Coordination Rights Beyond Nation States

PUBLISHED

Erik Peinert (@ErikPeinert) is a Postdoctoral Research Associate at the Watson Institute for International and Public AffairsBrown University

PUBLISHED

Erik Peinert (@ErikPeinert) is a Postdoctoral Research Associate at the Watson Institute for International and Public AffairsBrown University

Conversations about progressive possibilities for economic policy and political economy often undertheorize or ignore international trade. The international economy is often seen as a free-for-all between countries, a space where powerful multinational firms are able to play governments off one another, resulting in a race to the bottom of domestic laws and regulations. Or, it is seen in terms of competition between economies with coherent rules, laws, and industries in the domestic sphere, but where Ricardian comparative advantage wins out internationally. Competition in international markets is seen as a flat state of nature, a “real” free market.

There is a way to make sense of trade in these terms. Trade competition, and a great number of trade agreements, have appeared to result in the elimination of domestic regulations or governments’ ability to implement them. The rise of “superstar firms,” and their advantages in productivity and efficiency, is arguably the result of firm-level comparative advantages sorting themselves out. Trade itself may be one of the primary drivers of economic concentration, but not because of overly-powerful global corporations or unfair competition, but because these firms are more efficient and have objective comparative advantages of scale in international trade, as contemporary trade theory argues. The evisceration of American manufacturing jobs can be seen in clear terms as the result of international competition in low-wage industries following China’s entrance into the World Trade Organization in 2001.

So even progressive critiques often focus on rejecting trade–seeing it as a tool of powerful multinationals or as one of the ills of free markets–rather than on questioning these premises. Progressive economic advocacy usually looks to domestic rules for labor regulation, banking rules, antitrust, consumer protection, etc., assuming that in the absence of a world government, such things don’t exist across borders. International trade is assumed as an external constraint to domestic goals (e.g. competition pushing wages or regulatory standards down), with the characterization of a flat, state-of-nature international economy taken for granted.

But, making sense of the present or the past in terms of these flat views of international trade requires ignoring many of the most salient features of the world economy. Many international standards for regulations are set by central hubs, for example New York or London, for financial rules. International trade agreements are formalized to the extreme, with tariff schedules for minute differences in product classifications, and clear standards for shared obligations. The World Trade Organization, and the GATT before it, made many judgements about what were legitimate and illegitimate policy choices for governments to make, often based on arbitrary political compromise.

So, just as regulation and law institutionalizes certain types of markets domestically, international and transnational markets are similarly built on sets of institutional, legal, and regulatory frameworks. Now, as in the past, markets are created by state and social institutions that govern, organize, and coordinate market relations, as Neil Fligstein has written here before. Internationally, these may be messier, with overlapping jurisdictions, a patchwork of competing laws and norms, and large gaps in standards, but there is no abstract international economy where comparative advantage and efficiency win out, simply because markets do not and cannot function without rules, norms, and expectations to govern them.

So let’s compare what we have now with the previous generation of free trade, and the political choices that made it. Despite everyone’s association of Teddy Roosevelt with the earlier era of trustbusting, the largest antitrust campaign in history took place under Franklin D. Roosevelt during World War II. With the economic difficulties of the interwar period, many governments had turned to favoring protectionism from international trade as well as domestic cartel systems to restrict internal competition. Tariff barriers went up around the world, and many governments allowed industry coordination through cartel registration systems–some even requiring firms to participate in cartels. Even the United States went down this path early in the New Deal, suspending antitrust laws for the National Recovery Administration, which fixed prices, quotas, and wage scales, among other things, for American industries.

But even this exaggerates the divide between the international and the domestic. The interwar years had seen an enormous proliferation of international cartels produced by the intersection of domestic regulations and international business. Rather than simply nefarious agreements to collude in an institutional and legal vacuum, these cartels were built on the legal and regulatory devices of the state, in particular patents. By pooling patents together in international cartel agreements, firms would agree to divide up world markets amongst themselves, whether by market share or by region. These agreements would have the legal force of the state on their side in enforcing those regional and domestic monopolies, as domestic patent claims could be used to protect the international cartel. In this permissive environment, the most powerful firms in chemicals, steel, aluminum, electric products, etc. divided world markets for entire continents among themselves, allowing them to price gouge consumers, other firms, and governments. Absent these rules, cartels likely would have collapsed to defection, and the firms would have been forced to compete.

In the United States, advocates of cartel-like policy fell out of favor during FDR’s second term, losing ground to proponents of a reinvigoration of antitrust. The latter group largely won the debate in 1938, setting off a 10-year trustbusting campaign, led at first by Thurman Arnold. This campaign is well-known, but often left aside is just how international it was in its nature. Even before World War II, the Department of Justice was filing scores of cases against American firms for their behavior abroad, based on these cartel and patent agreements with foreign competitors.

Scoring a number of legal wins in American courts, these priorities were also projected abroad to change the institutional contours of international trade and markets. In its newfound global power, the United States attempted to impose this view on the rest of the world: the International Trade Organization (ITO) was the main alternative and predecessor to the General Agreement on Tariffs and Trade (GATT), and it included a host of rules against cartels and restrictive business practices that would have applied globally. When that failed, the U.S. continued pressuring other countries to take up competition or antitrust laws diplomatically, putting anti-cartel conditions in Marshall Plan funds, and pushing for the competition provisions in European institutions. Many European powers adopted competition laws in the 1940s and 1950s, and European institutions had even stronger competition provisions than these domestic laws.

Taking this background into account, let’s look at the current world again in these terms, rather than as a blank slate free market. Superstar firms are not merely a reflection of the natural abilities of those organizations or advantages to scale, but rather a dramatic shift to favor the protection of intellectual property–domestically and in international trade–since the 1970s and 1980s, as these firms are characterized above all by a concentration of heavily-protected IP rights. At the same time, not only have domestic antitrust rules been weakened over the same time period, but the extraterritorial application of antitrust and competition rules has been diminished, no longer creating the same institutional constraints for multinationals. The shifts in antitrust and antimonopoly policy that came with the Chicago School and the Law and Economics movement intellectually focused on questions of the domestic economy, in some ways covering up a much broader and more diffuse shift in how American law had shaped the world economy in its own image. It’s not that we moved from an era of regulation of domestic and international markets to a laissez-faire one. Rather, it is regulation, law, and institutions all the way down. Active political choices were made to create the inequalities we have now, including those stemming from trade.

By convincing ourselves that international trade and competition exists in a void–or accepting the assumption that it does–we ignore how law, policy, and regulation reshape the economy and commercial relationships to favor certain groups at the expense of others. The United States, the E.U., and others could reshape the foundational rules of international trade and markets to reduce inequality, rebalance the bargaining power of different market actors, and limit the control wielded by powerful firms, rather than treat the economic power of incumbent firms as “natural” outcomes of comparative advantage or international trade.

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