Law, economics and international law

I have often highlighted the inextricable link between Law and Economics in the study and interpretation of international trade law here and here. The interplay is so obvious in the Panel and Appellate Body decisions of the WTO. Use of complex econometric models, economic analysis and an economic understanding of international law in the context of trade regulations underlies this approach.

A new book by Eric Posner and Alan Sykes titled "Economic Foundations of International Law" should be another masterpiece to this growing field of scholarship.

Opinio Juris has an interesting book symposium on it.

Law and Economics at the WTO - A tense but necessary relationship

I have blogged about the relationship of economics and law in the interpretation of international trade law here and here. What is the relevance of economic principles, complex econometric models and economic analysis in WTO litigation. As lawyers one tends to ignore or sidetrack principles of economics while interpreting legal provisions.

Joost Pauwelyn in this piece titled "The Use, Nonuse and Abuse of Economics in WTO and Investor-­State Dispute Settlement" has a brilliant exposition of the complex relationship between economics and the law especially in relation to WTO litigation and Investor-State disputes. It traces the tense relationship, possible areas of application and the caveats required to have a meaningful combination.

Especially in relation to WTO disputes, the author states that the increasing use of economics is found in the determination of "like products", an analysis of "less favorable" treatment under various Agreements, definition and impact of "subsidies" as required by the ASCM, interpretation of the ever expanding "general exceptions" clause under Article XX of the GATT. he also prescribes some caveats in the unbridled use of economic principles like economics must be filtered through legal criteria, methodological discipline, for communication purposes, ‘keep it simple’, due process and avoiding or disclose value judgments.

He concludes with these words:

“Legal certainty and economic principles are not substitutes but complements”.100 Economics has a role in WTO and investor-­‐state dispute settlement. Economics provides insights not only in lawmaking but also in law application, both fact establishment and legal interpretation. The influence of economic evidence and arguments, including quantitative studies, is on the rise in both fields (in contrast to, for example, the practice of the International Court of Justice). It spans far beyond damage calculations and decisions on appropriate trade retaliation. In the WTO: like products (where quantitative studies could be used more prominently), less favorable treatment (where a tension is emerging between “detrimental impact” which must be shown, and “actual trade effects” which are not required), subsidies (e.g. assessing anticipated export shares for de facto export contingency or ex post serious prejudice for actionable subsidies) and general exceptions. In investor-­‐state arbitration: economic necessity (where the infamous Enron award was annulled for being based on economics rather than law). And in both regimes many more provisions lend themselves to input from economics. For example, in the WTO: causation and exceptions; in investment: definition of investment, fair and equitable treatment. Such input can provide more robust, empirically sound and predictable outcomes and better connect trade and investment law to the ‘real world’. It improves the output and effectiveness of both litigating parties and adjudicators. This, in turn, can broaden the support and legitimacy of both the trade and investment regimes. 

At the same time, reliance on economics does not come without risks. “Economic evidence is a powerful but also a dangerous tool”. Core caveats and limits are: (1) at least in litigation, economics must be filtered through legal criteria; (2) methodological discipline, to be respected by both the parties and the adjudicator (to avoid collective action problems, these disciplines must be imposed ex ante on both parties, which is not the case today); (3) for communication purposes, ‘keep it simple’; (4) due process (e.g. in respect of input by WTO staff economists; the independence and cross-­‐examination of party-­‐appointed experts; and participation of poor countries or small investors); and (5) avoid or disclose value judgments. The cases and controversies discussed in this contribution indicate the progress made on all five scores but highlight that a lot of work must still be done to conform to ‘best practices’. Appropriate use of economics surely tops nonuse. At the same time, given the risks involved, nonuse may eventually be wiser than misuse or abuse." 

The theme of the relationship between law and economics has a long standing one, especially in the context of trade law. Economics and its quantitative analysis has a bearing on judicial interpretation. Infact, this blog has a rich source list of blogs that believe in this inextricable relationship - Law and Economics and The Becker-Posner blog. What does this mean for litigation and negotiation at the WTO - more interdisciplinary teams of trade lawyers, economic experts to handle such complex situations. The question perhaps is not whether law or economics should prevail - the issue is how each could supplement the other in understanding realities of trade and business.

Dispute Settlement at the WTO - Interesting analysis

International trade law and policy is a complicated amalgam of law and economics. The two disciplines coalesce as well as intertwine in a complex fashion to churn out a quagmire of law and policy. A question that often dominates my mind is the dominance of "economists" or "trade specialists" in the discourse as against international trade law experts. Ofcourse, a lot is about international trade theory, principles of comparative advantage, international economics and trade related principles. Legalese is left to the dispute settlement mechanism. The extensive use of economic principles, theories and understanding dominates many panel and Appellate Body Reports of the WTO. Is the multilateral trading system dominated by economists rather than trade law specialists? Is there an underlying friction between the two streams? I have blogged about the use of economic principles and the danger of its unguided use, as reflected by Gregory Shaffer and Joel Trachtman's work, here.

The evident and obvious friction between trade policy diplomats and lawyers is reflected in Pascal Lamy's, Director General of the WTO, remarks at the celebration to mark 30 years of the Legal Affairs Division of the WTO said:

"Mr Dunkel’s decision to create a legal office in the GATT Secretariat would not have been taken lightly, as the GATT community generally was resistant to introducing all forms of legalism.  Fortunately, none followed the advice of Dick the Butcher in Shakespeare’s Henry the Sixth to ‘kill all the lawyers’.  But it must be said that old-school trade diplomats were quite sceptical about having lawyers meddle in the interpretation of rules that had been so carefully negotiated.  So Mr Dunkel was a brave man.

In a house no stranger to irony, the office of legal affairs was created on the condition that the head of the office not be a lawyer."

The dichotomy also reflects the divergent underpinnings of trade negotiations as against dispute settlement. While the latter is premised on trading power and political economy of trading realities, the latter is rule based and predictable.The dispute settlement mechanism of the WTO is often referred to as the crown jewel of the WTO reflecting the efficiency, fairness, transparent and predictable mature of rules. It reflects the dominance of a rule based system over a "power" based system. It reflects the equity in a system where a weak trading power can take on even the most powerful trading power on an issue that it views as violative of WTO obligations. The possibility of ensuring compliance in these cases reflects the power of the law to provide justice and protect rights. Trade relations as well as the history of international trade rules has always been seen in the context of negotiations that have involved compromises and have reflected unequal power structures. the dispute settlement mechanism is a challenge to this reality. 

The Dispute Settlement mechanism has many successes to its credit including the scope of its coverage, time taken as well as compliance. It would be interesting to see how the failure of political negotiations is reflected in functioning of the judicial wing of the WTO? Will it take over some of the functions of rule making by being "activist"? We have seen national judicial systems perform this rule when the "executive" branch fails to deliver. Will we see a similar current here? What impact would that have on the effectiveness of the dispute settlement mechanism? How far can it be stretched?

Is Protectionism rising?

The fears of rising protectionism (of rising barriers, both tariff and non-tariff barriers) loom large across the world. The failure of the Doha Development Agenda has created an impasse to further liberalise trade rules. The trend of a drift towards protectionism is often reported. This is despite public commitments of opening up of trade and resisting protectionism. The 8th Ministerial Conference of the WTO had unequivocally advocated the commitment to multilateral rules in its statement of political guidance:

"1. Ministers emphasize the value of the rules-based multilateral trading system and agree to strengthen it and make it more responsive to the needs of Members, especially in the current challenging global economic environment, in order to stimulate economic growth, employment and development.

2. Ministers underscore that the WTO’s role in keeping markets open is particularly critical in light of the challenging global economic environment. The WTO has a vital role to play in the fight against all forms of protectionism and in promoting economic growth and development. Ministers also acknowledge that experience has shown that protectionism tends to deepen global economic downturns. Ministers fully recognize WTO rights and obligations of Members and affirm their commitment to firmly resist protectionism in all its forms."

Perhaps statements of political guidance often do not translate into sovereign, national actions of countries across the developmental divide. Moreover, countries often justify their measures as being consistent with multilateral obligations and not being protectionist in letter and spirit.

Pascal Lamy, Director General of WTO recently addressed this issue:

"For the first time since the beginning of the crisis in 2008, this report is alarming.  The implementation of new measures restricting or potentially restricting trade has remained unabated over the past seven months, which is aggravated by the slow pace of rollback of existing measures. 

The accumulation of these trade restrictions is now a matter of serious concern.  Trade coverage of the restrictive measures put in place since October 2008, excluding those that were terminated, is estimated to be almost 3% of world merchandise trade, and almost 4% of G-20 trade. The discrepancy between the commitments taken and the actions on the ground add to credibility concerns.

This situation is adding to the downside risks to the global economy and what is now a volatile global context.

In such a situation, it is important that we collectively and urgently redouble our efforts to strengthen multilateral co-operation to find global solutions to the current economic difficulties and risks and avoid situations that would cause further trade and investment tensions."

What ultimately causes countries to adopt protectionist measures? Does an economic depression or the need to protect a local industry fuel it? Do democratic, political compulsions promote it? Do domestic business interests play a dominant role in policy making to ensure that barriers are raised? Is it politically more expedient to justify a protectionist measure to one's constituency? Does it signify a nation's control over it's own sovereign destiny? Is it a reaffirmation of one's national sovereignty? Are the reasons economic, political or both?

A study titled "Protectionism isn't countercyclical (anymore)" by Andrew K Rose in Vox analyses the relationship between economic depression, unemployment, growth and protectionism in terms of tariff barriers. He comes to the conclusion that protectionism is anything but cyclical - that is a wave of depression does not necessarily lead to the rise in protectionist measures.

"The goal of my recent work has been to show that, at least since World War II, protectionism has not been countercyclic. While this runs counter to conventional wisdom, the evidence is reasonably strong; no obvious measure of protectionism seems to be consistently or strongly countercyclic."

Taking the example of initiation of disputes at the WTO as a sign of protectionist measures, he has analysed the disputes initiated with growth patterns.

"Accordingly, Figure 3 provides a time-series plot of annual global GDP growth and the number of commercial disputes initiated under the GATT/WTO dispute settlement system. This is by no means a perfect measure of protectionism. Complaints are not formally initiated against all protectionism, are not equally important, and are not randomly initiated across countries. The inadequacies of the GATT system led to considerable reform under the WTO in 1995. Still, this measure covers both the world and NTBs.¹ The message from Figure 3 is that, for the world as a whole, global growth is essentially uncorrelated with the initiation of disputes under the multilateral mechanism set up precisely to handle protectionism.

This paper is an interesting economic analysis of protectionism. However, as the author himself indicates, all disputes initiated at the WTO may not signify issues of protectionism. May be a better analysis would be to plot the disputes in which the Appellate Body declared a measure contrary to WTO rules instead of the initiation per se. Another issue is of what constitutes protectionism? Is raising tariffs, even if it is within the bound rates of a country, per se a protectionist measure? Certain measures that raise the barriers of free trade are permitted by the WTO rules. Do they constitute protectionism? Is there a difference between economic protectionism and legal protectionism whereby the former is a much broader concept than the latter? In other words, a measure may be protectionist in the economic sense of restricting competition and not taking advantage of optimum allocation of resources but might be perfectly legal as per international trade law since the exceptions in the WTO rules allow for such a legitimate use of policy space. When we speak of protectionism rising, what form of protectionism are we talking about? Further, a whole host of non tariff barriers like technical barriers and standards are in play now denoting new forms and classes of protectionism. Is protectionism a relative term?