Status Quo Bias and the Difficulty of Reforming the International Economic Law System

The ongoing battle over the Ex-Im Bank illustrates an important point in the trade policy world: The more things stay the same, the harder they are to change. It is difficult to imagine that we would create an Ex-Im Bank today if none existed. Yet we cannot seem to get rid of it.

The Ex-Im Bank was created in 1934, at a time when finance markets were undeveloped, and international trade was filled with uncertainty. This was also a time of growing economic intervention in the economy, centered around the New Deal. As the Ex-Im Bank itself explains, “The Export-Import Bank was established by President Franklin D. Roosevelt, in 1934, as a New Deal program and to support his foreign policy.”

In the ensuing decades, economic thinking has changed radically, as our understanding of markets has grown. While it is possible that financing was simply not available for certain transactions at the time of Ex-Im’s creation, it is difficult to believe this is the case today. Finance is a sophisticated field with numerous options. If financing is not available for a particular transaction, it is almost certainly because the sale is not commercially viable. As The Economist recently put it: “The scarcity of private financing for certain exports reflects genuine risks that taxpayers are forced to assume.”

It is understandable that recipients of subsidies want to continue receiving those subsidies. But no market failure has been identified here, and the Ex-Im Bank serves no necessary domestic policy purpose.

Another good example of this problem is anti-dumping laws, which go back even further than Ex-Im, to the early 1900s (Canada adopted the first such law in 1904). Anti-dumping laws purport to address “unfair” pricing for imports. Note that they were developed around the same time as anti-trust laws, which apply to predatory pricing, among other things, and the development of the two was intertwined. The first U.S. anti-dumping statute, enacted in 1916, looks something like an anti-trust law.

Anti-trust doctrine has evolved considerably over the years, with consumer welfare and efficiency now being its primary goals. Anti-dumping, by contrast, remains rooted in its original view of pricing behavior, and has not caught up with economic theory. Anti-dumping laws target export prices that are below those in the home country or a third country, and those that are below cost. With regard to the first two, it is not clear why international price discrimination is any way problematic, so there is no need to “remedy” such pricing with anti-dumping duties. As for below cost sales, an argument could be made that predatory pricing is a problem when the seller has monopoly power and it sells below a particular measure of cost. But this is not how anti-dumping laws operate.

To the extent there are problems with predatory pricing in relation to imports, anti-trust law already addresses it. The anti-dumping laws serve only as a protectionist tool that acts against perfectly reasonable pricing practices.

A final illustration of this problem comes from the international investment system. Back in the 1950s, 1960s, and 1970s, as the colonial era ended, nationalization and expropriation of foreign investments in the developing world proliferated. In response, treaties were developed to provide recourse to international tribunals, ostensibly to protect foreign investors and promote foreign investment in the developing world. This treaty system spread, and there are now thousands of treaties to address this problem.

In the meantime, though, the problem of seizing foreign investments largely disappeared. Attitudes changed, and now most governments compete for foreign investment by offering subsidies and tax breaks. Yet the treaty rules remain in place, and litigation under these treaties is exploding, mostly in relation to claims under more general provisions relating to “fair and equitable” treatment and regulatory expropriation.

The current set of rules does not seem to be based on real evidence of problems faced by foreign investments, but rather on anecdotes and assertions. It may be that international rules on foreign investment would be beneficial. However, they should be based on objective studies of the issue, rather than industry demands related to perceived problems of past eras.

Many programs that exist today do so only because they were created decades ago, and vested interests fight hard to keep them. We would never start such programs now, and they do not seem to address any real problems. Because they are so entrenched, however, we cannot get rid of them, even in the face of a clear lack of justification and sometimes intense opposition.

Of course, the problem is not just that these programs are anachronistic. An additional difficulty with removing them is that they have spread around the world, and no one is willing to “disarm” first. With Ex-Im, for example, the argument is that if we abandon these programs while others keep them, we put ourselves at a disadvantage. At least in political terms (although not economic), this concern makes some sense. However, it is not a reason to avoid the issue. Rather, it is an opportunity to propose multilateral reform in these areas.

Simon Lester is a trade policy analyst at the Herbert A. Stiefel Center for Trade Policy Studies at Cato Institute