The design of international agreements

European Journal of International Law

Volumn 16, Issue 4, 2005, Pages 579-612

  Guzman, Andrew T ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 27844609036     PISSN: 09385428     EISSN: None     Source Type: Journal    
DOI: 10.1093/ejil/chi134     Document Type: Article

References (211)

1. This article offers an explanation for some, but not all, of the diversity that exists in international agreements. Some of the other sources of diversity within agreements are discussed in the Autumn 2001 symposium issue of International Organization. See Koremenos, Lipson, and Snidal, 'The Rational Design of International Institutions', 55 Int Org (2001) 761
2. Koremenos, Lipson, and Snidal, 'Rational Design: Looking Back to Move Forward', 55 Int Org (2001) 1051.
3. E.g., the North American Free Trade Agreement (NAFTA) is the product of a formal treaty while the Basle Accord is not a treaty. See Basle Committee on Banking Supervision, 'International Convergence of Capital Measurement and Capital Standards' (July 1998), available at http://www.bis.org/publ/bcbs04a.htm;
4. see generally, Lee, 'The Basle Accords as Soft Law: Strengthening International Banking Supervision', 39 Va J Int'l L (1998) 1
5. Oatley and Nabors, 'Redistributive Cooperation: Market Failure, Wealth Transfers, and the Basle Accord', 52 Int Org (1998). 1, at 35-54.
6. E.g., bilateral investment treaties (BITs) typically include dispute resolution procedures, as does the WTO, whereas the Geneva Convention Relative to the Treatment of Prisoners of War does not. See, e.g., Treaty Concerning the Reciprocal Encouragement and Protection of Investment, 14 Nov. 1991, U.S.-Arg., arts. II-V, S. Treaty Doc. No. 103-2, at 3-6 (1993); Geneva Convention Relative to the Treatment of Prisoners of War, 75 UNTS (1949) 135.
7. E.g., the International Covenant on Civil and Political Rights (ICCPR) provides for the submission of reports by the parties when so requested by the Human Rights Committee ('the Committee'), and the Committee is authorized to review and comment on these reports: See ICCPR, 999 UNTS (1966) 171 (1966), art. 40(1)(b), (4)
8. see also Raustiala, 'Police Patrols, Fire Alarms & the Review of Treaty Commitments', mimeo, at 2 (2003) (on file with author).
9. A soft law agreement reduces the credibility of the commitment relative to a treaty because it represents a lower level of commitment. Omitting dispute resolution and monitoring procedures has a similar effect because these procedures serve to identify and publicize violations.
10. This is a simple insight from contracts. It is discussed in detail in Section 2.
11. See Guzman, 'The Cost of Credibility: Explaining Resistance to Interstate Dispute Resolution Mechanisms', 31 J Legal Stud (2002) 303. Domestic contracts do not normally include dispute resolutions provisions either, but, unlike international agreements, they can rely on the background legal system for enforcement. International contracts provide a better example of private parties seeking to ensure the credibility of their agreements. These contracts typically include a choice of law clause and frequently an arbitration clause, which identifies the law that is to govern the dispute and the forum in which a dispute will be resolved.
12. See Raustiala, supra note 4. Domestic contracts do not always provide for monitoring, but they tend to do so where monitoring is most important. E.g., secured creditors will normally include monitoring provisions of some sort in their credit agreements when the amount involved is large enough to justify the costs of monitoring.
13. See, e.g., Raustiala, 'Form and Substance in International Agreements', mimeo (2002) (stating that international lawyers 'have produced few theories of why states chose to use or avoid legality') (on file with author)
14. Guzman, supra note 7, at 307 ('The reluctance of states to include binding dispute resolution clauses in their agreements has received limited attention from international law scholars.').
15. But see Sykes, 'Protectionism as a "Safeguard": A Positive Analysis of the GATT "Escape Clause" with Normative Speculations', 58 U Chicago L Rev (1991) 255 (offering a public choice explanation of the escape clause provisions contained in Art. XIX of GATT).
16. As this sentence makes clear, this article embraces an institutionalist view. It is worth noting that there is considerable debate about the proper way to model state behaviour, and institutionalism is only one of the possible choices, with the other common ones being realism and constructivism. The merits and demerits of these approaches have been exhaustively catalogued, debated, and discussed elsewhere, and it serves no purpose to revisit that debate here. For discussions of these approaches, see Abbott, 'Modern International Relations Theory: A Prospectus for International Lawyers', 14 Yale J Int'l L (1989) 335 (institutionalism)
17. Koh, 'Why Do Nations Obey International Law?', 106 Yale LJ (1997) 2599 (constructivism)
18. Koh, 'Transnational Legal Process', 75 Nebraska L Rev (1996) 181 (constructivism)
19. M.E. Brown, S.M. Lynn-Jones, and S.E. Miller (eds.), The Perils of Anarchy: Contemporary Realism and International Security (1995) (realism).
20. Throughout this article the term 'design elements' will be used to describe the credibility enhancing devices that represent the focus of the article - hard law, dispute resolution, and monitoring.
21. There are, of course, transaction costs, including lawyers' fees, but these are put to one side. In many cases these fees will be modest, and perhaps even zero, because most disputes are settled prior to trial, and some are settled before lawyers are even hired.
22. See infra note 33.
23. See Guzman, 'A Compliance-Based Theory of International Law', 90 Calif L Rev (2002) 1823.
24. States could, of course, provide for money damages in their agreements. In fact, they almost never do so. The reason for state resistance to money damages is itself something of a puzzle and this article does not attempt to explain this fact. It may be that money payments are not considered an effective deterrent, or that the political costs associated with either paying money damages or accepting them in compensation for a violation are significant. Alternatively, there may be a sense among states that money damages would be ignored too easily. Whatever the reason, this article simply recognizes this fact and assumes that money damages are not available. For a more detailed discussion of this issue, see Section 5B.
25. Along the way, Section 2 considers existing explanations for the resistance to credibility-enhancing devices in international agreements, including some that rely on domestic political forces.
26. The choice regarding dispute resolution and monitoring is, of course, not a binary one. There are a wide variety of ways each of these design elements could be incorporated. The article frequently speaks of a choice to include or exclude such elements, but this should be recognized as a shorthand for the actual choice that includes not only whether or not to include the design elements, but how strong to make them.
27. There is no single agreed-upon definition of soft law. One approach is to identify what soft law is not. It is not 'hard law', by which is meant treaties or custom, nor is it a purely political understanding without a legal component. Rather, soft law is what lies between these two alternatives. See Abbott and Snidal, 'Hard and Soft Law in International Governance', 54 Int Org (2000) 421, at 422.
28. For more about 'soft law,' see Wellens and Borchardt, 'Soft Law in European Community Law', 14 ELRev (1989) 267
29. Handl et al., 'A Hard Look at Soft Law', 82 Am Soc Int'l L Proc (1988) 371
30. Gruchalla-Wesierski, 'A Framework for Understanding "Soft Law"', 30 McGill LJ (1984) 37.
31. The term 'soft law' is used herein to denote law that falls short of the classical definition of international law. See Raustiala, supra note 9 (describing the term soft law). This is a common usage of the term, but it is not the only one. Some use the term to describe rules that meet the classical definition but are imprecise of weak.
32. See Weil, 'Toward Relative Normativity in International Law', 77 Am J Int'l L (1983) 413, at 414 n.7 ('It would seem better to reserve the term "soft law" for rules that are imprecise and not really compelling, since sublegal obligations are neither "soft law" nor "hard law": They are simply not law at all.')
33. Dupuy, 'Soft Law and the International Law of the Environment', 12 Mich J Int'l L (1991) 420
34. O'Connell, 'The Role of Soft Law in a Global Order', in D. Shelton (ed.), Commitment and Compliance: The Role of Non-binding Norms in the International Legal System (2000), at 100, 109-110
35. Chinkin, 'The Challenge of Soft Law: Development and Change in International Law', 38 ICLQ (1989) 850.
36. In other writing I have commented on the conceptual problems that soft law presents for international legal scholars. See Guzman, supra note 14, at 1878-1883.
37. See A. Aust, Modern Treaty Law and Practice (2000).
38. The terms 'binding' and 'non-binding' are sometimes used as synonyms for hard and soft law respectively but these terms are somewhat misleading because binding commitments - meaning treaties - often do not include enforcement mechanisms of any kind, let alone the sort of coercive enforcement mechanisms that we are used to in domestic law. Non-binding agreements, on the other hand, are commonly thought to affect the behaviour of states, and do so in part because they impose some sort of obligation on the signatories. We cannot, therefore, distinguish these two categories of commitment based on whether there is a sanction for non-compliance or whether state behaviour is affected. If non-binding agreements affect behaviour, a failure to comply must entail some consequences. On the other hand, it is clear that violation of a binding agreement imposes only limited costs on states. The most that can be said about the distinction between binding and non-binding agreements, then, is that a violation of the former will, all else being equal, impose greater costs on the violating state than violation of the latter.
39. Van Dijk, 'Normative Force and Effectiveness of International Norms', 30 FRG YB Int'l L (1987) 9, at 20. Perhaps the most traditional position views agreements other than treaties as nothing more than evidence of custom.
40. See Dupuy, supra note 18, at 432. Under another view, soft law 'tends to blur the line between the law and the non-law, be that because merely aspirational norms are accorded legal status, albeit of a secondary nature; be that because the intended effect of its usage may be to undermine the status of established legal norms':
41. Handl, supra note 18, at 371.
42. One additional clarification is needed here. Some commentators use a definition of soft law that encompasses formal treaties whose substantive obligations are weak. Thus, e.g., a formal treaty that has no clear requirements, but instead consists of a set of goals, aspirations, or promises to pursue certain general objectives, would be considered 'soft' under this taxonomy. See Baxter, 'International Law in "Her Infinite Variety"', 29 ICLQ (1980) 549, at 554
43. Chinkin, supra note 18, at 851. It is certainly true that the impact of an agreement is affected by both its form (binding versus non-binding) and its substantive provisions. That is, a formal treaty can certainly have its impact reduced if the substance of the agreement is watered down. Furthermore, one could talk in general terms about a treaty being 'strong' or 'weak' based on how much pressure it puts on states to change their behaviour, and this would depend on both the form and substance of the agreement. All that said, it remains useful to distinguish between the impact of a choice of form and the impact of a change in the substance of a treaty. For this reason, this article will retain the terms 'binding' and 'non-binding', as well as hard and soft law, to refer to the formal legal status of an obligation. Treaties will be referred to as binding or hard; other agreements as non-binding or soft. This is done to clarify the discussion and demonstrate the fact that many binding agreements impact on state behaviour less than some non-binding agreements.
44. This is assumed to be true even if the treaty has no monitoring, dispute resolution provisions or other enforcement mechanisms. Thus, it is the treaty form itself that increases the commitment, the costs of violation, and the likelihood of compliance.
45. At various points this article will refer to the decision to include or exclude dispute resolution provisions. In fact, states face a range of options with regard to dispute resolution rather than a binary choice. When the article refers to this choice, then, it should be taken to mean a choice among the full variety of possible strategies, ranging from little or no system to deal with dispute to a very structured and formal mandatory process.
46. An example of the former can be found in the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), 12 ILM (1973) 1085, which provides for negotiations between disputing parties and which allows for arbitration of disputes, but only with the consent of both parties. See ibid., at Art. XVIII. An example of the latter can be seen in bilateral investment treaties (BITs).
47. See, e.g., Treaty Concerning the Reciprocal Encouragement and Protection of Investment, 14 Nov. 1991, U.S.-Arg., arts. II-V, S. Treaty Doc. No. 103-2, at 3-6 (1993), 31 ILM (1992) 124, at 129-132
48. Vandevelde, 'U.S. Bilateral Investment Treaties: The Second Wave', 14 Mich J Int'l L (1993) 621.
49. See Understanding on Rules and Procedures Governing the Settlement of Disputes (Annex 2 to the Agreement Establishing the World Trade Organization), 15 Apr. 1994, reprinted in 33 ILM (12994) 1226.
50. See United Nations Convention on Law of the Sea, 10 Dec. 1982, Art. 76, UN A/Conf.62/122, 21 ILM (1982) 1261.
51. See Guzman, supra note 7, at 304.
52. Dispute resolution may provide an additional benefit, in that it serves to reduce the use of costly sanctions, especially when there has been no violation, because a finding that there has been no violation can prevent the unjustified use of such sanctions.
53. See, e.g., supra note 4. Kal Raustiala categorizes the different monitoring systems as either strong or weak. His category of strong systems include 'police patrols', by which he means investigation and evaluation of behaviour by a central authority, and 'fire alarms', by which he means a determination by a central authority based on self-reporting or claims by other parties.
54. See Raustiala, supra note 4.
55. Coase, 'The Problem of Social Cost', 3 J L & Econ (1960) 1.
56. In discussions of international institutions the effort to maximize the total joint surplus of the parties to an agreement is sometimes referred to as 'rational design'. See Koremenos, Lipson, and Snidal, supra note 1, at 781.
57. The assumptions made here are conventional institutionalist ones. See Abbott, 'Modern International Relations Theory: A Prospectus for International Lawyers', 14 Yale J Int'l L (1989) 335
58. R. O. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (1984), at 27
59. Raustiala and Slaughter, 'International Law, International Relations and Compliance', in W. Carlsnaes et al. (eds.), Handbook of International Relations (2002).
60. Note that these assumptions about state behaviour are consistent with both a public interest model of governance, in which states pursue the welfare of their citizens, and an alternative public choice model, in which governmental leaders pursue their own private goals: See Guzman, 'Choice of Law: New Foundations', 90 Georgetown LJ (2002)_883, at 900 (discussing how public choice issues can be handled in an international law context). The most able scholar using public choice analysis in the international context is Alan Sykes.
61. See Schwartz and Sykes, 'The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization', 31 J Legal Stud (2002) 179
62. Schwartz and Sykes, 'Toward a Positive Theory of the Most Favored Nation Obligation and its Exceptions in the WTO/GATT System', 16 Int'l Rev L & Econ (1996) 27
63. Sykes, 'Protectionism as a "Safeguard": A Positive Analysis of the GATT "Escape Clause" with Normative Speculations', 58 U Chi L Rev (1991) 255.
64. Domestic parties do occasionally enter into agreements that are not binding. E.g., in the course of the negotiation of a loan, two parties may sign a 'letter of intent' which lays out the terms of the ultimate agreement but is not itself legally enforceable. Agreements of this sort are often, though probably not always, intended to help the parties make sure that they have a common expectation about ongoing negotiations. In any event, and whatever their purpose, it is clear that such agreements are atypical of domestic law agreements, and private contracting normally takes the form described in the text.
65. See text accompanying note 44.
66. Variance in the use of credibility-enhancing devices is almost certainly related in part to the subject matter of the agreement. E.g., it is conventional wisdom that dispute resolution is more common in trade and human rights than in, e.g., arms agreements: See, e.g., Smith, 'The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts', 54 Int Org (2000) 137.
67. Similarly, it is said that monitoring is more common in the environmental context: See, e.g., E. B. Weiss and H. K. Jacobson, Engaging Countries: Strengthening Compliance with International Environmental Accord (2000), at 91. This article does not attempt to evaluate these empirical claims or to test the theory against them in a formal way. Section 4, however, discusses when the theory predicts that credibility-enhancing devices are most likely and offers some comments suggesting how well these predictions accord with what we observe. More formal testing of the theory is left for future work.
68. And they almost never provide for dispute resolution procedures that attempt to impose something analogous to expectation damages.
69. To illustrate the basic difference between what analogy to domestic contracting suggests and what we observe in the international context, consider how odd it would seem to see sophisticated business parties enter into negotiations, expend significant resources, produce a complex agreement, and then intentionally make that agreement non-binding and unenforceable. Similarly, one would be surprised to see an agreement that is legally binding, but that declares itself unenforceable before any court or tribunal. Indeed, the use of agreements that are intentionally not adjudicable before any body is so alien to conventional contract law that it is hard even to know what it means for a contract to be legally binding if there is no enforcement: See Uniform Commercial Code §1-201 (3, 11) (defining 'Contract' and 'Agreement'). Finally, a lawyer who negotiated a complex, long-term agreement and then failed to provide for the use of available and cost-effective monitoring procedures would be criticized for an error of judgement. Not only do all of these things happen in the world of inter-state agreements, they represent standard operating procedure.
70. I am not the first to make this observation. In a recent draft article, Kal Raustiala has observed that the choice of form (i.e., treaty v. soft law) can be traded off against the substance of an agreement: See Raustiala, supra note 9, at 34.
71. See Kaplow, 'The Value of Accuracy in Adjudication: An Economic Analysis', 23 J Legal Stud (1994) 307, at 352-354 (explaining the relationship between increased accuracy and costly sanctions in the domestic context).
72. As already discussed, see supra the text accompanying notes 35-37: contract theory tells us that states should increase the level of commitment up to the point at which the costs of violation are equal to the benefits thereof. If some combination of design elements generated excessive commitment states would provide for some lower level of commitment. In the international arena, however, it is hard to believe that any combination in the design elements can generates optimal, let alone excessive, incentives to comply.
73. See R. A. Posner, Economic Analysis of the Law (4th edn., 1992), at 117-126
74. Barton, 'The Economic Basis of Damages for Breach of Contract', 1 J Legal Stud (1972) 277, at 283-289
75. Shavell, 'Damage Measures for Breach of Contract', 11 Bell J Econ (1980) 466.
76. But see Friedmann, 'The Efficient Breach Fallacy', 18 J Legal Stud (1989) 1 (challenging the claim that expectation damages yield an efficient outcome). In domestic law there are other efficiency goals - specifically efficient insurance and efficient precaution - that may lead one to favour less than expectation damages. These objectives, however, have less applicability to inter-state agreements and, in any case, the level of damages provided by the background rules of international law seems too low even if these other goals are taken into account.
77. See, e.g., Damrosch, 'Enforcing International Law Through Non-Forcible Measures', 269 Recueil des Cours (1997) 19 ('A fundamental (and frequent) criticism of international law is the weakness of mechanisms for enforcement.')
78. Falk, 'The Adequacy of Contemporary Theories of International Law - Gaps in Legal Thinking', 50 Va L Rev (1964) 231, at 249 (1964) ('Among the most serious deficiencies in international law is the frequent absence of an assured procedure for the identification of a violation.')
79. Franck, 'Legitimacy in the International System', 82 Am J Int'l L (1988) 705, at 705 (observing '[t]he surprising thing about international law is that nations ever obey its strictures' because 'the international system is organized in a voluntarist fashion, supported by so little coercive authority').
80. But see Damrosch, 'Enforcing International Law Through Non-forcible Measures', 269 Recueil des Cours (1997) 19-22 (arguing that there are more sanctions for violation of international law than is generally recognized).
81. See, e.g., the WTO Dispute Settlement Understanding, Art. 22(4) ('The level of the suspension of concessions or other obligations authorized by the DSB shall be equivalent to the level of the nullification or impairment.').
82. See R. O. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (1984), at 105-108
83. R. Axelrod, The Evolution of Cooperation (1984)
84. Guzman, supra note 14.
85. See Downs and Jones, 'Reputation, Compliance, and International Law', 31 J Legal Stud (2002) 95 (discussing reputation as it affects international law).
86. See Draft Articles on Responsibility of States for Internationally Wrongful Acts, adopted by the International Law Commission at its 53rd session (Sept. 2001), Supp. No. 10 (A/56/10), chap. IV.E.1, at www.un.org/law/ilc/convents.htm (this site also contains the authoritative commentaries).
87. See Goldsmith and Posner, 'A Theory of Customary International Law', 66 U Chicago L Rev (1999) 1113
88. Swaine, 'Rational Custom', 52 Duke LJ (2002) 559.
89. Draft Articles, Art. 37.
90. There is a significant literature on the subject of soft law. See the sources cited supra, at note 18. The general view of soft law in international law is that it is in some sense less 'binding' than traditional sources of international law, and states are accordingly less likely to comply: Van Dijk, 'Normative Force and Effectiveness of International Norms', 30 German YB Int'I L (1987) 9, at 20.
91. Perhaps the most traditional position views agreements other than treaties as nothing more than evidence of custom: See Dupuy, supra note 18, at 432
92. Steinberg, 'In the Shadow of Law or Power? Consensus-based Bargaining and Outcomes in the GATT/WTO', 56 Int Org (2002) 339, at 340 ('[M]ost public international lawyers, realists, and positivists consider soft law to be inconsequential.').
93. See Hillgenberg, 'A Fresh Look at Soft Law', 10 EJIL (1999) 499
94. Lipson, 'Why are Some International Agreements Informal?', 45 Int Org (1991) 495, at 500
95. Abbott and Snidal, supra note 18
96. Gruchalla-Wesierski, supra note 18
97. Guzman, supra note 18.
98. Abbott and Snidal, supra note 18, at 445
99. Lipson, supra note 54, at 500 ('[I]nformal bargains are more flexible than treaties. They are willows not oaks.').
100. To the extent that the argument here is that it may at times be desirable to have weaker or less precise substantive provisions in an agreement, it is a question of what this article defines as the 'substance' of the agreement, and it is discussed in Section 3F. This article uses a definition of 'soft law' that turns entirely on questions of form - an agreement is soft if it is not a formal treaty. Given this definition, there is no a priori reason why soft law instruments (meaning instruments that fall short of formal treaty status) must be less precise. States could negotiate a detailed set of terms but have that exchange of promises take the form of soft law. Similarly, states can enter into formal treaty commitments that lack precision. Other scholars, in particular Abbott and Snidal, who are quoted above, see supra 56, use a different definition of soft law. As a result, some arguments made by other authors about 'soft law' may in fact be referring to characteristics of agreements (such as the precision of the substantive obligations) that are defined in differently in this article.
101. See Abbott and Snidal, supra note 18, at 441 (stating that soft law helps states to deal with the fact that '[t]he underlying problems may not be well understood, so states cannot anticipate all possible consequences of a legalized arrangement')
102. Lipson, supra note 55, at 518 (arguing that soft law 'is useful if there is considerable uncertainty about the distribution of future benefits under a particular agreement')
103. Guzman, supra note 9, at 18 ('governments need not predict the future and can easily adjust the agreement or renege').
104. See Lipson, supra note 55, at 518.
105. See Abbott and Snidal, supra note 18, at 435.
106. Some of the specific arguments about the merits of flexibility have additional problems. Claims that soft law is desirable because it makes renegotiation or termination easier seem wrong on their face, except inasmuch as they relate to matters of domestic politics, as discussed in Section 2B3. When negotiating an agreement, the parties remain free to include any termination and renegotiation provisions they wish, and can do so independently of the choice of form. They could, e.g., provide for termination without notice, or with short notice, or on whatever conditions they choose. Similarly, the parties can provide any amendment provisions they wish, regardless of the form of the agreement. E.g., the UN Charter can be amended 'by a vote of two thirds of the members of the General Assembly and ratified in accordance with their respective constitutional processes by two thirds of the Members of the United Nations, including all permanent members of the Security Council': See United Nations Charter, Art. 108.
107. This section is intended to offer only a glimpse at the domestic law arguments. It is not intended to be comprehensive. For more on the subject see Abbott and Snidal, supra note 18
108. Lipson, supra note 54.
109. Lipson, supra note 54, at 500.
110. Ibid., at 516 ('It is plain...that executives prefer instruments that they can control unambiguously, without legislative advice or consent.').
111. See Abbott and Snidal, supra note 18, at 430.
112. See Guzman, supra note 9, at 28 ('[M]any domestic and transnational interest groups focus on bindingness - on contractual form - as a necessary factor in international cooperation.').
113. SeeMorris, 'High Crimes and Misconceptions: The ICC and Non-party States', 64 Law and Contemporary Problems (2001) ('States are particularly unwilling to enter into broad commitments to adjudicate future disputes, the content and contours of which cannot be foreseen.')
114. Rovine, 'The National Interest and the World Court', in L. Gross (ed.), The Future of the International Court of Justice (1976), i, at 462-473
115. J.G. Merills, International Dispute Settlement (3rd edn., 1998).
116. 'It is one thing to show that resort to the [International Court of Justice] is preferable to armed conflict; it is quite another matter to demonstrate that judicial processes are as valuable as ordinary out-of-court bargaining and discussion': Rovine, supra note 67, at 314.
117. '[T]here is a more fundamental reluctance to submit to third-party adjudication that rests on the perceived advantages to States in some circumstances of retaining control over the resolution of disputes': Morris, supra note 66, at 17 (citing Bovine, supra note 66.)
118. Because commentators attempting to explain the absence of dispute resolution provisions frequently fail to distinguish between the inclusion of mandatory provisions in an agreement and the decision to submit disputes to third party arbitration at the time of the dispute, it is impossible to know if they seek to explain only the latter, in which case the arguments advanced seem right but the question asked is of less interest to this article; or if they hope to explain the former, in which case the arguments are flawed.
119. 'Most obviously, but most fundamentally, states resist judicial settlement because they fear losing': Rovine, supra note 66, at 317.
120. '[T]he more uncertain the adjudicated outcome of a particular dispute would be, the less willing a State will be to seek binding third-party adjudication': Morris, supra note 66
121. Merrills, supra note 66, at 293-294 ('when the result is all important, adjudication is unlikely to be used because it is simply too risky').
122. The risk aversion explanation even fails for agreements that are central to the existence or welfare of a state. Even under the most credible of international agreements the consequences of a violation are quite limited. There is no authority to compel compliance, so the harm from losing a dispute before a dispute settlement body is limited to the lesser of the costs of compliance and the costs of ignoring the decision of that body.
123. It is also worth noting that there are a number of alternative ways to deal with the risk of an agreement. States could, e.g., build in escape clauses triggered by poor economic performance, national crises, or other contingencies that concern the parties. This strategy reduces the exposure to risk without reducing the agreement's effectiveness in those states of the world in which the parties want compliance. An alternative strategy would be to weaken the substantive requirements of the agreement. This reduces the benefits of the agreement, but also reduces the level of commitment. Taken together, this may generate a higher expected return to the parties than an agreement with greater substantive provisions. Each of these strategies provides flexibility to the parties in a more nuanced and targeted way than simply including or excluding a dispute resolution provision.
124. See Raustiala, supra note 4.
125. See Helfer, 'Overlegalizing Human Rights: International Relations Theory and the Commonwealth Caribbean Backlash Against Human Rights Regimes', 102 Colum L Rev (2002) 1832, at 1841 (pointing out that even with the single field of human rights there is considerable diversity in human rights monitoring mechanisms).
126. See, e.g., Frischmann, 'A Dynamic Institutional Theory of International Law', 51 Buffalo L Rev (2003) 679 (observing the most international environmental agreements that include a monitoring system rely on self-reporting by states).
127. What is meant here is that the actual transfer of funds from one party to the other does not itself affect the value of the contract. The level of damages may, of course, affect the behaviour of the parties and this, in turn, may affect the value of the agreement.
128. See supra note 15.
129. See Understanding on Rules and Procedures Governing the Settlement of Dispute (DSU), Art. 22.
130. With a public choice perspective it is possible that the sanctions are zero sum, as discussed infra Section 3E.
131. Supra note 79, Art. 22(4).
132. See ibid.
133. Guzman, supra note 14.
134. See supra note 14 for a detailed discussion of why states comply with international law and the impact of both direct and reputational sanctions.
135. E.g., bilateral investment treaties provide for direct sanctions in the form of compensation to investors who have been mistreated by a host state: See Guzman, 'Explaining the Popularity of Bilateral Investment Treaties: Why LDCs Sign Treaties that Hurt Them', 38 Va J Int'l L (1998) 639
136. Robin, 'The BIT Won't Bite: The American Bilateral Investment Treaty Programme', 33 Am U L Rev (1984) 931
137. R. Dolzer and M. Stevens, Bilateral Investment Treaties (1995), at 97-117.
138. See Guzman, supra note 7, at 304 and n.3 (observing that of 100 treaties surveyed only 20 included dispute resolution provisions, and of those, 12 were BITs).
139. The theory of costly sanctions and their use in the domestic context is laid out in Shavell, 'Criminal Law and the Optimal Use of Nonmonetary Sanctions as a Deterrent', 85 Colum L Rev (1985) 1232
140. Polinsky and Shavell, 'The Optimal Use of Fines and Imprisonment', 24 J Pub Econ (1984) 89
141. Kaplow, 'A Note on the Optimal Use of Nonmonetary Sanctions', 42 J Pub Econ (1990) 245. The theory developed here is related to these earlier papers, though I am not aware of any previous work applying these ideas in the international context.
142. The United States may benefit from its now more accurate estimate of Russia's willingness to comply, but this represents only a small fraction of the harm suffered by Russia whose reputation is harmed worldwide. This example is given in the context of a bilateral agreement. In the case of multilateral agreements a similar but more complex reasoning applies: See Guzman, supra note 7, at 319-320.
143. Similar reputational effects may be at work in domestic law, but the presence of zero-sum damages creates a separate incentive to enter into contracts with efficient terms. Furthermore, the role of reputation is diminished in the domestic environment because credibility is provided by the legal system - parties do not have to rely as heavily on their reputations when they wish to enter into agreements.
144. See Lipson, supra note 54, at 508 ('The effect of treaties, then, is to raise the political costs of noncompliance.').
145. If the choice of hard law implies some additional costs such as ratification costs, then the parties would do better if they chose soft law.
146. The discussion here draws on Shavell, supra note 86, at 1241-1246.
147. See text accompanying note 90.
148. If, e.g., under certain circumstances a state (or its leaders) stands to gain so much by abrogating an environmental treaty that it will do so even if all available credibility-enhancing devices are in place, then the higher sanctions brought on by these devices represent a cost to the parties with no offsetting gain.
149. It may be possible to deter the behaviour without using all of the credibility-enhancing devices, in which case a subset of them may be used. All that matters is that the sanction be high enough to deter the conduct.
150. See Shavell, supra note 86, at 1241-1242.
151. The fact that safeguards are, according to many experts, always or almost always inefficient need not concern us because what we call the objectives of states are in fact the goals of decision makers within the states: See supra note 35 and accompanying text.
152. For simplicity we assume that the parties are choosing whether or not to include an established set of dispute resolution provisions. In reality, of course, states may be able to construct any number of different dispute resolution mechanisms. The example captures this wider set of options if one imagines the states choosing between any pair of approaches to the question of dispute resolution.
153. The game as presented should be thought of as the present discounted value of a repeated game rather than a one shot game. This is important because the game must be repeated for cooperation to emerge as a possibility in the absence of an enforcement mechanism.
154. This variable could represent any number of factors exogenous to the discussion, including economic shocks, domestic political developments, international events, and so on.
155. One could imagine stronger dispute resolution provisions. For example, the tribunal could be authorized to impose some form of sanction. All that matters for present purposes is that the dispute resolution provisions work to increase the costs of a violation.
156. See Guzman, supra note 14.
157. Without a dispute resolution clause, it is assumed for simplicity that there is no reputational loss in the event of a violation. It is straightforward to incorporate a positive reputational loss even in the absence of a dispute resolution clause.
158. By assuming that the variable N is the same for both states we ensure that if one violates the agreement the other one does as well. This assumption is not necessary for the results.
159. See Section 4.
160. See Downs, Rocke, and Barsoom, 'Is the Good News about Compliance Good News About Cooperation?', 50 Int Org (1996) 379, at 383
161. Raustiala, supra note 9, at 7.
162. See Downs, Rocke, and Barsoom, supra note 107, at 383.
163. See Raustiala, supra note 9, at 7.
164. E.g., the TRIPs Agreement required substantial changes to the law of intellectual property in many states, including most developing countries, but was largely consistent with the existing regimes in the United States and Europe.
165. A clear example of how the theory presented here might impact on the substance of an agreement is the common use of escape clauses. An escape clause allows the parties to an agreement to suspend their compliance if certain conditions are satisfied. E.g., Art. XIX of the GATT and the WTO's Agreement on Safeguards allow WTO members to suspend their obligation under certain circumstances. Like the design elements discussed throughout this article, the use of escape clauses is influenced by two offsetting effects. First, it reduces the level of commitment of the states in a manner analogous to how the omission of a dispute resolution clause reduces the incentive to comply with the terms of the agreement. The safeguards do provide that a member implementing a safeguard is to 'maintain a substantially equivalent level of concessions': Agreement on Safeguards, Art. 8(1). This requirement offsets the impact of the safeguards provisions on the level of commitment, but only partially. The state adopting a safeguard measure is given the discretion to determine how to maintain the level of concessions, and this discretion obviously reduces the extent to which the state is constrained in its actions. Secondly, because the escape clause allows a state to suspend its commitment, it reduces the sanction for doing so in a manner analogous to the way in which the omission of a dispute resolution clause reduces the sanction for a violation. When drafting an agreement, then, states must consider both the reduced likelihood of compliance with the (other) terms of the agreement and the reduction in total loss if there is such non-compliance. There are, of course, other explanations for the use of escape clauses, and the explanation offered here is intended to be complementary to these earlier theories: See Sykes, 'Protectionism as a 'Safeguard', 58 U Chi L Rev (1991) 255
166. Rosendorff and Milner, 'The Optimal Design of International Trade Institutions: Uncertainty and Escape', 55 Int Org (2001) 829.
167. They would proceed with the contract if its total expected value, taking into account the costs and benefits incurred by both parties and the risk of a breach, were positive.
168. See supra note 15.
169. See Guzman, supra note 7, at 319-320 (explaining why it is not certain that the net effect will be an increase in welfare).
170. High-stakes agreements are frequently, though certainly not always, formal treaties. Though this is contrary to what the theory suggests, the domestic reasons to prefer a treaty seem likely to offer an explanation. The desire of the executive branch to bind domestic actors (e.g., Congress) as much as possible seems a likely explanation of the treaty form.
171. These standards include: Freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced or compulsory labour; the effective abolition of child labour; and the elimination of discrimination in respect of employment and occupation: ILO Declaration on Fundamental Principles and Rights at Work, International Labor Conference, art. 2, 86th Session, Geneva, June 1998
172. See Alvarez, 'The New Treaty Makers', 25 BC Int'l & Comp L Rev (2002) 213, at 222.
173. See Trebilcock, 'Trade Policy and Labour Standards: Objectives, Instruments and Institutions' (University of Toronto Law and Econ. Research Paper No. 02-01, 2002), available at http://papers.ssrn.com/ sol3/delivery.cfm/SSRN_ID307219_code020501530.pdf?abstractid=307219, at 16-18
174. Diller, 'A Social Conscience in the Global Marketplace? Labour Dimensions of Codes of Conduct, Social Labeling and Investor Initiatives', 138 Int'l Labor Rev (1999) 99
175. Blackett, 'Global Governance, Legal Pluralism and the Decentralized State: A Labour Law Critique of Codes of Corporate Conduct', 8 Ind J Global Legal Stud (2001) 401
176. Howse, 'The World Trade Organization and the Protection of Workers' Rights' J Small & Emerging Bus L (1999) 131, at 159-161. Compensation-based strategies involve the making of some form of payment to states that achieve a positive change in their practices. They are criticized both because they involve the dubious practice of compensating states that have tolerated the worst labour practices, and because they generate perverse incentives.
177. Compensation for improvement that is not accompanied by a scheme for penalizing a deterioration in those same standards generates an incentive for states to lower their standards so they can subsequently be improved and the state can capture the payment: Chang, 'Trade Measures to Protect the Global Environment', 83 Geo LJ (1995) 2131.
178. The effectiveness of social labelling - the placing of a label on products that are produced by workers able to exercise their core labour rights - is also subject to significant limitations. The primary weakness of labelling is the voluntary nature of compliance and the lack of enforcement mechanisms: See Bloomfield, '"Sweating" the International Garment Industry: A Critique of the Presidential Task Force's Workplace Codes of Conduct and Monitoring System', 22 Hastings Int'l & Comp L Rev (1999) 567 (discussing more generally problems of enforcement and monitoring in voluntary codes of conduct for multilateral corporations)
179. Groos, 'International Trade and Development: Exploring the Impact of Fair Trade Organizations in the Global Economy and the Law', 34 Texas Int'l LJ. (1998) 379, at 408 ('WTO rules mandate that goods cannot be subject to statutory labeling requirements or differentiated on the basis of how they are produced').
180. To the extent enforcement stems from consumer preferences, social labelling also suffers from a collective action problem. The individual consumer has an incentive to purchase lower priced goods produced under poor labour conditions, relying on other consumers to bear the cost of the higher priced goods produced under core labour standards: See Trebilcock, supra this note;
181. Van Wezel, 'To the Yukon and Beyond: Local Laborers in a Global Market', 3 J Small & Emerging Bus L (1999) 93
182. Garg, 'Child Labor Social Clause: Analysis and Proposal for Action', 31 NYU J Int'l L & Pol (1999)_473, at 504-505.
183. There is serious debate about whether trade sanctions are an effective tool to influence labour policies. The most important empirical evidence on the question is in G. C. Hufbauer et al., Economic Sanctions Reconsidered: History and Current Policy (2nd edn., 1990).
184. It is assumed that the WTO does not already provide an exception of this sort. This is the dominant view, but it is challenged by some scholars: see Howse and Mutua, 'Protecting Human Rights in a Global Economy' (20 February 2002), available at http://www.ichrdd.ca/english/commdoc/ publications/globalization/wtoRightsGlob.html;
185. Howse, supra note 116.
186. I have expressed my views on the subject elsewhere: See Guzman, 'Trade, Labor, Legitimacy', 91 Calif L Rev (2003) 885. The key articles in the trade and labour literature include Sykes, 'International Trade and Human Rights: An Economic Perspective', University of Chicago Law and Economics Working Paper No. 188 (2003), available at www.law.uchicago.edu/Lawecon/WkngPprs_176-200/188.aos.human-rights,pdf;
187. Trebilcock, 'Trade Policy and Labour Standards: Objectives, Instruments and Institutions', University of Toronto Law and Economics Research Paper No. 02-01 (December 2001), available at http://ssrn.com/abstract=307219
188. Charnovitz, 'The Influence of International Labor Standards on the World Trading System: An Historical Overview', 126 Int'l Labor Rev (1987) 565
189. Howse and Mutua, supra note 118
190. Leary, 'Workers' Rights and International Trade: The Social Clause (GATT, ILO, NAFTA, US laws)', in J. Bhagwati and R. Hudec (eds.), Fair Trade and Harmonization (1996), ii, at 177
191. Langille, 'Eight Ways to Think About International Labour Standards', 31 J. World Trade (1997) 27
192. Howse, supra note 117.
193. See ILO Declaration on Fundamental Principles and Rights at Work, 18 June 1998, 37 ILM (1998) 1233.
194. I offer here two possible reasons why money damages may be unpopular. These are merely suggestive. I am not confident that either is an important part of the explanation for the resistance to money damages. First, states may avoid money damages because they serve as an ineffective incentive device for states. Because damages could be paid out of general revenues, the political costs of having to pay a fine may be small. Second, it may be that there are significant political costs to paying an award mandated by an international body. Indeed, there may even be political costs to receiving such an award. Imagine, e.g., an agreement between two states regarding environmental issues. There may be political resistance to the notion that one's counter-party can violate and simply pay damages. Accepting the award as full compensation may, therefore, be politically costly for government.
195. See Bhagwati, 'After Seattle: Free Trade and the WTO', 77 Int Aff (2001) 15.
196. Guzman, supra note 85
197. Vandevelde, supra note 26.
198. See, e.g., International Covenant on Economic, Social and Cultural Rights (ICESCR), Art. 9(5) ('Anyone who has been the victim of unlawful arrest or detention shall have an enforceable right to compensation.').
199. See Treaty Establishing the European Community, Art. 228(2).
200. I have written on compliance issues in the past: See Guzman, supra note 14.
201. See L. Henkin, How Nations Behave (1979), at 46-48
202. Chayes and Chayes, 'On Compliance', 47 Int Org (1993) 175, at 176
203. T. M. Franck, Fairness in International Law and Institutions (1995)
204. Koh, supra note 10
205. Raustiala and Slaughter, supra note 34
206. Keohane, supra note 34, at 25.
207. See Ratner, 'Does International Law Matter in Preventing Ethnic Conflict?', 32 NYU J Int'l L & Pol (2000) 591, at 654.
208. But see E.B. Weiss (ed.), International Compliance with Nonbinding Accords (1997)
209. Shelton (ed.), supra note 19 (analysing 'soft law' in environment and natural resources, trade and finance, human rights, and multilateral arms control).
210. See Schacter, 'The Twilight Existence of Nonbinding International Agreements', 71 Am J Int'l L (1977) 296, at 304 ('non-binding agreements may be attainable when binding treaties are not').
211. The major caveat to this conclusion relates to the public choice issues that are always present in international relations. Depending on one's public choice assumptions, it may be unwise to give negotiators the ability to enter into agreements that do not include rigorous obligations and enforcement strategies. E.g., if one believes that those who negotiate agreements have a strong incentive to achieve some concrete agreement, even when the substantive impact of the agreement is virtually nil, then it may be desirable to impose discipline on negotiators by forcing them to choose between truly effective agreements and no agreement at all: See, e.g., Stephan, 'The Political Economy of Choice of Law', 90 Geo LJ (2002) 957, at 961 ('[T]he people who negotiate international agreements, as well as the people who serve the institutions that promote these negotiations, have powerful incentives to achieve some kind of agreement regardless of substantive outcome.').