Gerhard Erasmus, tralac Associate, comments on the debate surrounding the protection of national policy space in trade agreements

National policy space is being re-discovered. The need to protect national sovereignty and policy space is emphasized in arguments against several aspects of formal trade arrangements. The “protection” called for apparently involves the danger that legally binding agreements will curtail the freedom of governments to pursue their own national policies and development plans. Or perhaps it is about “flexibility”; that it must be possible to suspend legal obligations when considered necessary.

These arguments have surfaced in the pro-Brexit debate; on how the United Kingdom would regain control over sovereign powers lost to Brussels. (One would assume that the more salient lessons now are about the costs, for the UK, in the unravelling of the benefits of deep integration with the EU.) The US presidential race displays more crude aspects of anti-globalization sentiments, and perspectives on international trade agreements.

The protection of national policy space surfaced prominently when Bilateral Investment Treaties (BITs) were identified as agreements with the potential to undermine the freedom of governments to implement national economic development policies. The perceived threats came in the form of private investors being entitled to sue governments under state-investor dispute settlement arrangements in the BITs. International investment arbitration rulings have frequently resulted in victories for private investors objecting to measures by host countries.

In a recent comment on the declaration on global economic issues adopted at the 14th session of the United Nations Conference on Trade and Development (UNCTAD 14) concluded in Nairobi on 22 July 2016, the protection of national policy space has been singled out as of particular importance for North-South relationships. The commentator writes: The developing countries fought to re-affirm the need for countries to have “policy space”. This concept… implies that developing countries should be given the right to make use of policies and instruments required for their development. Many trade and investment agreements have been identified as containing provisions that restrict or even eliminate the ability of developing countries to pursue pro-development policies.[1]

The debate about policy space is not limited to global relationships; it has surfaced in the EPA (Economic Partnership Agreement) context too. In a recent statement issued by a civil society organization in the East African Community (EAC) it is argued that the EAC-EPA will put local industrialization at risk: The tariff liberalization eventually foreseen in this EPA with the EU results in “a high level of liberalisation vis-à-vis a very competitive partner… likely to put EAC’s existing local industries in jeopardy and discourage the development of new and infant industries”.[2]

The call to protect national policy space in developing countries often includes references to the freedom needed to protect infant industries, to industrialize, and to ensure local value addition and “beneficiation” of domestic commodities. Presumably the objective is to eventually advance integration into the global economy once industrialization has become a reality (and the danger to national policy space would be less?).

Arguments which emphasize that national actors are best placed to develop policies suitable for domestic conditions are obviously valid. Whether industrialization (to produce goods for export) is always the most optimal route to Africa’s development is a different question. Industrialization and economic development in Africa will, by necessity, have to be based on a careful mix of policies which address national endowment factors, infrastructural needs, trade related services, trade facilitation challenges, the need for investment, and the dangers posed by domestic obstacles such as corruption and the lack of the rule of law. The policy and implementation needs facing these countries are wide-ranging and cannot be addressed by ignoring the wider picture. Inappropriate policy choices are costly. The space for a traditional industrialization process (to manufacture goods capable of competing with e.g. Asian producers which have already reaped first mover benefits) might have become rather limited.[3] Policies to support industrialisation have to take account of the fact that competitiveness in manufacturing is not possible without competitively priced, quality and reliable supply of transport, communication, financial and many other services.

As long as the nation state remains the building block of the international community national governments will enjoy jurisdiction over domestic policies and over their territories. This includes the freedom to adopt national economic development policies. However, claims for protecting national policy space have to be tempered by realism and by accepting that (good) policies need to be implemented. Policy space is not an end in itself and no state can prosper in isolation. Small African economies have to pursue regional and global integration strategies in order to grow and develop.[4] This requires appropriate policies as well as agreements with other nations. It is an act of sovereignty to conclude these agreements and to honour the mutually binding commitments. They entail benefits to local exporters and importers.

What about subsequent needs to escape from obligations accepted in international trade agreements? When remedial action is required (in order to deal with the consequences of e.g. the liberalization of trade in goods) governments are entitled to take permissible protective measures. These measures (such as safeguards and trade remedies) form part and parcel of trade arrangements between nations. They are necessary but entail a balance between permissible trade protection measures and the duty not to violate the rights of other, equally sovereign, states. Rules against unfair discrimination work in everyone’s favour; while unjustifiable protectionism is anathema to structured and predictable trade relations.

It is not always possible for Least Developed Countries (LDCs) in particular to avail themselves of these exceptions; because they are difficult to implement and require sophisticated skills. This is why development assistance and domestic reforms should target and prioritize these capacity needs through appropriate responses. Then it will also become possible to adopt (and implement) more appropriate national policies.

The protection of national policy space is nothing new and is not incompatible with trade agreements concluded among nations. The challenge lies in accepting the basic logic and playing by the full spectrum of rules mutually agreed upon. The fact that for LDCs this amounts to difficult choices about scarce resources, local priorities and governance challenges have to be accepted and be addressed through joint and suitable reforms and technical assistance.

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