Adapting Regulation to Globalization: A Typology of Approaches to the Internationalization of Regulation

With the progressive emergence of an open, dynamic, and globalized economy, the internationalization of rules has become a critical issue. Governments increasingly seek to exploit the benefits of globalization by eliminating unnecessary regulatory divergences and barriers and ensuring greater coordination of regulatory objectives. Intensification of global challenges, such as those pertaining to systemic risks (financial markets), the environment (air or water pollution), human health (COVID-19 pandemics) and safety, is also leading to growing regulatory cooperation efforts as a key component of risk management strategies across borders. Regulation increasingly transcends its domestic nature to become transnational and international through a wide variety of mechanisms. At the same time, concerns over the loss of sovereignty and perceived negative impacts of openness are constraining greater regulatory cooperation. This chapter explores the range of possible approaches to the internationalization of regulation and provides evidence on their use, merits, and challenges, building on OECD work on international regulatory cooperation.

Government by Relational Infrastructures: The Case of the Transnational Institutionalization of the European Unified Patent Court

This chapter analyzes the transnational institutionalization of the European Unified Patent Court (created in 2013) as a case illustrating government by relationships and mobilization of relational infrastructures in joint regulation of the economy. This court, specializing in patent litigation, originated from a public-private network of corporate lawyers, national judges, and European-level technocrats as institutional (or judicial) entrepreneurs, a collegial oligarchy using their own personal social networks across borders to start negotiating a common interpretation of the European patent and to lobby for the creation of the institution. A neostructural sociological approach is then proposed to frame this example in a more general perspective on institution building. This chapter identifies specific characteristics of institutional entrepreneurs who punch above their weight in regulatory processes, in particular the importance of being part of a collegial oligarchy and having several high, heterogenous, inconsistent, and multilevel dimensions of social status combined with the right rhetorics.

Regulate in Haste, Repent at Leisure: Private and Public Orderings in OTC Derivatives Markets

Over-the-counter derivatives were widely blamed for causing or exacerbating the financial crisis. As a result of perceived structural failings in these markets, legislators and regulators mandated substantial changes. The most notable of these changes was a requirement that most derivatives be centrally cleared. Under clearing, a central counterparty becomes a party to all contracts and guarantees performance on them. These mandates were predicated on a defective understanding of the economics of derivatives markets. The proposed reforms were fundamentally flawed because they were rooted in an institutional, rather than functional, approach to regulation.

The Medieval Expansion of Long-Distance Trade: Adam Smith on the Towns’ Escape from the Violent, Feudal Equilibrium

Most people in medieval Europe lived at subsistence level in a violent feudal world. Adam Smith explained both the long-term stability of the feudal system and how the towns escaped this violence trap through political exchange that fostered their ability to enter long-distance trade, create a significant division of labor, and encourage long-term economic growth and development. Violence is central to Smith’s approach to development, which Smith scholars have systematically underappreciated. In the face of episodic violence, individuals had little incentive to be industrious, to save, or to invest. Smith argued that medieval towns escaped the violence trap through three mutually reinforcing elements: law and liberty, commerce (including long-distance trade), and security from all forms of violence.

Contractual Arbitrage

Standard-form contracts are likely to be incomplete because they are not tailored to the needs of particular deals. In an attempt to reduce incompleteness, standard-form contracts often contain clauses with vague or ambiguous terms. Terms with indeterminate meaning present opportunities for strategic behavior well after a contract has been executed. This linguistic uncertainty in standard-form commercial contracts creates an opportunity for “contractual arbitrage”: parties may argue ex post that the uncertainties in expression mean something that the contracting parties did not contemplate ex ante. This chapter argues that the scope for contractual arbitrage is a direct function of the techniques that courts use to resolve ambiguities in boilerplate language. Using the case of NML Capital v. Argentina, this chapter shows how traditional contract doctrine can produce a fertile setting for the growth of contractual arbitrage.

International Trade Finance from the Origins to the Present: Market Structures, Regulation, and Governance

This chapter describes how the structure and governance of international trade finance—the oldest domain of international finance—evolved from the Middle Ages until today. Trade finance products initially consisted of idiosyncratic assets issued by local merchants and bankers. The financing of international trade then became increasingly centralized and credit instruments were standardized through the diffusion of the local standards of consecutive leading trading centers (Antwerp, Amsterdam, London). This process of market centralization/product standardization culminated in the nineteenth century when London became the global center for international trade finance and the sterling bill of exchange emerged as the most widely used trade finance instrument. The structure of the trade finance market then evolved considerably following World War I and disintegrated during the interwar deglobalization and Bretton Woods period. The reconstruction of global trade finance in the post-1970 period gave way to the decentralized market structure that prevails nowadays.

Governance Beyond Governments: The Effort to Slow Climate Change

Limiting anthropogenic climate change is a commons or public goods problem, typically addressed with top-down approaches such as international treaties and national regulations or taxes. However, research shows that bottom-up institutions developed by resource users can prevent resource depletion over long periods, and it identifies design principles for such governance. This chapter explores the potential to slow climate change with nonstate institutions—what the authors call private environmental governance. The authors address such questions as: Why would private actors voluntarily create regimes that restrict their options? What kinds of organizations join these regimes, and with what motives and roles? How can informal, nongovernmental entities exercise real influence, absent the force of law? What are the strengths and limitations of private governance? Does private governance supplement or impede governmental and intergovernmental governance? How can private governance function at sufficiently large scale to meaningfully affect global greenhouse gas emissions? How can its effectiveness be increased?

China’s Integration into the Global Economic System: Institutional Idiosyncrasies and Emerging Patterns

Since the—externally enforced—opening of China to the global economy in the mid-nineteenth century, China’s integration into the global economic system has been mostly determined by a passive adoption of norms and regulatory principles developed in the West. It is only in recent years, as China’s absolute and relative economic might in the global economic system has risen dramatically, that a more active Chinese approach toward the institutional ordering of global economic interaction can be observed. This chapter looks into the parameters of China’s integration into the international system, its role in global economic governance as well as the drivers of Chinese institution building in the context of the Belt and Road Initiative.

The Legal Pluralism at the Heart of International Economic Governance

When considering international economic governance, observers often focus on the lack of clear lines of demarcation regarding which rules apply. Businesses may complain about being subject to conflicting regulatory regimes; those concerned with labor rights, consumer protection, and the environment worry about regulatory evasion; and those focused on the philosophy of governance emphasize the possibility that norms regulating behavior may be unmoored from what is seen as a legitimate governing authority or polity. All of these concerns, however, rest on the assumption that for every dispute there should be one prevailing authority. This chapter questions that assumption, arguing that there is often no conceptually satisfying way to dictate a single set of legal norms to apply to a dispute and that the effort to do so often skews our focus. Instead, by embracing the pluralism at the heart of international economic governance, we can turn our attention to developing workable procedures, institutions, and discursive practices for managing multiple jurisdictional assertions by state and nonstate actors alike. We may even find that the existence of multiple ports of entry for normative assertions opens space for contestation, resistance, and creative possibility.

Changing Capital Market Structure and Regulatory Challenges

Advances in telecommunication technology in the nineteenth century encouraged greater centralization of liquidity on single, dominant exchanges in most major industrialized countries. Electronic trading, in contrast, has precipitated increased market fragmentation, creating a host of new regulatory dilemmas. In an attempt to understand this phenomenon, this chapter proposes a two-stage process of market structural development in response to electronic trading. This process is then examined in equities and foreign exchange markets. Despite significant differences between these two asset classes, they have exhibited a remarkably similar pattern of disintermediation followed by reintermediation. This analysis is followed by a survey of recent regulatory approaches to mitigate the negative externalities associated with electronic trading. It concludes with a brief discussion on the future of market fragmentation and centralization in global capital markets.