INTERNATIONAL TRADE LAW
CHAPTER ONE
1. INTRODUCTION
Before we dive into the fascinating subject of international trade, let us take a moment to think
about what international trade is and how it affects us. On an ordinary day, you may wear jeans
produced in Turkey, ride on a bus produced in Germany, and communicate with your friends on
cellular phones designed in the United States, but manufactured in China. Now answer the
following question: how did all of these goods (items or materials produced, consumed, and
traded in an economy) find their way into your city? If you guessed international trade, then you
are correct. Many of the goods and services (intangible goods such as banking services, cellular
phone service, etc.) we use on a daily basis are acquired through trade with different countries.
Like any other economic activity, the trade of goods and services is governed by a set of rules
and regulations. However, international trade is also governed by international organizations and
international agreements. The purpose of this chapter is to introduce you to the rules and
regulations that govern the international trade of goods and services, as well as to the
organizations in charge of making and enforcing said rules.
To begin, we will briefly look at the rationales in favor of the liberalization of international
trade, as well as the arguments against it. For now, we will define liberalization as the
progressive reduction of barriers to trade. We will then learn about the history of the current
international trade system, followed by an overview of the treaties—deals and agreements
between countries—and organizations that govern international trade. After being exposed to
the basic structures upon which the current international trade regime is built, we will explore the
rules and principles of international trade, as well as their exceptions and remedies. The chapter
will end with a discussion of the interaction between international trade and international
investment. You should know that although we will discuss the international trade in services,
the chapter’s main focus is international trade in goods.
After reading this chapter, you will be familiar with the core principles of international trade law,
and how they are applied to the international trade of goods and services. Additionally, you will
be acquainted with the organizations and agreements that oversee international trade. Most
importantly, however, you will have a better appreciation of how deeply integrated the world has
become, and the ways in which international trade has made this happen.
2. WHAT IS INTERNATIONAL TRADE AND WHY DO STATES
ENGAGE IN IT?
As we discussed in the previous section, international trade is the sale and purchase of goods
and services across international borders. International trade is governed by a vast set of rules,
codified in treaties and trade agreements. To clarify, the rules we are referring to are those
governing the actions of states and governments with regard to international trade. We will not
be discussing international investment law, and will also not be discussing commercial or
investor-state arbitration.
Now that we have a basic definition of international trade, perhaps we should begin to answer
the question of “why do states trade?” The answer, again, is rather simple. We buy goods and
services from other countries because we cannot domestically produce all the goods and services
that each individual consumer wants and needs. The reason for this is that each country has
different factors of production. Factors of production are the resources used to build an
economy and produce goods and services; they are land, labor, and capital. Each country is
endowed with different combinations of these factors, and therefore each country is capable of
producing different combinations of goods and services. When domestic production is greater
than domestic demand for a good, excess production is traded on the international market. The
act of selling domestically produced goods to international consumers is known as exportation.
Consider the following example: Whereas Lebanon may be a good place to grow fruits, the same
cannot be said about Sweden. Sweden does not have the necessary land or labor to produce fruits
on a large scale. In this situation, it may be in Lebanon’s interest to export fruits to Sweden.
Likewise, in order to satisfy the wants and needs of Swedish consumers, Swedish grocery stores
may want to procure fruits from Lebanese producers. The act of purchasing goods from a foreign
country in order to sell them domestically is known as importation.
The previous example involved only two countries and one product. However, the international
trading system in which we operate is comprised of dozens of countries and the thousands—if
not more—of products they individually produce. Moreover, it is often the case that several
countries are similarly suited to produce the same types of goods and services, and this places
them in direct competition with each other.
Take a few minutes to think about the scenario presented above, and ponder the following
questions:
• Should all fruits from all countries be treated equally?
• If the importation of fruits reduces the domestic price of fruits, or reduces consumption of
domestically produced fruits, should we forbid it?
• Is trade bad?
2.1 Arguments in Favor of International Trade
This section will focus on various economic and non-economic arguments in support of
international trade. After reading this section, you should be able to answer the questions
presented in the paragraph above.
2.1.1 Economic Arguments in Favor of International Trade
The example we analyzed above, in which Sweden and Lebanon became trading partners, is
based on the theory of absolute advantage. According to this theory, country X has an absolute
advantage in the production of a good when country X is able to produce more of that specific
good than country Y. Most countries have an absolute advantage in the production of certain
goods. Given that each country is better than others at producing certain goods, they specialize
and trade their excess production.
As you might have intuited, the world is more complicated than the scenario we presented above
between Sweden and Lebanon. Often, countries have very similar factors of production, and
therefore are able to produce similar amounts of the same goods. To rationalize trade in such a
scenario, a more complete and complex theory is needed. This theory is called the theory of
comparative advantage. A comparative advantage exists whenever a country has “a greater
margin of superiority or a smaller margin of inferiority” in the production of a good. It is
possible for a country not to have an absolute advantage in the production of a good, but it may
still have a comparative advantage if it is relatively better suited for the production of a certain
good than another country might be.
Let us use the following scenario to understand the theory of comparative advantage. In this
scenario, there are two countries: Techno and Agro. Techno is an industrialized country, and
Agro is still developing and has not yet reached the same level of industrialization as Techno.
Notwithstanding, both countries produce televisions and lamps, and both countries have 1,000
workers.
To produce one television per hour, Techno uses 10 workers, and Agro uses 100; and to produce
one lamp per hour, Techno uses 2 workers, whereas Agro uses 4. Let us assume that half of each
country’s workers produce televisions, and the other half produces lamps. If we do the math, we
will find that Techno can produce 50 televisions and 250 lamps per hour. Conversely, Agro can
produce 5 televisions and 125 lamps per hour. In this example, Techno has an absolute
advantage in the production of both goods.
Let us now think about how lamp production would change if each country decided to produce
more televisions. Assume Techno wants to produce 51 televisions instead of 50, and that Agro
wants to produce 6 televisions instead of 5. Given that instead of producing lamps, some
workers will produce televisions, the output of lamps for Techno decreases to 245, and the
output of lamps for Agro decreases to 100 lamps. It costs Techno 5 lamps to produce 1
television, whereas it costs Agro 25 lamps to produce 1 television.
Now let us think about what would happen if each country decided to produce one more lamp
instead of one more television. Again, because some workers that were producing televisions
will now be producing lamps, the television output must decrease in some amount. A simple
calculation will show us that increasing lamp output to 251 will decrease Techno’s television
output to 49.8 televisions, whereas increasing lamp output to 126 would decrease Agro’s
television output to 4.96. It costs Techno .2 televisions to produce one lamp, whereas it costs
Agro .04 televisions to produce one lamp.
If we compare the costs of producing 1 additional television and 1 additional lamp for each
country, we will discover the following: it is relatively cheaper for Techno to produce
televisions, and relatively cheaper for Agro to produce lamps. Therefore, Techno has a
comparative advantage in the production of televisions and Agro has a comparative advantage in
the production of lamps. If Techno and Agro specialize in the production of the good they have
a comparative advantage in, they will be left with more televisions and lamps than they can
consume domestically. If they trade, they will be able to consume more of both goods than if
they each attempted to produce televisions and lamps independently.
The theory of comparative advantage tells a compelling story of why international trade is
beneficial. However, there are many more arguments in favor of increased trade amongst
countries. For instance, trade between countries tends to expand the markets that domestic
producers can access, allowing them to produce at a scale that will keep their costs down.
Additionally, trade may lead to the spread of new technologies, which can be particularly
valuable in developing economies.
The economic rationales in favor of international trade are strong, but they are not a complete
representation of the pro-trade argument. Nonetheless, understanding them is a key element to
fully grasping the underpinnings of many rules and goals of the current international trade
system.
2.1.2 Non-Economic Arguments in Favor of International Trade
In addition to the economic arguments articulated above, there are many non-economic
rationales supporting international trade. Some scholars argue that international trade, and more
specifically, free trade—defined as trade without barriers—promotes peace. The idea behind
this argument is that countries that actively trade with each other are less likely to engage in a
war or conflict against one another. As evidence of this, scholars point to history, and note that
only on rare occasions has this theory been contradicted in modern times.
Some have argued that trade promotes democracy and peace, forming a ‘virtuous cycle. They
suggest that trade and economic integration tend to promote the introduction of democratic ideas
to society. This is ostensibly because increased trade also leads to an increase in the inflow of
books, and other forms of “political and social content.” Moreover, scholars contend that
“[f]oreign investment and services trade create opportunities for foreign travel and study,
allowing citizens to experience first-hand the civil liberties and more representative political
institutions of other nations.” Additionally, they introduce three main ways in which trade and
globalization reinforce the “trend toward democracy.” First, as explained above, it is rather
unlikely that democracies that trade with each other will fight one another. Second, trade
promotes economic integration, which means that economies are more linked and thus that
countries have more to lose from fighting each other. Third, trade allows countries to depend on
production and exchange to acquire wealth instead of depending on war and conquest.
We have already covered the main arguments in favor of international trade, both economic and
non-economic. Now, we shall explore the arguments against trade.
2.2 Arguments Against International Trade
The practice of preventing or limiting international trade with the ultimate goal of protecting
domestic producers is known as protectionism. We will discuss different types of protectionist
measures in subsequent sections, and will learn that not all protectionism is equally bad. This
section will focus only on the arguments in support of protectionism.
One of the most popular arguments against the free trade of goods across international borders is
the infant industry argument. The infant industry argument contends that allowing the
importation of goods and services into a country is detrimental to domestic producers,
particularly when the domestic industry is young and relatively uncompetitive.
Consider the two countries from our previous example, Techno and Agro. Now assume that
Techno is the world’s most experienced producer of computer chips and that Agro is a
newcomer to the computer chip industry. Allowing Techno’s computer chips to enter Agro’s
domestic market might drive Agro’s domestic producers out of business because they might not
be able to compete with Techno’s superior quality and lower prices.
There is a counterargument to the infant industry argument, and it is that allowing trade will
ensure that only the most efficient domestic producers survive. Additionally, domestic
consumers will be better off because they will have access to the best and cheapest products on
the market. Some scholars suggest that the infant industry argument is a “smoke screen”9 and
that it is merely a justification for the tariffs imposed on certain non-domestic industries to
protect domestic industries with political power. It has also been suggested that most infant
industries “never grow up,” which ultimately defeats the infant industry argument because
protection of the infant industries is only acceptable if they eventually flourish.
The second argument in favor of protectionism is centered around the existence of domestic
market failures that are too costly to correct. This argument posits that the only way in which a
“hands-off” policy is acceptable in one market (i.e. the market for goods) is if all other markets
are working properly. For instance, let us use capital markets as an example. Capital markets are
financial markets where you can buy and sell financial instruments such as debt. Now assume
that capital markets in Iraq are not functioning correctly and that fixing them may be incredibly
difficult or costly. A dysfunctional capital market makes it very difficult for domestic producers
to obtain financing. Thus, the government may choose to fix this problem by financing domestic
production of a good instead of fixing the capital market. The main counterargument for the
domestic market failure rationale is that it is more reasonable to institute domestic policies aimed
directly at the failure, than to institute short-term fixes in different yet related markets.
The third argument we shall address is a partial rebuttal of the comparative advantage theory. As
you may recall, comparative advantage is the idea that every country should produce that which
its factors of production make it most efficient at producing. According to this theory, all
countries will benefit from specialization and trade because they will increase their wealth.
However, this does not mean that every individual within each country will be better off; it
simply means that the “winners” will win more than the “losers” lose, and the country overall
will be in a better position after trade.
If appropriate wealth redistribution mechanisms existed in each country, then it would be
possible to efficiently compensate the “losers” from trade (e.g. industries that go out of business,
individuals whose jobs no longer exist, etc.). Additionally, even when such mechanisms exist,
redistribution rarely takes place, and thus only a portion of society benefits from trade, while the
rest of society suffers.
The last argument against international trade that we will be addressing is grounded in national
security concerns. This argument suggests that for a country to be able to defend itself, it must
have all the goods necessary to do so. In other words, it must be self-sufficient in certain sectors.
For instance, if a country is going to war, it should have all the steel it needs to be able to
produce weapons. If it has no capacity to produce steel and relies exclusively on imports, it
might find itself in a precarious situation should a conflict arise. This argument, however, clearly
does not apply to all sectors.