Here’s a letter to a new reader of Café Hayek:
Thanks for your e-mail.
You ask “How can free trade possibly work if one country is under one system of law and the other country is under a different system of law?”
Easy. Under a policy of free trade, the home government simply doesn’t prevent its citizens from trading with foreigners. The home government (1) leaves each person or firm responsible for assessing the risks to that person or firm of trading with people in different legal regimes, and (2) allows trade to commence unmolested if the person or firm judges the risk to be acceptable. If a fellow American judges that his trading with, say, people in China is worth whatever risks attend such trade, it is no business of the U.S. government to obstruct that trade.
In practice, of course, merchants value legal predictability – they want to have a good sense of what are the rules that govern their international transactions. They want also to be reasonably confident that disputes will be adjudicated fairly and settled peacefully. But assurance of legal predictability and of fair process need not be imposed by a sovereign power.
In fact, historically the legal rules that govern international trade have been created not by sovereign powers but by merchants themselves. The Lex Mercatoria – “Law Merchant” – is a body of legal rules, that evolved over the centuries, to govern international commerce. This law was neither designed nor enforced by sovereign governments. And to this day a great deal of international commerce is governed by this system of private law.
On this history see this 2011 article by Daniel Smith and my GMU Econ colleague Peter Leeson, who conclude that
The popular wisdom that flourishing international trade requires government may be popular, but it’s also wrong. We have the Law Merchant to thank for the incredible wealth that commerce has created. Today, international trade accounts for nearly one-third of world GDP—some $6 trillion in 2008. That’s an astonishing volume—produced predominantly on the basis of private order.
It is, in short, a myth that global free trade requires global government.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030