Addressing Negative Effects of Trade Liberalization: Unilateral and Mutually Agreed Flanking Policies

Abstract The conventional approach to trade liberalization has been to liberalize trade through international agreement and address subsequent domestic fallout and spillovers through domestic policies. In consequence, international obligations in trade liberalization are not legally connected with ‘flanking’ measures to address their negative effects. We discuss the shortcomings of this conventional approach with respect to labor adjustment and environmental protection: for political reasons, trade liberalization requires today the simultaneous regulation of labor and environmental spillovers. We suggest a novel approach to trade liberalization that includes the necessary flanking policies as part of, or linked to, the international agreement itself. This novel approach seeks to achieve the best of both worlds: reaping the benefits of international trade while making sure that negative spillovers are effectively addressed. To illustrate the intricacies of this approach, we introduce a new conceptual framework covering the negative effects of trade liberalization and flanking or mitigating policies, and a proposed novel approach in the form of trade liberalization packages and package treaties. Trade liberalization packages and package treaties are currently emerging around the world (e.g. sustainable palm oil in EFTA–Indonesia) and deserve our close attention.