How Shrinking Policy Space in the International Trade Regime is Constraining Development

By Rachel Thrasher

There is an unresolved tension between the network of rules that make up the global trading system, and the needs of the system’s individual countries. Indeed, troubling trends in treaty-making and international jurisprudence suggest global rules increasingly present obstacles to national governments pursuing development and economic expansion aims.

Consisting of one multilateral trade agreement, more than 300 preferential free trade agreements and almost 3,000 bilateral investment treaties, the global trading system seeks to establish a stable regulatory environment in which protectionist national interests are neutralized in favor of a more optimal distribution of global wealth. The system has the ostensibly unbiased role of paving the way for global commerce and quick and efficient economic growth. While the original project of liberalizing international trade had a relatively limited scope, treaty texts since the mid-1990s have encroached more and more on areas of domestic policy making.

As my new book, Constraining Development: The shrinking of policy space in the international trade regime, highlights, this encroachment takes place in the areas of industrial and investment policy, capital flow management and debt policy, as well as health and climate policy. Moreover, a growing number of international legal cases at the World Trade Organization (WTO) and through investor-state dispute settlement mechanisms have demonstrated the teeth and power of these treaties.

Overall, my research found that entering into broader and deeper trade agreements is not the best way to pursue development. Modern trade and investment agreements keep national governments from making and maintaining the policies they need to promote economic growth, financial stability, debt sustainability, public health and environmental protection. In response to that reality, new trade and investment treaties should take a step back from their interference with domestic regulatory sovereignty, and focus on narrower, shallower economic integration at a global level.

Below, I sketch an overview of the current constraints of the global trade regime, as well as recommendations for preserving policy space from further erosion.

The current landscape and its limitations

The book explores six distinct but overlapping areas of policymaking in which the world trading regime limits nations’ policy space. Of these six, three in particular should be highlighted: extensive trade liberalization, limited access to medicines and climate change.

First, despite the fact that national governments have consistently been called on to respond to immediate changing circumstances, trade and investment treaties increasingly diminish their ability to do so, while also balancing the goals of long-run diversification and development. This is especially true in bilateral and regional agreements where the United States is a party, and, to a lesser degree, those with the European Union. The treaties bind country-parties’ hands by requiring extensive trade liberalization (lowering tariff barriers and eliminating non-tariff barriers), as well as controlling how countries regulate foreign investors and service suppliers.

This has had impacts in the area of financial stability, making it more difficult for countries to mitigate financial crises, restructure sovereign debt and in land use management – limiting the ability of countries to protect vulnerable populations from multi-national corporations.

Second, the COVID-19 pandemic has unveiled yet another context in which global trade rules have potentially stood in the way of important policymaking efforts. The historical evidence shows high levels of intellectual property protection can increase medicine prices and, potentially, decrease access to those medicines. During the pandemic, this reality has come to life in the form of vast vaccine inequity and a reluctance to share patented innovations, technology and know-how.

Finally, climate change inarguably poses the greatest challenge faced by the international community. Exploring the tension between the need for large-scale collective action on climate change and the immediate needs of domestic communities – jobs, economic growth, health care, education and more, the book explains how trade and investment treaties and international disputes have made it more difficult for countries to address climate change in a way that is sensitive to domestic interests.

How to preserve policy space

The overarching message is that a new approach to trade and investment treaty-making is needed worldwide. While liberalizing international trade has been a most effective engine for economic growth in the 20^th century, various areas of human development have suffered and troubling trends in global political economy suggest a change in strategy is sorely needed.

To address these shortcomings, the international community must pull back from the regime’s tendency to encroach on a country’s right to regulate in its own interest. This strategy begins with forming an understanding of what the existing texts say and how they may be interpreted before an international tribunal.

However, the much more challenging step will be to guide the trajectory of new treaty texts toward a coherent and consistent goal – to resolve the tension in favor of individual state interests in making public policy. In order to meet this goal, new treaty texts must preserve and expand existing policy flexibilities. Negotiations should take place at a multilateral level, where the playing field is more balanced. Treaties should give deference to state regulators and prefer domestic judicial processes and diplomatic methods of dispute settlement. New commitments should focus on supporting “developing and least developed countries’ integration into the global economy” through capacity building and reinforcing different treatment for countries at different levels of development.

Through these mechanisms, trade and investment treaties can stop constraining development and begin to live into their stated goals of improving standards of living, economic growth and sustainability for all.