Academic journal article East Asian Economic Review

The Effect of International Trade on Rule of Law

Academic journal article East Asian Economic Review

The Effect of International Trade on Rule of Law

Article excerpt

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


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. Section IV looks at the overall picture drawn from the individual regressions, and Section V is a short conclusion.

II. Motivation and Past Literature

While there are numerous papers on international trade or globalization and rule of law (including human rights), most of these papers have dealt with the use and efficacy of economic sanctions: Using international trade as a tool to coerce countries into establishing better human rights or labor rights. Trade and investment sanctions have been often used to induce countries to change their behaviors and institutions, and have been politically popular in many countries. Since the Uruguay Round and NAFTA negotiations, provisions for countries to maintain minimum labor and human rights have also been popular. Many free trade agreements (FTAs) or regional trade agreements (RTAs) now include conditions on human rights or labor rights2. Economists and businessmen, however, usually point out that using economic sanctions to achieve political goals or enforcement of human and labor rights through multilateral trade organizations such as WTO is not the best way to impose these rights, no matter how desirable they may seem3. Rather, they argue that less restricted globalization, by promoting economic growth and through demonstration effects, will lead to stronger human rights, democracy and rule of law4. …

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