Author: Todd Tucker

A Times report this morning deemed as “binding” an opinion of the International Court of Justice that Japan’s whaling practices were in violation of its obligations under the International Convention for the Regulation of Whaling.

I am a bit wary of any characterization of international law as “binding”. In the absence of a global entity able to force compliance, what does “binding” mean? My impression is that some scholars use “binding” to refer to what could be even just a purely moral obligation, while others use it to refer to an obligation backed up by force.

I had similar concerns about the word “to avoid” in a WTO law context (how much intention does it require?), which I explore here with coauthor Jayati Ghosh. Then, as now, I reached for the Oxford English Dictionary for a bit more insight.

The entry for the adjective “binding” refers back to the verb “to bind“. There are fully 23 variants of “bind” that the OED editors catalogue.  Among them:

1. Tying up and fastening (as in objects);
2. Tying up a person to deprive them of liberty;
3. More binding, encircling, intertwining of things.

We then get to a group of eight different variants, under the heading “To restrain or unite [people] by non-material bonds”. We have the binding of holy matrimony, the binding of affection between people, the binding of apprenticeship. We have the notion of an actor committing themselves to a future course of action (” A landed proprietor may bind himself to a future payment, in a written deed.”) There are references to purely moral obligation, although there is an emphasis on this undertaking being an actual constraint (much like the physical constraints noted above). Given these definitions, it is not surprising that many writers use “bindingness” in a sort of power-neutral sense. Japan “binds” itself to ICJ rulings, or is “bound”, because that is what could make the international legal system cohere.

Then, there are three of these that touch specifically on law-related themes.

Continue reading “Bind it” →

Over at the Monkey Cage, Erik Voeten analyzes which scholars mis-predicted Russia’s Crimean intervention. Most people got it wrong of course, and of various international relations subdisciplines, the high water mark was 20 percent getting it right. Of particular interest to 2C readers:

Self-identified Liberals and Constructivists did poorly, with Liberals both very unlikely to predict intervention and very likely to offer a definitive “no” rather than the “don’t know” answer that was very popular among Constructivists (who sometimes look dimly on the predictive ambitions of social science).

Perhaps a misplaced faith in the power of international law and institutions was at the root of this. After all, the Russian intervention violates a system of laws and norms that these paradigms hold dearly. Yet, non-realist scholars who study international law or international organizations as their primary or secondary field were more likely to foresee the military action (see graph).

Delving deeper into the data, I found that only 7 percent of the 150 self-identified Liberals and Constructivists who do not study international organizations and law foresaw the Russian military intervention. By contrast 15 percent of the 87 Liberals and Constructivists who study international law and organization got it right. This is admittedly speculative but it may be that paradigms impose blinders especially outside of ones field of study. Only 5 percent (4) of the 87 Liberals and Constructivists who do not study international security, Russia or international organizations and law correctly predicted a military intervention.

To follow up Erik’s speculation with more of my own, I would wager that legal scholars from non-social science backgrounds would probably fare even worse, if we had data on this, for similar reasons of misplaced faith in the normative powers of law. Those who are willing to treat legal processes empirically rather than normatively would probably score better.

Continue reading “Blinded by the law” →

Not quite, but the Court did side with UK investors against Argentina and Obama in a historic decision last week.

The decision paired an unusual alliance of the court’s most liberal and conservative justices, who ruled in favor of empowering transnational arbitrators  – not only to second guess national policies and judicial processes – but to decide when they get to second guess them. Two of the court’s swing votes (Chief Justice Roberts and Justice Kennedy) dissented, arguing for more deference to national institutions. This outcome could have been predicted from the tone of the court’s oral arguments back in December, which was fairly hostile to both governments’ arguments.

The dispute arose when Argentina’s financial crisis response in the early 2000s harmed a UK corporation’s investment in the country’s privatized natural gas distribution sector. The investor (BG Group) successfully brought a claim under the UK-Argentina investment treaty. The dispute was sited in the US, which meant that Argentina could (and did) ask US courts to vacate the award. The US phase of the dispute went all the way to the Supreme Court, making it the first time that the court has ruled on an investment treaty dispute.

The Obama administration sided with Argentina in alleging that the transnational arbitrators should not have accepted jurisdiction over the case, arguing that the treaty obligated BG Group to first seek recourse in Argentine courts for 18 months before launching the treaty complaint (which the company did not do). The US’ recent treaties put some similar procedural limits and preconditions on countries’ consent to be sued by investors; the solicitor general’s position in the case seemed motivated by ensuring courts respect those limits in future cases.

There are a lot of interesting and novel aspects of the Supreme Court’s decision. I’ll focus on just a few.

Continue reading “Supreme Court endorses investment treaties” →

I know the world is waiting with bated breath for my Oscar picks, so here goes (based on what I liked, not what I think will necessarily win):

Best Picture: 12 Years a Slave. Steve McQueen brilliantly captures white privilege up-and-down the income scale, on both sides of the color line.

Best Actor: Matthew McConaughey in Dallas Buyers Club. We should stop rewarding extreme weight loss/gain, but I say Matthew gets it because of his casual homophobia that never quite goes away despite developing new comrades.

Best Actress: Cate Blanchett in Blue Jasmine. Despite the entire universe feeling qualified to weigh in on one side or the other of the Woody Allen pedophilia accusations, Cate is just brilliant in being an extremely status anxious widow in the middle of a nervous breakdown. Lots of funny cameos too.

Best Supporting Actor: Michael Fassbender in 12 years a slave. Absolutely wretched performance. Totally passes the SNL try-out parody from last night.

Best Supporting Actress: Jennifer Lawrence in American Hustle. Hilarious breakdowns and bravado from my homestate girl.

Cinematography: Emmanuel Lubezki for Gravity. Great use of small and wide spaces.

Best Directing and Editing: David O. Russell and the editors for American Hustle. Very fun pacing of excellent ensemble cast.

Best Documentary: As I tipped in a previous post, Joshua Oppenheimer’s The Act of Killing was one of the most innovative techniques for interviewing I have seen.

Best Foreign Language: Sadly, the only one I saw was the Hunt, from Denmark – which was great and disturbing. Apropos of the Woody Allen accusations.

Best Production Design: Her. From the high waisted pants to the cityscapes, a treat to watch.

Best Animated Short: Feral. A disturbing graphic novel style depiction of a wild boy.

Best Adapted Screenplay: 12 Years a Slave. Making a relic from archives come alive.

Best Original Screenplay: All were excellent. I cannot decide.

One difficulty in studying investment treaty arbitration is that the arbitral awards are not necessarily made public. This is confounding to scholars, leading Emilie Hafner-Burton and her colleagues at University of California-San Diego to put out a  study theorizing how and when awards are made public. (Spoiler alert: they find that disputes involving investments with long time horizons may be more likely to be undisclosed, as are cases involving frequent claimants and losing government respondents.) They look, however, at only cases registered at the World Bank’s arbitration arm (ICSID), and they look at non-investment treaty cases as well. Thanks to specialized reporting outlets like the Investment Arbitration Reporter, as well as the work of UNCTAD (the UN investment arm) and scholars like Lauge Poulsen, we can construct a more complete list of the “known unknowns” in investment treaty arbitration. As Donald Rumsfeld would say, that still leaves the “unknown unknowns”, but this list (which I’ll update over time) is an improvement over what we have currently. As you can see from the list below, former Soviet bloc countries are the real culprits in not releasing their awards, something Investment Arbitration Reporter has been trying to remedy through Freedom of Information Act requests. States’ reluctance to make some of their awards public is doubly bizarre, since states appear to prevail more in their unpublished awards (60% of the time) than in their published awards (43% of the time). (If you break apart those awards that culminated in merits determinations, the numbers are 65% and 35%. For jurisdiction determinations, it’s 45% and 54%.) States might therefore be able to further alleviate any reputational harm from having been hit with the challenge by simply disclosing these victories. (UPDATE 2.14.14: I don’t have much of a theory for why states might not disclose these successes, but attentive reader and scholar Jonnathan Bonnitcha offered one to me: “otherwise confidential awards sometimes become public when the investor seeks enforcement of the award. This is because enforcement proceedings in national courts normally require disclosure of the underlying award.”) Here’s the list, as I’ve tallied it. Please let me know if I’m missing any, or if any of these have been made public, or if you want to make one of these public by sending it to me. Continue reading “Known unknowns” →

How should we tax the hottest money?

Economist Anton Korinek spoke on the topic at this week’s Institute for New Economic Thinking workshop in Bangalore, India. Inevitably, it prompted some thinking on my part on the connection of finance to our trade and investment deals.

Anton’s paper outlines different policy options for countries hoping to avoid capital crises. In particular, he argues for a system of differentiated tax rates – applied before a crisis hits – based on the risk profile of the financial service provided.

The tax rate is estimated using the following parameters: what type of return an investor in a specific asset could hope to make after a crisis-induced devaluation, what type of externality that asset would impose on society, and the frequency of past crises.

Looking at the case of Indonesia in the 1998 Asian financial crisis, Anton notes that investors that bought dollar-denominated assets in the country in the lead-up to the crisis made out like gangbusters following the crisis-induced devaluation. Say you used 1 rupiah in 1997 to buy a 1 dollar asset. A year later, say a dollar can buy many more rupiahs. That lucky investor has made their dollar-denominated return, plus many more rupiahs when they convert their asset back. In contrast, those investors that purchased rupiah-denominated assets or assets (like FDI in retail sector) reliant on vibrant domestic sales do much worse. The numbers he uses are a 218% excess return on dollar-denominated assets, 100% return on inflation-indexed rupiah assets, and 44-66% return on non-adjusted rupiah stocks and bonds. These distinctions in rates of return form the first component of the calculation of the optimal tax rate

Anton then calculates the externality on the basis of a formula described on page 31, essentially – the hit national income takes because of the crisis. For the above assets, he puts these externalities at 30.7%, 14.1% and 6.2%-8.9%.

Finally, the externality is adjusted for the frequency of crises. If Indonesia has one crisis every 20 years on average, then the externality tax is divided by 20. This results in taxes on holders of the above assets of 1.54%, 0.71%, and 0.31% respectively.

Anton’s main justification for his approach is that it is neatly tailored to the more problematic forms of activity. This type of neat-tailoring is seen by most economists as more efficient than generalized policies (such as prudential measures) that impose costs even on market actors with non-problematic assets, even though they may have better ideas with what to do with their money. This cost on the latter group is a consequence of a less efficient policy approach. (Anton writes more about this here, in a paper for the IMF.)

Anton’s ideas would seem to produce smart policy, and wouldn’t require too much administrative capacity to pull off. In other words, all but the weakest states (who can’t even collect taxes) would be able to implement it.

His proposals pose some interesting challenges given the current provisions of trade and investment agreements, which feature various potential constraints on financial services policy space, as I write about here in a book through Boston University.

First, Anton notes that many capital control schemes invite evasion – evasion that is greatly facilitated by financialization and the emergence of derivatives. He suggests outright banning credit default swaps and other instruments in order to discourage innovation. However, as I note in this paper with economist Jayati Ghosh, such bans would likely violate market access provisions of the World Trade Organization’s services agreement.

Second, differentiated taxation could trigger liability under national treatment (or ‘fair and equitable treatment’) rules in investment treaties. After all, investors in credit-default swaps are taxed at higher rates that investors in local currency assets may be more likely to be foreign. If so, differentiated taxes, reserve requirements or quantitative control measures could be the basis for an investment treaty compensation claim by foreign investors. Given this, it may be useful to increase Anton’s tax in order for governments to create a reserve fund for their capital controls and other reserve funds. After all, if governments’ efforts to control externalities from harming society expose society to further financial liability through investment lawsuits, then further internalization of these lawsuit-related externalities is needed.

Of course, harsher taxation of foreigners with bad assets would prompt further liability, potentially creating a liability spiral, which brings me to my final thought.

Considered in the light of the above, Anton’s paper implies that trade and investment agreements might be privileging less efficient policies. Many trade agreements have ‘carve-outs’ for generalized prudential measures, but not for Anton’s targeted policies. (How effective the carve-outs are is a questionable proposition, as I write in the paper with Jayati, but that is another point.) This feature of trade agreements is especially ironic, given that these treaties are typically justified for their benefits of enhanced efficiency.