Foundations of International Economic Law

Objectives and Principles

Promoting free trade

International Economic Law (IEL) plays a crucial role in creating a framework for economic cooperation and growth across borders. One of its central goals is promoting free trade among nations.

Free trade implies the reduction or elimination of tariffs, quotas, and other trade barriers, enabling goods and services to move across national boundaries with minimal restrictions.

The legal basis of free trade is embedded in key instruments like:

General Agreement on Tariffs and Trade (GATT), 1947
World Trade Organization (WTO), 1995
Bilateral and regional Free Trade Agreements (FTAs)

Principles supporting free trade:

Most-Favoured-Nation (MFN) – Equal treatment to all WTO members
National Treatment – No discrimination between domestic and foreign products once they enter the market
Transparency – Publishing trade laws and regulations openly

Example 1. What is the effect of free trade on developing countries like India?

Answer:

Free trade enables India to access larger markets, attract foreign investment, and import advanced technology. However, it also creates challenges for domestic industries that must compete with cheaper or more efficient international products.

Facilitating international investment

Another primary goal of IEL is to facilitate cross-border investments by providing a predictable and legally secure environment for investors.

This is achieved through:

Bilateral Investment Treaties (BITs)
Multilateral agreements like ICSID (International Centre for Settlement of Investment Disputes)
Customary international law principles protecting foreign investors

Key principles in investment law:

Fair and Equitable Treatment (FET)
Protection against Expropriation without compensation
Right to repatriate profits
Access to international arbitration

These principles give confidence to investors to invest in foreign jurisdictions, knowing that their investments are protected by law.

Example 2. What happens when a country violates a bilateral investment treaty?

Answer:

The investor may approach an international arbitration body, such as ICSID or UNCITRAL, and claim damages. Many countries, including India, have faced such claims and have had to pay compensation to foreign investors.

Ensuring financial stability

IEL also focuses on the stability and resilience of the global financial system to prevent crises that may affect international trade and development.

Institutions like the International Monetary Fund (IMF) and Bank for International Settlements (BIS) play a pivotal role in ensuring:

Stable exchange rate systems
Financial sector supervision
Emergency lending to countries in financial crisis

Key principles for financial stability include:

Sound macroeconomic policies
Monitoring of capital flows
Transparency and accountability in financial regulation

Example 3. How does the IMF assist countries during a financial crisis?

Answer:

The IMF provides financial assistance to member countries facing balance-of-payments problems. In return, countries agree to implement certain policy reforms (known as conditionalities) aimed at stabilising their economies.

International Economic Institutions Diagram

Key Institutions and Agreements

World Trade Organization (WTO)

GATT, GATS, TRIPS Agreements

The World Trade Organization (WTO), established in 1995, is the central international body governing trade rules among member states. It evolved from the earlier General Agreement on Tariffs and Trade (GATT) 1947.

Key Agreements under WTO:

GATT (General Agreement on Tariffs and Trade): Focuses on trade in goods and promotes tariff reduction, elimination of quotas, and fair trade practices.
GATS (General Agreement on Trade in Services): Regulates international trade in services such as banking, telecom, and education, encouraging liberalization while respecting public policy objectives.
TRIPS (Trade-Related Aspects of Intellectual Property Rights): Sets minimum standards for the protection of intellectual property (IP), including patents, copyrights, and trademarks.

India’s compliance with TRIPS: India amended its patent laws in 2005 to align with TRIPS, allowing product patents in pharmaceuticals, which had significant effects on the generic drug industry.

Dispute Settlement Understanding (DSU)

The Dispute Settlement Mechanism (DSM) of the WTO, governed by the Dispute Settlement Understanding (DSU), is often considered the “crown jewel” of the WTO system.

Key features of DSU:

Panels and Appellate Body hear disputes between members
Time-bound process for resolving trade conflicts
Binding rulings and authorization for retaliation if a member fails to comply

Example 1. India vs. USA — Solar Panel Dispute (DS456)

Answer:

In this WTO dispute, the USA challenged India’s domestic content requirements for solar panels. The WTO ruled in favour of the USA, stating India violated national treatment obligations under GATT. India later revised its solar program to comply with the ruling.

International Monetary Fund (IMF)

Role in global monetary cooperation

The International Monetary Fund (IMF) was established in 1944 at the Bretton Woods Conference. It is a key institution promoting international monetary cooperation and financial stability.

Objectives:

Foster global monetary cooperation
Secure financial stability
Facilitate international trade and employment

Mechanism of functioning: Members contribute financial resources (quotas) based on their economic size, which determines their voting power and access to financial assistance.

Exchange rate stability

One of the core objectives of the IMF is to promote exchange rate stability and orderly exchange arrangements among members.

IMF surveillance involves monitoring member economies, offering policy advice to prevent currency manipulation or competitive devaluation.

It also offers support through:

Stand-By Arrangements (SBA)
Extended Fund Facility (EFF)

Example 2. What assistance did the IMF provide to Sri Lanka during its 2022 debt crisis?

Answer:

The IMF approved a $3 billion bailout package under the Extended Fund Facility to help Sri Lanka stabilize its economy and meet its international debt obligations, in exchange for implementing fiscal reforms and restructuring.

World Bank

Role in development finance

The World Bank is a vital institution for long-term economic development and poverty reduction, especially in developing countries like India.

It consists of two main institutions:

International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)

Main functions:

Provide financial and technical assistance for infrastructure and social projects
Issue low-interest loans and grants to low-income countries

The World Bank works on areas like:

Rural development
Water and sanitation
Education and healthcare

Poverty reduction initiatives

One of the most important goals of the World Bank is poverty eradication.

It sets long-term strategies aligned with the Sustainable Development Goals (SDGs) and national development plans to reduce inequality and improve living standards.

India has been one of the largest borrowers from the World Bank for projects in health, rural electrification, infrastructure, and digital governance.

Example 3. What kind of projects has the World Bank supported in India?

Answer:

Some major World Bank-supported projects in India include the Swachh Bharat Mission (rural sanitation), Pradhan Mantri Gram Sadak Yojana (rural roads), and COVID-19 emergency response and health system preparedness projects.

Issues in International Economic Law

Trade Liberalization vs. Protectionism

Trade Liberalization refers to the removal or reduction of trade barriers, such as tariffs, quotas, and import bans, to allow for free flow of goods and services between countries. It is a fundamental objective of the World Trade Organization (WTO).

Its benefits include:

Increased consumer choices and lower prices
Efficient resource allocation based on comparative advantage
Boost to economic growth and innovation

Protectionism, on the other hand, involves the use of trade barriers to protect domestic industries from foreign competition. It is generally pursued to:

Protect nascent industries (infant industry argument)
Safeguard jobs in strategic sectors
Ensure food and energy security

Balancing the Two

While liberalization promotes global efficiency, unregulated openness may harm developing or vulnerable economies. Hence, a balanced trade policy combining liberalization with strategic protectionism is often advocated.

Example 1. How has India balanced trade liberalization and protectionism?

Answer:

India liberalized its economy in 1991 by reducing tariffs and opening sectors to foreign investment. However, it still retains duties on sensitive goods like agriculture and has invoked safeguard duties to protect steel and solar panel industries from cheap imports.

Sovereignty and Economic Regulation

National Sovereignty is the authority of a state to govern itself without external interference. In the context of international economic law, there is often a tension between exercising sovereign control and adhering to international economic commitments.

Issue: When a state signs trade or investment treaties, it often limits its ability to enact certain domestic economic policies. For instance, WTO rules may restrict certain subsidies or local content requirements.

Key Conflict: Investor-State Dispute Settlement (ISDS) mechanisms in Bilateral Investment Treaties (BITs) allow foreign investors to sue governments, potentially limiting a state's policy space.

Real-life concerns include:

Restriction on India’s policy to promote local manufacturing (Make in India)
Cases where environment or public health measures are challenged as trade barriers

Example 2. Can states withdraw from investment treaties to reclaim sovereignty?

Answer:

Yes. India has terminated several BITs after facing arbitration claims from foreign investors. It adopted a new Model BIT in 2015 which grants more regulatory space for public welfare and limits investor claims.

Developing Countries and Global Trade

Developing countries face structural and economic disadvantages in global trade, such as low export diversification, weaker bargaining power, and dependence on primary commodities.

Major Challenges:

Limited influence in WTO negotiations
Technical and legal capacity constraints
Trade-distorting subsidies by developed countries
Difficulty in accessing developed markets due to non-tariff barriers (NTBs)

Efforts to Address These Issues:

Special and Differential Treatment (SDT) provisions under WTO offer longer transition periods, technical assistance, and preferential market access
South-South trade agreements and regional blocs like ASEAN, MERCOSUR
Capacity building by international agencies such as UNCTAD and ITC

Example 3. How has the WTO addressed the concerns of Least Developed Countries (LDCs)?

Answer:

The WTO has adopted initiatives like the “Duty-Free, Quota-Free” (DFQF) access for LDCs and has provided Aid for Trade to help build trade-related infrastructure and institutions. However, implementation remains uneven, and challenges persist.