Promoting Trade through Private Law: Explaining International Legal Harmonization

A large body of research examines states' efforts to promote international trade through public law, that is, by forming preferential trade agreements (PTAs) that lower governmental barriers to trade. Scholars, however, have overlooked another channel that states employ to facilitate trade: international legal harmonization of private law. The assumption underlying legal harmonization is that cross-national variation of commercial law impedes trade; by contrast, similarity of laws across jurisdictions encourages trade by reducing uncertainty and transaction costs. I argue that the harmonization of private law acts as a substitute for the public-law channel of enhancing trade: countries that are members of few PTAs make up for this deficiency by joining initiatives for private-law harmonization. Legal harmonization may be a weaker stimulant of trade than PTAs, but it also meets less political resistance. To test this hypothesis, I examine the ratification of the 1980 UN Convention on Contracts for the International Sale of Goods – one of the primary instruments of legal harmonization. Supporting the hypothesis, the analysis reveals that states with few PTA memberships are more likely to ratify the convention. The paper has significant implications for the study of the political economy of trade. Existing literature focuses on the multilateral trade regime and preferential trade agreements are two key instruments through which governments seek to boost trade. As this paper shows, however, these are not the only instruments that governments employ to facilitate commercial exchange. These public-law measures are part of a broader array of tools that also includes arrangements aimed at harmonizing private law, that is, replacing the existing cross-national diversity of commercial law with a single, unifying legal regime. Harmonization of the legal rules governing cross-border transactions increases clarity and certainty, reduces transaction costs and lowers the likelihood of disputes – all of which should facilitate economic activity. By focusing only on the public-law side – GATT/WTO and PTAs – and overlooking the private-law dimension, the trade literature has missed a part of the picture. In order to fully understand international trade cooperation, we must examine the entire picture – including the private-law side – as this paper seeks to do.