This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.

By Sonia E. Rolland (Northeastern University)

The Rise of Globalization in Economic Regulation and its Discontents

In the 1990s, international economic regulation quickly expanded to enable a new era of global business. This governance included the widespread use of Bilateral Investment Treaties (BITs), along with the creation of the World Trade Organization (WTO) and other trade agreements. The vision was that, over time, states would converge towards a capitalist, liberal democracy model. This would be facilitated by the WTO's policy of giving “special and differential treatment” to those states that were not yet ready to fully commit to the mainstream free trade agenda. “Washington Consensus” policies, which required privatization and a reduction of state interventions in the economy, were also seen as a way to help achieve this goal. However, a number of emerging countries are unable or unwilling to join this type of political economy contract. While theories abound as to the reason for such failings, international economic governance arguably plays a role. For instance, BITs have been used to attempt to restrict states' ability to enact regulatory measures in public health, the environment, taxation and other fields.

The landscape of development economics has changed dramatically over the decades. Early development economics models based on planned economies and government intervention, as well as trickle-down neoliberal theories, have been largely displaced. Today, developmental policies range from new industrial policies to export-oriented models, to an emphasis on local low-cost but quickly scalable innovation to serve the needs of poorer populations in emerging countries. Yet the content of trade and investment treaties is only beginning to adjust to this diversification in development policies. The gap between what the international economic legal framework assumes, allows and promotes, on the one hand, and what a number of emerging countries seek, on the other hand, is creating rifts.

New Directions for International Economic Law

Emerging countries are seeking a combination of market access abroad and policy autonomy at home. These priorities are reflected in how they seek to influence and reshape trade and investment law.  

With respect to investment regulation, some are simply side-stepping the current framework: for instance, South Africa and Indonesia are letting BITs lapse or outright denouncing them. Some are redesigning BITs to rebalance the rights and obligations of investors. For example, India has created a new model BIT, used as a draft in negotiations. The Pan African Investment Code is another instance of such a redrafting. These new templates typically redefine investor and investment, limit investor protection, and create obligations on investors (e.g., around issues of corporate social responsibility, anti-bribery, and regulatory compliance). Some create obligations on investors' home states (e.g., to assist in policing their investors' activities abroad). Others include regulatory carve-outs for investment host states (for instance by excluding public health and other sensitive policies from the ambit of the treaties) and create a more stringent framework for investor-state dispute resolution. 

With respect to trade law, emerging countries use a variety of strategies to challenge the status quo. Some use the flexibilities available within the WTO framework. Over the past 20 years, large emerging countries have built the legal capacity to deal with the rule-based order at the WTO, are winning cases in dispute settlement, and have successfully blocked efforts to impose new disciplines in negotiations. Beyond the limited official flexibilities that are still available, some ignore the rules in a “catch me if you can” game. Industrial support programs such as Inovar-Auto in Brazil and India's National Solar Mission are examples of such strategies: it was very likely from their inception that they would be challenged at the WTO, but by the time the challenges concluded, most of the programs had been implemented anyways and could not be dismantled by the WTO rulings.   

Some emerging countries are also seeking alternative trade agreements and new partners. The Asia-Pacific region is the most prominent example, with agreements in force, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) and the many ASEAN agreements, as well as arrangements in the making, and China's Belt and Road Initiative. 

Implications for Policy-Makers
  • As they become more disillusioned with trade and investment regimes inherited from the 1990s, emerging powers are asserting their sovereignty in economic relations and pulling back from international and intergovernmental organizations and their adjudicatory systems. They are aiming for more domestic policy autonomy and the ability to experiment with different types of economic policy making and commitments. This legal innovation from emerging countries is reshaping international trade and investment law. Corporate executives also need to realize that some emerging economies may not liberalize much their foreign investment and trade policies for a very long time, if ever.

Original Article

Rolland, S. E. & Trubek, D. M. (2019). Emerging powers in the international economic order: Cooperation, competition and transformation. Cambridge University Press.


If you are interested in learning more about this work, contact Professor Rolland.