NATIONAL LAW UNIVERSITY ODISHA

IV Y EAR (8TH SEMESTER)

INTERNATIONAL TRADE LAW PROJECT ON

ADVANTAGES AND CHALLENGES OF LIBERAL TRADE

SUBMITTED TO:

PROF. SHEELA RAI

PROF. ELUCKIA A.
 INTRODUCTION

The story of the progress of mankind is intimately linked to increase in trade, communication,
and interaction among people. Until the latter part of the 18th century, people thought that the
role of trade was to generate gold and silver for a country’s treasury in order to provide
resources for war and other matters of State. 1 To earn gold and silver, there had to be a
favourable balance of trade; that is, exports had to have more value than imports. This is
known as mercantilism.2 To acquire gold, the King’s treasury charged heavy taxes on imports
entering a country. That meant that each country’s ruler believed their trade should generate
an excess of exports over imports, as that was the only way to receive gold and silver on net.
Trade deficits were deemed undesirable.3 In those days few services were traded, so that the
trade balance and the current account balance moved closely together. That is less true today.

In mercantilist times, trade was conducted primarily under the auspices of government
granted charters.4 In the 1770s, however, Adam Smith challenged the mercantilist doctrine
with his book The Wealth of Nations.5 He set forth his reasoning that the basis of the wealth
of a country was its production capacity and that a country would be wealthier selling the
goods it produced more cheaply and buying the goods abroad that could be made more
cheaply there.6 He further argued that the purpose of trade was to enable the betterment of the
country’s population, and not to increase the current account balance. 7 He argued that if
markets functioned well without any government intervention the wealth of a country would
be maximized.8

His argument convinced almost all economists and also the British parliament. Britain
became the first free trading country in the world,9 and other European nations followed a
few decades later.10 Combined with the continuing sharp decline in transport and
communication costs, trade increased rapidly. It was one of the consequences of Britain’s

1
William Krist, Globalization and America’s Trade Agreements (Woodrow Wilson Central Press, 2013).
2
Lars Magnusson, The Political Economy of Mercantilism (Routledge, 2018).
3
id.
4
G Vaggi and P Groenewegen, A Concise Hostory of Economic Thought: From Mercantilism to Monetarism
(Palgrave, 2003).
5
Adam Smith, The Wealth of Nations (Oxford, 2002).
6
id.
7
id.
8
id.
9
William Grampp, ‘How Britain Turned to Free Trade’, The Business History Review 61 (1) (1987).
10
Mehdi Shafaeddin, ‘How did Developed Countries Industrialize? The History of Trade and Industrial Policy:
The Cases of Great Britain and the USA’, UNCTAD Review, 1998.
shift to a policy of free trade that it had by far the highest living standard in the world in the
late 19th century.11

Rising living standards and economic growth reflected the growing importance of
international trade. It is estimated that international trade constituted only 2% of world output
in 1800 and had reached 22% by 1913.12 These trade numbers reflect rapid growth of trade
among the European and North American countries, as well as rising volume of trade with
European colonies.13

After the strong growth of trade from the beginning of the 19th century, the trend was broken
from the outset of the First World War until the end of the Second World War. Although
trade and economic activity picked up by the mid 1930s, there was still slack in most
economies by 1939 and at the start of hostilities in the Second World War. 14 Transport,
communications and much economic activity were shifted to the war effort. Trading relations
and most economies were severely disrupted by the war effort.

However, the decades after the end of the Second World War were ones of rapid growth. 15
The war-torn economies recovered there pre-war levels of output by the late 1950s and
maintained their rapid growth.16 The modern trade era began in the 1940s when the futility of
trade wars and tit-for-tat tariffs and the harm they could inflict were strong memories. Since
the Second World War, trade has certainly played an important role in the international
economy, not only for the efficiency gains it has enabled but also for its role in the growth of
the world economy.

WHAT IS LIBERAL TRADE?

When people of a nation can purchase or sell commodities abroad with the same freedom as
they enjoy at home, it is called free trade. 17 That does not mean absence of all restrictions. 18
What it entails is that products produced in other countries will be governed in the same way

11
Hans-Joachim Voth, ‘Living Standards During the Industrial Revolution: An Economist's Guide’, American
Economic Review 93 (2) (2003).
12
World Trade Report, TRENDS IN INTERNATIONAL TRADE (World Trade Organization, 2013).
13
id; Daron Acemoglu et al, ‘The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth’,
American Economic Review 95 (3) (2005).
14
O Krpec and V Hodulak, ‘War and International Trade: Impact of Trade Disruption on International Trade
Patterns and Economic Development’, Brazilian Journal of Political Economy 39 (1) (2019).
15
THE WORLD ECONOMIC AND SOCIAL SURVEY 2017, The Department of Economic and Social Affairs of the
United Nations Secretariat, E/2017/50/Rev.1ST/ESA/365.
16
id.
17
Pascal Salin, Competition and Free Trade (Routledge, 2018).
18
id; Anne Krueger, Liberalization Attempts and Consequences (Cambridge, 1978).
that they are in the domestic country.19 As a result, foreign companies and individuals are
entitled to the same national treatment in the Courts as domestic businesses and individuals,
ensuring that taxes on goods imported into or exported from the country are harmonious
across same type of goods. Similarly, imported commodities are subject to the same
standards as applicable to domestic manufacturers.

When these conditions are met, international and domestic producers compete on a level
playing field, resulting in free trade.20 There is no distinction made between imported and
domestic products. Buyers have the option of selecting the cheapest commodity, whether it is
domestic or imported.

A level playing field does not mean that costs should be the same for producers everywhere.
It means that competitors must not be advantaged or disadvantaged by artificial costs or
regulations.21 A tariff is a charge on imports of a good that is not levied against the same good
domestically produced, and thus, is an artificial cost.22 Requiring that imports be shipped in
costly specialised containers whereas domestic products can be shipped in cheaper packaging
is artificial discrimination against imports. A level playing field is created when, for example,
the GATT/WTO rules on health and safety standard (SPS) is imposed on imports in the same
way it is imposed on domestic products as long as there is scientific basis for the standard.23

THE ADVANTAGES OF FREE TRADE

There are both theoretical and practical arguments supporting free trade. The theoretical, and
also the most convincing argument, known as comparative advantage, was first propounded
by Adam Smith and David Ricardo.24 The practical arguments are more dynamic and based
on the realities of modern trade and world system. This section shall analyse all of them in
detail.

A. The Theoretical Case - Comparative Advantage

19
id.
20
id; Surya Subedi, ‘The Notion of Free Trade and the First Ten Years of the World Trade Organization: How
Level is the Level Playing Field?’ Netherlands International Law Review 53 (2) (2006).
21
COMPETITIVE NEUTRALITY: MAINTAINING A LEVEL PLAYING FIELD BETWEEN PUBLIC AND PRIVATE
BUSINESS (OECD, 2012).
22
Daniel Bethlehem et al, The Oxford Handbook of International Trade Law (Oxford, 2012).
23
The WTO Agreement on the Application of Sanitary and Phytosanitary Measures, 1995.
24
Adam Smith (n 5); David Ricardo, On the Principles of Political Economy and Taxation (John Murray,
Albemarle-Street, 1817).
Most economists believe that countries should produce the products that they can produce
most cheaply, sell them to consumers in other countries, and exchange them for goods
produced more cheaply elsewhere. As noted earlier, this theory of comparative advantage
was first developed by Adam Smith and David Ricardo. They concluded that while certain
goods may always be cheaper in each country, and one country might be produce each
product more efficiently, as long as there are differences in relative prices, most countries
will be better off producing more of the relatively cheaper goods.25

Ricardo expanded on this theory by assuming only two nations, England and Portugal, as
well as only two commodities, wine and cloth, and also that labour was the only factor of
production.26 In his example, workers in England could produce 3 units of cloth or 1.5 units
of wine per day. On the other hand, workers in Portugal could only produce 1 unit each of
wine and cloth per day. As a result, these figures imply that English workers were more
active than Portuguese workers in each operation.

Now, if any worker in England switched from winemaking to clothmaking, he would reduce
wine production by 1.5 units while increasing cloth production by 3, resulting in a 2 unit
increase in the relative price of wine. However, in Portugal, the price of wine will be 1 unit of
cloth. Thus, even though English producers were more productive in each activity, wine
would be cheaper in Portugal and cloth in England.

If each country consumed only the goods it produced domestically, consumers would be able
to consume less of both the goods. However, the situation will be reversed if the countries
traded. To illustrate, if England employed 50 people, then it is possible to produce 150 cloth,
120 cloth and 15 wine, continuing on to no cloth and 75 wine.

Portugal, however, can produce 50 cloth and no wine, 25 cloth and 25 wine, and 50 wine and
no cloth. If workers split their income equally between wine and cloth, a worker in England
could buy 75 cloth and 38 wine, while in Portugal each could buy 25 cloth and 25 wine.
World consumption of cloth would be 100 and that of wine would be 63.

However, if only cloth was produced in England, the world consumption of cloth could be
150 units, and if Portugal only produced wine, the world consumption of wine could be 50
units. As a result of trade, cloth prices would fall in Portugal and rise in England, allowing
customers in both countries to buy more of both products.
25
id.
26
id.
Thus, when there are differences in relative prices of goods between countries when they do
not trade, there can be more of both commodities in both countries, with trade. As a result,
free trade will increase the consumption in each country. The benefits from free trade are
determined by relative efficiency in manufacturing products, rather than absolute efficiency.27

Since prices are assumed to represent relative cost in Ricardo’s example, it is assumed that
competition was present in the region.28 However, from an individual trading nation’s
vantage point, it is irrelevant why the prices are what they are abroad. If prices in the home
country represent the marginal cost of production of varied items, then buying from the least
expensive source can result in more value for money for consumers in the place of
manufacture.

B. Peacekeeping

The economic, monetary and trade policy of nations during the period between World War I
and II was largely aggravating. The incongruent levels of economic performance of the
former enemies only intensified the friction between them. For instance, while the US
economy took off, Germany’s was riddled with inflation and had begun to disintegrate. 29 The
American Smoot-Howley Act, which began a series of successive tariff escalations, coupled
with currency manipulation and other protectionist measures only worsened the situation.30

While it cannot be said that such erroneous policies were the principal cause of the Second
World War, it was largely agreed by the nations that they had stiffened the already strained
relations between the warring nations and led to the war. 31 Consequently, the Allied Powers
strongly believed that international economic cooperation and interdependence would play a
significant role in building the trust on which world peace depends, and would avoid another
war, and a liberal trade policy is one of the means of achieving that end. 32

This precept is also recognized in the ITO Charter wherein it states that “the experience of
cooperation in the task of earning a living promotes both the habit and technique of common

27
Marc Melitz et al, International Trade: Theory and Policy (Pearson, 2014).
28
id.
29
Harald Wixforth, ‘The Economic Consequences of the First World War’ Contemporary European History 11
(3) (2002).
30
Anne Krueger, American Trade Policy: A Tragedy in the Making (AEI Press, 1995).
31
Robert McGeorge, ‘An Introduction and Commentary: Revisiting the Role of Liberal Trade Policy in
Promoting Idealistic Objectives of the International Legal Order’, Northern Illinois University Law Review 14
(3) (1994).
32
Roland Paris, ‘Peacebuilding and the Limits of Liberal Internationalism’, International Security 22 (2) (1997).
effort and helps make permanent the mutual confidence on which peace depends.” 33
Moreover, in order to fully exploit the comparative advantage, nations encourage
specialization, which then promotes economic interdependence. Increasing economic
interdependence reduces the chances of hostilities between nations. This is because hostilities
would force the nations to invest in domestic substitutes, which in turn will impose higher
costs on producers leading to costly goods. Hostilities may also jeopardize the supply of vital
goods and services.

C. Economic Growth

There is a wealth of information which proves that liberal trade policies promote economic
development and higher standards of living. Case in point is the country of Britain, which
was the first to abolish trade barriers and pursue the ‘free trade’ agenda in the mid-nineteenth
century,34 which propelled it towards the highest economic growth rate as well as the highest
standard of living in the 19th century.35 The continent's economic growth accelerated as other
European countries followed Britain’s example.36 Many academics agree that the great
disparity in living conditions between the western world and the other nations could not have
occurred so quickly if trade barriers were not lowered. 37 The elimination of trade and
exchange barriers was a critical component in many European economies’ reconstruction and
long-term growth.38

This is also supported by the economic history of the four ‘Asian Tigers’ – South Korea,
Singapore, Hong Kong and Taiwan - in the period after 1960. Import substitution policies,
along with tariff barriers and other limits on imports, were introduced by all four ‘tigers'
immediately after the war to promote domestic economic development. 39 Instead, since input
prices were high and the protected market was more lucrative while producers had little
competition, those trade barriers acted as a deterrent to exports. 40 South Korea was the first to
change its approach. By 1960, nearly all import restrictions and taxes on products going into
export production had been removed, resulting in a surge in exports.41 The economy took off
33
The Havana Charter for an International Trade Organization, 1948.
34
William Grampp (n 9).
35
Hans-Joachim Voth (n 11).
36
Mehdi Shafaeddin (n 10).
37
Hans-Joachim Voth (n 11).
38
Anne Krueger, ‘The World Economy at the Start of the 21st Century’, Rochester (2006).
39
Umesh Gulati, ‘The Foundations of Rapid Economic Growth’, The American Journal of Economics and
Sociology 51 (2) (1992).
40
id.
41
id.
with further liberalization, with exports increasing by more than 30% annually and real GDP
increasing by more than 10% annually.42 South Korea was declared a developed country by
1990.43 The same was the case with Taiwan, Singapore and Hong Kong.

The Chinese economic reforms have also shown the success of liberalization. China had been
a virtually closed economy with very small volumes of imports and exports. 44 A major part of
the reform effort was to open the economy and reduce many of the trade barriers. 45 The rate
of economic growth and of trade volumes increased. 46 By the end of the 1990s China had
become a major trading nation and an important actor on the world stage. This is evidence by
the fact that negotiations for China to join the GATT/ WTO began in December 2001.47

D. Improved Domestic Performance

Import competition often leads to better performance of domestic firms as they are spurred to
innovate successfully. Similarly, producers of exportable and competing goods and services
face competition from the rest of the world. The importance of that competition cannot be
overestimated. The post-war history of the American automobile industry provides a vivid
example of what competition can do.

After the Second World War, the US auto industry was pre-eminent in the world and autos
were a major export.48 There were only a few large producers, and by the 1970s, the number
of American producers had fallen to three.49 At the same time, auto production had begun
ramping up in the other countries.50

By that time, flaws were common in the automobiles and choices limited. 51 Almost all US
made cars were large.52 Hence, imports, specially of compact cars, which were cheaper to
purchase as well as to operate, started growing.53 Those imports provided more choice for
42
Jong-Wha Lee, ‘The Republic of Korea’s Economic Growth and Catch-Up: Implications for the People’s
Republic of China’, ADBI Working Paper Series (2016).
43
id.
44
CRS Report, CHINA’S ECONOMIC RISE: HISTORY, TRENDS, CHALLENGES, AND IMPLICATIONS FOR THE
UNITED STATES (Congressional Research Service, 2019).
45
id.
46
id.
47
Press Release, ‘WTO Successfully Concludes Negotiations on China's Entry’, Press/243 (WTO, 2001).
48
Barton Bernstein, ‘The Automobile Industry and the Coming of the Second World War’, The Southwestern
Social Science Quarterly 47 (1) (1966).
49
id.
50
D Katzner and M Nikomarvo, ‘Exercises in Futility: Post-War Automobile Trade Negotiations between Japan
and the United States’, Economics Department Working Paper Series 52 (2005).
51
id.
52
id.
53
id.
buyers, and most of the imports had far fewer defects than the American models. American
auto companies were faced with serious competition and responded by starting to improve
the quality and variety of cars produced.

However, the US auto producers also appeal to the government for protection from imports,
and by 1980, a system of ‘Voluntary Export Restraints’ (VER) was introduced under which
the Japanese agreed to, and did, limit their exports to the US. 54 One result of VERs was that
the Europeans increase their production and share of the market for smaller vehicles, and
South Korean producers, who were not subjected to restraints, successfully entered the
market.55 Another was that the price of imported cars rose. 56 The additional profits of the
Japanese producers enabled them to devote more resources to research on quality
improvement than before.57 By the mid 1980s, the VERs were removed. 58 By that time,
competition facing American producers had increased and the quality of American made cars
had improved noticeably.59 American companies had launched the production and sales of
compact cars.

Therefore, the quality of manufactured automobiles of all types improved significantly, and
greater competition also enabled Americans to purchase compact and subcompact cars at
prices below what they would have had to pay for larger models. Equally important, being
able to sell in the world market enabled those companies that could produce superior products
and/or at a lower cost to have a larger market in which to sell their product. That, in turn,
raised world productivity and benefited both producers and consumers.

E. Dynamic Gains from Trade

Trade stimulates creativity and competition boosts productivity. On the demand side,
exchange broadens the range of products and services available to both customers and
producers. Many developing countries have enjoyed and applauded the benefits of increased
choices for consumers, which has resulted directly from free trade. 60 For domestic

54
Douglas Nelson, ‘The Political Economy of the U.S. Automobile Production’ in The Political Economy of
American Trade Policy (University of Chicago Press, 1996).
55
id.
56
id.
57
D Katzner (n 50).
58
Douglas Nelson (n 54).
59
L Howell and J Hsu, ‘Globalization Within the Auto Industry’, Research Technology Management 45 (4)
(2002).
60
Anne Krueger (n 18).
manufacturers, an access to a larger variety of products which can be used as raw materials
helps them maintain better quality control at a lower cost.

For consumers, the benefits of trade include lower prices for some goods and services. They
also include the reduced monopoly power of domestic producers, the spur of competition,
longer production runs enabling lower unit costs, and comparative advantage. Even when
imports are small as a share of the consumption of a particular item, the threat of additional
competition from imports significantly curbs the pricing power of domestic producers.

For efficient domestic producers, the larger market enables economies of scale and provides a
higher return to successful research and development activities. Allocation of more resources
to research and development becomes economically attractive when a successful product or
process is developed and has wider applicability. Now-a-days, production processes have
become more complex, with greater specialization in the production of individual parts. As
the time and costs of transport and communication have fallen, producers have been able to
produce and/or buy more differentiated parts and components, which can be produced at an
economically efficient scale in a low cost location. 61 The fact that these parts and components
can reach any part of the world rapidly enables longer production runs even of specialised
items, which in turn means that production of the commodities using those parts becomes
cheaper.

Open trade enables more rapid transmission of knowledge, as import competing and
exporting firms learn from their foreign competitors. This transmission of knowledge has
increased in importance as innovations and technical changes have increased the complexity
of most manufactured products.

F. Increased Trade in Services

Trade in services has grown even more rapidly than trade in goods in the past half century. 62
In earlier years, the high cost of transport and communications meant that many services
simply could not be effectively traded in significant quantities. Professional services, such as
architecture and medicine, for example, had to be undertaken with the service provider in
proximity to the service user. As transport and communication costs have fallen, even things
like medical tourism and architectural services have become significant for some countries.
61
Pascal Salin (n 17).
62
Greg McGuire, ‘Trade in Services – Market Access Opportunities and the Benefits of Liberalization for
Developing Economies’, Policy Issues in International Trade and Commodities UNCTAD/ITCD/TAB/20.
Some services, such as ocean transport, always existed. But because the price of most
services was high when they were supplied from a distance, the volume of most service
transactions was low.63 As transport and communication costs have fallen, international trade
in many services has become more economic.

G. Survival of Smaller States

To become economically self-sufficient, a country would have to have vast resources, such as
the terrain, optimum climates and natural resources at its disposal. However, that is seldom
the case. For all nations in the world, there are always products for which they enjoy a
comparative advantage, and likewise, goods for which they are at a comparative
disadvantage. This is exemplified in the case of smaller states, which, due to their
geographical location, size, or topography, find themselves with scarce resources. Liberal
trade allows the country with lesser resources to benefit from the abundance enjoyed by
larger nations, and thus, mitigate the comparative disadvantage.

Singapore offers a prime example of a small nation which thrives, and in fact, survives
because of liberal trade. It is a very small island nation, measuring only 709 square
kilometers.64 Not only is the island deficient in minerals, but the better part of the land is
unsuitable for agricultural activities. 65 Therefore, it is dependent on trade with other nations
for its survival. Despite facing such severe resource constraints, Singapore’s location on the
lines of international trade route transforms it into a trade hub. 66 Moreover, it allows the
country to import virtually all of its food and natural resources and sell finished goods and
other services in return. For instance, Singapore imports crude oil, refines it, and exports most
of it back.67 Thus, free trade allows the survival of smaller states which cannot be
economically self-sufficient.

CHALLENGES OF LIBERAL TRADE

A. Complicated Global Value Chains

63
id.
64
The World Bank Data (2014).
65
id.
66
Peter Borschberg, ‘Singapore's Historical Journey Toward a Global Trading Hub: An Introductory Overview’
Commodities Trading Institute, SMU (2016).
67
id.
International trade has led to the development of global value chains. 68 It used to be the case
that a commodity, such as a washing machine, was made of raw materials that were used in a
factory where the other parts were produced and the final product assembled. As technology
has progressed, more and more parts and components are used in the device, and, as in the
case of iPhones, the parts come from many countries. Bosch Sensortec makes accelerometers
in Germany, the US, China and South Korea, among other places. 69 Audi chips are made by
Cirrus Logic, with additional locations all over Asia and Europe.70 Batteries are made by
Samsung in some 80 countries,71 and cameras made by Qualcomm with factories all over the
world.72

Global value chains have developed as the final product assembler orders the parts,
components, and raw materials from the various places and companies in the world where
there are cost advantages due to low wages for unskilled workers in some instances, abundant
power or cheap raw materials in other cases, or an adequate supply of engineers and
technicians in still others.73 The fact that the final assemblers must have the appropriate parts
and components of very precise specifications, combined with the large cost saving accruing
to those who can achieve just-in-time delivery of parts and components, has integrated
various production processes in ways that could not have been imagined half a century ago.

The existence of complicated value chains for many products makes manufacturing and
assembly everywhere more sensitive to changes elsewhere in the world. That is a major
challenge confronting liberal trade. An earthquake shutting down a factory in Japan can
disrupt production in buyer’s facility in many places. Moreover, it often no longer makes
sense to speak of ‘country of origin.’ It has been estimated, for example, that about 40% of
ex-factory price of an automobile assembled in the US is attributable to auto parts and
components made in Mexico.74

68
Olivier Cattaneo et al, Global Value Chains in a Postcrisis World: A Development Perspective (The World
Bank, 2010).
69
Bosch, Locations <https://www.bosch-sensortec.com/about-us/our-company/locations/>
70
Audi, Locations
<https://www.audi.com/en/company/profile/locations.html#:~:text=The%20global%20network%20of
%20Audi,in%20Hungary%2C%20Belgium%20and%20Mexico.>
71
Samsung SDI, Global Network <https://www.samsungsdi.com/about-sdi/global-network.html>
72
Qualcomm, Locations <https://www.qualcomm.com/company/locations>
73
D Elms and P Low, Global Value Chains in a Changing World (World Trade Organization, 2013).
74
Centre for Automotive Research, THE GROWING ROLE OF MEXICO IN THE NORTH AMERICAN AUTOMOTIVE
INDUSTRY (2016).
Value chains are important because they create opportunities for further gains from trade for
consumers and producers. The international community should find ways to enable the world
to take advantage of the gains available with the efficient use of these possibilities.

H. Setting Uniform Standards for Goods

The complexity of modern production means that setting standards is more important than
ever. For instance, each of the pieces of an automobile must fit with the others precisely.
Moreover, some common rules are necessary if there is to be beneficial competition between
producers in different countries. Having some common rules and frameworks greatly
simplifies the challenge of exporters and importers who may be buying or selling in large
number of countries.

Many standards are set by the industries themselves, but for many items government plays a
major role.75 When that is the case, the standard can be set to facilitate commerce and assure
buyers and sellers that goods are of the intended size, shape, materials, and quality. But they
can also be set to preclude foreign entry. Companies and unions often lobby for standards that
give them an advantage over foreign competition. Political battles over standards for auto
emissions, for example, have been fought where domestic producers are seeking regulations
that give them an advantage over there foreign competitors.76

I. Barriers to Trade in Services

Services, almost by definition, are items on which a tariff at the border cannot be imposed. 77
Many services are regulated. In most countries, for example, banking, financial services, and
insurance are regulated. Regulations are often such that foreign insurance companies cannot
enter a country’s market or can enter it only in a very limited way. 78 Most countries license
health practitioners, and without mutual recognition of qualifications, trade in services
requires travel by a patient to the country where the health practitioners are located.

Barriers such as licensing requirements can arise to assure consumers that practitioners of the
license services are qualified, or they can be imposed in a way that restricts competition.
Some of the latter barriers impede the efficient trade in services in much the same way tariffs

75
Anne Krueger (n 18).
76
Douglas Nelson (n 54).
77
Anne Krueger (n 18).
78
id.
do for goods. Some agreement among the nations governing trade in services have been
reached under the GATT/WTO.79 However, there are still barriers to efficient international
trade in many services. While it is relatively straight-forward to compare, say, the tariff rate
on imports of automobiles with that on clothing, the same is not true for services. Banking
and insurance regulations, licensing requirements for professionals, and a host of other
measures affect the ability to compete cross-border in services.

J. Domestic Policies

Some domestic economic policies have a bigger effect on international trade than others.
Sometimes producers of goods wanting protection from imports can often find a domestic
regulation or other measure that would effectively improve their competitive position against
foreign producers. For example, the US has claimed that the European genetically modified
organism (GMO) restrictions are a form of discrimination against US products, as there is no
scientific evidence that GMOs are harmful.80 The Europeans, however, insist that there is
insufficient scientific evidence that they are not.81 An international dispute resolution
mechanism is needed and is provided by the WTO.

Other health regulations affect trade in more questionable ways. An example is a recent case
in the USMCA negotiations.82 US farmers long believed that Canadian quality grading of
premium wheat discriminated against US wheat.83 In a side letter to the USMCA agreement,
each party agreed to “treating wheat from each other no less favourably than it accords to like
wheat of national origin with respect to the assignment of quality grades.”84 Previously,
American produced wheat had been ineligible in Canada for classification as ‘premium.’ The
USMCA agreement was greeted by representatives of US farm groups and politicians as a
significant breakthrough for US farmers.85 Representatives of Canadian wheat growers were
unhappy, as they anticipated more competition for Canadian grown premium wheat.86

79
The General Agreement on Trade in Services, 1995; A Mattoo and C Fink, ‘Regional Agreements and Trade
in Services: Policy Issues’, Journal of Economic Integration 19 (4) (2004).
80
Charles Hurburgh, ‘The GMO Controversy and Grain Handling for 2000’, Iowa State University
<https://www.extension.iastate.edu/grain/files/Migrated/99gmoy2k.pdf>
81
id.
82
Agreement between the United States of America, the United Mexican States, and Canada, 2018.
83
D Johnson, ‘U.S. Perspectives on the Canadian Grain Problem: A Critical Appraisal’, Agricultural Economics
Miscellaneous Report No 182 (1998).
84
USMCA Agreement (n 81).
85
Clint Schemmer, ‘Spanberger Cheers Breakthrough on Big-Three Trade Agreement’
<https://fredericksburg.com/news/local/spanberger-cheers-breakthrough-on-big-three-trade-
agreement/article_121f52d2-01e1-5440-8b4d-d1258ab80fee.html>
86
id.
Some issues are very serious for trading partners. In the early part of this century, the US
government subsidized cotton production as part of the overall domestic agricultural
program.87 As a result, cotton production and supply rose rapidly, and American exports
increase sharply.88 The result was a fall in the international price of cotton, including the price
received by other exporters.89 There were four small African nations - Benin, Burkina Faso,
Ivory Coast and Mali - for which cotton was a major export. 90 Income from cotton exports
constituted a large share of the income of many poor farmers.91 Naturally, those countries
protested that the US subsidy scheme disadvantaged them unfairly.92 Therefore, something as
seemingly domestic as agricultural price support policy can have important implications for
international trade and international trade relationships.

K. National Security Concerns

Many issues of protection raise questions of trade policy in relation to domestic concerns. An
important case is military hardware. Some items are hi-tech and involve technology that is
not available internationally. Clearly, national security interests dictate that these items not be
exported to nations with hostile intent. However, preventing exports directly to hostile
nations is not simple, and is rendered even more difficult because exports to friendly nations
might be re-exported to hostile ones.

Many countries face this issue. In the US, there is a regime in which export control of
sensitive equipment covers not only to whom producers of equipment may sell, but what the
producers must be in the importing country to ensure that exports are not reshipped to nations
ineligible to receive them.93 The Department of State, Treasury, and Commerce have each
had their own system, although there have been proposals to institute a centralised system. 94
In addition, there are questions as to when the issue is truly a national security concern and
when it is one that protects domestic producers.

87
K Watkins, Cultivating Poverty: The Impact of US Cotton Subsidies on Africa (Oxfam, 2002).
88
id.
89
id.
90
id; Elinor Heinisch, ‘West Africa versus the United States on Cotton Subsidies: How, Why and What Next?’,
The Journal of Modern African Studies 44 (2) (2006).
91
id.
92
id.
93
Department of State, ‘Overview of U.S. Export Control System’ <https://2009-
2017.state.gov/strategictrade/overview/index.htm#:~:text=The%20U.S.%20Government%20controls
%20exports,interests%20and%20foreign%20policy%20objectives.&text=Provide%20for%20national
%20security%20by,sensitive%20U.S.%20technology%20and%20weapons>
94
id.
 CONCLUSION

International trade is important for many reasons. It is a source of goods and materials used in
production; it provides inputs of some raw materials and intermediate goods much more
cheaply than they can be produced domestically; it enables efficient producers to take
advantage of economies to scale; and it provides competition, which spurs productivity and
innovation.

It is true that, for countries whose trade policies were not liberal earlier, an open trade policy
single-handedly does not account for their successful economic growth. However, it would
not be an exaggeration to say that the results would have been much less drastic reversals of
fortune, if not for the shift in trade policies. One factor contributing to the success of the
outer-oriented countries was the transition from expensive domestic items produced with the
aim of import-substitution to other goods that would profit more in the markets overseas.
Other critical aspects, including the development of adequate infrastructure, also
complimented the free trade policy.

Intensifying trade ties between countries has played a significant and generally beneficial role
in the global economy's evolution. After WWII, the transparent and multilateral trade system
that emerged was bolstered, which led to a long period of successful global growth and
progress, which included greatly reducing poverty in the world. Liberalising trade further will
only enable more rapid economic growth.