Why soft law dominates international finance - And not trade

Journal of International Economic Law

Volumn 13, Issue 3, 2010, Pages 623-643

  Brummer, Chris ^a  

^a GEORGETOWN UNIVERSITY LAW CENTER   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 78649919610     PISSN: 13693034     EISSN: 14643758     Source Type: Journal    
DOI: 10.1093/jiel/jgq026     Document Type: Article

References (80)

1. Customary international law is, as a result, generally regarded as a vaguer and less specific form of international law. See Janet Koven Levit, 'A Bottom-Up Approach to International Lawmaking: The Tale of Three Trade Finance Instruments', 30 Yale Journal of International Law 125 (2005), at 179 (noting that customary international law norms must remain vague to ensure that they envelop enough 'state practice' to constitute international law).
2. John O. McGinnis, 'The Comparative Disadvantage of Customary International Law', 30 Harvard Journal of Law and Public Policy 7 (2006), at 10, http://www.law.harvard.edu/students/orgs/jlpp/Vol30-No1-McGinnisonline.pdf (visited 14 June 2010).
3. The argument here stems from the fact that the political costs incurred by alienating domestic manufacturers will likely outweigh the political favor curried from domestic consumers. This is because those benefitting in the aggregate most from liberalization-namely individual domestic consumers-will often not be as effective as producers at promoting their interests. See Warren F. Schwartz and Alan O. Sykes, 'Toward a Positive Theory of the Most Favored Nation Obligation and Its Exceptions in the WTO/GATT System', 16 International Review of Law & Economics 27 (1996), at 28. Furthermore, the domestic political process often assigns disproportionate weight to the interests of domestic producers as compared to those of individual domestic consumers, though of course consuming industries may still wield significant political influence.
4. This idea has been articulated by a variety of theorists, but for a comprehensive assessment see Andrew Guzman, How International Law Works (Oxford: Oxford University Press, 2007) 71-111.
5. This idea has been articulated by a variety of theorists, but for a comprehensive assessment see Andrew Guzman, How International Law Works (Oxford: Oxford University Press, 2007) 71-111.
6. Gregory C. Shaffer and Mark A. Pollack, 'Hard vs. Soft Law: Alternatives, Complements, and Antagonists in International Governance', 94 Minnesota Law Review 706 (2010), at 718 (noting that hard law treaties create mechanisms for the interpretation and elaboration of legal commitments over time).
7. Kenneth W. Abbott and Duncan Snidal, 'Hard and Soft Law in International Governance', 54 International Organization 421 (2000), at 429 (noting that treaties establish monitoring provisions to detect noncompliance with the commitments).
8. For an authoritative history of the WTO, see John H. Jackson, Sovereignty, the WTO and the Changing Fundamentals of International Law (Cambridge: Cambridge University Press, 2006).
9. Joost Pauwelyn, 'The Transformation of World Trade', 104 Michigan Law Review 1 (2005), at 25.
10. Robert Gilpin, Global Political Economy, Understanding the International Economic Order (Princeton: Princeton University Press, 2001) 223.
11. Jide Nzelibe, 'The Credibility Imperative: The Political Dynamics of Retaliation in the World Trade Organization's Dispute Resolution Mechanism', 6 Theoretical Inquiries in Law 215 (2005), at 215.
12. Jide Nzelibe, 'The Credibility Imperative: The Political Dynamics of Retaliation in the World Trade Organization's Dispute Resolution Mechanism', 6 Theoretical Inquiries in Law 215 (2005), at 216.
13. Susan D. Franck, 'The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions', 73 Fordham Law Review 1521 (2005), n 466 (discussing the mandate of the WTO Appellate Body).
14. GATS Annex on Financial Services Paragraph 2 (a).
15. For a discussion of the shortcomings of the institutional framework in the European Union with regards to financial supervision and its role in the recent financial crisis, see Eilis Ferran and Kern Alexander, 'Soft Institutions and Hard-Edged Power: What Role for the European Systemic Risk Board?', at 29 (Unpublished manuscript, 3 March 2010, on file with author).
16. For a description of the soft law basis of international standard setting bodies, see generally David Zaring, 'Informal Procedure, Hard and Soft, in International Administration', 5 Chicago Journal of International Law 547 (2005);
17. David Zaring, 'International Law by Other Means: The Twilight Existence of International Financial Regulatory Organizations', 33 Texas International Law Journal 281 (1998).
18. The first-generation set of rules, promoted under the organization's predecessor organization, The International Accounting Standards Committee, were called the international accounting standards (IAS). Later, when the organization changed its name and reorganized in 2001, the IASB incorporated the IAS but now promulgates new rules called international financial reporting standards (IFRS). These standards have gained prominence and now rival the US Generally Accepted Accounting Principles (GAAP), especially since the European Union adopted IFRS in 2001, though they are generally viewed as more flexible-and lenient-than US standards. See William W. Bratton and Lawrence A. Cunningham, 'Treatment Differences and Political Realities in the GAAP-IFRS Debate', 95 Virginia Law Review 989 (2009), at 997-99.
19. For further information on the CPSS, see Bank for International Settlements, 'CPSS History, Organization, Cooperation', http://www.bis.org/cpss/ cpssinfo01.htm (visited 14 June 2010).
20. Best practices have not been much analyzed from the standpoint of international law, but have been the subject of insightful scholarly examination in the domestic US context. See David Zaring, 'Best Practices', 81 New York University Law Review 294 (2006), at 294-350.
21. See, for example, the G-20, which represents the economies of leading developed and emerging economies.
22. Perhaps the most important private legislatures include IASB and IFAC, the international standard-setters for accounting and auditing services (noted above).
23. See, e.g. Basle Committee on Banking Supervision, 'Core Principles for Effective Banking Supervision', Basle, September 1997, http://www.bis.org/publ/ bcbs30a.pdf (visited 14 June 2010);
24. International Association of Insurance Supervisors, 'Insurance Core Principles and Methodology' 2003, http://www.iaisweb.org/-temp/Insurance-core- principles-and-methodology.pdf (visited 14 June 2010);
25. IOSCO, 'Objectives and Principles of Securities Organization', May 2003, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf (visited 14 June 2010).
26. The Technical Committee of the IOSCO, 'Code of Conduct Fundamentals for Credit Rating Agencies', December 2004, http://www.treasurers.org/node/3134 (visited 14 June 2010).
27. This realist interpretation of international affairs was first articulated by Kenneth Waltz. See generally Kenneth Waltz, Theory of International Politics (Reading: Addison-Wesley, 1979).
28. Abbott and Snidal, above n 7 at 434;
29. Charles Lipson, 'Why Are Some International Agreements Informal?', 45 International Organization 495 (1991), at 518 (noting that it is less costly to abandon informal commitments).
30. Levit, above n 1, at 171.
31. Jacob E. Gersen and Eric A. Posner, 'Soft Law: Lessons from Congressional Practice', 61 Stanford Law Review 573 (2008), at 589 (discussing 'cheap talk' theories).
32. Lipson, above n 25, at 500 (noting that although treaties often contain clauses permitting renegotiation, the process is slow and cumbersome).
33. David Epstein and Sharyn O'Halloran, 'Sovereignty and Delegation in International Organizations', 71 WTR Law & Contemporary Problems 77 (2008), at 89 (defining sovereignty costs as the distance between the policy a country would implement if it were not a member of an international organization and the policy it enacts once it has joined).
34. Michael C. Dorf, 'Dynamic Incorporation of Foreign Law', 157 University of Pennsylvania Law Review 103 (2008), at 133-38 (describing the costs arising when organizations incorporate the laws of foreign or international bodies).
35. Abbott and Snidal, above n 7, at 421 (defining hard law as legally binding obligations that delegate authority for interpreting and implementing the law to international actors).
36. Metalclad Corp. v United Mexican States, ICSID Case No ARB (AF)/97/1 (ICSID AF) (30 August 2000). 33 Abbott and Snidal, above n 7, at 438 (noting that hard law can lead to unanticipated costs because states cannot predict all possible contingencies);
37. Shaffer and Pollack, above n 6, at 719 (noting that soft law allows states to limit the risk of uncertainty).
38. Abbott and Snidal, above n 7, at 423.
39. Abbott and Snidal, above n 7, at 441.
40. Abbott and Snidal, above n 7, at 442. Indeed, for some scholars, such vagaries render hard law 'soft'. Donald Langevoort notes, however, that other regulatory strategies are possible, including the targeting of new overlapping areas of interest among jurisdictions.
41. See 'Global Securities Regulation after the Financial Crisis', Journal of International Economic Law (2010) (noting how the institutionalization of securities markets in both the USA and Europe creates new opportunities for international regulation).
42. Laurence R. Helfer, 'Exiting Treaties', 91 Virginia Law Review 1579 (2005), at 1641-2 (analyzing the unilateral exit from international agreements).
43. Abbott and Snidal, above n 7, at 442.
44. Abbott and Snidal, above n 7, at 442.
45. Abbott and Snidal, above n 7, at 443.
46. See generally Anne-Marie Slaughter, 'Governing the Global Economy through Government Networks', in Michael Byers (ed), The Role of Law in International Politics, Essays in International Relations and International Law 202 (Oxford: Oxford University Press, 2000) 177-206.
47. See generally Pierre-Hugues Verdier, 'Transnational Regulatory Networks and Their Limits', 34 Yale Journal of International Law 113 (2009) (highlighting the limits of networks);
48. see also Charles K. Whitehead, 'What's Your Sign?-International Norms, Signals, and Compliance', 27 Michigan Journal of International Law 695 (2006), at 704.
49. Kal Raustiala, 'The Architecture of International Cooperation: Transgovernmental Networks and the Future of International Law', 43 Virginia Journal of International Law 1 (2002), at 30 (exemplifying widespread use of MoUs as a cooperation tool).
50. Though not addressed specifically in this context, Howell Jackson surmises similar possibilities with regard to the under-enforcement of even domestic rules. See Howell Jackson, 'Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications', 24 Yale Journal on Regulation 253 (2007), at 286-7 (discussing rational under-enforcement and inefficient under-enforcement).
51. Ferran and Alexander, above n 15, at 1.
52. See Roberta S. Karmel and Claire Kelly, 'The Hardening of Soft Law in Securities Regulation', 34 Brooklyn Journal of International Law 883 (2009), at 885 (noting that soft law is relied upon 'because of the need for speed, flexibility and expertise in dealing with fast-breaking developments in capital markets').
53. Chris Brummer, 'How International Financial Law Works (and How It Doesn't) ', Georgetown Law Journal (forthcoming January 2011), at 33 and 58, http://papers.ssrn. - com/sol3/papers.cfm?abstract-id=1542829 (noting that international financial regulation is often buttressed by a range of reputational, institutional and market disciplines that render it more coercive than traditional theories of international law predict).
54. Abbott and Snidal, above n 7, at 423.
55. Abbott and Snidal, above n 7, at 425 (discussing how some international agreements are viewed as covenants).
56. Abbott and Snidal, above n 7, at 424, 427 (discussing how rationalists view international agreements as expressing contractual commitments, usually between states).
57. Gersen and Posner, above n 27, at 573.
58. Chris Brummer, above n 47, at 13.
59. This point perhaps enjoyed its most famous articulation in corporate law scholarship, especially regards to the 'choice' of states under domestic US corporate law. See Roberta Romano, The Genius of American Corporate Law (Washington, DC: AEI Press, 1993) (arguing that firms that choose states with inefficient corporate laws should have lower stock prices);
60. Ralph K. Winter Jr., 'State Law, Shareholder Protection, and the Theory of the Corporation', 6 Journal of Legal Studies 251 (1977).
61. See David Easley and Maureen O'Hara, 'Information and the Cost of Capital', 59 Journal of Finance 1553 (2004) (showing that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information).
62. In this case, the reverse is, not surprisingly, equally applicable. Specifically, where banks (or for that matter any financial institution embedded in financial systems as intermediaries) are viewed as having insufficient capital to meet their operational requirements or credit obligations, 'runs' on those banks are likely. For a recent description of bank runs over time, see Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009) 144-5.
63. Indeed, the very concept of market efficiency is often difficult to discern. Randall S. Thomas and James F. Cotter, 'Measuring Securities Market Efficiency in the Regulatory Setting', 63 SUM Law & Contemporary Problems 105 (2005), at 122.
64. See John C. Coffee Jr., 'Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance', 102 Columbia Law Review 1757 (2002), at 1763.
65. Daniel W. Drezner, All Politics is Global: Explaining International Regulatory Regimes (Princeton: Princeton University Press, 2007) 147.
66. Kern Alexander, Rahul Dhumale and John Eatwell, Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford: Oxford University Press, 2006) 89;
67. see also Joseph Stiglitz, Globalization and Its Discontents (New York: W. W. Norton & Company, 2002) 44 (discussing conditionality loans via the IMF);
68. Rosa Lastra, Legal Foundations of International Monetary Stability (Oxford: Oxford University Press, 2006).
69. tSee Abram Chayes and Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge, MA: Harvard University Press, 2007) 70-71.
70. Drezner, above n 58, at 75-7 (discussing clubs, standards, and the possibility of expulsion);
71. see also Chris Brummer, 'Post-American Securities Regulation', 98 California Law Review 327 (2010), at 364-72.
72. Embarrassment caused by deviating from network norms operates, for some, as a kind of social tax. Adhering to network-based standards may encourage praise, and deviation may cause embarrassment or shame that results in a loss of prestige or influence among peer regulators as the violation becomes known to others. See Whitehead, above n 42, at 705.
73. World Bank, 'Financial and Private Sector Development-Financial Sector Assessment Program', http://lnweb90.worldbank.org/FPS/fsapcountrydb.nsf/ FSAPexternalcountryreports? OpenPage&count=5000 (visited 14 June 2010).
74. International Monetary Fund, 'Factsheet: The Financial Sector Assessment Program (FSAP) ', http://www.imf.org/external/np/exr/facts/fsap.htm (visited 14 June 2010) (noting that the voluntary nature of FSAPs is necessary for 'buy-in' among participants).
75. IMF, 'IMF Expanding Surveillance to Require Mandatory Financial Stability Assessments of Countries with Systemically Important Financial Sectors', Press Release No 10/357, 27 September 2010, http://www.imf.org/external/np/sec/pr/ 2010/pr10357.htm (visited 18 October 2010).
76. Ferran and Alexander, above n 15, at 11, 18, 37-54 (discussing the legitimacy concerns regarding the Financial Stability Board, the IMF, and European Systemic Risk Board).
77. Ferran and Alexander, above n 15, at 12.
78. Brummer, above n 47, at 65 (suggesting improvements in the monitoring and information utility to the existing structure of international financial system).
79. Brummer, above n 47, at 80.
80. Brummer, above n 47, at 80.