The challenges of the current international trade rules system

Geopolitical power from trade

In this paper, Liu and Yang investigate international power stemming from trade. They develop a model that combines trade with bargaining over geopolitical tensions: ex-ante, countries make plans for international trade while ex-post, an international dispute may arise, and one country (the coercer) can threaten to reduce trade with another (the target). For the empirical part of the paper, the authors develop a measure of international power that captures asymmetric import dependence (export power) across nations. To measure bilateral engagement across all nation pairs they use data from the Integrated Crisis Early Warning System (ICEWS) dataset, which covers 19 million events ranging from nations expressing intent to meet or negotiate, appeal for economic aid from specific countries, or impose military threats or aggression. Their findings include:

• International power derived from trade asymmetry significantly impacts bilateral engagement and negotiations between countries. On average, a one standard deviation increase in power asymmetry between a pair of countries stimulate a 0.24 standard deviation increase in bilateral engagement.
• Export power has a stronger effect on bilateral engagement compared to import power. This aligns with the theoretical prediction that threats of export disruption are more credible and impactful than import disruption threats.
• Power derived from certain sectors (e.g., chemical products, optical/medical instruments, machinery/electrical equipment) has a stronger impact on bilateral engagement compared to other sectors like apparel and footwear.
• Countries strategically build up export power in response to anticipated changes in diplomatic alignment, particularly following electoral turnovers in partner countries.
• Political alignment between countries is associated with trade flows, with increased alignment correlating with higher trade volumes.

International Power
Authors: Ernest Liu, David Yang
From: Princeton University, Harvard University

The challenges of the current international trade rules system

In this paper, Guzman and Stiglitz discuss the challenges and shortcomings of the current international trade rules system and propose frameworks for designing new rules in a post-neoliberal era. Some of the main points they raise include:

• The post-World War II rules-based international trading system, built on neoliberal principles, is unraveling because a) it failed to deliver on promises of prosperity for all, often making large groups worse off in both developing and developed countries; b) it did not account for market failures, endogenous technological change, and power dynamics in shaping rules and their enforcement; and c) the system’s assumptions about political dynamics and efficient market adjustments proved incorrect.
• Endogenous innovation and learning-by-doing can lead to divergence rather than convergence between countries under free trade. This challenges the notion that free trade always benefits all parties.
• Industrial policies, which were largely prohibited under WTO rules, can be beneficial for addressing market failures and promoting innovation, especially in developing countries. The recent revival of industrial policies in advanced economies highlights this shift.
• Power dynamics play a crucial role in shaping trade rules, their implementation, and enforcement. Powerful countries have disproportionate influence and are less subject to enforcement actions.

The authors propose a framework for designing new trade rules, including:

• Recognizing the importance of industrial policies
• Promoting knowledge sharing, especially for global public goods like climate change mitigation
• Implementing fairer global taxation systems
• Allowing more flexibility for developing countries in trade rules

Post-Neoliberal Globalization: International Trade Rules for Global Prosperity
Authors: Martin M. Guzman, Joseph E. Stiglitz
From:Columbia University