International Trade Law:
Week 1: The Global Trading System.
F.A. Hayek: “The Economic Conditions of Interstate Federalism”.
In the formation of interstate federations economic challenges and
consequences arise.
Main purpose of federation:
- Secure peace.
o Eliminating conflicts between its members.
o Protecting the union from external threats.
- Political union without economic union is unsustainable.
o Economic barriers → conflicts of interest between regions.
Undermines political unity.
For sufficient federation economic integration is necessary:
- Free movement of goods; capital; people.
o Removes custom barriers.
o Ensures a common monetary system.
o Harmonizes fiscal policies.
- Has certain implications:
o Abolition of tariffs and economic barriers creates a single
market.
Prices and economic conditions across states become
uniform.
o States lose the ability to regulate industries through
protectionist policies.
Cannot control prices.
Creates a single market.
Direct subsidies through taxation become the only
available tool.
Price controls and tariffs cannot support specific
industries or sectors anymore.
o A common monetary policy must be adopted.
Eliminates independent central banks.
- Will limit individual state economic powers.
o Cannot manipulate monetary policy / enact protectionist
measures → would disrupt the economic unity of the
federation.
o Constrained in ability to impose taxes.
Could drive capital and labor away to other parts of the
union.
Federal economic policy nevertheless faces certain challenges:
- Federal economic intervention becomes more complicated.
, o States within the federation might not support sacrificing
their economic interests to benefit other regions.
o E.g., French farmers may resist paying higher prices to
support British industries.
Nationalist sentiment that supports such policies within
individual nations is absent in a federation.
- Resistance.
o Diversity of living standards and economic development
across different regions.
Economic planning is difficult.
Socialism.
Detailed central economic control.
Harder to find consensus on economic regulations /
policies.
- Requires provisions to prevent states from circumventing economic
rules through administrative measures.
- Federal government must have the power to restrict states from
interfering with the economic unity of the federation.
o Even if it cannot actively regulate certain economic matters.
o Scope should be narrower than it would be in a single
national state.
Centralized economic control might cause greater
resistance from diverse populations.
o Liberalism is a better fit for the federation.
Socialist economic planning requires uniform control
→ incompatible with diverse economic needs and
different traditions.
International federations, while essential for maintaining peace, can only
succeed with liberal economic policies that ensure minimal
government interference.
Challenge is the balance between:
i. The need for unity with respect for regional diversity.
ii. Ensuring that government intervention remains limited to avoid
breaking economic cohesion.
J. Bhagwati: “Free Trade: What Now?”
Adam Smith: Law of Comparative Advantage as an argument for free
trade.
Nations should specialize in what they do
best.
→ mutually beneficial.
,Free trade has since then been defended, both externally (from
protectionists) and internally (from within the discipline of economics).
It, however, also faces scepticism.
- Market failures.
Free trade relies on assumption markets are efficient.
- Infant industry protection (John Stuart Mill).
Protecting new industries → state intervention long term benefits
outweigh short-term losses.
- Tariffs (Keynes).
Tariffs as a way to increase domestic demand and reduce
unemployment.
o Short term fix → harms global trade.
- Imperfect competition.
Theories of monopolistic / oligopolistic competition challenge free
trade.
o When firms have market power → free trade might not have
most efficient outcomes.
This led to a sense of nihilism (1930) about free trade as economist
began to doubt its efficacy in real-world market imperfections.
This was furthered by strategic trade theory (how to intervene in
markets dominated by a few large firms to gain advantage).
→ economists did return to supporting free trade (1990) with nuanced
understanding:
- Free trade can harm if market failures are left unaddressed.
- If market failures are corrected, free trade can be beneficial.
o Through appropriate domestic policies.
o Maintaining free trade externally.
In some cases, protectionist policies can improve welfare, especially
when a country has market power, however:
- Empirical weakness: little evidence that such market imperfections
are significant enough to justify abandoning free trade (there is no
beef).
- Government failures: driven by lobbying rather than genuine
national interest (the visible hand will make matters worse).
- Retaliation: could lead to retaliation from other countries.
However, free trade faces criticism regardless:
- Trade hurts wages.
Harms unskilled workers in rich countries by driving down wages.
o Real cause however is not trade → technological change
which reduced demand for unskilled labor.
, - There is a difference between fair trade / free trade.
Free trade is unfair when countries with different standards trade
with each other.
o Forcing harmonization of standards is unjust.
→ trade altogether is a phenomenon that creates economic insecurity.
Comparative advantage is thin: slight changes in costs abroad can
undercut your competitiveness.
→ greater instability in comparative advantage.
This is kaleidoscopic comparative advantage = modern reality of
rapidly shifting competitive advantages among nations.
With global markets being highly
integrated, even small cost differences
can significantly affect competition.
Should not link free trade to social and environmental goals → this would
create obstacles to trade liberalization and distort social agendas.
- Slows down negotiations.
- Shifts focus away from economic growth.
→ social issues should be addressed through other international
institutions.
Questionable: N. Lamp: “The “development” Discourse in Multilateral
Trade Lawmaking”.
Influence of the development idea in trade lawmaking reduced to
principle of special and differential treatment (S&DT).
Allows developing countries to bypass
certain obligations in the trade system.
→ development is actually much more
extensive.
Creation of multilateral trading system → way to establish rule-based
international economic relations to overcome protectionism:
a. Liberalize trade.
b. Eliminate protectionist policies that hindered trade efficiency.
Developing countries viewed this with suspicion:
a. Perpetuate an international division of labor unfavorable to them.
Preserving their position as exporters of raw materials while
developed countries dominated value-added sectors.
b. Broader the goal of development.
Had divergent agendas:
Week 1: The Global Trading System.
F.A. Hayek: “The Economic Conditions of Interstate Federalism”.
In the formation of interstate federations economic challenges and
consequences arise.
Main purpose of federation:
- Secure peace.
o Eliminating conflicts between its members.
o Protecting the union from external threats.
- Political union without economic union is unsustainable.
o Economic barriers → conflicts of interest between regions.
Undermines political unity.
For sufficient federation economic integration is necessary:
- Free movement of goods; capital; people.
o Removes custom barriers.
o Ensures a common monetary system.
o Harmonizes fiscal policies.
- Has certain implications:
o Abolition of tariffs and economic barriers creates a single
market.
Prices and economic conditions across states become
uniform.
o States lose the ability to regulate industries through
protectionist policies.
Cannot control prices.
Creates a single market.
Direct subsidies through taxation become the only
available tool.
Price controls and tariffs cannot support specific
industries or sectors anymore.
o A common monetary policy must be adopted.
Eliminates independent central banks.
- Will limit individual state economic powers.
o Cannot manipulate monetary policy / enact protectionist
measures → would disrupt the economic unity of the
federation.
o Constrained in ability to impose taxes.
Could drive capital and labor away to other parts of the
union.
Federal economic policy nevertheless faces certain challenges:
- Federal economic intervention becomes more complicated.
, o States within the federation might not support sacrificing
their economic interests to benefit other regions.
o E.g., French farmers may resist paying higher prices to
support British industries.
Nationalist sentiment that supports such policies within
individual nations is absent in a federation.
- Resistance.
o Diversity of living standards and economic development
across different regions.
Economic planning is difficult.
Socialism.
Detailed central economic control.
Harder to find consensus on economic regulations /
policies.
- Requires provisions to prevent states from circumventing economic
rules through administrative measures.
- Federal government must have the power to restrict states from
interfering with the economic unity of the federation.
o Even if it cannot actively regulate certain economic matters.
o Scope should be narrower than it would be in a single
national state.
Centralized economic control might cause greater
resistance from diverse populations.
o Liberalism is a better fit for the federation.
Socialist economic planning requires uniform control
→ incompatible with diverse economic needs and
different traditions.
International federations, while essential for maintaining peace, can only
succeed with liberal economic policies that ensure minimal
government interference.
Challenge is the balance between:
i. The need for unity with respect for regional diversity.
ii. Ensuring that government intervention remains limited to avoid
breaking economic cohesion.
J. Bhagwati: “Free Trade: What Now?”
Adam Smith: Law of Comparative Advantage as an argument for free
trade.
Nations should specialize in what they do
best.
→ mutually beneficial.
,Free trade has since then been defended, both externally (from
protectionists) and internally (from within the discipline of economics).
It, however, also faces scepticism.
- Market failures.
Free trade relies on assumption markets are efficient.
- Infant industry protection (John Stuart Mill).
Protecting new industries → state intervention long term benefits
outweigh short-term losses.
- Tariffs (Keynes).
Tariffs as a way to increase domestic demand and reduce
unemployment.
o Short term fix → harms global trade.
- Imperfect competition.
Theories of monopolistic / oligopolistic competition challenge free
trade.
o When firms have market power → free trade might not have
most efficient outcomes.
This led to a sense of nihilism (1930) about free trade as economist
began to doubt its efficacy in real-world market imperfections.
This was furthered by strategic trade theory (how to intervene in
markets dominated by a few large firms to gain advantage).
→ economists did return to supporting free trade (1990) with nuanced
understanding:
- Free trade can harm if market failures are left unaddressed.
- If market failures are corrected, free trade can be beneficial.
o Through appropriate domestic policies.
o Maintaining free trade externally.
In some cases, protectionist policies can improve welfare, especially
when a country has market power, however:
- Empirical weakness: little evidence that such market imperfections
are significant enough to justify abandoning free trade (there is no
beef).
- Government failures: driven by lobbying rather than genuine
national interest (the visible hand will make matters worse).
- Retaliation: could lead to retaliation from other countries.
However, free trade faces criticism regardless:
- Trade hurts wages.
Harms unskilled workers in rich countries by driving down wages.
o Real cause however is not trade → technological change
which reduced demand for unskilled labor.
, - There is a difference between fair trade / free trade.
Free trade is unfair when countries with different standards trade
with each other.
o Forcing harmonization of standards is unjust.
→ trade altogether is a phenomenon that creates economic insecurity.
Comparative advantage is thin: slight changes in costs abroad can
undercut your competitiveness.
→ greater instability in comparative advantage.
This is kaleidoscopic comparative advantage = modern reality of
rapidly shifting competitive advantages among nations.
With global markets being highly
integrated, even small cost differences
can significantly affect competition.
Should not link free trade to social and environmental goals → this would
create obstacles to trade liberalization and distort social agendas.
- Slows down negotiations.
- Shifts focus away from economic growth.
→ social issues should be addressed through other international
institutions.
Questionable: N. Lamp: “The “development” Discourse in Multilateral
Trade Lawmaking”.
Influence of the development idea in trade lawmaking reduced to
principle of special and differential treatment (S&DT).
Allows developing countries to bypass
certain obligations in the trade system.
→ development is actually much more
extensive.
Creation of multilateral trading system → way to establish rule-based
international economic relations to overcome protectionism:
a. Liberalize trade.
b. Eliminate protectionist policies that hindered trade efficiency.
Developing countries viewed this with suspicion:
a. Perpetuate an international division of labor unfavorable to them.
Preserving their position as exporters of raw materials while
developed countries dominated value-added sectors.
b. Broader the goal of development.
Had divergent agendas:
