As the Biden Administration is launching its Indo-Pacific trade initiative, news regarding ongoing trade disputes and trade negotiations in various forums serve as daily reminders that the existing system of international economic law is under great strain. This post offers a reading of the problem and proposes alternative directions for the future. In brief, the system has evolved from what John Ruggie called “embedded liberalism” to what David M. Trubek and I describe as “embedded neoliberalism.” This has deep implications for understanding what international economic law stands for, which norms and values it is designed to protect, and how those values might be problematic for its constituents. Ultimately, though, the past couple of decades have witnessed something of a truce between those who designed the system and those who now are actors within it. But today this truce is largely crumbling. Yet preserving a functioning multilateral economic law system is critical. The issue, then, is how to formulate a new foundation for an inclusive and sustainable system.
The Existing Regime: Embedded Neoliberalism
Despite tensions between the current system of international economic law and the policy preferences of many states, some emerging countries have achieved a kind of balance between the neoliberal thrust of the system and their desire to pursue strategies that—from a neoliberal viewpoint—are heterodox.
We might think of this as a “truce” between a radical liberalization campaign and strong resistance in the name of state-led growth and sovereignty. The truce has been acceptable to emerging countries because the broader system benefits them to some extent, and they lack a clear alternative ordering—and even if they identified a substitute model, they lack the political capacity to mount a concerted action to implement it. Large, middle-income countries including China, India and Brazil are the most obvious actors in this space. Likewise, the truce is acceptable to the old powers because it has given them sufficient access to lucrative markets in emerging economies and cheap imports while ostensibly allowing social protection at home for those dislocated by trade liberalization.
This truce may be characterized as embedded neoliberalism, echoing John Ruggie’s famous description of the regime of “embedded liberalism” that emerged from World War II. Ruggie coined the term to describe a post-War system of international economic law that balanced two competing imperatives. On the one hand, it allowed goods and capital to flow around the world. On the other hand, the regime allowed national governments to control such flows and develop social protection systems that guarded against destabilizing shocks. In today’s regime of embedded neoliberalism, free-market globalization is governed by a multilateral rule system designed for capitalist market economies. This system views producers as the drivers of liberalization. However, the system’s built-in mechanisms for tempering trade and investment disciplines have shrunk on the books and in interpretative practice. The political objective has been to corral states into a specific model of market-driven political economy, regardless of their local social contracts.
To some extent, developing economies have been able to make use of the liberal trade and investment regime to support their development strategies without having to adopt the full gamut of neo-liberal prescriptions. A growing number of emerging countries are, for example, successfully utilizing trade law in support of their state-led development policies. Particularly noteworthy are victories in dispute settlement, the use of flexibilities such as trade remedies, and successful resistance to the further expansion of free trade disciplines. On the investment side, traditional bilateral investment treaties (BITs) required host countries to agree to extensive protections for foreign investors, but host countries typically retained control over access to their markets in the first place. In practice, capital-importing countries took advantage of this system by using sectoral exclusions and other policy tools to limit foreign investors in certain parts of their economy, typically in sectors touching on security, energy, and what they viewed as government services such as health and education. Additionally, South Africa, India, Ecuador, Indonesia, and others have pushed back by denouncing BITs or by drafting new models, while Brazil pursued a different approach altogether without significantly affecting the flow of FDI to its economy.
The Erosion of the Embedded Neoliberalism Truce
Today, however, the truce is unraveling. China has made it clear that it has no intention of abandoning its state-led model, despite the old powers’ longstanding expectation that integration into the global economic architecture would gradually lead it to do so. At the same time, systems of social protection in the United States and Europe are proving inadequate to protect globalization’s “losers” from the shocks of market opening. This has undermined the legitimacy of the multilateral system and created severe domestic backlash against it. The United States now questions many of the trade rules of the post-WWII regime, while the EU does the same in the field of investment. The WTO, the lynchpin of the modern regime, has largely stalled as a negotiation forum, and its preeminence is being challenged by unilateral moves by the United States, as well as the emergence of competing mega-regional free trade agreements such as the Comprehensive, Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership and the EU-Mercosur project.
This state of affairs raises several questions: if the truce continues to flounder, can a new equilibrium be found? What would be its defining features? Are we witnessing the end of the post-War liberal order and the emergence of a China-led order? It is clear that China has more and more to say about the multilateral ordering, but it is not seeking to remake the current system, from which it has benefited significantly. Indeed, a closer look at the struggles of China and emerging countries with the liberal trade and investment regime reveals a much more complex picture.
Alternatively, what would the failure to cooperate between the major trading powers, old and new, mean for the world order and for smaller emerging economies? In our book Emerging Powers in the International Economic Order, David M. Trubek and I argued that some premises of the current order must be reconsidered. In short, international economic law must reinvent itself as a connector with other regulatory regimes and an enabler of non-market societal values.
Abandon the Idea of Separate International and Domestic Spheres for Regulation
International economic law, like many other areas of international law, presumes the separation of domestic and international regulatory universes. In practice, rules on sanitary and phytosanitary measures, non-tariff barriers, intellectual property, and myriad others blur the international/domestic boundary and reach deep into the state. Failure to truly account for the porous nature of the domestic and the international realms results in political tensions and legal conflicts, as debates about “policy space” have shown. Brexit, Australia’s high-profile debates about foreign investment and tobacco regulation, India and South Africa’s battles regarding international intellectual property rules and access to medicines all illustrate these tensions. The increasingly fictitious idea that international economic law is separate from domestic regulation fails to serve states’ public policy needs and creates vast opportunities for private commercial actors to bypass or manipulate state policies. Current multilateral efforts to ensure that multinational corporations pay minimum taxes are an example of states’ growing desire to address this disconnect. We need to acknowledge and account for this post-Westphalian world as part of a rethinking of the underpinnings of international economic regulation.
Eliminate the Presumption that Trade Trumps Non-Trade Concerns
In the late 1990s, we witnessed the emergence of a sort of buffer zone called “non-trade issues” that encompassed those topics that rubbed against “purely” trade matters (though it is still a guess what “pure trade” issues might be). Non-trade issues include labor, the environment, public health, education, governance and corruption, and social welfare policies. While recognizing the inevitable intersection between trade and non-trade issues was a critical first step, existing legal tools to manage the relationship are minimal and blunt. Trade obligations are the rule, while the “non-trade issues” represented in provisions like Articles XX and XXI of the GATT (and their counterparts in other WTO agreements) have been interpreted as narrow exceptions. Similar dynamics exist in international investment regulation. In the face of the existential threat posed by climate change and the rise of populist regimes preying on the disenfranchisement of wage workers, better tools are needed. International economic law cannot justify its existence without making these societal imperatives the driving force for the global economic governance project. These “non-trade issues” must drive the organization of trade, not the other way around.
Voices from emerging economies and old economic powers alike are calling for reforms along these lines. Indeed, recent investment agreements devote more attention to non-market values, such as environmental protection, corporate governance, and anti-corruption. In trade law, though, environmental imperatives are still all too often brushed aside as “overloading trade agreements.” The sustainability community itself seems to have moved away from engaging with international economic law and is looking instead to human rights to enshrine the right to a clean and livable environment. Pushing away policy partners from connected fields is counterproductive and will only further undermine the legitimacy of international economic regulation. Instead, international economic law must reinvent itself as an enabler of non-market societal values.
Adapted from Sonia E. Rolland & David M. Trubek, Emerging Powers in the International Economic Order (Cambridge University Press, 2021)