12 - Managed Trade and Technology Protectionism

Summary

Low- and middle-income countries (LMICs) are confronted with a new world order in which the major economic powers that promoted multilateralism have moved toward nationalism, localization of production, and de-legalization of dispute settlement in favor of balance of power diplomacy. A counterpart to this trend is declining interest in developmental assistance. It remains to be determined how countries that are not part of the new great power dynamic will acclimate to this new world. LMICs have the opportunity to leapfrog in the current technological environment. A key challenge is securing adequate capital investment, including through the private sector. There is a trend among the capital-exporting countries to negotiate bilateral and plurilateral agreements with LMICs that preclude regulatory measures requiring technology transfer as a condition of foreign direct investment. Because individual private investors within LMICs may lack substantial bargaining power, these agreements diminish LMICs’ capacity to secure favorable terms for technology transfer. LMICs confront terms of trade that favor high-income countries and, more broadly, the ascendance of managed trade policy among economically powerful states. These factors portend the perpetuation of the marked disparity in the distribution of global income and wealth. There are no “magic bullet” solutions on the horizon.

12.1 Developing Economies and Technology Capacity

12.1.1 Technology and Disparity

There are a variety of factors that perpetuate economic disparity. Among these is a disparity in levels of technological development. Successful industrial policy is not only a matter of access to technology. Access to capital, infrastructure development, education and training, design of social welfare systems, and other factors are important to economic development and welfare. Whether a particular form of government is a strong determinant of successful economic development is an open question. In recent years, some autocratically governed countries employing substantial state intervention in economic activity have performed well in economic development metrics. The Western liberal idea that democracy and economic progress are necessarily linked has been challenged.

While technology is not the sole determinant of economic development, it is an important determinant because the efficiency of national industry and the international competitiveness of economies are dependent on the capacity to develop and implement technical solutions. The question addressed in this chapter is how the recent trend toward “economic nationalism” that employs managed trade relations to pursue strategic interests may affect the ability of low- and middle-income countries (LMICs) to develop and implement new technologies, potentially resulting in a deterioration of the relative economic performance of LMICs vis-à-vis the dominant national or regional economies. If deterioration is a realistic prospect, are there policy measures LMICs may take to protect against that?

In some areas, the possibility is present for LMICs to keep pace with the leading economic powers in terms of innovation. For example, the barriers to entry in software development and digital platform creation are relatively low. India has exploited this opening in the development of its digital sector. But in areas such as the development of new microprocessors, electric and autonomous vehicles, biotechnology, and aerospace, the barriers to entry remain high. Innovation expenditures in these fields are typically in the billions of U.S. dollars. To compete in these areas, LMICs likely need technology policies that attract foreign investment and cooperation.

Patent databases show that the vast preponderance of new technologies is being developed in a relative handful of countries.¹ The list has a new major entrant – China – but China is the exception, not the rule. Otherwise, the United States, Japan, the European Union, South Korea, and Taiwan dominate.² The United States continues to lead in the number of patents filed abroad.³

12.1.2 The Continuing Vulnerability of Developing Economies

The past decade has seen a narrowing of the gap in GDP per capita between developed and developing economies. However, much of that narrowing has been accounted for by GDP growth in China and other countries of East Asia.⁴ Yet there remains a wide disparity in average income levels among countries.

In its 2019 Handbook of Statistics, the U.N. Conference on Trade and Development (UNCTAD) summarizes:

Over the last 10 years, the global distribution of nominal GDP per capita between economies has become more equal. For example, in 2008, the poorest economies, accounting for 80 per cent of the world’s population, contributed 23 per cent to world GDP. By 2018, their share in GDP rose to 33 per cent. Between 2013 and 2018, however, inequalities in GDP per capita reduced mainly among economies with moderately high income. The relative distance between the richest and poorest economies in the world remained almost unchanged.⁵

Recognizing this progress, it nonetheless remains that LMICs are far more vulnerable to economic shock than developed economies.⁶ One of the principal reasons for this is the buffer of financial capital available to these economies. As the manager of the world’s reserve currency, the United States maintains extensive power to “print money” in times of crisis.⁷ The European Union, through the European Central Bank and the euro, has a similar, even if less extensive, capacity to create capital.⁸ Such observations can also be made about the Bank of Japan and, to a lesser extent, the People’s Bank of China.⁹ In addition, with well-functioning securities markets, the United States and the European Union tend to be less vulnerable to equity shocks.

While developing country central banks can undertake operations in the same way as the U.S. Federal Reserve, they face significant challenges in printing money to meet obligations because they must pay their external debts in one of the major reserve currencies (such as U.S. dollars).¹⁰ Moreover, as evidenced throughout the COVID-19 pandemic, the policies of LMIC central banks and treasuries depend on policies determined by the U.S. Federal Reserve that place U.S. interests first while taking into account the impact on the broader global economy.

The International Monetary Fund and other major international financial institutions recognized that the COVID-19 pandemic would have a more significant impact from a relative standpoint on developing economies than developed ones, acknowledging that the impact on developed economies was severe.¹¹

12.2 The Move to Managed Trade

12.2.1 The Resurgence of Economic Nationalism and “Reshoring”

Recent global developments do not portend an economic shift in favor of LMICs. Beginning in 2016, the United States led a sharp turn away from multilateral cooperation under the umbrella of the “Make America Great Again” agenda pursued by then-president Trump. The United States withdrew from the Paris Agreement on climate change, imposed trade barriers inconsistent with World Trade Organization (WTO) norms while blocking the appointment of WTO Appellate Body members, threatened withdrawal from the World Health Organization, and so on.¹² With the election of President Biden, U.S. policy began shifting back toward cooperation (including rejoining the Paris Agreement). Still, the return to its traditional multilateralist approach has been gradual and incomplete (such as in relation to the WTO), reflecting continued wariness regarding the strategic interests of other countries. The United States is not alone. The United Kingdom has withdrawn from the European Union. India is pursuing a “Make in India” agenda. Before the most recent deterioration, China adopted its Made in China 2025 program, which focused on making China the world leader in important technologies, including biotechnology, electric vehicles, robotics, and aerospace.¹³ High-income countries (HICs) and more economically advanced middle-income countries (MICs) are turning inward with policies intended to redirect capital to domestic investment, including by boosting the role of automated production processes to reduce reliance on lower-cost foreign sources of labor.

The COVID-19 pandemic has exacerbated deterioration in international relations as the United States accused China of aggravating the impact of the virus. It has also, perhaps more important for present purposes, strengthened the resolve of governments to assure self-sufficiency in the production of important products, especially in the pharmaceutical and health arena. The United States encourages “reshoring” manufacturing, particularly from China.¹⁴ In a similar vein, the Japanese government is encouraging reshoring from China. The European Union has been looking for regional industrial champions to counter the scale of Chinese penetration of its markets and to better compete with China in external markets.¹⁵

Many countries historically emphasized the importance of “food security.” Concern for food security played an important role in the special situation of agriculture (including agricultural subsidies) in international trade relations. It will not be surprising if the concept enjoys a rebirth in the aftermath of the pandemic.¹⁶

12.2.2 Diversification

Countervailing the reshoring trend is a diversity trend, in which multinational corporations (MNCs) seek to diversify sources of supply for their supply chains. While this interest in supply-chain diversification may appear inherently contradictory with interest in reshoring, it reflects a practical recognition by the MNC business community that reshoring to the United States (and pari passu in the cases of the European Union and Japan)¹⁷ is structurally limited. The U.S. labor force, for example, will resist the transition to repetitive assembly jobs (e.g., sewing jeans or assembling computer monitors) and would demand substantially higher wages than those paid in East Asia. Moreover, the pool of technically skilled labor “sitting on the sidelines” in the United States, Europe, and Japan is limited. Even considering that MNCs are deploying automated production processes as part of reshoring efforts, diversification creates opportunities for LMICs outside China to attract relocating foreign direct investment (FDI). So far, major beneficiaries of that diversification trend have been countries of East Asia, such as Vietnam, Malaysia, and Thailand.¹⁸

The possibilities for individuals and businesses to use technologically advanced products have expanded dramatically, mainly due to the Internet, electronic commerce, and other digital technologies. However, while access to products embodying new technologies improves the quality of life, that may not translate into enhancing the domestic innovation infrastructure in LMICs. Suppose South Korea and China offer low-price cellular telephones that individuals in LMICs can afford. In that case, the possibilities for LMIC local industries to develop handsets that compete with those offerings – given the capital intensity of the R&D – are quite limited. The incentives for undertaking such efforts are not so clear. Though there are openings in some higher value-added points of the global supply chain, LMICs may find it difficult to escape from the trap of serving as low-labor-cost assembly platforms. Even that position could be threatened as robotics manufacturing technologies advance.

12.2.3 De-Legalization

We are moving away from the “legalized” international trading structure embodied in the WTO.¹⁹ One reason for this move to “de-legalization” is frustration among U.S. trade officials with what is perceived as an abuse of the rule-based system by China. The U.S. frustration is not without some cause, even though China’s policies, from a developmental standpoint, have helped it transform its economy and transition many millions of individuals into the middle-income class. The United States has spent decades negotiating bilateral agreements with China intended to improve the protection of U.S.-origin intellectual property²⁰ and to address matters such as cyberpiracy (including state-sponsored cyberpiracy).²¹

Following the imposition of WTO-inconsistent trade sanctions on China, the United States negotiated the Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China, which incorporated the U.S. negotiating objectives of precluding so-called “forced technology transfer,” whether express or tacit and strengthening rules regarding electronic intrusion (i.e., cyberpiracy).²² There is no more assurance that China will change its behavior through effective implementation of this Agreement as compared with any other of the arrangements China has made with the United States previously, particularly as China accepted the terms of this arrangement “under duress” in the form of WTO-inconsistent tariff sanctions. Perhaps the most interesting element of the agreement is the complete eschewing of legalized dispute settlement, which has been replaced with the judgment and “untethered” discretion of diplomats. If either side is dissatisfied with the judgments and discretion, they walk away from the Agreement. There is no attempt to disguise this Agreement as anything other than implementing a balance-of-power diplomacy.

12.3 Foreign Direct Investment and Its Limits

12.3.1 TRIPS Constraints

The point of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) was to foreclose developing countries from “appropriating” developed countries’ technology.²³ For MICs, the obligation to provide patents across all subject matters that became fully operational in 2005 should prevent locally based companies from using foreign-owned, patented technology without the consent of the patent owners. As is well known, this foreclosure is subject to some exceptions or “flexibilities,” but those flexibilities are not like an innovation pathway. (For least developed countries (LDCs), the obligation to provide patent protection generally can be avoided until 2034,²⁴ yet many LDCs have not indicated an intention to take advantage of this flexibility and continue to grant and enforce patents.)

The question of whether LMICs have the flexibility to make use of foreign-owned technology is only important if the other elements necessary to create successful business enterprises are present. These include adequate capital, infrastructure, and technically trained staff to successfully implement innovative technologies.²⁵

Because of limitations concerning these elements, the path for moving up the innovation curve has been encouraging FDI. Although large privately owned MNCs may prefer to invest in geographic areas with adequate infrastructure, if the opportunity is substantial enough, even electricity generation can be addressed through small power generation stations. Of course, the MNC brings with it capital and trained personnel.²⁶

In this regard, there is a well-worn path – hosting FDI – for LMICs to develop manufacturing industries that use more advanced technologies. The question is whether this well-worn path leads to indigenous capacity for innovation and the creation of locally owned advanced technology industries or merely creates a perpetual situation of inequality between the technology “haves” and “have-nots.” Can LMICs influence the arc of technological progress through policy options?

12.3.2 Technology Transfer Obligations

Through legislation and/or regulatory measures, governments can improve the terms of trade for local businesses by setting ground rules that improve the capacity, that is, bargaining power, of local enterprises in negotiating the terms of FDI.²⁷ One mechanism for accomplishing this objective is to establish requirements that foreign direct investors enter into joint venture arrangements with local enterprises to pursue their objectives and share technology with those joint venture partners as part of such arrangements.

There are myriad potential configurations for joint venture arrangements and other technology-sharing arrangements. The business and legal questions that must be addressed include the relative percentages of ownership and control over the business, the composition of management, how the capital of the business will be contributed and/or raised, how funds will be repatriated, and so forth. The technology-sharing questions include the defined subject matter of the relevant technology (including such matters as identification of relevant patent portfolios), potential geographic limitations on the sale of products incorporating the technology, ownership and control of technologies newly developed by the joint venture, contributions of trade secrets and other information, residual interests in technology upon dissolution or sale of the joint venture or party interest, and so forth.

Just as there are myriad potential configurations for joint venture and technology sharing, there are many ways that host governments may go about creating and implementing the requirements that may be established. Principally, this would involve choices between macro- and micro-management. The government might establish macro-benchmarks such as requirements regarding percentages of ownership and control and largely leave to the parties the negotiation of the specific terms and conditions of the arrangement, including for technology transfer. Alternatively, the government might more precisely establish expected terms and conditions – for example, concerning technology licensing conditions. There is also a question of whether the government would seek to maintain a review and approval mechanism before the commencement of business operations. Alternatively, it might be left to the parties to assure compliance with the preestablished rules, with the possibility of ex post facto regulatory intervention.

A substantive objection by the United States to China’s policies and practices concerning joint ventures and technology sharing was, and still is, that demands by Chinese authorities were conveyed informally and “off the record” as a condition to FDI approval. The maintenance of nontransparent regulatory requirements creates a risk of discriminatory treatment of investors that could be based on various factors (e.g., national origin) and should not be recommended. This is of particular concern if public securities markets and investors are involved in a venture, as the investors will not have an adequate basis to evaluate the business without transparency.

Recent economic research strongly supports the conclusion that China’s joint venture requirements for foreign investors have resulted in more robust technology transfer to Chinese enterprises (including downstream enterprises) than wholly foreign-owned investments.²⁸ In the case of China, the available evidence suggests that “forced technology transfer” in the context of investment approvals has exerted a positive internal impact.

12.3.3 Limitations in Preferential Trade and Investment Agreements

12.3.3.1 Transfer of Technology

There is a trend of incorporating provisions precluding technology transfer conditions in preferential trade and investment agreements (TIAs). This is not a new phenomenon. The United States secured commitments from developing countries, at least as early as its bilateral free trade agreement (FTA) with Chile in 2004, that approval of investments would not be conditioned on a performance requirement: “to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory.”²⁹ This provision, in a substantially similar format, has become a “staple” of U.S.-negotiated TIAs and is found in the text of the Trans-Pacific Partnership Agreement (TPP),³⁰ preserved in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The United States is not alone in demanding restrictions on technology transfer obligations. The recently concluded Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union includes a restriction on technology transfer requirements.³¹

The Regional Comprehensive Economic Partnership Agreement (RCEP) includes a performance requirement similar to that in the TPP regarding technology transfer.³² Of some interest, the RCEP has a carveout in its investment chapter of the prohibition on technology transfer requirements in favor of Cambodia, Lao PDR, and Myanmar. India pushed back against including such a provision during the RCEP negotiations, and its unwillingness to accept a provision of that type may have partly been why India did not join the RCEP.³³

12.3.3.2 Competition

Transfer of technology, and economic growth more generally, may be stymied by anticompetitive practices engaged in by market actors. Commercial arrangements that might otherwise improve the position of locally based businesses and entrepreneurs may be frustrated through licensing and other conditions that make it difficult for technology transferees to employ the relevant technologies or that impose oppressive conditions otherwise. In addition, assuming that locally based businesses emerge to compete with more established foreign-owned enterprises, their evolution into effective competitors may be hampered by anticompetitive practices of dominant actors.

In recent years, competition authorities in LMICs have begun to assert themselves more vigorously and are actively prosecuting cases involving anticompetitive behaviors, including those concerning licensing agreements.³⁴ One potential risk that LMICs face is the trend toward incorporating competition chapters in TIAs that establish rules for conducting competition investigations. Most of these chapters are directed toward procedural protections, though some involve substantive rules.

While, in principle, the assurance of fair process in governmental investigations, including competition law investigations, is important, the historical assertion of TIA rules by HICs has a blemished record. Seemingly benign procedural rules regarding the conduct of competition investigations may provide the basis for threats of trade sanctions that, in turn, may have a chilling effect on the willingness of competition authorities to pursue such actions. LMICs should very cautiously approach the negotiation of competition chapters in TIAs. Competition authorities worldwide may enter into cooperative arrangements for conducting investigations, sharing information, and so forth without codifying these rules in TIAs. Though it is important to assure fairness in investigation processes, this can be accomplished under national law in LMICs without embedding the possibility that the investigation targets will have recourse to threats from their home governments to obstruct those investigations.

12.3.3.3 Investor–State Dispute Settlement

Until recently, there was a distinct trend in TIAs to incorporate an investor–state dispute settlement (ISDS) mechanism for disputes between nationals of the parties and the host country of investment.³⁵ Typically, recourse might be had by the private investor to third-party arbitration under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) and/or pursuant to United Nations Commission on International Trade Law (UNCITRAL) rules. However, ISDS has fallen out of favor for several reasons. First, defining limitations on the types of disputes that could be initiated proved challenging. Private investors brought claims concerning alleged regulatory or judicial takings that went well beyond traditional concepts of nationalization or expropriation. These included claims regarding government regulation of tobacco advertisement and ordinary judicial patent invalidation processes.³⁶ Second, the establishment of ISDS implies a lack of sovereign capacity to fairly administer judicial proceedings within a host state. More recent TIAs have made efforts to limit the scope of the claims that may be brought and/or the characteristics of the arbitral tribunal that will decide ISDS disputes.³⁷ The United States–Mexico–Canada Agreement (USMCA) nearly eliminates ISDS. Several countries have announced their intention to move away from including ISDS provisions in their TIAs.³⁸ Innovation in the area of ISDS is taking place to limit efforts to redress abuse to the traditional concepts of expropriation and nationalization.

From the standpoint of LMICs, ISDS presents special difficulties. Such proceedings are very costly to defend and are likely to absorb significant government legal and financial resources that could be better deployed elsewhere.³⁹ Because claims will arise under customary international law, there is no need to specially incorporate a state-to-state investment dispute settlement mechanism in a TIA. It is within the customary international legal practice for a state that obtains compensation on behalf of a private investor to return that compensation to the investor.⁴⁰

12.3.3.4 Tread Cautiously with TIAs

LMICs need to be on guard in the negotiation of TIAs to avoid the surrender of important policy options with respect to technology transfer and economic development. There is no good reason from an LMIC perspective to accept a provision precluding governmental measures requiring joint venturing and/or technology transfer obligations in the context of FDI. Nor is there a good reason to include a competition chapter in a TIA that can be used as the basis for HIC threats to withdraw trade concessions as a reaction to competition enforcement actions. Whether LMICs have the bargaining power to avoid these types of obligations is a different question. It is worth bearing in mind that ISDS obligations seemed to be an inevitability only a few years ago, and public perceptions about ISDS obligations shifted.

12.4 Options for LMICs

12.4.1 Revitalizing Multilateralism?

The idea that LMICs will climb the technology curve through some voluntary technology transfer programs adopted by HICs does not appear to be a particularly viable development solution. The multilateral system is largely broken down; even when it was “working,” there was very little in the nature of HIC government support for technology transfer. This is at least substantially explainable by the fact that technology is predominantly owned and controlled by private enterprises. Even if the will was present, HIC governments would face substantial obstacles in mandating that businesses make their technology available through some type of institutional program.

With the world economy shifting to a “beggar thy neighbor” approach in which the major technology powers seek to undermine each other’s progress, LMICs need to fend for themselves. We may be reverting to a late nineteenth-century model, where preferential alliances replace the mid-twentieth-century most-favored-nation model. In this devolved scenario, LMICs may find themselves with some technology acquisition bargaining power if they can successfully trade access to their markets for better terms of trade. It is hard to have confidence in such a model, given the disparities in economic strength. But it may be where we are headed.

12.4.2 Leapfrog Technologies

As noted earlier, there may be some subject-matter areas where the barriers to entry for advanced technology industries are lower than others. Some of these are areas that countries such as India have exploited. The Internet has made available vast libraries of technical know-how at negligible cost.⁴¹ When there are gaps in knowledge and skills, there are consultants to help LMICs fill those gaps and train local individuals.⁴² Information, including patent databases, is far more readily available worldwide than at any time in human history.

It is not only the possibility for creating new, locally developed technical solutions that may be enhanced through bypassing steps in the technology chain but also for deploying infrastructure that previously required large-scale investments of capital but which now can be accomplished with much more modest investment. The build-out of telecommunications infrastructure relying on satellite relays in contrast to wires and cables is one illustration.

Given the expansion of available information, building capacity for technology absorption may be the priority task for most developing countries. The benefits that can be obtained by piggybacking on externally created innovation will depend on the level of expertise within the recipient country. This depends on education – which historically required the physical presence of trained educators and hard-copy instructional materials. Access to online educational resources that were previously the province of a few select educational institutions mainly located in HICs represents another change that opens up new possibilities for LMICs.⁴³

Developments in smartphone technology and associated financial payment systems have made it possible for countries to upgrade their transaction processing in ways that enable low-income individuals to transact business without the build-out of expensive technological infrastructure.⁴⁴ The major beneficiaries of mobile payment system innovation may be the micro-scale operators – proprietors of street stalls and so forth. In addition, the evolution of payment systems is dramatically lowering the costs of repatriating foreign-earned income for expatriate workers, all to the potential benefit of LMICs. Mobile Internet technology has facilitated possibilities for efficient communication, planning, and execution in business.

Small-scale solar energy generation stations and other sustainable energy generation technologies have created opportunities for more remote areas to electrify without large infrastructure expenditure.⁴⁵ This is perhaps a more challenging area than education or payment systems in the sense that sustainable energy systems require building physical energy storage capacity for continuous use.⁴⁶ Similarly, much work is being done to reduce the costs of water purification systems, including developing small-scale water purification units. This type of technology is extremely important to many LMIC environments.

The foregoing references are just a few of the areas where recent advances in technology are creating new possibilities for LMICs.⁴⁷ It is not simply that it may be cheaper and easier to improve quality of life, such as through improved telecommunications and electronic payments, but that as technical solutions increase connectivity to a larger innovative community, local innovators are likely to adapt and advance that technology. This is not intended to suggest an over-optimistic portrayal of current conditions or the future, but some building blocks are present for advancing an economy by leapfrogging stages of technological development.

12.4.3 Attracting Capital Investment

The scarce resource for LMICs is the investment capital necessary to implement concepts. This perhaps states an obvious, if not a circular, proposition. That is, LMIC economies would do better with more money.⁴⁸ From a global perspective, ample capital is available for investment, and that investment is seeking returns.⁴⁹ The question for LMICs is how to “package” their national economies to attract that investment capital.⁵⁰

12.4.3.1 Sound Governance

One approach to attracting investment involves establishing a reputation for “sound governance,” which refers to a sound legal system⁵¹ and the absence of corruption in regulatory institutions.⁵² For the investor, the enforceability of contractual arrangements and consistency in implementing regulatory norms is important to executing business plans. The absence of sound governance is a risk factor that necessarily increases the cost of capital and creates a drag on the economy. Achieving sound governance is a long-term project for any country, especially for LMICs.⁵³

12.4.3.2 Autonomous Investor Agreements

In addition to trying to assure the neutrality of courts and regulators, an LMIC and its private-sector enterprises may also support and negotiate contractual arrangements that entail defining with some specificity the terms of investment, including the potential for third-party arbitration. Given that LMICs have arguably faced difficulties with some existing international arbitration institutions, carefully defined self-standing agreements might be an alternative.⁵⁴

The subject of international commercial arbitration is dealt with in detailed literature in which the potential issues have been laid out.⁵⁵ Alternative dispute settlement arrangements may be important to establish a secure environment for investors in LMICs.⁵⁶ At the same time, it is important that LMICs can negotiate third-party arbitration mechanisms that do not tilt against their interests.

12.4.3.3 Support for Private-Sector Initiative

Because many small- and medium-sized enterprises (SMEs) in LMICs do not have the experience and expertise to negotiate sophisticated investment and licensing agreements with foreign investors, it is important that governments try to make available consulting resources for assisting SMEs with their transactions.

12.4.4 Balancing Protective Measures

A key question for any developing or emerging market government is how much of the national economy to “protect” through tariff, trade, or tax measures to provide local development space. Consumers bear the cost of protectionism, which can and should be tolerated at a certain level, but blanket protectionism simply makes the functioning economy too expensive.

As the United States has moved away from a low-tariff approach to international trade relations toward strategic targeting of its trading partners, the idea that growth can be promoted by granting preferences to local companies is likely to gain traction. The net effect will be a reduction in global output, but this does not mean that the strategic use of tariffs will not benefit a particular country in individual cases. For an LMIC, it may be necessary to provide at least transitory tariff and/or quota protection for an “infant industry.” But it is important to limit the use of tariffs and quotas because they otherwise have the effect of raising prices for consumers and may harm general welfare.⁵⁷

12.5 Perpetuating Inequality?

LMICs are confronted with a new world order in which the major economic powers that promoted multilateralism have moved toward nationalism, localization of production, and de-legalization of dispute settlement in favor of balance of power diplomacy. A counterpart to this trend is declining interest in developmental assistance, whether actual or rhetorical.

There is a military overlay, so this new world may also be dangerous. It remains to be determined how countries that are not part of the new great power dynamic will acclimate to this new world. During the Cold War that lasted from 1946 to 1989, a bit more than four decades, countries of the so-called Third World sought to play the First and Second World countries off against each other, seeking economic and military alliances with one side or another. It may be that we are moving into a new technological world order in which the less powerful countries must choose to ally themselves in a technological sense with one or another of the dominant technology powers. This should not be taken as a proposal but rather an identification of one potential new reality.

Regrettably, as part of the “exercise of power” equation, there is a trend among the capital-exporting countries to negotiate bilateral and plurilateral agreements with LMICs that preclude regulatory measures requiring a transfer of technology as a condition of FDI, including within joint venture arrangements. Because individual private investors within LMICs may lack substantial bargaining power, this diminishes the capacity of LMICs to secure favorable terms for the transfer of technology. There is no obvious solution to this problem other than seeking to avoid commitments of this nature.

At the same time, based largely on the evolution of digital technologies, LMICs have the opportunity to leapfrog in the current technological environment. There remains the requirement of securing adequate capital investment, including through the private sector. Attracting that capital entails creating conditions in which investors are reasonably secure.

Sound governance and transparency may be important elements. National self-interest should move a country in that direction, regardless of its effect on the perception of prospective investors. Developing mechanisms for fair third-party arbitration of private commercial disputes may help foster an attractive investment climate.

LMICs have seen their relative economic circumstances deteriorate vis-à-vis the HICs due to the COVID-19 pandemic.⁵⁸ All economies were hit hard, but the HICs had more capacity to absorb the shock and are recovering reasonably well. LMICs confront terms of trade that favor the HICs, including provisions in TIAs that preclude requirements for the transfer of technology, as well as the ascendance more broadly of managed trade policy among economically powerful states. These factors portend the perpetuation of the marked disparity in the distribution of global income and wealth. There are no “magic bullet” solutions on the horizon.