In the wonderful comic strip of the same name, Calvin and Hobbes engage in endless games of “Calvinball,” a game where the players make up rules as they go along and no one wins. While great for building imagination, its players often end up in disputes. Playing Calvinball in commerce would have the same consequences, undermining the benefits of the transaction for both parties, which is why trade rules are important to parties engaged in international commerce.
A mutually-beneficial exchange between two parties is the essence of any commercial transaction. A transaction within a single political jurisdiction between two domestic partners would have one set of rules covering what represents a contract, how payment terms are handled, and so on. An international transaction, however, is conducted under two sets of rules: one set of rules governs the party in Country A and the other set of rules governs the party in Country B. With two sets of rules, then, how do the commercial actors develop a reliable basis for conducting business? Trade rules provide an agreement between the governments so traders can avoid engaging in Calvinball.
Trade rules help ensure the parties avoid engaging in Calvinball where the rules are constantly made up and no one wins.
When trade professionals talk about “rules-based trade,” they usually refer to the General Agreement on Tariffs and Trade, or GATT, established after WWII. The fundamental importance of GATT rules are, first, that the agreements are written down, and second, that they are made, modified, and enforced by mutual consent. Obviously, bargaining is involved in reaching an agreement, but once a rule is made it becomes something that all parties accept. The essential basis of GATT rules are very powerful core principles that protect the space for beneficial transactions. These principles are nondiscrimination, called “most favored nation” and “national treatment,” and the principle that any measure adopted by a party to the agreement ought to be done in the least trade restrictive manner.
Beyond these global rules (GATT 1994 has 193 signatories and counting), trade negotiations can produce agreements on preferential rules. For instance, the NAFTA and other “free trade agreements” offer improved market access and set rules for a more comprehensive set of matters related to trade. Further, the United States and other advanced economies offer expanded market access for exports from less-developed economies as a tool for economic development.
Are there alternatives? In the case of crude oil and other hydrocarbons, there are very few rules but lots of trade. But the precursor to the “rules-based” system was power politics. Whether in the form of the “imperial preference” of the 19th century, or the occasional application of “gunboat diplomacy,” through much of history powerful nations dictated terms of trade to less-powerful ones. For this and other reasons, GATT 1947 and succeeding arrangements have helped to promote peace and security while advancing prosperity.
The precursor to the “rules-based” system was power politics.
Trade rules aren’t perfect. Crafting neutral rules that remain effective as technology changes trading relationships is a major challenge for the responsible officials. But mutually-agreed trade rules with peaceful dispute settlement add efficiency and predictability, to the benefit of both buyer and seller.