Chapter P1-P2 C1 - (International Political Economy Series) Anna Karhu, Eini Haaja - Global Trade and

PART I
Development of Global Trade and Trade

Governance
CHAPTER 1
Lessons from Trade Policy Research
Anna Karhu and Eini Haaja
Introduction
Global challenges, from the climate crisis to digitalisation and the multi-
plicity of global powers, are faced by businesses as well as national
governments, but also by international organisations such as the WTO,
UNCTAD, the World Bank and the OECD. The increasing severity of
weather conditions and natural catastrophes, the outbreak of the COVID-
19 pandemic and Russia’s invasion of Ukraine are examples of events that
have shaken the prevailing governance structures of global trade. In addi-
tion to these trends, the global trade landscape has changed dramatically
from the time when these organisations were established. For instance,
the world trade volume in 2020 was approximately 40 times higher than
the records in the 1950s, the early years of GATT. In the same time
period, the world trade value has grown to 300 times that of the 1950s.
In comparison with the levels at the time of the establishment of the WTO
A. Karhu (B) · E. Haaja

University of Turku, Turku, Finland
e-mail: anna.karhu@utu.fi
© The Author(s), under exclusive license to Springer Nature 3

Switzerland AG 2022
A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance
During De-Globalization, International Political Economy Series,
https://doi.org/10.1007/978-3-031-13757-0_1
4 A. KARHU AND E. HAAJA
in 1995, world trade volume and value have grown by 4 and 5%, respec-
tively, as of 2020 (WTO, 2022). Given the gradually evolving megatrends
as well as the trade evolvement, the global economy has transformed
from what it was when these trade organisations were created, and it
is a valid question whether these institutions are still capable—let alone
optimal—of pursuing their original goals.
The global economy has seen two waves of globalisation, the first
starting in the nineteenth century and ending at the beginning of the First
World War, and the ongoing wave beginning after the Second World War
and continuing since. Stemming from comparative advantages and the
resulting national specialisation, international trade transactions include
goods and services with increasingly complex global value chains. Inter-
national business, meaning cross-border flows of trade and investment,
has been widely welcomed by policymakers due to its contribution to any
country’s economic growth and the creation of innovation and jobs; yet
the cons may involve competitive challenges and displacements of activi-
ties to other, more optimal countries (Ortiz-Ospina & Beltekian, 2018).
To optimise this balance, trade policy concerns the regulations and rules
of international trade—who trades what with whom and who makes what
kind of rules for these transactions. The conceptualisation of the term
‘trade policy’ has varied in different disciplines and at different times,
evolving together with theoretical as well as world economy develop-
ments. Trade policy as a phenomenon does not fall clearly into any single
academic discipline; as a result, it has been studied by multiple disciplines
from economics and international relations to law, development studies,
policy and international business (Velut, 2015).
Today, trade policy is gaining increasing attention from various disci-
plines. Responding to global megatrends and to the changing inter-
national trade dynamics requires large-scale co-operation and common
goals between multiple levels of decision-making agencies as well as
between different actors from policy and business to society at large.
It is crucial that the governing mechanisms of global trade are able to
transform themselves as global trade itself and the driving values in our
societies evolve. Prosperity and peace are built together, not in isolation.
However, the recent international crises have also shown the down-side
of interconnectedness, such as the difficulty in finding ways to decrease
environmentally harmful emissions that do not obey man-made national
borders, diseases that benefit from our ability to travel across continents
quickly and the fragility of international relations and their influence on
1 LESSONS FROM TRADE POLICY RESEARCH 5
national autonomy. While these phenomena are directly addressed at the

policy level, their impacts are instantly felt at the level of individual busi-
nesses—particularly the ones engaged in international operations, but also
domestically operating ones due to implications to and even disruptions
in global value chains. Thus, there is a need for an in-depth under-
standing of the international trade and investment landscape in a world
where all actors are increasingly interconnected and interdependent, yet
not as united as before. Indeed, unity is taking new forms through the re-
arrangement of previously mainly US-centred economic state power, and
through the emergence of new powers, such as societal voices through
uncontrolled social media movements and the emergence of gigantic
corporations such as Amazon, Huawei and Meta, which provide and
control increasingly crucial infrastructures.
These changes require reactions from businesses as well as policy-
makers, and understanding the related dynamics at a larger scale calls
upon us as researchers to explore the implications of global trends and the
disruptions to the links between trade, international business and policy
development. To expand the capabilities of all stakeholders to respond to
our rapidly changing international trade and business environment, the
respective actors, that is, policymakers, businesses and different kinds of
societal institutions, as well as scholars in these fields, must be invited
into the discussion on the dynamics shaping the future of the interna-
tional environment. In fact, this potential and need for collective action
has been the underlying inspiration for this book—the need to intro-
duce the emerging dynamics of trade policy to all, not only politicians,
and thereby, to also allow other actor groups to recognise their role and
possibilities to contribute, collectively at least, to this development.
To initiate this future-oriented trade policy exploration, we must set
the stage for where we are coming from. To start with, this first chapter
gives an overview of international business research related to trade and
trade policy, with the aim of identifying what our current understanding
is about the interconnectivity of trade policy and business, and what could
be the paths towards the most impactful future research concerning trade
policy dynamics and the future development of the international business
environment.
Development of Trade Policy as a Research Topic

International Trade Explained by Economists
At the beginning of twentieth century, before the two World Wars, global
trade was vigorous as goods such as cotton, coffee and tea were trans-
ported between different countries all over the world (Rodrick, 1995).
As international trade grew, economists were interested to understand
first of all why nations engage in international trade (Rodrick, 1995; Van
Assche, 2018). Thus, the economics discipline approached trade and trade
policy from the point of view of national economies (Van Assche, 2018).
The well-known models of Smith, Ricardo and Heckscher-Ohlin have
advanced our understanding of these questions. Economics has developed
a clear consensus of the superiority of free trade. However, international
trade is rarely free. To understand this contradiction, a vast literature has
developed at the intersection of economics and trade policy (Rodrick,
1995). Despite this, the focus in research has mainly been at the national
level, studying international trade and its implications to, for example,
costs and labour (e.g. Haberler, 1950; Samuelson, 1939; Williams, 1929).
After WWII, two influential changes gradually took place influencing
international trade and making way for international business (IB) as an
independent field of study. First, new independent countries began to
emerge, and the number of nations grew from fewer than 75 indepen-
dent countries in the world (although half a dozen of them had multiple
colonies) to nearly 200 independent countries today (Boddewyn &
Goodnow, 2020). Therefore, due to the increasing number of nations,
the opportunities for international trade and investment also grew.
Second, as a consequence of the new business opportunities that emerged
from growing international trade, a new type of large enterprise oper-
ating in multiple countries emerged: the multinational enterprise (MNE).
The emergence of such companies became the focus of IB research and
has a strong background in fields such as marketing, economics, finance
and management (Boddewyn & Goodnow, 2020; Van Assche, 2018).
Thus, in addition to looking at international trade and trade policy as a
national level phenomenon, researchers began viewing its influences and
interconnections from the perspective of firms and business environments.
Trade Liberalisation and the New MNEs

When IB studies related to the dynamics of trade, trade policy and
business began to emerge in the early twentieth century, they focused
on topics such as export and import activities of firms and the
economic, political and regulatory factors affecting imports and exports
(Boddewyn & Goodnow, 2020). As global trade grew and trade policy
worked for more liberal trade rules, the emerged new organisation of an
MNE also increased its influence. Thus, it presented a new part in the
puzzle for governing international trade and understanding the influence
of foreign firms on home and host countries. On a more general level,
government and foreign enterprise relations became one of the key char-
acteristics of IB research studying the influence that MNEs had on the
national environments both at home and abroad (e.g. Behrman, 1969;
Fayerweather, 1966; Fowler, 1965; Kapoor, 1970; Martyn, 1965; Mike-
sell, 1967; Vernon, 1969). For example, in the United States the labour
unions and businesses had advocated free trade policies together. The rise
and growth of MNEs, however, forced the labour associations to recon-
sider (Guisinger, 1973). MNEs were seen as taking jobs, technology and
capital out of the United States, thus questioning the benefits of free
trade for the home country (Guisinger, 1973). However, these rising new
worries were considered to provide no ground for trade restrictions, since
the primary objective of trade policy is not domestic employment genera-
tion. Nonetheless, it was conceded that MNEs have substantial power and
should take into consideration their effects on the home country when
planning their operations.
In a host country context, especially in relation to developing coun-
tries, the discussion has focused on the ability of MNEs to boost the
development of nations (Moore, 1972). This relationship is far from
straightforward, however. For example, the aim of a developing country’s
government might be to increase national independence, but at the same
time to improve the qualitative and quantitative change in services and
goods produced by their national economies. To produce these goods and
services efficiently, it is necessary to organise, accumulate and co-ordinate
the numerous resources necessary for producing the desired final output.
In addition, a very high production volume is often required to effectively
utilise these technical and organisational inputs to minimise the unit costs
of final output. Therefore, this points in the direction of increased interna-
tional interdependence rather than national independence. The research
identified three general actor groups to organise this: government, the

national private sector and the foreign private sector including MNEs.
Thus, depending on the level of a nation’s development, these different
actors have very different levels of capability to boost the desired develop-
ment. The choice between these three alternatives incurs different types
of costs and requires different degrees of support from policy. However,
when organised via international firms to produce the desired goods and
services, it generally implies a relatively higher level of international inter-
dependence, which may conflict with the other developmental goal of
increasing national independence. There have been some attempts to
overcome the increase of interdependencies by separating the national
market from the international market. However, this policy mostly leads
to violation of one of the requisites for productivity: the necessity for high
volume in order to reap the benefits of economies of scale. This reasoning
brings forward the paradox that accepting a higher degree of policy inter-
dependence with respect to individual sectors may ultimately increase the
overall independence of the country, as only the country which uses its
resources efficiently will be able to elevate the well-being of its citizens
(Moore, 1972).
In addition, Drucker (1974) brought forward our understanding of
the role of MNEs as a catalyst for the development of national economies,
that MNEs need political muscle to overcome strongly entrenched
protectionist forces and that exporting is done most successfully, most
easily and most cheaply if at least part of the production is to be sold in
the world market. In addition, the MNE itself has developed from the
‘parent company’ with wholly owned ‘branches’ abroad towards a more
globally structured business able to tap any capital market. For example,
in Japan, the removing of restrictions on foreign investment was expected
to bring a massive rush of take-over bids and 100 percent foreign-owned
ventures. Instead, it was increasingly the Western investor—American as
well as European—who presses for joint ventures in Japan and expects the
Japanese partner to supply the capital while they supply technology and
product knowledge (Drucker, 1974).
Around the 1960s and 1970s, the political domain of trade also
increasingly gained the interest of researchers as an outcome of the
economic and political developments that took place after the two World
Wars (Mansfield & Pevehouse, 2015). This specific subtheme of inter-
national political economy focuses on the different political aspects of
international trade such as sanction and statecraft (e.g. Baldwin, 1971),
domestic sources of trade policy (e.g. Katzenstein, 1977) and interna-

tional trade institutions (e.g. Krasner, 1976). As the understanding of
the trade policy mechanisms and policy making grew, also IB research
developed.
In addition to the perspective of studying the influences MNEs have on
nations and how governments should manage that relationship, another
stream of study has explored corporate political activity (Austen-Smith,
1987; Baysinger, 1984; Potters & Van Winden, 1992). The basic assump-
tion is that the objectives of corporate political activity can be divided
into three main themes (Baysinger, 1984). First, businesses may work to
gain incentives (monetary or anticompetitive) from government through
lobbying activities or trade unions. Second, they may aim to manage
the turbulence created by governmental threats through lobbying, public
relations or having a presence at certain important locations and third,
companies may work to maintain a suitable business environment for their
operations by lobbying or having presence at certain important locations.
Thus, this stream of the research literature focuses on understanding busi-
ness political activity and strategies (Hillman et al., 2004; Lawton et al.,
2013). The approach in IB, therefore, has not only focused on trade
policy and business relations but more widely on policy and international
business interconnection. In relation to trade policy, for instance, Rugman
and Verbeke (1991a, 1991b) focused on studying MNE–government
relations and presented a concept of ‘shelter’ for an entry barrier that
imposes artificial costs on rival firms. Rehbein and Schuler (1999), on
the other hand, studied 1100 US manufacturing firms’ influence on trade
policy. Both of these studies, as in the case more generally, focused on
understanding the motives and processes of the firms rather than giving
policy implications.
Another perspective on the interaction of MNEs and policy is given
by the socio-political network approach (Boddewyn, 1988; Hadjikhani &
Ghauri, 2001; Ring et al., 1990). Here, the discussion of business
networks is extended to also include societal and policy actors. This
approach was more managerially oriented and aimed to understand how
companies could manage their socio-political networks. Earlier studies
also paid attention to the management of political actors by viewing
management as a function of response to the political environment
(Conner, 1991; Egelhoff, 1988; Kogut, 1991) and to the design of
coping strategies as managerial risk, country risk ratings, corporate struc-

ture or industry structure (Cosset & Roy, 1991; Lenway & Murtha,
1994; Miller, 1992; Ring et al., 1990).
Overall, due to the vast economic growth and integration during this
period, MNEs and trade came to present globalisation both good and
bad. MNEs and their internationalisation were the central theme in IB
research, and the analysis of issues related to cross-border trade and
investment focused on a private perspective rather than on a national or
governmental perspective (Van Assche, 2018).
The Globalisation of Free Trade and Rising New Markets

Global economic growth has increasingly moved from developed coun-
tries to developing countries. In particular, some developed countries have
grown rapidly and have drawn the attention of businesses by providing
increasing business opportunities (e.g. the BRIC countries: Brazil, Russia,
India and China). As these countries have grown to become bigger players
in the global economy, they also constitute very different types of busi-
ness contexts. Consequently, a new set of multinational corporations has
appeared: emerging market multinationals (EMNEs).
Due to these developments, the role of the political environment has
become more critical in IB studies. From the outset, the institutional
theory perspective has gained popularity. The policy sphere is seen as a
part of the characteristics shaping firms’ international strategic behaviour
(Peng et al., 2009). Through the institutional structures, policy is seen
as a critical element alongside firm and industry characteristics, creating
a strategy tripod (Peng et al., 2008). In this context, it is considered
that institutions provide an order that regulates the external environ-
ment and, thus, governs firms’ internationalisation decisions (Ahuja &
Yayavaram, 2011; Kostova et al., 2020). Studies have explored both the
influence these institutional structures have on firms (e.g. Arregle et al.,
2013; Marano & Kostova, 2016) and the dynamics between MNEs and
institutions (e.g. Hillman & Wan, 2005).
The need to understand the changes in the international business
environment has become increasingly evident. Thus, in addition to under-
standing the direct interactions of business and policy through corporate
political activity, or the influence that policies have through the institu-
tional environment, an understanding of the co-evolutionary nature of
change in the business environment as a result of the actions of busi-

ness and policy actors has also emerged. This literature stems from the
dynamics of innovation policies and MNEs (Cantwell, 2009; Giroud
et al., 2012). Moreover, IB research has developed to understand the
changes in the international business environment and its influence on
firms as a multilevel phenomenon. This has been necessary to under-
stand the emergence of e-commerce and its rapid growth from the level
of global regulation development in the WTO and regional trade agree-
ments to the national level policies to support innovation all the way to
the strategies of firms (Agarwal & Wu, 2018). During the twenty-first
century, the role of global value chains has also begun to intrigue both
researchers and policy makers. The mechanisms through which GVCs
influence policy making and doing business have been the primary focus
of this line of research (Gereffi, 2019; Kano et al., 2020). The latest devel-
opment in international political economy studies has been towards more
firm-level analysis related to the politics of international supply chains
(Mansfield & Pevehouse, 2015). Consequently, a review of IB research
shows us how the perspectives towards the interaction between inter-
national business and trade policy have evolved, and how the published
studies also contribute to understanding and managing these increasingly
complex and rapidly evolving relationships.
Conclusions
When policymakers look at the continuously changing international envi-
ronment, their interests lie in the performance of countries or regions
from a public or societal perspective. Internationally operating businesses,
in turn, view the same changes with a strong focus on the performance
of the firm from a private perspective. In the same vein, international
business research has generated wide expertise in explaining how the
international environment affects the behaviour and strategies of firms.
The research on international trade in IB studies has developed from
explaining international trade as a phenomenon to gaining understanding
of the interrelationship of trade growth, free trade and multinational
enterprises, thereby establishing a wider interest in understanding the
interconnection of business and policy as a newly established focus area
of international business policy.
As our review shows, the evolving reality of international trade and
business has been naturally reflected in the international business research
over recent decades, whereby the multitude of themes covered in inter-

national business research has expanded from understanding international
trade flows to how different political aspects are today promoted via inter-
national business, for example. It is also worth noting that, although new
focus areas emerge, the older ones are not forgotten but continue to be
pursued too in the new reality. This growth in the variety of themes under
investigation today is illustrated in Fig. 1.1.
While we have now entered times that drive nations towards multiple,
alternative centres of power, international business is also facing a new
turning point: de-globalisation. In the aftermath of the COVID-19
pandemic, the Russian invasion of Ukraine has been regarded as the end
of three decades of globalisation, and a new reality is to emerge, requiring
both scholarly and managerial expertise to manage in the new normal
that is taking shape. In the midst of turbulent geopolitics, the essence
of ‘international’ is re-gaining its true meaning. Firms doing business
in global markets are now facing increasingly different political realities
depending on where they operate and are even faced with pressures to
‘choose sides’ on different geopolitical issues or disputes that are priori-
tised or even viewed very differently in different power blocs. While the
Human rights Sustainability Democracy
Global value chains MNEs as

and trade policy institutional actors
MNEs and Corporate political MNE socio-political

globalisation activity network
Efficiency International Benefits of

of trade trade as trade rules
rules and imports and and
policies exports policies
Free trade
Why nations engage in
international trade
Fig. 1.1 The emergence of trade policy research themes in IB studies

Western world familiarised itself with increasingly open and free trade, the
continuing decline in FDI in relation to GDP (The World Bank, 2022)
and protectionist actions, for example, suddenly make it considerably
more meaningful where a firm operates. This relatively rapid evolvement
requires farsighted and open-minded scholarly exploration and even the
questioning of some of our assumptions in international business research.
However, wide expertise in explaining how the international environment
affects the behaviour and strategies of firms should allow us to transform
our explanations to reflect even considerable changes in the international
environment. In fact, the inevitably changing international environment
now calls upon international business research to deliver new managerial
insight for the benefit of businesses. The need to step up to the next level
in this research is urgent.
Based on the lessons from trade policy research in the field of inter-
national business covered above, we find it important to highlight two
avenues that scholars need to proceed down in exploring the changing
dynamics of the international environment: the recognition of temporal
underpinnings and the recognition of impact underpinnings. Regarding
the first, businesses often find it hard to engage in truly future-oriented
thinking about what the surrounding institutions might become; yet this
visioning is the way in which they can themselves determine their course
of action instead of adapting to change. Historical path dependence
limits imagination, and the recognition of this is important for busi-
ness managers in managing their way amidst breaking value chains and
suddenly appearing political risks. Thus, amidst rapid and wide changes, it
is important to study how foresight is employed in different international
business areas and operations. Besides a perspective to be studied, we want
to highlight that considering the employment of foresight is relevant also
to business scholars themselves—considering and challenging our own
stances in this respect can allow the disengagement from prior assump-
tions that were generated at the time of ever-increasing globalisation. We
should not let the past limit our research.
When it comes to the second dimension, impact underpinnings, busi-
nesses too often take the trade policy institutions and the related business
environment as given, as something to adapt to. Our message is that inter-
national business research should increasingly support business managers
in recognising their role—possibly small, yet existent—in the current
transformation of old trade policy institutions and in the emergence of
new ones. Firms of various sizes are not only influenced by existing insti-
tutions; through their reactions to the changing trade policy environment
and complex chains of events they can also contribute to what those
become in the future. In particular, worth investigation is the collec-
tive agency of firms in this evolutionary change. Moreover, in relation
to the first dimension, the possibility to impact ongoing changes also
concerns the researchers themselves. While following trade developments
and trying to get a hold of them, international business studies some-
times suffer from focusing on retrospective reporting of what happened
and how. While this understanding is still obviously of value and impor-
tance, we want to highlight the increasingly active role that international
business scholars might take in the development of business in different
fields and the related institutions. Engaging in increasing action research
and dialogue with not only economic actors but also policy representa-
tives that shape the international business arena at different levels might
be eye-opening for today’s international business scholars as well as
politicians.
Indeed, while international business research is now in increasing
demand to explain the impacts of the changing international environ-
ment via managerial recommendations, it should also take (or regain) an
active role in generating future-oriented policy implications and delivering
them further to the respective stakeholders. This is of particular impor-
tance given the fact that the changes in the business environment stem
for a large part from policy-level changes. Recently, the strong business
emphasis has hindered international business scholars from pursuing the
policy implications of their research findings (Van Assche, 2018), whereas
the complexity of the evolving environment calls for research with increas-
ingly open approaches and aims for wider impact. Trade policy research is
at the intersection of policy and business research and is a field requiring
innovative and future-oriented insight from both sides to provide useful
insight to support the transformation of trade-related international insti-
tutions as well as the strategies and operations of internationally operating
businesses.
This chapter has shown the agility of international business research
in explaining the evolving business world. In the same vein, it suggests
that international business scholarship can play a central role in the future
development of new knowledge that is relevant to trade policy research
and concrete policymaking. Nevertheless, to proceed in exploring the
dynamics that shape the future of the international business environment
and trade policy, we must first similarly look into the development of
trade policy research. When we first understand the past trajectories of
both international business and trade policy development, it is possible
to recognise what kind of institutions, norms and practices we historically
take for granted in terms of trade policy, and what we no longer should,
requiring instead rapid transformation into something new. The following
chapters in this book provide valuable food for thought in this respect.
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CHAPTER 2
Global Trade Policy Regimes and Previous

Crises
Juhana Aunesluoma
Crises as Drivers of Regime Change

Economic crises and geopolitical conflicts have had a profound impact
on the historical evolution of trade. Crises of various kinds have had a
direct bearing on the fundamental features of the global trading system
as it has over time alternated between classical, laissez-faire free trade and
protectionism. The connection of economic and geopolitical crises and
changes in trade policy regimes was particularly marked in the twentieth
century, but similar patterns can be observed in earlier times as well as
today.
The First World War in 1914–1918 heralded the end of free trade as
it had been practised since the mid-nineteenth century. While there were
attempts after the war to re-establish a relatively liberal international trade
policy regime, these foundered with a turn to full-scale protectionism in
J. Aunesluoma (B)
University of Helsinki, Helsinki, Finland
e-mail: juhana.aunesluoma@helsinki.fi

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_2
20 J. AUNESLUOMA
the Great Depression of the 1930s. The effects of higher tariffs and other
protectionist measures were compounded with the adoption of further
restrictions to cross-border trade in the Second World War in 1939–1945.
The effects of the turn to protectionism were long lasting, and it
took several decades after the Second World War to construct a relatively
open global trade regime. Liberalization started first in the industrially
advanced Western economies in the late 1940s and 1950s, from where
it spread to the global south and Asian economies in the 1980s and
1990s. The creation of a more open international trade regime lead to a
rapid expansion of world trade and its share of the global GDP. Even so,
according to Findlay and O’Rourke (2007: 499–501), at the turn of the
millennium, 44% of the world’s population still lived in countries, where
the overall level of tariffs for foreign trade were higher than in 1913. This
group included countries such as the United Kingdom, China and India.
Crises that have the capacity to effect long-term changes in trade policy
regimes come in many forms. Economic crises stem, for example, from
systemic failures in the global financial sector, as happened in the finan-
cial crisis of 2008. Alternatively, they may be the result of other types
of weaknesses in economic structures in individual economies, or disrup-
tions in cross-border flows of goods and capital. International economic
interdependence itself can increase the fragility of economies and their
susceptibility to external shocks. In most cases, however, these shocks
are themselves endogenous to economic activity, such as international
conflicts and wars, social and political upheavals, revolutions, civil wars,
natural disasters and their international consequences. Large crises or
conflicts can bring about—and often are connected to—shifts in power
relations in the international system and in its institutional arrangements.
Trade is impacted in crises in a number of ways. First, crises have an
immediate effect on the functioning of economies. Any disruption of
economic activity in a country that is engaged in cross-border trade has
repercussions to its trading partners. The larger and the more open these
economies are, the more severe the consequences are.
Second, crises play a role in the reorganization of the institutions and
practices that govern international trade. These, in turn, reflect the way
in which power is distributed among the actors in the system. A trade
policy regime is formed usually in negotiations between the actors that
make up the system. The actors’ capacity to realize their policy preferences
depends on several factors, such as the relative weight of their economies,
the composition of trade, their negotiation capacity or their ability to use
2 GLOBAL TRADE POLICY REGIMES AND PREVIOUS CRISES 21
other means, such as military force, to achieve political and economic

goals. Large crises can therefore be seen as redistribution events, when not
only economic and other resources are reallocated, but also the principles
and institutions that underpin the trade policy regime itself are recast.
While the effects in the first category may be severe in the short to
medium term, economies have an ability to recover and adapt. A quick
recovery may offset losses and limit a crisis’s social and political conse-
quences. Nevertheless, when crises impact the fundamental features of the
international trading system, such as its relative openness or the preva-
lence of protectionist measures, the effects can be long lasting. As a
general observation, it can be said that crises change trade and trade policy
regimes more quickly than it takes to reconstruct pre-crisis regimes and
trade patterns. After particularly severe crises that may not be possible
at all, as the underlying conditions and structures may have changed to
make a return to a previous regime unfeasible.
As has been shown by the economic historians Ronald Findlay and
Kevin O’Rourke, global trade regimes have historically been closely
connected to the ways in which political power has been distributed and
exercised in the world. An open international trade system has required
a political superstructure, where an actor or a group of actors has estab-
lished the rules of the system, enforced their compliance and provided
the system with the public goods—such as security backed up by military
power or a legal framework within which to conduct trade—its stable
operation requires (Findlay & O’Rourke, 2007; O’Rourke, 2009). Find-
lay’s and O’Rourke’s interpretation develop on views put forward in the
so-called theory of hegemonic stability by the realist school of Global
Political Economy (Gilpin, 1987; Krasner, 1976). Its proponents state
that free trade is more likely to occur in an international economy domi-
nated by a single political hegemon than in a more dispersed or multipolar
system.
While the theory of hegemonic stability has been criticized both
theoretically and in historical case studies, Findlay and O’Rourke have
convincingly shown that trade policy regimes are essentially political
constructs that arise and decline together with the political powers that
maintain them. Contrary to the theory of hegemonic stability, instead of a
single hegemon, these orders can be maintained by a group of likeminded
countries as well. What is required are the will and the mechanisms to
share a set of rules and comply with them, as has been seen in forms
22 J. AUNESLUOMA
of regional integration such as the European Union (Keohane, 1984;

Moravcsik, 1998; Ruggie, 1983).
Furthermore, not all historical hegemons have necessarily preferred
free trade. In a long historical perspective, however, free or relatively
free international trade has occurred only when there has been a polit-
ical authority or authorities of some kind with the will and the means to
support it. Also, trade policy regimes do not appear accidentally, as the
establishment of a trade system—liberal or protectionist—is a painstaking
process, albeit in the latter case more easily achieved than in the first.
However, they may dissolve quickly together with the ideologies and
material powers that justify and underwrite them.
This chapter discusses the connection of state power in the interna-
tional system with global trade policy regimes, and what effect various
crises have had in their decline and transition from one order to another.
In the first part we will look into the dissolution of the classical free
trade system in the late 1800s and early 1900s and the final turn towards
protectionism in the First World War and especially in the 1930s. The
chapter then looks into the creation of the free trade system in indus-
trial goods created under the leadership of the United States and other
Western powers after the Second World War. It then discusses the expan-
sion of Western-led free trade to a genuinely global trade policy regime
from the 1980s onwards, and the effects of the end of the Cold War and
the creation and the expansion of the World Trade Organization WTO
in the 1990s. The chapter closes with an assessment of the effects of the
2008 financial crisis and geopolitical tensions in the 2010s and the 2020s
on the world trading system.
From Free Trade to Protectionism

in the Era of World Wars
The pre-1914 global free trade regime was founded upon the British
empire’s position as the world’s largest trader, and backed up by its
financial and industrial strength. British naval supremacy guaranteed the
openness of the main sea routes for trade around the world. Even
more significant was the influence of successive British governments from
the mid-nineteenth century onwards preferring free trade over protec-
tionism, and suggesting or imposing this principle to its trading partners.
After a landmark trade agreement with France in 1860, the so-called
Cobden-Chevalier Treaty, liberalization of trade policy and the lowering
of tariffs accelerated in the European and North American economies

(Foreman-Peck, 1995: 45).
The Anglo-French treaty of 1860 included the most-favoured-nation
(MFN) principle in the relations of the two countries, from where it
spread to agreements concluded by other partners, establishing for the
first time a multilateral, global trade regime based on non-discrimination.
In the monetary sphere, the gold standard provided the anchor for a
multilateral payments system and the convertibility of currencies.
In practice, the principle of free trade began eroding already in the
last decades of the nineteenth century with the increasing weight of more
protectionist economies, such as Germany and the United States. Inten-
sification of geopolitical rivalry at the turn of the twentieth century was
conjoined with increasing protectionism in the European continent and
in the Americas (Irwin, 2017). However, as long as the British empire
had the will and the means to maintain a liberal trade policy, the global
trade regime retained its openness.
All this ended when war came in 1914. The implementation of
economic blockades by the leading European economies and other
wartime restrictions to economic activity effectively put an end to free
trade. The overall ideological aim in the post-war settlement in 1918–
1919 was, besides punishing Germany for its guilt for war, to restore the
liberal international economic order that had preceded it. This included
an effort to revive the principle of non-discrimination in trade agree-
ments and the re-establishment of the gold standard as the anchor of
the international monetary system.
However, with an economically and politically weakened Britain, a
sharp post-war recession in 1919–1921, and at best an ambivalent attitude
towards liberal trade policy in other major countries, the reconstitution
of free trade did not have an auspicious start. Other countries could no
longer rely on the kind of leadership and stability the British empire had
provided in the previous century. The new economic giant, the United
States, was not yet ready to assume the position of systemic leadership it
would later have.
While liberal economic thought in principle permeated trade agree-
ments concluded in the 1920s, protectionist measures adopted in the war
years were difficult to remove in their entirety. Therefore, the post-war
agreements did not go quite as far as to restore the old regime. In agricul-
tural products, where a modern system of protectionism had for example
in Germany and in France started already in the late nineteenth century,
24 J. AUNESLUOMA
the shift from free trade to protectionism aiming at self-sufficiency in

foodstuffs was in many countries paradigmatic.
The financial crash in 1929 put an end to the liberalizing efforts of
the 1920s. As the economic crisis spread from North America to Europe,
governments resorted to higher tariffs and other restrictive measures to
protect their domestic producers. The United States led the way towards
all-out protectionism in the Smoot-Hawley Tariff Act in 1930, where
steps taken at first to protect agricultural producers were extended to
industrial goods. When sixty other countries reciprocated with similar
protective measures, they soon found themselves in a vicious circle of
measures and countermeasures. As prices fell and trade declined, tariffs
lost their effectiveness. Governments resorted to quantitative quotas,
which in some cases stifled trade altogether. Beggar-my-neighbour—
policies exported economic difficulties from one country to another,
leading to a further decline of economic output and trade. With coun-
tries suspending free convertibility of their currencies, multilateral trade
was reduced to bilateral trading partnerships.
The last country to give up on free trade was Great Britain, which in
the Ottawa Conference of 1932 formed a protectionist bloc out of its
empire and closest trade partners. In some countries, such as in Germany,
where Adolf Hitler rose to power in 1933 amidst overall economic and
political turmoil, protectionist trade policy was aimed at achieving autarky,
i.e. a high degree of self-sufficiency in essential goods. With increasing
isolation from anything but economic partnerships established on their
own terms, the totalitarian countries’ economies were geared to war well
before 1939.
When the Great Depression gradually gave way to a recovery in the
last years of the 1930s, trade policy liberalized somewhat in the economi-
cally advanced Western countries. The outbreak of war in 1939 put a swift
end to this. The Second World War saw a total harnessing of economic
resources in belligerent countries to support their war effort. A compre-
hensive regulation of economic activity was applied also to foreign trade,
with exports and imports regulated in a government-controlled licensing
system. Economic blockades were set up to inflict damage to the enemy’s
war-making capacity, and to limit the neutral countries’ ability to trade
with them.
The joint effects of two world wars and the economic crisis of the
1930s was such that the era has been described as the first wave of de-
globalization in the modern industrial era (O’Rourke, 2009). It is unlikely
that the course of globalization that had begun in the previous century
would have taken this turn without the wars, revolutions, the dissolution
of empires, economic crises and social and political upheavals of the first
half of the century.
Absent these shocks, the course of globalization and global trade
regimes would have looked very different. In an alternative historical
scenario, governments might have adopted some protective measures to
tackle social issues arising from accelerating globalization, such as rising
inequalities and other effects of the economic dislocation resulting from
the growing significance of foreign trade and nations’ exposure to the
international economy. This is what they did after the Second World War.
Regarding the first half of the twentieth century, however, it may be
assumed that these measures would have created at most a moderately
protectionist trade policy regime. They would have been exceptions to
the overall liberal orientation of the world economic system, and they
would not have challenged the basic course of globalization in the way
the crises of the first half of the twentieth century eventually did.
Trade Liberalization in the West, 1947–1980

What had remained of a multilateral global trading system before the
war laid in ruins in 1945. International trade was regulated with national
import and export restrictions. Quantitative quotas, that were the main
mechanism of regulating trade in the 1930s and 1940s, were settled in
bilateral trade agreements. As most of the world’s currencies were not
freely convertible, earnings from one country could not easily be used for
purchases elsewhere. Earnings in US dollars, the only major convertible
currency, were highly sought after, but a shortage of dollars remained a
major bottleneck for Europe’s economic recovery.
To ease the dollar gap, the US directed 13 billion US dollars to
Western Europe in the European Recovery Program (ERP) in 1948–
1952, i.e. the so-called Marshall plan. This helped the participants to
recover from post-war austerity and finance their essential consumption
needs and capital investments. A significant dimension of the Marshall
Plan was that it allowed for the return to multilateral trade within the
auspices of the European Payments Union from 1950 onward, also
funded by ERP dollars. Furthermore, within the Organization for Euro-
pean Economic Cooperation (OEEC, a precursor to the OECD) that
26 J. AUNESLUOMA
administered the aid, the member states were committed to remove obsta-
cles to trade they had erected in the war years and in the 1930s, most
importantly quantitative quotas.
Full convertibility of Western European currencies was restored by
the end of the 1950s, which improved the conditions for liberaliza-
tion of trade. In 1957, the liberalization programme that was begun
at the OEEC, was continued in the European Economic Community
(EEC). The Community achieved free trade in industrial goods among
its members in the course of the 1960s. Another experiment of free trade
integration, the European Free Trade Association (EFTA), did the same
among its members by the end of the decade.
With removal of tariffs and other trade restrictions between the EEC
and EFTA countries, the West European economies had by the mid-
1980s achieved a level of free trade comparable to pre-First World
War conditions, with the notable difference of agricultural goods that
in a glaring contrast to the pre-crises trade regime, remained heavily
protected.
US sponsorship and leadership was crucial to set the West European
regional trade liberalization in motion, and to maintain its momentum
in the subsequent decades. In currency policy, the fixed exchange rate-
system established at Bretton Woods in 1944 provided the necessary
stability until the turn of the 1970s.
The advent of the General Agreement on Tariffs and Trade (GATT)
under US leadership in 1947 heralded the beginning of liberalization on
a global level (Zeiler, 1999). At first, however, the lowering of tariffs
involved a limited group of commodities and compared to regional
integration efforts in Western Europe, progress remained modest. The
GATT-process gained speed in and after the so-called Kennedy round of
negotiations in the early 1960s, followed by further progress in the 1970s.
The GATT-process culminated in the Uruguay round in 1986–1994,
that saw a significant increase of participating countries, the deepening
of free trade between them and the broadening of liberalization to the
trade of services and other areas. In 1995 the agreements concluded
in GATT-negotiations were consolidated and codified in the World
Trade Organization (WTO), together with its newly established dispute
settlement system.
Seen from a Western perspective, a process to repair the damage done
in the crises of the early twentieth century was in many ways complete in
the 1980s. Nonetheless, it had taken much longer to create a liberalized
trade regime than it had taken to do away with the nineteenth century
free trade system in the First World War and its long aftermath. This
bore witness to the long-lasting significance of major crises to global trade
policy regimes, and how important the dominant powers’ preferences and
actions were in their deconstruction and reconstruction.
Globalizing Free Trade from 1980s

to the Crises of the 2000s
Perhaps the most remarkable feature of the recent historical evolution
of the world trading system is the dramatic expansion of free trade—
and of overall trade levels of GDP—from the year 1980 onwards. This
period of liberalization and growth lasted until the financial crisis in 2008,
when also the share of trade from the global GDP peaked. After an initial
post-crisis recovery it remained on a relatively lower level in the 2010s
(Hoekman, 2015).
It is one of the most remarkable periods in the history of the world
economy. It saw the expansion of the Western-led free trade regime into
new areas: the opening of China, the gradual end of protectionism in
post-colonial countries such as India, the rise of the East Asian economic
‘tigers’ and the transition of the old Soviet bloc from planned economies
to free markets. Institutionally the process reached its peak with China’s
accession to the WTO in 2001.
Countries in Eastern Europe, which belonged to the Soviet Union’s
sphere of influence in the Cold War, began to liberalize their foreign trade
with their transition to democracy and market economy in the 1990s. The
political preconditions for this were the easing of superpower tensions in
the latter half of the 1980s, the dissolution of the Soviet Union’s empire
in 1989–1991 and the geopolitical shift towards a unipolar world with
preponderant US power in the post-Cold War world in the 1990s.
While the factors and the causal mechanisms behind the post-1980s
growth in global trade and the acceleration of globalization are a matter
for ongoing debate, the role of the diminishing superpower competition
in the last decades of the twentieth century and the spread of Western
ideas of economic liberalism, should in any case be considered as a major
factor (Milner, 1999).
While it is true, that the relative power of the US in world politics and
the world economy began to decline from the 1960s onwards, its signifi-
cance behind the global shift in the 1980s should not be understated. The
28 J. AUNESLUOMA
Vietnam war, the collapse of the Bretton Woods system and the rise of the
economic significance of countries such as Japan and West Germany, all
contributed to the US’ relative decline. America’s own, internal turmoil
in the 1960s and 1970s contributed to the same direction. However, its
position as a global superpower with an ability to implement its policy
preferences regarding the institutional arrangements and organizing prin-
ciples of world trade, was not effectively challenged by other actors at the
time.
From the 1980s to the 2000s, the US still enjoyed an unusually
strong position in world affairs. This coincided not only with the global
economic expansion experienced at the time, but also with systemic
stability that lasted until the financial crisis of 2008. Despite a number
of shocks, such as the financial crises in South Asia and Russia in the
late 1990s or the September 11th terrorist attacks in 2001, the overall
systemic stability of the world economy and the basic features of the
global trade policy regime, were not seriously in doubt.
The financial crisis of 2008 appears in retrospect a real turning point.
This applies not only to the overall development of the world economy
but also to the relative positions of the main power centres to each other.
The US-led global trade policy regime and the relative economic and
military power of the US culminated in the first decade of the 2000s.
The 2010s saw the emergence of more diffuse and polycentric global
economic and political order. During the latter half of the decade, we
also saw the fracturing of the domestic consensus in the US regarding
its role as the guarantor of global free trade. The role and weight of the
European Union as a supplementary force favouring open markets could
not fully compensate the loss of American leadership.
US hegemony in the 1990s and early 2000s may have also hidden
structural problems in the global trade policy regime centred on the WTO
and the maintenance of its liberal, multilateral free trade orientation. The
success in expanding the WTO’s membership in the early 2000s masked
problems within the organization and in its governance and decision-
making system. Steps for further liberalization stalled in the first years
of the 2000s, and in the 2010s the one world approach popular in the
1990s had been replaced by network of regional or bilateral, in some
cases plurilateral free trade agreements and economic partnerships. At the
turn of the 2020s these numbered in the hundreds, creating a wide but
complex network of trade and investment agreements.
The global trade regime of the 2010s and early 2020s is a good
example of a free trade system without a single hegemonic power that
would guarantee its stability. At the turn of the 2020s a deeper politi-
cization of trade, the prevalence of the use of economic sanctions as a
geopolitical tool, and a tendency to use trade policy as a vehicle to achieve
diverse non-trade goals, such as environmental goals, the strengthening
of human rights or other geopolitical objectives, have born witness to an
incremental regime change.
Conflicts and crises were central to the dissolution and formation of
global trade regimes in the twentieth century, and it appears that political
developments and the state of affairs between the most important power
centres in the world continue to play a similar role in the functioning of
global trade today.
What has not changed are the conditions that support a liberal, free
trade global trade regime. What it requires is an international order that
supports free trade and is backed by adequate political and materials
resources either by a hegemonic power or by a group of like-minded
nations. This needs to be supplemented with domestic policies and social
conditions that allow governments to pursue further globalization, if they
so wish.
References
Findlay, R., & O’Rourke, K. (2007). Power and plenty. Trade, war, and the world
economy in the second millennium. Princeton University Press.
Foreman-Peck, J. (1995). A history of the world economy. International economic
relations since 1850. Prentice Hall.
Gilpin, R. (1987). The political economy of international relations. Princeton
University Press.
Hoekman, B. (Ed.). (2015). The global trade slowdown: A new normal? A
VoxEU.org eBook. Centre for Economic Policy Research Press.
Irwin, D. A. (2017). Clashing over commerce. A history of US trade policy. The
University of Chicago Press.
Keohane, R. (1984). After hegemony. Princeton University Press.
Krasner, S. D. (1976). State power and the structure of international trade. World
Politics, 28, 317–347.
Milner, H. V. (1999). The political economy of international trade. Annual
Review for Political Science, 2, 91–114.
Moravcsik, A. (1998). The Choice for Europe. Social purpose & state power from
Messina to Maastricht. Cornell University Press.
PART II
Disruptions of Global Trade

CHAPTER 3
WTO in a Changing Geopolitical

Environment
Sandra Polaski
Introduction
The World Trade Organization (WTO) came into existence in 1995,
replacing the 50-year-old trade regime known as the General Agreement
on Tariffs and Trade (GATT) that had governed trade among capitalist
countries in the geopolitical context of the Cold War. The new organiza-
tion grew out of what began as an eighth round of GATT negotiations in
Uruguay in 1986. The negotiations dragged on for almost eight years,
frequently stalling but eventually producing a greatly expanded body
of trade law covering a much broader range of issues than the GATT.
It also created a new, permanent organization (Marrakesh Agreement,
1994). The new regime was emblematic of a moment in time, when
global economic integration was gaining rapid momentum based on tech-
nological change; the socialist bloc and its separate trading system had
S. Polaski (B)
Global Economic Governance Initiative, Boston University, Boston, MA, USA
e-mail: sandrapolaski@gmail.com

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_3
34 S. POLASKI
collapsed; and China was still in the early stages of economic opening.
The new WTO offered a single global trade regime that gradually grew
to include 164 countries.
The rules of the WTO were different in many respects from the GATT,
which had focused on reducing tariffs and other border measures. The
WTO by contrast aimed to facilitate deep integration through disciplines
on domestic policies of member states. The new approach reflected a
shift in the prevailing economic consensus in the west and the priorities
of the US in particular, discussed in the next section. The new regime
did not command universal support from the member states, especially
developing countries who felt their needs were given inadequate consid-
eration, discussed in the third section of the chapter. A fourth section
addresses China’s accession to the WTO in 2001, its spectacular economic
and trade growth, and the changing relative economic weights in the
global economy. It explores the resulting distributional effects that eroded
support for open trade and the WTO, even among the organization’s
original proponents. A fifth section addresses the organization’s new chal-
lenges in an era marked by increasing strategic rivalry between the US
and China, the global economic and trade disruption caused by the coro-
navirus pandemic, and the emergence of climate change and the digital
economy as pressing new issues. A final section explores possible future
paths for the WTO and the implications of each.
The Birth of the WTO---An Institution

Emblematic of a Moment in Time
The predecessor of the WTO, the GATT, was not an organization per
se but the sum of a series of contractual agreements beginning in 1947
that gradually reduced tariffs among a group of countries known as
the contracting parties. The original GATT was signed by 23 coun-
tries (World Trade Organization, 1996).1 The 1947 contractual tariff
agreement was meant to be embedded in a broader institution, the
International Trade Organization (ITO), which would administer it and
1 The twenty-three countries that negotiated and signed the original GATT in 1947
were Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon (Sri Lanka), Chile,
China, Cuba, Czechoslovakia (Czech Republic and Slovakia), France, India, Lebanon,
Luxembourg, Netherlands, New Zealand, Norway, Pakistan, South Africa, Southern
Rhodesia (Zimbabwe), Syria, United Kingdom, and United States.
3 WTO IN A CHANGING GEOPOLITICAL ENVIRONMENT 35
oversee trade among the parties. However the ITO was never launched
(Toye, 2012).2 Instead the GATT went forward without a formal insti-
tutional structure. Over the course of the next five decades and seven
negotiating rounds the GATT membership expanded to 102 countries
and tariffs were further reduced.
By the 1980s the momentum of trade accelerated, enabled by break-
throughs in transport and information technology along with changing
economic policies in many countries that facilitated greater global
economic integration. The GATT was widely considered to lack the archi-
tecture needed to deal with the rapid increase in trade and the scope to
deal with the increasing complexity of the issues involved (Jackson, 1997).
The Uruguay Round of negotiations was a response to many govern-
ments’ desire to expand the rule book for transnational commerce and to
create a supranational institution to set and enforce the rules.
While the Uruguay Round negotiations were underway, the socialist
bloc of countries began to disintegrate and in 1991 the Soviet Union
collapsed. With the end of the Cold War—and with China’s spectacular
growth still years away—the US emerged as the sole superpower (Lüthi,
2020; Nijman, 1992). This shift in the geopolitical environment had a
profound effect on the ongoing negotiations. The western and particu-
larly US model of capitalism was considered the sole surviving economic
system and the victors were the ones to write the rules for the emerging
global economy.
Over the same period there had been a shift in the prevailing economic
consensus in the west. In the early post-war decades, most western
governments favored a Keynesian macroeconomic policy approach in
which they assumed the responsibility for ensuring sufficient incomes and
consumption demand when markets failed to provide them. By the 1980s,
particularly in the US and UK, the consensus had shifted to a neoliberal
2 The International Trade Organization (ITO) was conceived as part of the multilateral
governance architecture created after World War II to set rules for the international
economy. The ITO was intended to foster economic recovery after the war and to rein
in the type of punitive economic actions that contributed to the war. It was meant
to complement the United Nations, the International Monetary Fund (IMF), and the
World Bank (formally the International Bank for Reconstruction and Development, IBRD)
as part of a system of international economic governance. However changing domestic
political alignments and the advent of the Cold War led the US, one of the original
architects of the ITO, to withdraw its support and the organization never came into
being.
36 S. POLASKI
view that markets were the most efficient way to allocate resources and
that government intervention should be avoided (Irwin & Ward, 2021;
Williamson, 2004). While this shift provoked significant dissent in many
countries, the new ideology was widely embraced by the mainstream of
governments, academia, opinion makers, and the media. With strong US
influence, the WTO rules were written in the spirit of this new consensus,
expanding the rights of private firms and investors while reining in
numerous aspects of government intervention. For example, the Agree-
ment on Trade Related Aspects of Investment Measures (TRIMs) restricts
governments from requiring investors to use local content in production,
an approach that a number of countries had used to encourage backward
and forward linkages in their economies (Chang, 2002).
A Strong New Institution---But One

Contested from the Beginning
The new institution expanded trade rules into many more regulatory
areas, such as protections for intellectual property and rules for provi-
sion of services that constrained member states’ practices in areas that
had previously been excluded from the GATT trade rules. Perhaps most
importantly, the WTO created a binding dispute settlement system to
replace the weaker mechanisms of the GATT (World Trade Organization,
2021a). Under the GATT, disputes between parties could be referred
to an independent panel for findings and recommendations. But the
creation of the panel, the adoption of its findings and the authoriza-
tion for the complaining country to take countermeasures all required
a positive consensus of the organization’s governing Council. In other
words, a single party, including the party named in the dispute, could
block enforcement. By contrast, the new WTO dispute settlement system
did not allow a party to block panel formation and a panel’s findings did
not require unanimous consent. This was considered by some to reflect
a movement from a power-based system to a rules-based system and in
this light to represent a movement away from big power dominance to a
fairer system (Pauwelyn, 2005).
From the beginning, however, many developing countries considered
that the rules themselves had been written to favor the interests of the
already-developed countries (Ismail, 2020). A negotiating grouping then
known as the Quadrilateral (or “Quad”), including the US, EU, Japan,
and Canada, typically coordinated their bargaining positions during the
Uruguay Round and early years of the WTO. Once they found common
ground, they were in a strong position to achieve their key goals because
of their economic and political heft. When they could not agree because
of their internal conflicts of interest, they could and did block progress
(United States Senate, 2000).3 Developing countries felt the need to be
members of the WTO, since it set the rules for access to the largest and
most lucrative markets. However many felt that the overall balance of
rules in the WTO was not favorable to their own development interests,
notably in textiles and agriculture. Perhaps the most widespread criticism
by the developing countries related to the rules on agricultural trade,
which they believed favored commercial agriculture in high-income coun-
tries that benefited from subsidies, export support, and other measures.
Given that many developing countries depended heavily on agriculture
both for exports and for domestic subsistence, they sought reform of
the sector and formed their own negotiating alliances (Polaski, 2005;
World Trade Organization, 2021b).4 The tension between the devel-
oped and developing blocs contributed to the breakdown of the attempt
to launch a new round of WTO negotiations in Seattle, Washington in
1999. The new round was finally launched in Doha in 2001 by winning
the support of the developing countries (the majority of WTO members)
with a commitment to address their concerns (World Trade Organization,
2021c). Those negotiations stumbled repeatedly and eventually failed,
due both to disagreement between developed and developing countries
and within the bloc of developed countries.
From the earliest days the WTO was also challenged from the outside
by civil society. For example, the 1999 attempt to launch the new round
3 An example of the Quad’s blocking behavior can be found in the testimony of the
U.S. Trade Representative at a March 2000 hearing of the Senate Finance Subcommittee
on International Trade, in which she stated that some “base line understanding” among
the Quad countries would have to be the “first step” toward reconvening negotiations
after the WTO ministerial meeting ended in failure in Seattle in 1999. A number of
differences between the United States and the EU had not been overcome there and she
stated, “If the major trading partners cannot sort out their differences there will not be
another round.”.
4 For example, the G33, also known as the “Friends of Special Products” in agriculture,
is a coalition of developing countries pressing for flexibility for developing countries to
undertake limited market opening in agriculture to protect their small-scale farmers, while
the G20 coalition of developing countries (not to be confused with the G-20 summit
grouping formed in 2008) presses for ambitious reforms of agriculture in developed
countries with some flexibility for developing countries.
38 S. POLASKI
of negotiations in Seattle led to the famous “battle in Seattle” in which a

large, diverse coalition of labor, environmental, peasant, social justice, and
some anarchist groups brought negotiations to a halt (Edelman, 1999;
Tizon, 1999).
China’s Accession to the WTO,

Changing Geopolitical Weights,
and Distributional Consequences
The WTO continued to attract praise, criticism, and protest as well as
new members throughout its early years. The most high-impact accession
was that of China in 2001 (World Trade Organization, 2001a).5 This
occurred after years of intense bilateral negotiations with other WTO
members as a result of which China made significant commitments to
lower tariffs and non-tariff barriers as a condition for its accession (World
Trade Organization, 2001b). China’s accession was quantitatively and
qualitatively different from that of other developing countries that had
joined the GATT and then the WTO over the years. China was the most
populous country in the world and at the time of its accession the large
majority (63 percent) of its population was still rural, meaning that it
had a huge body of labor available to be drawn from agriculture into
manufacturing (World Bank, 2021). With its accession to the WTO and
greater certainty that its products would be able to enter other members’
markets, China attracted foreign direct investment (FDI) at an accel-
erating pace. Before accession it already ranked first among developing
countries in attracting FDI and in 2002 it surpassed the United States as
the world’s top destination for FDI (Zhang & Corrie, 2018). Together
with its available labor force and its own investments in infrastructure and
connectivity, this led to a rapid expansion of manufacturing for export.
This evolution of the economy allowed China to absorb several hundred
million workers into employment in higher productivity manufacturing,
with the result that China was able to eliminate extreme poverty (Li et al.,
5 As part of its economic reform and opening up process, China had requested to
resume its pre-revolution status as a contracting party to the GATT and a working party
on its status was established in 1987. That ongoing work was overtaken by the creation
of the WTO in 1995 and China’s request to accede to it. The GATT working party was
converted to a WTO working party.
2021). Because of its size, the growth in employment and incomes led to
a reduction of inequality at the global level (Lakner & Milanovic, 2013).
China’s domestic success had a less favorable impact on employment
and equity in some of its direct competitors, however. The rapid increase
in manufacturing in China drew investors, manufacturers, and jobs away
from some other countries, both developed and developing. In the US,
the rapid scaling up of Chinese production in many competitive industries
was described as the “China shock,” as many US firms shut produc-
tion facilities in the US and relocated to China (Autor et al., 2016).
Studies showed that regions and localities most exposed to the compe-
tition suffered declining employment and wages, with negative spillover
effects to housing prices, local government revenues, public services, and
health (Autor et al., 2016; Dean & Kimmel, 2019; Feler & Senses, 2016).
Mexico, a developing country competitor to China in many industries,
also experienced manufacturing losses (Hernández, 2012; Trachtenberg,
2019). It is telling that Mexico was the last country to agree to China’s
WTO accession (World Trade Organization, 2001b).6
The impact of China’s accession on countries in the European Union
was significantly different, due to a number of factors. First, the largest
share of exports and imports of goods take place within the bloc, due
to lack of tariffs, favorable border measures, and geographical prox-
imity. Second, a relatively more important “shock” occurred in Europe
around the time of China’s accession to the WTO, with the accession of
Eastern European countries to the EU after the collapse of their socialist
economies and opening to private foreign investment (Dauth et al.,
2014). Many EU manufacturers, particularly those based in Germany and
Austria, shifted production to the east, where wages were considerably
lower (Marin, 2010).7 In this sense, the collapse of the socialist trading
bloc and accession of those countries to the EU was Europe’s own shock
from the geopolitical shifts discussed at the beginning of this chapter.
Third, the relative concentration of many European firms in high tech-
nology or luxury products meant that the Chinese market represented
6 Mexico concluded bilateral negotiations on market access with China on 13 September

2001, days in advance of the final meeting of the WTO Working Party on China’s
Accession on 17 September 2001.
7 It is interesting to note that the shifts in production by firms in these two countries
shifted more high-skilled work rather than low-skilled work.
40 S. POLASKI
important new demand and thus at least some offsetting job creation at
home (Aubourg, 2017; Marin, 2017).
Chinese policies shifted over the years following its WTO accession,
including through a strong and steady increase in minimum and manu-
facturing wages after 2003 that gradually lifted its labor costs to exceed
those of Mexico and approach those of some Eastern European coun-
tries (International Labour Organization, 2020). Sixty percent of Chinese
workers were in the broadly-defined middle class by 2015 (Cuntao,
2016). This contributed both to increased domestic demand in China
and to imports, which was reinforced by the policy shift to a “dual circu-
lation strategy” in recent years (Sheng, 2021). China’s labor force stopped
growing in 2017 and is now declining (World Bank, 2021). Chinese
export growth slowed after 2007 and the “China shock” is considered
to have plateaued in 2010 (Autor et al., 2021; Brandt & Kim, 2020).
However, the sharp losses experienced by affected communities in the
US proved to be long-lasting, persisting a decade or more after the initial
shock (Autor et al., 2021). The experience gradually hardened into a
narrative of unfair competition and anti-Chinese sentiment (Huang et al.,
2021; Tan, 2011). In 2016 that narrative was weaponized in the presiden-
tial campaign of candidate Donald Trump, contributing to his electoral
victory (Cerrato et al., 2016; Corasaniti et al., 2016).
In historical perspective, the strong “China shock” to employment
and welfare in the US and elsewhere represented a transitory period,
much as the unipolar moment after the end of the Cold War proved
fleeting. However in both cases the impacts of transitory phenomenon
have endured in political and policy processes and have been consolidated
in laws and legally binding trade agreements. The shift in US sentiment
toward China became increasingly negative and much of the US discourse
about the WTO is now framed as an effort to strengthen the institution
in ways that constrain behavior of non-market economies in general and
China in particular, discussed below.
The Creators Grow Disillusioned;

New Challenges Arise
The US came to resent the constraints that the binding WTO dispute
settlement mechanism placed on its own behavior with regard both to
China and competitors in the west and sought to weaken it (Hart &
Murrill, 2021). Beginning in the Obama administration and accelerating
in the Trump administration the US vetoed the appointment of appel-

late body members, finally incapacitating the body in 2019. As China
grew into a major trading power, the EU, Japan and others also began
to agitate for changes in WTO rules to constrain the Chinese model
of state capitalism (European Commission, 2020a). The discontent of
developing countries also continued, although the reforms they sought
were often quite different from those sought by the high-income member
states (Ismael, 2020). For example, some high-income countries seek to
weaken provisions on special and differential treatment (SDT) for devel-
oping countries or to exclude some countries currently covered by the
category altogether, while developing countries seek to strengthen policy
space for development of their economies (Hegde & Wouters, 2021).
Some countries have sought a path for further trade liberalization through
plurilateral agreements within the framework of the WTO but involving
only subgroups of members, but these have struggled to reach conclusion.
The failure of the Doha round negotiations and the incapacitation of
the binding dispute settlement mechanism mean that two of the WTO’s
three structural functions have ground to a halt, with only the third func-
tion of reporting and monitoring left intact (World Trade Organization
Documents, 2020a).8 The organization is now widely considered to be
in crisis. It has been strained further by the economic and health effects
of the global COVID-19 pandemic, when its rules were widely disre-
garded as member states sought to protect their own populations and
stabilize their economies (Global Trade Alert database, 2021; Thrasher
et al., 2021). In response to the pandemic and the very unequal acces-
sibility of treatments and vaccines, India and South Africa proposed a
waiver of the WTO’s intellectual property rules protecting patents for
medicines and vaccines for the prevention, containment, and treatment
of COVID-19. The proposal was eventually co-sponsored by an addi-
tional 87 mainly developing countries and endorsed by the US and
China (Crossley, 2021; Schwegman & Woessner, 2021; USTR, 2021;
WTO, 2021b), while the EU split on the proposal and Japan, Norway,
Singapore, South Korea, Switzerland, Taiwan, and the UK expressed
reservations about starting text-based negotiations (Titievskaia, 2021;
8 Member states are required to notify the WTO about various trade practices but
the reports are often late. A group of countries seeks to strengthen these requirements
and impose administrative and representational penalties on countries failing to meet
notification requirements.
42 S. POLASKI
Farge, 2021). A modest compromise was agreed by trade ministers at

a WTO trade ministerial meeting in June 2022 that slightly expands the
ability of developing countries to produce and share COVID-19 vaccines
with other developing countries (WTO, 2022).
The climate change crisis poses yet another challenge to the WTO
going forward. Proposals by some countries for border measures such
as carbon taxes could require new approaches to rules on non-
discrimination, while support for green transitions could potentially run
afoul of current disciplines on state aid. The proper governance of digital
issues in global trade is yet another area in which there is wide diver-
gence of views and practices among member states. Finally, the rising
geostrategic competition between the US and China and now the war
in Ukraine threaten to cast a shadow over future efforts at reform across
the broad spectrum of issues.
Possible Futures for the WTO as It

Navigates These Complex Currents
What are the prospects for the WTO, given the complex current conjunc-
ture? Three very different paths seem possible. First, the organization may
continue to muddle through without meeting the challenges described
above and with no serious reform. The WTO still provides the basic rules
of trade for most bilateral trading relationships and countries will be reluc-
tant to let go of this fixed reference point, particularly in a global economy
upended by the pandemic, with snarled supply chains and continuing
trade uncertainties. As for disputes, the incapacitation of the appellate
body by the US may leave some trade disputes suspended without the
possibility of final resolution. As an interim measure, the EU and 22
other countries including China have set up a “multi-party interim appeal
arrangement” (MPIA) to hear appeals of WTO panel reports as long
as the appellate body is not functional (European Commission, 2020b).
The arrangement was notified to the WTO, stating that it is intended to
operate under the organization’s overall umbrella and is available to any
members willing to join (World Trade Organization Documents, 2020b).
It remains to be seen if it will function as intended and most WTO
members have not yet joined (Starshinova, 2021).
In a second plausible scenario, the organization may be buffeted more
strongly by the growing strategic rivalry between the US and China in
ways that undermine even the current suboptimal equilibrium and further
destabilize the WTO. The Biden administration has been pressing allies
to align with it against China’s state-led economic practices, including
through plurilateral agreements that could amount to a de facto division
into economic blocs even if it occurs within the shell of the WTO. On
the other hand, the pandemic experience led to widespread adoption by
many governments, including the US, of subsidies, state aid, government
equity stakes in private businesses, and other industrial policy measures
that could blunt the momentum for tightening rules on such policies. The
recent discourse in Europe of building national champion firms and the
announcement by many governments of efforts to build national capacity
in semiconductors, electric vehicles, clean energy, and other sectors could
lead to second thoughts on tightening rules on non-market practices.
A third possible pathway for the WTO may be the least likely on
the current geopolitics but arguably would be best for future global
economic stability. This would involve an updating of the trade regime to
allow greater flexibility for countries with different economic models and
systems to trade with each other without sacrificing the other legitimate
interests of their citizens and polities. The goal would be to continue a
fundamentally open global economy while allowing governments greater
scope for border actions and countermeasures to defend their own coun-
tries’ economic and social preferences (Shaffer, 2021; US-China Trade
Policy Working Group Joint Statement, 20199 ). A durable reform of
the global trading system will require greater space for domestic policies
such as local procurement, carbon border taxes, or industrial strategies
that aim at distributional justice, sustainability, or economic development.
A pessimistic view would consider that the current geopolitical realities
could make new negotiations even more difficult than the failed Doha
round. A more optimistic view would see the active government economic
9 A group of 37 eminent U.S. and Chinese economists, including five winners of the
Nobel Memorial Prize in Economic Sciences, formed a US-China Trade Policy Working
Group in 2019 and issued a Joint Statement calling for an approach that: “(i) allows
countries considerable latitude at home to design a wide variety of industrial policies,
technological systems, and social standards, (ii) allows countries to use well-calibrated
policies (including tariff and non-tariff trade policies) to protect their industrial, technolog-
ical, and social policy choices domestically without imposing unnecessary and asymmetric
burdens on foreign actors, and (iii) maintains a set of trade rules that prevent countries
from deploying what economists call ‘beggar-thy-neighbor’ policies – policies that produce
benefits to the home country only through the harm they impose on other countries.”.
44 S. POLASKI
interventions necessitated by the pandemic and current supply chain fail-

ures as having the potential to lead toward gradual convergence of views
on some of the policies that had polarized east and west, north and south.
The rules of the WTO were written with the assumption that China
would converge toward western models of capitalism, when in fact recent
practice in the west converges toward a more interventionist state.
The WTO was born at a time when neoliberal market capitalism was
the dominant system and it set global rules to protect the then-prevailing
preferences and advantages of the developed west. A quarter century
later China is the largest exporter to most countries and a hub of many
global supply chains. If western governments see China as a problem
to be contained there will be no solution at the WTO and there will
be increasing decoupling into separate trading blocs. This will produce
slower growth, including for the west, as China’s huge economy and
market will be out of reach. It will require the dismantling of global
supply chains, producing further sharp supply shocks. And it will reinforce
the tensions, suspicion, and rivalry that can lead to more dire conflicts.
Finding a new path that prioritizes coexistence is an enormous challenge.
But it is one that could achieve economic stability and peace.
References
Aubourg, A. (2017). Globalisation has forced French industry to play to its
strengths. Ministère de l’économie et des finances République française, Le 4
Pages de la DGE, No. 77, October. https://www.entreprises.gouv.fr/files/
files/etudes-et-statistiques/4pages/pdf/2017-12-4p76-french-industry-glo
balisation.pdf. Accessed 16 February 2022.
Autor, D. H., Dorn, D., & Hanson, G. H. (2016). The China Shock: Learning
from labor market adjustment to large changes in trade. National Bureau
of Economic Research, Cambridge, MA. NBER Working Paper No. 21906.
https://www.nber.org/papers/w21906.pdf. Accessed 16 February 2022.
Autor, D. H., Dorn, D., & Hanson, G. H. (2021). On the persistence of the
China shock. Brookings Papers on Economic Activity, Conference Drafts, 9
September 2021. https://www.brookings.edu/wp-content/uploads/2021/
09/On-the-Persistence-of-the-China-Shock_Conf-Draft.pdf. Accessed 16
February 2022.
Brandt, L., & Lim, K. (2020). Accounting for Chinese exports. Univer-
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16 February 2022.

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PART I

Development of Global Trade and Trade

Lessons from Trade Policy Research

Anna Karhu and Eini Haaja

A. Karhu (B) · E. Haaja

© The Author(s), under exclusive license to Springer Nature 3

national autonomy. While these phenomena are directly addressed at the

Development of Trade Policy as a Research Topic

Trade Liberalisation and the New MNEs

identified three general actor groups to organise this: government, the

domestic sources of trade policy (e.g. Katzenstein, 1977) and interna-

coping strategies as managerial risk, country risk ratings, corporate struc-

The Globalisation of Free Trade and Rising New Markets

change in the business environment as a result of the actions of busi-

over recent decades, whereby the multitude of themes covered in inter-

Human rights Sustainability Democracy

Global value chains MNEs as

MNEs and Corporate political MNE socio-political

Efficiency International Benefits of

Fig. 1.1 The emergence of trade policy research themes in IB studies

Global Trade Policy Regimes and Previous

Crises as Drivers of Regime Change

© The Author(s), under exclusive license to Springer Nature 19

other means, such as military force, to achieve political and economic

of regional integration such as the European Union (Keohane, 1984;

From Free Trade to Protectionism

of tariffs accelerated in the European and North American economies

the shift from free trade to protectionism aiming at self-sufficiency in

Trade Liberalization in the West, 1947–1980

Globalizing Free Trade from 1980s

Disruptions of Global Trade

WTO in a Changing Geopolitical

© The Author(s), under exclusive license to Springer Nature 33

The Birth of the WTO---An Institution

A Strong New Institution---But One

of negotiations in Seattle led to the famous “battle in Seattle” in which a

China’s Accession to the WTO,

6 Mexico concluded bilateral negotiations on market access with China on 13 September

The Creators Grow Disillusioned;

in the Trump administration the US vetoed the appointment of appel-

Farge, 2021). A modest compromise was agreed by trade ministers at

Possible Futures for the WTO as It

interventions necessitated by the pandemic and current supply chain fail-

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