Posner and Sykes Book Symposium: Comment by Rachel Brewster

[Rachel Brewster is Professor of Law at Duke Law]

One of the many virtues of Eric Posner and Alan Sykes’ new book, “Economic Foundations of International Law,” is that it provides the reader with a theoretically coherent and consistent overview of important international treaty regimes, substantive international rules, and state enforcement practices.  The book is a lucid introduction to international law for students and also contains sophisticated analysis of the dynamics of international legal systems for academics and international lawyers.

A major theme of the book is that state compliance with substantive international rules is not always optimal.  This will be controversial with many audiences, but is extensively defended in the text.  Once the authors shift to this paradigm (where compliance with substantive rules is not the primary goal), then the question of remedies take center stage.  Remedies serve an important sorting function by defining the consequences of breach, permitting (even encouraging) “efficient” breaches, and discouraging those that are inefficient. Remedy law thus receives its own chapter (rare for international law), as well as an extended discussion in the international trade and international monetary law chapters.

If remedies are properly calibrated, then they can support differing levels of enforcement.  To deter any breaches of international law, remedies should seek to eliminate any gains to the breaching party (accounting for the likelihood of detection).  To permit efficient breaches, the remedies need only provide expectation damages to the injured party.  As the authors argue, the creation of a third-party adjudicatory system of limited remedies can actually create more opportunities for “cheating” than a system of unilaterally determined responses to breach.

How one assesses remedies and what is entitled to a remedy are thus important issues to maintaining optimal levels of compliance with international rules.  Posner and Sykes maintain that the best means of operating international remedy regimes is through a liability rule, where a court or arbitrator determines the level of damages, rather than through a property rule, where a court would issue an injunction against a breach and the parties would renegotiate the relevant legal rule (either globally or for the particular case).  Both approaches have costs.  The liability rule may produce errors because the judge or arbitrator cannot correctly assess the level of damage to the injured party.  The property rule allows the parties who have private information on the level of injury or gain to use this information in bargaining, but the property rule can have high negotiation costs and hold-out problems (if bargaining with multiple parties).  The authors argue that the costs of the liability system should be lower in the international context.

Yet we can still debate whether the liability rule approach is really preferable in international law.  First, in bilateral or regional treaties agreements, a property rule may be preferable because the negotiating costs may be relatively low compared to the possible error of a liability rule, and concerns about hold-outs decrease.  Second, most disputes (if not most agreements) are bilateral.  The vast majority of the time, only a few states will bring complaints even if the allegedly breaching policy affects many states.  A number of factors, including power differentials and litigation costs, can prevent states from pursuing high quality cases.  For instance, in the WTO Upland Cotton case, the US policy affected a wide group of cotton-producing states, but only Brazil brought a case against the US.  If most cases are bilateral (or involve a small number of plaintiffs) then, again, negotiation costs and hold-out concerns are lower.  In addition, the property rule may better mimic an optimal remedy.  If only a small number of states bring claims, then a liability rule may be a very good filter for determining efficient versus inefficient breach.  A property rule may (but not always will) be a better filter because one complaining state can bargain for compensation based on the worldwide effects of the policy.

The property rule also has the advantage of using the parties’ private information about their damages to influence the remedy.  Liability rule awards are necessarily limited to observable costs, such as monetary losses.  Yet whether or not a breach is efficient will depend on the relative political gains and losses of the complaining and respondent states.  Objective measures may undervalue (or overvalue) the political losses to the complaining state, thus failing to filter out inefficient breaches (or deterring efficient breaches).  The property rule would better address political gains and losses because parties have access to such private information, even if this information is neither observable nor verifiable to a third party.

Finally, at least in the WTO context, a property rule could resolve some of the odd features of the DSU’s remedy scheme that does not provide for retrospective damages.  WTO remedies are conditional and prospective, meaning that a party is only entitled to a remedy if they maintain policy causing the treaty breach after the case has been adjudicated, and then the remedy includes only post-adjudicative damages.  With a liability rule, DSU panelists set the number based on this remedy rule.  With a property rule, the determination of damages is more flexible based on the party’s bargaining.  The respondent state would have a greater opportunity to include retrospective damages (and thus lead to a more efficient functioning of the WTO system) in the bargaining process.

Another virtue of the book is how it bases adherence to international law on state interests.  This highlights the importance of a growing area of work addressing how states determine what is in their interests, and how much this shifts with changes in government.  If states are rational, then we expect international law and international institutions to be designed to fit their interests.  So, when observing a treaty regime or institution, we may attempt to derive state interests (at least powerful states) from the legal outcome.  But this can turn into a tautology unless we have an independent means of assessing state interests.  In addition, government views can change – such as, government interests in maintaining an alliance, preventing foreign corruption or preserving the global environment.  Understanding how a regime will function depends on having a theory of government preferences.  This is particular true with secondary rules.  All remedy systems, like international law more broadly, needs to be self-enforcing (another major theme of the book).  Governments must accept the remedy rules of a treaty regime – even if they breach the treaty’s substantive rules – or the regime won’t be sustainable.  This requires an understanding of how government interests develop and change, including how the government trades off long-term versus short-term interests.