The Effect of International Trade on Rule of Law

Article excerpt

In this paper, we look at the relationship between international trade and the rule of law, using the World Justice Project Rule of Law Index, which include index figures on human rights, limits on government powers, transparency and regulatory efficiency. Based on regression analyses using the rule of law index figures and international trade figures (merchandise trade, service trade, exports and imports as percentage of GDP,) international trade and basic human rights seem to have little relationship; but trade has a close positive relationship with strong order and security. Somewhat surprisingly, regulatory transparency and effective implementation seems to have little or no effect on international trade and vice versa. International trade shows a clear positive relationship with the country's criminal justice system, but the relationship with the civil justice system is not as clear as such. For regulatory implementation and civil justice, services trade positively affect these institutions, but these institutions in turn affect exports more strongly than services trade. Finally, the effect of trade on rule of law is stronger on a medium to long term (10-20 year) time horizon.

Keywords: Rule of Law, International Trade, Regulatory Reform, Transparency, Institutions

JEL Classification: F19, K49, 043

I. Introduction

The relationship of international trade and investment with human rights, democracy and regulatory efficiency have been examined for hundreds of years. In the recent era of "globalization," whether increased international trade and investment hurt or help domestic political and economic institutions related to human rights, democracy, regulatory transparency and efficiency as well as economic growth, has been a controversial question fraught with ambiguities. While it is generally agreed that economic growth and higher economic living standards usually lead to better human rights, it is less clear that more political participation, democracy and higher regulatory efficiency, the role of international trade and investment would foster these beneficial effects. Some observers argue that more globalization, including more international trade and investment will lead to better institutions; other "anti-globalization" advocates argue that globalization hurts human rights and democracy due to excessive powers and influence given to multinational corporations or multilateral organizations such as IMF and WTO1.

In this paper, we try to see whether international trade has positive effect on human rights, democracy and regulatory efficiency as measured by the World Justice Project (WJP) Rule of Law Index. While the two pillars of economic globalization are international trade and foreign investment, and both pillars can potentially affect institutions such as human rights, democracy and regulatory transparency and efficiency, this paper looks only at international trade to the extent of keeping the length and the subject of the paper manageable. Foreign direct investment will be considered in a separate paper. For convenience we will refer to the political and economic institutions examined in this paper as "rule of law" following the conventions of WJP (2012). We note that the concept of rule of law by WJP is wider than most usage of that term. Following WJP (2012), the rule of law includes limiting government powers, absence of corruption, maintaining order and security, fundamental human rights, open government (transparency), effective regulatory enforcement, effective civil justice system and effective criminal justice system. More details are available below in

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In Section II of this paper, we look at the motivation behind this paper in more detail and take a short survey of past literature, including a short description of WJP Rule of Law Index. In Section III, we look at the individual regression results detailing the relationship between international trade and the various elements of rule of law. …