1. Introduction
There is a core and undeniable regulation within international economic law (IEL) that relates to trade, and to the monetary and financial system. This regulation is the result of the co-ordination efforts undertaken after Second World War at the Bretton Woods Conference, which in turn originated some of the most well-known international economic institutions, such as the International Monetary Fund (IMF), the World Bank (WB), and a multilateral treaty, the General Agreement on Trade and Tariffs (GATT), which subsequently was transformed into the World Trade Organization (WTO) in 1995.
However, IEL is now at a crossroads regarding the reconfiguration of the international economic order. On the one hand, IEL has been successful at creating a multilateral trading system through the GATT-1947, later reinforced by the WTO and its very advanced dispute settlement system, thus providing security and predictability in the trade area. The WTO has been praised as a major achievement within IEL and international law in general. It has become a very solid institution, itself the product of hard law, with the power to authorize the imposition of stiff economic sanctions to those infringing the agreed trade norms. According to the prevailing accounts, the 2008 economic crisis, already termed as the Great Recession,Footnote 1 has confirmed that the WTO has performed as expected and so it can be acclaimed as the most suitable institutional dyke against the adoption of restrictive trade measures among states. On the other hand, in the monetary and financial arenas IEL shows a very different record. Since their inception, the WB and especially the IMF have been unable to achieve a similar status as their role and legitimacy in the regulation and sanction of economic behaviour in these fields have diminished over time.Footnote 2 Moreover, the Global Financial Crisis (GFC) and the ensuing Great Recession have placed IEL regulating the financial system centre stage. Governments and civil society have turned to IEL in search of an international, co-ordinated answer. While in the trading system the WTO has been instrumental for an institutional answer, in the financial system this reaction has come mainly through G20 meetings, together with a timid response by the IMF, which has adopted decisions in the form of traditional soft law.
Why is this the case? Why has IEL performed so unevenly in these two areas? Is there any fundamental difference between the regulation of trade, on the one hand, and the regulation of money and finance, on the other? Are the regulatory functions accomplished by IEL so distinctively disconnected in these two areas of economic activity? Is there another reading of the extant situation?
The second section of this article will be devoted to testing the strength of the multilateral trading system and the challenges that it is now facing. We will briefly describe the elements that make the trade regime comparatively strong, and then will focus on whether the WTO institutional setting has had such a good performance during the crisis. We will then review the challenges posed by the Doha Round deadlock and the ‘trade and . . .’ debate still in need of response. A material reform seems to be needed if we want the WTO to be up to the tasks and demands flowing from global governance. The third section of this article will analyse the current structure of the international financial system. The recent reform of the global financial architecture led by the G20 will be assessed as well as the elements that would need to be changed in order to cope with the main regulatory objective, i.e., financial stability. An institutional reform in the mode of a vertical expansion of IEL is proposed in this article. A final conclusion will summarize the findings obtained in this study.
2. Global governance and the world trading system
As is very well known, the extant multilateral trading system had its origins in the adoption of the GATT in 1947, just before the plan to create the International Trade Organization was abandoned because of non-ratification issues. The GATT-1947 system was the first organized framework to deal with trade issues on a global basis, although it was more diplomatically-orientated than is the case today.Footnote 3 However, there has always been a deep aspiration in order to reconfigure the trade system into a more legally-orientated regime, an outcome largely achieved through the establishment of the WTO in 1995.
The current trade regime based on the workings of the WTO system has been best explained as the intellectual triumph of the model purporting ‘economic efficiency’.Footnote 4 This efficiency model, and the economic liberalization that it promotes, has operated as the normative benchmark of the trading system for approximately the last three decades, to the detriment of the collective action model and, above all, the embedded liberalism model.Footnote 5 The legalization of the trade regime poses at least two questions: (i) whether the WTO system has been up to the promise of the compliance with legal obligations agreed by WTO members in the face of the crisis; and (ii) whether the WTO legal system is in need of material reform regarding the Doha Round stalemate and the continuing challenges stemming from the ‘trade and. . .’ debate.
2.1. The strength of the WTO and the economic crisis
As previously mentioned, the WTO has attained a high level of legalization and institutionalization, compared to the situation that prevailed at the time of the GATT-1947. This is to a great extent due to the Dispute Settlement System (DSS) set up in Annex 2 of the WTO Agreement. The DSS is at the heart of a management system, which avoids recourse to alternative schemes for the settlement of trade differences, and it is shaped as an integrated system, which eludes the GATT à la carte practice that existed before 1995. As has been noted, the WTO is the ‘envy’Footnote 6 of other international organizations and its DSS can be aptly described as ‘legally rigorous, de facto compulsory, well-functioning and enforceable’.Footnote 7 Moreover, the implanting of ‘teeth’ by the WTO negotiators in the form of authorized sanctions has been regarded as one of the key achievements of the Uruguay Round, and a very significant step in the evolution of IEL.Footnote 8
From an institutional point of view, the debate over the constitutionalization of the WTO has also served to reinforce its strength and powers. John JacksonFootnote 9 has been singled out as the scholar most influential in the project to articulate the trade regime as having constitutional features,Footnote 10 in which institutions and the management of a system of rules takes centre stage. Together with the constitutionalization of the ‘institutional managerialism’ type,Footnote 11 there have been other projects, like the rights-based one,Footnote 12 perhaps both mutually supportive. Nevertheless, those constitutionalization projects have attracted a lot of criticism of various sorts.Footnote 13
One of the most debated questions among trade policy officials and international trade lawyers since the outbreak of the economic crisis in 2008 has been whether WTO rules have worked as an actual deterrent for the adoption of trade barriers by members. In other words, the success of the current multilateral trade regime should be measured in terms of its ability to avoid the across-the-board tariff increases similar to those adopted by states in the aftermath of the Great Depression, in the inter-war period. One should remember that the enactment of the Smoot-Hawley Tariff Act of 1930 by the US was at the origin of the most devastating trade wars among developed countriesFootnote 14 that resulted in the doubling of the tariff rates from 1929 to 1930.Footnote 15
According to the reports prepared by the WTO Secretariat, WTO members have achieved a good record during the recent crisis, as they have, on average, avoided adopting protectionist measures, that would have led to a situation comparable to that of the Great Depression. Specifically, these reportsFootnote 16 have been produced in response to the request by the G20 to the WTO, together with the OECD and the UNCTAD, ‘to monitor and report publicly on G20 adherence to their undertakings on “resisting protectionism and promoting global trade and investment”’.Footnote 17 Furthermore, the information about the measures which are the object of the analysis in the report has been collected from formal notifications submitted by G20 members and from other official and public sources.Footnote 18 The trade measures covered by the reports are what might be called traditional trade measures,Footnote 19 that is, border measures, behind the border measures, and trade defence measures, although in subsequent reports the coverage has been expanded, including sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT).
The picture described by these reports may look uneven. The initial reports produced by the WTO/OECD/UNCTAD showed that there was ‘no indication of a descent into high-intensity protectionism as a reaction to the crisis, involving widespread resort to trade or investment restriction or retaliation’.Footnote 20 However, the Sixth Report of October 2011 indicated that ‘there is a growing perception that trade protectionism is gaining ground in some parts of the world as a political reaction to current local economic difficulties’.Footnote 21 Moreover, the Seventh Report insists on the ‘revival of protectionist rhetoric in some countries’Footnote 22 which, together with the continuing implementation of new trade restrictions, the accumulation effect of trade restrictions since the outbreak of the crisis, and the very slow pace of removal of existing restrictions,Footnote 23 all add to depict a worrying situation in terms of free trade and open markets.
As well as the WTO, the EU produces its own reports devoted to evaluating the trade restrictive measures ‘identified in the context of the economic crisis’ (as stated in the subtitles of these reports). The EU has published already ten reports, the first one being in February 2009Footnote 24 and prepared in the aftermath of the November 2008 G20 summit in Washington, DC. The EU reports evaluate trade measures which are potentially trade restrictive, including border measures (import and export restrictions), behind-the-border measures (TBTs, government procurement, services, and investment restrictions), stimulus packages and export support measures, and trade defence instruments.Footnote 25 There is also an annex at the end of the report which collects potentially trade restrictive measures adopted or planned since October 2008.Footnote 26 Whereas the first EU report highlighted that there was no generalized race towards protectionism,Footnote 27 the latest reports stress the danger accruing from the rising number of potentially trade restrictive measures.Footnote 28 Other reports come from private organizations. For instance, Global Trade Alert – which is co-ordinated by the think tank called Centre for Economic Policy Research, elaborates the GTA Database collecting national government measures taken during the current global economic downturn that are likely to discriminate against foreign commerce.Footnote 29 GTA has produced several very critical reports, warning that worsening macroeconomic prospects have already prompted more protectionism, and more protectionism of the most harmful kind, that is, across-the-board.Footnote 30 Moreover, the evidence presented in one of its latest reports ‘casts doubts on the strength of international restraints on the resort to protectionism by governments, in particular by G20 governments’.Footnote 31
Nevertheless, from an economic point of view, there is a strong feeling and evidence that G20 members and other governments have been able to succeed in the overall management of the political process of keeping domestic protectionist pressures under control. WTO reports have shown that, although trade restrictive measures have been adopted and are on the rise even to this day, it is, however, true that ‘the multilateral trading system has been instrumental in maintaining trade openness during the crisis’.Footnote 32 This is so because the identified trade restrictive measures apply to a narrow range of trade and for a short period of time, which means that they have a limited economic effect.Footnote 33 As the EU Ninth Report states, the past years show that overall recourse to trade protectionism has been sidestepped, and trade openness preserved.Footnote 34
However, from a legal point of view, the assessment might be very different. There have been many instances of adoption of trade barriers and subsidization in the form of bailouts or otherwiseFootnote 35 that the system is not addressing, as WTO members have not decided to initiate proceedings before the DSS.Footnote 36 This might be interpreted as if there were a concealed consensus between the main players on various forms of government intervention in the presence of a big market failure like the economic crisis of 2008. This non-compliance phenomenon might be avoided if the DSS were open to complainants other than WTO Members (even with the help of a prosecutor or otherwise), or if individuals could resort directly to their domestic courts to enforce their trade rights, but of course that would imply a very different world trading system (very similar to the ‘rights-based’ one already mentionedFootnote 37).
2.2. The prospects of the trade regime
Even if we assume that the trade regime has performed ably during the recent economic crisis, there are many open questions surrounding the future of the multilateral trading system. The Doha Round deadlock for more than ten years reveals in a stark way the exhaustion that the model is experiencing. To start with, developing countries are nowadays willing to resist pressures unless they see their demands for a bigger part of the pie satisfied in the marketplace.Footnote 38 But the biggest loser of the Doha Round fiasco might be the WTO system itself as its credibility may suffer irreparable damages.Footnote 39 However, the Bali Package recently agreed at the Ninth Ministerial Conference in December 2013, specially the Agreement on Trade Facilitation,Footnote 40 has been praised as the ‘first major agreement among WTO members since [the WTO] was formed in 1995’.Footnote 41 Therefore, the bargain struck in Bali might be considered as a relief, considering the previous lack of progress.Footnote 42 Nevertheless, the Bali Package does not solve the problems at the heart of the 2001 agendaFootnote 43 and has actually been regarded as a small deal.Footnote 44 Even if we assume that the Doha Development Agenda was already dated by the time negotiators met in 2001,Footnote 45 the WTO cannot move on new issues until it achieves the Doha political goals of ‘rebalancing’ the trading system from the point of view of developing countries.Footnote 46
The WTO should perhaps place less emphasis on the periodic negotiations towards new commitments to liberalize trade further, and focus more on the enforcement of the existing agreements. The most pressing concerns faced by the world trading system today are the efficacy and fairness of the dispute settlement mechanism together with the integration of other ‘flanking policies’ within the WTO system, i.e. industrial policies or development, on the one hand, and environmental, human rights, and labour policies, on the other.Footnote 47 Both kinds of issues are linked together.
First, the suggestion to incorporate these other policies within the WTO is of course not new. In fact, the ‘trade and. . .’ debate has been with us for quite a few years, pointing to the need to overcome the persistent trade bias found in the multilateral trading system.Footnote 48 This trade bias stems from the non-consideration of the non-trade issues linked to trade, a result that should be attributed to the fragmentation of international trade law.Footnote 49 As is well known, the functional specialization of international organizations and treaty regimes is the origin of the so-called fragmentation of international law, which has only been avoided to date by efforts towards a coherent interpretation of the different legal systems using the principle of ‘systemic integration’.Footnote 50 The first suggested approach to solve the aforementioned trade bias has been much discussed by trade commentators since the end of the 1990s. They generally purport that the WTO dispute settlement system should embrace public international law in order to bring in a broader legal and normative order, hence amplifying the WTO's narrow mandate exclusively focused on the trade regime.Footnote 51 Contrary to other opinions,Footnote 52 this view submits that the WTO does not constitute a self-contained regime, but must be open to other sources of public international law.Footnote 53 Or, at least, that the WTO should not be considered as an isolated legal system and that non-WTO law may be relevant in the interpretation of WTO law.Footnote 54 According to this view, this recourse to interpretative norms of general international law gives the WTO more legitimacy.Footnote 55 The WTO's Appellate Body was apparently willing to apply this expanded or co-ordinated approach and therefore to avoid reading WTO law ‘in clinical isolation from public international law’ in some of the already key cases decided in the 1990s, like the Gasoline or the Shrimp cases.Footnote 56 However, in the 2000s the Appellate Body has adopted a more restrained approach and has avoided adopting a strong stance on several very sensitive issues, like in the Hormones and the Biotech cases,Footnote 57 a result very much criticized.Footnote 58 Possibly, the Appellate Body has implicitly sent out the message that, even though non-WTO law must be resorted to where technical questions are at stake, other issues of political or constitutional bearing may only be solved at the political level.Footnote 59
If the approach based on the dispute settlement system seems to be of limited value, then recourse should be made to the political arena. There are two ways in which the articulation of trade and non-trade issues could be solved at the treaty or policy-making level. First, the introduction of a ‘social clause’ has been proposed since the mid-1990s.Footnote 60 However, the Singapore Ministerial Declaration in 1996 reached a compromise between supporters and those against the integration of a social clause, which has resulted in the practical abandonment of this approach within the WTO, although the US and the EU are pursuing this path in their bilateral and regional trade agreements.Footnote 61 Second, another venue could be the establishment of some kind of primacy or hierarchy among trade rules, on the one hand, and human rights, environmental or labour rules, on the other.Footnote 62 Nevertheless, neither the strategy consisting of setting conflict clauses in subsequent multilateral agreements (e.g. the Biosafety Protocol), nor the articulation of solutions within the WTO itself (whether in the form of general decisions, authoritative interpretations, or waivers as provided for by Article IX of the WTO AgreementFootnote 63) has led to a working solution (the work of the Committee on Trade an Environment has shown itself devoid of any clear resolveFootnote 64).
In spite of the aforementioned difficulties, there is, however, a growing consensus within the discipline on the need to address from within the WTO the ‘trade and . . .’ question. If it is assumed that nowhere in the WTO Agreements it is stated that free trade is the objective to be pursued by the organization,Footnote 65 then WTO law could serve as a vehicle for global governance, where liberal trade would be on an equal footing vis-à-vis other societal values.Footnote 66 After all, ‘there is no persuasive overarching rationale to explain the choice for embodying intellectual property rights in a trade agreement but not labour rights, for instance’.Footnote 67 Therefore, even law and economic analysesFootnote 68 recommend incorporating into the WTO those ever-increasing concerns related to trade, such as the protection of human rights, the environment, and labour rights. A material reform of the WTO architecture to integrate those areas is the most practical solution, which could take the form of plurilateral agreements or codes to which WTO members would progressively adhere.Footnote 69 Furthermore, the plurilateral path is preferable to the bilateral approach that the US and the EU have adopted in their recent trade agreements. This substantive reform in turn may or may not trigger an institutional reform.Footnote 70 Nevertheless, other scholars have submitted that the WTO should limit itself to the anti-discrimination model, thus rejecting the expansion of its material authority and conversely promoting national regulatory autonomy,Footnote 71 which in turn would leave environmental and labour policies to be dealt with by other international organizations in the field.Footnote 72 However, the existing model has already intruded into national sovereignty, if only partially,Footnote 73 which means it is only a question of time before we witness more far-reaching clashes between regulatory goals and free trade. Moreover, promoting scale back towards a purely non-discrimination model implies a ‘radical departure from the existing rules’Footnote 74 that seems nowadays politically unfeasible. Therefore, as long as the world trading system is dominated by economic liberalism,Footnote 75 the incorporation of social and related issues into the WTO may well help solve the questions of global governance and coherence among regimes in the meantime, if only in an incomplete manner.Footnote 76
Second, development issues must also be addressed by the WTO more intensely. As a general criticism, it has been submitted that IEL has taken developing countries as ‘objects’ rather than ‘subjects’.Footnote 77 However, the adoption of the Doha Development Agenda in the current Doha Round reveals the importance of and the agreement attached to the need of solving the question of economic and social development. To a large extent, the stalemate that this Doha Round is experiencing is due to the major differences expressed by developed and developing countries on the approaches and expectations of each group.Footnote 78 As noted, the concerns voiced by developing countries after the Uruguay Round are very similar to those articulated three or four decades ago.Footnote 79 Moreover, the proposals submitted during the first years of the Doha Round are similarly based on the current special and differential treatment that has by now shown its limits.Footnote 80 However, the recent Bali Package agreed in December 2013 has adopted several decisions on development issues.Footnote 81 In addition to the ‘Aid for Trade’ and ‘Cotton’ Decisions, the Bali Package includes four decisions affecting least-developed countries.Footnote 82 But, in the long run, what is needed is an approach that not only addresses development as an incidental issue that needs to be fixed on an ad hoc basis, but that embraces development as a normative project that ‘is grounded in an affirmative understanding of the balancing between trade liberalization objectives and development priorities’.Footnote 83 Some authors have suggested institutional reforms in order to advance the development agenda within the WTO.Footnote 84
3. The global financial system: Normative coherence
The International Monetary and Financial System was founded at the Bretton Woods Conference in 1944. The IMF and the WB are among the main achievements accruing from this Conference – although this article will only focus on the financial area. These international organizations had performed reasonably well until the end of the fixed exchange rate system in the 1970s and the first financial crises of the 1980s.Footnote 85 Indeed, the financial crisis witnessed in western countries from 2007–10 onwards (the European countries are still dealing with a huge sovereign debt crisis) is not a unique event. In fact, there have been several recurrent financial crises like the Latin American debt crisis in the 1980s, the South-East Asian financial crisis in 1997–8, the Russian crisis in 1996–9, and the sovereign default crisis of Argentina in 2002.Footnote 86
The question arises whether IEL was and is normatively well equipped to prevent or even deal with these crises. International financial stability is a very contemporary concept that, in any case, can be considered as a public goodFootnote 87 consisting of the avoidance of systemic risk from unfolding uncontrollably in the market.Footnote 88 It is true that monetary and financial stability was difficult to achieve taking into account the huge changes the international economy has gone through since the end of the system based on fixed exchange rates in the 1970s. Open markets in trade and finance favoured by loose or tolerant national regulation (due to neo-liberal policies) has led to ever increasing capital flows. Financial transactions have grown exponentially thanks to financial innovation combined with quick telecommunications technologies (the internet). Most importantly, in the absence of an international strategy, this openness and interconnectedness have led to global imbalances in the financial markets which are at the origin of the crisis.Footnote 89
3.1. Weak institutions and soft law
International monetary and financial law is an area of IEL which revolves around the activities carried by two main international organizations, namely, the IMF and the WB. The objectives of these organizations were to encourage monetary policy co-operation, ensure currency convertibility, deliver credit for the reconstruction of countries after the war, and provide loans and technical assistance to member countries.Footnote 90
These international organizations are based on hard law rules, specifically international treaties, have international institutions or organs proper within their structure, and are endowed with a large and permanent staff. However, they have not played a significant role in the administration of the financial system. This is due to the fact that they are devoid of the necessary regulatory powers (and maybe expertise) to adequately perform as financial regulators.Footnote 91 As has been pointed out, the IMF and the WB do not normally create regulatory standards.Footnote 92
Instead, the standard-setting function has been assumed in this area by several international bodies, which in turn have produced soft law rules aimed at protecting the stability of the financial system. Political bodies like the G10 or the G7, then the G8, since the 1970s progressively assumed the task of creating those international bodies that would be entrusted with the job of providing the standards needed to cope with the increasing globalization in the financial domain. As a result, the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors, and the International Organization of Securities Commission were created and rank among the most prominent bodies.Footnote 93 These heterogeneous bodies were progressively created as a way to fill the gap left after the demise of the Bretton Woods System in the 1970s. They are not formal international organizations and do not have law-making powers. The latter feature makes them rely on the adoption of Principles, Codes, and Guidelines, for example, which in turn are to be implemented at the national level, thereby setting up a decentralized enforcement mechanism.Footnote 94 These bodies are generally known as Transnational Regulatory Networks (TRN), and bear many differences among them regarding their quality or composition (from central bank officials to private non-governmental actors).Footnote 95 As a way to achieve co-ordination among these different bodies, the Financial Stability Forum was established in 1999 by the G7.Footnote 96
The soft-law standard-setting method used by these bodies over the years has been described as ‘an alternative form of international law-making without the burden of cumbersome treaty formation rules’.Footnote 97 Furthermore, the resulting international financial soft law regulatory framework has been regarded as ‘more coercive than traditional theories of international law predict’,Footnote 98 because they ‘are more than soft law’; they ‘reflect mutual commitments made after intense negotiations, and taken together, they contain both incentives for compliance and at least the suggestion of meaningful sanctions for non-compliance’.Footnote 99 Among these international financial standards, the main regulatory outcome has been produced by the BCBS which adopted in 1988 the ‘Basel Accord’ establishing minimum capital requirements for banks (Basel I), subsequently substituted by the Basel Accord II in 2004.
However, the soft law-making process carried out by these TRNs and the resulting international financial standards have also generated substantial criticism as they present several limitations. First, the process has been condemned because of a lack of political legitimacy and accountability,Footnote 100 as developing countries are not given a voice within the bodies that produce those standards, later imposed on them by developed countries.Footnote 101 Second, the TRNs’ effectiveness in solving concrete international regulatory problems is doubtful when co-operation involves distributive implications and enforcement problems.Footnote 102 Certainly, soft law financial regulation as a product has been disregarded because of the absence of mechanisms to ensure its enforcement. The IMF surveillance activity is mainly performed bilaterally (by way of Article IV, Section 1) and through the Financial Sector Assessment Programme (by way of Article V, Section 2, b) and the Reports on the Observance of Standards and Codes (together with the WB) which are, nevertheless, voluntary.Footnote 103 Indeed, there are neither centralized procedures nor sanctions available to achieve full compliance of those standards.Footnote 104 The possibility of a cheap exit from commitments by states has been tested in the recent crisis and proves that soft-law standards are barely constraining.Footnote 105
Finally, the current structure of the international financial regulation, consisting of the TRNs and soft law, is the product of historical path dependence and the political actors involved, i.e., national regulators, the financial industry, and great powers governments.Footnote 106 After the demise of the fixed-rate system in the 1970s, and absent any formal international framework to address the challenges posed by trans-border finance, informal networks and non-binding standards were the path chosen, which has prevailed to this day. Within this informal context, the record of international financial soft law standards has been uneven, very successful at liberalizing international finance, yet very poor at raising prudential standards or establishing cross-border bank resolution mechanisms.Footnote 107
3.2. Failure during and after the crisis
Recent studies have tried to ascertain the main causes of the financial crisisFootnote 108 so that today they can be classified between macro- and micro-causes or failures.Footnote 109 From the macro aspect, the main reasons for the crisis were relaxed monetary and fiscal policies together with trade imbalances, regulatory failure regarding prudential control and supervision, and massive and unrestrained capital flows. From the micro aspect, the features that fuelled the crisis were excessive risk and leverage taking, inadequate compensation structures within private entities, inappropriate amassing of public and private debt, shortcomings of credit ratings by private agencies, and flawed use of financial innovation. A historical account with the sequence of events has been described in detail in the Larosière Report.Footnote 110
As has been suggested, from a legal point of view it may seem surprising that the 2008 financial crisis happened despite the existence of a ‘comprehensive’ corpus of international financial standards that had been developed over the last 35 years.Footnote 111 However, one of the main problems regarding this crisis was the ineffective implementation and enforcement of existing regulations.Footnote 112 Second, another major mistake was that financial standards produced by transnational regulatory networks had over relied on self-regulation by the market (due to neo-liberal and deregulation policies).Footnote 113 Third, and as a consequence, the extant regulation excessively focused on the micro-prudential supervision of individual financial entities and left outside the macro-stability of the whole financial system,Footnote 114 while risk taking through financial innovation and interconnectedness of too-big-to-fail financial entities should have become the primary objects of supervision on a trans-border basis. Specifically, there is some evidence suggesting that some of those international financial standards like the Basel I and Basel II rules have contributed to aggravating or spreading the crisis (through massive securitization, misguided pro-cyclicality and over-reliance on private credit rating agencies).Footnote 115 Furthermore, multilateral surveillance (through IMF) did not function efficiently.
Once the crisis erupted, the international financial architecture based mainly on the activity of TRNs has been useless at coping with the financial meltdown witnessed in 2007–10Footnote 116 and still present in many countries, especially the European countries. In the absence of a centralized international mechanism to address the challenge, the reaction to the financial crisis has mainly come from unilateral measures taken individually by states with no co-ordination and even at the cost of originating important inconsistencies among them.Footnote 117
From an institutional point of view, the answer to the crisis has been in the form of a revitalization of the G20.Footnote 118 The G20 has acted as a co-ordinating executive, as a mega-network,Footnote 119 and the G20 meetings held after the eruption of the crisis have produced two changes: the establishment of the Financial Stability Board (FSB), previously the FSF, and the pledge to strengthen the IMF. The FSB has an undefined legal status from an international law point of viewFootnote 120 and may be deemed as another example of a TRN with the aim of supervising regulatory policies and standards. Together with other standard-setting bodies (like the BCBS), the FSB has tried to solve the problems regarding legitimacy and accountability through the broadening of its membership to include emerging economies from the G20. However, governance problems are not completely solved, as the FSB remains a TRN with no binding powers or meaningful tools to accomplish its function. Commitments undertaken by FSB member states are still of a soft law nature.Footnote 121 As to the IMF, its primary surveillance role has been recognised by an IMF/FSF Joint Letter in 2008 and reinforced by the 2010 Executive Board Decision to integrate FSAP stability valuations within the IMF ability to carry out bilateral assessments (Article IV, Section 1).Footnote 122 Nevertheless, there is still an important gap concerning surveillance as IMF Article VII, Section 5 allows member states not to disclose data regarding individuals or corporations.Footnote 123 But then again what would be needed precisely is the mandatory international supervision of private financial entities.Footnote 124
From a substantive point of view, there has been an effort to harden the soft law financial standards. A new Basel Accord (Basel III) was adopted in 2010 by the BCBS and will be fully implemented at national level by 2019.Footnote 125 Other standards have also been revised.Footnote 126 The regulatory and supervision financial standards under scrutiny go from capital and liquidity requirements to risk management, accounting standards, credit rating agencies, derivatives markets, hedge funds, systemically important financial institutions, and cross-border crisis management and resolution mechanisms.
To sum up, although some steps have been taken in order to make the international financial system more integrally co-ordinated (like the Non-Cooperative Jurisdictions InitiativeFootnote 127), the truth is that the soft law approach and the voluntary, non-binding character of international financial obligations still prevails.Footnote 128 In other words, the post-crisis reforms have shown a preference for a model of governance based on more or less informal government networks over more formal intergovernmentalism of the Bretton Woods Conference.Footnote 129 In doing so, they perpetuate pre-crisis patterns as they ‘do not fundamentally replace TRNs and soft law, but rather attempt to expand, rationalize, and strengthen the existing system in various ways’.Footnote 130
3.3. Towards a more institutionalized financial law
It is a fact that initiatives undertaken after a crisis like the one initiated in 2008 normally imply a decline in reliance on private standards and self-regulation.Footnote 131 However, as previously seen, the reaction to the financial meltdown of 2008 at the international level has mainly come through the response of an invigorated G20, which has taken over the global reform and oversight of the financial system. Its Declarations and Statements look more for the strengthening of the existing regulatory apparatus, based on TRNs, than for a radical transformation of it. In other words, instead of launching a new institutional vertical approach, the furtherance of a horizontal approach of intergovernmental co-operation was chosen. Furthermore, after the recent reform of the international financial architecture, domestic jurisdictions still keep the exclusive competence to incorporate international financial standards into their national legislation, regulation, and supervisory process. Indeed, as those standards are not based on a formal, hard law type international treaty, their implementation is still ‘voluntary’.Footnote 132
However, the reinforcement of this kind of trans-governmental regulatory network seems to fall very short of what is needed within the international financial system. The G-20 speedy reaction of 2008 will very likely blur overtime as the urgent needs of the day dissipate and there is some recovery from the financial and economic crises.Footnote 133 Reinforced international co-operation through the G-20 is doomed to lose political momentum and seems to be only a temporary solution.Footnote 134 If the aim consists of establishing an international framework to avoid a new financial crisis such as the one recently witnessed then there are other choices available in international law based on a more supranational attitude.
The alternative options which transmit a hard-law regulation approach and a more vertical or institutionalized financial system at the international level have already been advanced. All of them revolve around the idea that a formal international treaty establishing some kind of supra-national body would be the most effective solution to the problems posed by international finance. First, there is a proposal to craft a formal international organization that could be termed the World Financial Authority (WFA)Footnote 135 or the World Financial Organization (WFO), maybe even in the image of the WTO.Footnote 136 This WFO would produce compulsory international financial standards for those states seeking market access for home financial entities in foreign countries. This international organization should also be invested with the power to sanction members whose national regulatory policies fail to comply with those international standards,Footnote 137 by way of authorized countermeasures or otherwise.Footnote 138 A very similar scheme introduces the setting up of a treaty-established Governing Council that would probably delegate to other bodies the authority to develop those standards and even the tasks of surveillance and enforcement.Footnote 139 In a highly elaborated intellectual framework, one author suggests that this Governing Council should oversee the activities of up to four regulatory and supervisory international authorities.Footnote 140 The rationale of this proposal follows very closely the one that the Stiglitz Report advises for the whole economic area.Footnote 141 Other authors, building on the ‘Global Administrative Law’ project,Footnote 142 have suggested the establishment of an international administrative body in the form of an independent college of supervisors that would be entrusted with financial regulatory, but most importantly, supervisory powers.Footnote 143 This administrative agency should also have the means to impose sanctions when national financial institutions do not conform to the legal standards.Footnote 144
Second, a very similar result could be achieved through a strengthening of the IMF. The financial crisis of 2008 has demonstrated how necessary a world financial authority is for the smooth functioning of global markets. Therefore, it would be wise to have recourse to the IMF because it ‘is not only the international monetary institution par excellence; the IMF is also at the centre of the international financial system’.Footnote 145 Within this alternative, there are different degrees: on the one hand, as the IMF has statutory responsibility for surveillance of international economies and has the power and responsibility of an international lender, incorporating the function of a WFA would be like combining the ‘roles of a quasi-central bank and a quasi-regulator’.Footnote 146 On the other hand, a less ambitious scheme would only attribute supervisory tasks to the IMF, but not a regulatory or a dispute settlement role. Nonetheless, as a ‘global sheriff’, the IMF is the institution best placed to ‘monitor the compliance with standards through its function of surveillance and through its assessment of the health of the financial sector’. Although it would be advisable to expand the IMF's powers through an amendment to its Articles of Agreement, a creative interpretation of Article I and Article IV would be enough to reinforce its function of surveillance over issues of financial stability.Footnote 147
Finally, other less ambitious approaches, even admitting the superiority of a proposal based on hard law, put forward some intermediate steps which would serve to harden specific features of the soft law model strengthened in the post-crisis reforms.Footnote 148 One of those steps would consist of the establishment of a dispute settlement mechanism similar to the one existing within the WTO in order to solve differences over international burden-sharing in the event of trans-border financial institution failures.Footnote 149
These alternative frameworks for introducing some degree of institutionalization regarding the international financial structure have been qualified as politically unfeasible.Footnote 150 We are reminded that there is no consensus among states regarding the establishment of an international framework of a mandatory type in this realm.Footnote 151 Truly, developed countries home to the largest private international institutions or in control of the most important financial centres (New York, London) will be reluctant to risk the political weight they currently enjoy.Footnote 152 Indeed, creating an international financial organization goes against their national interests and against those of their domestic financial championsFootnote 153 in areas like investment banking or credit rating. However, normatively speaking, the solution consisting of building an international financial framework based on a formal international organization with legal powers is superior to the one chosen after the 2008 crisis. If crises are recurrent, it might be wise to try to avoid them or limit their negative effects as much as possible through more, not less, hard law/formal regulation of the kind suggested in this article. As has been stated, ‘[t]he key to effectively managing systemic risk is having regulatory authorities who operate in the same domain as the institutions they regulate’.Footnote 154 If ‘informal cooperation has reached the limits of effectiveness’ then the optimal solution from a normative point of view is a WFA that performs the same tasks that are performed today by efficient national regulators, ‘namely information, authorisation, surveillance, guidance, and policy’ (including the macroeconomic and microeconomic level).Footnote 155 Moreover, from a political theory point of view, an institutionalized international organization would be in a better position to resist the domestic political pressures that government networks and national regulators currently face.Footnote 156 Finally, it is true that this proposal entails some dangers regarding overintegration in economic life.Footnote 157 However, firstly only those states wanting to engage in deeper financial integration should commit to new and more elaborated institutional frameworks.Footnote 158 Second, the proposed institutional reconfiguration does not rule out other tools like the dynamic management of a country capital account,Footnote 159 thus enhancing policy space and national regulatory autonomy.
Indeed, the EU experience is a case in point regarding deeper integration of finance internationally. The EU had completed its agenda to liberalize financial markets just prior to the crisis. Following the GFC, there were two main routes to be followed: more Europe or less Europe. After the demise of the paradigm based on deregulation and/or self-regulation,Footnote 160 and ruling out inaction or the re-nationalization of this field (together with less open markets) as possible answers, the reaction has been in the form of more Europe.Footnote 161 The mismatch between a pan-European market for financial services and the nationally-based supervision and resolution regimes has called for more centralized regulation concerning prudential regulation, crisis management, market efficiency, and a new institutional structure.Footnote 162, Footnote 163 However, the sovereign debt crisis has led the EU to reinforce its own powers by strengthening those of the European Central Bank through a recent RegulationFootnote 164 setting up a Single Supervisory Mechanism that will definitely further the path towards a European Banking Union.Footnote 165
Similarly, given that the globalization of finance is unlikely to be reversed, the regulatory stance at the international level cannot consist once again of a market-based stance through regulatory competition,Footnote 166 as this brought about the regulatory arbitrage underlining the GFC.Footnote 167 Some improved international co-operative mechanism is necessary to avoid repeating the same mistakes recently witnessed.
4. Conclusion
Conventional wisdom argues that international trade law and international financial law are very different branches of IEL. The functions performed by these two areas of IEL are radically separated. The multilateral trading system aims at liberalization to ensure competitive markets, whereas the international financial system is concerned mostly with regulation to secure financial stability. Accordingly, international trade law is equipped with instruments that look for the liberalization of national markets, like the principle of non-discrimination. This principle does not support the establishment of regulations, which could very well explain why it is almost unknown within the remit of international financial law.Footnote 168
However, as we have seen there is some evidence that point towards a more nuanced understanding. To begin with, international trade law and international financial law have similar functions in that both aim to achieve system stability (whether in trade or financial trans-border operations).Footnote 169 The multilateral trading system has developed a higher level of institutionalization and legalization but at some cost. First, as we have seen, the trade system allows the main players to adopt protectionist measures if there is a big market failure (the 2008 economic crisis). Second, the ‘trade and . . .’ debate shows that the trade regime is not complete as long as other societal values are not incorporated. The protection of human rights, labour rights, the environment, and the real promotion of development must be addressed at the WTO system if we want to preserve it from irrelevance in the near future. After all, it is not at all clear that the world trading system is only about free trade. The Preamble to the WTO Agreement encompasses other objectives together with trade liberalization (like raising standards of living, ensuring full employment, sustainable development, and the preservation of the environment). In the end, it is only a question of enabling the trading system to get rid of the pervasive economic liberalism that has been dominating it during the last decades and adopting a true global governance stance that accords with the goals stated and needs observed within the trade regime.
Second, with respect to finance, there is a real need to change the structure of the financial architecture. Soft law standards produced by TRNs were once acclaimed because they could solve the globalization paradox. However, these government networks have been unable to cope with the task once assumed, that is, that of ensuring the stability of the international financial system. As attested by the recent crises, those financial standards convey important problems regarding effectiveness and enforcement. They do not solve the crucial issues related to international banking regulation like the supervision of prudential regulation and the application of bank-resolution mechanisms for cross-border financial institutions. Moreover, their lack of accountability and inclusiveness make them an instrument for developed countries to impose their standards on non-participating countries, mostly developing countries. A proposal for reform would consist of the establishment of a WFO, although there are more modest approaches that may serve as an intermediate step. The current unfeasibility of this approach predicated by its critics may not change its normative coherence weight: collective problems may only be solved through the most appropriate co-ordinated responses which in this case require an institutional or vertical articulation in the form of an international organization.Footnote 170
As this article has tried to demonstrate, the recent economic and financial crisis has put IEL at a crossroads in the two areas under scrutiny, trade law and financial law. Global governance and normative coherence have been used as the theoretical tools to unveil the similarities stemming from the functions performed and the need for transformation that both areas of IEL have in common. Trade law and financial law are in need of reform at the international plane, be it a substantive reform in the first case or an institutional reform in the second. Of course, this change in both areas of law would introduce a meaningful step from negative regulation towards a more positive approach to regulation (an outcome already achieved with the TRIPS Agreement). Some scholars have already forecast this as the likely way forward.Footnote 171
