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Scritto da nel Economia e Politica, Numero 0 - Estate 2006 | 0 commenti

The limits of international law

1. why is international law binding?

In this brief essay I will draw an economic comparison between Contract and International Law.

This comparative analysis will define some similarities and differences among these two branches of law in order to explain why we do observe states complying to International Law and to understand the reasons why International Law fails to ensure an efficient level of compliance and a social optimum cooperation from a global perspective.

As Sykes highlightes, the main difference we can draw between International Law and other branches of national law is that “no international legislature exists to pass the equivalent of domestic statutes, and no international court exists with the power to create a general international common law” (p. 2)[1]. Therefore International Law lacks a hierarchical enforcing structure and it basically arises through agreements among states (horizontal structure).

Despite the absence of a super-national enforcing authority International Law is binding and international agreements show different degrees of legal obligation depending on the legal instruments they are based on. The two most important instruments through to an agreement becomes manifest are treaties and customs. Customary international law is defined as a “general and consistent practice of states followed by them from a sense of legal obligation”[2] while traties are formal and written agreements signed by authorized national institutions with the clear intention to create a binding legal obligation. In this sense, treaties, as a form of hard law, are more binding than other international legal instruments belonging to the broad “Soft Law” area.

An obvious question should now arise: “Why should States ever comply to International Law given the lack of an supernational enforcing authority?”.

International Law & Economics answers this question by referring to the basic principles of the Rational Choice Theory: States are rational agents with stable preferences acting in order to maximize their own self-interest. Therefore States decide to comply (or not to comply) to international law if it is in their interest to do it, that is, when by adopting this strategy they maximize their own utility.

A clear example is given by the simplest case concerning coordination games where two states can be mabe better off simply by coordinating their actions. In this case cooperating is the dominant strategy and no temptation to deviate exists.

However most of international agreements differ from the coordination game and they can be reconducted to the Prisoner's Dilemma case: in this kind of games reciprocal cooperation would bring to a social optimum equilibrium (where the overall payoff is maximized) but the resulting outcome is a “non cooperation equilibrium” because national payoffs are maximized by adopting a defecting strategy (deviating is the dominant strategy).

Without a superior enforcing authority with the coercive power to ensure states' compliance to international treaties we should expect these “Prisoner's Dilemma” agreements to fail. However, in International Law we observe a higher level of compliance and cooperaion than what classical Game theory would predict.

Indeed, International law should not be considered meaningless simply because of the absence of an exogenous enforcing authority; in fact, cooperation is favoured by some (non-legal) remedies endogenously defined that make international commitments more credible.

International Law & Economics tends to classify the plurality of remedies into three basic mechanisms (the 3R mechanims):

Reciprocity: this mechanism ensures that states taking part to an international agreement perform symmetrically by excluding the combination of asymmetric strategies (cooperation; deviation) from the game and making only the symmetric payoffs available.

Retaliation: this mechanism can be reconducted to the Friedman's “trigger strategy” or to the less punitive Axelrod's “tit fir tat strategy”. However this economic remedy becomes problematic to enforce in the case of multilateral agreements that increase coordination costs among partecipants. In fact, in cases requiring a collective action, countries might be temptated to free ride on other countries's effort to adopt a retaliation policy, increasing the difficulty to impose a retaliation remedy to potential defecting countries.

Reputation: this mechanism is an effective remedy in the case of repeated games and it relies on the principle that agents prefer to enter in cooperative agreements with credible and reliable parties. In a context of asymmetric information where countries cannot distignuish ex ante good types from bad types, complying to international agreement becomes a signaling strategy aimed at building a “good type reputation”. Therefore, breaching international agreements might be profitable in a one shot game but it imposes an opportunity cost (loss of reputation) that will make more difficult to build new agreements in the long term. Reputation is a mechanism that differently from reciprocity and retaliation doesn't require high level of coordination; therefore it tends to be efficient also in those situations with high coordination costs where retaliation and reciprocity strategies are likely to not be really effective.

2. an economic comparison between Contract Law and International Law

This brief introduction to International Law is usefull to highlight its similarities with Contract law. Sykes argues that from economic perspective “a treaty is a contract albeit one between states rather than individuals” (p. 16, 2004). Indeed, like a contract, a treaty can be defined as a consensual agreement to achieve a mutual benefical end through a commitment.

In their famous manual of Law & Economics, Cooter and Ulen argue that the main role of Contract Law is to tranform non cooperative games among individuals into cooperative games. Also International law facilitates cooperation by allowing states to make credible commitments in the same way Contract law facilitates private parties to achieve an agreement by reducing the relative transaction costs.

The basic principle of Contract Law & Economics is that contrcats should be designed in a way to induce parties to perform the contrcact whenever it is efficient to perform and to breach the contract otherwise. In this perspective the definiton of remedies is crucial to induce parties to peform or to breach efficiently. In fact, like in International Law, also in Contract Law the remedies' definition influences backward the parties' propensity to perform or to breach the agreement stipulated in the contract.

We can classify contractual remedies into three broad categories:

non-legal remedies: in a famous article Anthony Kronman identifies some non-legal remedies (or market remedies) that, like International Law remedies, can explain why trade agreements used to be effective even before the institution of superior enforcing authorities. Kronman classifies these non legal remedies into: hostages, collateral, hand-tying or pre-commitment strategies, union and relational contracts[3] and they can be easily reconducted to the Sykes' 3R mechanims;

parties-designed remedies: like most of international agreements are designed, contracts may include parties-designed remedies that, in case of breach of contract, can be enforced simply by appealing to a previously defined third party (arbitrator) rather than by suying the breaching party before a court (costly and sometimes inefficient operation). A clear example is given by the liquidated damages parties stipulate in the contract.

court-imposed remedies: differently from International Law, national law relies on superior enforcing authority (courtes) that can coercively impose the breaching party to compensate the injured party. Specific performance or damages compensation are typical examples of court-imposed remedies

Non-legal and parties-designed remedies can be effective and efficient in inducing a certain degree of commitment, however Contrcat Law & Econmics literature recognizes that by themselves these remedies fail to ensure an efficient level of contractual agreements among individuals.

In questioning the origin of the State, all the contractual theories recognize the need for a superior authority in order to ensure political-social organization and to promote economic development.

Also the most liberal theories, finding their deeper roots in the Lockean and Rousseau' s thought and, more recently, in the James Buchanan's Public Choice Theory, assert that in the state of nature, free men mutually agree to define property rights and to voluntarily limiting their absolute freedom in order to ensure a convivial order.

While different theories can dispute about what is the optimal level of political intervention into human beings' private life and rights (from Hobbessian absolutism to liberalism), all these theories agree on the basic point that social organization and economic development cannot take place in the absence of a superior coercive authority whose powers have beed delegated through a social contract where human beings voluntarily decide to limit their absolute freedom they dispose in the state of nature.

3. the limits of international law: the Kyoto Protocol

If we transpose these considerations from a national to an international level, we observe that in International Law the above described process of power delegation to a supernational institution substantially has not occurred yet: indeed, a part from the European Union exception, no State is willing to limit its national sovreignity (absolute freedom) by delegating some powers to a superior coercive authority.

The lack of an international-supernational institution implies that the remedies in case of breach of International Law mainly consist in economic mechanims; consequently, International Law is still subject to classical market failures; it can ensure a certian degree of international cooperation but it fails to ensure an efficient level of compliance to international treaties and a social optimum equilibrium from a global perspective.

Environmental pollution and the Kyoto Protocol show clearly such failure of international law.

The recent Kyoto Protocol's ratification implies that a first step toward a global approach to the environmental issue is taking place. In fact, it constitutes the first supranational concrete attempt to reduce the atmospheric concentration of Green House Gasses' emissions (GHG).

However, pollution and climate change are a global negative externality and our atmosphere is a global public good; as a consequence, countries competing at an international level face an incentive to adopt an opportunistic behaviour and to free ride on others' investments in environmental protection. “Deviating” becomes the dominant strategy and the resulting underinvestment in environmental protection fails to fully internalize the environmental negative externality.

This situation differs from the games previously described; in fact, while in the previous prisoner's dilemma game an agent was imposing a cost on the others by not complying to a signed treaty, in this case states don't impose a cost when they breach a signed treaty but they are already imposing a cost on the other countries even before entering a treaty, just by refusing to sign the Kyoto Protocol.

The uncertainties related to the effective implementation of an international treaty and the lack of a supernational institution with the coercive power to impose a certain behaviour imply at least two main risks of failure.

The first one concerns the possibility that States might prefer to free ride on other states' effort by refusing to sign the Kyoto Protocol. In effect, this situation, rather than a risk of failure, is already a failure itself since U.S.A. and other countries, such as China and India, that are experiencing an economic growth at rates never observed before, refused to ratify Kyoto Protocol.

The second risk regards the effective achievement of the CO2 emissions reduction target and the possibility that some countries might find convenient to not respect the Kyoto commitments and to withdraw from the treaty.

In effect, the Emissions Trading System has still to bring some significant results in terms of emissions reduction in Europe, and the recent ETS' market development suggests that its real capacity to achieve the Kyoto target strongly depends on the public institutions' will to implement credible environmental policies.

The Kyoto Protocol's efficiency has not been verified yet, and we cannot say ex-ante if the overall environmental benefits will effectively exceed the relative costs Kyoto is imposing on the participating countries (and firms). In fact, the relative emissions' reduction promoted by the Kyoto's flexible mechanisms will be probably overweighed by the emissions' increase coming from the States that have not ratified the Protocol. As a consequence, the Kyoto Protocol implementation might only impose significative costs on the European firms, worsening their international competitiveness, without bringing any substantial environmental improvement.

This risk is inducing some countries to re-think their environmental commitment. Therefore we shouldn't be surprised if States will fail to reach their target as we shouldn't be surprised by the recent declaration of Tony Blair to reduce the english abatement target defined in 1997 in the “Blair Labour political Manifesto” from 20% to 17%.

It is clear that refusing to ratify Kyoto in order to preserve national competitiveness, such as U.S.A., China and India are doing, and breaching the international commitment by withdrawing from the Kyoto Protocol are not a sustainable solution: they might result efficient strategies from a national perspective but not from a global one. Cooperating at a global level (and not adopting opportunist behaviour) is the sustainable solution to the environmental global public good problem, but actuall, in the absence of an international institution with some powers delegated by States voluntarily deciding to limit their national sovreignity, International Law fails to find an efficient mechanism to ensure global cooperation.

[1] Sykes, Economics of Public International Law, Chicago working paper series n. 216, 2004

[2] American Law Institute, Restatement of the Foreign Relations Law of the United States § 102 (2) (1987)

[3] for an exaustive explanation see: Kronman A., 1985 “Contract and the Law of Nature”, Journal of Legal and Economics Organization

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