Distributing the Gains: Justice and International Trade.

• Author: Kapstein, Ethan B.

This article provides a normative assessment of the international trade regime. It analyzes the question of distributive justice: that is, how the gains from trade get distributed both within and between countries. Following John Rawls, I accept that "justice is the first virtue of social institutions."(1) Institutions that are not just--that do not provide, for instance, equal opportunity and equal access to all participants--are unlikely to prove stable or enduring, regardless of their efficiency. This leads to the question: is the trade regime just?

I will argue that justice in trade implies a distribution of gains that participants accept as the result of a fair process; I thus adopt the Rawlsian notion of "justice as fairness." This means that our economic institutions should be designed so that all participants, and especially those who are least advantaged, enjoy the opportunity to compete and profit on equal terms with those who are greatly advantaged. Institutions that discriminate against some players or fail to provide equal opportunity to the least advantaged cannot be considered just, though of course they might be efficient.

Trade negotiators who are concerned with achieving just agreements--if only because they associate justice with system stability--will be sensitive to their distributive effects both within and between nations. If the gains from trade were concentrated in a few countries, or if a large number of countries actually faced deteriorating terms of trade, questions about the structure of the regime might be raised. Countries would ask whether they ought to continue participating in a regime that offers them no tangible benefits.

For that reason, if trade is to be considered a Pareto-optimal policy in which someone is made better off but none are made worse off, the winners will have to find ways of compensating the losers. From a Paretian perspective, the amount of compensation must be sufficient so that, at a minimum, the losers consider themselves no worse off than before free trade. Otherwise, the best we can say for free trade is that it promotes efficiency, but not necessarily social welfare.

What follows is an examination of the international regime governing trade between developed and developing countries--one that demonstrates that the creation of compensation mechanisms within and between countries has in fact been central to the postwar liberalization agenda. In other words, justice in trade clearly requires proactive measures, on the part of both states and multilateral institutions, to ensure that gains are spread fairly and that "losers" within and among nations are offered due recompense. In advancing my argument, I will draw on history, political philosophy and economic theory. The first part of the article provides a brief history of the postwar economic order, highlighting the normative issues that helped shape its policies. I then provide a more detailed analysis of the trade regime, focusing on the distributive problem both between and within countries, and concluding with some thoughts concerning the implications of this paper's findings for theory and policy.

ECONOMIC JUSTICE AND THE POSTWAR ORDER

In August 1941, months before the surprise attack on Pearl Harbor, U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill expressed their hopes for the postwar world in the Atlantic Charter. They pledged at the war's end to secure "for all countries and peoples improved labor standards, economic advancement, and social security," vowing to ensure that "all the men in all lands may live out their lives in freedom from fear and want."(2)

The words of the Atlantic Charter were inspired by the failure of the Versailles Treaty and the League of Nations to achieve a lasting peace, as well as the devastating political effects of the collapse of the world economy during the Great Depression.(3) The wartime leaders were committed to rebuilding a global economy, but recognized that international economic outcomes could not be treated in isolation from the great powers' domestic politics. The Achilles' heel of 19th century globalization, they believed, had been social disruption. Faced with domestic turmoil in the presence of rapid industrialization and modernization, and chafing under the gold standard, states lacked the economic policy wherewithal to respond with social safety net programs. As a result, radical politics fed the longings of the disenfranchised for a voice in policymaking. The upshot, as taught in such influential works as Peter Drucker's The End of Economic Man (1939) and Karl Polanyi's The Great Transformation (1944), was inevitably fascism, communism and war.

The "lessons" of this history implied that the postwar planners would have to find a way of easing the tensions existing both within and between states. Britain's 19th century model combining balance-of-power politics with laissez-faire economics had apparently failed to do so, and the wartime years saw the protagonists working feverishly on designs for alternative futures. In so doing, at the war's end policymakers became open to a host of normative ideas about how a revitalized global economy ought to function.

These ideas naturally drew upon the domestic experiences of the major powers during the Great Depression, especially the United States and Great Britain. Central to the emerging conceptualization of political economy was the idea that the state must play an active role in economic management, given the failure of the free market to deliver stable growth and full employment. In coining the term "New Deal" in the early 1930s, Franklin Roosevelt explained:

The word "Deal" implied that the Government itself was going to use affirmative action to bring about its avowed objectives rather than stand by and hope that general economic laws alone would attain them. The word "New"... implied that a new order of things designed to benefit the great mass of our farmers, workers and businessmen would replace the old order of privilege in a Nation which was completely and thoroughly disgusted with the existing dispensation.(4) All told, the purpose of the New Deal was, in the president's words, to help people "to gain a larger social justice." Roosevelt went so far as to enumerate a variety of economic rights, including the right to a job and the right to "earn enough to provide adequate food and clothing and recreation."(5)

Among professional economists, it was John Maynard Keynes who was central in defining the state's role as a provider of opportunity and security for all citizens. "The outstanding faults of the economic society in which we live," he wrote in The General Theory, "are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."(6) Keynes directed his work to the redressing of these faults, and his theories formed the ideological core of the postwar welfare state.

In the interests of political legitimacy, economic growth and social justice, the postwar leaders resolved to build a global economy that would be far more institutionalized and, above all, constitutionalized than its prewar predecessor. Thus, Article 55 of the U.N. Charter states: "With a view to the creation of conditions of stability and well-being which are necessary for peaceful and friendly relations among nations ... the United Nations shall promote ... Higher standards of living, full employment, and conditions of economic and social progress and development."(7) A constellation of political and economic institutions would be created to help advance these goals.

In their initial conception, international political stability would be provided by the United Nations, backed by the "policemen" of the Security Council. Economic growth among nations would be promoted by free multilateralism" and the international division of labor, facilitated by such organizations as the General Agreement on Tariffs and Trade (GATT), the World Bank and the International Monetary Fund (IMF). Social justice within nations, in turn, would be the province of the welfare state, ensuring full employment and social policies that promised working people jobs at a living wage along with universal education for their children--and a social safety net to buffer the hard times. All told, the new international economic system was to be fashioned in such a way as to leave considerable autonomy in the social realm for the state qua insurance agency.(8)

The postwar planners were hardly idealists. They did not believe that the central tension of world politics--that between the nation-state and the international system--would be erased by the postwar settlement, any more than the founding fathers of the United States believed that they had eased all tensions between the federal government and the individual states. Their concern was to create a just framework that permitted aggrieved parties to seek and find redress within the system. It is this issue that I explore here, in the context of the international economy.

The postwar statesmen thus devised a system of justice that melded two distinct approaches: a domestic scheme with the welfare state at its core, and an international scheme privileging free multilateralism. The overarching notion was that free trade promoted peace through fostering interdependence while promoting prosperity through the increased efficiencies arising from the division of labor. At the same time, the leaders recognized that free trade could disrupt domestic economic arrangements, leading to social conflict. This would be eased by the welfare state, which would provide social insurance as compensation to those who found themselves on the losing end of change. In the following sections, I examine the extent to which the postwar combination of free trade and the welfare state provided durable pillars for the emerging global economy. At the heart...