Part III Forms of Organization, Ch.8 Private Transnational Governance
Edited By: Jacob Katz Cogan, Ian Hurd, Ian Johnstone
- Collective security — Attribution to international organizations — Membership of international organizations — International organizations, practice and procedure — Resolutions of international organizations
The traditional understanding of international governance organized around the idea of sovereign states vesting authority in centralized intergovernmental organizations (IGOs) to govern the conduct of states has been found increasingly wanting. By now it is widely accepted that the structure and arrangement of international governance has been fundamentally transformed. Strong linkages between actors from different institutional levels—sub-national, national, and supranational—and sites of authority—public and private—have been shifting authority away from its traditional vestiges and changing its form away from hierarchy and direct regulation toward softer forms of law and indirect market-based instruments.
Public–public, public–private, and private–private partnerships are particularly salient new transnational organizational forms.1 They exist today in virtually every arena of global governance. To give just a few examples, the World Trade Organization (WTO) has been linked through the SPS and TBT Agreements2 to References(p. 172) private international standard-setting organizations. These organizations set regulations for agricultural products, health and safety standards, and a broad range of other product-related standards. The global financial architecture is similarly no longer comprised solely of the twin Bretton Woods institutions but rather is the sum of various disparate partnerships established between political networks (e.g., the G20), IGOs (e.g., the International Monetary Fund), and a plethora of technocratic authorities (e.g., the International Organization of Securities Commissions). Equally, a meaningful picture of global environmental governance cannot be gleaned by only looking to Nairobi and the United Nations (UN) Environment Programme, while ignoring all the partnerships with NGOs and private sector organizations that constitute this disparate regime.
Partnerships have attained a particularly prominent status in European Union (EU) governance.3 Pioneered in the 1980s through the so-called “New Approach” to product standard-setting, against a background of legal constraints and bureaucratic conservatism, there now exist over twenty pan-European specialized agencies that regulate the common market, working outside the structure of the EU’s central institutions. The EU Commission also retains hundreds more alliances with NGOs, trade associations, and a wide range of private sector groups. The frequency with which the Commission seeks to partner with others should not surprise: its mandate is sweeping; its resources, however, are few. Its own administrative staff is small—“much smaller than that of the local government of the city of Rotterdam,” for example.4 The inevitable consequence, as put by Bowen, is that “[b]ecause of the under-resourced nature of the European Commission, the institution depends heavily on external resources.”5 It is important to emphasize that regional governance partnerships are not unique to the EU: the Association of Southeast Asian Nations and the North American Free Trade Agreement, for instance, have also witnessed the sharing of regulatory authority with an increasing number of specialized agencies and networks.
The focus of this chapter is on the “private ordering” dimension of this complex new governance. This dimension has two parts. The first is the privatization of functions or policy areas previously largely dealt with or controlled by states; the second is the astounding growth of governance functions that have always been principally “private”—that is, outside the sphere of state preoccupation or control. Needless to say, the two parts are not fully separate or independent. Over the last two decades, References(p. 173) public–private partnership arrangements and state acts of delegation of regulatory authority to private sector organizations have strongly invigorated the already perceptible endogenous growth of transnational private governance. The two parts are discussed separately.
The Privatization of Transnational Governance and Its Limits
Globalization has laid bare some of the procedural inadequacies and organizational limits of traditional intergovernmental organizations, most notably the excruciatingly slow pace of rules production and, increasingly, their lack of technical expertise and financial resources to deal with ever more complex and demanding regulatory issues. This has led to a much greater involvement of private sector actors in transnational rulemaking. This trend has diminished the presence of state actors in important areas of global regulation but it has not necessarily led to state capitulation to private sector regulators. The state has been redefining its role in some of these areas of rulemaking. Private regulation may fail to consider nonindustry interests or revert to anticompetitive practices. Thus, in some cases, governments have reasserted their authority by imposing upon transnational private rulemakers important organizational changes to comply with public interest safeguards. In other cases, governments have decided to work in tandem with transnational private groups, with each party contributing according to its comparative institutional advantage. What is emerging in some areas is a novel type of transnational governance, one that is neither purely private nor public but may best be captured by the term of “joint or hybrid governance.” It describes an arrangement that seeks to combine technical expertise, extensive resources, and market responsiveness with genuine openness, transparency, and legitimacy.6
In more analytical terms, the general evolution of governance can be summarized as following a three-stage process driven by externalities triggered by mismatches between (1) national rules and international markets, (2) limited public capabilities and expansive private sector needs, and (3) private rulemaking and public policy goals. The first mismatch drives the site of governance upwards to the transnational level; the second causes a horizontal move from public (transnational) to private (p. 174) (transnational) governance; and the third drives the transfer from private governance to hybrid governance. None of these transfers of site of governance is automatic or inevitable, however. General efficiency gains alone do not explain governance change. Any change in regulatory governance generates winners and losers; and potential losers may seek to stop or slow change. Institutional and actor-specific characteristics tend to shape the politics of governance choice and regulatory outcomes. The following subsections illustrate this process of governance evolution or transformation.
Enlisting International Private Sector Rulemaking Organizations
By the late 1970s, cross-national differences in product standards had become prominent nontariff barriers (NTB) to international trade, stifling economic recovery and growth. These standards addressed national compatibility issues and served as the technical basis of laws that sought to tackle purely domestic health, consumer safety, or environmental concerns. In addition, many countries had adopted such standards to protect domestic producers, usually in declining or uncompetitive industries. One seemingly simple way of tackling the NTB problem was to replace domestic standards with international standards. But who would produce international standards? The WTO did not have the in-house expertise to produce detailed technical rules for all major sectors of the global economy. The International Organization for Standardization (ISO) and International Electro-Technical Commission (IEC), by contrast, possessed the requisite resources. The WTO thus decided to enlist these two private sector rulemakers.
The ISO and IEC are best described as centrally coordinated global networks comprising hundreds of technical committees from all over the world and involving tens of thousands of experts largely hailing from industry. ISO and IEC are not operationally self-sufficient, and their officials do not work in isolation. They rely heavily on private sector standards bodies at the national level for logistical and technical support. The domestic bodies thus are part and parcel of the global institutional structure of standardization; in a sense, they form the institutional backbone of the global regulators.7
ISO and IEC have produced about 85 percent of all international product standards. Product standards are technical specifications of design and performance characteristics of manufactured goods.8 ISO standards include the standards for freight containers, paints and varnishes, screw threads, corrosion protection, thermal (p. 175) performance, and air quality measurement, as well as the “ISO 9000”-series management standards. IEC standards specify, for instance, radiation dosages for X-ray machines, the standard dimensions and other characteristics of audio CDs and battery sizes, as well as methods to measure electromagnetic interference and thresholds to safeguard against it, so that the operation of one piece of electric equipment, such as a vacuum cleaner or microwave, does not interfere with the operation of other crucial equipment such as pacemakers or computerized security systems.
Little known until the mid 1980s, ISO and IEC became prominent, in large part, due to the WTO endorsement, which took the form of the Agreement on Technical Barriers to Trade (negotiated during the Uruguay Round trade negotiations from 1986 to 1994). This Agreement obliges all member states of the WTO to use international standards as the technical basis of domestic laws and regulations unless international standards are ineffective or inappropriate for achieving the specified public policy objectives. Regulations that use international standards are presumed to be consistent with the country’s WTO obligations, whereas the use of a standard that differs from the pertinent international standard may be challenged through the WTO dispute mechanism as an unnecessary nontariff barrier to trade and thus a violation of international trade law.
Unsurprisingly, WTO endorsement has spurred growth of ISO and IEC standards; domestically produced standards, by contrast, have steadily declined. The combined annual production of ISO and IEC standards grew in the early 1980s from about 500 to 1,700 standards in recent years. In the same period, the annual standards production of the German National Standards Institute, for instance, declined from 1,300 to about 200.
Another example of governance transformation relates to an important area of global financial regulation. Financial reporting rules specify how to calculate assets, liabilities, profits, and losses in a firm’s financial statements, as well as which particular type of transactions and events to disclose, so as to create accurate and easily comparable measures of its financial position. Cross-national differences in these rules are said to have exacerbated the Asian Financial Crisis of 1997/98. The belief that harmonization would bring substantial benefits prompted firms and governments to call on the private sector International Accounting Standards Board (IASB), based in London, to produce a single set of international financial reporting standards. Such standards would increase the cross-national comparability of corporate information, improve the transparency of financial statements for shareholders, investors, and creditors, as well as achieve greater efficiency and stability in global capital markets.9
References(p. 176) Similarly, in 2009, as the global financial crisis was quickly deepening, the leaders of the G20 group of industrialized and developing nations met in London and urged the IASB to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards to bring greater stability to global financial markets and thus lay the foundation for the resumption of economic growth around the world. State leaders turned to the IASB because it had the resources to produce these standards and had established itself as the focal organization in global accounting. Early public sector competitors to IASB, including the UN Group of Experts on International Standards of Accounting and Reporting and its successor, the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, quickly lost the race to become the global focal regulator on financial reporting, largely due to insufficient technical expertise and political wrangling.10
State-endorsement has served the organizational interests of the IASB well, boosting its prestige and increasing demand for its rules. A rapidly growing number of countries have set out timetables to adopt or converge to IASB standards. By 2010, about one hundred countries required compliance with international financial reporting standards, up from fewer than twenty countries ten years earlier.
The Risks and Limits of Privatization of Regulatory Governance
The privatization of transnational regulation entails considerable distributional implications within the private sector.11 That is, some industry actors will be more successful than others in pushing their preferred technical standards for adoption as international standards; winners incur no or only minimal switching costs, whereas losers may find the switch to international standards exorbitantly expensive. However, the privatization of regulation can have other distributional consequences: it may promote industry interests at the expense of public interests. As Braithwaite and Drahos note: “Industry can utterly dominate [rulemaking in standards-developing organizations] because no one else has the energy to do so,”12 and private rulemaking and public policy goals do not always go hand in hand.13 (p. 177) Similarly, Eyal Benvenisti and George Downs voice concern about the move toward new global regulation in which private sector actors play an increasingly central role: It “circumvent[s] domestic democratic and supervisory processes that had developed over the years through the efforts of civil society, legislatures and courts. By doing so it threatens to effectively disenfranchise both voters and legislators in a host of areas.”14 In short, the problem with privatization of regulation is twofold: (1) the private forums of global rulemaking tend to be secretive and devoid of proper due process, and (2) the number of groups involved in private regulation is small and disproportionately—if not exclusively—from industry. The risk, then, is that this combination of skewed institutional setting and narrow participation may lead to regulatory capture.15
A case in point is consumer participation in international product standardization.16 Such participation is strikingly weak. Indeed, a 2004 survey undertaken by the EU Commission on consumer participation in standardization found that the “participation of consumer organisations in international standardization … seems to be out of reach for them at present.”17 There are at least three reasons for the weak role played by consumer groups in global product regulation. First, direct access to ISO/IEC technical committees is difficult. The only group allowed to represent consumer interests within such committees—independently of national member body representatives—is Consumer International (CI), an umbrella organization representing over 200 independent consumer organizations from almost one hundred countries. CI must apply for liaison status for each ISO/IEC technical committee in which it wants to participate. Such status is not given as a right but only at the discretion of the chairperson of the committee, and it merely offers the possibility to participate as a nonvoting member.18
(p. 178) Second, measures by international standards bodies to provide financial support to consumer representatives are few and far between, hampering CI’s ability to send observers to all important committees. In the words of a European Commission survey participant: “The lack of resources … forces consumer associations to make a strict selection of what they consider to be the most important [standards issues] for consumers.”19 The absence of significant financial assistance offered at the international level reflects, in part, the practice of some key ISO/IEC members. American private sector standard-setting bodies have always staunchly opposed to any government interference and contend that willingness to pay is the best measure of interest in standardization. Unsurprisingly, those who see no need for financial assistance domestically oppose the idea internationally.
Third, consumer representatives are frequently viewed as “outsiders” in private sector rulemaking bodies. Heavily outnumbered by industry representatives, they often are no more than tolerated. Or, as put by CI:
Many consumers [believe] … when they are invited to join [a technical committee] that their views are being sought and will be valued. The reality can be different; the invitation may have come simply because the meeting host was required to demonstrate that all major stakeholders were involved in the process. Once the goal of having a consumer representative attend the meeting ha[s] been achieved there [i]s no further need of the consumer representative and substantive input from [consumers] would not be encouraged.20
The ISO and IEC are not the only major global private rulemaking bodies singled out for lacking proper representation of noncommercial stakeholders. The IASB, similarly, has been a target of criticism. In 2008, the European Parliament issued a report highly critical of the IASB governance structure, observing: “[The] IASB lack[s] transparency, legitimacy, [and] accountability.”21 The report went on to make a series of proposals to remedy perceived institutional deficiencies. The proposals include strengthening the due process of IASB to enable previously rarely represented groups, such as investors, to play a prominent role in rulemaking; the creation of a public oversight body involving domestic legislators and financial market supervisors; transparent appointment procedures of board members and trustees drawn from all main groups with an interest in international financial reporting; and a new funding structure that avoids conflicts of interests.
These proposals heed calls by politicians and scholars alike to apply lessons from domestic administrative law to debates on how to improve global public and private governance. Laura Dickinson, for example, writes: “[P]rivatization is now as significant a phenomenon internationally as it is domestically … I [thus] (p. 179) suggest [that] the domestic U.S. administrative law literature may provide a useful set of responses to privatization that has been overlooked by international law scholars, policy-makers, and activists.”22 Administrative law offers a system of institutionalized procedural and substantive norms intended to assure that all those affected by regulation will be heard during the rulemaking process, that decisions will be taken in a transparent manner on the basis of disclosed reasons and in compliance with norms of proportionality and means–end rationality, and that regulations are subject to review by a judicial or another independent body upon request.
There is growing evidence that state pressure is transforming private regulatory governance into a form of hybrid governance—a new form of governance that comes with public oversight and robust due process and disclosure. The IASB is a case in point. In 2010, it created a new body, the Monitoring Board, to provide a formal link between the private sector trustees and public authorities. The Monitoring Board consists of one representative, each, of the Securities and Exchange Commission, the EU, and the Japan Financial Services Agency, two representatives of the International Organization of Securities Commissions—and the chair of the Basel Committee on Banking Supervision as an observer. It has the power to request meetings with the Trustees and “participate” in their appointment, but it has no authority directly vis-à-vis the IASB.
In a wide-ranging study on trends in global institutional reform, Benedict Kingsbury, Nico Krisch, and Richard Stewart identify many cases similar to the IASB. The authors thus are sanguine about the potential for the growth of administrative law principles and mechanisms in global governance and conclude that a global administrative law is not only possible, but that it is in the process of being created.23
Greater transparency, more provisions for participation, and related reforms may indeed be necessary first steps to ensure that global regulation will come to reflect a wide range of interests. But, as I have argued elsewhere, such steps are far from sufficient—especially in global private governance. Lack of broad-based participation in highly technical domains may be caused not just by exclusion or nontransparent procedures but also by technical ignorance, information deficits, erroneous beliefs, or collective action dilemmas. The creation of more robust notice-and-comment procedures, for example, will achieve little when the problem is ignorance or lack of technical expertise by the subjects of a particular governance arrangement. Greater procedural transparency and formal rules guaranteeing procedural inclusion of all affected parties may be in vain if those parties’ participation is in (p. 180) fact prevented by a lack of financial resources or collective action problem.24 The most likely outcome in such cases may be de facto capture regulation—not common interest regulation.
Endogenous Growth of Private Governance
Efficient transacting in global markets necessitates not only global rules but also international enforcement mechanisms finely attuned to the needs of different business groups. States have addressed some of these needs by creating and improving treaty-based dispute resolution mechanisms such as the European Court of Justice or the mechanisms offered by the WTO.25 The number of cases brought to these bodies, however, is tiny compared to the enormous volume of cases resolved in private international arbitration courts. International arbitration, indeed, is one of the most striking and vibrant—yet least explored—areas of global private governance. This section offers a brief overview of private international courts and concludes with a discussion of the risks and limits of such courts.
The Growth of Private International Courts
Arbitration is a binding, nonjudicial, and private means of settling disputes based on an explicit agreement by the parties involved in a transaction. Such an agreement is typically embodied in the terms of a contract between the parties. Unlike judges in public courts, who must follow fixed rules of procedure and apply the laws of the land, arbitrators can dispense with legal formalities and may apply whatever procedural rules and substantive law best fit a case.
Arbitration becomes international when the parties to a dispute reside or conduct their main business in different countries. The term commercial in international commercial arbitration (ICA) is broadly conceived and covers activities such as sale of goods, distribution agreements, commercial representation of agency, leasing, consulting, transportation, construction work, joint ventures, and other forms of industrial or business cooperation.
(p. 181) Two broad types of ICA can be distinguished: universal arbitration and specialized arbitration. The former is offered by major arbitration centers such as the International Court of Arbitration of the International Chamber of Commerce (ICComm), the London Court of International Arbitration, the Arbitration Institute of the Stockholm Chamber of Commerce, the Singapore International Arbitration Center, and the International Center for Dispute Resolution of the American Arbitration Association. The combined annual caseload of these major arbitration forums has steadily increased over time, reaching 602 in 1992 and 2,348 in 2011.26
Specialized arbitration, by contrast, is conducted in forums established in specific industries by the respective international trade associations, such as the Society of Maritime Arbitration, the Grain and Feed Trade Association, and various stock and commodity exchanges, and is open only to the members of these associations and exchanges. Specialized courts are a particularly vibrant part of the global arbitration scene, adjudicating many more cases than universal arbitration forums. For example, the caseload of the London Maritime Arbitrators Association alone exceeds the combined annual total cases of all major universal arbitration courts: it has grown from 2,219 cases in 2002 to 3,849 in 2012.27
How can we account for the growing popularity and seeming efficiency of ICA? One explanation—the economic-rationalist model—is based on insights from new institutional economics and the rational institutional design school in political science.28 These schools conceive of governance structures as organizational frameworks within which the integrity of a contractual relationship is decided and maintained. Governance structures emerge and adjust to minimize the costs and risks of transacting in markets. That is, transaction costs are economized by assigning transactions (which differ in their attributes) to governance structures (which differ in their adaptive capacities and associated costs) in a discriminating way. The higher the asset specificity of a transaction, for example, the greater the governance complexity needed to promote efficient exchange.
With globalization, the volume of transactions in international markets has grown exponentially and so have the potential costs and problems associated with References(p. 182) these transactions. In response, businesses have designed a wide range of novel transnational governance structures to minimize transaction costs and maximize the net benefits to firms and societies of operating in global markets.
International commercial arbitration is one such governance structure. The surge in its popularity as a method of dispute resolution can be attributed to features or attributes of arbitration that economic agents operating in global markets value, including flexibility, technical expertise, privacy, confidentiality, and speed. From the perspective of the economic-rationalist model, agents select, use, amend, or design new dispute resolution forums based on their evolving needs and priorities.29
An illustration of an arbitral governance structure that appears to fit the economic-rationalist model is the ICA of the ICComm.30 It seems to have evolved to maximize the efficiency of dispute resolution in a challenging and rapidly changing international economic environment. For example, its rules and institutional apparatus effectively override obstacles that a noncooperative disposition by one of the parties to an international commercial dispute may pose. If one of the parties refuses to participate in the arbitral proceedings (despite a contractual obligation to do so), ICA is entitled to appoint the arbitrator(s) and constitute a tribunal. The notice and summons procedure is performed by the ICComm Secretariat and is supervised by the court, assuring the arbitrators that the defaulting party had notice of the arbitration. If one party fails to sign the Terms of Reference, ICA may approve them and the proceedings continue. After the Terms of Reference are approved, the opportunity for a party to engage in dilatory tactics by presenting additional claims and counterclaims is minimized because such claims can only be heard on the agreement of all parties.
The Court closely monitors the arbitral proceedings, ensuring that time limits and due process principles are respected.31 It replaces arbitrators who do not fulfill their functions or are behind in their work. At the end of the process, it scrutinizes the award in relation to jurisdiction and applicable law. This monitoring and checking increases the quality of the arbitral award and, in turn, reduces the chance that the losing party will challenge the award in a national court. As noted by an experienced international arbitrator, “most final awards rendered under [ICComm] auspices are carried out voluntarily by the parties, because [of their high] quality … A company that fails to carry out an [ICComm award] is almost certain to lose subsequently and in addition runs the risk of jeopardizing its reputation in international circles.”32 Indeed, only about 5 percent of awards have been challenged, and (p. 183) of these only one in ten awards rendered under the aegis of the ICComm has been set aside by a national court.
This remarkable organizational sophistication and efficiency is not unique to ICA. According to the economic-rationalist approach, different types of international arbitration respond in different ways to the specific requirements of different sets of economic actors. The rules and institutional approaches of specialized arbitration as conducted in maritime affairs or offered by various stock and commodity exchanges thus are different from those designed for users of universal commercial arbitration or investor-state arbitration. In each case, optimal institutional design and organizational efficiency is assumed to emerge given the backdrop of intense competitive pressure that each forum faces. Forums that do not innovate and adjust in order to satisfy their clients’ needs and priorities will lose arbitration business and become obsolete.
Direct state intervention in ICA governance is neither necessary nor desirable as market pressure keeps arbitration centers on their “organizational toes.” States may help indirectly by ensuring the functioning of ICA is not hampered by state corruption and related failings or jurisdictional jealousies. In this backstage role, states have made important contributions, for example, by enacting statutes to reform their arbitration laws to satisfy the business users of international arbitration or signing the New York Convention on the Recognition and Enforcement of Arbitral Awards. The result is a strengthening and enhanced efficiency of ICA governance.
The economic-rationalist model further implies that organizational efficiency of arbitration forums is good not only for the contracting parties (by generating private gains); it also is good for the wider public. By enabling the smooth operation of global markets, ICA contributes to the optimal allocation of the world’s resources, which, in turn, generates economic growth and prosperity for societies across the globe. Recent econometric analysis strikingly illustrates the positive impact of effective ICA governance on international trade.33 In short, the model claims that ICA is a source of significant positive externalities.
The Risks and Limits of Private International Justice
The economic-rationalist explanation of ICA is not universally accepted. Cultural-sociological theorists, for example, consider the model incomplete and thus misleading.34 They argue that the key to understanding ICA’s emergence References(p. 184) as a form of global governance is a legal culture specific to the international arbitration community. Culture is defined as a complex of norms that condition behavior both by shaping the thinking of members of a community and by creating a community consensus or peer pressure that discourages deviation from these norms. Culture emerges from the repeated interactions among actors of a particular community. Culture-based behavior is reflexive; it operates prior to deliberative decision-making.
Several factors are said to have facilitated the emergence of a strong legal culture among international arbitration practitioners: they were educated in elite institutions, share cosmopolitan backgrounds and multicultural legal training, speak multiple languages, travel in both business and academic circles, frequently meet in conferences, and work repeatedly with each other and on disputes within a relatively narrow range of commercial subjects. Their community, unsurprisingly, is small. It has been described as an exclusive club, epistemic community, caste, cartel, gang, and even mafia.35
Perhaps a more troubling “incompleteness” in economic-rationalist analysis is the lack of any discussion of power and its implications for the functioning of ICA. Power plays a central role in the analysis of ICA by critical political economy theorists.36 They see ICA governance as a scheme designed by the powerful few for their own private commercial ends. It is a mechanism of rent-extraction from the weak and poorly organized in business and society at large. In other words, far from being the “positive-sum” arrangement with positive externalities, as portrayed by economic-rationalist theorists, ICA governance is better understood as a “zero-sum” arrangement that, in addition, generates extensive negative social, economic, and political externalities.37 The image of holistic efficiency is a mirage, a ploy by powerful business groups to silence the critics and seduce the gullible.
Critical theorists point primarily to abuses in investor-state arbitration in the context of BITs as evidence in support of their thesis. These treaties may involve powerful investors (multinational corporations or “vulture” funds) and weak or corrupt governments. Some such treaties have led to harmful industrial activities and short-sighted policies dictated by investor interests. Examples of negative externalities include land-grabbing affecting access to food for the poor, pollution and other durable ecological harm, destruction of local cultural or religious heritage, discrimination in respect of local workforce, exploitation, and violence.38
(p. 185) Are the inequities generated by power asymmetries unique to investor-state arbitration? In his critical assessment of ICA, Thomas Dietz answers the question negatively. He claims that power asymmetries are pervasive in ICA and a root-cause of the relatively ineffective or marginal role played by universal arbitral governance, as reflected in the modest growth of arbitration cases relative to the explosive growth of global trade over the last two decades: “The relatively low case load points to a limited governance function of international commercial arbitration.”39
Dietz’s argument can be put as follows: in a commercial relationship, one private party is likely to be more powerful than the other. It will use its power to create an uneven legal playing field disadvantaging the other party. A particularly effective strategy is to bypass neutral transnational commercial law and choose instead national law it knows best and the other party may know least: “Parties do not choose the law that is most efficient for both parties but the law that suits their self-interests.”40 For the same reason, the powerful party may even want to drag a case to a familiar domestic court rather than have it adjudicated in a neutral international arbitration court. A domestic court is likely to confer a home advantage to the powerful party and increase the legal cost and uncertainty for the weak foreign party. As a result, and in striking contrast to the prediction of the economic-rationalist model, the vast majority of international commercial contracts, even when they contain arbitration clauses, are said to still be governed by national laws. The chosen tribunal may be international; the preferred choice of law, however, tends to be national. The result is not the de-localized, autonomous, private, and efficient ICA governance portrayed by economic-rationalists but instead a system that still largely depends on territorially fragmented (and sometimes dysfunctional) state law, is less than efficient, and favors the powerful at the expense of the weak.
Constitutionalist theorists reject such gloomy or negative assessment of ICA. They acknowledge its imperfections but emphasize the ability of ICA governance to evolve—consistent with the three-stage theory introduced earlier in this chapter—to obviate weaknesses inherent in a purely private arbitration system. Moritz Renner, for example, notes that arbitral tribunals increasingly are not simply executors of the will of the contracting parties but apply public policy norms, thereby supplementing the supposedly private nature of arbitration with broader policy objectives. Recent arbitral practice “integrates different conceptions of public policy into an overarching hierarchy of norms mimicking domestic constitutional orders.”41 Mandatory public policy norms are long established in domestic systems, (p. 186) where courts may enforce rules limiting freedom of contract to protect public goods or interests (e.g., market stability or fair competition) or the weaker party in a contractual arrangement (e.g., consumers or employees). An international arbitrator may now refer, for example, to domestic mandatory rules against corruption as an expression of domestic public policy as well as to more recent rules in international anticorruption conventions as an expression of transnational public policy.
Renner considers the rise of transnational public policy as “the starting point of a constitutionalisation of international commercial arbitration.” Two features characterize constitutionalization: First, a hierarchy of norms. “Both [domestic and international] layers of public policy are reflected in a legal hierarchy which by now forms the constitutional core of the regime of transnational commercial arbitration.” The second feature is the structural coupling of law and politics. “By referring to policy considerations and political discourse, be it on the domestic … [or] international level, international arbitral tribunals ‘externalize’ the problem of norm justification to the realm of politics.”42
What may be facilitating constitutionalization? Arguably an important factor is the increasing willingness of tribunals to publish arbitral awards. Such publication enables the development of a genuinely legal form of reasoning based on precedent, generating normative expectations as well as greater doctrinal consistency, and fostering the growth of transnational law.43
This chapter has offered an overview of the key drivers and risks of private transnational governance. One finding worth highlighting is that private governance rarely seems to stay purely private. When it fails to consider wider societal interests and concerns, private governance will draw unwanted attention to it from governments, potentially leading to oversight and regulation or public private partnerships—what I referred to as “joint or hybrid” governance. A trend toward hybrid governance appears to be detectable both in the cases of privatization of global regulation and the rise of transnational private justice. In the former case, states have taken steps to improve procedural transparency and broaden the range of partners involved in transnational rulemaking. In the latter case, the constitutionalization (p. 187) of international arbitration governance promises to integrate and safeguard fundamental public policy norms in private judicial processes. Future research on global governance will have to carefully examine the significance and effectiveness of “joint or hybrid” governance. Is such governance working as envisaged and making a real difference? Or is it simply a façade, an illusion, a ploy to hide an inconvenient truth? Who benefits the most from it—who the least, when, and why?
I conclude with a few conjectures in the hope of stimulating further research on the distributional implications of hybrid governance and partnerships.44 First, the parties in hybrid governance arrangements often assume one of two complementary roles: rulemaking and rule supporting. Rule supporting partners provide a wide range of services, including provision of information on local conditions or compliance levels, endorsement or appointment of rulemakers, ongoing legitimation and oversight, and various forms of logistic and material support to rulemakers. The latter define the general parameters and/or specific details of a solution to a cooperation challenge. In areas where partners diverge on how best to approach and solve a joint cooperation problem, agents with rulemaking capabilities will have a disproportionate impact on the ultimate solution. They are in a position to select their preferred Pareto points—that is, they are likely to set regulatory parameters that reflect their substantive policy preferences and ensure that their organizational and economic interests are maximized subject to a constraint of minimum acceptability to rule supporting partners. Three reasons explain why rulemakers accrue more power over time.
First, their technical or expert knowledge generates great information asymmetry between partners, keeping the rule supporter potentially in the dark or at bay. The latter partner may trust the rulemaker but not fully understand the regulatory solutions proposed or grasp the long-term implications of these solutions. Lack of information and knowledge makes it difficult to effectively oppose a regulatory proposal that may have unfavorable distributional implications. In other words, asymmetry reduces the constraints under which the rulemaker operates, enabling the forging of solutions that will favor the interests of the rulemaker more so than those of the rule supporter.
Second, rulemaking is more constitutive than rule supporting. A rulemaker is in the driver’s seat, charting the course of action and continuously deciding which turn to take or not. Rulemakers can use their power to directly enhance their own capacity for political action. By contrast, rule supporting activities—though critically important to effective governance—are more discrete and backstage. A decision by an IGO, for example, to formally endorse a private sector rulemaking partner can tremendously boost the legitimacy of the rulemaker. However, the rule supporting (p. 188) act of endorsement is a single event. Endorsement can be revoked, of course, as can logistic or financial support. Nevertheless, rule supporting events have less direct impact on the shaping of cooperation outcomes than the more continuous activity of rulemaking.
And third, rules once set and adopted may be hard to change because of network effects. The power to institute rules inevitably attracts actors outside the hybrid partnership with an interest in the form and content of rules, gradually concentrating and reinforcing the locus of relevant information and deliberation, decision and authority. The benefits of adopting and complying with new rules also increase as more targets convert to these rules. The logic of these increasing returns is to spawn large networks of vested interests in and defenders of the rules and rulemakers, increasing the cost to opponents seeking to dislodge their status. Network effects entrench and magnify the power of the rulemaker over time and, ceteris paribus, render it more difficult for the governance partner to successfully rectify the rules’ distributional biases.
The ease with which rulemakers obtain their preferred “Pareto points” (that is, regulatory parameters that reflect their substantive policy preferences and maximize their organizational gains) is not constant, however. The price of cooperation also depends on a second variable—the number of (actual or potential) partners. For example, a single or focal initiator of a joint governance scheme who faces a steady supply of (actual or potential) partners to co-opt incurs a lower opportunity cost (suspended gains if a partnership breaks down) than an easily substitutable partner. The former will find it easy to arrange an alternative arrangement with another “supplier” whereas the latter may be excluded from such an arrangement for some time and thus incur a high opportunity cost. As a result, an actor is expected to accrue fewer benefits or pay a higher price to institute and/or maintain a partnership with an organization in a monopoly position than if the actor faces many (actual or potential) partners. Only a monopoly player can set a monopoly price.
In sum, in hybrid or joint governance, the partners gaining the greatest share of benefits from cooperation are those endowed with rulemaking capability that is not easily substitutable (i.e., they have no competitors). Examples are the ISO or the IEC in their arrangement with WTO members. Other combinations of the two variables—rulemaking versus rule supporting role and single versus many (actual or potential) partners—will generate further testable distributional scenarios.45
1 K. Abbott and D. Snidal, “The Governance Triangle: Regulatory Standards Institutions and the Shadow of the State,” in The Politics of Global Regulation, ed. W. Mattli and N. Woods (Princeton: Princeton University Press, 2009), 44–88.
2 The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) and the Agreement on Technical Barriers to Trade (TBT) were negotiated during the Uruguay Round and entered into force in 1995.
3 R. Dehousse, “Regulation by Networks in the European Community,” Journal of European Public Policy 4/2 (1997): 246–61; A. Héritier and D. Lehmkuhl, “The Shadow of Hierarchy and New Modes of Governance: Sectoral Governance and Democratic Government,” Journal of Public Policy 28/1 (2008): 1–17; and B. Eberlein and A. Newman, “Escaping the International Governance Dilemma? Incorporated Transgovernmental Networks in the European Union,” Governance 21/1 (2008): 25–52.
6 K. Abbott and D. Snidal, “International ‘Standards’ and International Governance,” Journal of European Public Policy 8 (2001): 345–70; W. Mattli, “Public and Private Governance in Setting International Standards,” in Governance in a Global Economy: Political Authority in Transition, ed. M. Kahler and D. Lake (Princeton: Princeton University Press, 2003), 197–229.
8 More specifically, product standards cover properties such as interoperability, interconnectability, levels of safety, conformity, materials, systems of classification, methods of testing, the operation of systems, and quality assurance.
9 See three titles by W. Mattli and T. Büthe, namely “Accountability in Accounting? The Politics of Private Rule-Making in the Public Interest,” Governance 18 (2005): 399–429; “Global Private Governance: Lessons From a National Model of Setting Standards in Accounting,” Law and Contemporary Problems 68 (2005): 225–62; and The New Global Rulers: The Privatization of Regulation in the World Economy (Princeton: Princeton University Press, 2011).
11 Mattli and Büthe, “Setting International Standards”; and The New Global Rulers.
13 D. Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Washington, DC: Brookings Institution Press, 2005); “Private Global Business Regulation,” Annual Review of Political Science 11 (2008): 261–82.
14 E. Benvenisti and G. Downs, “Toward Global Checks and Balances,” Constitutional Political Economy 20 (2009): 366–87, 367; see also S. Quack, “Law, Expertise, and Legitimacy in Transnational Economic Governance,” Socio-Economic Review 8 (2010): 3–16; J. Black, “Constructing and Contesting Legitimacy and Accountability in Polycentric Regulatory Regimes,” Regulation and Governance 2 (2008): 137–64; J.-C. Graz and A. Nölke (eds.), Transnational Private Governance and Its Limits (London–New York: Routledge, 2008); M. Zürn, “Global Governance and Legitimacy Problems,” Government and Opposition 39 (2004): 260–87.
15 W. Mattli and N. Woods (eds.), The Politics of Global Regulation (Princeton: Princeton University Press, 2009). Regulatory capture is defined as the control of the regulatory process by those whom it is supposed to regulate or by a narrow subset of those affected by regulation, with the consequence that regulatory outcomes favor the narrow “few” at the expense of society more broadly.
17 European Commission, Health and Consumer Protection Directorate-General, Evaluation Report: Questionnaire on Consumer Representation in Standardisation Activities at National, European and International Level, January 2005, 4, http://ec.europe.eu/consumers/cons_org/eval_report_en.pdf.
18 K. Dawar, “Global Governance and Its Implications for Consumers,” Consumer Policy Review 16 (2006): 2–4; B. Farquhar, “Consumer Representation in International Standards,” Consumer Policy Review 16 (2006): 26–30, 26.
20 Consumers International, First Steps in Standards Representation (London, September 2005), 10, http://www.consumersinternational.org.
25 J. Goldstein and R. Steinberg, “Regulatory Shift: The Rise of Judicial Liberalization,” in The Politics of Global Regulation, ed. W. Mattli and N. Woods (Princeton: Princeton University Press, 2009), 211–41.
27 The numbers are published by the London Maritime Arbitration Association, see http://www.lmaa.org.uk/default.aspx. A third type of international arbitration, Investor-State Arbitration, is public. The main provider of such arbitration is the International Centre for Settlement of Investment Disputes (ICSID). ICSID was created in 1966 by the so-called Washington Convention and is part of the World Bank organization. ICSID’s authority is limited to investment disputes where one of the parties is the host state. ICSID arbitration has recently become more prominent largely due to the growth of bilateral investment treaties (BITs) in the 1990s. However, ICSID cases are relatively few, though growing: two in 1992 and fifty in 2012 (see https://icsid.worldbank.org).
28 O. Williamson, Markets and Hierarchies (New York: Free Press, 1975); The Economic Institutions of Capitalism (New York: Free Press, 1985); B. Koremenos, C. Lipson, and D. Snidal, “The Rational Design of International Institutions,” International Organization 55/4 (2001): 761–99.
31 Principles of due process include transparency of the arbitral process, the right of the parties to be called and heard, and equal treatment of the parties in the exchange of pleadings, in evidentiary matters, in resort to expertise proceedings, and in the holding of hearings.
34 J. Karton, “International Arbitration Culture and Global Governance,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 74–116.
35 Ibid.; Y. Dezalay and B. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (Chicago: University of Chicago Press, 1996).
36 C. Cutler, “International Commercial Arbitration, Transnational Governance, and the New Constitutionalism,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 140–67.
38 H. Muir Watt, “The Contested Legitimacy of Investment Arbitration and the Human Rights Ordeal,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 214–39.
39 T. Dietz, “Does International Commercial Arbitration Provide Efficient Contract Enforcement Institutions for Global Commerce?,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 168–95.
41 M. Renner, “Private Justice, Public Policy: The Constitutionalization of International Commercial Arbitration,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 117–39.
43 A. Stone Sweet and F. Grisel, “The Evolution of International Arbitration,” in International Arbitration and Global Governance, ed. W. Mattli and T. Dietz (Oxford: Oxford University Press, 2014), 22–46.
44 W. Mattli and Jack Seddon, “Orchestration along the Pareto Frontier: Winners and Losers,” in International Organizations as Orchestrators, ed. K. Abbott et al. (Cambridge: Cambridge University Press, 2015), 315–48.
45 For a full elaboration of the theory and systematic testing, see Mattli and Seddon, “Orchestration along the Pareto Frontier.”