Abstract
Economists often equate “free trade agreements” with the broader concept of “free trade,” sometimes overlooking the increasingly complex and controversial elements embedded within modern trade deals. Contemporary agreements have moved far beyond traditional concerns like tariffs and quotas, extending into areas such as regulatory alignment, intellectual property protections, labor provisions, investment protocols, and investor-state dispute resolution mechanisms. These developments frequently escape the bounds of standard economic frameworks. Instead of simply curbing protectionist tendencies, such agreements might serve to bolster new forms of rent-seeking by influential stakeholders, including multinational corporations, global financial institutions, and pharmaceutical giants. While there remains potential for trade agreements to promote mutually advantageous trade liberalization and raise global regulatory standards—such as those concerning environmental protection or labor rights—they also risk producing outcomes that primarily redistribute wealth under the misleading banner of “free trade.” As these agreements increasingly shape internal policies and regulations rather than merely addressing border restrictions, economists should perhaps devote greater scrutiny to these domestic implications.
Keywords: Trade Policy, Regulatory Harmonization, Political Economy, Investor-State Dispute Settlement.
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1. Introduction
In March 2012, the Booth School of Business at the University of Chicago posed two key questions on international trade to its expert panel—an assembly of distinguished economists from top institutions across the United States. The first question addressed economists’ general views on free trade, stating: “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.” The second question zeroed in on the North American Free Trade Agreement (NAFTA): “On average, citizens of the U.S. have been better off with the North American Free Trade Agreement than they would have been if the trade rules for the U.S., Canada and Mexico prior to NAFTA had remained in place.” Respondents could select from a range of options including “strongly agree,” “agree,” “uncertain,” or “strongly disagree.” The responses showed overwhelming support for both statements. Among the 37 economists who participated, 35 agreed or strongly agreed with the first statement, and the remaining two were uncertain—none disagreed. Similarly, for the NAFTA-specific question, no disagreement was recorded. Only two experts selected “uncertain,” while 10 chose “strongly agree” and 25 selected “agree.”
The near-unanimous endorsement of the general merits of free trade is predictable. Within the economics profession, few topics enjoy as solid a consensus as the superiority of free trade over protectionist policies. The theories of comparative advantage and mutual gains from trade are foundational elements of modern economics. Therefore, the strong support for liberalized trade in general is not surprising. However, the same level of agreement regarding NAFTA—a highly complex, 2,000-page document shaped by multiple governments and influenced heavily by lobbying and strategic political interests—invites more scrutiny. It raises critical questions about how economists arrived at the conclusion that NAFTA benefited Americans “on average.” Did they account for how the advantages and disadvantages were distributed across different income groups? Were the disproportionate effects on specific communities considered negligible? What assumptions were made regarding compensation mechanisms for those who incurred losses? And would their evaluations remain unchanged in light of recent findings indicating that NAFTA’s net efficiency gains for the U.S. were minimal, while it significantly suppressed wages in sectors most vulnerable to competition from Mexico?
It’s possible that the experts gave precedence to overall efficiency gains, treating distributional issues as secondary concerns. This perspective treats trade liberalization as analogous to technological progress: although disruptive for some, the aggregate benefits justify the costs. Just as society did not halt the spread of automobiles or electric lighting due to job losses among coach drivers and candle-makers, restricting trade may appear equally irrational. Viewed through this lens, distributional impacts, though acknowledged, are often downplayed in favor of perceived aggregate welfare improvements.
This tendency to prioritize net gains over inequality might have been more defensible if trade agreements were still primarily concerned with removing import barriers like tariffs and quotas. But recent agreements differ substantially from those older, simpler arrangements. The term “free trade agreements” is somewhat misleading when applied to contemporary deals such as the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP). These pacts are less about traditional trade liberalization and more about aligning domestic rules, regulations, and standards across nations.
Today’s trade agreements have expanded significantly in scope, encompassing a wide array of non-tariff issues. These include regulatory norms, health and safety standards, labor policies, financial and investment measures, environmental safeguards, and intellectual property rights. Rather than stopping at national borders, they push for deeper integration between participating countries—a concept Lawrence (1996) distinguishes as “deep integration” as opposed to “shallow” integration. A 2011 analysis highlighted that 76% of preferential trade agreements addressed aspects of investment such as capital mobility; 61% included provisions on intellectual property rights; and 46% incorporated environmental regulation clauses (Limão 2016).
The transformation of trade agreements can be vividly illustrated by comparing two bilateral U.S. agreements signed two decades apart: one with Israel and the other with Singapore. The U.S.–Israel Free Trade Agreement, enacted in 1985, was America’s first bilateral trade accord in the post-WWII era. It is concise—under 8,000 words—and primarily focused on classic trade topics like tariff reduction, quotas, import licensing, and origin rules. Contrast this with the U.S.–Singapore Free Trade Agreement, which took effect in 2004. It is substantially longer at 70,000 words, containing 20 chapters, over a dozen annexes, and several side letters. Of those 20 chapters, only seven address conventional trade concerns. The remainder delve into behind-the-border topics like anti-competitive behavior, digital commerce, labor standards, environmental regulation, investment protections, and financial services. For instance, intellectual property provisions span only 81 words in the Israel agreement, while occupying more than 8,700 words—plus two side letters—in the Singapore agreement.
This evolution in the nature of trade agreements calls for a reassessment of economists’ traditional perspectives on their purpose and effect. A key theme of this paper is that economists often equate trade agreements with free trade because of an underlying political economy framework. This framework assumes that protectionist interests—particularly those in import-competing industries—are the dominant force influencing trade policy. Within this paradigm, trade agreements function to restrain these interests and facilitate movement toward more efficient economic outcomes by curtailing protectionist measures.
Such agreements are seen as mechanisms to prevent both beggar-thy-neighbor strategies and self-defeating protectionist policies. Export-oriented interest groups, which often support trade liberalization, are viewed as beneficial counterweights to protectionist forces. Though these groups do have vested interests, their goals are aligned with broader welfare-enhancing liberalization efforts. As a result, the conventional wisdom positions these actors as instrumental in achieving policy outcomes that improve efficiency overall.
Yet there exists an alternative political economy interpretation—one that challenges the assumption about which actors hold the upper hand. From this angle, trade agreements are not tools to check protectionism but are instead vehicles for advancing the agendas of elite, globally integrated stakeholders. These include multinational corporations, pharmaceutical firms, and large financial institutions that use trade agreements to entrench their market power and expand their regulatory influence. Rather than promoting widespread welfare gains, such agreements risk producing skewed, redistributive outcomes that benefit a narrow group of powerful interests under the guise of liberalization.
This risk was relatively low when trade agreements were largely concerned with border measures like tariffs. But as these pacts increasingly dictate domestic policy and regulatory frameworks, the nature of their impact has become more ambiguous—and potentially more detrimental. A re-examination of trade agreements, along with the political and economic forces that shape them, is not only warranted but necessary. This paper contributes to that rethinking by exploring how today’s trade architecture may subvert the idealized model of free trade and instead reflect a new political reality rooted in regulatory capture and rent-seeking behavior.
2. Free Trade versus Free Trade Agreements
Basic trade theory has long held that unrestricted international trade tends to deliver optimal outcomes for national economies—assuming that appropriate policy instruments are in place to address market imperfections and to compensate those adversely affected. The only notable exception to this rule arises in the case of a large country, which may be able to leverage its market power to alter the terms of trade in its favor through the imposition of “optimal tariffs.” This scenario, however, poses risks of retaliatory measures by trading partners, leading to collectively damaging outcomes. It is this danger that provides a rationale for the existence of trade agreements—to prevent a spiral of protectionism that leaves all parties worse off.
Economists have long acknowledged that the actual design and functioning of trade agreements deviate significantly from what the optimal tariff model would predict. This divergence becomes even more pronounced as trade pacts move beyond conventional border measures—such as tariffs and quotas—into more complex terrain involving domestic regulations and policy coordination. These include, among others, intellectual property standards, environmental and health regulations, labor norms, and procedures for resolving investor disputes. The welfare implications of such provisions are considerably more ambiguous than the straightforward gains typically associated with reducing tariffs. Although these newer elements may stimulate international trade and investment, their ultimate effect on economic efficiency and welfare remains uncertain and context-dependent.
To illustrate the intricacies of these newer dimensions, this section explores four areas that have become central in modern trade agreements: intellectual property rules (specifically those referred to as Trade-Related Aspects of Intellectual Property Rights, or TRIPs), provisions on cross-border capital flows, investor-state dispute settlement (ISDS) mechanisms, and the harmonization of domestic regulatory standards.
Let us begin with intellectual property—specifically patents and copyrights, now formally integrated into trade frameworks under the umbrella of TRIPs. These rules first entered multilateral trade law through the Uruguay Round, which concluded in 1994. Since then, the United States has consistently advocated for even stronger protections, known as TRIPs-plus standards, in its subsequent bilateral and regional trade agreements. The tensions surrounding TRIPs often pit developed countries, particularly those with major innovation-driven industries, against developing nations. The former seek longer and stricter monopolies for their firms, while the latter face higher costs for access to essential products like medicines and information technologies.
The conventional view of free trade promotes mutual benefits for all parties. However, in the case of TRIPs, the distributional effects are lopsided: the financial benefits enjoyed by firms in developed countries come largely at the expense of consumers in developing economies. The result is higher prices for patent-protected goods, particularly in pharmaceuticals, and increased revenues for rights-holding firms. To argue that this outcome contributes to global welfare, one would have to assume that enhanced protection in poorer countries leads to a disproportionately large increase in global innovation—a claim that lacks empirical credibility. For this reason, some of free trade’s most dedicated advocates have expressed strong opposition to TRIPs being incorporated into global trade rules (Bhagwati, Krishna, and Panagariya 2014). Yet, despite such objections, TRIPs provisions have not only remained a fixture but have grown more expansive with each new trade agreement. Over time, the flexibility originally afforded under the World Trade Organization (WTO) agreement has been whittled away (Sell 2011), as intellectual property protections become both broader and more rigid.
The second issue pertains to the treatment of international capital flows within trade agreements. Since the early 2000s—starting with bilateral trade deals with Singapore and Chile—the United States has sought provisions that effectively enshrine open capital accounts as a default condition. These commitments severely limit the ability of signatory countries to regulate or restrict the movement of capital, including highly volatile short-term financial instruments. Even during periods of financial instability, many of these agreements do not allow for temporary controls. This rigidity has provoked criticism even from mainstream institutions like the International Monetary Fund (IMF) (Siegel 2013).
Ironically, the incorporation of capital account liberalization into trade pacts came at a moment when academic and policy circles were beginning to reassess the desirability of unfettered capital mobility. Recurrent financial crises—such as those in Asia, Latin America, and the global collapse in 2008—have demonstrated that unregulated financial flows can undermine economic stability. Consequently, a growing number of economists have come to see capital controls not as harmful distortions, but as necessary tools in a second-best world—complements to prudential regulation or emergency measures in times of crisis. Reflecting this shift, the IMF, once a champion of open capital markets, has revised its stance to acknowledge that capital controls can be useful when other policies are unavailable or insufficient. Nevertheless, the investment and financial service chapters of numerous trade agreements continue to treat capital account liberalization as a non-negotiable objective, ignoring this emerging professional consensus.
A third area of concern is the inclusion of investor-state dispute settlement (ISDS) clauses in trade agreements. These mechanisms, originally developed in bilateral investment treaties, allow foreign investors to initiate arbitration against host governments for policy changes that allegedly harm their expected profits. What makes ISDS unusual is that it gives rights to foreign investors that are not typically available to domestic firms or citizens, such as access to special arbitration tribunals outside of the host country’s legal system. These tribunals can award substantial financial damages, sometimes in response to policy measures that were taken in the public interest.
ISDS was initially promoted as a way to encourage investment in developing countries by offering firms assurances against arbitrary expropriation. However, critics argue that the system has overreached. Arbitration panels often interpret investor protections more expansively than national courts (Johnson, Sachs, and Sachs 2015). Additionally, ISDS proceedings lack transparency, provide no opportunity for appeal, and are not bound by precedent. While one could argue that weaker legal systems in developing countries might justify such mechanisms, it is harder to defend their inclusion in agreements between nations with well-functioning judicial institutions—such as the proposed Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the EU. In such contexts, ISDS can appear less like a tool for legal certainty and more like a mechanism for corporate influence over domestic regulation.
The fourth issue involves the harmonization of domestic regulations—a central component of many new-generation trade agreements. The rationale behind regulatory harmonization is to reduce transaction costs for firms operating across borders by eliminating duplicative or inconsistent standards. In principle, this sounds reasonable: if two countries regulate the same product differently, firms may face extra costs in compliance. By aligning standards, trade becomes smoother and more efficient.
However, the push for harmonization can also obscure legitimate differences in national preferences. For instance, one country’s stricter safety or environmental standards may be labeled as “non-tariff barriers” by another. A telling example is the European Union’s restrictions on genetically modified organisms and hormone-treated beef. These bans apply to both domestic and foreign producers and reflect strong domestic consumer preferences, not protectionist intent. Nonetheless, the U.S. government has challenged these policies as trade barriers, and WTO panels have frequently ruled in favor of such challenges (Euractiv 2006 [updated 2012]).
For economists, the problem is that unlike tariffs or quotas—where the economic distortions are well understood—there is no clear baseline for determining whether a regulation is excessive or unduly restrictive. Different nations have different tolerances for risk and different philosophies regarding the relationship between business and society. These divergent perspectives will naturally yield varied regulatory regimes. In economic terms, regulatory standards are public goods with heterogeneous preferences across jurisdictions. The ideal international framework would weigh the efficiency benefits of standardization against the social and political costs of eroding regulatory diversity. But in practice, we lack both the information and the tools to identify such an optimum, which likely varies across issue areas.
Given these ambiguities, it is striking how firmly many economists continue to support trade agreements. Despite often having limited knowledge of the fine print, they appear to assume that the benefits outweigh the costs across the board. Perhaps this confidence is rooted in the belief that any agreement carrying the label “free trade agreement” must inherently move us closer to an efficient equilibrium. This perception may reflect a conceptual slippage: economists conflate free trade with trade agreements, assuming the latter always approximate the former.
Part of this confusion may arise from an implicit political economy narrative. According to this view, the principal obstacle to economic efficiency in international trade is domestic protectionist interests—especially import-competing industries. Left unchecked, these groups drive governments to adopt inefficient trade policies. Trade agreements, under this interpretation, serve as institutional constraints on protectionism, empowering liberalizing interests and fostering global welfare. The precise design of the agreement is of secondary importance; what matters is that the agreement helps overcome vested protectionist interests.
This narrative holds water if the primary political economy dynamic is indeed one of protectionist dominance. But what if, instead, trade agreements are increasingly shaped by powerful interests on the exporting side—such as multinational corporations, pharmaceutical giants, or global financial institutions? These actors may use trade agreements not to dismantle distortions, but to entrench their own advantages—through regulatory provisions, rent-seeking protections, and legal shields such as ISDS. When trade agreements focus on behind-the-border rules rather than traditional trade barriers, it becomes far harder to identify whether they are reducing inefficiencies or creating new ones.
In earlier eras, when tariffs were high and agreements focused on their reduction, the logic was straightforward: liberalization suggested efficiency gains, and the presence of pre-agreement protectionism was easy to detect. But as modern agreements delve into complex regulatory domains, we lose that clarity. There is no obvious baseline for what constitutes “efficient” policy in areas like environmental law, intellectual property, or capital controls. As a result, such agreements may just as easily be instruments of corporate capture as mechanisms for liberalization.
There is ample anecdotal evidence to suggest that some firms support trade agreements because they expect to benefit from them—through enhanced monopoly rights, legal protections, or favorable regulatory shifts. To evaluate this properly, we must revisit the foundational question: why do countries enter into trade agreements in the first place?
3. The Logic of Trade Agreements
When economists introduce the concept of gains from trade, they typically frame it as a policy that benefits each individual country, regardless of what others do. (Of course, defining what constitutes “benefit” for an entire nation, especially when some groups gain and others lose, is a complex matter. But, following conventional treatments, I will set that issue aside.) Ricardo’s (1817) formulation of comparative advantage remains one of the foundational insights in economics: even a country that is more productive in every sector benefit from specializing in the goods it produces relatively more efficiently and trading for the rest. This principle means that trade allows a country to consume beyond its own production possibilities frontier.
One key takeaway from this idea is that countries should unilaterally embrace free trade policies, regardless of the actions taken by their trading partners. Retaliating against foreign protectionism by raising one’s own trade barriers is effectively an act of self-harm—a textbook example of a suboptimal response. If this were the full picture, however, the very existence—and especially the proliferation—of trade agreements would be puzzling. Why would countries need to negotiate deals with others in order to pursue a strategy that already aligns with their national interest?
An early theoretical resolution to this apparent paradox was offered by Harry Johnson (1953), who introduced the role of market power in international trade. Countries that are large relative to global markets have the incentive to manipulate their terms of trade through tariffs. By imposing an import tariff, a large country can reduce demand for foreign goods, which in turn depresses world prices for those imports. In a strategic world where all large countries behave similarly, each country ends up applying its own “optimal” tariff, resulting in a Nash equilibrium that is globally inefficient. Trade agreements that constrain this behavior by enforcing free trade can thus make all countries better off by eliminating this mutually harmful competition.
Even if one accepts the logic of this “terms-of-trade manipulation” theory, further questions arise. Why, for instance, do countries need formal institutions like the World Trade Organization (WTO) or NAFTA to ensure cooperation? In theory, repeated interactions among countries should be sufficient to sustain cooperative behavior over time, especially if deviation from free trade invites retaliation. Moreover, one might wonder whether any binding agreement can truly prevent sovereign nations from acting opportunistically. Still, this theory offers a coherent reason for governments to voluntarily commit to trade liberalization by entering into formal agreements.
Yet this explanation seems at odds with how policymakers behave in practice. During trade negotiations, officials rarely cite terms-of-trade considerations. Instead, they focus primarily on trade volumes: nations tend to celebrate rising exports and worry about growing imports. Trade negotiations are often framed as exchanges of market access: “We will open our markets more to your products if you do the same for ours.” This mode of thinking seems detached from concerns over price manipulation or efficiency.
It is certainly true that restricting imports can reduce global demand and lower world prices—thus improving the home country’s terms of trade. However, when it comes to exports, governments often do the opposite of what would be beneficial from a terms-of-trade standpoint. Rather than limiting supply to prop up prices, they typically promote exports through subsidies, favorable financing, and institutional support. This increases global supply and depresses prices, thereby worsening the country’s terms of trade.
Another inconsistency arises when we consider the WTO’s explicit prohibition of export subsidies. If trade agreements are intended to prevent countries from exploiting their terms of trade, then banning export subsidies is hard to justify—since these measures actually harm the subsidizing country while benefiting others. In this case, the country offering the subsidy accepts a worsening of its own terms of trade. As Grossman (2016) has pointed out, current theory offers no compelling justification for why such subsidies should be banned in a world with perfectly competitive markets.
In practice, trade officials appear far more concerned with domestic political dynamics than with international spillovers or price effects. Agreements are often described as tools to discipline domestic protectionist pressures. Without such external constraints, governments may be too easily swayed by short-term political considerations—such as demands from import-competing industries—and adopt inefficient protectionist policies (Bown 2016). This perspective has been formalized in several academic models that depict trade agreements as solutions to time-inconsistency problems (see Staiger and Tabellini 1987; Maggi and Rodriguez-Clare 1998).
In this framework, governments understand that free trade is the optimal policy over the long term. However, in the short run, they may face political incentives to appease concentrated interest groups demanding protection. Investors and other economic agents, anticipating this behavior, may alter their decisions to ensure the continuation of such support. In such cases, a trade agreement serves as a commitment mechanism, helping the government credibly resist future protectionist pressures.
Grossman (2016) notes, however, that this is a very elaborate solution. Why, he asks, should governments go through the trouble of crafting intricate agreements with multiple trading partners over the course of many years simply to bolster their own domestic resolve? Still, the belief that trade agreements serve as bulwarks against protectionist lobbying is widespread.
This idea resembles familiar arguments in other policy domains where dynamic inconsistency is a concern. For example, in monetary policy, the delegation of authority to an independent central bank is justified to prevent inflationary bias. In regulatory policy, autonomous agencies are used to insulate decision-making from political interference. In all these cases, the argument is that delegation or external constraint enhances credibility and leads to more consistent, long-term outcomes.
But this logic rests heavily on the assumptions embedded in the underlying political economy model. If there is truly a time inconsistency problem, then everyone—except perhaps the special interest groups—benefits from pre-commitment. When protectionist lobbyists come knocking, governments can point to trade commitments and say: “Our hands are tied.” In this version, trade agreements are tools of good governance, enabling elected officials to resist inefficient lobbying.
Now consider an alternative scenario. Here, the problem is not that governments fear their future selves, but rather that they fear political opponents. In other words, the motivation for entering trade agreements is to constrain the policy options of a potential future administration. If the incumbent government believes that the opposition—if elected—will pursue a different economic strategy, then it might sign a binding agreement today to lock in current policies. From a social welfare perspective, this raises red flags. There is no assurance that constraining future governments is a good idea, particularly if the new government’s proposals are more efficient or more equitable. Nevertheless, this kind of “lock-in” is often justified in the same delegation language used in the time-inconsistency framework. But in reality, what is being protected is not long-term economic efficiency, but the partisan preferences of the ruling coalition.
Take this logic one step further. Suppose the current government is not acting on behalf of broad national interests but is instead aligned with a particular set of export-oriented special interests. In this case, the agreement is not a mechanism to prevent rent-seeking, but a vehicle to institutionalize it. Instead of resisting political pressure, the government is actively responding to it—except now the beneficiaries are not import-competing industries but globally integrated firms with strong lobbying capabilities.
These may include pharmaceutical companies pushing for stronger intellectual property rules, financial institutions seeking limits on capital controls, or multinational corporations lobbying for investor-state dispute settlement mechanisms. In such instances, trade agreements do not discipline rent-seeking—they facilitate it. Far from being neutral economic instruments, they become tools through which particular actors entrench their privileges.
In this context, trade agreements shift from being commitment devices that protect governments from themselves to instruments that shield special interests from democratic accountability. The standard narrative of trade agreements as bulwarks against inefficient protectionism thus fails to account for the full spectrum of political motivations and economic outcomes. The very mechanisms designed to constrain domestic political pressures may end up amplifying them—only now in favor of different, and often more powerful, stakeholders.
4. Whose Interests Do Trade Agreements Serve?
With earlier generations of trade agreements—those centered primarily on eliminating tariffs and border restrictions—it was relatively straightforward to evaluate which theoretical models of trade policy most closely matched actual outcomes. A good case in point is the sequence of GATT (General Agreement on Tariffs and Trade) negotiation rounds prior to the 1995 establishment of the World Trade Organization. In the post–World War II era, tariffs were exceptionally high, and the central aim of negotiations was to progressively reduce them. Few topics outside of border measures were addressed. That tariffs had been high initially strongly suggests that protectionist coalitions had prevailed in shaping prior trade policy. And since the agreements under GATT successfully brought tariffs down, they appear to have served as a counterweight to those protectionist forces. In short, the narrative that trade agreements functioned as political commitments to liberalize trade fit well with reality. These agreements seemed to move participating economies in broadly desirable directions.
The situation has become far murkier with trade agreements negotiated after 1995. Traditional border-related restrictions, including tariffs, have already been cut to historically low levels, while negotiations have increasingly turned to matters for which no clearly defined free-trade benchmark exists. For instance, it is difficult to determine whether Vietnam’s capital controls or intellectual property statutes serve or hinder the country’s economic development. Are EU food safety laws primarily designed to reflect consumer preferences, or do they cater disproportionately to agricultural producers? Does U.S. legal practice provide suitable safeguards for foreign investors, or fall short? Certainly, domestic standards can be manipulated for protectionist ends. But they may also be designed to fulfill legitimate developmental, social, or environmental objectives. When nations get this balancing act wrong, how confident can we be that trade agreements such as the Trans-Pacific Partnership or the Transatlantic Trade and Investment Partnership will help correct these distortions rather than exacerbate them? Are the dispute resolution systems in such agreements equipped to distinguish between unjustified protectionism and reasonable regulatory variation?
These questions defy easy answers. What is evident is that we can no longer judge trade agreements solely on the basis of whether they boost trade flows. There are abundant cases where excessive regulatory convergence, pursued ostensibly to ease trade, ends up worsening outcomes for at least one negotiating party. The expansion of intellectual property rights in developing countries is a frequently cited example. Likewise, lowering consumer safeguards in countries with already high standards might increase imports but leaves domestic citizens worse off. Agreements skewed heavily in favor of investor rights, at the expense of labor or environmental concerns, are prone to yield redistributive effects without accompanying efficiency improvements. These worries are common among critics of investor-state dispute mechanisms. In nearly all areas touched by new-generation trade agreements, the central dilemma is the same: regulatory convergence may facilitate commerce, but it also risks undermining legitimate domestic objectives. A well-designed negotiation process should weigh both sides of this trade-off.
While modern trade agreements typically include rhetorical nods to broader societal aims, such as sustainable development or worker rights, their true focus remains squarely on commercial interests. They are not primarily instruments for enhancing public health systems, nurturing institutional innovation, fostering industrial growth in the Global South, or defending labor standards in wealthier countries. It is therefore not surprising that such agreements tend to be shaped largely by business priorities. And it is similarly predictable that their success is often measured by the volume of trade they generate.
To better understand the nature of these outcomes, we need to examine the process through which trade agreements are negotiated. Unfortunately, those negotiations are often veiled in secrecy. This lack of transparency has drawn criticism from labor unions, public-interest advocates, and politicians. During the Trans-Pacific Partnership talks, for instance, U.S. lawmakers and staff could access the negotiating text only in secured reading rooms, with just two copies available (Bradner 2015). Public disclosure was forbidden, with penalties for leaking details. Although this confidentiality is justified on the grounds that it enables frank, behind-the-scenes bargaining, it also raises serious concerns. From the perspective of public welfare, secrecy may speed up deal-making, but it can systematically favor those who have access to the talks (Kucik and Pelc 2016).
Business lobbies, predictably, are often closely tied to the negotiation process. In fact, accounts of talks like those for NAFTA describe business representatives actively influencing outcomes in real-time from just outside the negotiating rooms (Smith 2015). Among the clearest illustrations of such influence is the history of trade-related intellectual property rights (TRIPs). The inclusion of TRIPs in the 1994 agreement that formed the WTO was a milestone. As Devereaux, Lawrence, and Watkins (2006, p. 42) observe, “[a]fter seven years of negotiating, industries that rely on copyrights, patents, and trademarks received more protection than anyone had believed possible at the outset of the talks.” U.S. companies had been pressuring their government since the 1970s to protect intellectual property abroad. The traditional forum for such matters had been the World Intellectual Property Organization (WIPO), but American firms considered WIPO inefficient and overly influenced by developing countries. So they mobilized a coalition—including agrochemical firms like Monsanto, apparel companies like Levi-Strauss, pharmaceutical giants like Pfizer, and technology firms such as IBM—to recast the issue as a trade matter. This enabled what political scientists refer to as “forum shifting,” moving discussions from WIPO to what became the WTO. In collaboration with European and Japanese counterparts, these firms crafted minimum IP standards, which heavily shaped the eventual Uruguay Round outcomes (Devereaux, Lawrence, and Watkins 2006; Sell 2011).
This strategic shift to the WTO ensured that commercial priorities took center stage, often at the expense of development goals and public health concerns. But TRIPs was only the first step. Following this success, many of the same firms pursued what Sell (2011) terms “vertical” forum shifting—securing even stronger protections in bilateral or regional trade agreements, where U.S. leverage over smaller nations was greater. With TRIPs as a precedent, U.S. negotiators could push for additional provisions such as data exclusivity (blocking generics from using test data), bans on parallel imports, constraints on compulsory licensing, and automatic extensions for patent terms (Sell 2011). The Trans-Pacific Partnership exemplified this push for more expansive protections, drawing condemnation even from the World Health Organization, which warned of interference from “powerful economic operators” (Germanos 2015).
Importantly, business influence is rarely overt or coercive. Instead, it tends to work through the subtle re-framing of private interests as public benefits. TRIPs gained legitimacy, in part, because it was framed as securing “property rights” rather than locking in monopoly rents. Practices of reverse-engineering and imitation—common among lagging economies historically, including the U.S. and U.K.—were recast as “piracy.” For example, many of the early textile entrepreneurs in Boston openly copied designs from British mills in Lancashire, evading British IP protections (Morris 2012). Yet preserving monopoly profits for U.S. pharmaceutical, entertainment, and tech firms was transformed into a defining principle of free trade.
Pro-trade lobbies have similarly shaped the inclusion of other new domains in trade agreements. The incorporation of services into multilateral trade talks, for instance, was driven by U.S. industry. Service trade often requires overhauls to domestic rules, especially in areas like finance. As Marchetti and Mavroidis (2011, p. 692) note, “it was the US financial services sectors that first argued systematically in favor of a trade round that would include a chapter on liberalization of trade in services.” The Coalition of Service Industries (CSI), representing U.S. service providers, led a campaign to secure the right of market entry for financial and insurance firms abroad. CSI organized research, held events, launched advocacy efforts, and lobbied aggressively (p. 693). Top executives from firms like Citibank and American Express chaired important advisory bodies to the U.S. Trade Representative ahead of the Uruguay Round. American Express, in particular, spearheaded both domestic and global lobbying efforts and was even involved in actual trade talks (Yoffie 1990, cited in Marchetti and Mavroidis 2011).
Ironically, while business lobbying has opened foreign markets, it has not eliminated protectionist policies at home. For example, the Merchant Marine Act of 1920—also called the Jones Act—prohibits foreign vessels from operating on U.S. domestic shipping routes. This law, justified in terms of national security, effectively protects U.S. shipping and shipbuilding industries. It remains untouched in all U.S. trade deals, including the TPP (Grennes 2017).
As trade negotiations extend into increasingly complex regulatory areas, the relationship between business and government shifts. Governments depend more on private-sector expertise to navigate the intricacies of financial regulations, data protection, and technical standards. In turn, firms become quasi-partners in shaping trade policy. They help define the scope of negotiations, supply technical knowledge, and organize transnational alliances. Woll and Artigas (2007, p. 131) describe this dynamic: “[u]nlike the exchange model assumed in the traditional economic models, firms do not just exchange votes or money to lobby against regulation. Rather, they offer expertise and political support in exchange for access to the elaboration of specific stakes.”
In some cases, private-sector participation in trade talks is so extensive that corporate representatives outnumber public officials. Analysis by the Sunlight Foundation, based on lobbying disclosures during the TPP process, underscores this point. Pharmaceutical firms and their trade group, PhRMA, dominated the lobbying landscape (Drutman 2014). Other prominent sectors included auto manufacturing, dairy, textiles, IT, and entertainment. By contrast, labor organizations such as the United Steelworkers and AFL-CIO trailed behind. Although advisory committees to trade negotiators are supposed to include a diversity of stakeholders, business groups composed more than 80 percent of membership during TPP talks (Ingraham 2014; Ingraham and Schneider 2014).
Empirical studies of lobbying in trade negotiations remain scarce due to the lack of transparency. However, Rönnbäck (2015) offers a unique analysis based on Sweden’s unusually broad freedom-of-information laws. His study of Swedish policymaking during the Uruguay Round reveals that government positions were shaped substantially by export-oriented industry lobbies. These groups, rather than pressing for tariff reductions (which were already low), advocated for a broader agenda that included services, investment, and public procurement rules. Their lobbying drove the Swedish government to expand the negotiation scope and coordinate with foreign business allies.
Rönnbäck also shows how trade negotiations help interest groups learn and organize across borders. Initially, Swedish businesses paid little attention to intellectual property rights. But as the U.S. escalated efforts to include TRIPs, Swedish firms became increasingly engaged. Pharmaceutical companies and industry associations soon mobilized, prompting the government to prioritize IP protections in its negotiating stance. By the late 1980s, the Swedish government identified intellectual property as one of its top concerns in the trade talks.
Finally, special-interest influence can be inferred from what is not included in trade negotiations. One critical omission involves global competition in tax policy and subsidies. In an era of mobile capital, countries often race to offer favorable terms to attract investment, resulting in suboptimal outcomes. Governments compete via tax holidays and reduced corporate rates, creating large windfalls for multinational firms. Despite clear cross-border spillovers and inefficiencies, trade agreements rarely impose constraints in this area. Instead, they focus on protecting investor rights, while ignoring mechanisms that allow countries to waste public resources in corporate giveaways. This silence reveals whose interests the agreements primarily serve.
In summary, while the objectives and coverage of trade agreements have expanded significantly in recent decades, so too has the influence of business lobbies in shaping their content. Far from being neutral platforms for promoting economic efficiency, modern trade negotiations often reflect the priorities of the most politically connected and economically powerful stakeholders.
5.Ammunition to the Barbarians?
Following a lecture in which I highlighted how economists often downplay the negative aspects of advanced globalization, I was challenged by a fellow economist in the audience. He asked, pointedly: Aren’t you concerned that your critique could be co-opted—or distorted—by populists and protectionist factions for their own agendas? His concern echoed a reaction I received more than twenty years ago after publishing my 1997 monograph, Has Globalization Gone Too Far? At that time, a prominent economist told me that while he found my arguments persuasive, they would merely provide “ammunition to the barbarians.” This kind of objection is revealing, as it uncovers the underlying political economy assumptions that often shape economists’ participation in trade policy debates. From this vantage point, the principal danger to sound trade policy is thought to come from domestic protectionist interests, and trade agreements are viewed primarily as tools to counterbalance those forces.
Yet, as modern trade agreements have moved far beyond traditional concerns like tariffs and import quotas to encompass behind-the-border regulatory issues—including intellectual property rights, health and safety standards, labor regulations, investment rules, and mechanisms for investor-state dispute settlement—the standard economic frameworks have struggled to accommodate them. What accounts for the assumption among many economists that voicing doubt about these agreements is riskier than offering unconditional support? Why is skepticism seen as problematic, while enthusiastic endorsement is rarely questioned? Implicitly, this view assumes that the “barbarians” only exist on one side of the debate.
In this paper, I have suggested an alternative interpretation. Rather than primarily restraining protectionist pressures, contemporary trade agreements may in fact reinforce the power of a different set of interest groups—those with considerable economic and political clout, such as global banks, large pharmaceutical firms, and multinational corporations. These agreements can serve to extend the reach of these influential domestic actors into international policymaking arenas. While such arrangements can certainly generate mutually beneficial outcomes by expanding market access and potentially elevating regulatory standards—on labor or environmental grounds, for instance—they also risk producing outcomes that are largely redistributive, under the misleading label of “free trade.”
As the focus of trade policy shifts from border measures to domestic regulations, economists should perhaps direct greater attention to this emerging reality. It may even be prudent to adopt a posture of cautious skepticism toward these newer forms of trade deals—presuming skepticism until clear evidence of broad public benefit is presented.
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