How Do Global Trade Rules Evolve?

On November 22, ESSCA School of Management organized the 20th Shanghai Social Studies Colloquium welcoming Matthew CASTLE, PhD Candidate and Research Assistant at McGill University, to talk about his research on negotiation and formulation of trade agreements.     When the EU revised the investment clauses of its recent trade deal with Canada, the Comprehensive Economic and Trade Agreement (CETA), it was widely believed that the amendments were motivated by concern over the design of another, yet-to-be-signed agreement with the United States: the Transatlantic Trade and Investment Partnership (TTIP). There is no formal link between those two agreements, and academic literature generally sees preferential trade agreements (PTA) as products of signatories’ bilateral relations. Our speaker challenged this view and discusses the evolution of global trade rules.     Matthew CASTLE questioned the conventional narrative about why countries sign trade agreements and how innovative rules emerge. He argued that existing agreements create precedent that shapes the design of subsequent agreements, and that policymakers sometimes take such precedent into account by sequencing trade agreements, signing ambitious agreements with less important partners first so as to improve the odds of achieving their preferred agreement design in subsequent negotiations with more important partners.     Negotiators are also taking the future into account by sequencing the agreement, exploiting the agreements with less important trade partners in order to establish templates that they can use in the future. It is based on an observation of ‘stickiness’ of the legal language. Matthew CASTLE argued that trade rules are ‘copy-pasted’ from one agreement to another, and the power of precedent in agreement design and the ‘stickiness’ of legal language creates incentives for states to be strategic in their choice of partner, signing innovative agreements with less important economic partners first in order to increase the odds of achieving their ideal outcome with more important partners. This perspective explains a currency chapter in the new North American Free Trade Agreement (NAFTA), that is meant to commit the members to avoid manipulation or competitive depreciation and encompass a simple definition of manipulation to identify violators of that commitment.  However, neither Canada or Mexico have ever been accused of currency manipulations in order to gain advantage in trade. This chapter can be seen as an attempt to create a precedent that the US can exploit in the future negotiations with China or Japan, the countries that have faced accusations of currency manipulations.     The evidence presented in Matthew CASTLE’s research suggests that those states that are most likely to sequence agreements are states that not only have a concern for the content of global rules, but also the ability to translate that concern into action. Sequencing enables states to promote the adoption of their preferred trade rules, this would suggest that powerful states continue to benefit most from it.