“You skate to where the puck will be, not where it is.”

(Steve Jobs, CEO of Apple Inc.)

Trade liberalization, like much in international governance, happens both through regional and multilateral integration. In political economy, there has been some debate over the merits and demerits of regional trade blocs, whether they constitute “building blocs” or “stumbling stones” for world trade.

I think that by creating universally, rather than regionally binding precedents under the World Trade Organization‘s (WTO) Dispute Settlement Understanding (DSU), multilateral integration helps us to level to playing field of trade liberalization, to strengthen “right over might” and to address the fundamental equity concerns of economic globalization.

I was recently tasked in Dr. Mildner‘s “States and Markets” seminar at the Hertie School to write a fictional memo for the Mexican Secretary of the Economy, Gerardo Ruiz Mateos, arguing why Mexico should bring its agricultural trade disputes with the United States in front of the WTO, not the North American Free Trade Agreement (NAFTA).

Both dispute settlement regimes are relatively similar in substance and procedure, except that the WTO proceedings are faster, tougher on compliance and address anti-subsidy and anti-dumping issues important in the Mexican context. Surprisingly, parties to NAFTA, and other free trade agreements, can freely choose (shop) from the dispute settlement fora to which they are signatories for most issues.

The agricultural trade disputes between Mexico and the U.S., including Mexican sugar cane and American High-Fructose Corn Syrup (HFCS), reflect the essential dilemma for developing economies in international commodity trade (Mexico of course not being a developing country). Mexico needs free export access markets for its cheap produce to modernize production and jumpstart rural development, but is unable to compete successfully against highly subsidized and efficient production in the developed world, in this case of cane sugar substitute American HFCS and protected Central Valley (CA) fresh produce. The US, in turn, refuses to lower subsidies or trade barriers, so long as Mexico will not open its domestic markets to American HFCS, which Mexican is, in the short run, unable to do for it would wreck inefficient, sometimes subsistence local production.

Under regional, reciprocity based dispute settlement, this mutually countervailing stalemate comes to no conclusion. The U.S.-Mexican trade balance is net negative, negotiations and even rule-based dispute settlement are always asymmetric, for suspensions of concessions and other obligations (SCOO) will always harm Mexico more than the U.S. Additionally, producers in the U.S., such as the feared and famed Corn Refiners Association (CRA), are likely much better equipped and organized than their Mexican counterparts and consumers in both countries, further distorting the political economy of trade liberalization (Avery 1998). Reciprocity here, is a dead end.

What follows from this? 

Marc L. Bush of Georgetown University recently (2007) suggested that, in cases like this, complaining governments choose dispute settlement fora by balancing and interacting present utility of likely rulings and their future precedent effect. He argues, that governments’ forum shopping is guided, in part, by their desire to set a multilateral, regional or no precedent.

This insight provides another argument for the “building bloc” vs. “stumbling stone” discussion. When precedent matters,  multilateral dispute settlement can strengthen universal “right over might” and help us to address the imbalances and equity problems of trade liberalization. Regional trade blocs can easily bring back power politics and the flexibility it allows for might as well exploited in self-interested defection of the likes of the CRA.

Multilateral integration can, and should, as recently featured under the Doha Round negotiations include a robust doctrine of special and differential treatment for the developing world. This will allow Mexico to export its produce, while at the same time protecting inefficient domestic production during a transition period of infant industry protection.

For sustainable and equitable development, this the universally binding precedent we should seek. For fair globalization, this is kind of the global constitutionalism (Peters 2006), we must achieve. And in Steve Job’s words, this is where the puck is.

References

[Avery, 1998] Avery, W. P. (1998). Domestic interests in nafta bargaining. Political Science Quarterly, 113(2):281–305.

[Bush, 2007] Bush, M. L. (2007). Overlapping institutions, forum shopping, and dispute settlement in international trade. International Organization, 61:735–761.

[Peters, 2006] Peters, A. (2006). Global constitutionalism revisited.

For your interest, the complete Memo is available here for download.