Posted 10:55 AM by Robert

The Bad Man's Theory of International Trade Law

The great and hugely influential Justice Oliver Wendell Holmes, Jr. maintained that law should be viewed from the perspective of a self-interested "bad man." That is, someone who cares only about economic consequences of his actions. Holmes saw law as simply a system of pricing - and this was especially true of commercial contract law. Although some people have always lamented Holmes' contribution as pernicious (he intended it to be shocking) it is now understood even by the best such lamenters that for better or for worse Holmes' views and views directly derived from them are today commonplace - and actually dominant.

It is also a practical, real-world fact that commercial contracts are generally treated by their parties in exactly the way Holmes described. A company that enters into a contract to buy a certain amount of, say, coal from a coal producer does not see itself as morally obligated to buy that much coal. Rather, the decision to buy the coal will generally be treated as an economic matter along these lines:

If we buy the coal our net cost will be X, and if we don't buy the coal (and therefore breach the contract and obligate ourselves to pay the damages resulting from the breach) our net cost will be Y. Therefore, if X > Y, we will not buy the coal.

Nobody in the coal business will be shocked or surprised. In fact, to do otherwise would make other commercial actors wonder about one's intelligence. And the law (generally the Uniform Commerical Code) reflects these realities by assuming that monetary damages are normally sufficient remedy, and denying "specific enforcement" of the contract except in highly unusual cases. Ordinary people make such decisions every day - as when a homeowner walks from a non-recourse mortgage on a home that has depreciated or been destroyed by an earthquake. Indeed, for many months following the Northridge Earthquake the majority of home sales in the San Fernando Valley were forclosure sales. Many of those homeowners were perfectly capable of keeping up their home payments - it just wasn't worth while for them to do it on a house that had experienced, say, $100,000 in earthquake damage after already being hit with serious real-property deflation. Those home owners were "bad men."

Holmes' "bad man" approach to the law is even more accepted as usually (there are exceptions) being both the proper ("normative") structure of law and actual ("positive") practice, in the arena of international law. Nation states are generally thought to look out for their own interests - with the main question being how "enlightened" or "correct" their view of their own self-interest really is.

There is perhaps no arena in which the "bad man" theory is more dominant and casually accepted than the arena in which all of these factors favoring the approach align in a kind of grand, legal and commercial syzygy: international commercial trade agreements.

That is all by way of background.

The Man Without Qualities is no fan of the United States' just-rescinded steel tariffs. Those steel tariffs exhibit a law-abiding, "bad man" approach to the WTO. The US did not walk away from the law - it accepted the right of other parties to the WTO to impose countervailing duties, which is the remedy allowed to them. In exactly the same way a Holmesian "bad man" accepts the law's right to compel the payment of monetary damages for breach of a contract. That's the price of breaching the contract.

But its simply preposterous for EU trade commissioner Pascal Lamy to write today in the Wall Street Journal - with emotion whose genuineness is most comparable to that of the Walrus and the Carpenter expressed over the oysters they have just devoured:

But abuse comes at a price, and that price is systemic. The U.S. action may have already let the genie out of the bottle. Every protectionist move by others can now be justified with reference to U.S. measures. Many former arch-enemies of trade defense instruments, including major developing countries, are now among the heaviest users of anti-dumping rules. And there are plenty of steel-producing countries getting ready to cite the U.S. example to keep out imports. Unsurprisingly, there are also calls for fundamental reform of the trade defense sector in the context of the Doha Round.

Please. To insist that a country or other commerical contract party must actually perform under a trade agreement is all but equivalent to insisting that parties to such contracts are generally entitled to specific performance, not monetary damages - a position thoroughly rejected by commercial practice, legal theory and common sense. [Any argument that civil law establishes specific performance as the usual remedy for breach, unlike the common law preference for monetary damages, would reflect nothing but a naivete on the part of the one making the argument, since the civil law "preference" is so gutted with exceptions that in practice the result is essentially the same as the common law.]

Just by way of example: The EU has supposedly eliminated restrictions on imports of Japanese cars. But no Japanese car manufacturer thinks it can export unlimited numbers of cars to Europe - where consumers would love to buy them. Instead, the Japanese know that they must open plants in Europe and restrain their market share expansion. The actual EU stance towards Japanese car sales is like that of the United States - but much, much worse.

To pick another example: No sensible person believes that Japan does not practice the extensive non-tariff trade restraints that Japan (and it's more foolish-sounding apologists in the West) so violently deny, or that other Asian countries have not picked up many of these tricks.

One could go on and on. So what? Nobody is surprised by any of that that. Nobody is weeping on the pages of the Wall Street Journal that genies have emerged from bottles when Japan trumps up yet another "health and safety" regulation that stifles some import to the benefit of its Japanese equivalent.

Did the Bush Administration's steel tariffs mark a shift in US trade policy? Yes. It made them a little more those of the rest of the world. That's not necessarily a good thing - although it's humorous to see "internationalists" who argue so passionately in other spheres that the US should act more like the rest of the world fulminating over this Administration gambit.

It really asks a lot of even a hard boiled "bad man" to stomach the sanctimonious, disingenuous pretenses of Mr. Lamy and the carefully worded evasions of Herr Doktorprofessor Paul Von Krugman. [I have already noted in prior posts that Herr Doktorprofessor rarely argues from economic principles for free trade - he prefers to cite international law.]

The Administration's gambit may even have a strategic benefit for the American trade negotiation position. Mr. Lamy suggests that the gambit has resulted in calls for the fundamental reform of the trade defense sector in the context of the Doha Round.

Amazingly, Mr. Lamy writes as if such calls for fundamental reform were a bad thing.

UPDATE:

Messrs. Krugman and Lamy ask uo to believe that Europe is appalled over the supposedly illegal US tariffs, where the EU itself is constantly faced with this kind of report concerning its member states' flouting EU regulations:

The latest Eurobarometer to be released this week found that just 48 per cent of EU citizens viewed membership as a "good thing", down from 54 per cent last spring.

[E]ven the French were below half for the first time after months of battles with Brussels over tax cuts and illegal aid to ailing firms.