Trade Agreements and Democracy

Introduction

Trade policy is currently politically and popularly salient. Few days pass without major media outlets offering analyses that blast or praise the Trump administration’s approach to the subject. The Trump White House is seeking to renegotiate The North American Free Trade Agreement (NAFTA) 22 ½ years after its initial implementation. The U.S. – South Korea Free Trade Agreement (KORUS, for the pundits) is also under review by the current administration. The United States has also placed the World Trade Administration (WTO) in a parlous position by refusing to accept appointees to the organization’s Appellate Body, its judicial organ, which hears disputes from members. If we add to this mix the announced intention of the United Kingdom to withdraw from the European Union—Brexit—all of the ingredients necessary for an implosion of the current architecture of global trade are present.

Critics of trade agreements such as NAFTA, and of supranational organizations such as the WTO, argue that these legal arrangements and institutions have been implemented and managed to the detriment of workers and citizens of advanced nations in general and of the United States in particular. But what precisely do these trade accords and organizations do? Who benefits from them and what are their consequences?  This short essay briefly summarizes the state of the art of research concerning trade policy. I will argue that an important line of inquiry is still missing: the institutional consequences of trade agreements. Research on this concern could potentially shed at least partial light on the reasons for the current backlash among a share of the American population to free trade policy.

Trade Agreements

In the current public debate about trade, it is important to emphasize that these agreements are primarily instruments for liberalization whose purpose is the reduction of tariffs (taxes on imports) and quotas (limits on the quantities of a product that may be exported or imported). The goal of reducing barriers to trade is a more efficient system for exchanging goods among nations. There are many different types of exchange agreements and, as a group, they differ in content and scope. Relevant scholarship orders them in a hierarchy from “shallow” to “deep.” Shallow agreements are those, such as the KORUS, which include only measures at national borders. Shallow free trade accords reduce tariffs at borders, but domestic policies may remain untouched. Deep agreements also include rules and regulation beyond national borders, such as introducing standards and rules of origin for products and services (WTO 2011, p. 110). Some examples may help clarify these differences. As noted, KORUS is a shallow trade agreement, while NAFTA is a medium-deep agreement. The European Union is one of the deepest trade accords, as its provisions include a common market and a single currency for its members.

Taken together, all of these covenants are meant to create more efficient markets and to promote and simplify conducting business among their member countries. But what do they do actually? As past WTO director general, Pascal Lamy, has observed, “We need to look at the manner in which RTAs [regional trade agreements] operate” (Lamy 2007).

Economists: We are Better Off Thanks to Trade Agreements

Economists like numbers. Most of their research is dedicated to quantifying the benefits of trade and of its liberalization. Analysts have created a vast literature on the consequences of exchange agreements that, as a general proposition, argues that free trade is beneficial. There are welfare gains associated with freer trade for citizens across all income strata, but these may not be evenly distributed or occur immediately (Corcos, Del Gatto, Mion and Ottaviano 2012). In consequence, many citizens today, across the U.S. and Europe, do not perceive themselves to have benefited from many major trade compacts. In fact, empirical research demonstrates that the gains from such agreements have indeed been unevenly distributed among individuals and across time (Baccini, Pinto and Weymouth 2017). In particular, a share of U.S. blue-collar workers, for example, have suffered from employment off shoring and real wage decline due to some trade agreements, including NAFTA (Hakobyan and McLaren 2016). These facts help explain why some laborers have perceived that they were left behind by the globalizing efforts of encouraging more and freer trade. In fact, and as a result, many citizens in the Rust Belt region in the Midwest of the United States and the manufacturing regions of Northern England have strongly supported anti-trade agreement rhetoric à la advocates of Brexit or as articulated by Donald Trump.

Political Consequences of Trade Agreements

Political scientists have also researched trade agreements resulting in a vast literature on public opinion and trade (Kono 2008; Mansfield and Mutz 2009; Guisinger 2017; Jedinger and Schoen 2017). Recent research of this sort provides a mixed picture of the extent of public support for free and open trade, and of agreements that support those goals. Nonetheless, recent polls have suggested that the majority of Americans still support free trade and broad U.S. involvement in global affairs (Smeltz et al. 2017). Indeed, political scientists have found evidence that free trade agreements and the sustainability of democratic governments are related (Liu and Ornelas 2014). In fact, democracies tend to sign trade agreements with each other (Mansfield, Milner and Rosendorff 2002). Similarly, analysts have determined that economic liberalization and free trade follows regime change towards democracy (Milner and Kubota 2005).

That is, there is evidence of a positive relationship between trade agreements and liberalization and the resilience of democratic systems. Trade compacts, as well as international organizations, however, lack direct and clear democratic accountability, as they are not approved or enacted by a specific demos or democratic citizenry (Elsig 2007, Koppell 2010) and they suffer deficiencies in their legitimacy, since their procedures are sometimes not transparent and characterized by technocratic decision-making (Esty 2002). The point is that “global governance is neither democratic nor entirely undemocratic” (Strange 2011, 240). In fact, on the one hand, public opinion supports open trade, while on the other hand, many citizens express concerns about the democratic accountability of such accords and the institutions that oversee them.

I argue therefore that to examine the political legitimacy and the democratic accountability of trade agreements, analysts must add another factor into their investigative calculus. It is not enough to evaluate the economic, political and institutional consequences of trade accords against the electoral and participatory dimensions of democracy alone. In addition, to gauge their overall import and impact, the rules and procedures of democracies, often anchored in judicial and legislative checks-and-balance systems, also must be analyzed. This is not to say that it is not important to consider what people think about goods exchange deals, but an additional layer of concerns should also be considered when evaluating their implications, including their relative transparency, impacts on civil liberties, rule of law and import for horizontal accountabilities (veto rights, checks on rulers), to name a few (Coppedge et al. 2011). Researchers studying the consequences of trade agreements should consider these concerns seriously if they expect to understand why some workers and citizens support anti-globalization politicians. Put differently, those examining the implications of free trade need to understand better the implications of such agreements for these dimensions of liberal democracy. Investigating these matters will lead analysts to evaluate more fully the domestic political effects of such efforts.

The global economic system is fundamentally capitalist and trade agreements are part of the management of that market regime. This structure, often dubbed regulatory capitalism, is increasingly dominated and managed by a system of administrative rules that are neither obvious, nor readily transparent to the populations affected by them (Levi-Faur, 2005). Trade agreements have often been implemented to reduce or eliminate the anti-competitive effects of specific policies, such as tariffs, so as to allow freer exchange across national borders. However, as Vogel has argued, more open markets seem also to imply more rules (Vogel 1996). Scholars are not yet in a position to understand the consequences of trade agreements for the performance of such a regulatory capitalism regime and future research should seek actively to understand and examine those. Efforts to do so, I have argued, must investigate how international trade agreements are affecting the liberal character of the democratic states that agree to participate in them.

Conclusion

Analysts need to understand better the ways in which trade agreements have contributed to creation of the current regulatory capitalism global regime. Researchers have focused on the electoral and participatory dimension of democracy. In the U.S. case, the majority of Americans still support open and free trade, but paradoxically, a share of that group also back political leaders who are against such policies. This paradox might partially be a consequence of regulatory and administrative changes in the management of the global economy. Hence, it is necessary to study the impact of trade agreements on the liberal dimensions of democracy, which include judicial and legislative checks-and-balance processes. Such inquiry could shed light on the reasons why so many citizens in western democratic nations have supported a recent, and often unreflective, backlash against, trade agreements, international organizations and global governance.

References

Baccini, L., P. M. Pinto, and S. Weymouth (2017): “The Distributional Consequences of Preferential Trade Liberalization: Firm-Level Evidence,” International Organization 71(2): 373–395.

Coppedge, M. et al. (2011): “Conceptualizing and Measuring Democracy: A New Approach,” Perspectives on Politics 9: 247-68.

Elsig, M. (2007): “The World Trade Organization’s Legitimacy Crisis: What Does the Beast Look Like?” Journal of World Trade 41(1): 75–98.

Guisinger, A. (2017): American Opinion on Trade. Preferences without Politics. Oxford University Press.

Esty, D. C. (2002): “The World Trade Organization’s legitimacy crisis,” World Trade Review 1(1).

Hakobyan, S., and J. McLaren (2016): “Looking for labor market effects of NAFTA,” The Review of Economics and Statistics 98(4): 728–741.

Jedinger, A., and Schoen, A. (2017): “Anti-Americanism and Public Attitudes toward Transatlantic Trade,” German Politics, pp. 1–22.

Kono, D. Y. (2008): “Does Public Opinion Affect Trade Policy?,” Business and Politics, 10(2), 1–19.

Koppell, J. (2010): World Rule. Accountability, Legitimacy, and the Design of Global Governance. The University of Chicago Press.

Lamy, P. (2007). “Proliferation of regional trade agreements “breeding concern”” Speech at the opening of the Conference on Multilateralizing Regionalism. 10 September 2007. Available at: https://www.wto.org/english/news_e/sppl_e/sppl67_e.htm

Levi-Faur, D. (2005): “The Global Diffusion of Regulatory Capitalism,” The Annals of the American Academy 598: 12–32.

Liu, X., and E. Ornelas (2014): “Free Trade Agreements and the Consolidation of Democracy,” American Economic Journal: Macroeconomics 6(2): 29–70.

Mansfield, E. D., and D. C. Mutz (2009): “Support for Free Trade: Self-Interest, Sociotropic Politics, and Out-Group Anxiety,” International Organization, 63(3), 425–457.

Mansfield, E. D., Milner, H.V. and Rosendorff, B. P. (2002): “Why Democracies Cooperate More: Electoral Control and International Trade Agreements.” International Organization 56 (3): 477–513.

Milner, H. V., and K. Kubota (2005): “Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries,” International Organization 59(1): 107–143.

Smeltz, D.; Daalder, I.H.; Friedhoff, K. and Kafura, C. (2017): “What Americans Think about America First.” The Chicago Council on Global Affairs. Available at: https://www.thechicagocouncil.org/publication/what-americans-think-about-america-first.

Strange, M. (2011): “Discursivity of Global Governance: Vestiges of “Democracy” in the World Trade Organization,” Alternatives: Global, Local, Political 36(3): 240–256.

WTO. (2011): World Trade Report 2011 – The WTO and preferential trade agreements: From co-existence to coherence. World Trade Organization.

Simone Franzi is a doctoral student in the Planning, Governance and Globalization program at Virginia Tech. His current research interest is in the political economy of trade and, in particular, how trade and trade agreements play roles in shaping geographies and polities. More specifically, he is studying the consequences of trade agreements for different dimensions of democracy. Prior to coming to Virginia Tech, Simone earned a Bachelor and a Master’s degree in Political Science and Geography from the University of Bern, Switzerland. His baccalaureate thesis addressed conceptualizations of trust in the social sciences. For his Master’s degree, he studied the implications of commodity trading for sustainable development and wrote a thesis on the relationship between commodity abundance and international cooperation.