BSc International Business and Politics - IBP @ · PDF fileBSc International Business and...

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 4th of April 2017

Number of pages: 10 (12, incl. front page and bibliogaphy)

Number of characters incl. spaces: 22.743

Copenhagen Business School 2017

Annkatrin

Hervorheben

Annkatrin Mies (2704903564) BGG (final) 4.4.2017 Copenhagen Business School 2017 – BSc IBP

1

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

Annkatrin

Hervorheben


2

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

Annkatrin

Hervorheben


3

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

Annkatrin

Hervorheben


4

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

Annkatrin

Hervorheben


5

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 business-

government 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

Annkatrin

Hervorheben


6

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

Annkatrin

Hervorheben


7

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: quasi-

deregulation 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 investor-

state 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

Annkatrin

Hervorheben


8

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.

Annkatrin

Hervorheben


9

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

Annkatrin

Hervorheben


10

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.

Annkatrin

Hervorheben


11

Bibliography:

Archibugi, Daniele, and Andrea Filippetti. 2010. “The Globalisation of Intellectual Property Rights: Four

Learned Lessons and Four Theses.” Global Policy 1 (2): 137–49.

Bouwen, Pieter. 2002. “Corporate Lobbying in the European Union : Towards a Theory of Access.” Social

Sciences 9 (3): 365–90.

Büthe, Tim, and Walter Mattli. 2010. “Standards for Global Markets: Domestic and Interational

Institutions.” Handbook on Multi-Level Governance, 455–76.

Fuchs, Doris. 2007. “Business as an Actor in Global Governance.” Understanding Business Power in Global

Governance, 43–70.

Henderson, David. 1999. The Mai Affair: A Story and Its Lessons. London: London.

Kaul, Inge, Isabelle Grunberg, and Marc Stern. 1999. “Global Public Goods: International Cooperation in the

21st Century.” In , 1–20.

Mattli, Walter, and Ngaire Woods. 2009. “In Whose Benefit? Explaining Regulatory Change in World

Politics.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods, 1–43.

Princeton: Princeton University Press.

Pagliari, Stefano, and Kevin L. Young. 2014. “Leveraged Interests: Financial Industry Power and the Role of

Private Sector Coalitions.” Review of International Political Economy 21 (3): 575–610.

Sell, Susan K. 1999. “Multinational Corporations as Agents of Change: The Globalization of Intellectual

Property Rights.” In Private Authority and International Affairs, 169–92.

Walter, Andrew. 2001. “NGOs, Business, and International Investment: The Multilateral Agreement on

Investment, Seattle, and beyond.” Global Governance 7 (1): 51–73.

Annkatrin

Hervorheben

BSc International Business and Politics - IBP @ · PDF fileBSc International Business and...

Documents

Transcript of BSc International Business and Politics - IBP @ · PDF fileBSc International Business and...