SPLIT ONE - (International Political Economy Series) Anna Karhu, Eini Haaja - Global Trade and Trade

Anna Karhu · Eini Haaja
Editors
Global Trade
and Trade Governance
During
De-Globalization
Transforming Trade Policy for Not-So-United
World
Contents
Part I Development of Global Trade and Trade

Governance
1 Lessons from Trade Policy Research 3
Anna Karhu and Eini Haaja
2 Global Trade Policy Regimes and Previous Crises 19
Juhana Aunesluoma
Part II Disruptions of Global Trade

3 WTO in a Changing Geopolitical Environment 33
Sandra Polaski
4 Regional Trade Agreements: A Hope or a Threat
to the Global Trade? 51
Vladimir Zuev
5 How Do Global Value Chains Challenge Traditional
International Business Policy? 69
Ari Van Assche
6 The US–China Relations and Trade Policy 85
K. C. Fung, Nathalie Aminian, and Chris Y. Tung
ix
x CONTENTS
7 Post-brexit Trade Policy and Its Impact on United

Kingdom’s Economy 109
Pervez N. Ghauri and Ursula F. Ott
8 Trade Policy Challenges from the Perspective of Small
and Open Economy: The Cases of Latvia and Iceland
During 2008/2009 Financial and Economic Crises 123
Sandis Sraders
Part III Trade Policy for Futures

9 Sustainable Development in EU Trade Agreements:
Different Trade Partners, Different Rules? 143
Jale Tosun and Christin Heinz-Fischer
10 Future Challenges to Trade Policy in Support
of International Business 161
Louise Curran
11 Two Lenses to Megatrends in Trade Policy: Towards
a Future-Oriented Contextual Approach 181
Toni Ahlqvist
12 Conclusions: The Future of Trade Policy in the Not
So United World 197
Eini Haaja and Anna Karhu
Index 203
Abbreviations
AAs Association Agreements

ASEAN The Association of SouthEast Asian Nations
CBAM The Carbon Border Adjustment Mechanism
CBD The Convention on Biological Diversity
CFETS The Chinese Foreign Exchange Trading System
CIS The Commonwealth of Independent States
CITES The Convention on International Trade in Endangered Species
of Wild Fauna and Flora
EAEU The Eurasian Economic Union
EBA The Everything But Arms initiative
ECU The European Currency Unit
EEC The European Economic Community
EFTA The European Free Trade Association
ETS Emissions Trading System
EU The European Union
EUR Euro
FDI Foreign Direct Investment
FLEGT The Forest Law Enforcement, Governance, and Trade
FTA A Free Trade Area
GATT The General Agreement on Tariffs and Trade
GDP Gross-Domestic Product
GDPR The General Data Protection Rules
GSP The Generalised System of Preferences
GVC Global Value Chain
IB International Business
IMF International Monetary Fund
xvii
xviii ABBREVIATIONS
IPR Intellectual Property Rights

ITO The International Trade Organization
IUU The Regulation to Address Illegal Unreported, and Unregulated
LDCs Least Developing Countries
MEAs Multilateral Environmental Agreements
MERCOSUR The Common Market of the South, Mercado Común del Sur
MIC 2025 Made in China, 2025
MMT The Association for Motor Manufacturers and Traders (UK)
MNE Multinational Enterprise
MOSS The Market-Oriented Sector-Specific
MRTAs The Mega-Regional Trade Agreements
NTB The Non-Tariff Barriers
OECD Organisation for Economic Co-operation and Development
OEEC The Organization for European Economic Cooperation
ONS Office of National Statistics (UK)
PBOC The People’s Bank of China
PCAs Partnership and Cooperation Agreements
PMI Composite Purchasing Managers’ Index
R&D Research & Development
RMB The Renminbi
RO The Regional economic Organization
RTA The Regional Trade Agreement
SDGs Sustainable Development Goals
SDT Special and Differential Treatment
SII The Structural Impediment Initiative
SOEs State-Owned Enterprise
TBT A Technical Barrier to Trade
TIRM The Agreement on Trade Related Aspects of Investment
Measures
UNCTAD United Nations Conference on Trade and Development
USD United States Dollar
USMCA The United States-Mexico-Canada Agreement
WTO The World Trade Organization
WWII World War II
ZTE Zhongxing Telecommunication Equipment
List of Figures
Fig. 1.1 The emergence of trade policy research themes in IB

studies 12
Fig. 4.1 Leading regional organizations by the share of inner trade
in total trade, 2012–2020 (Sources done by the author
on the basis of calculations from statistics on all five
regional organizations. Obtained from: WITS [2021],
UN Comtrade Database [2021], EAEU [2021], Eurostat
[2020], Leitner et al. [2016]) 58
Fig. 7.1 International business negotiations
analysis—an interdisciplinary and cross-cultural
framework 116
Fig. 8.1 Currency challenges of the Lats and the Krona 129
Fig. 9.1 Degree of the integration of environmental concerns
in trade agreements 150
Fig. 10.1 EU policy initiatives seeking to integrate sustainability
concerns into trade policy 166
Fig. 11.1 Two lenses to approach the concept of “megatrend” 187
Fig. 11.2 Embedding trends and signals in a particular context 188
xix
List of Tables
Table 6.1 U.S.–Japan Bilateral trade balance (US$billion), various

years 88
Table 6.2 U.S.–China bilateral trade balance (US$billion), various
years 89
Table 9.1 Environmental issues addressed in the trade agreements 151
Table 9.2 Subchapters in the sections/chapters on trade
and sustainable development 152
Table 9.3 Overview of EU trade agreements 156
Table 10.1 Value and share of EU imports of products covered
by CBAM 171
Table 10.2 Share of EU imports covered by Regulation
in deforestation 173
Table 11.1 Some factors involved in trend identification (adapted
from Slaughter, 1993: 842) 185
xxi
PART I
Development of Global Trade and Trade

Governance
CHAPTER 1
Lessons from Trade Policy Research
Anna Karhu and Eini Haaja
Introduction
Global challenges, from the climate crisis to digitalisation and the multi-
plicity of global powers, are faced by businesses as well as national
governments, but also by international organisations such as the WTO,
UNCTAD, the World Bank and the OECD. The increasing severity of
weather conditions and natural catastrophes, the outbreak of the COVID-
19 pandemic and Russia’s invasion of Ukraine are examples of events that
have shaken the prevailing governance structures of global trade. In addi-
tion to these trends, the global trade landscape has changed dramatically
from the time when these organisations were established. For instance,
the world trade volume in 2020 was approximately 40 times higher than
the records in the 1950s, the early years of GATT. In the same time
period, the world trade value has grown to 300 times that of the 1950s.
In comparison with the levels at the time of the establishment of the WTO
A. Karhu (B) · E. Haaja

University of Turku, Turku, Finland
e-mail: anna.karhu@utu.fi
© The Author(s), under exclusive license to Springer Nature 3

Switzerland AG 2022
A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance
During De-Globalization, International Political Economy Series,
https://doi.org/10.1007/978-3-031-13757-0_1
4 A. KARHU AND E. HAAJA
in 1995, world trade volume and value have grown by 4 and 5%, respec-
tively, as of 2020 (WTO, 2022). Given the gradually evolving megatrends
as well as the trade evolvement, the global economy has transformed
from what it was when these trade organisations were created, and it
is a valid question whether these institutions are still capable—let alone
optimal—of pursuing their original goals.
The global economy has seen two waves of globalisation, the first
starting in the nineteenth century and ending at the beginning of the First
World War, and the ongoing wave beginning after the Second World War
and continuing since. Stemming from comparative advantages and the
resulting national specialisation, international trade transactions include
goods and services with increasingly complex global value chains. Inter-
national business, meaning cross-border flows of trade and investment,
has been widely welcomed by policymakers due to its contribution to any
country’s economic growth and the creation of innovation and jobs; yet
the cons may involve competitive challenges and displacements of activi-
ties to other, more optimal countries (Ortiz-Ospina & Beltekian, 2018).
To optimise this balance, trade policy concerns the regulations and rules
of international trade—who trades what with whom and who makes what
kind of rules for these transactions. The conceptualisation of the term
‘trade policy’ has varied in different disciplines and at different times,
evolving together with theoretical as well as world economy develop-
ments. Trade policy as a phenomenon does not fall clearly into any single
academic discipline; as a result, it has been studied by multiple disciplines
from economics and international relations to law, development studies,
policy and international business (Velut, 2015).
Today, trade policy is gaining increasing attention from various disci-
plines. Responding to global megatrends and to the changing inter-
national trade dynamics requires large-scale co-operation and common
goals between multiple levels of decision-making agencies as well as
between different actors from policy and business to society at large.
It is crucial that the governing mechanisms of global trade are able to
transform themselves as global trade itself and the driving values in our
societies evolve. Prosperity and peace are built together, not in isolation.
However, the recent international crises have also shown the down-side
of interconnectedness, such as the difficulty in finding ways to decrease
environmentally harmful emissions that do not obey man-made national
borders, diseases that benefit from our ability to travel across continents
quickly and the fragility of international relations and their influence on
1 LESSONS FROM TRADE POLICY RESEARCH 5
national autonomy. While these phenomena are directly addressed at the

policy level, their impacts are instantly felt at the level of individual busi-
nesses—particularly the ones engaged in international operations, but also
domestically operating ones due to implications to and even disruptions
in global value chains. Thus, there is a need for an in-depth under-
standing of the international trade and investment landscape in a world
where all actors are increasingly interconnected and interdependent, yet
not as united as before. Indeed, unity is taking new forms through the re-
arrangement of previously mainly US-centred economic state power, and
through the emergence of new powers, such as societal voices through
uncontrolled social media movements and the emergence of gigantic
corporations such as Amazon, Huawei and Meta, which provide and
control increasingly crucial infrastructures.
These changes require reactions from businesses as well as policy-
makers, and understanding the related dynamics at a larger scale calls
upon us as researchers to explore the implications of global trends and the
disruptions to the links between trade, international business and policy
development. To expand the capabilities of all stakeholders to respond to
our rapidly changing international trade and business environment, the
respective actors, that is, policymakers, businesses and different kinds of
societal institutions, as well as scholars in these fields, must be invited
into the discussion on the dynamics shaping the future of the interna-
tional environment. In fact, this potential and need for collective action
has been the underlying inspiration for this book—the need to intro-
duce the emerging dynamics of trade policy to all, not only politicians,
and thereby, to also allow other actor groups to recognise their role and
possibilities to contribute, collectively at least, to this development.
To initiate this future-oriented trade policy exploration, we must set
the stage for where we are coming from. To start with, this first chapter
gives an overview of international business research related to trade and
trade policy, with the aim of identifying what our current understanding
is about the interconnectivity of trade policy and business, and what could
be the paths towards the most impactful future research concerning trade
policy dynamics and the future development of the international business
environment.
Development of Trade Policy as a Research Topic

International Trade Explained by Economists
At the beginning of twentieth century, before the two World Wars, global
trade was vigorous as goods such as cotton, coffee and tea were trans-
ported between different countries all over the world (Rodrick, 1995).
As international trade grew, economists were interested to understand
first of all why nations engage in international trade (Rodrick, 1995; Van
Assche, 2018). Thus, the economics discipline approached trade and trade
policy from the point of view of national economies (Van Assche, 2018).
The well-known models of Smith, Ricardo and Heckscher-Ohlin have
advanced our understanding of these questions. Economics has developed
a clear consensus of the superiority of free trade. However, international
trade is rarely free. To understand this contradiction, a vast literature has
developed at the intersection of economics and trade policy (Rodrick,
1995). Despite this, the focus in research has mainly been at the national
level, studying international trade and its implications to, for example,
costs and labour (e.g. Haberler, 1950; Samuelson, 1939; Williams, 1929).
After WWII, two influential changes gradually took place influencing
international trade and making way for international business (IB) as an
independent field of study. First, new independent countries began to
emerge, and the number of nations grew from fewer than 75 indepen-
dent countries in the world (although half a dozen of them had multiple
colonies) to nearly 200 independent countries today (Boddewyn &
Goodnow, 2020). Therefore, due to the increasing number of nations,
the opportunities for international trade and investment also grew.
Second, as a consequence of the new business opportunities that emerged
from growing international trade, a new type of large enterprise oper-
ating in multiple countries emerged: the multinational enterprise (MNE).
The emergence of such companies became the focus of IB research and
has a strong background in fields such as marketing, economics, finance
and management (Boddewyn & Goodnow, 2020; Van Assche, 2018).
Thus, in addition to looking at international trade and trade policy as a
national level phenomenon, researchers began viewing its influences and
interconnections from the perspective of firms and business environments.
Trade Liberalisation and the New MNEs

When IB studies related to the dynamics of trade, trade policy and
business began to emerge in the early twentieth century, they focused
on topics such as export and import activities of firms and the
economic, political and regulatory factors affecting imports and exports
(Boddewyn & Goodnow, 2020). As global trade grew and trade policy
worked for more liberal trade rules, the emerged new organisation of an
MNE also increased its influence. Thus, it presented a new part in the
puzzle for governing international trade and understanding the influence
of foreign firms on home and host countries. On a more general level,
government and foreign enterprise relations became one of the key char-
acteristics of IB research studying the influence that MNEs had on the
national environments both at home and abroad (e.g. Behrman, 1969;
Fayerweather, 1966; Fowler, 1965; Kapoor, 1970; Martyn, 1965; Mike-
sell, 1967; Vernon, 1969). For example, in the United States the labour
unions and businesses had advocated free trade policies together. The rise
and growth of MNEs, however, forced the labour associations to recon-
sider (Guisinger, 1973). MNEs were seen as taking jobs, technology and
capital out of the United States, thus questioning the benefits of free
trade for the home country (Guisinger, 1973). However, these rising new
worries were considered to provide no ground for trade restrictions, since
the primary objective of trade policy is not domestic employment genera-
tion. Nonetheless, it was conceded that MNEs have substantial power and
should take into consideration their effects on the home country when
planning their operations.
In a host country context, especially in relation to developing coun-
tries, the discussion has focused on the ability of MNEs to boost the
development of nations (Moore, 1972). This relationship is far from
straightforward, however. For example, the aim of a developing country’s
government might be to increase national independence, but at the same
time to improve the qualitative and quantitative change in services and
goods produced by their national economies. To produce these goods and
services efficiently, it is necessary to organise, accumulate and co-ordinate
the numerous resources necessary for producing the desired final output.
In addition, a very high production volume is often required to effectively
utilise these technical and organisational inputs to minimise the unit costs
of final output. Therefore, this points in the direction of increased interna-
tional interdependence rather than national independence. The research
identified three general actor groups to organise this: government, the

national private sector and the foreign private sector including MNEs.
Thus, depending on the level of a nation’s development, these different
actors have very different levels of capability to boost the desired develop-
ment. The choice between these three alternatives incurs different types
of costs and requires different degrees of support from policy. However,
when organised via international firms to produce the desired goods and
services, it generally implies a relatively higher level of international inter-
dependence, which may conflict with the other developmental goal of
increasing national independence. There have been some attempts to
overcome the increase of interdependencies by separating the national
market from the international market. However, this policy mostly leads
to violation of one of the requisites for productivity: the necessity for high
volume in order to reap the benefits of economies of scale. This reasoning
brings forward the paradox that accepting a higher degree of policy inter-
dependence with respect to individual sectors may ultimately increase the
overall independence of the country, as only the country which uses its
resources efficiently will be able to elevate the well-being of its citizens
(Moore, 1972).
In addition, Drucker (1974) brought forward our understanding of
the role of MNEs as a catalyst for the development of national economies,
that MNEs need political muscle to overcome strongly entrenched
protectionist forces and that exporting is done most successfully, most
easily and most cheaply if at least part of the production is to be sold in
the world market. In addition, the MNE itself has developed from the
‘parent company’ with wholly owned ‘branches’ abroad towards a more
globally structured business able to tap any capital market. For example,
in Japan, the removing of restrictions on foreign investment was expected
to bring a massive rush of take-over bids and 100 percent foreign-owned
ventures. Instead, it was increasingly the Western investor—American as
well as European—who presses for joint ventures in Japan and expects the
Japanese partner to supply the capital while they supply technology and
product knowledge (Drucker, 1974).
Around the 1960s and 1970s, the political domain of trade also
increasingly gained the interest of researchers as an outcome of the
economic and political developments that took place after the two World
Wars (Mansfield & Pevehouse, 2015). This specific subtheme of inter-
national political economy focuses on the different political aspects of
international trade such as sanction and statecraft (e.g. Baldwin, 1971),
domestic sources of trade policy (e.g. Katzenstein, 1977) and interna-

tional trade institutions (e.g. Krasner, 1976). As the understanding of
the trade policy mechanisms and policy making grew, also IB research
developed.
In addition to the perspective of studying the influences MNEs have on
nations and how governments should manage that relationship, another
stream of study has explored corporate political activity (Austen-Smith,
1987; Baysinger, 1984; Potters & Van Winden, 1992). The basic assump-
tion is that the objectives of corporate political activity can be divided
into three main themes (Baysinger, 1984). First, businesses may work to
gain incentives (monetary or anticompetitive) from government through
lobbying activities or trade unions. Second, they may aim to manage
the turbulence created by governmental threats through lobbying, public
relations or having a presence at certain important locations and third,
companies may work to maintain a suitable business environment for their
operations by lobbying or having presence at certain important locations.
Thus, this stream of the research literature focuses on understanding busi-
ness political activity and strategies (Hillman et al., 2004; Lawton et al.,
2013). The approach in IB, therefore, has not only focused on trade
policy and business relations but more widely on policy and international
business interconnection. In relation to trade policy, for instance, Rugman
and Verbeke (1991a, 1991b) focused on studying MNE–government
relations and presented a concept of ‘shelter’ for an entry barrier that
imposes artificial costs on rival firms. Rehbein and Schuler (1999), on
the other hand, studied 1100 US manufacturing firms’ influence on trade
policy. Both of these studies, as in the case more generally, focused on
understanding the motives and processes of the firms rather than giving
policy implications.
Another perspective on the interaction of MNEs and policy is given
by the socio-political network approach (Boddewyn, 1988; Hadjikhani &
Ghauri, 2001; Ring et al., 1990). Here, the discussion of business
networks is extended to also include societal and policy actors. This
approach was more managerially oriented and aimed to understand how
companies could manage their socio-political networks. Earlier studies
also paid attention to the management of political actors by viewing
management as a function of response to the political environment
(Conner, 1991; Egelhoff, 1988; Kogut, 1991) and to the design of
coping strategies as managerial risk, country risk ratings, corporate struc-

ture or industry structure (Cosset & Roy, 1991; Lenway & Murtha,
1994; Miller, 1992; Ring et al., 1990).
Overall, due to the vast economic growth and integration during this
period, MNEs and trade came to present globalisation both good and
bad. MNEs and their internationalisation were the central theme in IB
research, and the analysis of issues related to cross-border trade and
investment focused on a private perspective rather than on a national or
governmental perspective (Van Assche, 2018).
The Globalisation of Free Trade and Rising New Markets

Global economic growth has increasingly moved from developed coun-
tries to developing countries. In particular, some developed countries have
grown rapidly and have drawn the attention of businesses by providing
increasing business opportunities (e.g. the BRIC countries: Brazil, Russia,
India and China). As these countries have grown to become bigger players
in the global economy, they also constitute very different types of busi-
ness contexts. Consequently, a new set of multinational corporations has
appeared: emerging market multinationals (EMNEs).
Due to these developments, the role of the political environment has
become more critical in IB studies. From the outset, the institutional
theory perspective has gained popularity. The policy sphere is seen as a
part of the characteristics shaping firms’ international strategic behaviour
(Peng et al., 2009). Through the institutional structures, policy is seen
as a critical element alongside firm and industry characteristics, creating
a strategy tripod (Peng et al., 2008). In this context, it is considered
that institutions provide an order that regulates the external environ-
ment and, thus, governs firms’ internationalisation decisions (Ahuja &
Yayavaram, 2011; Kostova et al., 2020). Studies have explored both the
influence these institutional structures have on firms (e.g. Arregle et al.,
2013; Marano & Kostova, 2016) and the dynamics between MNEs and
institutions (e.g. Hillman & Wan, 2005).
The need to understand the changes in the international business
environment has become increasingly evident. Thus, in addition to under-
standing the direct interactions of business and policy through corporate
political activity, or the influence that policies have through the institu-
tional environment, an understanding of the co-evolutionary nature of
change in the business environment as a result of the actions of busi-

ness and policy actors has also emerged. This literature stems from the
dynamics of innovation policies and MNEs (Cantwell, 2009; Giroud
et al., 2012). Moreover, IB research has developed to understand the
changes in the international business environment and its influence on
firms as a multilevel phenomenon. This has been necessary to under-
stand the emergence of e-commerce and its rapid growth from the level
of global regulation development in the WTO and regional trade agree-
ments to the national level policies to support innovation all the way to
the strategies of firms (Agarwal & Wu, 2018). During the twenty-first
century, the role of global value chains has also begun to intrigue both
researchers and policy makers. The mechanisms through which GVCs
influence policy making and doing business have been the primary focus
of this line of research (Gereffi, 2019; Kano et al., 2020). The latest devel-
opment in international political economy studies has been towards more
firm-level analysis related to the politics of international supply chains
(Mansfield & Pevehouse, 2015). Consequently, a review of IB research
shows us how the perspectives towards the interaction between inter-
national business and trade policy have evolved, and how the published
studies also contribute to understanding and managing these increasingly
complex and rapidly evolving relationships.
Conclusions
When policymakers look at the continuously changing international envi-
ronment, their interests lie in the performance of countries or regions
from a public or societal perspective. Internationally operating businesses,
in turn, view the same changes with a strong focus on the performance
of the firm from a private perspective. In the same vein, international
business research has generated wide expertise in explaining how the
international environment affects the behaviour and strategies of firms.
The research on international trade in IB studies has developed from
explaining international trade as a phenomenon to gaining understanding
of the interrelationship of trade growth, free trade and multinational
enterprises, thereby establishing a wider interest in understanding the
interconnection of business and policy as a newly established focus area
of international business policy.
As our review shows, the evolving reality of international trade and
business has been naturally reflected in the international business research
over recent decades, whereby the multitude of themes covered in inter-

national business research has expanded from understanding international
trade flows to how different political aspects are today promoted via inter-
national business, for example. It is also worth noting that, although new
focus areas emerge, the older ones are not forgotten but continue to be
pursued too in the new reality. This growth in the variety of themes under
investigation today is illustrated in Fig. 1.1.
While we have now entered times that drive nations towards multiple,
alternative centres of power, international business is also facing a new
turning point: de-globalisation. In the aftermath of the COVID-19
pandemic, the Russian invasion of Ukraine has been regarded as the end
of three decades of globalisation, and a new reality is to emerge, requiring
both scholarly and managerial expertise to manage in the new normal
that is taking shape. In the midst of turbulent geopolitics, the essence
of ‘international’ is re-gaining its true meaning. Firms doing business
in global markets are now facing increasingly different political realities
depending on where they operate and are even faced with pressures to
‘choose sides’ on different geopolitical issues or disputes that are priori-
tised or even viewed very differently in different power blocs. While the
Human rights Sustainability Democracy
Global value chains MNEs as

and trade policy institutional actors
MNEs and Corporate political MNE socio-political

globalisation activity network
Efficiency International Benefits of

of trade trade as trade rules
rules and imports and and
policies exports policies
Free trade
Why nations engage in
international trade
Fig. 1.1 The emergence of trade policy research themes in IB studies

Western world familiarised itself with increasingly open and free trade, the
continuing decline in FDI in relation to GDP (The World Bank, 2022)
and protectionist actions, for example, suddenly make it considerably
more meaningful where a firm operates. This relatively rapid evolvement
requires farsighted and open-minded scholarly exploration and even the
questioning of some of our assumptions in international business research.
However, wide expertise in explaining how the international environment
affects the behaviour and strategies of firms should allow us to transform
our explanations to reflect even considerable changes in the international
environment. In fact, the inevitably changing international environment
now calls upon international business research to deliver new managerial
insight for the benefit of businesses. The need to step up to the next level
in this research is urgent.
Based on the lessons from trade policy research in the field of inter-
national business covered above, we find it important to highlight two
avenues that scholars need to proceed down in exploring the changing
dynamics of the international environment: the recognition of temporal
underpinnings and the recognition of impact underpinnings. Regarding
the first, businesses often find it hard to engage in truly future-oriented
thinking about what the surrounding institutions might become; yet this
visioning is the way in which they can themselves determine their course
of action instead of adapting to change. Historical path dependence
limits imagination, and the recognition of this is important for busi-
ness managers in managing their way amidst breaking value chains and
suddenly appearing political risks. Thus, amidst rapid and wide changes, it
is important to study how foresight is employed in different international
business areas and operations. Besides a perspective to be studied, we want
to highlight that considering the employment of foresight is relevant also
to business scholars themselves—considering and challenging our own
stances in this respect can allow the disengagement from prior assump-
tions that were generated at the time of ever-increasing globalisation. We
should not let the past limit our research.
When it comes to the second dimension, impact underpinnings, busi-
nesses too often take the trade policy institutions and the related business
environment as given, as something to adapt to. Our message is that inter-
national business research should increasingly support business managers
in recognising their role—possibly small, yet existent—in the current
transformation of old trade policy institutions and in the emergence of
new ones. Firms of various sizes are not only influenced by existing insti-
tutions; through their reactions to the changing trade policy environment
and complex chains of events they can also contribute to what those
become in the future. In particular, worth investigation is the collec-
tive agency of firms in this evolutionary change. Moreover, in relation
to the first dimension, the possibility to impact ongoing changes also
concerns the researchers themselves. While following trade developments
and trying to get a hold of them, international business studies some-
times suffer from focusing on retrospective reporting of what happened
and how. While this understanding is still obviously of value and impor-
tance, we want to highlight the increasingly active role that international
business scholars might take in the development of business in different
fields and the related institutions. Engaging in increasing action research
and dialogue with not only economic actors but also policy representa-
tives that shape the international business arena at different levels might
be eye-opening for today’s international business scholars as well as
politicians.
Indeed, while international business research is now in increasing
demand to explain the impacts of the changing international environ-
ment via managerial recommendations, it should also take (or regain) an
active role in generating future-oriented policy implications and delivering
them further to the respective stakeholders. This is of particular impor-
tance given the fact that the changes in the business environment stem
for a large part from policy-level changes. Recently, the strong business
emphasis has hindered international business scholars from pursuing the
policy implications of their research findings (Van Assche, 2018), whereas
the complexity of the evolving environment calls for research with increas-
ingly open approaches and aims for wider impact. Trade policy research is
at the intersection of policy and business research and is a field requiring
innovative and future-oriented insight from both sides to provide useful
insight to support the transformation of trade-related international insti-
tutions as well as the strategies and operations of internationally operating
businesses.
This chapter has shown the agility of international business research
in explaining the evolving business world. In the same vein, it suggests
that international business scholarship can play a central role in the future
development of new knowledge that is relevant to trade policy research
and concrete policymaking. Nevertheless, to proceed in exploring the
dynamics that shape the future of the international business environment
and trade policy, we must first similarly look into the development of
trade policy research. When we first understand the past trajectories of
both international business and trade policy development, it is possible
to recognise what kind of institutions, norms and practices we historically
take for granted in terms of trade policy, and what we no longer should,
requiring instead rapid transformation into something new. The following
chapters in this book provide valuable food for thought in this respect.
References
Agarwal, J., & Wu, T. (2018). E-commerce in emerging economies: A multi-
theoretical and multilevel framework and global firm strategies. In Emerging
Issues in Global Marketing (pp. 231–253). Springer.
Ahuja, G., & Yayavaram, S. (2011). Explaining influence rents: The case for an
institutions-based view of strategy. Organization Science, 22, 1631–1652.
Arregle, J. L., Miller, T. L., Hitt, M. A., & Beamish, P. W. (2013). Do regions
matter? An integrated institutional and semiglobalization perspective on the
internationalization of MNEs. Strategic Management Journal, 34(8), 910–
934.
Austen-Smith, D. (1987). Interest groups, campaign contributions, and proba-
bilistic voting. Public choice, 54(2), 123–139.
Baldwin, D. A. (1971). The power of positive sanctions. World Politics, 24(1),
19–38.
Baron, D. (1997). Integrated strategy, trade policy and global competition.
California Management Review, 39(2), 145–169.
Baysinger, B. D. (1984). Domain maintenance as an objective of business political
activity: An expanded typology. Academy of Management Review, 9(2), 248–
258.
Behrman, J. N. (1969). Some patterns in the rise of the multinational enterprise.
The International Executive, 11(3), 1–2.
Boddewyn, J. J. (1988). Political aspects of MNE theory. Journal of Interna-
tional Business Studies, 18(3), 341–363.
Boddewyn, J. J., & Goodnow, J. D. (2020). A short history of the academy of
international business. https://www.aib.world/about/history/
Cantwell, J. (2009). Location and the multinational enterprise. Journal of
International Business Studies, 40(1), 35–41.
Conner, K. R. (1991). A historical comparison of resource-based theory and five
schools of thought within industrial organization economics: Do we have a
new theory of the firm? Journal of Management, 17 (1), 121–154.
Cosset, J. C., & Roy, J. (1991). The determinants of country risk ratings. Journal
of International Business Studies, 22(1), 135–142.
Drucker, P. F. (1974). Multinationals and developing countries: Myths and

realities. Foreign Affairs, 53(1), 121–134.
Egelhoff, W. G. (1988). Strategy and structure in multinational corporations:
A revision of the Stopford and Wells model. Strategic Management Journal,
9(1), 1–14.
Fayerweather, J. (1966). 19th century ideology and 20th century reality. The
International Executive (pre-1986), 8(2), 1.
Fowler, H. H. (1965). National interests and multinational business. California
Management Review, 8(1), 3–12.
Gereffi, G. (2019). Global value chains and international development policy:
Bringing firms, networks and policy-engaged scholarship back in. Journal of
International Business Policy, 2(3), 195–210.
Giroud, A., Ha, Y. J., Yamin, M., & Ghauri, P. (2012). Innovation policy, compe-
tence creation and innovation performance of foreign subsidiaries: The case
of South Korea. Asian Business & Management, 11(1), 56–78.
Guisinger, S. (1973). The rise of the multinational corporation and United States
trade policy. Social Science Quarterly, 552–567.
Haberler, G. (1950). Some problems in the pure theory of international trade.
The Economic Journal, 60(238), 223–240.
Hadjikhani, A., & Ghauri, P. N. (2001). The behaviour of international firms
in socio-political environments in the European Union. Journal of Business
Research, 52(3), 263–275.
Hillman, A. J., Keim, G. D., & Schuler, D. (2004). Corporate political activity:
A review and research agenda. Journal of Management, 30(6), 837–857.
Hillman, A. J., & Wan, W. P. (2005). The determinants of MNE subsidiaries’
political strategies: Evidence of institutional duality. Journal of International
Business Studies, 36(3), 322–340.
Kano, L., Tsang, E. W., & Yeung, H. W. C. (2020). Global value chains: A
review of the multi-disciplinary literature. Journal of International Business
Studies, 51(4), 577–622.
Kapoor, A. (1970). Negotiation strategies in international business-government
relations: A study in India. Journal of International Business Studies, 21–42.
Katzenstein, P. J. (1977). Introduction: Domestic and international forces and
strategies of foreign economic policy. International Organization, 31(4), 587–
606.
Kogut, B. (1991). Country capabilities and the permeability of borders. Strategic
Management Journal, 12(S1), 33–47.
Kostova, T., Beugelsdijk, S., Scott, W. R., Kunst, V. E., Chua, C. H., & van
Essen, M. (2020). The construct of institutional distance through the lens
of different institutional perspectives: Review, analysis, and recommendations.
Journal of International Business Studies, 51(4), 467–497.
Krasner, S. D. (1976). State power and the structure of international trade. World
Politics, 28(3), 317–347.
Lenway, S. A., & Murtha, T. P. (1994). The state as strategist in international
business research. Journal of International Business Studies, 25(3), 513–535.
Lawton, T., McGuire, S., & Rajwani, T. (2013). Corporate political activity: A
literature review and research agenda. International Journal of Management
Reviews, 15(1), 86–105.
Mansfield, E. D., & Pevehouse, J. C. W. (2015). Trade Policy and Trade Policy
Research. The TRIP conference at the College of William and Mary, January
15–16, 2015. https://www.wm.edu/about/search/index.php?q=Mansfield
Marano, V., & Kostova, T. (2016). Unpacking the institutional complexity in
adoption of CSR practices in multinational enterprises. Journal of Manage-
ment Studies, 53(1), 28–54.
Martyn, H. (1965). Multinational corporations in a nationalistic world. Chal-
lenge, 14(2), 13–16.
Miller, D. (1992). The generic strategy trap. Journal of business Strategy, 13(1),
37–41.
Mikesell, R. F. (1967). Healing the breach over foreign resource exploitation.
Columbia Journal of World Business, 2(2), 25–32.
Moore, R. M. (1972). The role of international firms in Latin American
automotive industry. Journal of International Business Studies, 3(1), 51–67.
Ortiz-Ospina, E., & Beltekian, D. (2018). Trade and Globalization. Our World
in Data. https://ourworldindata.org/trade-and-globalization
Peng, M. W., Sun, S. L., Pinkham, B., & Chen, H. (2009). The institution-based
view as a third leg for a strategy tripod. Academy of management perspectives,
23(3), 63–81.
Peng, M. W., Wang, D. Y., & Jiang, Y. (2008). An institution-based view of
international business strategy: A focus on emerging economies. Journal of
international business studies, 39(5), 920–936.
Potters, J., & Van Winden, F. (1992). Lobbying and asymmetric information.
Public choice, 74(3), 269–292.
Rehbein, K. A., & Schuler, D. A. (1999). Testing the firm as a filter of corporate
political action. Business & Society, 38(2), 144–166.
Ring, P. S., Lenway, S. A., & Govekar, M. (1990). Management of the political
imperative in international business. Strategic Management Journal, 11(2),
141–151.
Rodrik, D. (1995). Political economy of trade policy. In G. M. Grossman & K.
Rogoff (eds.), Handbook of international economics (Vol 3, pp. 1457–1494).
Elsivere.
Rugman, A. M., & Verbeke, A. (1991a). Mintzberg’s intended and emergent
corporate strategies and trade policy. Canadian Journal of Administrative
Sciences/revue Canadienne Des Sciences De L’administration, 8(3), 200–208.
Rugman, A. M., & Verbeke, A. (1991b). Trade barriers and corporate strategy
in international companies—The Canadian experience. Long Range Planning,
24(3), 66–72.
Samuelson, P. A. (1939). The gains from international trade. Canadian Journal
of Economics and Political Science/revue Canadienne De Economiques Et
Science Politique, 5(2), 195–205.
The World Bank. (2022). Foreign direct investment, net inflows (%
of GDP). https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS.
Retrieved 25th May 2022.
Van Assche, A. (2018). From the editor: Steering a policy turn in interna-
tional business–opportunities and challenges. Journal of International Business
Policy, 1(3), 117–127.
Velut, J. B. (2015). Trade Policy. International Encyclopedia of the Social &
Behavioral Sciences (2nd ed., pp. 485–490). Elsevier.
Vernon, R. (1969). Multinational enterprise and the nation state: Project report
from the Harvard Business School. Journal of Common Market Studies, 8(2),
160–170.
Williams, J. H. (1929). The theory of international trade reconsidered. The
Economic Journal, 39(154), 195–209.
WTO. (2022). Evolution of trade under the WTO: Handy statis-
tics. https://www.wto.org/english/res_e/statis_e/trade_evolution_e/evolut
ion_trade_wto_e.htm
CHAPTER 2
Global Trade Policy Regimes and Previous

Crises
Juhana Aunesluoma
Crises as Drivers of Regime Change

Economic crises and geopolitical conflicts have had a profound impact
on the historical evolution of trade. Crises of various kinds have had a
direct bearing on the fundamental features of the global trading system
as it has over time alternated between classical, laissez-faire free trade and
protectionism. The connection of economic and geopolitical crises and
changes in trade policy regimes was particularly marked in the twentieth
century, but similar patterns can be observed in earlier times as well as
today.
The First World War in 1914–1918 heralded the end of free trade as
it had been practised since the mid-nineteenth century. While there were
attempts after the war to re-establish a relatively liberal international trade
policy regime, these foundered with a turn to full-scale protectionism in
J. Aunesluoma (B)
University of Helsinki, Helsinki, Finland
e-mail: juhana.aunesluoma@helsinki.fi

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_2
20 J. AUNESLUOMA
the Great Depression of the 1930s. The effects of higher tariffs and other
protectionist measures were compounded with the adoption of further
restrictions to cross-border trade in the Second World War in 1939–1945.
The effects of the turn to protectionism were long lasting, and it
took several decades after the Second World War to construct a relatively
open global trade regime. Liberalization started first in the industrially
advanced Western economies in the late 1940s and 1950s, from where
it spread to the global south and Asian economies in the 1980s and
1990s. The creation of a more open international trade regime lead to a
rapid expansion of world trade and its share of the global GDP. Even so,
according to Findlay and O’Rourke (2007: 499–501), at the turn of the
millennium, 44% of the world’s population still lived in countries, where
the overall level of tariffs for foreign trade were higher than in 1913. This
group included countries such as the United Kingdom, China and India.
Crises that have the capacity to effect long-term changes in trade policy
regimes come in many forms. Economic crises stem, for example, from
systemic failures in the global financial sector, as happened in the finan-
cial crisis of 2008. Alternatively, they may be the result of other types
of weaknesses in economic structures in individual economies, or disrup-
tions in cross-border flows of goods and capital. International economic
interdependence itself can increase the fragility of economies and their
susceptibility to external shocks. In most cases, however, these shocks
are themselves endogenous to economic activity, such as international
conflicts and wars, social and political upheavals, revolutions, civil wars,
natural disasters and their international consequences. Large crises or
conflicts can bring about—and often are connected to—shifts in power
relations in the international system and in its institutional arrangements.
Trade is impacted in crises in a number of ways. First, crises have an
immediate effect on the functioning of economies. Any disruption of
economic activity in a country that is engaged in cross-border trade has
repercussions to its trading partners. The larger and the more open these
economies are, the more severe the consequences are.
Second, crises play a role in the reorganization of the institutions and
practices that govern international trade. These, in turn, reflect the way
in which power is distributed among the actors in the system. A trade
policy regime is formed usually in negotiations between the actors that
make up the system. The actors’ capacity to realize their policy preferences
depends on several factors, such as the relative weight of their economies,
the composition of trade, their negotiation capacity or their ability to use
2 GLOBAL TRADE POLICY REGIMES AND PREVIOUS CRISES 21
other means, such as military force, to achieve political and economic

goals. Large crises can therefore be seen as redistribution events, when not
only economic and other resources are reallocated, but also the principles
and institutions that underpin the trade policy regime itself are recast.
While the effects in the first category may be severe in the short to
medium term, economies have an ability to recover and adapt. A quick
recovery may offset losses and limit a crisis’s social and political conse-
quences. Nevertheless, when crises impact the fundamental features of the
international trading system, such as its relative openness or the preva-
lence of protectionist measures, the effects can be long lasting. As a
general observation, it can be said that crises change trade and trade policy
regimes more quickly than it takes to reconstruct pre-crisis regimes and
trade patterns. After particularly severe crises that may not be possible
at all, as the underlying conditions and structures may have changed to
make a return to a previous regime unfeasible.
As has been shown by the economic historians Ronald Findlay and
Kevin O’Rourke, global trade regimes have historically been closely
connected to the ways in which political power has been distributed and
exercised in the world. An open international trade system has required
a political superstructure, where an actor or a group of actors has estab-
lished the rules of the system, enforced their compliance and provided
the system with the public goods—such as security backed up by military
power or a legal framework within which to conduct trade—its stable
operation requires (Findlay & O’Rourke, 2007; O’Rourke, 2009). Find-
lay’s and O’Rourke’s interpretation develop on views put forward in the
so-called theory of hegemonic stability by the realist school of Global
Political Economy (Gilpin, 1987; Krasner, 1976). Its proponents state
that free trade is more likely to occur in an international economy domi-
nated by a single political hegemon than in a more dispersed or multipolar
system.
While the theory of hegemonic stability has been criticized both
theoretically and in historical case studies, Findlay and O’Rourke have
convincingly shown that trade policy regimes are essentially political
constructs that arise and decline together with the political powers that
maintain them. Contrary to the theory of hegemonic stability, instead of a
single hegemon, these orders can be maintained by a group of likeminded
countries as well. What is required are the will and the mechanisms to
share a set of rules and comply with them, as has been seen in forms
22 J. AUNESLUOMA
of regional integration such as the European Union (Keohane, 1984;

Moravcsik, 1998; Ruggie, 1983).
Furthermore, not all historical hegemons have necessarily preferred
free trade. In a long historical perspective, however, free or relatively
free international trade has occurred only when there has been a polit-
ical authority or authorities of some kind with the will and the means to
support it. Also, trade policy regimes do not appear accidentally, as the
establishment of a trade system—liberal or protectionist—is a painstaking
process, albeit in the latter case more easily achieved than in the first.
However, they may dissolve quickly together with the ideologies and
material powers that justify and underwrite them.
This chapter discusses the connection of state power in the interna-
tional system with global trade policy regimes, and what effect various
crises have had in their decline and transition from one order to another.
In the first part we will look into the dissolution of the classical free
trade system in the late 1800s and early 1900s and the final turn towards
protectionism in the First World War and especially in the 1930s. The
chapter then looks into the creation of the free trade system in indus-
trial goods created under the leadership of the United States and other
Western powers after the Second World War. It then discusses the expan-
sion of Western-led free trade to a genuinely global trade policy regime
from the 1980s onwards, and the effects of the end of the Cold War and
the creation and the expansion of the World Trade Organization WTO
in the 1990s. The chapter closes with an assessment of the effects of the
2008 financial crisis and geopolitical tensions in the 2010s and the 2020s
on the world trading system.
From Free Trade to Protectionism

in the Era of World Wars
The pre-1914 global free trade regime was founded upon the British
empire’s position as the world’s largest trader, and backed up by its
financial and industrial strength. British naval supremacy guaranteed the
openness of the main sea routes for trade around the world. Even
more significant was the influence of successive British governments from
the mid-nineteenth century onwards preferring free trade over protec-
tionism, and suggesting or imposing this principle to its trading partners.
After a landmark trade agreement with France in 1860, the so-called
Cobden-Chevalier Treaty, liberalization of trade policy and the lowering
of tariffs accelerated in the European and North American economies

(Foreman-Peck, 1995: 45).
The Anglo-French treaty of 1860 included the most-favoured-nation
(MFN) principle in the relations of the two countries, from where it
spread to agreements concluded by other partners, establishing for the
first time a multilateral, global trade regime based on non-discrimination.
In the monetary sphere, the gold standard provided the anchor for a
multilateral payments system and the convertibility of currencies.
In practice, the principle of free trade began eroding already in the
last decades of the nineteenth century with the increasing weight of more
protectionist economies, such as Germany and the United States. Inten-
sification of geopolitical rivalry at the turn of the twentieth century was
conjoined with increasing protectionism in the European continent and
in the Americas (Irwin, 2017). However, as long as the British empire
had the will and the means to maintain a liberal trade policy, the global
trade regime retained its openness.
All this ended when war came in 1914. The implementation of
economic blockades by the leading European economies and other
wartime restrictions to economic activity effectively put an end to free
trade. The overall ideological aim in the post-war settlement in 1918–
1919 was, besides punishing Germany for its guilt for war, to restore the
liberal international economic order that had preceded it. This included
an effort to revive the principle of non-discrimination in trade agree-
ments and the re-establishment of the gold standard as the anchor of
the international monetary system.
However, with an economically and politically weakened Britain, a
sharp post-war recession in 1919–1921, and at best an ambivalent attitude
towards liberal trade policy in other major countries, the reconstitution
of free trade did not have an auspicious start. Other countries could no
longer rely on the kind of leadership and stability the British empire had
provided in the previous century. The new economic giant, the United
States, was not yet ready to assume the position of systemic leadership it
would later have.
While liberal economic thought in principle permeated trade agree-
ments concluded in the 1920s, protectionist measures adopted in the war
years were difficult to remove in their entirety. Therefore, the post-war
agreements did not go quite as far as to restore the old regime. In agricul-
tural products, where a modern system of protectionism had for example
in Germany and in France started already in the late nineteenth century,
24 J. AUNESLUOMA
the shift from free trade to protectionism aiming at self-sufficiency in

foodstuffs was in many countries paradigmatic.
The financial crash in 1929 put an end to the liberalizing efforts of
the 1920s. As the economic crisis spread from North America to Europe,
governments resorted to higher tariffs and other restrictive measures to
protect their domestic producers. The United States led the way towards
all-out protectionism in the Smoot-Hawley Tariff Act in 1930, where
steps taken at first to protect agricultural producers were extended to
industrial goods. When sixty other countries reciprocated with similar
protective measures, they soon found themselves in a vicious circle of
measures and countermeasures. As prices fell and trade declined, tariffs
lost their effectiveness. Governments resorted to quantitative quotas,
which in some cases stifled trade altogether. Beggar-my-neighbour—
policies exported economic difficulties from one country to another,
leading to a further decline of economic output and trade. With coun-
tries suspending free convertibility of their currencies, multilateral trade
was reduced to bilateral trading partnerships.
The last country to give up on free trade was Great Britain, which in
the Ottawa Conference of 1932 formed a protectionist bloc out of its
empire and closest trade partners. In some countries, such as in Germany,
where Adolf Hitler rose to power in 1933 amidst overall economic and
political turmoil, protectionist trade policy was aimed at achieving autarky,
i.e. a high degree of self-sufficiency in essential goods. With increasing
isolation from anything but economic partnerships established on their
own terms, the totalitarian countries’ economies were geared to war well
before 1939.
When the Great Depression gradually gave way to a recovery in the
last years of the 1930s, trade policy liberalized somewhat in the economi-
cally advanced Western countries. The outbreak of war in 1939 put a swift
end to this. The Second World War saw a total harnessing of economic
resources in belligerent countries to support their war effort. A compre-
hensive regulation of economic activity was applied also to foreign trade,
with exports and imports regulated in a government-controlled licensing
system. Economic blockades were set up to inflict damage to the enemy’s
war-making capacity, and to limit the neutral countries’ ability to trade
with them.
The joint effects of two world wars and the economic crisis of the
1930s was such that the era has been described as the first wave of de-
globalization in the modern industrial era (O’Rourke, 2009). It is unlikely
that the course of globalization that had begun in the previous century
would have taken this turn without the wars, revolutions, the dissolution
of empires, economic crises and social and political upheavals of the first
half of the century.
Absent these shocks, the course of globalization and global trade
regimes would have looked very different. In an alternative historical
scenario, governments might have adopted some protective measures to
tackle social issues arising from accelerating globalization, such as rising
inequalities and other effects of the economic dislocation resulting from
the growing significance of foreign trade and nations’ exposure to the
international economy. This is what they did after the Second World War.
Regarding the first half of the twentieth century, however, it may be
assumed that these measures would have created at most a moderately
protectionist trade policy regime. They would have been exceptions to
the overall liberal orientation of the world economic system, and they
would not have challenged the basic course of globalization in the way
the crises of the first half of the twentieth century eventually did.
Trade Liberalization in the West, 1947–1980

What had remained of a multilateral global trading system before the
war laid in ruins in 1945. International trade was regulated with national
import and export restrictions. Quantitative quotas, that were the main
mechanism of regulating trade in the 1930s and 1940s, were settled in
bilateral trade agreements. As most of the world’s currencies were not
freely convertible, earnings from one country could not easily be used for
purchases elsewhere. Earnings in US dollars, the only major convertible
currency, were highly sought after, but a shortage of dollars remained a
major bottleneck for Europe’s economic recovery.
To ease the dollar gap, the US directed 13 billion US dollars to
Western Europe in the European Recovery Program (ERP) in 1948–
1952, i.e. the so-called Marshall plan. This helped the participants to
recover from post-war austerity and finance their essential consumption
needs and capital investments. A significant dimension of the Marshall
Plan was that it allowed for the return to multilateral trade within the
auspices of the European Payments Union from 1950 onward, also
funded by ERP dollars. Furthermore, within the Organization for Euro-
pean Economic Cooperation (OEEC, a precursor to the OECD) that
26 J. AUNESLUOMA
administered the aid, the member states were committed to remove obsta-
cles to trade they had erected in the war years and in the 1930s, most
importantly quantitative quotas.
Full convertibility of Western European currencies was restored by
the end of the 1950s, which improved the conditions for liberaliza-
tion of trade. In 1957, the liberalization programme that was begun
at the OEEC, was continued in the European Economic Community
(EEC). The Community achieved free trade in industrial goods among
its members in the course of the 1960s. Another experiment of free trade
integration, the European Free Trade Association (EFTA), did the same
among its members by the end of the decade.
With removal of tariffs and other trade restrictions between the EEC
and EFTA countries, the West European economies had by the mid-
1980s achieved a level of free trade comparable to pre-First World
War conditions, with the notable difference of agricultural goods that
in a glaring contrast to the pre-crises trade regime, remained heavily
protected.
US sponsorship and leadership was crucial to set the West European
regional trade liberalization in motion, and to maintain its momentum
in the subsequent decades. In currency policy, the fixed exchange rate-
system established at Bretton Woods in 1944 provided the necessary
stability until the turn of the 1970s.
The advent of the General Agreement on Tariffs and Trade (GATT)
under US leadership in 1947 heralded the beginning of liberalization on
a global level (Zeiler, 1999). At first, however, the lowering of tariffs
involved a limited group of commodities and compared to regional
integration efforts in Western Europe, progress remained modest. The
GATT-process gained speed in and after the so-called Kennedy round of
negotiations in the early 1960s, followed by further progress in the 1970s.
The GATT-process culminated in the Uruguay round in 1986–1994,
that saw a significant increase of participating countries, the deepening
of free trade between them and the broadening of liberalization to the
trade of services and other areas. In 1995 the agreements concluded
in GATT-negotiations were consolidated and codified in the World
Trade Organization (WTO), together with its newly established dispute
settlement system.
Seen from a Western perspective, a process to repair the damage done
in the crises of the early twentieth century was in many ways complete in
the 1980s. Nonetheless, it had taken much longer to create a liberalized
trade regime than it had taken to do away with the nineteenth century
free trade system in the First World War and its long aftermath. This
bore witness to the long-lasting significance of major crises to global trade
policy regimes, and how important the dominant powers’ preferences and
actions were in their deconstruction and reconstruction.
Globalizing Free Trade from 1980s

to the Crises of the 2000s
Perhaps the most remarkable feature of the recent historical evolution
of the world trading system is the dramatic expansion of free trade—
and of overall trade levels of GDP—from the year 1980 onwards. This
period of liberalization and growth lasted until the financial crisis in 2008,
when also the share of trade from the global GDP peaked. After an initial
post-crisis recovery it remained on a relatively lower level in the 2010s
(Hoekman, 2015).
It is one of the most remarkable periods in the history of the world
economy. It saw the expansion of the Western-led free trade regime into
new areas: the opening of China, the gradual end of protectionism in
post-colonial countries such as India, the rise of the East Asian economic
‘tigers’ and the transition of the old Soviet bloc from planned economies
to free markets. Institutionally the process reached its peak with China’s
accession to the WTO in 2001.
Countries in Eastern Europe, which belonged to the Soviet Union’s
sphere of influence in the Cold War, began to liberalize their foreign trade
with their transition to democracy and market economy in the 1990s. The
political preconditions for this were the easing of superpower tensions in
the latter half of the 1980s, the dissolution of the Soviet Union’s empire
in 1989–1991 and the geopolitical shift towards a unipolar world with
preponderant US power in the post-Cold War world in the 1990s.
While the factors and the causal mechanisms behind the post-1980s
growth in global trade and the acceleration of globalization are a matter
for ongoing debate, the role of the diminishing superpower competition
in the last decades of the twentieth century and the spread of Western
ideas of economic liberalism, should in any case be considered as a major
factor (Milner, 1999).
While it is true, that the relative power of the US in world politics and
the world economy began to decline from the 1960s onwards, its signifi-
cance behind the global shift in the 1980s should not be understated. The
28 J. AUNESLUOMA
Vietnam war, the collapse of the Bretton Woods system and the rise of the
economic significance of countries such as Japan and West Germany, all
contributed to the US’ relative decline. America’s own, internal turmoil
in the 1960s and 1970s contributed to the same direction. However, its
position as a global superpower with an ability to implement its policy
preferences regarding the institutional arrangements and organizing prin-
ciples of world trade, was not effectively challenged by other actors at the
time.
From the 1980s to the 2000s, the US still enjoyed an unusually
strong position in world affairs. This coincided not only with the global
economic expansion experienced at the time, but also with systemic
stability that lasted until the financial crisis of 2008. Despite a number
of shocks, such as the financial crises in South Asia and Russia in the
late 1990s or the September 11th terrorist attacks in 2001, the overall
systemic stability of the world economy and the basic features of the
global trade policy regime, were not seriously in doubt.
The financial crisis of 2008 appears in retrospect a real turning point.
This applies not only to the overall development of the world economy
but also to the relative positions of the main power centres to each other.
The US-led global trade policy regime and the relative economic and
military power of the US culminated in the first decade of the 2000s.
The 2010s saw the emergence of more diffuse and polycentric global
economic and political order. During the latter half of the decade, we
also saw the fracturing of the domestic consensus in the US regarding
its role as the guarantor of global free trade. The role and weight of the
European Union as a supplementary force favouring open markets could
not fully compensate the loss of American leadership.
US hegemony in the 1990s and early 2000s may have also hidden
structural problems in the global trade policy regime centred on the WTO
and the maintenance of its liberal, multilateral free trade orientation. The
success in expanding the WTO’s membership in the early 2000s masked
problems within the organization and in its governance and decision-
making system. Steps for further liberalization stalled in the first years
of the 2000s, and in the 2010s the one world approach popular in the
1990s had been replaced by network of regional or bilateral, in some
cases plurilateral free trade agreements and economic partnerships. At the
turn of the 2020s these numbered in the hundreds, creating a wide but
complex network of trade and investment agreements.
The global trade regime of the 2010s and early 2020s is a good
example of a free trade system without a single hegemonic power that
would guarantee its stability. At the turn of the 2020s a deeper politi-
cization of trade, the prevalence of the use of economic sanctions as a
geopolitical tool, and a tendency to use trade policy as a vehicle to achieve
diverse non-trade goals, such as environmental goals, the strengthening
of human rights or other geopolitical objectives, have born witness to an
incremental regime change.
Conflicts and crises were central to the dissolution and formation of
global trade regimes in the twentieth century, and it appears that political
developments and the state of affairs between the most important power
centres in the world continue to play a similar role in the functioning of
global trade today.
What has not changed are the conditions that support a liberal, free
trade global trade regime. What it requires is an international order that
supports free trade and is backed by adequate political and materials
resources either by a hegemonic power or by a group of like-minded
nations. This needs to be supplemented with domestic policies and social
conditions that allow governments to pursue further globalization, if they
so wish.
References
Findlay, R., & O’Rourke, K. (2007). Power and plenty. Trade, war, and the world
economy in the second millennium. Princeton University Press.
Foreman-Peck, J. (1995). A history of the world economy. International economic
relations since 1850. Prentice Hall.
Gilpin, R. (1987). The political economy of international relations. Princeton
University Press.
Hoekman, B. (Ed.). (2015). The global trade slowdown: A new normal? A
VoxEU.org eBook. Centre for Economic Policy Research Press.
Irwin, D. A. (2017). Clashing over commerce. A history of US trade policy. The
University of Chicago Press.
Keohane, R. (1984). After hegemony. Princeton University Press.
Krasner, S. D. (1976). State power and the structure of international trade. World
Politics, 28, 317–347.
Milner, H. V. (1999). The political economy of international trade. Annual
Review for Political Science, 2, 91–114.
Moravcsik, A. (1998). The Choice for Europe. Social purpose & state power from
Messina to Maastricht. Cornell University Press.
30 J. AUNESLUOMA
O’Rourke, K. (2009). Politics and trade. Lessons from past globalisations. Bruegel
essay and lecture series. Bruegel.
Ruggie, J. (1983). International regimes, transactions and change’. In S. D.
Krasner (Ed.), International regimes (pp. 196–232). Cornell University Press.
Zeiler, T. W. (1999). Free trade, free world. The advent of GATT . The University
of North Carolina Press.
PART II
Disruptions of Global Trade

CHAPTER 3
WTO in a Changing Geopolitical

Environment
Sandra Polaski
Introduction
The World Trade Organization (WTO) came into existence in 1995,
replacing the 50-year-old trade regime known as the General Agreement
on Tariffs and Trade (GATT) that had governed trade among capitalist
countries in the geopolitical context of the Cold War. The new organiza-
tion grew out of what began as an eighth round of GATT negotiations in
Uruguay in 1986. The negotiations dragged on for almost eight years,
frequently stalling but eventually producing a greatly expanded body
of trade law covering a much broader range of issues than the GATT.
It also created a new, permanent organization (Marrakesh Agreement,
1994). The new regime was emblematic of a moment in time, when
global economic integration was gaining rapid momentum based on tech-
nological change; the socialist bloc and its separate trading system had
S. Polaski (B)
Global Economic Governance Initiative, Boston University, Boston, MA, USA
e-mail: sandrapolaski@gmail.com

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_3
34 S. POLASKI
collapsed; and China was still in the early stages of economic opening.
The new WTO offered a single global trade regime that gradually grew
to include 164 countries.
The rules of the WTO were different in many respects from the GATT,
which had focused on reducing tariffs and other border measures. The
WTO by contrast aimed to facilitate deep integration through disciplines
on domestic policies of member states. The new approach reflected a
shift in the prevailing economic consensus in the west and the priorities
of the US in particular, discussed in the next section. The new regime
did not command universal support from the member states, especially
developing countries who felt their needs were given inadequate consid-
eration, discussed in the third section of the chapter. A fourth section
addresses China’s accession to the WTO in 2001, its spectacular economic
and trade growth, and the changing relative economic weights in the
global economy. It explores the resulting distributional effects that eroded
support for open trade and the WTO, even among the organization’s
original proponents. A fifth section addresses the organization’s new chal-
lenges in an era marked by increasing strategic rivalry between the US
and China, the global economic and trade disruption caused by the coro-
navirus pandemic, and the emergence of climate change and the digital
economy as pressing new issues. A final section explores possible future
paths for the WTO and the implications of each.
The Birth of the WTO---An Institution

Emblematic of a Moment in Time
The predecessor of the WTO, the GATT, was not an organization per
se but the sum of a series of contractual agreements beginning in 1947
that gradually reduced tariffs among a group of countries known as
the contracting parties. The original GATT was signed by 23 coun-
tries (World Trade Organization, 1996).1 The 1947 contractual tariff
agreement was meant to be embedded in a broader institution, the
International Trade Organization (ITO), which would administer it and
1 The twenty-three countries that negotiated and signed the original GATT in 1947
were Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon (Sri Lanka), Chile,
China, Cuba, Czechoslovakia (Czech Republic and Slovakia), France, India, Lebanon,
Luxembourg, Netherlands, New Zealand, Norway, Pakistan, South Africa, Southern
Rhodesia (Zimbabwe), Syria, United Kingdom, and United States.
3 WTO IN A CHANGING GEOPOLITICAL ENVIRONMENT 35
oversee trade among the parties. However the ITO was never launched
(Toye, 2012).2 Instead the GATT went forward without a formal insti-
tutional structure. Over the course of the next five decades and seven
negotiating rounds the GATT membership expanded to 102 countries
and tariffs were further reduced.
By the 1980s the momentum of trade accelerated, enabled by break-
throughs in transport and information technology along with changing
economic policies in many countries that facilitated greater global
economic integration. The GATT was widely considered to lack the archi-
tecture needed to deal with the rapid increase in trade and the scope to
deal with the increasing complexity of the issues involved (Jackson, 1997).
The Uruguay Round of negotiations was a response to many govern-
ments’ desire to expand the rule book for transnational commerce and to
create a supranational institution to set and enforce the rules.
While the Uruguay Round negotiations were underway, the socialist
bloc of countries began to disintegrate and in 1991 the Soviet Union
collapsed. With the end of the Cold War—and with China’s spectacular
growth still years away—the US emerged as the sole superpower (Lüthi,
2020; Nijman, 1992). This shift in the geopolitical environment had a
profound effect on the ongoing negotiations. The western and particu-
larly US model of capitalism was considered the sole surviving economic
system and the victors were the ones to write the rules for the emerging
global economy.
Over the same period there had been a shift in the prevailing economic
consensus in the west. In the early post-war decades, most western
governments favored a Keynesian macroeconomic policy approach in
which they assumed the responsibility for ensuring sufficient incomes and
consumption demand when markets failed to provide them. By the 1980s,
particularly in the US and UK, the consensus had shifted to a neoliberal
2 The International Trade Organization (ITO) was conceived as part of the multilateral
governance architecture created after World War II to set rules for the international
economy. The ITO was intended to foster economic recovery after the war and to rein
in the type of punitive economic actions that contributed to the war. It was meant
to complement the United Nations, the International Monetary Fund (IMF), and the
World Bank (formally the International Bank for Reconstruction and Development, IBRD)
as part of a system of international economic governance. However changing domestic
political alignments and the advent of the Cold War led the US, one of the original
architects of the ITO, to withdraw its support and the organization never came into
being.
36 S. POLASKI
view that markets were the most efficient way to allocate resources and
that government intervention should be avoided (Irwin & Ward, 2021;
Williamson, 2004). While this shift provoked significant dissent in many
countries, the new ideology was widely embraced by the mainstream of
governments, academia, opinion makers, and the media. With strong US
influence, the WTO rules were written in the spirit of this new consensus,
expanding the rights of private firms and investors while reining in
numerous aspects of government intervention. For example, the Agree-
ment on Trade Related Aspects of Investment Measures (TRIMs) restricts
governments from requiring investors to use local content in production,
an approach that a number of countries had used to encourage backward
and forward linkages in their economies (Chang, 2002).
A Strong New Institution---But One

Contested from the Beginning
The new institution expanded trade rules into many more regulatory
areas, such as protections for intellectual property and rules for provi-
sion of services that constrained member states’ practices in areas that
had previously been excluded from the GATT trade rules. Perhaps most
importantly, the WTO created a binding dispute settlement system to
replace the weaker mechanisms of the GATT (World Trade Organization,
2021a). Under the GATT, disputes between parties could be referred
to an independent panel for findings and recommendations. But the
creation of the panel, the adoption of its findings and the authoriza-
tion for the complaining country to take countermeasures all required
a positive consensus of the organization’s governing Council. In other
words, a single party, including the party named in the dispute, could
block enforcement. By contrast, the new WTO dispute settlement system
did not allow a party to block panel formation and a panel’s findings did
not require unanimous consent. This was considered by some to reflect
a movement from a power-based system to a rules-based system and in
this light to represent a movement away from big power dominance to a
fairer system (Pauwelyn, 2005).
From the beginning, however, many developing countries considered
that the rules themselves had been written to favor the interests of the
already-developed countries (Ismail, 2020). A negotiating grouping then
known as the Quadrilateral (or “Quad”), including the US, EU, Japan,
and Canada, typically coordinated their bargaining positions during the
Uruguay Round and early years of the WTO. Once they found common
ground, they were in a strong position to achieve their key goals because
of their economic and political heft. When they could not agree because
of their internal conflicts of interest, they could and did block progress
(United States Senate, 2000).3 Developing countries felt the need to be
members of the WTO, since it set the rules for access to the largest and
most lucrative markets. However many felt that the overall balance of
rules in the WTO was not favorable to their own development interests,
notably in textiles and agriculture. Perhaps the most widespread criticism
by the developing countries related to the rules on agricultural trade,
which they believed favored commercial agriculture in high-income coun-
tries that benefited from subsidies, export support, and other measures.
Given that many developing countries depended heavily on agriculture
both for exports and for domestic subsistence, they sought reform of
the sector and formed their own negotiating alliances (Polaski, 2005;
World Trade Organization, 2021b).4 The tension between the devel-
oped and developing blocs contributed to the breakdown of the attempt
to launch a new round of WTO negotiations in Seattle, Washington in
1999. The new round was finally launched in Doha in 2001 by winning
the support of the developing countries (the majority of WTO members)
with a commitment to address their concerns (World Trade Organization,
2021c). Those negotiations stumbled repeatedly and eventually failed,
due both to disagreement between developed and developing countries
and within the bloc of developed countries.
From the earliest days the WTO was also challenged from the outside
by civil society. For example, the 1999 attempt to launch the new round
3 An example of the Quad’s blocking behavior can be found in the testimony of the
U.S. Trade Representative at a March 2000 hearing of the Senate Finance Subcommittee
on International Trade, in which she stated that some “base line understanding” among
the Quad countries would have to be the “first step” toward reconvening negotiations
after the WTO ministerial meeting ended in failure in Seattle in 1999. A number of
differences between the United States and the EU had not been overcome there and she
stated, “If the major trading partners cannot sort out their differences there will not be
another round.”.
4 For example, the G33, also known as the “Friends of Special Products” in agriculture,
is a coalition of developing countries pressing for flexibility for developing countries to
undertake limited market opening in agriculture to protect their small-scale farmers, while
the G20 coalition of developing countries (not to be confused with the G-20 summit
grouping formed in 2008) presses for ambitious reforms of agriculture in developed
countries with some flexibility for developing countries.
38 S. POLASKI
of negotiations in Seattle led to the famous “battle in Seattle” in which a

large, diverse coalition of labor, environmental, peasant, social justice, and
some anarchist groups brought negotiations to a halt (Edelman, 1999;
Tizon, 1999).
China’s Accession to the WTO,

Changing Geopolitical Weights,
and Distributional Consequences
The WTO continued to attract praise, criticism, and protest as well as
new members throughout its early years. The most high-impact accession
was that of China in 2001 (World Trade Organization, 2001a).5 This
occurred after years of intense bilateral negotiations with other WTO
members as a result of which China made significant commitments to
lower tariffs and non-tariff barriers as a condition for its accession (World
Trade Organization, 2001b). China’s accession was quantitatively and
qualitatively different from that of other developing countries that had
joined the GATT and then the WTO over the years. China was the most
populous country in the world and at the time of its accession the large
majority (63 percent) of its population was still rural, meaning that it
had a huge body of labor available to be drawn from agriculture into
manufacturing (World Bank, 2021). With its accession to the WTO and
greater certainty that its products would be able to enter other members’
markets, China attracted foreign direct investment (FDI) at an accel-
erating pace. Before accession it already ranked first among developing
countries in attracting FDI and in 2002 it surpassed the United States as
the world’s top destination for FDI (Zhang & Corrie, 2018). Together
with its available labor force and its own investments in infrastructure and
connectivity, this led to a rapid expansion of manufacturing for export.
This evolution of the economy allowed China to absorb several hundred
million workers into employment in higher productivity manufacturing,
with the result that China was able to eliminate extreme poverty (Li et al.,
5 As part of its economic reform and opening up process, China had requested to
resume its pre-revolution status as a contracting party to the GATT and a working party
on its status was established in 1987. That ongoing work was overtaken by the creation
of the WTO in 1995 and China’s request to accede to it. The GATT working party was
converted to a WTO working party.
2021). Because of its size, the growth in employment and incomes led to
a reduction of inequality at the global level (Lakner & Milanovic, 2013).
China’s domestic success had a less favorable impact on employment
and equity in some of its direct competitors, however. The rapid increase
in manufacturing in China drew investors, manufacturers, and jobs away
from some other countries, both developed and developing. In the US,
the rapid scaling up of Chinese production in many competitive industries
was described as the “China shock,” as many US firms shut produc-
tion facilities in the US and relocated to China (Autor et al., 2016).
Studies showed that regions and localities most exposed to the compe-
tition suffered declining employment and wages, with negative spillover
effects to housing prices, local government revenues, public services, and
health (Autor et al., 2016; Dean & Kimmel, 2019; Feler & Senses, 2016).
Mexico, a developing country competitor to China in many industries,
also experienced manufacturing losses (Hernández, 2012; Trachtenberg,
2019). It is telling that Mexico was the last country to agree to China’s
WTO accession (World Trade Organization, 2001b).6
The impact of China’s accession on countries in the European Union
was significantly different, due to a number of factors. First, the largest
share of exports and imports of goods take place within the bloc, due
to lack of tariffs, favorable border measures, and geographical prox-
imity. Second, a relatively more important “shock” occurred in Europe
around the time of China’s accession to the WTO, with the accession of
Eastern European countries to the EU after the collapse of their socialist
economies and opening to private foreign investment (Dauth et al.,
2014). Many EU manufacturers, particularly those based in Germany and
Austria, shifted production to the east, where wages were considerably
lower (Marin, 2010).7 In this sense, the collapse of the socialist trading
bloc and accession of those countries to the EU was Europe’s own shock
from the geopolitical shifts discussed at the beginning of this chapter.
Third, the relative concentration of many European firms in high tech-
nology or luxury products meant that the Chinese market represented
6 Mexico concluded bilateral negotiations on market access with China on 13 September

2001, days in advance of the final meeting of the WTO Working Party on China’s
Accession on 17 September 2001.
7 It is interesting to note that the shifts in production by firms in these two countries
shifted more high-skilled work rather than low-skilled work.
40 S. POLASKI
important new demand and thus at least some offsetting job creation at
home (Aubourg, 2017; Marin, 2017).
Chinese policies shifted over the years following its WTO accession,
including through a strong and steady increase in minimum and manu-
facturing wages after 2003 that gradually lifted its labor costs to exceed
those of Mexico and approach those of some Eastern European coun-
tries (International Labour Organization, 2020). Sixty percent of Chinese
workers were in the broadly-defined middle class by 2015 (Cuntao,
2016). This contributed both to increased domestic demand in China
and to imports, which was reinforced by the policy shift to a “dual circu-
lation strategy” in recent years (Sheng, 2021). China’s labor force stopped
growing in 2017 and is now declining (World Bank, 2021). Chinese
export growth slowed after 2007 and the “China shock” is considered
to have plateaued in 2010 (Autor et al., 2021; Brandt & Kim, 2020).
However, the sharp losses experienced by affected communities in the
US proved to be long-lasting, persisting a decade or more after the initial
shock (Autor et al., 2021). The experience gradually hardened into a
narrative of unfair competition and anti-Chinese sentiment (Huang et al.,
2021; Tan, 2011). In 2016 that narrative was weaponized in the presiden-
tial campaign of candidate Donald Trump, contributing to his electoral
victory (Cerrato et al., 2016; Corasaniti et al., 2016).
In historical perspective, the strong “China shock” to employment
and welfare in the US and elsewhere represented a transitory period,
much as the unipolar moment after the end of the Cold War proved
fleeting. However in both cases the impacts of transitory phenomenon
have endured in political and policy processes and have been consolidated
in laws and legally binding trade agreements. The shift in US sentiment
toward China became increasingly negative and much of the US discourse
about the WTO is now framed as an effort to strengthen the institution
in ways that constrain behavior of non-market economies in general and
China in particular, discussed below.
The Creators Grow Disillusioned;

New Challenges Arise
The US came to resent the constraints that the binding WTO dispute
settlement mechanism placed on its own behavior with regard both to
China and competitors in the west and sought to weaken it (Hart &
Murrill, 2021). Beginning in the Obama administration and accelerating
in the Trump administration the US vetoed the appointment of appel-

late body members, finally incapacitating the body in 2019. As China
grew into a major trading power, the EU, Japan and others also began
to agitate for changes in WTO rules to constrain the Chinese model
of state capitalism (European Commission, 2020a). The discontent of
developing countries also continued, although the reforms they sought
were often quite different from those sought by the high-income member
states (Ismael, 2020). For example, some high-income countries seek to
weaken provisions on special and differential treatment (SDT) for devel-
oping countries or to exclude some countries currently covered by the
category altogether, while developing countries seek to strengthen policy
space for development of their economies (Hegde & Wouters, 2021).
Some countries have sought a path for further trade liberalization through
plurilateral agreements within the framework of the WTO but involving
only subgroups of members, but these have struggled to reach conclusion.
The failure of the Doha round negotiations and the incapacitation of
the binding dispute settlement mechanism mean that two of the WTO’s
three structural functions have ground to a halt, with only the third func-
tion of reporting and monitoring left intact (World Trade Organization
Documents, 2020a).8 The organization is now widely considered to be
in crisis. It has been strained further by the economic and health effects
of the global COVID-19 pandemic, when its rules were widely disre-
garded as member states sought to protect their own populations and
stabilize their economies (Global Trade Alert database, 2021; Thrasher
et al., 2021). In response to the pandemic and the very unequal acces-
sibility of treatments and vaccines, India and South Africa proposed a
waiver of the WTO’s intellectual property rules protecting patents for
medicines and vaccines for the prevention, containment, and treatment
of COVID-19. The proposal was eventually co-sponsored by an addi-
tional 87 mainly developing countries and endorsed by the US and
China (Crossley, 2021; Schwegman & Woessner, 2021; USTR, 2021;
WTO, 2021b), while the EU split on the proposal and Japan, Norway,
Singapore, South Korea, Switzerland, Taiwan, and the UK expressed
reservations about starting text-based negotiations (Titievskaia, 2021;
8 Member states are required to notify the WTO about various trade practices but
the reports are often late. A group of countries seeks to strengthen these requirements
and impose administrative and representational penalties on countries failing to meet
notification requirements.
42 S. POLASKI
Farge, 2021). A modest compromise was agreed by trade ministers at

a WTO trade ministerial meeting in June 2022 that slightly expands the
ability of developing countries to produce and share COVID-19 vaccines
with other developing countries (WTO, 2022).
The climate change crisis poses yet another challenge to the WTO
going forward. Proposals by some countries for border measures such
as carbon taxes could require new approaches to rules on non-
discrimination, while support for green transitions could potentially run
afoul of current disciplines on state aid. The proper governance of digital
issues in global trade is yet another area in which there is wide diver-
gence of views and practices among member states. Finally, the rising
geostrategic competition between the US and China and now the war
in Ukraine threaten to cast a shadow over future efforts at reform across
the broad spectrum of issues.
Possible Futures for the WTO as It

Navigates These Complex Currents
What are the prospects for the WTO, given the complex current conjunc-
ture? Three very different paths seem possible. First, the organization may
continue to muddle through without meeting the challenges described
above and with no serious reform. The WTO still provides the basic rules
of trade for most bilateral trading relationships and countries will be reluc-
tant to let go of this fixed reference point, particularly in a global economy
upended by the pandemic, with snarled supply chains and continuing
trade uncertainties. As for disputes, the incapacitation of the appellate
body by the US may leave some trade disputes suspended without the
possibility of final resolution. As an interim measure, the EU and 22
other countries including China have set up a “multi-party interim appeal
arrangement” (MPIA) to hear appeals of WTO panel reports as long
as the appellate body is not functional (European Commission, 2020b).
The arrangement was notified to the WTO, stating that it is intended to
operate under the organization’s overall umbrella and is available to any
members willing to join (World Trade Organization Documents, 2020b).
It remains to be seen if it will function as intended and most WTO
members have not yet joined (Starshinova, 2021).
In a second plausible scenario, the organization may be buffeted more
strongly by the growing strategic rivalry between the US and China in
ways that undermine even the current suboptimal equilibrium and further
destabilize the WTO. The Biden administration has been pressing allies
to align with it against China’s state-led economic practices, including
through plurilateral agreements that could amount to a de facto division
into economic blocs even if it occurs within the shell of the WTO. On
the other hand, the pandemic experience led to widespread adoption by
many governments, including the US, of subsidies, state aid, government
equity stakes in private businesses, and other industrial policy measures
that could blunt the momentum for tightening rules on such policies. The
recent discourse in Europe of building national champion firms and the
announcement by many governments of efforts to build national capacity
in semiconductors, electric vehicles, clean energy, and other sectors could
lead to second thoughts on tightening rules on non-market practices.
A third possible pathway for the WTO may be the least likely on
the current geopolitics but arguably would be best for future global
economic stability. This would involve an updating of the trade regime to
allow greater flexibility for countries with different economic models and
systems to trade with each other without sacrificing the other legitimate
interests of their citizens and polities. The goal would be to continue a
fundamentally open global economy while allowing governments greater
scope for border actions and countermeasures to defend their own coun-
tries’ economic and social preferences (Shaffer, 2021; US-China Trade
Policy Working Group Joint Statement, 20199 ). A durable reform of
the global trading system will require greater space for domestic policies
such as local procurement, carbon border taxes, or industrial strategies
that aim at distributional justice, sustainability, or economic development.
A pessimistic view would consider that the current geopolitical realities
could make new negotiations even more difficult than the failed Doha
round. A more optimistic view would see the active government economic
9 A group of 37 eminent U.S. and Chinese economists, including five winners of the
Nobel Memorial Prize in Economic Sciences, formed a US-China Trade Policy Working
Group in 2019 and issued a Joint Statement calling for an approach that: “(i) allows
countries considerable latitude at home to design a wide variety of industrial policies,
technological systems, and social standards, (ii) allows countries to use well-calibrated
policies (including tariff and non-tariff trade policies) to protect their industrial, technolog-
ical, and social policy choices domestically without imposing unnecessary and asymmetric
burdens on foreign actors, and (iii) maintains a set of trade rules that prevent countries
from deploying what economists call ‘beggar-thy-neighbor’ policies – policies that produce
benefits to the home country only through the harm they impose on other countries.”.
44 S. POLASKI
interventions necessitated by the pandemic and current supply chain fail-

ures as having the potential to lead toward gradual convergence of views
on some of the policies that had polarized east and west, north and south.
The rules of the WTO were written with the assumption that China
would converge toward western models of capitalism, when in fact recent
practice in the west converges toward a more interventionist state.
The WTO was born at a time when neoliberal market capitalism was
the dominant system and it set global rules to protect the then-prevailing
preferences and advantages of the developed west. A quarter century
later China is the largest exporter to most countries and a hub of many
global supply chains. If western governments see China as a problem
to be contained there will be no solution at the WTO and there will
be increasing decoupling into separate trading blocs. This will produce
slower growth, including for the west, as China’s huge economy and
market will be out of reach. It will require the dismantling of global
supply chains, producing further sharp supply shocks. And it will reinforce
the tensions, suspicion, and rivalry that can lead to more dire conflicts.
Finding a new path that prioritizes coexistence is an enormous challenge.
But it is one that could achieve economic stability and peace.
References
Aubourg, A. (2017). Globalisation has forced French industry to play to its
strengths. Ministère de l’économie et des finances République française, Le 4
Pages de la DGE, No. 77, October. https://www.entreprises.gouv.fr/files/
files/etudes-et-statistiques/4pages/pdf/2017-12-4p76-french-industry-glo
balisation.pdf. Accessed 16 February 2022.
Autor, D. H., Dorn, D., & Hanson, G. H. (2016). The China Shock: Learning
from labor market adjustment to large changes in trade. National Bureau
of Economic Research, Cambridge, MA. NBER Working Paper No. 21906.
https://www.nber.org/papers/w21906.pdf. Accessed 16 February 2022.
Autor, D. H., Dorn, D., & Hanson, G. H. (2021). On the persistence of the
China shock. Brookings Papers on Economic Activity, Conference Drafts, 9
September 2021. https://www.brookings.edu/wp-content/uploads/2021/
09/On-the-Persistence-of-the-China-Shock_Conf-Draft.pdf. Accessed 16
February 2022.
Brandt, L., & Lim, K. (2020). Accounting for Chinese exports. Univer-
sity of Toronto Department of Economics, Toronto. Working Papers
tecipa-680. https://ideas.repec.org/p/tor/tecipa/tecipa-680.html. Accessed
16 February 2022.
Cerrato, A., Ruggieri, F., & Ferrara, F, M, (2016). Trump won in counties that
lost jobs to China and Mexico. The Washington Post, 2 December 2016.
https://www.washingtonpost.com/news/monkey-cage/wp/2016/12/02/
trump-won-where-import-shocks-from-china-and-mexico-were-strongest/.
Accessed 16 February 2022.
Chang, H. J. (2002). Kicking away the ladder: An unofficial history of capitalism,
especially in Britain and the United States. Challenge, 45(5), 63–97. http://
www.jstor.org/stable/40722165. Accessed 16 February 2022.
Corasaniti, N., Burns, A., & Appelbaum, B. (2016). Donald Trump vows
to rip up trade deals and confront China. The New York Times, 28 June
2016. https://www.nytimes.com/2016/06/29/us/politics/donald-trump-
trade-speech.html. Accessed 16 February 2022.
Crossley, G. (2021). China backs talks on intellectual property waiver for
COVID vaccines. Reuters. 13 May 2021. https://www.reuters.com/world/
china/china-backs-talks-intellectual-property-waiver-covid-vaccines-2021-
05-13/. Accessed 16 February 2022.
Cuntao, X. (2016) Wages, productivity and labour share in China.
ILO Regional Office for Asia and the Pacific, Bangkok, Thai-
land. https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/
documents/publication/wcms_475254.pdf. Accessed 16 February 2022.
Dauth, W., Findeisen, S., & Suedekum, J. (2014). The Rise of the east and the
far east: German labor markets and trade integration. Journal of the European
Economic Association, 12, 1643–1675.
Dean, A., & Kimmel, S. (2019). Free trade and opioid overdose death in
the United States. SSM – Population Health, 8. https://doi.org/10.1016/
j.ssmph.2019.100409
Edelman, M. (1999). Peasant–farmer movements, third world peoples, and the
Seattle protests against the World Trade Organization, 1999. Dialectical
Anthropology, 33, 109–128. https://doi.org/10.1007/s10624-009-9109-6
European Commission. (2020a). EU, U.S. and Japan agree on new ways to
strengthen global rules on industrial subsidies. https://trade.ec.europa.eu/
doclib/press/index.cfm?id=2101. Accessed 16 February 2022.
European Commission. (2020b). Interim appeal arrangement for WTO
disputes becomes effective. https://trade.ec.europa.eu/doclib/press/index.
cfm?id=2143. Accessed 16 February 2022.
Farge, E. (2021). A year after COVID vaccine waiver proposal, WTO talks
are deadlocked. Reuters, 4 October 2021. https://www.reuters.com/bus
iness/healthcare-pharmaceuticals/year-after-covid-vaccine-waiver-proposal-
wto-talks-are-deadlocked-2021-10-04/
46 S. POLASKI
Feler, L., & Senses, M. Z. (2016). Trade Shocks and the Provision of Local
Public Goods. Institute for the Study of Labor, Bonn, Germany. IZA Discus-
sion Paper No. 10231. https://ssrn.com/abstract=2846322. Accessed 16
February 2022.
Global Trade Alert Database. (2021). https://www.globaltradealert.org/.
Accessed 3 November 2021.
Hart, N. M., & Murrill, B. J. (2021). The world trade organization’s appellate
body: Key disputes and controversies. Congressional Research Service, Wash-
ington. CRS Report R46852. https://crsreports.congress.gov. Accessed 16
February 2022.
Hegde, V., & Wouters, J. (2021). Special and differential treatment under the
world trade organization: A legal typology. Journal of International Economic
Law, 24(3), 551–571. https://doi.org/10.1093/jiel/jgab033
Hernández, R. H. (2012). Economic liberalization and trade relations between
Mexico and China. Journal of Current Chinese Affairs, 41(1), 49–96.
https://doi.org/10.1177/186810261204100103
Huang, J., Cook, G. G., & Xie, Y. (2021). Large-scale quantitative evidence of
media impact on public opinion toward China. Humanities and Social Sciences
Communications, 8(181). https://doi.org/10.1057/s41599-021-00846-2
International Labour Office. (2020). Global Wage Report 2020–21: Wages
and minimum wages in the time of COVID-19. Geneva: International
Labour Office. https://www.ilo.org/global/publications/books/WCMS_7
62534/lang--en/index.htm. Accessed 16 February 2022.
Irwin, D. A., & Ward, O. (2021). What is the ‘Washington Consensus?’
Peterson Institute for International Economics online publication. https://
www.piie.com/blogs/realtime-economic-issues-watch/what-washington-con
sensus. Accessed 4 November 2021.
Ismael, Faizel. (2020). WTO Reform and the Crisis of Multilateralism—A Devel-
oping Country Perspective. Geneva: South Centre. Available at https://www.
southcentre.int/book-by-the-south-centre-2020-3/
Jackson, J. H. (1997). The world trading system: Law and policy of interna-
tional economic relations. MIT Press. https://mitpress.mit.edu/books/world-
trading-system-second-edition
Lakner, C., & Milanovic, B. (2013). Global income distribution: From the Fall
of the Berlin Wall to the Great Recession. World Bank. Policy Research
Working Paper No. 6719. https://openknowledge.worldbank.org/handle/
10986/16935. Accessed 16 February 2022.
Li, L., Lou, C., & Lyu, Q. (2021). China takes historic step by eliminating
absolute poverty. Xinhua, 25 February. http://www.xinhuanet.com/english/
2021-02/25/c_139767414.htm. Accessed 16 February 2022.
Lüthi, L. M. (2020). The end of the superpower cold war. In L. M. Lüthi

(Ed), Cold Wars: Asia, the Middle East, Europe (pp. 563–594). Cambridge
University Press. https://doi.org/10.1017/9781108289825.031
Marin, D. (2010). The opening-up of Eastern Europe at 20: Jobs, skills, and
reverse Maquiladoras in Austria and Germany. Bruegel, Brussels. Working
Paper No. 2010/02. https://www.bruegel.org/wp-content/uploads/imp
orted/publications/wp_2010_02_maquiladoras_.pdf. Accessed 16 February
2022.
Marin, D. (2017). The China Shock: Why Germany is different. VoxEU and
CEPR 7 September 2017. https://voxeu.org/article/china-shock-why-ger
many-different. Accessed 16 February 2022.
Marrakesh Agreement Establishing the World Trade Organization. (1994).
https://www.wto.org/english/docs_e/legal_e/04-wto_e.htm. Accessed 16
February 2022.
Nijman, J. (1992). The limits of superpower: The United States and the Soviet
Union since World War II. Annals of the Association of American Geographers,
82(4), 681–695. http://www.jstor.org/stable/2563695
Pauwelyn, J. (2005). The transformation of world trade. Michigan Law Review,
104(1). https://repository.law.umich.edu/mlr/vol104/iss1/1. Accessed 16
February 2022.
Polaski, S. (2005). Agricultural Negotiations at the WTO: First, Do
No Harm. Carnegie Endowment for International Peace, Washington.
Policy Outlook. https://carnegieendowment.org/files/PO18.polaski.FINAL.
pdf. Accessed 16 February 2022.
Schwegman, L., & Woessner, P. A. (2021). China’s President Xi Jinping throws
his support behind an intellectual property rights waiver for COVID vaccines.
National Law Review, XI (306). https://www.natlawreview.com/article/
china-s-president-xi-jinping-throws-his-support-behind-intellectual-property-
rights. Accessed 16 February 2022.
Shaffer, G. (2021). Governing the interface of US–China trade relations. Univer-
sity of California, Irvine School of Law Research Paper No. 2021–19.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3821205. Accessed 16
February 2022.
Sheng, A. (2021). Dual circulation is a strategic process, not a theory. East Asia
Forum 20 January. https://www.eastasiaforum.org/2021/01/20/dual-circul
ation-is-a-strategic-process-not-a-theory/. Accessed 16 February 2022.
Starshinova, O. (2021). Is the MPIA a solution to the WTO appellate body
crisis? Journal of World Trade, 55(5), 787–803.
Tan, Q. (2011). The change of public opinion on US-China relations. Asian
Perspective, 35(2), 211–237.
Thrasher, R., Polaski, S., Kaplan, W., Clear, L., Bodduluri, S. P. & Wirtz, V. J.
(2021). COVID-19 policy responses and global trade and investment rules.
World Trade Organization. (1996). Press Brief Fiftieth Anniversary of the Multi-
lateral Trading System. https://www.wto.org/english/thewto_e/minist_e/
min96_e/chrono.htm. Accessed 8 February 2022.
World Trade Organization. (2001a). China’s accession to the WTO and its rela-
tionship to the Chinese Taipei accession and to Hong Kong and Macau,
China. https://www.wto.org/english/thewto_e/acc_e/s7lu_e.pdf. Accessed
8 February 2022.
World Trade Organization. (2001b). WTO successfully concludes negotiations
on China’s entry. WTO 2001b Press Release 243. https://www.wto.org/eng
lish/news_e/pres01_e/pr243_e.htm. Accessed 8 February 2022.
World Trade Organization. (2021a). Historic development of the WTO dispute
settlement system. https://www.wto.org/english/tratop_e/dispu_e/disp_s
ettlement_cbt_e/c2s1p1_e.htm. Accessed 8 February 2022.
World Trade Organization. (2021b). Groups in the negotiations. https://
www.wto.org/english/tratop_e/dda_e/negotiating_groups_e.htm. Accessed
8 February 2022.
World Trade Organization. (2021c). The Doha Round. https://www.wto.org/
english/tratop_e/dda_e/dda_e.htm. Accessed 8 February 2022.
World Trade Organization. (2021d). Briefing Notes: Special and differen-
tial treatment. https://www.wto.org/english/tratop_e/dda_e/status_e/sdt_
e.htm. Accessed 8 February 2022.
World Trade Organization Documents. (2020a). Draft General Council Deci-
sion Procedures to Enhance Transparency and Strengthen Notification
Requirements Under WTO Agreements circulated at the request of the Dele-
gations of Argentina, Australia, Canada, Costa Rica, the European Union,
Israel, Japan, New Zealand, the Separate Customs Territory of Taiwan,
Penghu, Kinmen and Matsu, and the United States. JOB/GC/204/Rev.3
https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/Jobs/
GC/204R3.pdf&Open=True. Accessed 8 February 2022.
World Trade Organization Documents. (2020b). Statement on a mecha-
nism for developing, documenting and sharing practices and procedures in
the conduct of WTO disputes. https://docs.wto.org/dol2fe/Pages/FE_Sea
rch/FE_S_S009-DP.aspx?language=E&CatalogueIdList=263504. Accessed 8
February 2022.
World Trade Organization Documents. (2021). Waiver from certain provisions
of the TRIPS Agreement for the prevention, containment and treatment of
COVID-19 circulated at the request of the delegations of the African Group,
the Plurinational State of Bolivia, Egypt, Eswatini, Fiji, India, Indonesia,
Kenya, the LDC Group, Maldives, Mozambique, Mongolia, Namibia,
Pakistan, South Africa, Vanuatu, the Bolivarian Republic of Venezuela
50 S. POLASKI
and Zimbabwe. IP/C/W/669/Rev.1. https://docs.wto.org/dol2fe/Pages/

SS/directdoc.aspx?filename=q:/IP/C/W669R1.pdf&Open=True. Accessed 8
February 2022.
World Trade Organization. (2022). WTO Ministerial Decision on the TRIPS
Agreement Adopted on 17 June 2022. WT/MIN(22)/30 WT/L/1141.
https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/
MIN22/30.pdf&Open=True
Zhang, X., Corrie, B. P. (2018). History of foreign investment in China. In
X. Zhang, & B. P.Corrie (Eds.), Investing in China and Chinese investment
abroad. Springer. https://doi.org/10.1007/978-981-10-7983-2_1
CHAPTER 4
Regional Trade Agreements: A Hope

or a Threat to the Global Trade?
Vladimir Zuev
Regional Trade Agreements: Global

Trading System Radical Re-Shaking
In this section, we explore the growing role of the Regional Trade Agree-
ments (RTAs) for the international trading system. The analysis reveals the
fast-growing number of the regional agreements and a change in their
nature. As a result of recent developments, regionalism and regional inte-
gration have reached new heights in their evolution. The fast spread of
the RTAs does not lower down the necessity to reform the multilateral
trading system. Moreover, it helps to demonstrate the main avenues of
these reforms, increasing the chances to introduce them at the WTO
level. The RTAs legal framework becomes all the more important as a
policy decision determinant for the business community all around the
V. Zuev (B)
Higher School of Economics, Moscow, Russia
e-mail: vzuev@hse.ru

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_4
52 V. ZUEV
world, not alone in purely trade policy matters, but in many other trade
related issues.
Regionalisation—Regionalism—Regional Integration and Regional

Trade Agreements (RTAs)
The starting point of the analysis in this chapter is the concept of region-
alism as it embraces, but not exclusively resides in, the process of the
creation of the RTAs. Though quite recently, J. Bhagwati defined region-
alism as ‘preferential trade agreements among the subset of nations’
(Bhagwati, 1993). Such definitions belong to history, as today regionalism
is not only about trade.
There is a big variety of thinking on regionalism and we have to iden-
tify where we depart from. The broad understanding of the term ‘region’
in international relations is not linked to a geographical identity or terri-
torial proximity any longer. It used to be that way half a century ago.
A well-known definition of the region was given by J. Nye: ‘a limited
number of states linked together by a geographical relationship and by
a degree of mutual interdependence’ (Nye, 1971). For modern region-
alism, it does not matter whether the number of states is ‘limited’. As
experience reveals, regional agreements could embrace states both in small
and big numbers. ‘Geographical relationship’ could be a factor to facilitate
a regional agreement, but not necessarily, as many regional agreements are
formed by states from different geographical locations. ‘A degree of inter-
dependence’ was never defined by scholars. Thus, it could be high or low
and in case it was low, it never hampered reaching a regional agreement.
However, the narrow understanding of the term ‘region’ is still widely
used, e.g., in the World Trade Organization (WTO) RTAs database.
We understand Regionalism as a policy, as a specific gover-
nance response to the challenges of regionalization and globalization.
Concluding RTAs represent just the trade policy part of this response. The
logic of the current trends would suggest regionalism as a process leading
to globalization of regions, or even to a ‘regional world order’, or rather
to several ‘regional Worlds’ (Acharya, 2014). The process of regional-
ization could be pushed forward by any kind of links, i.e., economic,
political, and cultural between actors all over the globe, creating a new
political and economic geography, building up new, economic and polit-
ical regions, and arriving at a new level of interdependence. The number
4 REGIONAL TRADE AGREEMENTS … 53
of extra-regional RTA connections is roughly four times bigger than intra-

regional ones (WTO | Regional Trade Agreements, 2021a, 2021b), which
testifies that regionalism has become a global phenomenon.
Sorting out the understanding of the interrelated definitions, we
should bear in mind that most RTAs have been concluded in the form
of a Free Trade Area (FTA). An FTA breeds the first form of regional
economic integration, leading to another important definition, Regional
integration. Regional integration embodies more intensive interactions
compared to regionalization as the term integration has a deeper meaning
i.e., ‘bringing separate parts together’.
With this idea in mind, it will be appropriate to recall the study of B.
Balassa published 60 (!) years ago (Balassa, 1961). Anniversary is always
a good occasion to revise the major points of the theory. Can the validity
of this theory be questioned today, as the contemporary concept of a
‘region’ is interpreted very differently half a century from its inception?
The original concept of the Economic integration forms looked as
follows, in accordance with the criteria of the level of discrimination in
trade: (1) Free trade area, (2) Customs union, (3) Common market,
(4) Economic union and (5) Full economic integration. It looks like a
paradox, but despite the huge intensification of regional links, the theory
on the forms of regional economic integration is almost identical to what
it looked like 60 years ago, except for one thing. Balassa did not foresee
the creation of the Monetary Union. It is definitely a form of integra-
tion, but it was not mentioned in his classification. As a solution to this
inadequacy, the scholars started to refer to the Monetary Union jointly
with the Economic Union, by describing this form of integration as ‘Eco-
nomic and Monetary Union’. Some researchers perceived the Monetary
union as a specific form of an Economic union: ‘The extreme case of an
Economic Union could be a Monetary Union’ (Hosny, 2013). However,
the meaning of these terms is absolutely different. The Economic Union
refers to the coordination of macroeconomic policies, while the Mone-
tary Union suggests merging them together. Coordination lies only at the
starting point of unification. The unified monetary policy is miles away
from a ‘mere’ coordination of policies.
For me, it was a puzzle for a long time, why setting up any common
economic policy apart from the trade and monetary policy was not treated
as a form of economic integration. Let us remember that a common trade
policy was considered by Balassa and his followers as an important element
of the economic integration that made a difference between an FTA and
54 V. ZUEV
a Customs Union. Hence, a common trade policy stepped forward in the

classification of the forms of integration. If everybody accepts a common
trade policy as a step to integration, then, why not consider a common
agricultural or regional policy or any other common economic policy as
a form of integration? Creating a common policy is no less important for
the process of working out relationships between states than eliminating
barriers to trade. If we can agree on that, the classification would look
different.
The evolution of the forms of Economic integration, according to the
criteria of the level of discrimination in trade and the level of coordination
of policies could be presented as follows: (1) Free trade area, (2) Customs
union, (3) Common policy, (4) Common market, (5) Economic union,
(6) Single policy, Monetary Union and (7) Full economic integration. In
this renewed list of forms, apart from the added form of the common
policy, the case of the Monetary Union does also have a special meaning.
As we remember, before the Monetary Union was introduced, there was
another form of economic integration in the European Union (EU)—
the common monetary policy with the common monetary unit—The
European Currency Unit (ECU). We come to an important method-
ological point that allows us to distinguish between regional cooperation
(regionalism) and regional integration. Integration is not only about elim-
ination of barriers. The maturity of cooperation matters. States agreeing
to have their national policies coordinated to a certain extent does not
imply integration. Coordination happens everywhere in the world, even
between the states in a conflict. If states create something common, for
instance a common policy or a common institution, that is the first step
to integration. Out of something purely national, states manage to create
something common. However, they still could preserve their national
policies and institutions sovereign and intact. When states go further to
substitute national policies with single elements, for instance the intro-
duction of the Euro as a single European currency, only then a deep form
of integration manifests itself. As a result, national structures and policies
become merged, or integrated in a single whole, registering the peak of
the economic integration process.
Another important distinction that we have to take into account is the
demarcation line between a regional economic organization (RO) and
an RTA. An organization, whether regional or global, appears when its
member-states or other actors come to agreement upon a statute with a
set of rules, norms and procedures, fixed mechanism, and an institutional
structure with common goals to be achieved. Different RTAs could be

the building blocks within a regional organization. However, a regional
organization is a more developed structure than an RTA. A RO aims at
different levels of either formal cooperation like in the majority of inter-
national organizations, or setting up a more ambitious target, the one of
integration. With these basic definitions and concepts in mind, we can
move on forward to develop the topic of the role of the RTAs for the
international trading system.
The Growing Role of RTAs in International Trade

According to the WTO, more than 700 RTAs have been notified by 2021.
Around half of them (350) continue to be in force (WTO | Regional
Trade Agreements, 2021a, 2021b). The RTAs dynamics over the past
20 years shows that the number of registered RTAs has almost tripled,
and the number of RTAs in force—has doubled.
The push for the multiplication of the RTAs can be explained in many
ways. One factor—is the slow progress in trade liberalization at a global
level, which is being compensated for at a regional level. Another expla-
nation is that major economies are seeking reliable regional partners
to support themselves against increasing global competition. Regional
projects are also more feasible than global ones. It is more realistic to
find a common denominator at a regional rather than at a global level
between countries with different trade policies.
Reliance on the RTA is growing worldwide. All countries, even the big
ones conclude RTAs to support their trade activity (EU, United States
of America (USA), Canada, China, Russia, Japan). European countries
are the leaders in the RTAs creation. However, if we put North, South,
and Central America together, the total for the notified RTAs—165, will
be practically the same as for Europe—168. It is also of interest, if we
bring together countries from East Asia, West Asia and the Middle East,
we arrive to a figure—162 RTAs (WTO Secretariat/RTA Section 2021).
Hence, we come to a rather balanced global redistribution of the RTAs
between Europe, America, and Asia.
However, if we take a single trading entity, the EU will be an absolute
leader in the RTAs. In 2021, the EU participated in 49 such agree-
ments. About 3/4 of the EU foreign trade is conducted with the FTA
partner countries. Switzerland and Iceland signed 31 agreements. Other
leaders in RTAs are Norway (30 agreements), Chile (29), Liechtenstein
56 V. ZUEV
(29), Singapore (25), Mexico (22), Turkey (22), Peru (19), South Korea
(18), Ukraine (18), and Japan (17) (WTO | Regional Trade Agree-
ments, 2021a, 2021b). Numerous trade agreements between states from
different continents have formed an interconnected global network of
RTAs that are contributing to the creation of the new ‘global region-
alism’ (Zuev, 2020). This trend outlines the importance of participation
by any country in the process of the formation of FTAs networks.
Goals and forms and methods of regional interactions of states differ
to a great extent. Free trade area is the most widespread type of RTAs.
About 80% of all agreements are concluded in the form of an FTA. Most
frequently FTAs are covering trade in goods. However, since the start of
this century agreements on services are also on a fast rise. This tendency
reflects the growing role of services in international trade. It is not only
the number of the RTAs that is constantly growing. The share of trade
within and between RTAs is impressive and continues to be on an upward
trend.
The share of inner trade within the major regional organizations is not
necessarily high. In most cases, it is not even higher than trade with third
countries. Actually, only within the EU, inner trade is by far larger than
trade with third countries. We could suggest that the deeper the level
of integration within the organization, the higher the share of the inner
trade between members of this entity should be. A well-integrated unions
like the EU or the United States-Mexico-Canada Agreement (USMCA)
do have higher levels of inner trade. While a lower profile ROs, like
Common Market of the South, Mercado Común del Sur (MERCOSUR)
and the Eurasian Economic Union (EAEU) do have much lower shares
of inner trade. The Association of Southeast Asian Nations (ASEAN) is
placed in between, with a relatively low share of inner trade. The national
sovereignty remains much treasured for members of this RO. Hence,
the level of economic integration remains relatively low. There seems to
be a correlation between the degree of integration within the regional
organization (the highest, clearly, is in the EU) and the share of trade
within it (again, the largest share of inner trade is also within the EU).
But this first-glance correlation should be further proven. The counter-
argument to this statement could be the level of complementarity of the
economies of countries within the RO. Less complementary economies
in the ASEAN or within MERCOSUR do continue to rely more on the
extra-regional trade links.
Another interesting feature is that trade within the RTAs occurred to

be more resistant to economic crisis shocks than trade outside the RTAs,
including the Pandemic shocks. Our recent study showed that external
trade volumes for the EU, restored faster for those trade partners that had
an FTA with the EU, rather than for those that did not have any trade
agreement with the EU (Kalachyhin & Zuev, 2022). During COVID-19
crisis, some trade-restrictive measures have been adopted also within the
RTAs. But they were phased out faster using the mechanisms of interac-
tion within the RTA, and hence, the negative effect on trade was leveled
down sooner. In July 2020, public and private trade experts deliberated
on possible RTAs provisions that could complement national anti-crisis
trade policies (Shirotori et al., 2021). The search for the increased role
of the RTAs at a time of a crisis goes on, and RTAs may become a more
important anti-crisis instrument, eventually.
What is clear, is that the share of inner trade between members of
all major regional organizations is growing (shown in darker color in
Fig. 4.1). In the last decade, the largest increase in the share of inner
trade was registered within the EU, followed by the USMCA. Same trend
could be depicted for most RTAs partners. According to Eurostat, from
2015 to 2020, total EU trade growth with FTA partners was on average
2,5 times higher than with non-FTA partners (European Commission,
2021). A study for the EU RTAs, done in Sweden supports this thinking.
According to the findings, trade effect of EU RTAs increases with the
level of ambition in the agreement. EU custom unions (with Turkey,
San Marino, and Andorra) and single-market agreements (the Euro-
pean Economic Area (EEA), EU-Switzerland) increased trade by 111%
on average. By contrast, no impact was found for economic partner-
ship agreements with countries in Africa, the Pacific, and the Caribbean.
Earlier (1996–2010) EU free trade agreements (FTAs) increased trade by
20% on average, whereas post-2010 EU more ambitious FTAs increased
trade by 37% (Altenberg et al., 2019).
If on top of the inner trade within the leading ROs, we add the extra-
regional trade flows (between different countries having an FTA, between
countries and ROs with an FTA, and within the mega-trade deals), the
share of international trade that is channeled through different types of
RTAs will be, according to different estimates, around an impressive 70%!
It’s definitely appropriate to use the term ‘global’ in conjunction with
RTAs, as all countries at all the continents do conclude regional trade
agreements. RTAs and mega-RTAs connect America with Europe, Europe
58 V. ZUEV
2020 2012
Share of inner trade in total trade, %

80
70
60
50
40
30
20
10
0
EU USMCA ASEAN MERCOSUR EAEU
Fig. 4.1 Leading regional organizations by the share of inner trade in total
trade, 2012–2020 (Sources done by the author on the basis of calculations
from statistics on all five regional organizations. Obtained from: WITS [2021],
UN Comtrade Database [2021], EAEU [2021], Eurostat [2020], Leitner et al.
[2016])
with Asia, Asia with America. Multiple RTAs between countries from
different continents around the globe create an interconnected global
RTA network and could be considered as a basis for the new Global
regionalism.
RTAs Growing Maturity: Meeting Global Challenges, Becoming

Comprehensive and Sustainable
The hope to fill in the gaps in global trade regulation depends more
than ever before both on the expansion of the RTAs and especially on
the changes occurring in their substance. Elimination of barriers creates
common spaces by demolition of economic frontiers. Another way to a
common structure—to construct it anew. A distinctive feature of modern
RTAs is that they do contain this second way of building common
spaces by introducing common instruments, standards, and norms. The
old-time and well-established ROs, such as the EU, ASEAN, USMCA,
MERCOSUR, African Union, and others, do also have common insti-
tutions and policies. This form of the regional integration is widely
acknowledged. What can be regarded as a new trend, relates to the
extra-regional RTAs that are mostly done in the form of the FTAs. They
also provide for not alone elimination of different barriers to trade, but
for creation of common mechanisms of interaction. The nature of the
modern RTAs has become more extensive, embracing new areas and
disciplines, not fully covered by the WTO. This trend manifests the
growing role of the regional trade policy as a tool to meet the current
economic challenges. The examples are numerous: it could be setting up
a common legal framework for the protection of the Intellectual Prop-
erty Rights (IPR), or for the protection of investors rights; introducing
common technical and quality regulations, or labor and environment
standards; adhering to the competition laws; building up common dispute
settlement bodies or procedures. They also take care of e-trade, human
rights, small enterprises, cybersecurity, they respond to the energy tran-
sition, they take into account climate agenda (Haas, 2016). Intra and
extra-regional RTAs have become the strong driving power of modern
regionalism not just because they continue to abolish barriers to economic
interaction. Though it continues to be an important function of the
RTAs, as barriers that were not sufficiently treated previously, like the
Non-Tariff Barriers (NTB), started to be actively incorporated into the
newly formed RTAs. A notable change in the RTAs function is that they
turned out to be the drivers of the integration by building up common
mechanisms, policies, spaces, etc. in a positive stream of integration
activities.
Analyzing the contents of the recent RTAs, we see that most frequently
their chapters are devoted to such items as: services (in 64% of agreements
signed since 2001), e-commerce and digitalization (33%), movement of
people (50%), export restrictions (51%), environment (59%), competition
(71%; including rules on monopolies), intellectual property rights (72%),
transparency (80%), sanitary and phytosanitary measures (SPS—82%),
technical barriers to trade (82%), and investments (85%). The coverage of
trade related issues in the current RTAs is becoming more comprehensive,
embracing many new chapters and provisions.
Another change in the substance of the current RTAs is that they
are becoming SDG-focused. Almost all recent RTAs include at least
one reference to maintaining Sustainable Development Goals (SDGs).
RTAs frequently refer to the multilateral environmental agreements;
clean energy and waste management; policies which harm forests, water
resources and downgrade biodiversity; aim sustainable management and
rule-making procedures (WTO & UN Environment, 2018). Some trade
blocks do more to advance the Sustainable Development (SD) agenda.
60 V. ZUEV
For instance, the EU has included labor and environmental standards in

its FTAs with third countries for about 10–15 years already. Since FTA
with Korea in 2011, these have been included in a trade and sustain-
ability separate chapter. The European Union has also included a chapter
on Trade and Sustainable Development (TSD) in its latest trade agree-
ments. The EU-MERCOSUR mega-deal provides for a separate chapter
on the SDGs. According to the post-Brexit trade agreement with the
United Kingdom (UK), signed in 2020, parties can impose trade sanc-
tions in case levels of sustainability in trade are not sufficient. On February
18, 2021, the European Commission published a Trade policy review
(European Commission, 2021). The Commission plans reinforcing the
sustainability dimension of existing and future agreements, strengthening
the enforcement of trade and sustainable development commitments.
Hence, the sustainability is likely to become more enforceable through
the EU trade policy, including through the RTAs as its main instrument.
The sustainability provisions are also found in mega-trade agreements
such as the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership. To assist SDGs implementation in RTAs, the United Nations
(UN) Environment branch, has developed a Sustainability Toolkit for
Trade Negotiators as advisory services (WTO and UN Environment,
2018). The methods of environmental provisions in RTAs continue to
evolve. Bringing the environment and sustainable development into RTAs
has become a typical element of regional trade policy.
Digitization of the economy and trade has become another big issue
dealt with in the current RTAs. For instance, the reshaped USMCA
contains a set of digital rules and provisions, if compared with the former
North American Free Trade Agreement (NAFTA). The digitization has
been intensified since 2020 because of COVID-19. E-commerce was
expanding at a time of pandemic isolation. In 2019, the first Digital
Trade Agreement (DTA) was done by the United States (US) and Japan,
aimed at building up and regulating common digital trade framework.
E-commerce regulation is being provided for in many RTAs in the
form of specific provisions. By 2021, in the Asia–Pacific region three
DTAs were signed and one agreement was under negotiation. The first
trade agreement with a dedicated chapter on e-commerce was the New
Zealand-Singapore FTA signed in 2000. Within the last two years from
2019 to 2020, about half of all trade agreements (eight out of the 17)
included specific e-commerce provisions. That is a clear demonstration of
the growing role of the e-commerce regulation within the current RTAs.
At the start of 2021, there were 65 regional trade agreements in place

with e-commerce provisions (UN ESCAP, 2020).
Some RTAs include a dedicated chapter on electronic commerce, or
provisions on digital commerce in the chapter on IPR, or provisions
related to digital rights management, or to data protection and local-
ization. We can have an idea about the substance of the regulation in
this area by looking at the list of provisions included in the chapters
on e-commerce: electronic trade rules and market-access commitments,
facilitating digital trade; prerequisites for telecommunications services
provision; intellectual property rights protection; elimination of customs
duties on electronic trade; de minimis thresholds for low-cost parcels;
non-discrimination of digital imported products; the cross-border elec-
tronic transfer of information, data localization and cybersecurity; elec-
tronic authentication and e-signatures; paperless trading; e-invoicing;
e-payments; consumer protection; personal information protection; open
government data access; unified e-system the ‘single window’; usage of
source code for software; digital identities; standards and conformity
assessment for digital trade; rules for artificial intelligence in trade; dispute
settlement. Hence, this part of the regulation in the RTAs has become
virtually comprehensive.
On the other hand, many RTAs just reproduce the moratorium
reached within the WTO on customs duties for e-commerce transactions
and provide for cooperation between regulatory authorities without going
into any details. However, these arrangements within the RTAs may have
a special meaning for the trading system as if the multilateral moratorium
is not extended one day, there would be an RTA-level base for it. That
could be considered as a limited scope substitute. With the growing role
of digitalization, there are all the reasons to suggest that future RTAs
will be further oriented to various forms of regulation on trade in digital
goods and services, compared to traditional goods and services.
The leading economies became leaders in forming the current RTAs
agenda, bringing more items into it. It can be demonstrated by the
example of the EU, pushing forward the green agenda, being the leader
in environmental provisions incorporation into numerous RTAs. The
USA emphasizes RTAs rules on the protection of the intellectual prop-
erty rights that usually go beyond what is required by WTO. Many US
FTAs contained provisions related to digital rights management. Digital
provisions are frequently included into the RTAs upon the insistence
of the developed economies. The illustration is in a number of RTAs
62 V. ZUEV
between an advanced economy that insisted upon e-commerce provisions

as a condition for the agreement with less developed countries such as
with Cambodia, Georgia, Guatemala, India, Indonesia, and others. In
general, RTAs between advanced economies have a broader coverage and
a deeper penetration into the ways and means the topics are treated.
The EU concluded several RTAs with a chapter on trade in services
(telecommunications or financial services) and e-commerce (Wu, 2017).
All in all, we can conclude that recent RTAs do have a broader
and deeper coverage of different topics. In other words, their maturity
is growing. The current economic challenges are increasingly met by
the trade regulative response within the modern RTAs. The RTAs are
more focused not alone on trade liberalization, they start responding
to environmental, climate, digitalization, crisis management, and other
important concerns of the current economic agenda.
The RTAs and the Multilateral Trading System: Increased

Fragmentation and Protectionism or Continued Globalization
and Liberalization?
One core principle of the WTO trading system is non-discrimination.
However, RTAs are an exception to this rule. RTAs are somehow discrim-
inatory as only their signatories enjoy favorable market-access conditions,
put forward by these agreements. The partial solution to this problem is
the WTO notification procedure. In order to be recognized by the WTO,
a regional trade agreement has to be notified in a due way. It should aim
facilitating trade between its parties and should not raise trade barriers
vis-à-vis third-parties. From this perspective there is no formal conflict
between the RTAs multiplication and the multilateral trading system.
According to many scholars, regionalism is not opposed, but comple-
mentary to free trade. Especially after the concept of regionalism has been
transformed into a ‘new regionalism’ often referred to as an ‘open region-
alism’ (Laursen, 2003). However, with time, and at economic crisis times
and during the Pandemic, some RTAs become restrictive toward third
countries and it is not controlled in a due manner by any multilateral
institution. The WTO authority lies more in the sphere of monitoring
trade. It produces trade monitoring reports of its members and joint
reports together with the Organization for Economic Co-operation and
Development (OECD) and the United Nations Conference on Trade and
Development (UNCTAD) on trade and investment measures for G-20
economies. Trade policy reviews on individual countries and ROs are also
done. But in case of restrictions revealed, there are no sanctions.
The hope for the global trade regulation breakthrough lies and
depends more than ever both on the expansion of the RTAs and espe-
cially on the changes occurring in the coverage of areas of cooperation.
Modern RTAs are different from what they were only a decade ago. As we
have showed, they deal not only with lowering down tariffs and quantita-
tive restrictions on trade, but they go beyond that. This is what is called
‘WTO plus and WTO extra’ topics, which comprise non-tariff barriers,
intellectual property rights protection, public procurement, investment
regimes, ecology and environment protection and many others. These
issues are not dealt with to the same extent at a multilateral WTO level,
as it is difficult to reach a consensus between many members. However,
the absence of solutions at a multilateral level looks less a tragedy for
the global trade regulation as the number and the role of the RTAs is
constantly growing and the quality of the regulation advanced within
them is on a continuous upward trend. If we take digital trade, we find
that the RTAs number dealing with digital trade is moving to a hundred.
New international regulative frame originated and pushed forward by the
RTAs could be considered as a compensation for the absence of a compro-
mise at a multilateral level. The nature does not tolerate an empty space.
There is always something to fill it in. This is exactly the case for the
global and intra-regional trade regulation.
Having said this, does not mean there is no need for a progress in
trade regulation at the multilateral level. Even the global regionalism is
not sufficiently global to fully substitute the WTO multilateral framework.
Thus, countries will have to find a compromise for the reform of the
WTO (already in progress) to restore its authority to the benefit of the
re-shaken global trade regulation. According to OECD experts, services,
investment, transparency, and e-commerce are the areas that show the
most significant degree of similarity across different RTAs. Hence, these
particular areas are the first ones to create a common ground for speeding
up negotiations at the WTO level. A link RTA—WTO should operate this
way too.
Regionalism is working both ways. Regionalism and globalism could be
both opposing and complementary, counterbalancing or complementing
each other (Hettne, 2005). On the one hand, regionalism fills in the gaps
of the multilateral system, becoming more comprehensive and global.
Regions ‘are increasingly fundamental to the functioning of all aspects
64 V. ZUEV
of world affairs from trade to conflict management, and can even be said
to now constitute world order’ (Fawn, 2009). On the other hand, global
multilateral system is becoming fragmented in certain areas of governance
into more robust regional coalitions to deal with the current challenges
in a more effective way. ‘.. regions and regionalism are taking a quasi-
autonomous role in shaping global policies and in addressing issues..
previously tackled in the framework of global multilateral institutions’
(Barbieri, 2019). International trade is definitely the case illustrating such
a dual impact of regionalism by the fast spread of the RTAs.
Mega-Regional Trade Agreements (MRTAs) represent a new level of
RTAs’ development in terms both of the scope and the substance. They
are done between large and important trading partners, or between the
regional organizations (EU—MERCOSUR), or between a regional orga-
nization and a big economy (EU—Canada, EU—Japan). Mega-RTAs
follow the RTAs path by regulating a wider and more complex range
of issues. As R. Baldwin puts it, twentieth century RTAs were helping
to ‘sell things’ by reducing barriers for goods to cross borders, twenty-
first century RTAs (including mega-RTAs) are there to help ‘make things’
by enabling factories … to insert themselves into global value chains …
(Baldwin, 2014). Mega-RTAs represent another step forward in creating a
large base for common regulatory standards for investment and business
activities. They generate incentives for other states to become partners
with actors in a MRTA. Economies of scale working. Third countries
try to achieve compatibility with mega-RTAs rules, simplifying the access
to the large markets. The trend to create MRTAs has all the chances
to further intensify the process of multiplication of the standard RTAs.
Hence, the most likely scenario in the coming years is a follow up trend
of the new RTAs multiplication.
Does the trend of the RTAs multiplication lead to a fragmentation
in the international trading system? To a certain extent—yes. As benefits
of the newly created RTAs are only available to members. The focus of
scholars and the WTO was traditionally made upon the level of liberal-
ization of trade. If no extra-barriers to trade were created by the newly
formed RTA and some barriers were phased out within an RTA, that was
considered in accordance with the WTO rules. The logic was understand-
able: the overall level of liberalization of international trade was due to be
higher as a result of intensified liberalization within the regional parts of
the trading system. However, taking into account the focus of the current
RTAs—not so much on dismantling the barriers to trade but on building
up common spaces (see “Regional Trade Agreements: Global Trading

System Radical Re-Shaking” section of this chapter), the newly created
mechanisms will be available only to members of the RTA. It does not
formally confront the WTO rules. The more these common mechanisms
become important, the more they would lead to another kind of fragmen-
tation within the international trading system. This time fragmentation
could be not identified upon the level of liberalization of trade within the
global system, but it will emerge through a difference in the degree of
coordination of policies within the trading blocks and RTAs. The trick is
that the higher the level of coordination of policies, the more advantages
the countries will mutually enjoy from the system that provides opportu-
nities for such a coordination. And the WTO can’t do anything about it
but to further continue to accept the notifications of the incoming new
RTAs.
Many scholars may be worried on the prospects for a new phase of
fragmentation within the international trading system, the way they were
worried about the existing fragmentation in the levels of trade liberal-
ization. My guess is that contrary to these worries, the incoming ‘new’
fragmentation could bring about a hope for a progress at a multilateral
level within the WTO. It looks as a controversial statement: how could
yet another fragmentation in the global trading system bring back positive
developments into the multilateral trade negotiations?!
I suggest a following logic. ‘Defiant’ states could easily block multi-
lateral negotiations using or rather abusing the consensus rule within the
WTO. They can’t do that standing outside the RTAs, or belonging only
to a small number of RTAs. And RTAs are becoming the dominant rule-
makers within the international trading system. ‘Maverick’ states could
continue blocking consensus decisions within the WTO, but they can’t
do so within the multiple RTAs. And if these against-multilateral-trade-
solutions’ states are becoming increasingly marginalized, they should
normally loose motivation to continue blocking decisions within the
WTO, as the dominant part of trade will be handled anyway by a set
of rules within the growing RTAs network. Hence, there is a chance for
the multilateral trading system to rebecome solid the way it used to be.
The chances for the multilateral system renewal are strong with the RTAs
on a rise.
We demonstrated that RTAs have become a foundation for building
up the new global trading system with many new distinctive features.
66 V. ZUEV
This system was formed parallel to the existing multilateral framework.

However, it remains strongly linked to it in many various ways. RTAs are
guided by the WTO principles and apply its norms, being at the same
time a best practice case for the WTO and fostering multilateral trade
links in a particular way.
Acknowledgements for the assistance of the Faculty of the World Economy and
International Relations of the Higher School of Economics.
References
Acharya, A. (2014). Global International Relations (IR) and regional worlds: A
new agenda for international studies. International Studies Quarterly, 58(4),
647–659.
Altenberg, P., Berglund, I., Jägerstedt, H., Prawitz, C., Stålenheim, P., &
Tingvall, P. (2019). The Trade Effects of EU Regional Trade Agreements –
Evidence and Strategic Choices. https://www.kommerskollegium.se/global
assets/publikationer/rapporter/2019/publ-trade-effects-eu-rta.pdf. Accessed
15 November 2021.
Balassa, B. (1961). The theory of economic integration. G Allen & Unwin Ltd.
Baldwin, R. (2014). Multilateralising 21st century regionalism. OECD.
Barbieri, G. (2019). Regionalism, globalism and complexity: A stimulus towards
global IR? Third World Thematics: A TWQ Journal, 4(6), 424–441. https://
doi.org/10.1080/23802014.2019.1685406
Bhagwati, J. (1993). Regionalism and multilateralism: An overview. Trading
blocs: Alternative approaches to analyzing preferential trade agreements.
http://ctrc.sice.oas.org/trc/Articles/Regionalism/dm_ch2.pdf. Accessed 20
November 2021.
EAEU. (2021). EAEU Legal Portal. https://docs.eaeunion.org/en-us. Accessed
12 December 2021.
European Commission (2021) Communication: Trade Policy Review – An Open,
Sustainable and Assertive Trade Policy. COM(2021) 66 final.
Eurostat. (2020). Intra-EU trade in goods – Main features. https://ec.eur
opa.eu/eurostat/statistics-explained/index.php?oldid=452727. Accessed 12
December 2021.
Fawn, R. (Ed.). (2009). Globalizing the regional. Cambridge University Press,
Cambridge.
Haas, P. M. (2016). Regional environmental governance. In T. A. Börzel &
T. Risse (Eds.), The Oxford handbook of comparative regionalism (1st ed.,
pp. 430–456). Oxford University Press.
Hettne, B. (2005). Beyond the ‘New’ regionalism. New Political Economy, 10(4),
543–571.
Hosny, A. (2013). Theories of economic integration: A survey of the economic
and political literature. International Journal of Economy. Management and
Social Sciences, 2(5), 133–155.
Kalachyhin, H., & Zuev V. (2022). Role of EU RTA network and anti-crisis
measures in overcoming the effects of the pandemic. Current Problems of
Europe, 1, 126–150. https://doi.org/10.31249/ape/2022.01.05; https://
upe-journal.ru/article.php?id=695
Laursen, F. (2003). Comparative regional integration: Theoretical perspectives.
Ashgate.
Leitner, S.M., Marcias, M., Mirza, D., Pindyuk, O., Siedschlag, I., Stehrer, R., &
Stöllinger, S. Z. (2016). The Evolving Composition of Intra-EU Trade (No.
414). WIIW Research Report. https://wiiw.ac.at/the-evolving-composition-
of-intra-eu-trade-dlp-4059.pdf. Accessed 12 December 2021.
Nye, J. S. (1971). Peace in parts: Integration and conflict in regional organiza-
tion. Little, Brown.
Shirotori, M., Ito, T., Duval, Y., Du, R., & Marceau, G. (2021). Readying
regional trade agreements for future crises and pandemics. UNCTAD.
https://unctad.org/news/readying-regional-trade-agreements-future-crises-
and-pandemics. Accessed 15 November 2021.
UN Comtrade Database. (2021). https://comtrade.un.org/. Accessed 12
December 2021.
Under an FTA, member states cancel customs duties in mutual trade. In trade
with third countries, each member can maintain its own policies and apply
different customs tariffs.
UN ESCAP. (2020). Asia-Pacific trade and investment agreement database –
APTIAD. https://www.unescap.org/content/aptiad. Accessed 4 December
2020.
WITS. (2021). World Integrated Trade Solution. https://wits.worldbank.org/.
Accessed 12 December 2021.
WTO | Regional Trade Agreements. (2021a). https://rtais.wto.org/UI/Public
MaintainRTAHome.aspx. Accessed 2 December 2021.
WTO | Regional Trade Agreements. (2021b). RTAs in force. http://rtais.wto.
org/ui/PublicAllRTAList.aspx. Accessed 4 December 2021.
WTO Secretariat/RTA Section. (2021). FACTS&FIGURES Regional Trade
Agreements. https://www.wto.org/english/tratop_e/region_e/rtafactfig_e.
pdf. Accessed 5 December 2021.
WTO, UN Environment. (2018). Making Trade Work for the Environment,
Prosperity and Resilience. https://www.wto.org/english/res_e/publications_
e/unereport2018_e.pdf. Accessed 02 December 2021.
68 V. ZUEV
Wu, M. (2017), Digital Trade-Related Provisions in Regional Trade Agree-

ments: Existing Models and Lessons for the Multilateral Trade System.
RTA Exchange. International Centre for Trade and Sustainable Development
(ICTSD) and the Inter-American Development Bank (IDB), Geneva.
Zuev, V. (2020). International trade at a triple crossroads. In L. Grigoryev, A.
Pabst (Eds.), Global governance in transformation. Springer. https://doi.org/
10.1007/978-3-030-23092-0_12
CHAPTER 5
How Do Global Value Chains Challenge

Traditional International Business Policy?
Ari Van Assche
Introduction
Global value chains (GVC) have taken the policy world by storm (Gereffi,
2019). In the past decade, virtually all leading international organiza-
tions including the International Labor Organization, the Organization
of Economic Cooperation and Development, the United Nations Confer-
ence on Trade and Development, the World Bank, and the World Trade
Organization (WTO) have dedicated at least one flagship publication to
GVCs. The WTO has gone a step further by launching the “Made in the
World” initiative ten years ago to deepen the understanding of the role of
GVCs in international trade and their implications for the world economy.
Yet, despite the huge enthusiasm about the topic of GVCs in policy
circles, there remains substantial ambiguity how the adoption of GVC
thinking alters trade policy recommendations. Is it old wine in new bottles
A. Van Assche (B)

HEC Montréal, Montréal, Canada
e-mail: ari.van-assche@hec.ca

Switzerland AG 2022
https://doi.org/10.1007/978-3-031-13757-0_5
70 A. VAN ASSCHE
as some scholars have argued? Or does the reality of GVCs really lead to
new policy thoughts?
The goal of this chapter is to study these questions. In Sect. “Trifecta
of Tasks, Linkages, and Firms”, we discuss which new elements the GVC
framework brings to thinking about international trade by emphasizing
the role of the trifecta of tasks, linkages, and firms. In Sect. “The Trifecta’s
Influence on Trade Policy Narratives”, we then analyze how the enlarged
focus on this trifecta has influenced policy thinking in four leading trade
narratives in which GVCs play a central role. We use Sect. “Discussion
and Concluding Comments” to make some concluding comments about
the influence of GVCs on trade policy.
Trifecta of Tasks, Linkages, and Firms

Global value chains (GVCs) have revolutionized the way that production
processes are organized. Thanks to improvements in communication and
transportation technologies, companies have abandoned the practice of
producing goods or services entirely in a single country and within their
own organizational boundaries. Through offshoring and outsourcing,
they have sliced up their value chains and dispersed activities to locations
and actors where production can be conducted most efficiently.
In a recent article, Carlo Pietrobelli, Roberta Rabellotti, and I laid out
a framework that evaluates the impact of GVCs on our thinking about
international business policy (Pietrobelli et al., 2021). The main message
of the paper was that GVCs alter our reasoning about trade by elevating
the role of tasks, linkages, and firms. In this Sect., we briefly discuss how
GVCs have raised the importance of this trifecta. In the next section, we
then explain how the trifecta has influenced different narratives that relate
GVCs to public policy.
Tasks
The first novelty of the GVC framework is its shift of attention from
industries to tasks (or value chains stages). Traditionally, trade economists
and practitioners treated comparative advantage as a phenomenon that
drives countries to specialize in industries. This is because much of trade
theory is built on the “national production paradigm” whereby final
goods are considered tradable in world markets but production inputs are
non-tradable (Van Assche, 2017). The emergence of GVCs has shattered
5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 71
this paradigm by demonstrating that production processes are nowadays

globalized as well. This matters because it means that countries can partic-
ipate in a finer-grained international division of labor than was previously
considered. Countries no longer need to specialize in entire industries but
can rather “hyperspecialize” in those value chain stages or “tasks” of an
industry in which they have a comparative advantage (Grossman & Rossi-
Hansberg, 2008). Empirical evidence backs this up. Timmer et al. (2018),
for example, combined value-added trade data with occupational employ-
ment data to show that, within industries, developed countries specialize
in knowledge-intensive headquarter activities (e.g., R&D and marketing)
while despecializing in labor-intensive fabrication activities. In contrast,
developing countries predominantly specialize in fabrication activities.
The focus on tasks has redirected the attention toward the type of
tasks that generate most development opportunities. A highly influential
concept in this respect is the “smile of value creation.” It suggests that the
disproportionately high knowledge intensity of tasks at the two extremes
of the value chain (R&D upstream and marketing downstream) implies
that they capture a disproportionately high portion of the value added
generated in GVCs. In contrast, the low knowledge intensity of assembly
activities in the middle of the chain means that they generate little value
added, putting them at the bottom of the smile curve.
Recent studies have provided empirical support for this conceptualiza-
tion (Van Assche, 2020). Dedrick and Kraemer (2017) used teardown
reports to showcase the existence of “smile curves” in smartphone value
chains. Lead firms such as Apple, Huawei, and Samsung, which are
responsible for the R&D, product design and brand equity, captured
around one-third of total value added. Assembly activities in developing
countries only captured 3–4 percent of total value added. Rungi and Del
Prete (2018) uncovered a similar story in their analysis of the financial
data of two million European firms. After controlling for firm hetero-
geneity, they detected a U-shaped relationship between the value-added
content of a firm and its distance from final consumption.
The existence of the “smile of value creation” implies that countries
nowadays vie to increase their competitiveness in higher value-added
activities. Developed countries seek to develop policies that allow them
to maintain their position at the extremes of the smile curve while devel-
oping countries look for the optimal policy mix to move up the smile
curve.
72 A. VAN ASSCHE
Linkages
A second novelty that the GVC framework uncovers is the importance of
international production and knowledge linkages for a country’s perfor-
mance. In traditional trade thinking, international linkages were generally
ignored since companies were believed to concentrate their entire produc-
tion process within the same country (national production paradigm). For
firms that participate in GVCs, however, international linkages become
critical for performance. Collaborating with strong suppliers that can
produce components cheaper at a higher quality can boost domestic firms’
productivity while working with weaker foreign value chain partners can
stifle performance (Grossman & Rossi-Hansberg, 2008). Furthermore,
international linkages to foreign partners can act as a powerful conduit
for accessing foreign knowledge that can be leveraged to improve tech-
nological and operational capabilities (Ambos et al., 2021; Turkina & Van
Assche, 2018). Countries therefore seek to develop an optimal policy mix
that allows them to strengthen the benefits that international linkages
provide without making them too vulnerable to foreign shocks through
international linkages.
Firms
A third novelty of the GVC framework is that it highlights the impor-
tance of firms. GVC scholarship recognizes that the power in GVCs is
unequally distributed in the favor of lead firms which can determine the
terms and conditions of GVC participation for other firms (Dallas et al.,
2019). Lead firms have the power to impose the product, social or envi-
ronmental standards that GVC partners need to meet and can use various
types of carrots (e.g., knowledge transfer) and sticks (e.g., supplier exclu-
sion) to ensure that partners are in lockstep. An influential literature has
built on these ideas to discuss the importance of GVC governance for
economic and social upgrading (Barrientos et al., 2011; Gereffi et al.,
2005). Other studies have built on this power asymmetry argument to
call for lead firms to step up the plate and develop private governance to
upgrade local suppliers, ensure fair treatment of workers, adopt environ-
mentally sustainable business practices, and build resiliency (Van Assche &
Brandl, 2021).
The Trifecta’s Influence

on Trade Policy Narratives
How does the elevated role of tasks, linkages, and firms challenge tradi-
tional trade policy? In this section, we address this question by analyzing,
comparing, and contrasting the policy recommendations that arise from
four major policy narratives that have recently emerged related to GVCs:
The GVC participation narrative which focuses on the importance of
participating in GVCs to boost economic development; (2) the resilience
narrative that concentrates on GVCs’ impact on a country’s economic
resilience against global economic shocks; (3) the economic upgrading
narrative that focuses on the fastest pathways for countries to increase
their value capture in GVCs; and (4) the sustainability narrative that
focuses on improving local social and environmental conditions in GVCs.
GVC Participation Narrative

The GVC participation narrative is a perspective that is most closely
aligned to traditional trade thinking. As we will see, it enriches trade
theory by embracing the concept of tasks and linkages in GVCs, but it
also promotes neoliberal policies that are at the heart of conventional
trade policies. Because of the widespread support that the narrative enjoys
in many international organizations, it can also be called the establishment
narrative.
The starting point of the narrative is that countries increase their partic-
ipation in GVCs for reasons that are similar to those evoked in traditional
trade theory. According to this perspective, GVC participation primarily
strengthens economic development by allowing countries to “hyperspe-
cialize” in those tasks in which they have a comparative advantage, letting
domestic resources flow to their most productive use (Grossman & Rossi-
Hansberg, 2008). This is beneficial for developing countries which can
embark on a fast track to industrialization by allowing them to enter
GVCs through the concentration on simpler production stages that suit
their existing level of capabilities. It is also advantageous for developed
countries which can specialize in high-value-added tasks such as R&D
and marketing that generate more value capture.
Due to the establishment narrative’s focus on the benefits of deeper
international division of labor which is also at the heart of traditional
74 A. VAN ASSCHE
trade policy thinking, it proposes many of the same neoliberal poli-

cies that international organizations have traditionally embraced (World
Bank, 2019). Specifically, it emphasizes two policy pillars that aim to
strengthen the functioning of the market in the global trading system:
market-enabling policies and connectedness policies (Pietrobelli et al.,
2021).
Market-enabling policies address the market distortions that prevent
the allocation of private resources toward comparative advantage sectors
and value chain activities. Eliminating such market distortions is thus
considered instrumental to facilitating GVC participation and promoting
a country’s functional specialization in those GVC activities in which a
country has a latent comparative advantage.
Connectedness policies aim at improving GVC participation by
reducing the cost for local firms to receive or transmit goods and informa-
tion across borders, thus turning them into more attractive GVC partners.
On the goods side, this includes trade liberalizing policies such as the
elimination of tariff and non-tariff barriers as well as policies aimed at the
introduction of competition in transport services and at the improvement
of port structure and governance. On the information side, there are poli-
cies that strengthen companies’ ability to transfer data cheaply, freely, and
safely across borders, such as those aimed at fostering competition in the
telecommunications sector and at improving the quality of the wireless
network infrastructure.
The recognition of the sequential nature of linkages in GVCs has
nonetheless led to new neoliberal policies that go beyond traditional
policy. For example, the recognition that the same component may cross
borders multiple times as it journeys along a GVC implies that the
elimination of downstream trade restrictions in GVCs can substantially
boost the participation of upstream producers in GVCs. This logic is
at the basis of the “Global Value Chains for Least Developed Coun-
tries (LDCs)” initiative that I recently promoted with Gary Gereffi and
Stephanie Barrientos in an open letter to the Director General of the
World Trade Organization (WTO) (Van Assche et al., 2021). Under
this Initiative, WTO members would complement existing preferential
schemes based on “direct” LDC exports with a multilateral scheme that
would extend a proportional duty-free treatment to the LDC value-added
that is incorporated in exports across the globe. Hence, LDC value-added
exports would remain duty-free throughout their journey along global
and regional value chains, thus offering firms and workers in LDCs the
needed additional support to participate in global trade.
For instance, consider the case of mangos exported by LDCs.
Currently, such products are offered duty and quota-free in certain
preferential schemes for LDCs (e.g., the EU’s Everything but Arms
program). But if the LDC mango is embedded in the destination coun-
try’s processed-food export (e.g., yogurt or ice cream) which faces a 15%
most-favored-nation tariff, the LDC mangos are also indirectly subject
to this tariff. Under the “GVCs for LDCs” initiative, the domestic value
added of the LDC mango will be deducted from the dutiable value of
the processed food items, leading to a boost to LDCs exports of mangos
along the supply chain. A similar positive trade effect would arise for non-
agricultural products (e.g., copper, aluminum, cotton) and manufacturing
products (e.g., apparel and textiles).
Antimiani and Cernat (2021) estimate that the “GVCs for LDCs”
initiative will increase the value-added embodied in LDC exports by
more than US$5 billion on an annual basis, with textiles, metal prod-
ucts, and other primary goods showing the biggest gains. On average,
LDCs would see their domestic value-added content in exports increase
by two percent and move away from excessive specialization in agri-food
production toward the supply of intermediate manufacturing inputs.
GVC Resilience Narrative

A second narrative that has been front-and-center in recent policy discus-
sions is the GVC resilience narrative. In the face of the Great Recession
of 2008–2009 and the COVID-19 pandemic, many trade sceptics have
clamored that hyperspecialization is endangering countries’ ability to
ensure the supply of essential goods and to develop a resilient economic
system. Proponents of the resilience narrative, then again, have pushed
back against these views by countering that GVCs have in the past
played a central role in building economic resilience and that they need
to be further embraced to build a more robust economic system (Van
Assche, 2021). In this section, we will briefly discuss these two contrasting
viewpoints and identify what new policy recommendations the resilience
narrative generates.
In today’s globally interconnected economies where international link-
ages are prevalent, a disruption in one part of the global economic system
76 A. VAN ASSCHE
can propagate to other countries through GVC linkages (Miroudot,

2020). Recent history provides us with numerous examples. During the
Great Recession of 2008–2009, negative liquidity shocks in one country
caused a chain reaction of financial difficulties throughout GVCs as firms
relied on each other for credit (Bems et al., 2013). In the aftermath of
the 2011 Tohoku earthquake and tsunami, the production of Japanese
automotive and electronics components dried up, creating supply chain
disruptions that affected the price and availability of cars and computers
around the world (Escaith et al., 2011). In the early months of the
COVID-19 pandemic, confinement efforts in China led to the closure
of factories across the globe as companies could not access parts.
These events—combined with recent shortages in essential goods and
supply chain disruptions—have raised the concern among trade scep-
tics that hyperspecialization has overly heightened countries’ reliance on
foreign suppliers and GVCs, thus endangering governments’ ability to
deliver societal well-being. Assertions have been made that GVCs had
become too complex and that they were not designed to operate in
today’s turbulent geopolitical landscape. Calls have therefore become
increasingly loud for GVC-curtailing policies that would make countries
more resilient to global economic shocks through reshoring.
Proponents of the resilience narrative have pushed back against these
arguments by pointing out that the link between GVCs and resilience is
more complicated than trade sceptics portray (Miroudot, 2020). While
it is true that GVCs increase a country’s exposure to foreign shocks, it
also reduces a country’s vulnerability to local disasters. Building a truly
resilient economic system thus requires supply sources to be sufficiently
diversified both between domestic and international suppliers and across
countries, and GVCs play an important role in this (Miroudot, 2020).
Policies that promote reshoring and “buy local” can in this respect be
detrimental by both reducing resiliency and increasing procurement costs
(OECD, 2021a).
Advocates of the resilience narrative instead focus on policy instru-
ments that can help countries strengthen the resilience of the supply of
essential goods without curtailing GVCs (OECD, 2021b). First, they call
for governments to build more slack in the system through domestic
stockpiling so that unforeseen future shocks can be better managed.
Second, they call for heightened government collaboration with the
private sector to promote standards of risk management that reduce the
perils of supply chain disruptions. This may include mandates for GVC
lead firms in essential goods sectors to develop due diligence strategies

that strengthen awareness, transparency, accountability, and agility. Third,
they call for increased international regulatory co-operation with like-
minded countries to ensure resilient GVCs by reinforcing predictable,
rules-based trade and avoiding unilateral or retaliatory trade measures.
Through cooperation with the private sector and other countries, it is
believed that governments can incite companies to build GVCs that can
ensure resilient supply chains in essential goods.
It is important to point out that the focus on mandated due diligence
strategies is a policy recommendation that builds squarely onto the GVC
framework’s focus on firms. By imposing due diligence principles onto
GVC lead firms in essential goods sectors, governments are imposing a
heightened responsibility on lead firms to develop terms and conditions
for GVC participation that will build resilience, thus ensuring that the
private sector meets broader government expectations.
Value Capture Narrative

The value capture narrative pushes the trade policy discussion further
away from the neoliberal trade policies of the past (Gereffi, 2019). While
this narrative recognizes that GVC participation is an important ingre-
dient for economic development, it cautions that market and coordination
failures often prevent market forces from moving countries to activi-
ties that lead to higher value capture (Pietrobelli & Staritz, 2018). It
therefore advocates that governments should adopt more interventionist
trade policies to ensure a stronger nexus between GVC participation
and industrialization through structural transformation (Pietrobelli et al.,
2021).
The starting argument of the economic upgrading narrative is that
moving up the smile curve is key to economic development and that inter-
national linkages play a central role in doing so. Suppliers’ international
linkages with global lead firms provide access to knowledge that helps
them build the necessary capabilities to move into higher value-added
activities (Gereffi et al., 2005; Morrison et al., 2008). This linkage-
induced economic upgrading can take on different forms: product and
process upgrading, which implies moving vertically along the value chain
to better products or processes as well as the more challenging func-
tional and interchain upgrading, entailing horizontal movement toward
78 A. VAN ASSCHE
new functions or new markets (Humphrey & Schmitz, 2002). A range

of empirical studies have used this upgrading typology to analyze how
GVC participation may trigger economic development, including Bair
and Gereffi’s (2001) study of the apparel cluster in Torreon, Mexico and
Van Assche and Van Biesebroeck’s (2018) study of the export processing
regime in China.
A key talking point of the economic upgrading narrative is that a
supplier’s ability to economically upgrade depends on both the gover-
nance structure of the lead firm (Schmitz & Knorringa, 2000) and the
absorptive capacity of the supplier (Sako & Zylberberg, 2019). First,
governance structure matters. Lead firms are generally willing to tolerate
or even support innovation by their suppliers along the dimensions of
quality, flexibility, and productivity if it helps strengthen the complemen-
tarities between the two value chain partners. In contrast, lead firms may
discourage and even hinder the acquisition of technological capabilities by
its suppliers if in the future this type of innovation risks to encroach on the
lead firm’s core competence. In this respect, the GVC governance litera-
ture has focused on how different patterns of governance may enhance or
hinder different types of economic upgrading, which are themselves often
the result of learning and innovation activities (Schmitz & Knorringa,
2000).
Second, absorptive capacity matters (Sako & Zylberberg, 2019). The
quality of linkage-induced learning depends on local firms’ ability to
absorb, master, and adapt the knowledge and capabilities that lead firms
transfer to them (Morrison et al., 2008). These firm-level processes are
often lacking in developing countries, where firms have low R&D and
innovation capabilities.
Building on these arguments, proponents of the value capture narra-
tive advocate that governments should develop a more interventionist
trade policy stance to boost economic upgrading, with vertical policies
focusing on specific sectors and even firms that can lead to more rapid
economic upgrading. Instead of advocating for market-enabling poli-
cies, they promote greater selectivity in building absorptive capacities
and harnessing governance structures that can lead to stronger economic
upgrading toward high value-added activities (Lee, 2013).
Sustainability Narrative
The sustainability narrative similarly promotes policies that are more
interventionist and focus on leveraging the power of lead firms. A
central argument in the sustainability narrative is that GVC participa-
tion, resiliency building, and economic upgrading do not automatically
foster social and environmental upgrading along the GVC. Even if
they create significant economic progress, the benefits often leave many
behind (Lund-Thomsen & Lindgreen, 2014) and lead to environmental
degradation (De Marchi et al., 2019). Barrientos et al. (2011) show
that economic upgrading can, but does not necessarily, lead to social
upgrading which implies accessing better work and enhancing working
conditions, protection, and rights. Similarly, there could be tensions
between economic and environmental upgrading, defined as any change
in the value chain resulting in the reduction of firms’ ecological footprint,
such as in their impact on greenhouse gas emissions, on biodiversity losses
and on natural resources overexploitation (De Marchi et al., 2019).
At the same time, there is a growing acknowledgment that lead firms—
if properly harnessed—can be a powerful vector to promote social and
environmental upgrading. As we have seen, lead firms have the corpo-
rate power to define the terms and conditions of GVC membership and
can use their authority to promote social standards and environmental
stewardship among their suppliers (Van Assche & Brandl, 2021). This
compliance can cascade down to lower tier suppliers if GVC participa-
tion is made conditional on promoting sustainability standards further
down the chain (Narula, 2019). Distelhorst and Locke (2018) find that
firms reward suppliers for complying with social standards, supporting the
notion that lead firms can play a key role in promoting social upgrading.
The ability of lead firms to dictate the terms under which lower-level
actors operate in a GVC has led to a vibrant academic debate about
the role of private governance in filling gaps in global regulation. Many
MNEs have implemented corporate social responsibility initiatives in their
supply chains as a way of independently regulating labor issues, including
the establishment of codes of conduct and the implementation of third-
party monitoring of working and environmental conditions. While several
scholars have pointed out the positive role that private governance can
play in addressing market failures that public governance has difficulties
80 A. VAN ASSCHE
tackling (Scherer & Palazzo, 2011), others have warned that it is rela-
tively ineffective (Locke et al., 2009) and may weaken state regulation
and create parallel regulatory systems (Rossi, 2019).
For this reason, proponents of the GVC sustainability narrative have
called for policies targeting lead firms that can more effectively incen-
tivize them to promote sustainability along GVCs. One instrument that
can be used in this regard is the use of social and environmental standards
in public procurement practices. The 2014 EU Procurement Directives,
for example, includes several far-reaching regulatory features that facili-
tate the monitoring of the respect for human rights and labor standards
of contractors and subcontractors across borders. Another is the develop-
ment of guidelines to which multinational firms need to abide in specific
industries. The OECD Due Diligence Guidance, for example, provides
detailed recommendations to help companies respect human rights and
avoid contributing to conflict through their mineral purchasing decisions
and practices.
Discussion and Concluding Comments

GVCs are challenging traditional trade policies by putting the spotlight
on the trifecta of tasks, linkages, and firms in trade policy development.
Tasks matter because countries nowadays hyperspecialize in slivers of
value chains—tasks—instead of entire industries. Proponents of the GVC
participation narrative argue that a country should rely on neoliberal trade
policies to benefit from hyperspecialization since it allows the country to
functionally specialization in those tasks that are in line with the country’s
latent comparative advantage, boosting economic development. Advo-
cates of the value capture narrative suggest that more interventionist trade
policies are needed to facilitate countries’ economic upgrading into higher
value-added activities.
International linkages matter because a country’s trade performance
nowadays is heavily influenced by its firms’ linkages with foreign value
chain partners. Proponents of the GVC participation narrative suggest
that these international linkages can generate an additional productivity
and knowledge boost to domestic firms and thus promote further hyper-
specialization through neoliberal policies. Advocates of the GVC value
capture narrative point towards the importance of linkage-induces knowl-
edge spillovers for economic upgrading and call for interventionist policies
that can help strengthen developing-country firms’ absorptive capacity
and the amount of knowledge that lead firms transfer to these firms.
Proponents of the GVC resilience narrative point toward the importance
of diversified supply bases to ensure the resilience of GVCs in essential
goods industries and call for international cooperation to achieve this.
Firms matter because GVC lead firms have the power to set the terms
and conditions of supplier participation in GVCs. Proponents of the GVC
resilience narrative build on this argument to call for governments to
mandate due diligence principles related to resilience so that lead firms
can use their power to make their supply bases more resilient. Propo-
nents of the GVC sustainability narrative make similar arguments to push
governments to mandate due diligence principles that can promote social
standards and environmental stewardship along GVCs.
Taken together, these insights show that GVCs have created a new
global trade reality that require a systemic redesign of trade policies. At
the same time, the differential and sometimes opposing policy recommen-
dations across the various narratives also highlights the need to develop
a more integrative way of thinking about the complex phenomenon of
GVCs and its interaction with public policy.
References
Ambos, B., Brandl, K., Perri, A., Scalera, V. G., & Van Assche, A. (2021). The
nature of innovation in global value chains. Journal of World Business, 56(4),
101221.
Bair, J., & Gereffi, G. (2001). Local clusters in global chains: The causes and
consequences of export dynamism in Torreon’s blue jeans industry. World
Development, 29(11), 1885–1903.
Barrientos, S., Gereffi, G., & Rossi, A. (2011). Economic and social upgrading
in global production networks: A new paradigm for a changing world.
International Labour Review, 150(3–4), 319–340.
Bems, R., Johnson, R. C., & Yi, K. M. (2013). The great trade collapse. Annual
Revue of Economics, 5(1), 375–400.
Cernat, L., & Antimiani, A. (2021). Untapping the full development potential
of trade along global supply chains: ‘GVCs for LDCs’ proposal. Journal of
World Trade, 55(5), 697–714.
Dallas, M. P., Ponte, S., & Sturgeon, T. J. (2019). Power in global value chains.
Review of International Political Economy, 26(4), 666–694.
Dedrick, J., & Kraemer, K. L. (2017). Intangible assets and value capture in
global value chains: The smartphone industry (Vol. 41). WIPO.
82 A. VAN ASSCHE
De Marchi, V., Di Maria, E., Krishnan, A., & Ponte, S. (2019). Environmental
upgrading in global value chains. In G. Gereffi, S. Ponte, & G. Raj-Rechert
(Eds.), Handbook on global value chains (pp. 310–323). Edward Elgar.
Distelhorst, G., & Locke, R. M. (2018). Does compliance pay? Social standards
and firm-level trade. American Journal of Political Science, 62(3), 695–711.
Escaith, H., Keck, A., Nee, C., & Teh, R. (2011). Japan’s earthquake and
tsunami: International trade and global supply chain impacts. VoxEU.org,
April, 28.
Gereffi, G. (2019). Global value chains and international development policy:
Bringing firms, networks and policy-engaged scholarship back in. Journal of
International Business Policy, 2(3), 195–210.
Gereffi, G. (2020). What does the COVID-19 pandemic teach us about global
value chains? The case of medical supplies. Journal of International Business
Policy, 3(3), 287–301.
Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global
value chains. Review of International Political Economy, 12(1), 78–104.
Grossman, G. M., & Rossi-Hansberg, E. (2008). Trading tasks: A simple theory
of offshoring. American Economic Review, 98(5), 1978–1997.
Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains
affect upgrading in industrial clusters? Regional Studies, 36(9), 1017–1027.
Lee, K. (2013). Capability failure and industrial policy to move beyond the
middle- income trap: From trade-based to technology-based specialization.
In J. E. Stiglitz and J. Y. Lin (Eds.), The industrial policy revolution I: The
role of government beyond odeology (pp. 244–272). Palgrave Macmillan.
Locke, R., Amengual, M., & Mangla, A. (2009). Virtue out of necessity? Compli-
ance, commitment, and the improvement of labor conditions in global supply
chains. Politics & Society, 37 (3), 319–351.
Lund-Thomsen, P., & Lindgreen, A. (2014). Corporate social responsibility in
global value chains: Where are we now and where are we going? Journal of
Business Ethics, 123(1), 11–22.
Miroudot, S. (2020). Reshaping the policy debate on the implications of
COVID-19 for global supply chains. Journal of International Business Policy,
3(4), 430–442.
Narula, R. (2019). Enforcing higher labor standards within developing country
value chains: Consequences for MNEs and informal actors in a dual economy.
Journal of International Business Studies, 50(9), 1622–1635.
OECD. (2021a). Shocks, risks and global value chains: Insights from the OECD
METRO Model. http://www.oecd.org/trade/documents/shocks-risks-gvc-
insights-oecd-metro-model.pdf
OECD. (2021b). Fostering economic resilience in a world of open and integrated

markets: Risks, vulnerabilities, and areas of policy action. https://www.
oecd.org/newsroom/OECD-G7-Report-Fostering-Economic-Resilience-in-
a-World-of-Open-and-Integrated-Markets.pdf
Morrison, A., Pietrobelli, C., & Rabellotti, R. (2008). Global value chains and
technological capabilities: A framework to study learning and innovation in
developing countries. Oxford Development Studies, 36(1), 39–58.
Pietrobelli, C., Rabellotti, R., & Van Assche, A. (2021). Making sense of global
value chain-oriented policies: The trifecta of tasks, linkages, and firms. Journal
of International Business Policy, 4(3), 327–346.
Pietrobelli, C., & Staritz, C. (2018). Upgrading, interactive learning, and
innovation systems in value chain interventions. The European Journal of
Development Research, 30(3), 557–574.
Rossi, A. (2019). Applying the GVC framework to policy: The ILO experience.
Journal of International Business Policy, 2(3), 211–216.
Rungi, A., & Del Prete, D. (2018). The smile curve at the firm level: Where
value is added along supply chains. Economics Letters, 164, 38–42.
Sako, M., & Zylberberg, E. (2019). Supplier strategy in global value chains:
Shaping governance and profiting from upgrading. Socio-Economic Review,
17 (3), 687–707.
Schmitz, H., & Knorringa, P. (2000). Learning from global buyers. Journal of
Development Studies, 37 (2), 177–205.
Scherer, A. G., & Palazzo, G. (2011). The new political role of business in a
globalized world: A review of a new perspective on CSR and its implications
for the firm, governance, and democracy. Journal of Management Studies,
48(4), 899–931.
Timmer, M. P., Miroudot, S., & de Vries, G. J. (2019). Functional specialisation
in trade. Journal of Economic Geography, 19(1), 1–30.
Turkina, E., & Van Assche, A. (2018). Global connectedness and local innovation
in industrial clusters. Journal of International Business Studies, 49(6), 706–
728.
Van Assche, A. (2017). Global value chains and the rise of a global supply chain
mindset. In S. Tapp, A. Van Assche, and R. Wolfe (Eds.), Redesigning Cana-
dian trade policies for new global realities (pp. 183–208). McGill Queen’s
University Press.
Van Assche, A. (2020). Trade, investment and intangibles: The ABCs of global
value chain-oriented policies (No. 242). OECD Publishing.
Van Assche, A. (2021). Shortages in essential goods: Are global value chains part
of the problem or the solution? The School of Public Policy Publications, 14.
Van Assche, A., & Brandl, K. (2021). Harnessing power within global value
chains for sustainable development. Transnational Corporations Journal,
28(3), 135–146.
84 A. VAN ASSCHE
Van Assche, A., Gereffi, G., & Barrientos, S. (2021). Global value
chains for least developed countries: A letter to WTO Ngozi Okonjo-
Iweala. https://igs.duke.edu/news/global-value-chains-least-developed-cou
ntries-letter-wto-ngozi-okonjo-iweala
Van Assche, A., & Van Biesebroeck, J. (2018). Functional upgrading in China’s
export processing sector. China Economic Review, 47 , 245–262.
World Bank. (2019). Trading for development in the age of global value chains
(World Development Report 2020) World Bank.

SPLIT ONE - (International Political Economy Series) Anna Karhu, Eini Haaja - Global Trade and Trade

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SPLIT ONE - (International Political Economy Series) Anna Karhu, Eini Haaja - Global Trade and Trade

Uploaded by

Copyright:

Available Formats

Anna Karhu · Eini Haaja

Part I Development of Global Trade and Trade

Part II Disruptions of Global Trade

7 Post-brexit Trade Policy and Its Impact on United

Part III Trade Policy for Futures

AAs Association Agreements

IPR Intellectual Property Rights

Fig. 1.1 The emergence of trade policy research themes in IB

Table 6.1 U.S.–Japan Bilateral trade balance (US$billion), various

Development of Global Trade and Trade

Lessons from Trade Policy Research

Anna Karhu and Eini Haaja

A. Karhu (B) · E. Haaja

© The Author(s), under exclusive license to Springer Nature 3

national autonomy. While these phenomena are directly addressed at the

Development of Trade Policy as a Research Topic

Trade Liberalisation and the New MNEs

identified three general actor groups to organise this: government, the

domestic sources of trade policy (e.g. Katzenstein, 1977) and interna-

coping strategies as managerial risk, country risk ratings, corporate struc-

The Globalisation of Free Trade and Rising New Markets

change in the business environment as a result of the actions of busi-

over recent decades, whereby the multitude of themes covered in inter-

Human rights Sustainability Democracy

Global value chains MNEs as

MNEs and Corporate political MNE socio-political

Efficiency International Benefits of

Fig. 1.1 The emergence of trade policy research themes in IB studies

Drucker, P. F. (1974). Multinationals and developing countries: Myths and

Global Trade Policy Regimes and Previous

Crises as Drivers of Regime Change

© The Author(s), under exclusive license to Springer Nature 19

other means, such as military force, to achieve political and economic

of regional integration such as the European Union (Keohane, 1984;

From Free Trade to Protectionism

of tariffs accelerated in the European and North American economies

the shift from free trade to protectionism aiming at self-sufficiency in

Trade Liberalization in the West, 1947–1980

Globalizing Free Trade from 1980s

Disruptions of Global Trade

WTO in a Changing Geopolitical

© The Author(s), under exclusive license to Springer Nature 33

The Birth of the WTO---An Institution

A Strong New Institution---But One

of negotiations in Seattle led to the famous “battle in Seattle” in which a

China’s Accession to the WTO,

6 Mexico concluded bilateral negotiations on market access with China on 13 September

The Creators Grow Disillusioned;

in the Trump administration the US vetoed the appointment of appel-

Farge, 2021). A modest compromise was agreed by trade ministers at

Possible Futures for the WTO as It

interventions necessitated by the pandemic and current supply chain fail-

Lüthi, L. M. (2020). The end of the superpower cold war. In L. M. Lüthi

and Zimbabwe. IP/C/W/669/Rev.1. https://docs.wto.org/dol2fe/Pages/

Regional Trade Agreements: A Hope

Regional Trade Agreements: Global

© The Author(s), under exclusive license to Springer Nature 51

Regionalisation—Regionalism—Regional Integration and Regional

of extra-regional RTA connections is roughly four times bigger than intra-

a Customs Union. Hence, a common trade policy stepped forward in the

structure with common goals to be achieved. Different RTAs could be

The Growing Role of RTAs in International Trade

Another interesting feature is that trade within the RTAs occurred to