Encyclopedia of Law & Economics - 5910 INTERNATIONAL TRADE

5910

INTERNATIONAL TRADE

Alan O. Sykes

University of Chicago, School of Law

© Copyright 1997 Alan O. Syles

Contents

Abstract  
1. Introduction  
2. The Legal Landscape  
3. The Framework for Law and Economics Research  
4. Antidumping Law  
5. Subsidies and Countervailing Measures  
6. Injury Analysis in Antidumping and Countervailing Duty Cases  
7. Safeguards Measures and the "Escape Clause"  
8. The Most-Favored Nation Obligation and Exceptions  
9. Technical Barriers to Trade  
10. Dispute Settlement, Self Help and Unilateralism  
11. A Concluding Note on the Research Agenda  
Bibliography on International Trade (5910)  


Abstract  

This paper provides a survey of the law and economics literature oninternational trade topics. It includes an overview of the legal system, and ageneral discussion of normative and positive economic approaches to theanalysis of the legal rules on trade. Particular issues discussed subsequentlyinclude antidumping and subsidies rules, the escape clause for troubledindustries, non-discrimination obligations in international trade, technicalbarriers to trade, and international dispute resolution in the trade field.

JEL classification : K33

Keywords : International Trade, Dumping, Subsidies, Nontariff Barriers,Most-Favored-Nation, International Dispute Resolution

1. Introduction  

The instruments of international trade policy, such as border taxes (tariffs)and quantitative restrictions on the volume of imports or exports (quotas) are,in one fashion or another, laws. Economic scholars have studied the impactand wisdom of these laws for centuries, creating a branch of internationaleconomics devoted to these matters of "commercial policy." It is no stretch tocharacterize all of the work in this field as "law and economics." Were I todefine the field in that fashion, however, the bibliography accompanying thisessay would by itself fill this volume. To reduce the undertaking tomanageable proportions, I have restricted attention primarily to the work ofeconomically-oriented scholars with legal backgrounds, to work withconsiderable legal as well as economic content, and to work that has beenpublished in law and economics journals. I have also omitted attention tovarious "trade and" issues, such as trade and the environment, trade andlabor standards, and trade and competition policy, on the premise that theyare better addressed elsewhere. See Bhagwati and Hudec (1996) . Finally, Ihave included a selective set of references to the mainstream internationaleconomics literature, intended to provide readers with a place to start shouldthey desire to learn more about the basic economics of international trade.The work of many prominent figures in international economics isnevertheless unrepresented or underrepresented, and to them I apologize inadvance.

2. The Legal Landscape  

Until modern times, most nations maintained substantial tariffs or restrictivequotas on a wide array of goods. Accordingly, much of the early work ininternational economics focused on the wisdom of these conventionalinstruments of international trade policy. Scholars soon developed theeconomic case for free trade, which holds that (with some qualifications)nations can increase their national economic welfare through a unilateralreduction in their import restrictions. The logic of this proposition, whichinvolves a demonstration that trade liberalization benefits consumers morethan it costs producers or the government treasury, may be found in virtuallyany international economics textbook.

The years since the end of World War II have changed the legallandscape profoundly, with equally important implications for the researchagenda. From the Bretton Woods conference of 1944 emerged the GeneralAgreement on Tariffs and Trade (GATT), concluded in 1947. Although thecentral objective of GATT was to foster a reduction in tariffs and quotas, itsdrafters recognized from the outset that bare commitments to lower tariffs andquotas were but a small part of what would be necessary to an effective tradeliberalizing agreement. The restrictive effects of a tariff could easily berecreated by a domestic regulatory measure that disadvantaged importedgoods, by a domestic subsidy, by a state-franchised monopsonist with thesole right to import from abroad, by a cumbersome bureaucracy for importprocessing, or in a number of other ways. The drafters had to plug such"loopholes," and also had to decide whether reductions in trade impedimentscould be implemented on a discriminatory basis, and whether subgroupswithin the GATT membership would be allowed to negotiate separate tradeagreements. They had to accommodate demands by signatories for the rightto address certain "unfair" trade practices unilaterally. They also had toanticipate the possibility of contingencies that might make some terms of thebargain politically unpalatable, and incorporate mechanisms to permitmodification of the bargain under appropriate circumstances. Finally, theyhad to confront the question of how to respond to breach (or alleged breach)of promise by a signatory. As a result of attention to these and other issues,the GATT emerged as a lengthy and elaborate document, with provisionsgoverning not only tariffs and quotas but, inter alia , various domestic taxesand domestic regulatory policies, the conduct of state controlled entities,methods of customs valuation, unfair practices such as dumping andsubsidization, rules governing discrimination in trade, procedures foradjusting and renegotiating the bargain, and a dispute settlement mechanism.

After 1947, the GATT continued to expand its scope and coverage. In thelate 1970's, additional agreements were entered on such matters as technicalstandards and regulations, subsidies, antidumping, and governmentprocurement. Various regional arrangements also emerged (such as theEuropean Union and the NAFTA) that afforded preferential trade benefits totheir members pursuant to an exception to the non-discrimination obligationsof GATT allowing for customs unions and free trade areas. These regionalarrangements have their own legal foundation, often more complex and farreaching than that of the GATT itself. Jackson (1989) .

During the most recent round of negotiations under GATT auspices (the"Uruguay Round"), a new institution was created to absorb the GATT and itsvarious side agreements -- the World Trade Organization (WTO). The WTOtreaty elaborated many prior GATT obligations, added a new disputeresolution system with considerably greater credibility and authority, and forthe first time extended the coverage of the GATT system to servicesindustries, such as banking, securities, telecommunications and insurance.This service sector liberalization has proven even more complicated thanliberalization in the goods sector due to the mix of licensing, prudential, andother regulations that are in play. The effects of international tradeagreements on national regulatory policies has thus become considerablymore significant, and will likely continue to grow. Current discussions in theWTO and the OECD further contemplate possible linkages between tradepolicy on the one hand and competition policy, environmental policy andlabor market standards on the other. The WTO already extends its umbrella tothe substantive rules of intellectual property law.

Nations that are parties to the WTO (over 120 at this writing) or to variousregional arrangements must implement their international obligations at thenational level. Usually, the implementation process requires a host ofdomestic statutes or their equivalent, replacing or modifying preexistingdomestic law in a number of areas, and creating new domestic law in a numberof others. Title 19 of the United States Code, for example, a massive volume,is closely connected to and shaped by the international law of the WTO andNAFTA. For a general introduction to the scope of international and nationallaw in the trade area, the reader may wish to consult Jackson, Davey andSykes (1995) .

3. The Framework for Law and Economics Research  

Although I have said little about economics to this point, the reader shouldalready appreciate the potential scope of law and economics research in thearea. Each of the topics addressed by the WTO agreement, the variousregional agreements, and national laws relating thereto raises a range ofnormative and positive questions. In this section, I sketch a framework forthinking about and identifying these questions in general terms. Thesucceeding sections delve into the literature on particular topics.

Normative Perspectives  

Much of the research in international economics has a normative cast. Earlywriters such as Adam Smith and David Ricardo were responding to themisguided Mercantilist instinct that national wealth was measured by the sizeof the gold reserve rather than the standard of living of the citizenry, urginggovernments to open their markets. The more modern articulation of the casefor free trade grounded in the theory of comparative advantage, with varioustechnical caveats and qualifiers, is also plainly normative in tone, restingeither on Kaldor-Hicks conceptions of welfare as a basis for policy making or,in the alternative, the claim that other policy instruments can better addressdistributive concerns. It is also conventionally argued that trade policy is aninferior policy instrument for addressing various market failures includingproduction externalities, labor market imperfections and the like. Better to taxthe pollution output of a domestic polluter directly, for example, than to tax itsimported input products -- a tax on pollution will correct the externalitywithout distorting the choice of inputs and sacrificing the least cost methodof production. See Bhagwati and Srinivasan (1983) , Dixit and Norman (1980) , Kenen (1985) , and Krugman and Obstfeld (1993) .

Normative discussion of international trade policy often must distinguishbetween national welfare and global welfare (or now regional welfare) formany purposes. For example, perhaps the best known caveat to the case forfree trade -- the opportunity for importing nations with the power to influencetheir terms of trade (i.e., a degree of monopsony power) to use tariffs toextract rents from foreigners -- suggests how some nations can increase theirown welfare at the expense of global welfare. See Bhagwati and Srinivasan(1983) , Dixit and Norman (1980) . The modern literature on strategic tradepolicy, which suggests among other things how nations can increase theirwelfare by subsidizing or protecting certain industries with increasing returnsto scale, affords yet another example of the importance of the choice betweennational and global objective functions. See Krugman (1987) .

The same welfare economic framework can be brought to bear on thebroader range of topics implicated by modern international trade law.Whether the problem concerns the discipline of national governmentsubsidies that may distort trade, "dumping" by foreign firms (explainedbelow), the question whether nations should discriminate between tradingpartners in their tariff policies, the consequences of harmonizing regulationsfor the international marketing of prescription drugs, the procedures forcertifying that imported foodstuffs are sanitary, or the wisdom of protectingdeclining industries to facilitate "orderly contraction" or alleviateunemployment, the normative questions to be asked are much the same. TheKaldor-Hicks benchmark can be used to evaluate the available alternatives.Sometimes, but not always, global and national welfare will point in differentdirections. One can inquire as to what policy is optimal by the appropriatecriterion in the abstract, or ask the related question whether some existinglegal rule at the global, regional or national level is optimal from among the setof politically feasible choices.

An alternative normative framework rests not on conventional economicmeasures of welfare, but on democratic legitimacy and internationalconsensus as the underlying value. Here, the question becomes one of hownational governments should faithfully implement their internationalobligations, or perhaps how courts and administrative agencies withdiscretion should exercise it to promote the international or national goalsimplicit in the texts of treaties and statutes. Sometimes, though not always, aninterpretation of a text intended to provide it with economic coherence maybe helpful in this context, much as economic scholars have helped shape theinterpretation of laws such as the U.S. Sherman Antitrust Act or sections ofthe Uniform Commercial Code.

Positive Perspectives  

Although international economists have long described themselves asengaged in positive as well as normative inquiry, the distinction between thetwo has been muddled for much of the history of the discipline. Part of themuddle owes to the naiveté of much economic writing (particularly olderwritings), in which governments are "assumed" to maximize national welfare.Normative analysis using the national welfare criterion then becomes positiveanalysis as well, with the national welfare optimum serving as a predictor ofhow governments will behave. That predictor has proven a poor one,however, on many fronts. Most obviously, national governments wouldengage in far less trade protectionism than they do in practice if theeconomists' familiar measure of national welfare were the touchstone of policymaking.

To improve the quality of positive theory, it has been necessary forinternational economics to embrace the insights of public choice theory. Theemergent "political economy" of trade policy recognizes that different interestgroups have different degrees of influence on political actors. The weaknessof consumer interest groups, for example, can explain why tariffs emerge inthe first instance despite their generally adverse impact on national economicwelfare. See Baldwin (1982) ; Dougan (1984) . Public choice has also provensuccessful at explaining a number of more narrow policy decisions in thetrade field (see Gerber (1976) ) such as the politics of partivular qutas, as wellas the pattern of votes cast in elections where trade was a key issue. See Irwin (1994) .

Public choice insights further help to explain why internationalagreements such as the GATT tend to liberalize trade despite the absence ofmuch consumer participation -- they allow producer groups comprised ofexporters to reward their political representatives for securing access toforeign markets. See Baldwin (1987) . This example once again suggests theimportance for analysis of the distinction between the national and globalperspectives -- the interest groups in play (or at least their stakes in theoutcome) may change importantly as we move from an environment in whichnations act noncooperatively to an environment in which nations actcooperatively.

The positive analysis of international agreements also draws on anotherline of economic analysis -- the economics of contracts. An internationalagreement is, after all, a contract between or among nations. It can behonored or breached, breach can be efficient or inefficient (from theperspective of the self-interested officials who enter the agreement), moralhazards and hold-up opportunities may arise, the agreement may be selfenforcing or not, enforcement may rely on reputation, self help, third partycoercion, and so forth. Insights from the theory of contracts about howparties design agreements to facilitate valuable adjustments of the bargainwhile discouraging opportunism thus have much to contribute to theunderstanding of international agreements generally, and international tradeagreements in particular.

With this background, I now turn to the literature on particular legaltopics. The concluding section contains some thoughts about furtherresearch. A compact survey of many of these issues may be found in therecent volume by Trebilcock and Howse (1994) . Another useful selection ofwritings may be found in Bhandari and Sykes (1998) .

4. Antidumping Law  

Aside from the study of conventional tariffs and quotas, perhaps no topic inthe law and economics of international trade has a longer history than thestudy of dumping. The term "dumping" has meant different things throughthe years, but in modern parlance it refers to pricing behavior by an exportingfirm that results in (a) an F.O.B. price to the export market that is below theF.O.B. price to the home market for the same goods; (b) an F.O.B. price to theexport market that is below the F.O.B. price to some third market; or (c) anF.O.B. price to the export market that is below the fully allocated cost ofproduction for the good in question (including an allocation of fixed costs,general selling and administrative expenses, and so on). Prior to the formationof GATT, some nations (including the United States) unilaterally condemneddumping and had statutes in place to sanction it. The GATT (now WTO)authorizes such sanctions but constrains them -- an importing nation cancounteract dumping with an "antidumping duty" equal to the magnitude ofdumping (the difference between the export price and the relevant benchmarkabove), but only if the dumping is causing material injury to a competingdomestic industry.

The early view of antidumping law in the economics profession wasfavorable. A distinguished University of Chicago economist, Jacob Viner,devoted an entire volume to dumping, arguing that it is harmful to theimporting country. He reasoned that low prices attributable to dumping aretransitory, and impose adjustment costs on the importing nation that exceedthe benefits of temporarily cheaper imports. Viner (1923) . The basis for Viner'sanalysis, however, was shaky. Dumping need not be transitory (as whendifferent markets have different demand elasticities), and even when it is,nothing in Viner's work (or since) demonstrates that temporarily cheapimports necessarily impose adjustment costs that exceed the welfare gains tothe importing country from temporarily cheaper imports.

Not surprisingly, therefore, scholars eventually began to question thewisdom of antidumping policy. Various possible justifications in addition toViner's have been considered, including the notion that dumping is somehowsymptomatic of predatory pricing, and by and large rejected. See Barcelo(1979) ; Ordover, Sykes and Willig (1983) ; Knoll (1987) , Messerlin (1990) ; Therakan (1990) ; Cass (1993) . It is also clear that the administration of theantidumping laws often biases the system in favor of a finding of dumpingthrough peculiar accounting and averaging practices. Boltuck and Litan(1991) , McGee (1983) ; Dick (1991) . To be sure, an antidumping duty may bychance benefit a nation with the ability to influence its terms of trade. Or itmay protect an industry with increasing returns or positive externalities, andthereby yield the sorts of benefits that are the focus of the strategic tradepolicy literature. See Dick (1991) . But these benefits of antidumping dutieshave nothing to do with the existence or nonexistence of dumping, only withthe special circumstances in which protectionist measures may have utility tothe importing nation for other reasons. It is thus fair to say that an academicconsensus now holds antidumping law to be welfare-reducing in general.Interestingly, the national welfare effects are often worse than the globalwelfare effects, because the importing nation is generally harmed, ceterisparibus, when it deprives itself of cheaper imports. From the globalperspective, however, if antidumping policy reduces the incidence ofimperfect price discrimination, the welfare effects can be favorable. See Ordover, Sykes and Willig (1983) . Cass and Boltuck (1996) also considervarious "fairness" justifications for antidumping law, and for the most partreject them.

Although the normative analysis of antidumping law is well developedand has probably hit diminishing returns, strikingly little has been done fromthe positive perspective. If antidumping policy is so foolish, why is it also sosurvivable, particularly in the WTO environment where nations havemutually agreed to forego economically foolish policies on a number of otherfronts?

5. Subsidies and Countervailing Measures  

Attention to the problem of subsidies in international trade, and to the legalregime that constrains them or allows nations to respond to them, also has arich history in law and economics. Economists have long distrustedgovernment subsidy programs, recognizing that although subsidies may inprinciple correct certain forms of market failure, they may also causedistortions in resource allocation. The latter concern has become increasinglyprevalent with the rise of public choice.

In an ideal world, governments would limit subsidies to their constructiveuses and eschew unproductive uses. Suppose that this goal is doublydifficult to achieve in a noncooperative environment because governmentsfind themselves in a race to the bottom of sorts (farmers in country A candemand subsidies to level the playing field with the subsidized farmers incountry B, for example). Or suppose that subsidies are being used to protectdomestic industries against foreign competition, much like tariffs. If so,international trade law might usefully incorporate a covenant to forego certaintypes of subsidies -- indeed, such an evolving covenant has been present inthe GATT system since its inception. The question of what an idealanti-subsidy compact might look like was the focus of Schwartz and Harper(1972) . In the end, however, they concluded that the problem was immenseand perhaps insoluble, suggesting, among other things, that Kaldor-Hicksefficiency is not easy to identify in practice, and that is; hardly clear that theKaldor-Hicks benchmark is the proper one in any event.

Related to the policies imposing multilateral constraints on subsidies arethose facilitating a unilateral response to imports of subsidized goods.Subsidized competition is often labeled "unfair", and the GATT system hassince its inception permitted signatories to counteract the effects ofsubsidization at the border through the use of "countervailing duties". Theseduties may be employed in many instances even when the foreign subsidypractice at issue is perfectly legal under international law. As in the case ofantidumping duties, however, countervailing duties are only permitted whensubsidized imports are causing injury to competing firms.

The wisdom of unilateral countervailing measures has been questioned.Subsidized imports are cheaper than unsubsidized imports, ceteris paribus,and cheaper imports tend to enhance the welfare of the importing nationregardless of the reason for their cheapness. It is by no means clear why animporting nation should not respond to subsidized imports with, in the wordsof Paul Krugman, "a thank-you note to the embassy." Although Barcelo(1977) viewed unilateral countervailing measures as a useful adjunct to effortsto discipline wasteful government subsidy practices, Schwartz (1978) initiatesa more skeptical line of discussion. Sykes (1989) argues that under virtuallyany assumption about market structure or possible market imperfections,countervailing duties are an imprudent policy from the perspective of theimporting country, and dubious as well from the global welfare perspective.See also Trebilcock (1990) .

Another strand of literature questions the ability of existingcountervailing duty law to achieve its own posited objectives (granting thepossibility that those posited objectives may not be welfare enhancing). Inparticular, if one assumes that the goal of countervailing duty law is tocounteract the effects of the subsidy on the prices charged for importedgoods, it is essential for those who administer the law to identify that priceeffect in deciding what duty to impose. Likewise, if countervailing measuresare only allowable if a subsidy is causing injury abroad, it is necessary toidentify the price effect to decide whether the subsidy is indeed causingmaterial injury. The effect of the subsidy on price will depend, in turn, and inter alia , on how the subsidy affects marginal costs for subsidized firms.Yet, existing law pays little attention to that issue (to see its importance,consider one example -- farm programs that pay farmers to reduce acreage willnot lower their export prices). Goetz, Granet and Schwartz (1986) made thesepoints, which led Diamond (1989) , (1990) to suggest some specific reformsdesigned to make countervailing duties a more accurate device forcounteracting the cross border effects of subsidies. Sykes (1990a) is critical ofthese proposals on grounds of administrative cost, coupled with someuncertainty as to whether they will have any welfare payoff. Cass (1990) alsohas a mixed reaction.

As in the case of antidumping law, far less has been done with thepositive side of subsidies and countervailing measures than with thenormative side. The effects of duties in the presence of downstreamintegration have been examined ( Benson, Faminow, Marquis and Sauer(1994) ), but the political economy of national and international rules regardingsubsidies has received little attention.

6. Injury Analysis in Antidumping and Countervailing Duty Cases  

As noted, WTO law prohibits antidumping and countervailing duties unlessthe importing nation first establishes that the unfair imports in question arecausing or threatening "material injury" to domestic competitors. The task ofdetermining what impact an unfair practice has on the domestic industrylends itself readily to economic analysis, and much has been written on thesubject.

Initial work focused on the lack of economic coherence in the analysis ofthe U.S. International Trade Commission (ITC), the agency charged withadministering the injury test under U.S. law. The pertinent statute requires theITC to determine whether dumped or subsidized imports, as the case may be,have caused or threaten to cause "material injury" to domestic producers oflike products. If the task of the ITC is thus to ascertain what effect thedumping or subsidization has had on domestic producers (a proposition thatis not uncontroversial as a legal matter), it has often relied on information thatis misleading. For example, it has tended to look for a correlation betweenrising imports and deterioration in the condition of domestic producers, butthat correlation may be spurious. It has also emphasized price comparisonsbetween imported and domestic goods, even though price differentials mayreflect quality differentials that have nothing to do with the impact of anyunfair practice. These and other criticisms have been leveled by a number ofwriters, most notably Knoll (1989a) , (1989b) . He and others have suggestedthat the tools of price theory be employed to construct quantitative modelsthat would allow the ITC more accurately to measure the impact of dumpingor subsidies. Proponents of this economic approach include Boltuck andKaplan, see Therakan (1990) , as well as Rousslang (1988) . See also Morkreand Kelly (1993) . In Wood (1989) , the emphasis is rather different -- sheargues that antidumping and countervailing duties should not be sued toprotect supracompetitive rates of return to a domestic industry, and urgesthat lost monopoly profits not "count" in the injury analysis.

Other writers have wondered whether the apparent economic incoherencein the analysis of the ITC has a political economy explanation. Cass andSchwartz (1990) address the issue, and conclude that it probably does not. Sykes (1996) disagrees to an extent, offering some conjectures as to why ITCpractice may serve the joint political interests of the United States and itstrading partners. He further questions whether a more economic approach toinjury analysis would have any welfare benefits.

Finally, efforts have been made to ascertain whether injury findings reflectpolitical factors (such as the interests of the constituencies of key Senatorsand Congressmen), or instead reflect judgments about the "merits" of eachcase. Finger, Hall and Nelson (1982) hold the former view, while Anderson(1993) concludes that ITC decisions are not well explained by such politicalvariables.

7. Safeguards Measures and the "Escape Clause"

Article XIX of the GATT (the "escape clause") permits signatories towithdraw trade concessions temporarily when increased imports cause orthreaten to cause "serious injury" to a domestic competing industry. U.S. lawfurther provides that these "safeguards measures" shall not be taken whensome cause other than increased imports is a more important source of injury.

Several writers have undertaken to give economic content to this inquiry. Grossman (1986) analyzes the causes of injury to the U.S. steel industry in theearly 1980's, while Pindyck and Rotemberg (1987) consider the copperindustry. In these papers, the authors set forth a framework within which tothink about the causal contribution of increased imports to industrial decline(no trivial task since import quantity is usually viewed as an endogenousvariable by economists), as well as the causal contribution of other factorssuch as recession. Kelly (1988) , (1989) also addresses these issues.

Other writers have inquired into the wisdom of safeguards measures. Lawrence and Litan (1986) find efficiency and fairness argumentsunpersuasive as a justification for protecting industries impaired by importcompetition, although they in the end favor the use of escape clausemeasures as a "safety valve" against protectionist pressures that mightproduce an even worse outcome if left unchecked. Trebilcock, Chandler andHowse (1990) are agnostic about the possible utility of temporary protectionto facilitate adjustment, although skeptical of government policies in practice. Sykes (1990c) suggests some possible reforms in the injury analysis aimed atlimiting relief to plausible cases of labor market imperfections.

On the positive side, Sykes (1991) offers a public choice explanation forthe existence of GATT Article XIX. He suggests that declining firms willrationally expend greater resources to secure protection than growing firms,and that the escape clause may facilitate the politically "efficient breach" ofGATT obligations.

8. The Most-Favored Nation Obligation and Exceptions  

Article I of the GATT agreement is a general prohibition on discrimination intariff policy, creating a so-called "most-favored nation" obligation. Article XIcreates a similar obligation relating to the use of quotas. But the GATTsystem also contains a number of exceptions to these obligations. The mostimportant is Article XXIV, which permits the formation of customs unionsand free trade areas (such as the European Union and NAFTA) that granttrade preferences to members. Other exceptions include the authority to usediscriminatory safeguards measures under certain conditions, and theauthority to grant preferences to developing countries.

The normative economics of trade discrimination has been studiedextensively. Other things being equal, discrimination in protectionist policies(such as the use of different tariffs for different trading partners) producesgreater deadweight losses than nondiscriminatory policy. The reason is thatdiscrimination produces "trade diversion" -- inefficient investment andproduction in higher cost countries that benefit from trade preferences. Otherthings may not be equal, however, because discriminatory trade liberalizationmay be better than none at all -- in the parlance of the profession, "tradecreation" can dominate trade diversion. See Lipsey (1960) ; Bhagwati andSrinivasan (1983) . Thus, the theoretical view of discrimination is agnostic,and it becomes a difficult empirical question whether a particulardiscriminatory arrangement is welfare reducing or welfare enhancing. Thequestion is all the more difficult because the answer turns on a counterfactual-- what would the world look like without the discrimination in question? Theprevailing view seems to be, however, that most of the existing preferentialarrangements have tended to be welfare enhancing, and that regionalarrangements such as the EU and NAFTA are "building blocks" rather than"stumbling blocks" on the road toward a more open trading system. See Lawrence (1996) .

Schwartz and Sykes (1996) examine the GATT rules on tradediscrimination from a positive perspective. They argue that nondiscriminationrules tend to maximize political surplus for officials in signatory nations, otherthings being equal, by increasing the sum of producer surplus andgovernment revenue (both assumed to count heavily in the political welfarefunctions of politicians). But exceptions exist -- for example, the most favorednation obligation may at times create a free rider problem in bargaining thatmakes it difficult for nations to exhaust all politically valuable deals. Schwartzand Sykes use these observations to offer an explanation for some of theexceptions to the most-favored nation obligation under GATT, includingArticle XXIV.

9. Technical Barriers to Trade  

Recent negotiations under WTO auspices have produced two agreementsconcerning "technical barriers" to trade, which result from divergent productstandards and regulations in the international economy. The agreement onsanitary and phytosanitary measures is aimed at food safety issues andrelated problems in the agricultural sector. The agreement on technicalbarriers to trade covers other product markets. These agreements containtheir own commitments regarding nondiscrimination, least restrictive meanstests, covenants to rely on international standards where feasible, and manyother matters. Sykes (1995) provides a survey of the economic issuesinvolved in the technical barriers area, a review of the different legalapproaches to policing technical barriers around the world, and an economicexplanation for many of the legal rules that are in place. Leebron (1996) discusses in a general way the case for harmonizing national regulatorypolicies. See also Davidson et. al. (1989) .

10. Dispute Settlement, Self Help and Unilateralism  

International trade agreements have no central enforcement authority with thepower to compel nations to adhere to them. It is also exceedingly unlikely thatany nation would unilaterally go to war to vindicate its rights under theseagreements. Yet, these agreements seem to hold together fairly well, and it isapparent that some mixture of reputational concerns and implicit threats ofunilateral retaliation on matters of commercial policy go a long way towardmaking trade agreements viable.

But unilateral "retaliation" in the trade arena may also be opportunistic,and may be employed against nations that have done nothing wrong underinternational law. This concern has been expressed widely with respect toSection 301 of the 1974 U.S. Trade Act, which permits the United States toretaliate for all manner of "unfair" practices. Many prominent economistshave been critical of the "aggressive unilateralism" of the United States underthis statute. Bhagwati (1988) is illustrative.

Sykes (1990b) takes the other side of the debate, arguing that Section 301was a potentially sensible "self help" measure in the face of imperfections inthe GATT dispute resolution system. Sykes (1992) argues further that Section301 might play a constructive role in addressing trade impediments outsidethe coverage of GATT obligations, and that Section 301 had been fairlysuccessful from the U.S. point of view in opening up foreign markets withoutthe need for any retaliatory measures in most cases.

New developments in the WTO dispute resolution system moot many ofthe arguments in this debate, as it can no longer be argued that unilateralaction is necessary to create meaningful commercial policy sanctions forbreach of promise -- the new Dispute Resolution Understanding ensures thatWTO-authorized sanctions can be imposed on nations found to be inviolation. Likewise, the number of matters still outside the explicit or implicitcoverage of the WTO/GATT system has diminished greatly. Perhaps the nextstep in the economic literature on dispute resolution within trade agreementswill be to explain the recent changes in the WTO system, including the detailsof procedures and sanctions, and in time to assess their efficacy.

11. A Concluding Note on the Research Agenda  

The expanding scope and detail of international trade law affords law andeconomics scholars an exceptionally broad range of research opportunities.Although the welfare economics of conventional tariffs and quotas is quitewell developed, normatively inclined scholars should find much to occupythem in the treatment of nontariff issues of various sorts. Issues relating toregulatory divergence and harmonization, for example, will be central for manyyears in both goods and services markets. I suspect that much of the bestwork will be focused reasonably narrowly on particular problems, from themarketing of prescription medications to the harmonization oftelecommunications standards to the opening of insurance and securitiesmarkets. Much work also remains to be done on understanding the economicconsequences of regional trading arrangements, and on the question of howthe WTO ought police their emergence and operation. Opportunities fornormative, comparative analysis are also widespread, as the world witnessesa proliferation of sophisticated legal arrangements that must all contend withessentially similar problems. The "trade and" issues that I have neglected inthis essay -- trade and the environment, trade and competition policy, and soon -- will also afford fruitful subjects for research as the wisdom ofharmonizing policies across nations increasingly becomes a subject of topicaldebate.

The opportunities for positive analysis are equally great, if not greater.The political economy of much of the WTO/GATT system remainsunexplored, from the provisions on "unfair" trade practices to the treatment ofdeveloping countries to the rules for accession, voting, renegotiation anddispute settlement to the sector specific arrangements such as the Agreementon Agriculture. Fundamental questions relating to the expansion andevolution of the GATT system, both in scope and timing, have hardly beenposed, let alone answered. The same may be said about the details of regionalarrangements -- even the most basic questions, such as who joins a regionalarrangement, when, and why, remain little touched.

In short, much like other subject areas under the rubric of internationallaw, law and economics has only begun to make a dent in the set of potentialtopics in the trade area. The rapid rate of change in international trade lawsimply adds to the possibilities for interesting new research. Mainstreameconomists can, of course, be expected to continue to invest considerableenergy in the field, but scholars with legal training as well will retain acomparative advantage in work addressed to many of the concrete positiveand normative problems raised by modern legal developments.

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