II. History of international economic law Thomas Müller

1. 1. Globalization and international economic law 2. Theories: in particular Neoliberalism 3. Two pillars: GATT and the System of Bretton Woods II. History of international economic lawThomas Müller

2. 1. Globalization and international economic law 1.1. What is globalization? • Multifaceted – not fully understood • Globalization: (Economic, social, cultural, political, technological) process by which the people of the world are unified into a single society and functioning together. • Economic globalization: integration of national economies into the international economy through trade (esp breaking down of artificial barriers), general capital flows, esp foreign direct investment, migration and the spread of technology and know-how. Possible emergence of a global marketplace or a single world market (Neoliberalism). It is just onepillar of the globalization process (but an important one). • Economic globalisation affects people everywhere and in many aspects of life (jobs, food, health, education, leisure time, prices of goods and services) • Economic globalisation is not unprecedented – 19th century till WW I.

3. 1.2. Economic integration andspill over • See preambles, F 1 • Economic integration leads also to political integration (spill over). Strategy of European and international integration (but see also the political integration UNO) • Economic integration leads to welfare, it is also an instrument e.g. to halve poverty and eridicate hunger • Conclusio 1: Economic integration is not the main goal • Conclusio 2: Economic globalization has to be managed and regulated at the international level to reach overruling goals.

4. 1.3. Technology and Liberalisation: Main forces of economic integration • Technology makes integration feasible; Liberalisation of trade and foreign direct investment make it happen • Technology: Transport, Communication and Information, Computing (see examples Bossche, 4 f) • Liberalisation: Most developed countries have lowered barriers to trade and capital over the last 60 years • Postive effects: Access and Democratisation of technology, finance and information (Internet!) • Negative effects: Marketization (receding governments, deregulation, shrinking of social obligations) and external costs

5. See also F 2 Growth in the volume of world merchandise trade by selected region, 2000-2006 © WTO Exports Imports 2000-06 2005 2006 2000-06 2005 2006 5 7 8 World 5 7 8 3 6 8 North America 5 6 6 6 8 3 South and Central America 6 14 14 4 4 7 Europe 4 4 7 4 4 7 European Union (25) 3 4 7 8 4 6 Commonwealth of Independent States (CIS) 17 18 21 10 11 13 Asia 9 8 9 6 5 10 Japan 3 2 3 8 8 11 Six East Asian traders Hong Kong, China; Malaysia; Republic of Korea; Singapore; Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Taipei, Chinese) and Thailand 6 6 8

6. ©http://www.globalpolicy.org

7. Example: China • „One of the key elements of China´s economic reform process has been the encouragement of foreign direct investment. Since late 1970s, China has gradually opened its economy for foreign businesses and has attracted large amount of direct foreign investment. At the same time, China’s policies toward FDI have also experienced various changes on their policy priorities.“ (Fung et al, Foreign Direct Investment in China: Policy, Trend and Impact [2002], 3) • 1979: The Law of the People´s Republic of China on Joint-Ventures using Chinese and Foreign Investment was adopted, granting foreign investment a legal status in China • Since 1980: setting up Special Economic Zones (SEZs) • 1982: The decision to open up China to the world economy was formally included in the 1982 state constitution adopted by the Sixth National People´s Congress. • 1986: Provisions of the State Council of the People´s Republic of China for the Encouragement of Foreign Investment (preferential tax treatment, freedom to import inputs such as materials and equipment, right to retain and swap foreign exchange with each other, simpler licensing procedures, autonomy of joint ventures from external bureaucratic interference, privileged access to supplies of water, electricity and transportation, etc) • …. And more….

8. 1.4. Economic integration and international economic law • International economic law exists since countries/states trade goods • International law depends on the emergence of modern state • Modern state: natural law 16 th century provided the basis for the diplomatic conference system and absolutist state-formation – Autonomy/Souvereignity - Mercantilism • Basis for international economic law is thus the national foreign trade legislation • Competences are shifted to international/supranational bodies in the 20th century and international law grows concurrently to economic globalisation – Antithesis to absolute Autonomy/Souvereignity

9. 1.5. International economic law • Rules concerning the behavior of legal persons participating in cross border trade (including capital and services) • Conventions, common law, principles of law, international law resolutions, supranational law and national foreign trade legislation • „Legislative bodies“ on national, regional and international basis

10. Rule-based system of human institutions is essential to a beneficial operation of the markets (rules concerning rights and duties of those carrying out transactions) • Reasons: • Countries must be restrained from taking trade-restrictive measures („tying their hands to the mast“ like Ulysses) • Avoid escalation of trade restrictive measures (trade wars) • Security and predictability • Single states can not cope with economic globalization • State measures (e.g. product safety, health, environmental protection) are „reduced“ to necessity, harmonization is possible • Equity in international economic relations („Freedom that oppresses ... law that makes free)

11. 1.6. Questions • How is „globalization“ defined? • How does „economic globalization“ relate to „general globalization“? • Is economic integration the main goal of regulated globalization? • What are the main forces behind economic globalisation? • Is economic integration connected to international economic law? • Can economic globalization be reversed?

12. 2. Theories (of economic integration) 2.1. Overview • How did the thinking of economists (and the law) evolve on this subject over the last 400 years? Focus on capitalist theories. • Importance of economist thinkers: Keynes: “… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else… I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…” (General Theory of Employment, 1936, 383) • Starting point: Mercantilism (17th century – 1st half of 19th century): rise of economics (confidence in reason, exactly: raison d´etat); theories of international markets; absolute state as the key-player • Mercantilism is „archenemy“ of Liberalism but also its ground • The Enlightenment also „causes“ Socialism (e.g. Marxists were „scientific“ socialists) – strong believe in reason (test of the morally acceptable, method of scientific discovery, ultimate judge in resolving conflicting opinions) – believe in invariant mechanical laws (opposite: Hegel and Marxists believe in processes with telos) • Modern forms: Neomercantilism, Neoliberalism

13. 2.2. Mercantilism • Stands for Nationalism (national interest) and political determination of economics (political economy) • No homogeneous economic school • Mercantilist policy has been a recurring topic ever since nations began to regulate their economics purposefully • Doctrine: • World resources are limited, international economic relations are a zero-sum game between nations (win-lose situation) • National wealth (power) is measured in gold • Excess of exports over imports (surplus of the balance of trade) to accumulate gold (import raw material, export finished goods) • To achieve surplus: protectionist measures/ Colbert: measures favoring industrialization/ others: increase spending, curb interest rates • Diplomatic mercantilism: directed outward, concept of disintegration (maintenance of the nation state as a value) • Political mercantilism: directed inward (national frame), most significant: nationalism of the welfare state • Neo-Mercantilism: see F3

14. 2.3. Liberalism • Stands for private interest and freedom of economy (laisser faire) furthermore: limitations on the power of governments, the rule of law, a market or mixed economy, and a transparent system of government, etc. • Homogeneous economic schools (classic, neoclassic, neoliberalism) • Liberal economic policy is a recurring topic since Adam Smith (Wealth of Nations) • Market Liberalism Core Doctrine: • Belief in moral necessity of the market and market forces (i.e. entrepreneur) – market shall determine important aspects of life • Self-interest alone (later: in a proper institutional setting) can lead to socially beneficial results (through the invisible hand). • International economic relations are beneficial to all thanks to international division of labor (esp the theory of comparative advantage and of opportunity costs: even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations). Liberalism is hostile to economic self-sufficiency. • Freedom of economy (to follow the self-interest) – withdrawal of state and other intermediate powers (esp guilds) – hostile to every interference in the process (esp distribution of wealth)

15. 2.3. Liberalism (cont´d) • Reject any design or plan for society (religious, utopian, ethical) and also external values (formal equality) – anti-utopianism (anticipated grand strategy of deregulation of neoliberalism) • Nation state is taken for granted – Nationalism • Formal equality but inequality in talent

16. 2.4. Neoliberalism • Neoliberalism is often used interchangeably with globalisation or „the rich grow richer, the poor grow poorer“ • But free markets and free trade are not new (Neoliberalism derives from the ideas of early liberalism). What is the „Neo“ of this form of Liberalism? • Doctrine: • Marketization (creation of new markets, esp transaction intensive markets), competition and transaction/contract maximilisation (frequency of contracts) are overruling principles - Transaction costs play an increasing role • Everyone is an entrepreneur: Nations are companies in a global market place („national competitiveness“ form of economic nationalism?) • Further keywords: Privatisation, Deregulation, free trade, stable currency and low taxes, competition law • Application of Neoliberalism: • International law (SAP´s of IMF, WTO-law) • European community law (partly) • National law (partly)

17. Energy Policy Privatization Macro-economic/ Industrial Policy Mercantilism *More costly state exploitation of national resources *Diversify sources of supply, delivery routes Resist privatization and keep industries under national control *Import-substituting industrial policy *Inflationary Market-Liberalism Privatize and break up energy monopolies Auctions open to national and international bids *Prioritize stable currencies, balanced budgets *No direct intervention in production Lib/Merc Todays Keith A. Darden, ECONOMIC IDEAS AND INSTITUTIONAL CHOICE AMONG THE POST-SOVIET STATES (published online)

18. 2.5. Questions • What is the difference between Mercantilism and Liberalism? • Can both „theories“ be found in today´s economic policies? • What are the main reasons for protectionist trade policy? (Protect domestic industry and employment, infant industry protection, optimal tariff, strategic trade policy, revenue for government, national security and self-sufficiency, pursuit of non-economic/societal value • Why is free trade „good for all“ in economic theory? • What is „Neo“ about the „Neoliberalism“? • Does Neoliberalism affect national policies?

19. Discussion • RPG-Discussion: • Group A represents globaphile, free-trade-orientated entrepreneurs • Group B represents globaphobe, protectionism-orientated NGO • Prepare arguments for the questions: Is economic globalization a blessing or a curse? What role should international economic law play?

20. 3. Two pillars: GATT and the System of Bretton Woods 3.1. General Remarks • Most influential organisations of economic globalisation: WTO, IMF, World Bank • Weak organisations with small budget and staff, but they can exert powerful effects • “International economic constitution“: regulating international transactions concerning goods, services, capital, intellectual property and transaction media (money, currencies)

21. 3.2. Complementary purposes • An international trade organization to liberalize trade in addition to IMF and World Bank would work toward the expansion of trade and would benefit the world (by ensuring economic stability and political peace) • Trade organization will have jurisdiction over underlying transactions and Fund will have jurisdiction over exchange controls relating to the payments and transfers for those transactions. TO: Liberalization, Fund: financing balance-of-payments support in order to restrain countries from destructive measures (e.g. restricting transfers or related payments and transfers)

22. 3.3. From the GATT to the WTO • December 1945 US invite allies to enter into negotiation to conclude a multilateral agreement for the reduction of tariffs on trade in goods. Also at the proposal of the US the UN ECOSOC adopts resolution calling for a conference concerning an ITO, that should complement the Bretton-Woods-System. • Geneva meeting 1947: three major parts (Charter for an ITO, multilateral agreement to reduce tariffs reciprocally, general clauses) – latter two formed GATT, which advanced well, while negotiations on ITO were more difficult. • But some countries feared submitting GATT alone to their parliaments would jeopardise latter effort to get ITO passed • Compromise: PPA of October 1947 („Protocol of Provisional Application of the General Agreement on Tariffs and Trade“ - parts (esp MFN obligation and tariff concessions; procedural provisions, see den Bossche 80) of GATT were applied provisionally • Havana-Charter never entered into force (esp US Congress never approved) – its demise left a significant gap in the structure of international economic institutions

23. 3.3. From the GATT to the WTO (cont´d) • The GATT´47 became, although conceived as an agreement, a de facto international organisation, but with a scant institutional framework • The GATT´47 was very successful in reducing tariffs on trade in goods (esp on industrial goods): average level of tariffs of developed countries was brought down from 40 to 4 % in eight negotiating rounds • First five rounds (Geneva 1947, Annecy 1949, Torquay 1951, Geneva 1956, Dillon 1960-1961) dealt with reduction of tariffs, the next three rounds (Kennedy 1964-1967, Tokyo 1973-1979, Uruguay 1986-1994) increasingly focus NTB´s, which were rapidly becoming a more serious problem for international trade • Institutional and substantial deficits of the GATT´47: • Not very successful in dealing with NTB´s (direct price influencers, such as export subsidies or drawbacks, exchange rate manipulations, methods of imports valuation, customs surcharges, lengthy customs procedures, establishment of minimum import prices, unreasonable standards and inspection procedures, and indirect price influencers, such as import licensing) • Didn´t include trade in services and intellectual property which became rapidly important • Agreement became to complex • No sufficient organisation

24. 3.3. From the GATT to the WTO (cont´d) • The Uruguay-Round led to the establishment of a new international organisation for trade: the WTO • Institutional and substantial deficits of the international trade system were solved: • The WTO is an international organisation with a organisational structure • Single agreement approach: the WTO is the legal framework for the three pillars: GATT´94 (including agriculture, textiles and clothing), GATS and TRIPS • It further contains the DSU (Dispute Settlement Understanding) and the TPRM (Trade Policy Review Mechanism)

25. 3.4. Questions • Why do you think an international trade organisation should be founded after WWII? • How were the „constitutional problems“ of countries that needed parliamentary approval solved concerning GATT ´47? • What were institutional and substantial deficits of the GATT´47? • How did the WTO solve this problems?

26. 3.5. System of Bretton Woods • Origins: • The Great Depression (economic slump in North America, Europe, and other industrialized areas from 1929 until about 1939; most severe economic crisis of modern times). Reaction of national states was protectionism, esp imposing tariffs, raising existing ones, competitive devaluation, setting quotas and other NTB’s. Effect: great reduction of the volume of international trade (in total by half). Lessons learned: (1) weaknesses and imbalances within the U.S. economy (2) inability of the nation's political and financial institutions to cope with the vicious downward economic cycle (3) market forces alone proved unable to achieve the desired recovery – governmental intervention is required by liberal international economic system (result: turn-around in economic theory/policy; regionally: rise of the welfare-state in Europe). • Wartime devastation in Europe: US assistance was needed for reconstruction • Theory of “economic security”: fundamental causes of two WW lay in economic discrimination and trade warfare (Cordell Hull) – ensure economic stability and political peace. Free trade relies on free convertibility of currencies and major monetary fluctuations can stall the free flow of trade.

27. The Great Depression in Europe • http://www.english.uiuc.edu/maps/depression/about.htm

28. Bretton Woods-System of fixed exchange rates (IMF) • Set forth in the Agreement of the International Monetary Fund and the IBRD • Members were required to establish a parity of national currencies in terms of gold, to maintain exchange rates (band of 1 %, change of par value only with IMF approval in case of “fundamental disequilibrium” - ) and to encourage an open system by committing members to convertibility • Principal reserve currency: US-Dollar (sell or buy Dollars to maintain exchange rates) – US-Dollar linked to gold at the rate of $ 35 per ounce (only currency that was backed in gold) • Stable exchange rate requires similar monetary policies

29. Bretton Woods-System of managing trade deficits • IMF is provided with a fund composed of contributions of member countries in gold and their own currencies (“quota”) • Money is used to grant loans to member countries with financial difficulties (payback 18 months to 5 years) – surveillance of the member states policies by IMF

30. Readjusting Bretton Woods • USA began running a trade deficit (Vietnam war accelerated inflation) in 1970 – gold coverage deteriorated (from 55% to 22%) – excess of supply with US-Dollars – US announces it would no longer convert dollars in gold – speculation against dollar • 1971 Bretton Woods moved to 2,25 % fluctuation bands, which could result in up 9 % divergence - unacceptable to European Countries (Basle Agreement: maintain 2,25 against US-Dollar, limit fluctuation between their own currencies to +/- 2,25%: “The Snake in the Tunnel”) • 1976 all major currencies were floating, exchange rates no more a principal for monetary policy – flexible exchange rate system • Establishment of the EMS (European Monetary System with its key elements ECU, Parity Grid and Exchange Rate Mechanism [fluctuation margin 2,25%]) – replaced by EURO.

31. The IMF Today • Ensure stability of the international monetary and financial system, the system of international payments and exchange rates • Surveillance of member countries’ economic situation, technical assistance • Financial assistance (policy programme of IMF, effective implementation is conditional) • Poverty reduction (HIPC-Initiative) – Poverty Reduction Strategy Papers

32. The IBRD • Original mission was to finance the reconstruction of european nations and Japan devastated by the WW II with a focus on large-scale infrastructure projects, building highways, airports, and powerplants. • The IBRD now focuses on developing countries and provides financing to eastern states/former Soviet Union • World Bank Group: IBRD, IFC (private sector investment in developing countries), IDA (providing long-term, interest-free loans to the world's 81 poorest countries), MIGA (promotes foreign direct investment into developing countries by insuring investors against political risk), ICSID (facilities for the conciliation and arbitration of investment disputes between member countries and individual investors)