What Do Trade Agreements Really Do?

Journal of Economic Perspectives—Volume 32, Number 2—Spring 2018—Pages 73–90

he Booth School of Business at the University of Chicago asked its panel of

economics experts—made up of leading professors of economics around

the country—to respond to two statements on international trade in its

March 2012 survey (at http://www.igmchicago.org/surveys/free-trade). The first

statement focused on attitudes towards the general concept of free trade: “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 statement honed in specifically on the North American Free Trade Agree-

ment (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.” The experts

could choose among a range of options, from “strongly agree” to “strongly disagree.”

There was near-unanimous support for the first statement on free trade. Of the

37 economists who answered, 35 picked “strongly agree” or “agree.” Two answered

“uncertain” and none disagreed. The second question on NAFTA produced a

virtually identical response. Once again, no one disagreed and only two econo-

mists picked “uncertain.” The only difference was that there was one less vote for

“strongly agree” (reducing the tally for this option from 11 to 10) and one more

vote for “agree” (raising the tally from 24 to 25).

What Do Trade Agreements Really Do?

■ Dani Rodrik is the Ford Foundation Professor of International Political Economy, John F.

Kennedy School of Government, Harvard University, Cambridge, Massachusetts. His email

address is dani_rodrik@harvard.edu.

†

For supplementary materials such as appendices, datasets, and author disclosure statements, see the

article page at

https://doi.org/10.1257/jep.32.2.73 doi=10.1257/jep.32.2.73

Dani Rodrik

74 Journal of Economic Perspectives

The consensus in favor of the general statement supporting free trade is not a

surprise. Economists disagree about a lot of things, but the superiority of free trade

over protection is not controversial. The principle of comparative advantage and

the case for the gains from trade are crown jewels of the economics profession, so

the nearly unanimous support for free trade in principle is understandable. But the

almost identical level of enthusiasm expressed for the North American Free Trade

Agreement—that is, for a text that runs into nearly 2,000 pages, negotiated by three

governments under pressures from lobbies and special interests, and shaped by a

mix of political, economic, and foreign policy objectives—is more curious.

The economists must have been aware that trade agreements, like free trade

itself, create winners and losers. But how did they weight the gains and losses to

reach a judgment that US citizens would be better off “on average”? Did it not matter

who gained and lost, whether they were rich or poor to begin with, or whether the

gains and losses would be diffuse or concentrated? What if the likely redistribution

was large compared to the efficiency gains? What did they assume about the likely

compensation for the losers, or did it not matter at all? And would their evaluation

be any different if they knew that recent research suggests NAFTA produced minute

net efficiency gains for the US economy while severely depressing wages of those

groups and communities most directly affected by Mexican competition?

Perhaps the experts viewed distributional questions as secondary in view of the

overall gains from trade. After all, opening up to trade is analogous to technological

progress. In both cases, the economic pie expands while some groups are left behind.

We did not ban automobiles or light bulbs because coachmen and candle-makers

would lose their jobs. So why restrict trade? As the experts in this survey contemplated

whether US citizens would be better off “on average” as a result of NAFTA, it seems

plausible that they viewed questions about the practical details or the distributional

questions of NAFTA as secondary in view of the overall gains from trade.

This tendency to view trade agreements as an example of efficiency-enhancing

policies that may nevertheless leave some people behind would be more justifiable

if recent trade agreements were simply about eliminating restrictions on trade such

as import tariffs and quotas. In fact, the label “free trade agreements” does not

do a very good job of describing what recent proposed agreements like the Trans-

Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership

(TTIP), and numerous other regional and bilateral trade agreements actually do.

Caliendo and Parro (2015) is the most sophisticated evaluation to date of NAFTA’s overall economic

effects. These authors develop a multisector, multicountry Ricardian model with intermediate inputs

and productive heterogeneity within sectors. They conclude that NAFTA increased US “welfare” by 0.08

percent (that is, by less than one tenth of 1 percent). Moreover half of this gain came not from an

increase in efficiency but from an improvement in the US terms of trade (that is, at the expense of

other countries, mainly Mexico). As for the distributional impacts, they have been recently estimated

by Hakobyan and McLaren (2016). These authors find very sharp adverse effects for certain groups of

workers. High school dropouts working in industries that were heavily protected by tariffs on Mexican

exports prior to NAFTA experienced a drop in wage growth of as much as 17 percentage points relative

to wage growth in unaffected industries.

Dani Rodrik 75

Contemporary trade agreements go much beyond traditional trade restrictions at

the border. They cover regulatory standards, health and safety rules, investment,

banking and finance, intellectual property, labor, the environment, and many

other subjects. They reach well beyond national borders and seek deep integration

among nations rather than shallow integration, to use Lawrence’s (1996) helpful

distinction. According to one tabulation, 76 percent of existing preferential trade

agreements covered at least some aspect of investment (such as free capital mobility)

by 2011; 61 percent covered intellectual property rights protection; and 46 percent

covered environmental regulations (Limão 2016).

To illustrate the changing nature of trade agreements, compare US trade

agreements with two small nations, Israel and Singapore, signed two decades

apart. The US–Israel Free Trade Agreement, which went into force in 1985, was

the first bilateral trade agreement the US concluded in the postwar period. It is

quite a short agreement—less than 8,000 words in length. It contains 22 articles

and three annexes, the bulk of which are devoted to free-trade issues such as

tariffs, agricultural restrictions, import licensing, and rules of origin. The US–

Singapore Free Trade Agreement went into effect in 2004 and is nearly ten times

as long, taking up 70,000 words. It contains 20 chapters (each with many articles),

more than a dozen annexes, and multiple side letters. Of its 20 chapters, only

seven cover conventional trade topics. Other chapters deal with behind-the-border

topics such anti-competitive business conduct, electronic commerce, labor, the

environment, investment rules, financial services, and intellectual property rights.

Intellectual property rights take up a third of a page (and 81 words) in the US–

Israel agreement. They occupy 23 pages (and 8,737 words) plus two side letters in

the US–Singapore agreement.

Taking these new features into account requires economists to rethink their

default attitudes toward trade agreements, and the politics behind them. This paper

offers a starting point toward the reconsideration that is needed. I will argue that

economists’ conflation of free trade with trade agreements is rooted in an implicit

political economy perspective that views import-competing interests as the most

powerful and dominant architect of trade policy. Under this perspective, protec-

tionists on the import side are the main villain of the story. Trade agreements, when

successfully ratified, serve to counter their influence and get us closer to a welfare

optimum by reducing the protectionism (or harmful regulations) that these special

interests desire. In particular, they prevent beggar-thy-neighbor and beggar-thyself

policies that would result in the absence of trade agreements. In achieving these

ends, governments may be assisted by other special interests—those with a stake

in expanding exports and market access abroad. But the latter play an essentially

useful role, since they are merely a counterweight to the protectionist lobbies.

There is an alternative political economy perspective, one that reverses the

presumption about which set of special interests hold the upper hand in trade policy.

In this view, trade agreements are shaped largely by rent-seeking, self-interested

behavior on the export side. Rather than reining in protectionists, trade agreements

empower another set of special interests and politically well-connected firms, such

76 Journal of Economic Perspectives

as international banks, pharmaceutical companies, and multinational corporations.

Such agreements may result in freer, mutually beneficial trade, through exchange

of market access. But they are as likely to produce welfare-reducing, or purely redis-

tributive outcomes under the guise of free trade.

When trade agreements were largely about import tariffs and quotas—that is

before the 1980s—the second scenario may not have been particularly likely. But

with trade agreements increasingly focusing on domestic rules and regulations, we

can no longer say the same. Taking these new features into account requires us to

cast trade agreements, and the politics behind them, in quite a different light.

Free Trade versus Free Trade Agreements

Basic trade theory suggests that free trade is the optimal policy for an economy,

provided compensatory policies can be implemented and adverse interactions with

market failures can be addressed through complementary policies. The only excep-

tion is that a large country may be able to manipulate its terms of trade at the

expense of its trade partners, using an “optimal tariff.” The latter motive provides a

rationale for countries to enter into trade agreements, preventing mutually harmful

trade protectionism.

Economists have long known that real-world trade agreements are difficult

to understand from the lens of “optimal tariff” theory. And as trade agreements

have evolved and gone beyond import tariffs and quotas into regulatory rules

and harmonization (patent rules, health and safety regulations, labor standards,

investor courts, and so on), they have become harder and harder to fit into received

economic theory.

International agreements in such new areas produce economic consequences

that are far more ambiguous than is the case of lowering traditional border

barriers. They may well generate increases in the volume of trade and cross-border

investment. Nevertheless their welfare and efficiency impacts are fundamentally

uncertain. Here, I will sketch the issues that arise in four areas that have become

common in modern trade agreements: trade-related intellectual property rights,

rules about cross-border capital flows, investor-state dispute settlement procedures,

and harmonization of regulatory standards.

Consider first patents and copyrights (so-called “trade-related intellectual

property rights” or TRIPs). TRIPs entered the lexicon of trade during the Uruguay

Round of multilateral trade negotiations, which were completed in 1994. The

United States has pushed for progressively tighter rules (called TRIPs-plus) in

subsequent regional and bilateral trade agreements. Typically TRIPs pit advanced

countries against developing countries, with the former demanding stronger and

lengthier monopoly restrictions for their firms in the latter’s markets. Freer trade

is supposed to be win-win, with both parties benefiting. But in TRIPs, the advanced

countries’ gains are largely the developing countries’ losses. Consumers in the devel-

oping nations pay higher prices for pharmaceuticals and other research-intensive

What Do Trade Agreements Really Do? 77

products and the advanced countries’ firms reap higher monopoly rents. One

needs to assume an implausibly high elasticity of global innovation to developing

countries’ patents to compensate for what is in effect a pure transfer of rents from

poor to rich countries.

That is why many ardent proponents of free trade were

opposed to the incorporation of TRIPs in the Uruguay Round (for example, Bhag-

wati, Krishna, and Panagariya 2014).

Nonetheless, TRIPs rules have not been dropped, and in fact expand with each

new free trade agreement. Thanks to subsequent trade agreements, intellectual

property protection has become broader and stronger, and much of the flexibility

afforded to individual countries under the original World Trade Organization

agreement has been eliminated (Sell 2011).

Second, consider restrictions on nations’ ability to manage cross-border capital

flows. Starting with its bilateral trade agreements with Singapore and Chile in 2003,

the US government has sought and obtained agreements that enforce open capital

accounts as a rule. These agreements make it difficult for signatories to manage

cross-border capital flows, including in short-term financial instruments. In many

recent US trade agreements, such restrictions apply even in times of macroeco-

nomic and financial crisis. This has raised eyebrows even at the International

Monetary Fund (Siegel 2013).

Paradoxically, capital account liberalization became a norm in trade agree-

ments just as professional opinion among economists was becoming more skeptical

about the wisdom of free capital flows. The frequency and severity of financial crises

associated with financial globalization have led many experts to believe that direct

restrictions on the capital account have a second-best role to complement pruden-

tial regulation and, possibly, to provide temporary breathing space during moments

of extreme financial stress. The International Monetary Fund itself, once at the

vanguard of the push for capital-account liberalization, has officially revised its

stance on capital controls. It now acknowledges a useful role for them where more

direct remedies for underlying macroeconomic and financial imbalances are not

available. Yet investment and financial services provisions in many free-trade agree-

ments run blithely against this new consensus among economists.

A third area where trade agreements include provisions of questionable merit

are the so-called “investor-state dispute settlement” (ISDS) procedures. These provi-

sions have been imported into trade agreements from bilateral investment treaties.

They are an anomaly in that they enable foreign investors, and they alone, to sue

host governments in special arbitration tribunals and to seek monetary damages for

regulatory, tax, and other policy changes that reduce their profits. Foreign inves-

tors (and their governments) see ISDS as protection against expropriation, but in

See Diwan and Rodrik (1991) for an attempt to justify TRIPS from the standpoint of developing nations.

The history of this paper is of some interest. It was written while I was visiting the World Bank as a junior

researcher and at a time when developing nations were strenuously objecting to the US push for TRIPS

in the Uruguay Round. The paper was motivated by a challenge that came down to us from the then chief

economist of the World Bank. Wouldn’t it be nice if someone could make a positive economic case for

TRIPS for the developing nations? It turned out someone could.

78 Journal of Economic Perspectives

practice arbitration tribunals interpret the protections provided more broadly than

under, say, domestic US law (Johnson, Sachs, and Sachs 2015).

Developing countries traditionally have signed on to investor–state dispute

settlement procedures in the expectation that they would compensate for their

weak legal regimes and help attract direct foreign investment. But ISDS also suffers

from its own problems: it operates outside accepted legal regimes, gives arbitrators

too much power, does not follow or set precedents, and allows no appeal. Whatever

the merits of ISDS for developing nations, it is more difficult to justify its inclusion

in trade agreements among advanced countries with well-functioning legal systems

(like the prospective Transatlantic Trade and Investment Partnership between the

United States and European countries).

Finally, consider the pursuit of the harmonization of regulatory standards that

lies at the center of today’s trade agreements. The justification for harmonization is

that eliminating regulatory differences among nations reduces the transaction costs

associated with doing business across borders. Taking this line of argument one step

further, proponents sometimes label regulatory standards abroad that are more

demanding than those at home as “non-tariff barriers.” There is little question that

governments sometimes do deploy regulations to favor domestic producers over

foreign ones. But these differences may also reflect dissimilar consumer preferences

or divergent regulatory styles. European bans on genetically modified organisms

and hormone-fed beef, for example, are rooted not in protectionist motives—the

same bans apply to domestic producers as well—but in pressures from consumer

groups at home. The US government, for its part, considers them as protectionist

barriers, and dispute-settlement panels of the World Trade Organization have often

agreed (Euractiv 2006 [updated 2012]).

For economists, the trouble is that unlike in the case of tariffs and quotas,

there is no natural benchmark that allows us to judge whether a regulatory standard

is excessive or protectionist. Different national assessments of risk—safety, envi-

ronmental, health—and varying conceptions of how business should relate to its

stakeholders—employees, suppliers, consumers, local communities—will produce

different standards, none obviously superior to others.

In the language of economics, regulatory standards are public goods over which

different nations have different preferences. An optimal international arrangement

would trade off the benefits of expanding market integration (by reducing regu-

latory diversity) against the costs of excessive harmonization. But in general, we

have only a hazy idea where that optimal point may lie, which in any case will vary

across different policy domains. Perhaps regulators and trade negotiators do their

For some statistics on the use of investor-state dispute settlement procedures, see UNCTAD (2015, chapter

III). Of all concluded cases as of end-2014, 27 percent resulted in a ruling in favor of the investor. Twenty-

seven percent of the cases were settled, 9 percent were discontinued, and in 2 percent of cases, the state

was found in breach but no damages were awarded. In the rest of the cases (36 percent), rulings were in

favor of the state. Note that even when the state “wins” in these cases, it is at most awarded its legal costs.

Dani Rodrik 79

job properly and assess the costs and benefits appropriately, safeguarding room for

diversity. Perhaps not.

Regardless, it is curious that economists tend to be nearly unanimous in their

view that trade agreements are a good thing. Despite not knowing much about the

details, they must believe such agreements regularly strike the right balance in all

these areas of ambiguity.

Is it that none of these complications matter as long as the

agreement is called a “free trade agreement”?

The tendency to associate “free trade agreements” all too closely with “free

trade” may result from the fact that the new (and often problematic) beyond-the-

border features of these agreements have not yet made their mark on the collective

unconsciousness of economists. But I suspect it also results from a certain implicit,

hand-waving kind of political economy analysis. In this perspective, protectionist

interests are the dominant influence in the determination of trade and other poli-

cies. Hence, in the absence of trade agreements, barriers to trade are too high and

there is too little trade. Trade agreements are in turn a mechanism through which

protectionist interests can be neutralized. The specific details of the agreement do

not matter much as long as trade-creating interests are empowered to offset the

otherwise dominant protectionist influences. In other words, trade agreements must

move us in a desirable direction because they are a counterweight to protectionists.

This inference is valid as long as the argument’s premise is correct—namely,

that trade agreements on balance empower the special interests more closely aligned

with good economic performance. But what if they empower the wrong special

interests instead—the investors, banks, and multinational enterprises seeking to

increase rents at the expense of the general interest?

When trade agreements are mostly about tariffs and quotas, there is an easy way

to tell the difference. The presence of high tariffs before the agreement and tariff

reduction as a result of the agreement provide prima facie evidence that protectionists

were the dominant influence before the agreement and that they were countervailed

through the agreement. But this intuition does not carry over to trade agreements on

domestic rules, regulations, and standards because we do not readily know where the

efficient benchmark is. A trade agreement captured by an alternative set of special

interests may make things worse just as easily as it makes them better. Such an agree-

ment can move us away from the efficient outcome, even if it takes the guise of a free

trade agreement and expands the volume of trade and investment.

There is plenty of anecdotal evidence of rent-seeking by firms that favor trade

agreements. But to put this evidence in context, let us first examine why countries

sign trade agreements in the first place.

An additional area of concern raised by trade specialists early on in the context of NAFTA was the

design of the rules of origin, the regulations that determine whether a good imported by one country

receives duty-free treatment within the free trade area. Krueger (1993) and others worried that restrictive

rules of origin would essentially extend the more protectionist country’s tariffs to the other partners.

(This concern does not arise in customs unions where countries adopt a common external tariff.)

80 Journal of Economic Perspectives

The Logic of Trade Agreements

When economists teach gains from trade, they emphasize that free trade is

good for each nation on its own. (What it means to say “good for the nation” in

the presence of losers as well as gainers is, of course, a thorny issue, but I will leave

that aside, in keeping with the standard treatment.

) Ricardo’s (1817) demonstra-

tion of the principle of comparative advantage—free trade expands a nation’s

consumption possibilities frontier even if it has an absolute productivity advantage

in producing every good—remains one of our profession’s most significant

intellectual achievements. A direct implication is that countries should want to have

free trade regardless of what their trade partners do. Responding to another coun-

try’s protectionism by raising one’s own trade barriers is tantamount to cutting off

the nose to spite the face.

If this insight were the end of the story, the presence (and proliferation) of

trade agreements would be a mystifying puzzle. What is the point of signing agree-

ments with other countries to do what is in your national interest in the first place?

A possible answer was provided early on by Harry Johnson (1953). Countries that

are “large” in world markets have the incentive to exploit their market power. An

import tariff restricts home demand for other countries’ exports and drives down

the world price of the imported good. A Nash equilibrium among large countries

would be inefficient, as each country would be imposing its own, positive “optimal”

tariffs. Correspondingly, a trade agreement that enforced free trade could leave all

the countries better off.

Even if the logic of this argument is accepted, the question remains of why a

formal trade agreement is needed, such as the World Trade Organization or NAFTA.

After all, a free-trade equilibrium can be achieved through cooperation in a repeated

interaction game. In addition, one can ask whether a formal agreement on its own

can prevent opportunistic behavior on the part of sovereign nations. Nonetheless,

the motive to manipulate the terms-of-trade provides a valid economic motive for

countries to commit themselves to free trade by signing on to trade agreements.

However, this theory does not sit well with the fact that actual policymakers do

not seem very concerned about the terms of trade when they negotiate trade agree-

ments. They tend to care more about the volume of trade: nations like it when their

exports grow, but not so much when their imports expand. Effectively, nations trade

market access: more of your imports in return for more of my exports. Moreover,

these preferences do not seem to be grounded in the effects that trade volumes

have on world market prices. It is true that home policies that lower import demand

tend to reduce world market prices of imports, and hence improve the terms of

However, Driskill (2012) takes the profession to task, correctly, for sweeping distribution under the rug

when discussing the “welfare gains” from trade.

See Grossman (2016) for an exposition of the Johnson argument and the subsequent literature.

Bagwell and Staiger (2002) have been the most consistent and prolific defenders of this perspective on

trade agreements.

What Do Trade Agreements Really Do? 81

trade. But on the export side, general government practice consists of boosting

export supply, through export subsidies, credits, and other assistance, rather than

reducing it. This has the effect of lowering export prices on world markets, and

hence worsening the terms of trade.

Also, if trade agreements are really about curbing terms-of-trade manipulation,

what do we make of the prohibition on export subsidies in the World Trade Organiza-

tion? When a government resorts to export subsidies, it worsens its own terms of trade

and confers economic benefits on other nations. If it does so nevertheless, it must be

for noneconomic or special-interest reasons. Regardless, there would be no reason

for trade agreements to prohibit their use. As Grossman (2016) notes, “the literature

offers no compelling reason why trade agreements should outlaw export subsidies in

a trading environment characterized by perfectly competitive markets.”

Trade policy practitioners seem to worry little about international terms-of-

trade spillovers. Instead, they tend to justify trade agreements by reference to the

politics of trade policy at home: Trade agreements are what enable governments

to say “no” to domestic import-competing interests. Absent trade agreements, this

argument goes, governments are too easily tempted to do the easy thing and provide

import protection when faced with short-term political pressures (for example,

Bown 2016).

A number of academic papers conceptualize this argument in the form of a

time-inconsistency problem (for example, Staiger and Tabellini 1987; Maggi and

Rodriguez-Clare 1998). In this framework, the government knows that free trade is

the best policy in the long run. But it faces short-term political pressures to respond

to organized interest groups. Forward-looking workers and capitalists understand the

difference between the government’s short-run and long-run incentives and behave

accordingly. In particular, they make their investment decisions so as to ensure the

government provides them with trade protection. In these settings, trade agreements

are a commitment device for governments to withstand political pressure from future

protectionists. As Grossman (2016) notes, we may question whether there is not an

easier way of purchasing such commitment than negotiating very complicated deals

with multiple partners over many years. Nevertheless, the view that trade agreements

serve to neutralize protectionist special interests is very widely held.

This commitment or lock-in argument is analogous to the familiar case for

policy delegation in other areas with dynamic inconsistency, such as monetary

policy (justifying an independent central bank) or business regulation (justifying

autonomous regulatory agencies). In any of these settings, the validity of the policy

conclusion depends critically on the specification of the game that is being played

between the government and special interests.

When there is a genuine time consistency problem, everyone is better off with

pre-commitment or delegation (save, possibly for the lobbyists and special inter-

ests). When protectionists show up at the government’s door, the government says:

Under imperfect competition, countries may have an economic incentive to use export subsidies to

shift excess profits from foreign firms to domestic firms. See Grossman (2016, section 3) for a discussion.

82 Journal of Economic Perspectives

“Sorry, I’d love to help you out, but the trade agreement will not let me do it.” This

is the good kind of delegation and external discipline.

Now consider a different setting. Here, the government fears not its future

self, but its future opponents: the opposition party (or parties). The latter may have

different views on economic policy, and if victorious in the next election, the oppo-

sition may well choose to shift course. In this situation, an incumbent government

enters an international agreement to tie the hands of its opponents. From the stand-

point of social welfare, this strategy has much less to recommend itself. The future

government may have better or worse ideas about government policy, and it is not

clear that restricting what it can do in the future is a win-win outcome. This govern-

ment too will present its case in traditional delegation terms. But what it is really

doing is to ensure the permanence of partisan policies.

Now suppose further that the current government is captured by special

interests—but by exporter lobbies instead of import-competing lobbies. In this

case, the government’s objectives are explicitly redistributive, to transfer rents from

the rest of society to a special interest. But unlike in the usual model, the rent-

seekers are not the traditional protectionists. They are pharmaceutical companies

seeking tighter patent rules, financial institutions that want to limit ability of countries

to manage capital flows, or multinational companies that seek special tribunals to

enforce claims against host governments. In this setting, trade agreements serve to

empower special interests, rather than rein them in.

Whose Interests Do Trade Agreements Serve?

With traditional trade agreements, which focused on reducing tariff and

nontariff barriers to trade, it was relatively easy to figure out which of these different

models approximated reality better. Consider for example the GATT (General

Agreement on Tariffs and Trade) rounds of multilateral trade negotiations before

the World Trade Organization was established in 1995. Tariff levels were high

after World War II, and negotiations were largely about bringing them down. Few

other issues were discussed beyond tariffs and other explicit barriers at the border.

The fact that tariffs were high to begin with is prima facie evidence that protec-

tionist interests had previously held the upper hand in the political equilibrium.

The fact that trade agreements succeeded in lowering tariffs is evidence that such

agreements served to counteract those protectionist interests. In other words, the

trade-agreements-as-political-commitment story worked pretty well. It suggests that

these agreements were moving the economies of the negotiating parties broadly in

the right direction.

Of course, if trade deals are the outcome of partisan politics, there will be pressure in the future to renege

on them, once political power changes hands. But this is no different than in the standard time-inconsistency

case, where short-term incentives always militate in favor of reneging on trade agreements. In both cases,

the argument relies on the presence of costs that render international agreements hard to reverse.

Dani Rodrik 83

With post-1995 trade agreements, matters are no longer so simple. Tariffs and

explicit barriers to trade have dropped considerably, and many new areas of negoti-

ation have opened up in which there is typically no efficient “free-trade” benchmark

analogous to the role that zero duties play in the context of tariffs. Do Vietnam’s

capital-account regulations, say, or patent rules serve the country’s economic devel-

opment well or poorly? Are European Union food safety regulations closely aligned

with European consumers’ risk preferences or do they privilege producer interests

too much? Does US jurisprudence provide adequate protections for foreign inves-

tors, or not? To be sure, domestic regulations and product standards can be enacted

for protectionist purposes—simply to keep competing imports out. But they can be

also used to serve developmental, social, or other deserving goals.

If countries have gotten the balance wrong in these and other areas, can we

be at all sure that trade agreements such as the Trans-Pacific Partnership or the

Transatlantic Trade and Investment Partnership will move their policies closer to

the social optimum—and not further away? Can the dispute settlement process

provided by such trade agreements draw the appropriate distinctions in practice

between pure protectionism and legitimate regulatory divergence?

It is hard to provide a definitive answer to these questions. What is clear is

that we cannot simply look at whether agreements are trade-creating or not and

evaluate them on that basis. It is all too easy to come up with examples where too

much regulatory harmonization in the name of reducing transaction costs to trade

leaves at least one of the negotiating parties worse off. The case of tightening intel-

lectual property rights in developing countries, mentioned earlier, is a prominent

example. Erosion of consumer protections in high-standard countries may likewise

expand trade, but it will not leave importing countries better off. It is similarly easy

to see that agreements that privilege investors or corporations over other interests

(like labor or the environment) can end up producing largely redistributive conse-

quences with few efficiency gains. That fear is widespread among opponents of

investor courts.

Potential trade-offs arise in all of these areas: regulatory harmonization may

spur trade, but it could also prevent regulations from reflecting domestic prefer-

ences. A proper negotiating process would take both sides of the ledger into account.

The texts of trade agreements pay plenty of lip service to economic and social goals

beyond trade. However, these are fundamentally trade deals. They are not negotia-

tions on public health, regulatory experimentation, promoting structural change

and industrialization in developing nations, or protecting labor standards in the

advanced economies. It would not be surprising if the process were captured by

See Sykes (2017) for some of the difficulties. Howse and Tuerk (2001) provide an early discussion of

WTO jurisprudence, drawing attention to the risk that WTO rules can be used to challenge domestic

regulations aimed at addressing serious health risks. The specific case they discuss is a case brought

by Canada against France’s ban on asbestos in construction materials. Even though the WTO panel

ultimately ruled against Canada, it accepted the basis of the claim, namely that asbestos and non-asbestos

materials were “like products” and that therefore France had discriminated against Canadian imports.

84 Journal of Economic Perspectives

trade interests. Nor should it be unexpected that the success of the agreements is

typically gauged by the volume of trade they create.

We could gain further insight into specific outcomes by looking at the actual

process through which trade agreements are negotiated. However, such negotiations

are typically secret—a feature that draws the ire of labor, public-interest groups, and

many politicians. During the Trans-Pacific Partnership negotiations, for example,

only two copies of the text were made available in special reading rooms to US

congressmen and their staff with special security clearances (Bradner 2015). And

even these readers could be prosecuted if they revealed the contents to the public.

The ostensible reason for secrecy is to facilitate the back-and-forth dealing

needed to produce compromise. But from the perspective of broader social welfare,

secrecy is a mixed blessing. It may promote quicker bargains. But it also tends to bias

the results against interests not present in the negotiation (Kucik and Pelc 2016).

Business is rarely far from the actual negotiations. In fact, it is commonplace for busi-

ness lobbyists to wait just outside the negotiation room and influence the outcome

in real time (for example, see the account of NAFTA negotiations in Smith 2015).

One of the better-known and most instructive cases is the story of trade-related

intellectual property rights, or TRIPs. The inclusion of TRIPs in the 1994 agreement

that established the World Trade Organization was a landmark event. As Devereaux,

Lawrence, and Watkins (2006, p. 42) write, “[a]fter seven years of negotiating,

industries that rely on copyrights, patents, and trademarks received more protec-

tion than anyone had believed possible at the outset of the talks.” Business interests

had been pushing since at least the 1970s to get the US government to enforce

patent and copyright protections abroad. The conventional international forum for

discussion of such issues was the World Intellectual Property Organization (WIPO).

However, US firms regarded WIPO as an ineffective UN agency dominated by devel-

oping countries. A coalition made up of agrochemical companies like Monsanto,

trademark-based companies such as Levi-Strauss and Samsonite, pharmaceutical

companies like Pfizer, and computer companies such as IBM effectively redefined

TRIPs as a trade issue. They managed to engineer what political scientists call

“forum shifting,” moving the focus of international negotiation from WIPO to what

would eventually become the World Trade Organization. US firms coordinated with

their counterparts in Europe and Japan to develop minimum standards on which

they would agree. These standards would in turn significantly shape the final agree-

ment that emerged from the Uruguay Round (Devereaux, Lawrence, and Watkins

2006; Sell 2011).

The shift in forums from the World Intellectual Property Organization to the

World Trade Organization was a brilliant strategic move for business. It ensured

that commercial considerations would dominate and outweigh other goals, such as

implications for economic development and public health. But TRIPs was only the

beginning. Following their success with using the Uruguay Round to pursue their

goals for protection of intellectual property, pharmaceutical and other companies

engaged in what Sell (2011) calls “vertical” forum shifting—that is, pushing for and

obtaining further protections in specific free trade agreements. The United States

What Do Trade Agreements Really Do? 85

had much greater bargaining leverage vis-à-vis individual developing nations in

bilateral or regional trade agreements. Once a precedent had been set in the WTO

talks, it was now possible to go considerably beyond TRIPs. Pharmaceutical compa-

nies were able to obtain test data exclusivity (preventing generics providers from

using the same data in their own licensing applications), a prohibition on parallel

imports (of original products, but by other than the patent-holders), severe restric-

tions on compulsory licensing requirements by host governments, and automatic

patent term extensions (Sell 2011). The Trans-Pacific Partnership (TPP), the latest

of these agreements, has such broad protection of intellectual property that the

head of the World Health Organization has spoken out against it, blaming interfer-

ence by “powerful economic operators” (Germanos 2015).

The influence of special interests is rarely exercised through the naked applica-

tion of power—do this, or else! Instead, these groups get their way by convincing

policymakers and the broader public that certain of their goals also further the

public interest. The success of TRIPs had to do in no small part with the framing

of the issue in terms that gave it broad legitimacy and appeal. Thus, what might

have been more accurately called monopoly rents were transformed into “property

rights.” Then firms abroad who imitated and reverse-engineered technologies of

the more advanced countries became engaged in “piracy,” even though this is a

time-honored practice by technologically lagging countries, including today’s devel-

oped countries in the past. As one prominent example, many of Boston’s original

textile mill owners “stole” their designs from Lancashire, taking elaborate steps to

evade British intellectual property rights protections (Morris 2012). With some

hand-waving, preserving the monopoly of US film studios, pharmaceutical compa-

nies, and fashion houses turned into a fundamental issue of free trade.

Pro-trade business interests are known to have played a significant role in the

expansion of trade agreements into other new areas beyond intellectual property.

For example, the push to include services in multilateral trade negotiations took

place at the behest of American firms. Services differ from trade in goods insofar

they often require changes in domestic regulations. Financial services is a good

example. As Marchetti and Mavroidis (2011, p. 692) write, “it was the US financial

Even though US pharmaceutical companies would have gotten a better deal under the Trans-Pacific

Partnership than they ever had, they were dissatisfied at the end because they could not get the other

countries to agree to the 12-year protection in biologics that they currently enjoy in the United States.

They got a minimum of five years instead, with three additional years under special regulatory safe-

guards. Mark Grayson, a spokesman for PhRMA, which represents top pharmaceutical companies, is

quoted as saying: “They were supposed to come back with U.S. law on [intellectual property] rights,

and they didn’t, and our board is very disappointed” (Ferris 2015). For another perspective, Branstetter

(2016) concludes that TPP struck a reasonable balance between incentives to innovation and access

to medicines. He praises the agreement for exporting the US regulatory model (specifically, the Drug

Price Competition and Patent Term Restoration Act of 1984, often known Hatch–Waxman Act) to the

Asia-Pacific context. But given that the parties to the trade agreement are at very different stages of

development, it is not clear that a similar model is suitable for all, rather than being a mechanism for

rent shifting from less-developed to more-developed countries. Moreover, empirical research fails to

find strong effects on innovation from more restrictive patents (Boldrin and Levine 2012; Moser 2013;

Sakakibara and Branstetter 1999; Branstetter 2004).

86 Journal of Economic Perspectives

services sectors that first argued systematically in favor of a trade round that would

include a chapter on liberalization of trade in services.” A key role was played by the

Coalition of Service Industries, a trade group representing US service industries,

which focused its energies on the right of establishment of financial and insurance

companies in foreign countries: “The CSI gathered data, organized conferences,

engaged in extensive public lecturing, and heavily lobbied the US government to

this effect” (p. 693). The heads of Citibank and American Express each headed

key advisory groups organized by the US Trade Representative in the run-up to the

Uruguay Round agreement in 1994. American Express was especially active, with

its executives building up a domestic lobby, establishing links with other service-

industry lobbies around the world, and exerting influence on US policy through

direct participation in negotiations with other countries (Yoffie 1990, cited in

Marchetti and Mavroidis 2011).

Interestingly, this lobbying to expand markets abroad in services has not done

much to nullify service protectionism in the United States itself—unlike in the tradi-

tional account of what trade agreements do. For example, one of the most blatant

forms of US protectionism is the Merchant Marine Act of 1920 (often known as

the Jones Act), which prevents foreign ships from serving domestic US shipping

lines. The objective of the law is to maintain a strong US shipbuilding industry and

merchant marine, ostensibly for national security purposes. But the protectionist

intent and consequences are clear (Grennes 2017). It has remained untouched

in all the trade agreements the United States has negotiated, including the Trans-

Pacific Partnership.

As trade agreements move into these new areas, the role of business lobbies

changes as well. Governments have to rely on knowledge and expertise from busi-

nesses to negotiate complex regulatory changes. Hence, business lobbies become

partners and collaborators for the trade negotiators: they help define the issue,

provide information and expertise, and mobilize support from other business

groups transnationally. As Woll and Artigas (2007, p. 131) put it, “[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.”

Business lobbies also become much more intimately involved in the actual trade

negotiations, sometimes forming a larger part of the delegation than the actual

government representatives (Woll and Artigas 2007).

A rough idea of who actually lobbies for trade agreements can be obtained

from data collected by the Sunlight Foundation for the Trans-Pacific Partner-

ship. Their analysis is based on public lobbying reports issued by corporations

and industry associations, and whether the TPP is mentioned by name in those

reports (as reported by Drutman 2014). Perhaps unsurprisingly, pharmaceutical

manufacturing firms and PhRMA (the industry association) dominate the list.

Others that stand out are auto manufacturers, milk and dairy producers, textiles

and fabrics firms, information technology firms, and the entertainment industry.

Labor unions such as United Steelworkers and AFL-CIO, which are traditionally

Dani Rodrik 87

associated with protectionist motives, tend to lag behind these industry-based

groups.

Business interests exert influence also through their presence in the various

trade advisory committees that are set up in the course of trade negotiations.

Such committees are in principle made up of a wide range of all the stakeholders,

including labor groups and environmental nongovernment organizations who

may have a negative view of conventional trade agreements. But business repre-

sentatives and trade associations are by far the dominant group, making up more

than 80 percent of the membership of such committees during the negotiation of

Trans-Pacific Partnership (as reported in Ingraham 2014; Ingraham and Schneider

2014).

Systematic studies of how interest groups on different sides of trade agree-

ments shape the negotiations are rare, given the lack of transparency of the process.

However, one analysis of Swedish lobbies takes advantage of the fact that Sweden

has a far-reaching freedom-of-information clause in its constitution, which enabled

Rönnbäck (2015) to access all the documents behind trade policy formulation in

the country during the Uruguay Round. As Rönnbäck points out, the commonly

maintained assumption in the literature on the political economy of trade is that

the process is influenced overwhelmingly by import-competing, protectionist inter-

ests. Trade agreements are signed despite these interests, not because of them. But

Rönnbäck found that the approach pursued by the Swedish government in the

trade negotiations was not only in line with special-interest lobbying, but it was

largely shaped by it. The interest groups that played the determining role in the

consultative process were in favor of expanding trade. But the interests of these

groups were not in tariffs per se, which were already low. Instead their demand was

“to broaden the scope of the agenda of the GATT, by including issues such as trade

in services, investment measures and public tender agreements” (p. 286). In other

words, industry lobbies pushed for deep integration measures beyond the standard

free-trade policies.

Rönnbäck’s (2015) study also documents how trade negotiations can help

special interests coordinate across national borders. Apparently Swedish businesses

initially did not show much awareness—or interest in—intellectual property rights.

But as the United States pushed harder on TRIPs in the negotiations, the issue rose

in prominence among Swedish interest groups. As Rönnbäck (p. 287) puts it: “It

seems as if the interest groups only realized the potential for economic rents that the

trade negotiations could offer quite slowly, as the negotiations progressed. As soon

as the Swedish interest groups realized this potential, however, they did not hesitate

to act and make demands on the government.” As individual corporations such as

Astra as well as the Pharmaceutical Industry Association took up the cause, Sweden’s

government followed suit. By the late 1980s, any doubts the Swedish government

may have harbored about the wisdom of including TRIPs in the Uruguay Round

seems to have vanished. In the years leading to the final agreement, the intellectual

property issue came to be “described as among the most important for the Swedish

interests” (p. 288).

88 Journal of Economic Perspectives

Finally, the influence of special interests also shows up in the dog that does

not bark: potential areas of negotiation with high social returns that are left out of

the trade agenda. One such area that touches directly the interests of large firms is

global tax-and-subsidy competition. In a world with mobile capital, governments are

tempted to offer better terms to globally mobile corporations in order to compete

for investment. This results in a sub-optimal Nash equilibrium with larger transfers to

corporations and their shareholders than is globally desirable. In practice, the effects

show up in two areas: investment subsidies (in the form of tax holidays and other

sweeteners) and reductions in corporate tax rates. In view of the obvious cross-border

externalities, enacting global disciplines on tax-and-subsidy competition would make

excellent economic sense. Yet trade agreements never touch on this issue. They are

replete with restrictions on what home governments can do to impose obligations

on foreign investors. But they do not prevent these governments from wasting tax

dollars and enriching corporations in a harmful race to the bottom.

Ammunition to the Barbarians?

When I recently gave a talk arguing that economists underplay some of the

adverse consequences of advanced globalization, an economist in the audience took

me to task: Don’t you worry, he asked, that your arguments will be used (or abused)

by populists and protectionists to further their own interests? It is a reaction that

reminds me of a response from a distinguished economist more than two decades

ago to my 1997 monograph Has Globalization Gone Too Far? All your arguments are

fine, he told me, but they will give “ammunition to the barbarians.”

The objection is instructive insofar as it lays bare the implicit political economy

understanding with which economists tend to approach public discussions of trade

policy. In this perspective, the serious threats to sensible trade policy nearly always

come from the import protectionists, and trade agreements mainly offset the influ-

ence of the protectionists. But as trade agreements have evolved and gone beyond

import tariffs and quotas into regulatory rules and harmonization—intellectual

property, health and safety rules, labor standards, investment measures, investor-

state dispute settlement procedures, and others—they have become harder and

harder to fit into received economic theory. Why do many economists presume that

it is more dangerous to express skepticism in public about these rules than it is to

cheerlead? In other words, why do they think that there are barbarians only on one

side of the issue?

I have presented an alternative perspective in this paper. Rather than

neutralizing the protectionists, trade agreements may empower a different set of

rent-seeking interests and politically well-connected firms—international banks,

pharmaceutical companies, and multinational firms. They may serve to internation-

alize the influence of these powerful domestic interests. Trade agreements could

still result in freer, mutually beneficial trade, through exchange of market access.

They could result in the global upgrading of regulations and standards, for labor,

What Do Trade Agreements Really Do? 89

say, or the environment. But they could also produce purely redistributive outcomes

under the guise of “freer trade.” As trade agreements become less about tariffs and

nontariff barriers at the border and more about domestic rules and regulations,

economists might do well to worry more about the latter possibility. They may

even adopt a stance of rebuttable prejudice against these new-type trade deals—a

prejudice against these deals, which should be overturned only with demonstrable

evidence of their benefits.

■ I am grateful to Robert Lawrence, Gene Grossman, and the editors for helpful comments

that improved the paper, and to Vedant Bahl for research assistance.

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