Thank you all for coming.
It's a pleasure to be here.
And let me congratulate you on the new school you have found.
And I still have to learn a bit more about it,
but it sounds incredibly interesting.
That's actually one of the main reasons
I wanted to visit and see how your program works
and what issues you deal with.
I sent the organizers a couple of things,
and they asked me to present this book, which
has been published already.
Actually, it's here.
I have a copy of it.
It's quite thin.
It's a bit of a long article or a short book,
but it came out with Cambridge University Press.
And to be honest, it's somewhat of a reflection
of my personal life story in the professional sense,
not the private sense.
Professional sense in that, as you said,
I was born in Belgium, trained as a European lawyer
with this idea in mind that the law is a science.
It's a discipline.
It's a set of rules that have to be complied with.
But then I started working for the WTO,
where you see the law in practice.
You see more of the realist approach to international law.
And then I actually left the WTO to take up
a professorship in the United States at Duke University,
where you see the complete opposite picture of how
you can approach law and of how the US legal academy analyzes
things about public international in a very
different way.
So really, this reference to European absolutism
versus American voluntarism is really
that kind of a contradiction that I went through myself.
I'll explain it in a moment.
And to exemplify this, this is the cover page of the book.
I don't know whether you've published books already,
but it's quite difficult to get a cover page
on an academic book, so I was quite happy to have this.
I don't know whether any one of you knows who this is, what
this represents.
No Americans in the room.
Well, I made it a bit more difficult.
This is Amerigo Vespucci, an Italian explorer,
and there's a whole controversy over him.
But it exemplifies a little bit that story
that I tell in the book of Navigating Between Two Extremes.
And just to exemplify that, it is really much more complicated
than you would think.
You may know that Amerigo Vespucci
gave the name Amerigo America to the continent
for the time that he was not the one who discovered the Americas.
But anyhow, I kind of like the picture of that as a cover page.
I know that most of you or all of you
will have to do a PhD thesis.
So also, when I do my publications
or when I talk to my PhD students,
I always tell them that they have to have one single question.
I think this is really important for a PhD, for a book.
So the question that I tackle in this book
is, how binding should international law be?
And you'll see the question is important,
and it's phrased very specifically.
First of all, I'm not asking whether international law
is binding.
I'm assuming that it is binding, and I'm asking,
how binding should it be?
And secondly, I'm not thinking or writing
about how to ensure compliance, how
to enforce international law, which
is a bit of an obsession of many international lawyers.
I'm rather assuming that we can enforce international law
and then asking the question of how strictly should we
enforce, protect international law.
Now, the answer that I give in the book
is at one level pretty straightforward.
I think that optimal protection of international law
means variable protection.
But it's definitely not obvious when
to present the thesis to traditional public
international lawyers.
I've been presenting this at several places
before it got published.
And it's kind of interesting to see
the reaction of different people to that question
and the answer I provide.
One type of reaction has been that just asking
the question of how binding should international law be,
European-style scholars have really
taken almost offense with the very question itself.
Asking that question is implicitly undermining
the bindings of international law,
because asking how binding should it be,
you kind of leave the door open for countries
to violate international law.
I don't know how familiar you are with the US legal academy,
but I got that reaction when I gave that book
or presented the book where I'm teaching now in Geneva.
That was actually my job talk.
But a similar reaction was received at a place
like Yale Law School, which is very idealistically
tinted, I would say.
Or they have a relatively European pro-international law
approach to the matters.
Whereas a second type of reaction I received
was very much, OK, the question you're asking
and the answer you provide, OK, that
may be a relevant question for domestic law,
where you have a sophisticated legal system.
But really, in the context of public international law,
where you don't have any centralized enforcement,
the very question and the answer is pointless.
When I presented the paper at Chicago Law School,
they were all saying, look, this is useless.
This is too refined.
International law is much more primitive than that.
International law is not binding in the first place.
It's not law, so what are you talking about?
So very different reactions to the question
and to the answer that I provide here.
And ultimately, the main thing I want to do with this book
is to make the point that public international law, much
like domestic law, needs sophistication.
And that we must examine public international law the way
we examine domestic law.
And one of the things we can apply to it is law and economics
is all kinds of theories of law and analysis
that we scrutinize domestic law with.
But somehow, when it comes to public international law,
the debate, in my view, is quite often one of ideologies.
You have one camp who is always in favor of international law.
The assumption is, OK, the more international law you have,
the better.
The harder the international law is, the more it is enforced,
the better.
That's kind of one ideal type, and I
refer to this as the European type of school.
Whereas another type really almost ideologically
is very critical of international law,
doesn't want to see it binding, doesn't believe in further
examining it.
So I'm trying to find a more objective analysis,
a more objective approach to think about these questions.
And the methodology I have followed,
and again, I'm presenting this to you somewhat differently
than I would present it to other people,
because I know you have to go through a PhD,
and that's quite of a difficult exercise.
But the methodology I used is to take what
I find one of the best law review articles ever published
by Calabresia and Melamed, property rules, liability
rules, and inalienability.
I took that template, which in US legal academia,
and I think anyone who has studied law and economics,
the starting point of many analyses.
So I've taken that article, analyzed it,
it's as old as I am, and applied it to public international law.
To be honest, I'm not a hardcore law and economics person,
but I find law and economics, the way it is used here,
incredibly useful.
Again, to have that objective analysis,
to kind of think objectively, cause benefit type,
we want to maximize welfare.
Let's think how we could work this out.
I mentioned here, I'm kind of a critical law and economics
person, because I see a lot of limits
to that analysis, which doesn't mean it's completely useless.
But especially when we will try and apply it to states,
I think it has quite a number of shortcomings.
And we'll have to be careful about those.
But again, I don't think that undermines,
or that should mean that we cannot apply the law
and economics approach at all.
We just have to be careful about it.
And I know its limits.
The other methodology I used, and it's really
offering kind of extremes, ideal types,
but to offer signposts of two extremes.
I've called them European absolutism,
American voluntarism.
But it's quite kind of useful to have these extremes in mind
to present your own position, which of course is, in my view,
in my case, somewhere in between.
The other thing I've put up for myself
to really make this a normative analysis,
so to think about how strongly should international law
be enforced protected.
So you make an objective analysis of how
should the world be construed.
And then I've tested that against how
public international law is written today,
to see whether it is what it should be.
And I've really tried to check that normative outcome
to the law in the books, but also
to public international law as it is applied,
or as it plays out in action.
Who has read this article by Calabresi and Melamed?
Is it as popular here as it is in the US?
We just discussed it briefly in our master class.
OK, because I don't know whether you've had this experience.
But it doesn't happen too often, especially now,
because there's so many things published.
For me, reading that article is like, wow,
eye opener, it's very simple.
You can apply it to everything.
And I thought immediately, it could
be interesting to apply this to my own field,
international law.
Of course, if you apply an existing model to something
new, you have to adapt it at some level.
So I made, instead of two steps, I really
introduced three steps.
And the third step was not in the original paper,
because it was domestic law, so it was not really an issue.
But essentially, the point is that think
of any legal system, including international law.
And really, what we have is a universe of entitlements,
not rights entitlements.
The first question is, we have a conflict of interest.
We have to allocate entitlements.
You have the right to trade.
You have the right to clean environment, what have you.
We allocate the entitlements by treaty, in our case,
by custom, or by accord ruling.
The problem we have in international law,
as opposed to domestic law, of course,
is the question of consent.
We don't have a world government that
will allocate entitlements to different governments.
They are allocated by consent, which really
limits the way we can allocate entitlements,
the way we can deal with collective action, for example.
That's the first step.
So when you've allocated entitlements,
the next question, the second step
is, how strongly do you protect these entitlements?
And there's two issues there.
One is, do you allow transfer of the entitlements?
In most cases, we will.
And the property rule, we will allow transfers.
You and I sit together, and I sell this computer to you.
I can transfer my entitlement to the computer to you,
and you pay me a price for it.
It's property rule protection.
In some cases, though, transfer is not permitted.
I have an entitlement, and I cannot sell it.
It's inalienable.
Example of kidneys or selling yourself into slavery,
I have an entitlement to my body parts.
I cannot, on the most legal systems,
sell my kidneys or my lungs, what have you.
Certain entitlements cannot be transferred.
A third type is where the entitlement can be transferred.
And actually, even worse, some collective intervention
can force the transfer.
So the idea would be that I have my computer.
If it were to be protected by a liability rule,
it means that you can just, at night,
take it away from my home, steal the computer,
and just leave, I don't know, 200 euros
behind the fair value for the computer.
So the entitlement can be transferred.
Actually, it can be unilaterally taken,
as long as you compensate or pay for it.
That is an entitlement protected by a liability rule.
An example is, OK, when you drive a car,
it's really hard to make sure to bargain with everyone
you can hurt or hit under a property rule.
So what we have in most risky activity
is you go ahead and engage in the risky activity.
But if you hurt someone, you have to pay for it.
Car accident, you pay for it.
So that entitlement to be free from bodily harm
is protected by a liability rule.
Now, the third step, then, is we have
allocated the entitlement.
We have set the level of protection.
The third step, and for us at International,
this is an important step, what do we do if, somehow,
the level of protection is not respected?
So what do we do if you steal my computer in violation
of the property rule?
Or if I, anyhow, sell my kidney?
Or if, under a liability rule, the guy who hit me
and damaged my car doesn't pay compensation?
So this is backup enforcement or sanctions in case of breach.
And again, we have a problem in international law
because, also, under the third step,
we don't have any centralized enforcement.
We don't have a central government
or a central court system that could
impose sanctions or fines.
So this is the model, basically.
Long story, but ultimately, the position
that I take is that, as much as in domestic law
and international law, as well, the fallback protection
should be property protection.
It really aligns with the idea of welfare maximization.
To allow people to contract will maximize welfare.
If I'm willing to sell my computer,
you pay something for it that I'm happy to sell it for,
everyone is happy.
It aligns with contractual freedom,
applied at a state to state level.
It really takes care of the diversity between states.
We don't want to have some world governments dictate
what states have to do.
Plus, and very importantly for international law,
if you go with a property system,
you just transfer entitlements.
It's done at a bilateral level.
So it requires the least amount of collective intervention.
Now, if you check the current protection of international law,
it really is property protection.
Read the articles on state responsibility,
customary international law.
You have to seize the breach.
If you've breached an international obligation,
the remedy is specific performance,
you cannot pay your way out.
So it is protected by a property rule, not by liability rule.
One of the difficulties I then faced,
and I'll come back to this in a moment,
is there's a bit of a puzzle here in that on the books,
there is clearly protection by property rule.
But then if you look at the backup enforcements,
the sanction, what we see is mere compensation,
or one-to-one retaliation, as I refer to it.
Again, those of you familiar with the remedies
in public international law, if states do not
comply with specific performance or cessation,
they continue to breach the other state the victim can
retaliate, proportional countermeasures.
So the question is, how can we achieve this relatively high
level of property protection with a relatively low backup
enforcement of mere compensation or one-to-one retaliation?
And domestic legal systems, a property rule
is protected not just by one-to-one retaliation.
If you steal my computer, you'll be fine.
You may be put in prison, what have you.
In international law, it's really
something of a lower scale, just compensation
or one-to-one retaliation.
Now, in my view, and this is one of the main insights
I tried to offer, this actually does
work in international law, this idea of mere compensation
or tit-for-tat countermeasures.
It can achieve property protection,
because we should really not forget
that international law has formal remedies,
but also informal remedies, that if you violate
international law, it also comes
with informal remedies, which I refer to as community costs.
Reputation, the fear of emulation, peer pressure,
belief and values represented in international law,
you comply or states comply for all of these informal reasons
as much as they comply for the formal remedies.
So this is the core point, that really also international law
should be protected by a property law.
At the same time, and this is where in my view
it gets interesting, as I said, we
need to think or start thinking about variable protection.
We need to realize that as much as in domestic law,
certain international entitlements
ought to be protected as inalienable entitlements
or under reliability.
So some of them need to have a higher level of protection,
some of them a lower level of protection.
And essentially, the reasons that we're
given in that law review article to move to inalienability
or to liability, in my view, can be applied equally
to international law.
So the reasons, for example, to move to inalienability.
So when is it exactly that we should prohibit transfer?
When is it that we should stop people from selling their kidneys
or transferring entitlements?
The theory there is that you should do this, again,
to maximize welfare, to avoid social costs,
if you have very high externalities.
In international law, think of cross-border environmental
damage or nuclear bombs or very serious weapons.
If the externalities are enormous
and no one who benefits from the activity
would ever be able or willing to pay for all of these externalities,
the best thing is to just simply prohibit transfer.
Now, a second reason you see for inalienability
is the idea of moral values or that certain entitlements cannot
be priced.
So that's the example of kidneys or of selling yourself
into slavery or perhaps of quite a number of international law
rules that are of the USKOGANS type, which are inalienable.
You see the link between inalienability and USKOGANS.
A third example of a reason to move to inalienability
is the idea that the legal system has to be paternalistic in the sense
that you want to prevent yourself later on from doing certain things.
That's what we normally do with constitutions.
So you have self-paternalism.
I want to tie my hands.
I have this entitlement.
If you're an occupied territory, there are certain things you cannot do.
You're too weak.
So the idea is you cannot transfer entitlements
because it would harm yourself.
Or you could have another type of paternalism the way we have it
with minors in domestic law.
They cannot sign treaties or really transfer their entitlements.
So in certain cases, if there's coercion or in other types of situations,
we do not recognize the transfer.
Now, the other extreme can also happen.
And that is as interesting I find.
There may be situations also under international law
where we want to force a transfer.
Remember, the liability rule is the one way you can just unilaterally
take the entitlement and pay for it.
Like a take and pay principle.
Now, in domestic law, three reasons are given to impose liability protection.
And again, the idea is that there's a market failure in the sense
that if the transfer would happen, we would maximize welfare.
But somehow, the transfer has not happened.
And the traditional example is that of public domain.
So we have, imagine a city of Hamburg.
There's a particular location in Hamburg.
There's a plot of land.
And you want to make a park out of it.
So the people who own the land have an entitlement to the land
but may want to sell the land so that you can make a park out of it,
a park that will benefit the entire community.
Of course, the city will have to pay for the land,
will have to negotiate transfer of the land.
You may have a situation of holdout.
So even if the population of Hamburg would be willing to pay a lot of money
for the park, they really want this park.
Their benefits would outweigh whatever interest
that the current property owners have in the land.
So the transfer should happen.
It's welfare maximizing.
But you have a holdout.
If you own a small piece of land on that entire property,
you may want to holdout to really make sure that the city council pays you
more and more money.
You just don't want to close the deal.
So if you have this situation of a holdout,
because you realize as a seller that they really want this,
so I'll be asking a lot of money for this,
the rule is that you can, under domestic law, expropriate the property.
So remember that.
So in that sense, the transfer happens, but it's forced.
The government intervenes, takes the property, and pays you for it.
Liability protection.
To deal with strategic behavior, to make the transfer happen,
to basically overcome the situation of holdouts.
In international law, we have similar situations
where it's really difficult to make the transfer happen,
and where sometimes states can unilaterally take the entitlement
and just pay for it.
In the WTO, you have this investment protection,
and you have it more and more in environmental protection as well.
Again, this is done for good reasons if certain conditions are met.
The second situation where you may have liability protection
is where it's not the owners of the land who refuse to sell,
but it's those who will benefit from the park in Hamburg
who refuse to pay for buying a land.
This is the free ride problem.
So if you're a citizen of Hamburg, you may think,
well, the others will pay for the park,
and then I'll just sneak in and also benefit, enjoy the park.
You'll free ride, let them buy it, and you benefit from it as well.
To deal with this, in domestic law, we have taxation.
The city of Hamburg imposes a tax, and with that money,
it buys out the property and makes a park.
Free ride is solved because you have centralized government,
you have taxation.
If you think of international law, of course, free riding is very common.
Think of cutting carbon emissions.
Some of them do with other stones.
The others could be seen as free riding.
There is no central government.
We cannot say, somehow, through a world government, we tax the world,
and then we will impose a carbon tax or something.
So to deal with free ride is really difficult in international law,
and it doesn't work to impose a liability rule
because we don't have a centralized government.
So that reason in international law is really out.
But the third reason, transaction costs, is there.
And again, quite prominent in international law.
So the reasoning there is that, OK, we would like to see a transfer.
A transfer would make everyone happy, but somehow it's very difficult
to make it happen.
The car accident example is a typical example.
You know, I can't, before I drive a car in the streets of Hamburg,
I cannot go to every single car that I may potentially hit and negotiate,
somehow beforehand, how I will deal with any possible accident.
Transaction costs would be just too huge.
You would have to negotiate with too many people.
So rather than that, we'll just have a liability rule.
You drive your car, if you hit someone, you pay for it.
Again, in international law, you see this, especially
in multilateral treaties, international organizations
with a lot of players, they'd be difficult to renegotiate the treaty.
So sometimes, for that reason, you allow for the take and pay principle.
Again, in the WTO, I think we see this quite often.
So this is the setup, and very quickly, the application
of the domestic law theory to international law.
Just to highlight a few things, inalienability and liability clearly
require collective intervention.
For inalienability, you have to have someone there
to prevent people selling their kidneys or occupy territories signing
treaties they shouldn't.
Same thing for liability.
If you just tell people you take and pay,
someone has to control that people pay.
Someone has to collectively value the entitlement.
Sorry, I'm just going to interrupt you.
So just in question, can I give you
an example for this case of transaction?
In international law, what do you call for the set of WTO,
for example, because I probably was quite mentioning what you really are.
Yeah, so for example, the WTO case of protecting tariff commitments.
OK, so as you know, under WTO law, you make commitments not to have
tariffs above a certain ceiling.
This is an entitlement that was allocated.
The question now is, what if I do want to impose a higher tariff,
because I have an economic crisis or whatever?
Normally, under property rule protection,
the requirement would be you negotiate with everyone.
And if everyone agrees, you raise your tariff
and you somehow give something in exchange to the other members.
This may work if you have a bilateral treaty or three parties.
And the WTO has 153 countries.
So you'd have to negotiate with everyone.
Transaction costs could be really high.
Plus, certain countries may engage and hold out.
They may say, OK, I know this guy wants to raise tariffs,
so I really want a big price.
So to deal with that problem, if you look at the GATT WTO agreement,
there's a process of renegotiation of tariffs.
So the first step is you renegotiate.
You try to agree with everyone.
But if that doesn't work, you can unilaterally raise your tariff
and then pay for it.
So this is really a liability rule.
You can unilaterally take the entitlement and pay for it,
either by reducing your tariff in another product
or suffer retaliation, rebalancing of the concessions.
So that is, I'll come back to it with more example,
but I just wanted to set the theory out first.
I don't know how much you need to pay for it.
Yeah, so again, the idea is that it has to be equivalent
to whatever your tariff increase is.
So there's a requirement of equivalence.
And then again, as I said, it's really very important
that we have a check on this, that someone checks
that the payment is sufficient, that it is objectively defined,
that we don't have a system where I say, OK,
I will raise my tariff and I will pay you
a fraction of the cost.
So the idea is, and that's why it's not easy to have
a workable liability rule, you need
to have collective intervention.
For it to work, you have to make sure
that the compensation is accurate.
Otherwise, we don't have maximizing welfare situations.
So this is where the law in economics comes in, I guess.
This whole idea is that under all three levels of protection,
property, inalienability, liability, the outcome
is very too optimal in the sense that the cake is bigger
and no one is losing out.
So we have deals happening or forced upon people,
but no one is losing.
If your entitlement gets taken, you
will be fully compensated for it.
But the one who takes the entitlement
will evaluate more than you do.
So there will be a bigger cake because the one taking it
will be happier than before, so to put.
So it raises some similarities of liability idea
with the notion of efficient breach,
but I think it's somewhat misleading.
So liability, yes, means you can take it and pay for it,
but the liability rule is written within the contract.
The example I gave of the WTO is written in the contract.
It's perfectly legal and fine for me to raise my tariff
and then to pay for it.
Most people, when they think of efficient breach,
they see it as, OK, I violate the contract,
but I really don't care.
The breach is efficient because I pay off the victims.
Ultimately, in economic terms, the outcome is the same.
But in legal terms, when we set up a liability rule
and we take and pay compensation,
we really act within the contract.
We don't breach.
OK?
Now, before we move to inalienability,
for whatever reason, any of the three reasons I gave,
and really the analogy with international law
here is obligations of Juscogens or collective obligations,
like human rights, where you cannot,
if you're a party to the European Convention on Human
Rights, you cannot agree between two nations
to change the convention.
You need the agreement of everyone.
So in that sense, the entitlement
has inalienability features.
In other treaties, and I think the WTO treaty,
you can change between two parties
for as long as you don't harm third parties.
But really, before you make a treaty inalienable,
or before you kind of promote a rule of international law
to the status of Juscogens, you really
have to be careful about these caveats.
First thing is that because international law
requires consent, if you set up a rule as really strict,
you can never change it.
You can't contract out of it.
Such a strict rule may attract little participation.
Or if some nation participates in it,
it may exit whenever the strictures become too much.
In international law, we have a lot of incomplete contracting
and a lot of demands for flexibility, which really
are kind of the opposite pole of inalienability.
For those people who question the legitimacy
of international law, to make international law written
in stone will only enhance this problem of accountability
legitimacy.
And in my view, very importantly,
if you think now of how currently Juscogens is defined,
they really do it based on some subjective assessment
of the value, how important it is
to protect human rights or the environment or what have you,
and based on the importance of the entitlement,
you put something in the class of Juscogens.
Again, the way it should be done, in my view,
is far more objectively, you need to show market failure.
The fact that a value is important,
say environmental protection, does not
mean that you have to protect it by an inalienability rule.
Quite often to protect it differently will be optimal.
So really to move away from this idea of, OK,
whenever something is important, it
has to be Juscogens or inalienable
to really think more objectively about it.
And the reasons I gave you to move to inalienability
or liability have to be present, not just
some subjective assessment.
Because if you think of it, at the end of the day,
a lot of rules of Juscogens or collective obligations,
those that are inalienable to some extent,
are really made inalienable without thinking
about the third step of backup enforcement.
Nations put something out there as really important,
but then they don't back it up with sanctions.
And the risk is that if you set up these community obligations
inalienable entitlements without community enforcement,
you may actually make the situation worse than
beforehand, OK?
And a lot of Juscogens rules, in my view, are of that nature.
They are set up as really important,
but there is no backup enforcement,
making ultimately the situation worse rather than better.
Caveats for liability protection,
as we just discussed really before you do this,
before you say, look, anyone can just take computers, books,
items, whatever, and pay for it.
Obviously, you need to have some third party adjudication.
Someone will have to check what is being taken,
and then make sure that the compensation is accurate.
So we need to have collective valuation.
We must make sure, and I would say
under a lot of liability rules in the WTO and investment
protection, there's a risk to undervalue.
So you have a liability rule.
Countries take entitlements, but they
don't pay the full price for it.
And of course, if you don't pay the full price for it,
the victim is losing, and we don't
have a Pareto optimal outcome, because the victim is losing,
he's not fully compensated.
Now, liability protection, before you move there,
you have to really make sure that you can value
the entitlements or the goods.
So as I said, certain goods are unique or moral values
that you cannot put a price on.
Before you just open this option for countries
to take entitlements, you need to think also
about what effect impact will it have on the idea of stability.
Because again, if you have a liability rule, a take
and pay principle, without the structures in place,
it can fall back to a situation of the law of the jungle,
where everyone just takes what he wants
and pays a little bit for it.
So you have to be really careful.
Liability rule can be efficient, but you
have to have the conditions method I did something up here.
Very importantly, in international law,
we have strong and weak states.
Take and pay principle can work,
but we have to make sure that it works equally for weak states.
And that it's not just the US and Europe taking
entitlements and paying for it, but that also small countries
can do the same.
That if they want to take an entitlement,
that they can do it, and that they can pay for it
without retaliation, or that they have the money or the capital
to do it.
Some other restrictions that we can come back to later.
But going to the third and final step.
So I've shown that we need to think
when we think of how strongly should we
protect international law, how binding should it be.
We need to think of allocating the entitlements.
Think about how we protect them.
And then finally, how do we structure the sanctions,
the backup enforcement.
And here we have a bit of a paradox,
because normally in domestic law,
when we have stronger protection,
say inalienability or property, we
need to back it up with sanctions.
The stronger the level of protection
is, the more sanctions one would expect.
And international law, though, it's pretty uniform.
Different entitlements, if you breach them, the sanction,
as I said, is really compensation
or one-to-one retaliation.
So the paradox, and this is paradox number two here,
but I've already dealt with it to some extent.
The paradox is, how can we really,
under international law, claim to have a property rule?
Remember, you can't take my computer.
I need to consent to sell my computer to you.
How can we have this system, which
is pretty strong, with that relatively weak backup
enforcement, compensation or one-to-one retaliation?
As I said, to me, the trick is that we
need to think beyond the formal remedies,
one-to-one retaliation.
Yes, it's the formal remedy.
If I violate international law, I will be retaliated against.
But there's also a lot of informal remedies,
community costs that will be triggered.
If I violate, if I do not protect the entitlement
the way it should be.
And those community costs, and here it
becomes a bit difficult, but I think that's a key insight.
These community costs are triggered
not because the one violating the rule feels bad about it.
The community costs are triggered
because the outsiders, the other states who
see the violation happen, believe that there is a violation
and that, as a result, the violator is losing reputation,
will suffer peer pressure, what have you.
And this community cost, which is based
on the perception of the outsiders, the victims
more than on the perception of the violator,
the community costs are really triggered or valued
based on how strongly you protect and step number two.
Let me try to explain this.
If in step number two we have liability protection,
like in the WTO example I gave, so my compensation
will be the price that I have to pay
for taking your entitlement.
If I pay the full price, if I raise my tariff
and I compensate, it's the end of the story.
I'm not doing anything bad, so no community costs
will be triggered.
Whereas if the entitlement would be protected by property
and I suffer retaliation, or I have to pay compensation
not as the price for the entitlement, but as a sanction,
then for as long as I'm paying the sanction,
suffering retaliation, on top of the sanction
will come community costs.
Is that clear?
So it's really, it depends on step number two
whether or not community costs will be triggered.
So it would really be wrong to look at step number three
and say we see just one-to-one retaliation or mere compensation
and to derive from that, to reverse engineer
and think that under step two, we have a liability rule.
You may have one-to-one retaliation or mere compensation
under both a liability rule or a property rule.
The difference is that under a liability rule,
it will be the price to pay, no community costs.
Whereas under a property rule, it will be a sanction.
So you have community costs added onto it, OK?
Now, I think this is kind of difficult,
but the best practical example that I found to see
the difference between price and sanction
is a study that was done once on daycare centers in Israel, OK?
And the problem was in these daycare centers at 4 o'clock,
kids had to be picked up.
The reality was that a lot of parents just came late, 4.35,
and the kids were there.
The teachers wanted to go home.
It was really bad.
So they thought of a system, OK, how
can we deal with that problem?
What kind of a backup enforcement can we put in place?
And what they did was they charged,
I think it was $3 or $4 for each hour
that parents would be late, OK?
Now, guess what the outcome of that rule was?
Exactly.
So it's really crucial to think about whether that $3
is a sanction.
You have to pay $3, and all the other parents
are looking at you and thinking, this is a violator,
so you have pressure building up.
Or whether you kind of introduced the $3
as cheap babysitting, right?
And the study showed, indeed, that rather than more parents
coming to pick up their kids at 4,
you had more of them leaving them thinking, OK,
we'll pay $3, and that's the end of it.
So it depends on how you structure something,
the level of the sanction, how you introduce it.
But if it is a price, this formal remedy
can crowd out informal community costs that I was referring to.
Or if it is a sanction, it can really be quite effective.
So that's really thinking about the third step,
backup enforcement, and how it can play out differently.
So we really can't look only at the third step, no, the $3.
We need to link it up with step number two.
A couple of examples, and that will hopefully
clarify some of the points I was trying to make.
As I said, in the WTO, we have quite a good laboratory
of different entitlements out there.
Some entitlements are protected by a liability rule.
I mentioned tariffs.
Who of you is familiar with WTO law here?
Not many.
I mean, there's a number of other situations where you can,
again, you can just increase your tariff
or reintroduce trade restrictions
and essentially pay for it.
Think of the three bucks you pay,
and under the WTO system, it's a liability rule.
The $3 you pay is the price, and it's the end of the story.
It's perfectly legal acceptable.
That's a liability rule.
Now, why have they done this?
How can we explain this liability structure?
As I said, we have holdout issues, transaction costs.
Nations in the WTO, when it comes to trade policy,
they want to have some flexibility.
If an economic crisis hits them, they
want to be able to pay their way out.
And crucially, we have the dispute settlement
understanding.
We have this mechanism in place, which
you really need for a liability rule that
can check when there's a violation
or when something, a transfer happens,
and can also put a price on it, an objectively defined price.
Crucially, and there's quite a bit of debate on this,
but I really think that all of the other WTO entitlements
are protected by property rules.
So you have two sets of entitlements in the WTO.
The fallback is really what I explained earlier, property
protection.
If you violate the rule, you can't just pay your way out.
You have to comply unless you renegotiate
or you have a bilateral settlement.
So property protection is the fallback rule.
And there is no inalienability or collective type
of obligation in the WTO.
So we can have a transfer.
If the EU and the US want to reintroduce certain trade
restrictions, in my view, they can for as long as they agree
on it and they don't harm third parties in the WTO.
So the entitlement is transferable.
But if there's no agreement to transfer the entitlement,
property protection requires consent.
And the remedy in the WTO is really
to comply, to implement, to change your legislation,
to make it in line with WTO rules.
And why did they do this?
Very importantly, to have this stability that I refer to,
to make commitments credible.
Because one risk with liability rule
is that anyone can just take and pay.
And also, because of the principle of equality,
weak nations that I mentioned earlier,
if you know the WTO system a bit, the US and the EU
can play around with these tariff bargainings
and paying for breaches.
If you're a small country, it becomes much more difficult.
OK?
So here, and this is really going back
to this daycare example I gave.
Some people are saying, perhaps in the WTO,
where you only have retaliation if there's breach.
There's no obligation to pay compensation.
It's kind of unique in international law.
You only have to suffer prospective retaliation
if you violate the rules.
You don't have to pay for past harm.
Some people are saying, perhaps we
should introduce compensation in the WTO
to beef up backup enforcement.
Now, one risk, and it depends on how you present it,
but one risk is that if you say, OK, you
have to pay X amount of dollars for a breach of the WTO,
one risk is that people will, or some countries,
may see it as a price.
You pay for breach so that we may see more breaches.
They just pay for it, and that's the end of the story,
rather than perceive it as a sanction.
Because normally, most people who
want to have compensation added as a remedy
would do so to make backup enforcement more strong.
But as in the daycare example, it could actually
work the opposite way.
Very quickly, in the Kyoto Protocol, for those of you
who do environmental law, again, a very interesting mix
if you apply these theories here to what is happening.
Clearly, under the Kyoto Protocol,
the parties that have to cut their emissions,
they each have a cap.
And you cannot touch on that cap.
It's not transferable between two Kyoto parties.
To that extent, it is inalienable.
But as we all know, within your cap, you can trade.
You can exchange emission allowances
between Kyoto parties pursuant to a property rule.
So a transfer can happen.
And that is liability protection.
Rich nations can continue to pollute, but pay for it.
And how do you pay for it?
You just do projects in developing countries
under the clean development mechanism.
And you basically, under a liability rule,
again, perfectly fine within the structure,
you continue to emit carbon, but you pay carbon allowances
or you buy carbon allowances on the market to make up for it.
Again, this liability rule or inalienable protection
of the caps can only work if we have a collective verification
system, clean development mechanism board, CDM board,
and if we have serious backup enforcement when it comes
to the caps, for example.
And we'll see how seriously they are complied with.
But in 2012, calculations will be made.
And if you don't meet your cap, for the next period,
there's a sanction of 30%.
So again, as I said, the fact that some rules may be protected
by a liability rule doesn't mean that they are less important.
It just follows an objective analysis of when
should be forced transfer.
And for some issues, it really makes sense to protect them
by liability rules.
Environment is a good example.
Intellectual property is also an increasing example
where rather than protect it as property,
we set up databases.
And people who want to use the invention just pay for it.
Anyone focusing on investment protection?
Again, very similar analysis you can make.
If you look at the NAFTA bilateral investment
treaties, a lot of breaches, the only thing they trigger
is an obligation to compensate.
The poor example being expropriation,
which is fully permitted under international law,
but you have to pay for it.
Same thing as a liability rule.
Again, you can apply all the arguments
to the example of investment.
Investment is kind of the perfect example
for a liability rule because it's a fungible good.
It's about money.
It's about how much money did you sink into a country.
You can calculate this.
You can compensate and offer compensation
as a price to pay for expropriation.
But remember, if you set it up as a price,
you won't have community costs.
If you set up your compensation as a sanction,
you'll be a law breaker, and community costs
will be triggered.
So as a sanction, it can really meet the objective
of property protection.
Again, if we set up a liability rule,
we have to be very careful about calculation,
getting the calculation right.
If Argentina expropriates the airlines,
as it did a couple of years ago, the case pending,
they have to make sure they can expropriate,
but the expropriated, in this case,
Spanish investor has to be paid for it.
Only then can we talk about a liability rule that
maximizes welfare.
Sure, Argentina may have public reasons
to expropriate the airlines, but remember,
we are seeking Pareto optimality,
so they have to make sure that the victims are
paid for that expropriation.
Quite interestingly, that approach also
explains why, in investment law, we have private standing.
Corporations can sue directly against governments, again,
in my view, to make sure that we have this risk premium
reduced, and that we have victims compensated directly.
The company directly gets money, that it
doesn't have to go through a state-to-state mechanism.
I know you are doing research, and basically, for me,
I was just thinking about this before coming here,
typing up a few questions that I think require further research
and could be examined in the next step.
First one on my list is, OK, I focused in that little book
on level two, step number two, liability, property,
and alienability.
As I said, a lot of work needs to be
done on step number three, sanctions.
How should you structure sanctions?
How high or low should they be?
Like in the Kyoto Protocol, why is it 30%?
Why not 20?
Why not 50?
Law and economics has all kinds of theories about this.
Some people say you just look at the chances of getting caught,
and at the cost you impose by violating,
and then you just multiply the cost
by the chances of getting caught.
Really, to think about how should we
structure backup enforcement?
What level of sanctions is optimal?
As I said, quite often one-to-one retaliation
will be OK, but perhaps in other cases
we need more or less sanctions.
Secondly, and this is crucial for any liability system,
we need to have the valuation right.
Read any WTO report, investment arbitration.
We lawyers, and I assume most of us here are lawyers,
we love to talk about when is there a breach
and analyze the breach.
And then when it comes to calculation of damages,
a couple of pages, just we add up the two
and split it in two or something.
Very little attention, too little, in my view,
is now paid to calculating damages.
If you want to have a system of liability rule that works,
we need to get these damages right.
In investment law you see a huge improvement now.
In the WTO as well, they have to calculate retaliation.
A lot of improvement as opposed to 10 years ago.
Another question, I've been talking about entitlements,
rules that are binding, and how to protect those.
Now the next step, of course, is what about soft law,
non-binding entitlements?
Because all of these entitlements, in my view,
even though they may not be legally binding,
if nations breach them, these breaches
may also trigger the informal remedies I refer to,
like reputation costs, what have you.
So in some situations there may be very little difference
in terms of formal and informal remedies combined
between a legally binding rule and a soft norm.
A soft norm may actually be complied with more
than a legally binding rule,
depending on these informal remedies that may be triggered.
So for me to say that if something is non-binding,
international law plays no role, I think that's wrong.
I think international law does have a role to play
to set and declare formally whether or not
something has been violated or not complied with.
So monitoring is crucial.
And then to think about these informal remedies
that I refer to.
Another question, remember, and this is a huge one
that I'm working on now with a number of projects.
This idea of consent, we have collective action.
Remember, allocation of entitlement needs requires consent.
If we have climate change or something where, you know,
we all need to work together to solve the problem,
how are we going to do this?
How do we allocate entitlements in a way
that deals with collective problems?
Networks, think of the G20 of the OECD,
setting out guidelines and then imposing them
on the rest of the world is one way
that we see happen quite often now.
The question is, you know, this kind of deviation
from the consent rule, is this a problem?
Is this an accountability problem
or is it just the perfect solution
to the collective action problem?
What we see also, and in my view,
that's the future of action on climate change
rather than a centralized treaty
that dictates what everyone has to do.
This type of collective action seems
to be incredibly difficult to achieve.
We see more of, you know, confiderations of states
that sit around the table and do their own stuff
to fight climate, and then there's an agreement
that, okay, what China does in terms
of its environmental policies is acceptable, is equivalent,
is equitable as opposed to what the US, the EU are doing.
So you don't have an international treaty,
you just have kind of a loose agreement
on equivalence to deal with the problem.
And then finally, and I've mentioned it several times,
to me the future, the more sophisticated
international law becomes,
the more liability, the more inalienable schemes
we will see.
So it's now, the next step for me would be
to look at some of these specific fields
and see whether it's good or not a good idea
to move to any of these schemes
and then to think about how should these schemes
be structured to make them optimal, basically.