria. Rodrik believes that the “global community” should not influence national goals and priorities. This view is misleading, at least partly. Principles and disciplines need to be strengthened and enforced at the national level for international trade to reduce global inequalities.

The Case for a Rules-Based System                      

Modern free trade agreements (FTAs) possess certain characteristics that promote a reduction in global inequalities. This essay discusses three of them: the rule of law, economic competition and labour rights.

The laureates of the 2019 Nobel Prize in Economics, Abhijit Banerjee and Esther Duflo, underline that trade openness “has almost gone in the opposite direction of what the basic Stopler-Samuelson logic would suggest.” That is to say, the income gap between low-skilled workers in developing economies and their better-off counterparts has increased. They point to evidence from trade liberalization in Mexico, Colombia, Brazil, India, Argentina, and Chile during the late 1980’s and 1990’s to sustain their argument.

Nonetheless, this view may not be wholly accurate if we assess the broader implications of trade global governance on global inequalities.

Rule of Law

The WTO and regional trade agreements establish a set of rules that are predictable and enforceable. The binding nature of these instruments forces states to adhere to the rule of law in order to integrate themselves into global value chains. When countries decide to open up for international trade, they accept playing by the rules.

Extortion is tightly linked to rule of law. While not traditionally considered in inequality studies, extortion is one of the main burdens that hinder competition and overall economic development. By doing so, it reduces the possibilities of redistribution and promotes inequality.

FTAs allow foreign industries to enjoy a privileged regime vis-à-vis domestic industries, where they are not subject to extortion. Two underlying reasons explain this. First, by entering into an FTA with stringent and enforceable dispute settlement mechanisms, governments agree to wear a straitjacket that eliminates their capacity to extort foreign industries. Second, governments have an incentive to promote the establishment of foreign industries in an environment that respects property rights. This is the case of industrial parks, which can serve as ‘islands’ of rule of law in areas where the state has otherwise little control.

Both, state-state and investor-state dispute settlement procedures are the main mechanisms to enforce the rule of law in trade regimes. These procedures need to be fine-tuned to make them more enforceable. Some amendments could include avoiding situations in which one party is able to block the establishment of an international panel. Likewise, other proposals could include a reform to the WTO’s appellate body and even considering moving forward with the implementation of Canada-EU’s Comprehensive Economic and Trade Agreement’s (CETA) investment court in other multilateral trade agreements.

Economic Competition

It is out of the question that market concentration promotes inequality. A 2017 study by the OECD concludes that market power increases the wealth of the richest 10 percent of the population by 12 percent to 21 percent for an average country. The report also states that “redistribution from eliminating market power would occur mainly from the wealthiest 10 percent of the population to the bottom 80 percent.”  In this context, FTAs emerge as one of the most powerful instruments to promote economic competition at the national level.

This is achieved by lifting tariff and non-tariff barriers to promote the free flow of goods, services and investment. There is a further range of instruments, however, which are designed to promote economic competition in specific sectors. Modern trade agreements include provisions regarding competition policy. These disciplines may include ensuring the independence of competition authorities (NAFTA), telecommunications (Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP) and energy regulators (Mexico-European Union FTA). Additionally, provisions regarding government procurement guarantee a minimum degree of competition in public purchases and intellectual property rights protections provide a level playing field for the creative and pharma industries, among others.

Labour Rights

The trade and labour debate has been one of the most contentious issues in international negotiations at least since the enactment of NAFTA’s labour side agreement in 1994. Trade critics argue that multinationals take advantage of the cheap labour and the lax, and seldom enforced, labour protections in emerging economies. Still, labour provisions in FTAs force states to pass law amendments and comply with certain international standards, for example the International Labour Organization’s Declaration on Rights at Work. CPTPP’s labour provisions compel Vietnam to take measures against the infamous “sweatshops” and the United States-Mexico-Canada Agreement (USMCA, NAFTA’s potential replacement) urged Mexico to amend its labour laws in a pro-worker reform. Probably, the most extreme example is the Labor Value Content (LVC) provisions in the USMCA, which enforce a minimum hourly wage for a percentage of workers directly involved in the production of vehicles and auto parts in North America. Rather than making a race to the bottom, FTAs are an instrument for upward harmonisation of labour standards.

The Road Ahead

Attempting to reduce inequalities with protectionist measures is a costly mistake. The way forward is to strengthen trade institutions to make them less subject to blockades and to promote enforcement mechanisms when a party does not comply with its obligations.

It is possible to think of a broader agenda with disciplines that ultimately address global inequalities from a trade policy perspective. In a recent interview, Rodrik gives light on some issue areas:

• Tax harmonisation
• Labour mobility
• Standardising diplomas and salary scales
• Tackling social dumping

Additionally, a more ambitious proposal could include:

• Lifting protectionist sanitary and phytosanitary measures
• Integrate energy markets to promote access to cheap energy
• More stringent anticorruption provisions in FTA’s
• Mutual recognition of technical standards

Despite the protectionist wave in recent years, there are reasons to believe the outlook for global trade is not so grim. The main argument to sustain this view is the enactment of CPTPP last year and the imminent passing of the USMCA on Capitol Hill. Most likely the U.S. will eventually rejoin CPTPP and although trade frictions with China will likely prevail, they likely will not distort the basic foundations of global trade governance. States have a narrow margin to significantly revert the openness achieved so far, and this is good news for the fight against inequality.

References

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