This article is written by Adithya Prasad, pursuing Diploma in International Business Law from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Evolution of international trade
Trade is among the oldest activities known to mankind; it has formed the bedrock of human civilization. The concept is simple, however as everything man does, trade as an act has taken many incarnations and with each incarnation, the law had to change to better adapt. This article will focus on the evolution of law and its presence over the markets of a nation and the world itself. Along with which the following questions will be answered:
- What is the free-market dynamic? Why is it widely accepted and/or debated upon?
- What position did the law initially hold?
Freemarkets : history and morality
On March 9th, 1776, Adam Smith, one among the most profound economics and philosophers of his time authored a book that would forever change the world of global economics. Titled, ‘An inquiry into the Nature and Causes of the Wealth of Nations’ better known as the Wealth of Nations, described the fundamentals of industrial capitalism and the end for the prevailing mercantilist system.
The book can be summarized into the following points:
- The central idea behind Smith’s “The Wealth of Nations” is that our individual need to fulfil self-interest results in societal benefit, called the “invisible hand”.
- This invisible hand combined with the division of labour in an economy, results in a web of mutual inter-dependencies that promotes stability and prosperity through the market mechanism.
- Smith rejected the need or idea of government interference in all market activities, instead state governments should serve just three functions: protect national borders; enforce civil law; and engage in public works (e.g., education).
He elaborately spoke about the invisible hand, which he understood as a key factor that governs all markets. This invisible hand is what one would call the amalgamation of every decision taken, rendered, thought, and executed by all players in the market. One could, loosely call it the average outcome of all choices made in a market to affect the market thereof.
“This free-market force became known as the invisible hand, but it needed support to bring about its magic. In particular it was the market that emerged from an increasing division of labour, both within production processes and throughout society that created a series of mutual inter-dependencies, promoting social welfare through individual profit motives.”
Another concept that Adam smith explained with the invisible hand is the inevitability of globalization. He explained that all nations that take part in trade amongst themselves in any micro or macro way will find themselves integrated and pitted against other parties from different nations in the free market system. However, this theory, though accepted by most economists and philosophers till this date, had its own legal issues.
Dynamics of the Free Market
The importance of the free-market dynamic cannot be explained in a book much less an article. When one reads about the free market dynamic, the basic idea is that the market remains undisturbed through its operation. This dynamic remains favourable to all merchant guilds and others engaged in business as it creates an equation where only buyer and seller exist without third party influence. Merchant guilds, in the early eras of trade heavenfuls pushed for independent marketplaces under their respective rulers to amass the most amount of profit.
This also brings into question the morality of free markets. The concern for free markets comes with the notion that the parties involved must be the participants of the markets and no other third party.
Richard Ebeling, professor of economics at the Citadel, The Military College of South Carolina said: “The hallmark of a truly free market is that all associations and relationships are based on voluntary agreement and mutual consent. Another way of saying this is that in the free market society, people are morally and legally viewed as sovereign individuals possessing rights to their life, liberty, and honestly acquired property, who may not be coerced into any transaction that they do not consider to be to their personal betterment and advantage.”
This did not stand, with the concept of state-owned services being used to run such free markets, rulers and then states all wanted a part of the merchant business This lead to the formation of trade laws or what was known, back in medieval times as Lex Mercatoria and Lex Maritima also known as the “law of merchants on land” and “law of the merchants on sea”. However, these laws were crude at best, they did not fulfil the purpose that modern trade law does.
What purpose did the law initially serve?
The law initially held a very divergent attitude, the medieval era saw most nation states trading in cold coins with the insignia of the ruling house. The law in such eras varied between the ruling houses with some city states such as Venice being comparative tax havens to other city states. Most laws in this time were basic laws that dealt with import and export tariffs, routine checks for questionable goods and other basic elements. The difference was between how each state treated trade as an aspect of their society, warring states often had more stringent laws that helped the war effort while others were much more lenient due to geographical advantage.
“The king has jurisdiction over merchants to put them to the stand to right”, These laws were often in accordance with the laws of nature. English courts applied merchant customs depending on the nature of trade and its existence must be consistent with the law. One could say that early laws of trade were foundational bits to common law today, a philosophy and codification of law practiced by most commonwealth countries till date.
Prior to and during the medieval era, international trade was never a law itself but an activity that was practiced. Heavy accounts on this were found in the entries of famous explorers and travellers who went along the silk route and across the seven seas. In such journals, laws were described in a similar fashion with respect to trade since they all followed a retributive style of punishment to morally incorrect activities. One could say that the law was what the powerful wanted it to be. Early accounts of rulers and ruling parties determined the fate of those that lived on their land.
Going a century ahead, into the 16th century mercantilism reached what was its peak in human history. This philosophy of trade ran around the hoarding and exchange of gold as a common value of exchange.
“Mercantilism was based on the conviction that national interests are inevitably in conflict—that one nation can increase its trade only at the expense of other nations. Thus, governments were led to impose price and wage controls, foster national industries, promote exports of finished goods and imports of raw materials, while at the same time limiting the exports of raw materials and the imports of finished goods. The state endeavoured to provide its citizens with a monopoly of the resources and trade outlets of its colonies.”
An illustration of the mercantilist spirit is the English Navigation Act of 1651, which reserved for the home country the right to trade with its colonies and prohibited the import of goods of non-European origin unless transported in ships flying the English flag. This law lingered until 1849.
In summary, law held a purpose that was decided by morality often bought with gold and other jewels. This was going to go through a massive change because society was going to take its greatest evolution yet, the Industrial revolution.
Trade law of the modern world
The industrial revolution saw two major ideologies come into the world of philosophy and economics. While liberalism was on the rise, the majority supported labour unions whilst the majority of power was held in the hand of the lesser in number, capitalists.
“After Adam Smith, the basic ideas of mercantilism were no longer considered defensible. This did not translate into nations abandoning all mercantilist policies. There was still a restrictive economic philosophy which they justified by the claim that the government should keep foreign merchandise off the domestic market in order to shelter national production from outside competition”.
This translated into law, where the industrial revolution saw the law adopt a more holistic nation state approach. With the rise of colonization, common law in this era was the most widely accepted form of law. This version of trade law, focused on the nature of goods traded, import, and export duties and even say a more widely accepted form of force majeure or the act of God.
In Tennant v Earl of Glasgow (1864 2 M (HL) 22) Lord Chancellor Westbury enumerated on the act of God in the case:
“What is denominated in the law of Scotland damnum fatale — occurrences and circumstances which no human foresight can provide against, and of which human prudence is not bound to recognize the possibility; and which, when they do occur, therefore, are calamities that do not involve the obligation of paying for the consequences that may result from them.”
This concept played a heavy importance in the realm of trade law as the transportation of goods at the time was still crude and unpredictable. The silk route was not the only trade route that was taken, this legal integration and the colonial effort saw for the first-time a near unified law on trade between countries. The British presence though harmful for all countries including India, played a vital role in shaping what is now the global economic integrated market.
Towards the world wars, protectionism came back into existence through the German- Nazi rule where the country would spend its time protecting its assets to aid the war effort. Seeing the birth of major companies that are still operational today. The world war also saw a huge increase of trade in the intellectual property rights segment. Where countries would commission other country’s weapon designs to aid their armies in the war effort. Even so, before the development of the M1 grand, America’s most iconic weapon, their standard issue rifle was based on a design from a German manufacturer which required royalty payment.
By the end of world war, trade as an activity had seen a tremendous change, with the rise of the United Nations and the global collaboration effort, trade was seen as that activity that could bind the world together. With the batter of both physical goods and meta-physical goods such as ideas and other goods. The world was ready for economic integration.
Trade in the modern world is governed through treaties, agreements, and organizations such as the International Monetary Fund, International Trade Centre, etc. Each having its own rules and regulations however, the laws followed in the general space of international trade have not changed much post World War II. Yes, there were slight changes in terms of tradable goods and services, methods, and channels of trading, etc. This however does not see an actual shift in the legal thought process of society itself. The general principle of international trade laws are as follows:
National Treatment Principle: “Imported and locally-produced goods should be treated equally, at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights, and patents. These principles apply to trade in goods, trade in services as well as trade related aspects of intellectual property rights.”
Most Favoured Nation Principle: “The MFN principles ensures that every time a WTO Member lowers a trade barrier or opens up a market, it has to do so for the like goods or services from all WTO Members, without regard of the Members’ economic size or level of development. The MFN principle requires to accord to all WTO Members, any advantage given to any specific country.”
The future does not see much change, apart from human activities finding their integration into the title of interplanetary species with spatial conquest being our next goal. Even then, the primary philosophies of trade will not change, they will have additions and subtractions in terms of contents but not in context.
- International trade law – Wikipedia
- Mercantilism – Wikipedia
- Protectionism – Wikipedia
- Laissez-faire – Wikipedia
- Free trade – Wikipedia
- Economic nationalism – Wikipedia
- Economic integration – Wikipedia
- Progressive Development of the Law of International Trade: Report of the Secretary-General of the United Nations, 1966 (uio.no)
- Free Market Definition & Impact on the Economy (investopedia.com)
- WTO | The history of multilateral trading system
- Adam Smith and “The Wealth of Nations” (investopedia.com)
- The Morality of Free Markets | Walter Williams | godanriver.com
- Navigation Act
- international trade | Definition, History, Benefits, Theory, & Types | Britannica
- History of International Trade (managementstudyguide.com)
- Timeline of international trade – Wikipedia
- A Brief History of International Trade Policy – Econlib
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