International institutions 101

  What do international institutions do?  I'm not referring to the European Union, but the more garden-variety alphabet soup stuff, the arbitration panels and dispute-resolution mechanisms and the like?  After all, they usually don't alter domestic law, and when they do, the domestic law in question is usually pretty easy to un-alter.  There usually isn't a whole lot stopping countries from just breaking their agreement, and when there is, it tends to rely on sanctions from other individual states. 

Frex, the WTO.  Nobody has to write WTO rules into their constitution.  And the WTO doesn't sanction anyone.  All the WTO does is tell the aggrevied member state whether and how much it can sanction the offending party without breaking WTO rules.  In that case, what do you need the WTO for?

An answer below the fold.

Well ... consider the last post.  Imagine the following sequence.  The U.S. violates NAFTA by writing buy-USA policies into the stimulus package.  The Canadian government complains and goes to a NAFTA tribunal.  The tribunal rules in Canada's favor and tells it the value of the sanctions that it can impose, in the form of tariffs on American exports.  Canada imposes the tariffs.  The Americans keep the stimulus.  The stimulus expires in two years, after it has been spent.  The Canadian government lifts the tariffs.  What difference did the NAFTA tribunals make? 

Simple:  they kept the trade war from spinning into an uncontrollable game of tit-for-tat.  The tribunals announced the allowable amount of Canadian damages, making it much harder for Canadian interests to use the excuse to lobby Ottawa for protection under the guise of retaliating against Washington.  After all, once Ottawa made the decision to raise tariffs on U.S. goods, any additional tariff would have a small cost.  So why not add a little more protection?  It makes interest group X happy.  But then why annoy interest group Y?  Here's a little more protection still.  Wait ... that seems to have angered interest group Z.  So here's yet more, but only a small amount ...

Even more importantly, the NAFTA tribunal makes it hard for American protectionists to use the Canadian retaliation as an excuse to force Washington into raising its own tariffs.  “Look,” the American administration will say, “we're just holding to our treaty obligations, following the letter of the law.”  The hypocrisy is irrelevant.  

In other words, NAFTA and the WTO are designed as firebreaks.  They won't keep countries from doing things in their national interest, like including buy-USA provisions in a fiscal stimulus package.  Nor will they stop countries from retaliating when other countries break the rules.  What they do do is insure that the rules can be broken without throwing away the rulebook, which is what would otherwise happen.

And that's important, I think.

I'm not sure that we're on the verge of much of a trade war, or even a trade squabble. 

Comments

[Spike Gomes]

Professor Maurer, I have a question.
What do you think of this analysis?

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Being that I took all of one undergraduate class of economics, I have no clue as to its worth.

[Noel Maurer]

Sorry about the delay. I'm pretty busy these days, unfortunately.

I just skimmed it, but here's what he seems to be saying:

(1) Changes in the price level can redistribute income;

(2) Unexpected inflation can cause changes in real economic activity;

(3) The velocity of money is unstable.

This is not new. Nor is it outside the mainstream. So I don't understand why he's making himself out to be some sort of iconoclast. Makes me kinda suspicious.

[Spike Gomes]

Thanks.

The reason I asked is this; it's being bandied around one of my blogging circles with the entire hysteria going on right now. Unlike most of the stuff, I couldn't just dismiss it out of hand as crankwork.

Really, there are parts of the blogosphere right now where otherwise intelligent people are acting as if a new apocalypse is aborning, complete with "The End is Nigh" Excel spreadsheets.

Peter probably knows who I'm referring to here.