Cashing in on Cooperation: Democracy, Free Trade, and International Rules

Article excerpt

Protesters in the streets view international economic organizations such as the World Trade Organization (WTO) as hostile to democracy. Critics on both the left and right warn against the restraints of international rules, which they portray as the product of corporate interests or self-serving international bureaucrats. Yet the rise of legalization in international affairs over the past 20 years has taken place alongside the spread of democracy. The trend of democratic governments confronting challenges of economic interdependence by turning to international organizations for help has proven predominant and shows few signs of abating. The role of these organizations is not simply to solve coordination problems among states but also to solve coordination problems within states, especially democratic states. Rather than seeing international organizations as a threat to democracy, we should view them as a necessary-tool for democratic leaders trying to balance conflicting pressures at home. A closer look at trade policy highlights the complementarities between democracy, economic interdependence, and international law.

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How do democratic governments manage trade policy? Electoral incentives create conflicting pressures to provide economic growth that will benefit the general interest and to respond to special interest groups that offer money and votes. To the extent that free trade raises income levels, it will please everyone, but all recognize that trade brings winners and losers. Support for free trade in democracies therefore depends on whether export industries mobilize to counterbalance protectionist groups and whether the government is able to persuade the public of a broader interest in free trade. Research shows that, over the past 30 years, democracies have undertaken trade liberalization at a higher rate than other governments. How have they harnessed the pressures for aggregate welfare gains while resisting protectionist lobbies? International institutions play a critical role in this process. The WTO has been on the frontlines of the international financial crisis in ways that are not widely recognized, and it deserves credit for holding back the kind of protectionism that occurred after the stock market crash of 1929.

The Mixed Record of Democracy and. Free Trade

The rise of democratic governments in the early 20th century contributed to the unraveling of the first golden era of globalization. Leaders who sought support from newly organized and enfranchised labor movements and trade associations could not be indifferent to unemployment and the devastation wrought by falling world prices. The United States took the lead in the turn to protectionism with the infamous Smoot-Hawley Tariff Act of 1930. In a classic example of log-rolling across narrow interests in democratic legislatures, Congress passed the tariff legislation that increased tariffs across both agricultural and light industry products. President Herbert Hoover had campaigned in 1928 with promises to address the grim situation of farmers who were facing low prices and foreclosures brought on by rising mortgage debt. He faced pressure from strong protectionist sentiment in the Republican Party, and so he reluctantly signed the bill even while he criticized it for the negative effect on international cooperation and the global economy. Indeed, the legislation led to other countries imposing similar tariff hikes that choked off US exports. The Great Depression witnessed the rise of beggar-thy-neighbor policies, as governments hoped that protectionist walls and currency devaluation could shelter their home markets from downward trends in world prices. Instead, the turn toward trade protection only worsened the crisis.

The second era of globalization following World War II was made possible by two key institutional changes that helped to make democracy more compatible with free trade. …