International trade agreements are the tool to advance trade between countries. They do not provide for completely free trade but set the platform for the conditions governing the global exchange of goods and services. While governments conclude trade agreements with the goal of increasing their citizens’ welfare, trade liberalization also comes with certain costs. The key question today is how to handle those costs and make international trade liberalization more sustainable
Johanna Jacobsson is a lawyer specialized in international economic law. Her fields of expertise are international trade law (especially preferential trade agreements, services trade and digital trade) and the EU’s internal market law and external trade relations. Johanna’s current research interests lie especially in the effects of technology and digitisation on international trade and business.
Johanna holds a PhD in European and international law from the European University Institute, Florence (2016). She has previously acted as a law clerk at the Court of Justice of the European Union and been a visiting researcher at the Finnish Institute of International Affairs. She has also practiced law in a commercial law firm and is a regular visiting lecturer at several universities.
Governance of global issues through international trade agreements
Ever since Adam Smith published The Wealth of Nations in 1776, the vast majority of economists have accepted the proposition that free trade among nations improves overall economic welfare.
But does free trade really exist? The answer is – not really. Even in the European Union where there is a free movement of goods, services, capital and people, there are still many barriers to trade between the EU member states. The EU is much further in its internal trade liberalization than any other region in the world, but most countries do also aim at a certain – if not free than at least freer – trade with their neighbors and other trading partners. How do they do that? By concluding agreements with each other. Through trade agreements countries set their border taxes – that is tariffs –as well as quotas, and other market access conditions that they are willing to allow to products coming from other countries to their market. These agreements therefore set the conditions for how global commerce is run. The actors of global commerce are mainly private companies but as the agreements are concluded between countries, they are governed by international law.
The world’s arguably most important trade agreement, the GATT, entered into force in 1948. Today the GATT is one of the agreements under the umbrella of the WTO – the World Trade Organization – which is the only global international organization dealing with the rules of trade between nations. The tariff negotiations carried among countries under the GATT agreement have been so successful that today tariffs are actually very low, on average below 5 %. Instead of tariffs on goods, countries’ main focus is moving to other issues, particularly to services and all types of regulatory barriers that face products on foreign markets. For example, each country has its own consumer protection and product safety rules. This means that producers have to follow several different standards when selling their products internationally. Trade agreements are increasingly trying to accommodate these differences by setting common standards. At the same time, countries use trade agreements for geopolitical objectives, to increase their power over a specific region, for example.
In recent years trade agreements have become the object of increasing criticism especially in the richer parts of the world. While not all such criticism is well-founded, it is probably true that trade agreements could do more to tackle some of the most negative side effects of globalization. Among the key questions is the effect of trade agreements on labour, both in the source and destination countries of goods and services sold internationally. One of the key arguments against trade agreements is that they destroy jobs especially in the more developed part of the world. Research tends to show that trade liberalization does affect jobs in certain sectors but overall, they tend to create more jobs than destroy them. That makes sense as otherwise governments would probably not conclude them. However, the problem may be that those people who lose their jobs may feel as they are left behind. It is therefore increasingly suggested that governments address these types of distributional effects of trade agreements by targeted domestic decisions, through corrective tax and social and educational policies.
There are also increasing demands to include labour protection clauses in trade agreements to demand higher salaries and improved working conditions especially in the source countries of cheaper imports. Similar demands are being put forward to include clauses on higher environmental standards in return for a better access to foreign markets. The European Union has started to include commitments to effectively implement the Paris Climate Agreement under the sustainable development provisions of its trade agreements. The EU has also announced that it would not conclude any trade agreement with a country that has not signed up to the Paris Agreement. However, these sustainable development chapters in the EU’s trade agreements are not enforceable in the same way as the rest of the commitments. This means that they cannot be used as a basis of a claim in a legal dispute settlement between the EU and its trading partners. Therefore, even though binding, they may be of limited practical significance.
At the moment probably the biggest challenge and source of uncertainty to the international trade regime is caused by the United States. The US was for decades one of the strongest supporters of international trade negotiations and one of the key pillars of the global economic governance system. While there are clearly flaws in the management of globalization, the Trump administration has decided to tackle these challenges from a purely national point of view. Economists, and the international community, tend to disagree with that approach as going backwards on trade liberalization is not likely to make people’s lives better anywhere, the United States included. However, something positive in President Trump’s attack on trade agreements is maybe the increased public discussion regarding these treaties. Trade agreements do have big effects on people’s lives, and they should be open to public scrutiny. Such public scrutiny should, of course, be based on facts. The discussion should also reach beyond trade agreements to address how we can make our societies more just and inclusive by internal, domestic policies. In times of environmental crises, also the environmental sustainability of any new trade agreements should be a top priority for politicians and voters alike.