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.

Can questions of fact be reviewed on appeal - Standards of Appellate review in the WTO

This post is about the powers of the Appellate Body of the WTO to go into questions of fact on appeal. To what extent can the Appellate Body of the WTO review a Panel's decision? Can it go into the facts of the particular case or should it limit itself to legal interpretation or principles of law? Can it overrule the findings of fact of the panel or is its power of judicial review limited to legal interpretations? What are the standards of Appellate review in the DSU of the WTO? Often a case involves complex issues of fact and law. An appreciation of facts sometimes intertwines with the interpretation of law. Should the Appellate Body intervene in these circumstances or should it concur with the Panel's decision on the findings of fact. It is also observed that the Appellate Body in many instances is constrained by a limited appreciation of facts of the Panel. Is it reluctant to explore the facts of the case and content to rely on the adequate or inadequate appreciation of facts by the Panel. On the other hand, is an inadequate analysis of law itself a question of law and thus explorable by the Appellate Body? The lines between what constitutes a pure question of fact, law and legal application of the law to the facts of a particular case get blurred in complex situations. An analysis of how the Appellate Body has dealt with these situations and the jurisprudence developed is a fertile area for research.

Simon Lester has raised these issues and more in an article titled "The Development of Standards of Appellate Review for Factual, Legal and Law Application Questions in WTO Dispute Settlement" in the Trade, Law and Development Journal.

Some of the relevant provisions of the DSU that address the issue of the contours of the Appellate Body's interpretative flexibility are Article 11 and Article 17(6) of the DSU.

Article 11 deals with the functions of Panels and states:

The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements.  Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements.  Panels should consult regularly with the parties to the dispute and give them adequate opportunity to develop a mutually satisfactory solution.

Article 17(6) of the DSU states that "An appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel."

While Article 17(6) is amply clear about the scope of an Appellate review, Article 11 gives leeway for the Appellate Body to exercise a wider ambit of judicial review. Simple questions of fact may be outside the scope of the Appellate body. On most occasions questions of fact and law do not overlap. However, an inconsistent application of law  to a set of facts, may require the interpretation of both the facts and the law. However, when application of law to particular facts becomes a complex issue of understanding the factual situation correctly or an inconsistent or non-objective assessment of the facts, Appellate review does play a role. There the simplistic distinction between law and fact disappear and converge into a complex quagmire of judicial appreciation and interpretation. 

As observed by Simon Lester:

"As a matter of policy, it may be desirable to give the Appellate Body a good deal of leeway in reviewing a panel’s examination of the measures that are being challenged. However, Article 17.6 explicitly narrows the scope of appellate review to ‘issues of law’ and ‘legal interpretations’. Arguably, the Appellate Body’s decision to consider the panel’s construction of the challenged measures, outside the context of WTO obligations, as a law application issue stretches the boundaries of this provision, as the Appellate Body seems to have taken a very broad view of what constitutes a law application question. The result of this interpretation is an expansion of the scope of issues over which the Appellate Body can exercise a review.  For those who think that appellate review is a good idea, this development may be a positive one. On the other hand, to the extent that the Appellate Body’s interpretation goes in a direction different than what the drafters intended, it may cause concerns."

To what extent the Appellate body might go to unravel facts in an Appellate review would depend on the particular facts and circumstances of each case (We lawyers love this phrase - "depend on facts and circumstances of each case"). However, the limits of Article 17(6) and the purpose of an appellate review to decide on matters of legal interpretation might hold it back. It would be worthwhile to make an analysis of the cases where the Appellate Body has crossed the line? Or perhaps, it draws the line itself, so never crosses it.

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?