The University of Chicago Law School Faculty Blog

Student Blogger - Fall WIP: Bradford and Ben-Shahar on Rewarding the Enforcers of International Law

They say you catch more flies with honey than with vinegar. They might be wrong. But what would really be great is if the same substance could serve as both honey or as vinegar, as the job requires. Anu Bradford, presenting a paper co-written with fellow Chicago Professor Omri Ben-Shahar, thinks they may have that magic policy in the nettlesome field of international law enforcement.

Enforcement of international agreements is a difficult and costly endeavor. In an ideal world, the threat of sanction would be the preferable way of deterring cheating behavior, because a threat alone is costless. Unfortunately, a threat is only effective if it is credible, and it is only credible if the cost of following through is less than the cost of simply absorbing the bad behavior. Because sanctions are often expensive, many threats of punishment are not credible, and thus bad behavior goes undeterred.

An alternative to punishment (vinegar) is rewards (honey) -- paying off potential violators to encourage them to play nice. Rewards are generally cheaper than punishment, but at root the suffer from a similar problem: if the amount of harm to the enforcer is less than the benefits accruing to the violator, the enforcer has no incentive to offer a reward high enough to convince the wrongdoing to cease misbehaving. Consequently, if there is a desire to continue reducing the level violation below this point (for example, to account for difficult to monetize externalities, as often is the case in environmental regulations)

Bradford and Ben-Shahar's solution is deceptively simple: have the money do both. Enforcers should pre-commit a certain amount of money to an escrow account, with the promise that it will be offered out as a reward to violators who clean up their act. If the violator refuses to do so, then that money is used instead to finance a punishment, effectively multiplying the investment. They analogize this to a system wherein bail money is used to finance bounty hunters (if the defendant skips town). Not only does the wrongdoer lose the money they put up for bail (the reward for coming to trial), but they also face increased resources directed against them as punishment.

Future of the WTO: In Conclusion

Thank you for your engagement over this past week Richard, Greg and Daniel. Your critical insights provoked many great discussions in this blogsphere and beyond.

While the tone of the discussion was often pessimistic about the prospect of concluding major multilateral trade rounds, we seemed to agree that the WTO's dispute settlement mechanism continues to constrain the most egregious forms of protectionism that the current economic and political climate breeds. Similarly, none of us suggested that we have come to the end of trade liberalization. Rather, the consensus seemed to be that any new liberalization commitments -- at least in the foreseeable future -- will be undertaken in regional and bilateral settings.  The current financial crisis is unlikely to be particular conducive to even such more circumscribed trade deals, but it is in those more limited settings where we expect states to continue to strike Pareto-improving deals with their key trade partners.

Our discussion covered a range of ideas on how we might revive the WTO as a forum for multilateral negotiations: Domestic politics, liberal ideas, institutional design, judiciary-induced liberalization, linkages across regimes, gradualism, PTAs as building blocks of (eventual) multilateralism and, finally, reciprocity and development in bargaining. Yet the diffusion of power and divergent preferences among the key economic powers tended to weigh heavily on the most optimistic arguments.  Exposing both the agreement and disagreement among us, I trust that the conversation left all of us with a more nuanced appreciation of the opportunities and challenges ahead. 

Thank you again for a spirited exchange!

[Ed. note: or your convenience, all of the posts in this conversation are listed here in chronological order]

• 2/23: Future of the WTO (Anu Bradford)
• 2/23: Future of WTO (Daniel Abebe)
• 2/23: Future of the WTO-Relevance (Gregory Shaffer)
• 2/23: Future of the WTO (Richard Steinberg)
• 2/24: Future of the WTO: End of multilateralism?
• 2/24: Future of the WTO- Liberal Ideas and Domestic Politics (Gregory Shaffer)
• 2/25: Future of the WTO: Noise versus Trend (Richard Steinberg)
• 2/25: Future of the WTO: Judiciary taking the lead?
• 2/25: Future of the WTO: "Death" of the WTO and Hegemonic Stability Theory
• 2/26: Future of the WTO-- Power Diffusion and Regionalism/Bilateralism (Richard Steinberg)
• 2/26: Future of the WTO-PD Games and Deadlock, Financial Crisis, Regional Blocks (Gregory Shaffer)
• 2/26: Future of the WTO: Governing the world economy beyond trade
• 2/27: Future of the WTO: Limited Options
• 2/27: Future of the WTO: Regionalism, Multilateralism, and Global Governance (Richard Steinberg)
• 2/27: Future of the WTO- Institutional Reform, Development and Reciprocity (Gregory Shaffer)

Future of the WTO: Governing the world economy beyond trade

Let me build on Greg and Richard’ assumptions and try to sketch a way forward. We all seem to agree that new, meaningful trade deals will not at least in the near future be struck in the WTO. Instead, negotiations are more likely to take place in the bilateral and regional context. There is less agreement among us on whether bilateral and regional progress will pave the way for multilateral trade deals in the future. We can speculate whether the WTO will be revived or made obsolete through these preferential trade agreements (PTAs). It is possible, and maybe even likely, that the net benefits from new global trade deals will gradually diminish as PTAs continue to proliferate. The opportunity costs of forgoing the WTO negotiation process would inevitably seem lower when the various new regional trade relations become more entrenched.

Acknowledging this shift towards regionalism, Richard asks: “Will we see competition between blocs? Cooperation between them? What will be the implications for multilateralism?” China’s recent effort to build closer trade relations with its Asian neighbors is one of the most interesting developments. That trend is likely to continue. Greg seems correct in doubting the emergence of coherent rival geopolitical blocks. But the most important regional trade deals will be built around the US, EU and China. In addition, we will see a fragmented web of PTAs within, across and beyond the key trade regions.

I would predict some competition but no confrontation among regional blocks. We may see attempts of the “big three” – the US, EU and China – to expand their spheres of economic influence though negotiating PTAs with other states, in particular the energy-rich states in the Middle East, Central Asia and Africa.

Future of the WTO: Judiciary taking the lead?

Richard and Greg's entries offer a stark contrast about where the WTO is heading and what factors are relevant in determining the faith of the institution. Is the future of the WTO determined by power, domestic coalitions or, ultimately, norms and ideas?

Greg calls for the mobilization of domestic interests and ideas about trade liberalism as a solution to the current deadlock. Domestic coalitions have lost their faith in liberal markets. Without domestic support and, consequently, the prospect for political rents, states have little incentives to negotiate new trade deals.

Given the degree of economic interdependence today, one would expect there to be an even more positive domestic political economy story in favor of free trade. Traditionally, we rely on exporters to counter the protectionist pressures generated by import-competing industries. With a dramatic growth in intra-industry trade, pro-trade coalition of exporters should be joined by a large number of domestic producers who rely on imports as inputs or raw materials. In addition, the extent of foreign direct investment (FDI) would be expected to create new interest groups that benefit from free trade. For instance, if the US were to raise trade barriers vis-a-vis Chinese imports, we would expect US exporters and US companies relying on Chinese goods as inputs object the measures. But shouldn't also an increasing number of US companies that are established in China and that export their goods back to their home country rally againts the proposed measures? I agree with Greg that we do not currently see strong interest groups favoring new WTO deals. But the bottom-line is that there are winners and those winners do have a stake in the system. The fundamental political economy rationale of trade liberalization has therefore not changed. Quite the contrary.

Future of the WTO: End of multilateralism?

Richard pronounces that "as a location for trade negotiation, the WTO is dead". Looking at the dismal trackrecord of the the past 7 years of negotiations, current political economy climate, the extent of disagreements among the key trading nations, and the urgency of policy priorities elsewhere, that may well be an accurate projection at least for the next five to ten years. 

Even in the life after the financial crises, the structural problems undermining the WTO prevail, impeding states' ability to reach a consensus that is required for agreeing on any new commitments.  Daniel refers to the variation in internal characteristics among the great powers as a primary reason for the deadlock. While the US and the EU have their differences, those differences are even sharper between the US and the EU on one hand and the emerging and the developing countries on the other.  In addition, BRIC countries' composition of production and trade further ensures that they are not a coherent block and hence less likely to be able to lead a coherent coalition.  All BRIC countries pursue export-driven growth but rely on very different industries in generating that growth. China exports primarily manufactured goods, India services and Brazil agricultural products.  Russia's economy, if admitted to join the club, depends on natural resources.  Thus, what is common among the emerging economies, is their willingness to counter-balance the US and EU created trade order rather than their shared preferences on the priorities of the trade agenda. We are therefore more likely to continue to see them exercise veto-power rather than set the agenda for any new trade rounds.

So have we come to the end of multilateralism?

Future of the WTO (Anu Bradford)

The WTO’s troubles began much before the financial crises erupted. Trade protectionism is on the rise but the institutional foundations of international trade deals have been shaky for several years. The Doha round of trade negotiations, commenced in 2001, has repeatedly stalled as states have failed to reach a consensus on key issues. These difficulties have undermined the efforts to multilaterally reduce remaining trade barriers and shifted the momentum of trade liberalization towards bilateral and regional trade agreements.

Why have multilateral trade deals been so difficult to conclude in the past years? The WTO has been hailed as the most effective international institution that has delivered enormous welfare gains to its members since the GATT Agreement was first negotiated in 1947. In 1995, when the contracting parties of the GATT established the WTO and expanded the institution's mandate to include services and intellectual property rights, the continuing progress towards a truly liberal multilateral trade order built around the all-mighty WTO seemed inevitable.

Much has happened since the conclusion of the Uruguay Round. Most importantly, what has complicated the WTO’s ability to facilitate international trade agreements is the fundamental shift in the balance of economic power that underlies international trade negotiations. At the end of the Uruguay Round in 1995, the United States and the European Union were in the position to dictate the negotiation agenda, facing few constraints from the other contracting parties. Now, in contrast, the talks are frequently brought to a halt by developing countries that vocally resist the imposition of US and EU’s trade preferences on them. Most recently this past July, the attempts to revive the Doha Round in Geneva failed due to the opposition of new trade powers, India and China. The US and EU are facing an entirely different strategic situation whereby their power is increasingly constrained by that exercised by the recently empowered emerging economies.

Chinese Antitrust Law: The New Face of Protectionism?

Today, China’s new Antimonopoly Law goes into effect. This comprehensive antitrust makeover is celebrated in some quarters as a significant step in China’s transition to a market economy. But the new law is also worrisome, for it could be used to protect national corporate champions while keeping foreign corporations out of the Chinese market. And if China follows this course, the options for the rest of the world are grim.

On its face, the new Chinese law is neutral. It subjects both foreign and domestic corporations to antitrust scrutiny. The law purports to promote economic efficiency and advance consumer welfare, which are appropriate goals of antitrust law. But the law also contains several ominous provisions, including a clause subjecting foreign acquisitions of Chinese corporations to a “national security review.” The law further defines “national security” to include economic security, opening the door for the Chinese officials to block any foreign transaction that significantly impacts the structure of the Chinese economy or, as some fear, that Chinese authorities simply do not like. An antitrust law that on its face is designed to open markets can be a powerful tool to close them.