BSc International Business and Politics ORDINARY EXAM: Business and Global Governance - Home assignment Course coordinator: Susana Borras Assignment 1 Research Question: Are the outcomes of the TRIPS and MAI negotiations in the public interest? By Annkatrin Mies CPR: 270490-3564 Handed in on the 4 th of April 2017 Number of pages: 10 (12, incl. front page and bibliogaphy) Number of characters incl. spaces: 22.743 Copenhagen Business School 2017
Are the outcomes of the TRIPS and MAI negotiations in the public interest? 1. INTRO This paper compares the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Multilateral Agreement on Investment (MAI) to analyse if the respective regulatory outcomes are in the public interest. For this purpose, regulatory capture theory (RCT) by Mattli and Woods is applied and complemented by a look through the lens of an idealist understanding of public interest. TRIPS was signed in 1994 as a founding element of the WTO (Archibugi and Filippetti 2010,138). TRIPS created internationally harmonised standards for IPR protection, provides enforcement procedures at intergovernmental level and a dispute settlement scheme (ibid). Initially, some developing countries, such as India and Brazil, contested the inclusion of IP in the GATT, but gave up their protest when faced with US pressure (Sell 1999,185,187). The MAI draft agreement, initiated in 1995, attempted to establish global standards for non-discriminatory treatment of investors while granting them full operating freedom. It also included protection from expropriation, a right to due legal process and compensation through international investor-state arbitration mechanisms (Walter 2001,59,60). MAI was negotiated between the members of the OECD and allowed for later accession of non-oecd countries. The negotiations were stopped in 1998 after NGOs and other civil society groups campaigned heavily against MAI causing negative media publicity (ibid,61). This paper is structured as follows. The next section outlines the framework of regulatory capture by Mattli and Woods, followed by a brief literature review that contextualises the theory. The third part analyses the cases by applying the framework. The fourth section takes a look at the cases through idealist understanding of public interest. After assessing the theoretical framework, it is concluded that the outcome of the TRIPS negotiations favour narrow interests due to regulatory capture, while the failure of MAI was in the public interest. 2. THEORY 2.1. RCT According to RCT, different intersections of supply and demand for change lead to regulatory outcomes that either lean towards serving the broad public (common interest regulation) or narrow interests (regulatory capture) (2009,4). Regulatory capture is the control of the regulatory process by those whom it 1
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 as a whole. (ibid,12). Hence, capture results either in the absence of regulation where rules would have imposed costs on or eliminated privileges from capture groups; regulation that is inadequate to safeguard broad societal preferences; regulation that on paper meets these preferences but is not enforceable or enforced; or, finally, regulation that eliminates present and future competition for capture groups, thereby maximizing their rents. (ibid). The definition of public interest differs between three schools of thought. The idealist branch defines public interest as the course of action which is most beneficial to society as a whole (ibid,13). The rejectionist branch does not attribute any importance to public interest as they do not believe in the concept of the public, but only in individuals and special interests with heterogeneous preferences over regulatory outcomes and means (ibid). Mattli and Woods follow the proceduralist school, which associate public interest with the regulatory process itself. Regulation is in the public interest if certain standards of due process are met, including a deliberative process granting everyone likely to be affected by the regulatory outcome a fair and equal opportunity of consultation and involvement (ibid). Building on this proceduralist understanding, Mattli and Woods propose a framework where not only supply-side conditions of i.a. due process must be met, but also certain demand-side conditions. The supply-side consists of the drafting, implementing, monitoring and enforcing of rules (ibid,17). The institutional context in which these regulatory processes take place can be extensive or limited. An extensive institutional context is characterised by open forums, proper due process, multiple access points and oversight mechanisms and promotes public interest regulation. A limited institutional context with club-like, exclusive, closed and secretive forums, on the other hand favours regulatory capture (ibid,14). On the demand-side, information, interests and ideas play a crucial role. The asymmetric distribution of information about regulatory proposals, technical expertise, financial and organisational resources can hamper due process mechanisms (ibid,21). Yet, in addition to proper information, groups or individuals also need to be motivated to act for change (ibid). This motivation is stimulated by the diffusion of information about the social cost of capture, but pro-change groups also need to build broad alliances with public or private entrepreneurs in order to be successful (ibid). These entrepreneurs might be able to unite pro-change 2
forces around a convergence of interests or driven by particular sets of ideas to remain actively involved in the lengthy process of regulatory change (ibid). Public interest regulation is only possible when an extensive institutional supply is met by sustained demand. 2.2. Literature review RCT is part of the diverse literature in the broad field of business and global governance (BGG). In general, works in BGG can be understood along an agency-structure divide, where some place business actors at the centre of their analysis, while others seek to theorise the underlying structure of global governance. RCT is part of the governance stream of literature. Yet, various contributions from both streams can complement and deepen the understanding of the central concepts of capture and public interest in RCT. To begin with, Baker (2010) also models regulatory capture in the context of global governance. The four mechanisms of capture that he identifies are also considered in RCT. The institutional design, including the concept of revolving doors, is captured by the supply-side of RCT. The concentration of material resources and direct lobbying, the political salience of an issue, as well as intellectual capture of a matter including technical expertise, networks and personal connections are captured by the focus on interest, information and ideas on the demand-side. Drawing on Bouwen s (2002) valuable insight into the logic of access can enhance the understanding of regulatory capture, because unequal access to regulatory institutions can hamper due process. Bouwen argues that in return for access to a regulatory institution, business interests must provide access goods, such as expert knowledge or information about encompassing interests, as demanded by that institution (ibid,369). Turning to the demand-side, Pagliari and Young (2014) make a similar point to RCT about the importance of interest coalitions. According to their interest plurality theory, the payoff of a group that is affected by some regulation (target group) depends on the convergence of interest within this group and on the level of mobilisation of the non-target group (ibid,587). Actor plurality can lead to in inter-group conflict (low convergence), which weakens the ability of the target group to reach its desired regulatory outcome. Alternatively, the target group s influence can be leveraged by supportive coalitions of groups sharing preferences (high convergence). The highest payoff is reached in the event of highly converged interest 3
within the target group in combination with low mobilisation of the non-target group. The lowest payoff results from a combination of weak interest convergence in the target group and high mobilisation of the non-target group (ibid). Turning to contributions from the actor-centric literature can offer a deeper understanding of how and why business interests seek to influence regulatory institutions in order to secure a regulatory outcome in their favour. Fuchs (2007) describes three dimensions of business power. The first, actor-centred, instrumental dimension describes power as the ability of a political actor to achieve results, through for example lobbying, campaign finance, revolving doors and networks (ibid,56). The second, structuralist dimension of power focusses on the ability to set or shape the political agenda (including rule-setting power). The third, discursive dimension highlights the power of ideas and the ability to frame issues and shape perceptions and interests (ibid,58,60). While the first and second power dimensions are important for the analysis of the due process on the supply-side, the third power dimension seems relevant for the demand-side. Büthe and Mattli (2010) explain the rationale behind business preferences for international standardisation i.a. with positive effects on economies of scale, quality control and trade facilitation (ibid,458). This may aid understand the objective and motivation behind the lobbying efforts in the cases at hand. Yet, recalling the idealist understanding of public interest, standards reduce diversity and may not always represent the optimal solution for society as a whole. Furthermore, insights of the public goods literature help understand the idealist school of public interest. Since public goods are non-rivalrous in consumption and non-excludable, this leads to market-inefficiencies and likely undersupply of public goods in the absence of regulation (Kaul, Grunberg, and Stern 1999,3). 3. APPLICATION OF THEORY The first part of this section applies RCT to both cases and analyses, if the outcomes are in the public interest. The second part takes a look through the idealist lense and compares the conclusions. 3.1. RCT 3.1.1. Supply-side The US regulatory system is very open to private influence with fluid relationships between private authority and state policy (Sell 1999,172). The decentralised power in Congress and the opening of 4
legislative procedures offer increased transparency in the regulatory process and opportunities for special interest to advocate their proposals (ibid,176). Yet NGOs and academic institutions are excluded as ineligible nominees for the Industry Sector Advisory Committees and Industry Functional Advisory Committees, which fulfil important functions in the regulatory process (Walter 2001,55). This puts business interests at an advantage concerning the accessibility of regulatory institutions. In the case of TRIPS, a small number of large US firms successfully lobbied for changes in the US trade laws and formed a powerful interest group (IPC) in the years up to and during the negotiations of the Uruguay GATT Round. Furthermore, due to revolving doors between government and the private sector, representatives of IP interests were appointed to key positions in important institutions of the regulatory process (Sell 1999,179). So, while US regulatory institutions in principle are open, transparent and allow access, in practice, the sheer economic capacity of these corporations, their position as top exporters and their contributions to GDP conferred upon them authority by the government and gave them an explicit policymaking role (ibid,173). Hence, there are concerns with regards to the inclusiveness, fairness and equal accessibility of institutions, rendering institutional supply rather narrow. In the early stages of the MAI negotiations, it was mainly business interests representing investors preferences that collaborated closely with government and regulatory bodies (Walter 2001,61). Yet, the publication of the draft in 1997 raised the involvement of many US and international NGOs in the negotiation process (Henderson 1999,22). The concerns brought forward alienated many government negotiators, both in the US and other countries (Walter 2001,61). With the erosion of the businessgovernment coalition, the incentive for regulators to continue the MAI negotiations faded (ibid,64). Thus, eventually, proponents and opponents of MAI succeeded with getting their voice heard by the regulatory institutions. Hence, due process was met and the supply can be described as rather extensive. 3.1.2. Demand-side In the case of TRIPS, the large corporations had an advantage with regards to information, interest and ideas (Sell 1999,192). Since IP is a very technical and highly complex matter, the US government depends and relies on the expert knowledge provided by these corporations (ibid,174). Furthermore, even IP experts working for the state were biased towards supporting an increased protection of IPR (ibid,175). The business activists were successful in promoting their ideas and interests as a solution to pressing American trade issues and alleged damage suffered by US firms from IPR infringements by their foreign competitors (ibid,178). They succeeded in capturing the imagination of policymakers and persuaded them to adopt 5
their private interests as American interests, thereby making international IPR protection an objective of the US government (ibid,192). Further, they were able to activate their corporate counterparts in other developed countries to join efforts and influence their governments in the same way. In conclusion, demand for change was narrow. In the beginning of the MAI negotiations, large pro-trade business lobbies successfully claimed to represent the national interest, because their anti-liberalisation counterparts were often organised along sectoral lines and thus less unified (Walter 2001,56,58). Also, little media attention held information diffusion about the consequences of MAI at a minimum. Yet, after the first draft of MAI became public in 1997, media attention and public opposition towards MAI increased. Unions expressed fears that increased capital mobility would lead to a race to the bottom for wages, labour standards and security (ibid,57). NGOs successfully framed MAI as a charter of rights for MNCs which would enable firms to challenge domestic laws in arbitration proceedings thereby undermining the jurisdiction and authority of countries to set i.a. high environmental standards as well as protective labour laws (ibid,62). As a result, several state and local government authorities in Canada and the US took the stand that MAI would undermine their political autonomy and opposed it (ibid,63). The publication of the draft was a turning point. Before, only business interest expressed demand for change in the form of MAI, narrow demand in terms of RCT. After the leakage, due to NGO efforts, massive negative media coverage and union activities, a broad demand not to change the status quo, a demand for no change evolved. This is problematic, since RCT only captures demand for change, be it broad or narrow, but not for no change. This is different from a situation of no demand, where RCT would predict that no legislation would come into existence, because both supply and demand conditions must be met to result in some kind of regulatory outcome. However, I argue that this does not render RCT inapplicable. I argue that the leakage had a similar effect as if MAI had been concluded at that point in time. This resulted in demand to change this new quasi-status quo. With this understanding of the situation, RCT actually suggests that broad demand for change against the MAI draft existed, because both pro- and anti-mai camps had equal access to information, formed broad coalitions and succeeded in presenting their interests and ideas. 3.1.3. Conclusion RCT In the case of TRIPS, a combination of rather limited supply and narrow demand lead to pure regulatory capture. Powerful, resource-rich corporate interests successfully influenced the regulatory process so that 6
it resulted in an outcome favourable to them (Sell 1999,188). Hence, the conclusion of TRIPS was not in the public interest. In the early stages of the MAI negotiations, business interests successfully captured the regulatory process and demand was narrow mainly due to lack of information dispersion. Hence, before 1997, an intersection of narrow demand and supply indicated pure regulatory capture. Yet, after the leakage broad demand to change the new quasi-status quo emerged. In addition, massive media coverage and lobbying efforts by other interests gave anti-mai arguments access to regulatory bodies, broadening the supply-side. In conclusion, a combination of broad demand and supply lead to an outcome in the public interest: quasideregulation in the form of termination of the MAI negotiations. 3.2. Idealist school of public interest In the case of TRIPS, idealists would analyse if strong, global IPR protection is best for society as a whole. Most IP such as songs, inventions, calculation methods or drugs, etc. shows the characteristics of public goods (non-rivalrous, non-exclusive). Hence, proponents of strong IP protection argue that the absence of legal protection would lead to an underinvestment in creative activities (Kaul, Grunberg, and Stern 1999,7). IPRs allow investors to exclude others from using the outcome of their creative activities, thus granting them a monopoly right to exploit their invention and exclusively reap the economic benefits for a set period of time (Archibugi and Filippetti 2010,138). This, proponents argue, creates incentives for individuals to invest their time and resources into creative activities, which fosters innovation and benefits all of society (ibid). TRIPS grants inventors a twenty-year monopoly right. This increases the price of information and technology. Furthermore, such strong protection of key innovations may discourage competitors from investing in socially beneficial innovations (Sell 1999,190). Additionally, less developed countries argue that TRIPS puts them at a disadvantage with regards to technology transfer, investment flows and industrial development. Rather, through TRIPS, private corporate losses were defined as losses of the developed world, which then were defined as losses for all peoples (ibid). While some IP protection in beneficial for society, too strong protection is rather harmful. Concludingly, TRIPS benefitted the few at the expense of the many (ibid,191) and, thus was not in the public interest. In the case of MAI, the question at hand is whether multilateral rules on investment including investorstate dispute settlement mechanisms would have been in the public interest. As the Ethyl vs Canada case showed, the costs of these settlements can be very high for states and thus for society (Walter 2001,63). Furthermore, it is argued that these settlements can impede with the states' sovereignty to make laws 7
protecting the environment or labour rights. Hence, it is argued that the MAI agreement would not have been in society s best interest. In sum, the idealist understanding of public interest arrives at the same conclusions as RCT. 4. ASSESSMENT OF RCT This section outlines some weaknesses of RCT and suggestions for improvement. The greatest weakness of RCT is that it only provides four boxes that represent extreme ideal cases. Either an institutional setting or the demand for change is broad or narrow, meaning that either principles of due process are met or not, respectively demand is large or small. Yet, reality is rarely this clear-cut. As the above analysis has shown, the institutional set-up of a country may be open, inclusive and granting equal accessibility to all parties, while in practice only resource-rich interests can afford access or only interests providing expert knowledge will be taken into account. Hence, real-life cases will rarely fit perfectly into one of the four boxes. This problem could be avoided if the properties of RCT were instead presented as axes of a system as indicated by the figure below. 8
Then, demand and supply could range along a continuum from narrow to broad, allowing for a more flexible and differentiated placement of the case somewhere within the boxes in the grid. Also cases could be compared by their relative placement. According to the above analysis, the placement of TRIPS and MAI could look like below. Furthermore, the case of MAI has shown that there may also be a demand for no change, which is different from a situation of no demand for change. I argue that the framework could be modified to encompass also such a situation. Firstly, demand would have to be defined as including both, the demand for change and demand for preserving the status quo. Secondly, the framework then needs to cover the abandonment of a regulatory process, hence no regulation, as a possible outcome. This could be overcome by a simple adjustment in terminology. Instead of Common Interest Regulation, this outcome could be termed Common Interest Outcome. The same logic goes for the other three outcomes. This way, the model could result in the outcomes of regulation, deregulation or abandonment of a regulatory attempt as the result of an intersection of broad or narrow supply with broad or narrow demand for change or preservance of the status quo. 5. CONCLUSION This paper has analysed the cases of TRIPS and MAI in order to determine if the regulatory outcomes of these negotiations were in the public interest applying a procedural understanding using RCT and an 9
idealist understanding of public interest. In the case of TRIPS, a combination of rather limited supply and narrow demand lead to pure regulatory capture and an outcome not in the public interest. The MAI negotiations were characterised by broad demand and supply, which lead to an outcome in the public interest: quasi-deregulation in the form of termination of the MAI negotiations. A look at the same cases through the sense of the idealist school arrives at the same conclusion, yet with a different explanation. TRIPS does not benefit society as a whole, while the termination of MAI prevented an outcome that would not have been beneficial for the broad masses. Furthermore, it has pointed out some weaknesses of RCT, such as the use of boxes and a terminology that strictly speaking only rooms outcomes of either more or less regulation. These weaknesses could be overcome by arranging the models properties along two axes, allowing for more differentiated placement of real-life cases. Furthermore, the inclusion of demand for no change in the definition of demand and a change in terminology replacing the world regulation with outcome, allows outcomes to be regulation, deregulation or abandonment of regulatiory attempts. 10
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