The
Economic
Structure
of
International
Law
The Economic Structure of
International Law
class="bi x0 y7 w2 h3"
The Economic Structure of
International Law
j
JOEL P. TRACHTMAN
HARVARD UNIVERSITY PRESS
Cambridge, Massachusetts
London, England
2008
Copyright © 2008 by the President and Fellows of Harvard College
All rights reserved
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
Trachtman, Joel P.
The economic structure of international law / Joel P. Trachtman.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-674-03098-5 (alk. paper)
1. International law—Economic aspects. 2. International economic
relations. 3. Globalization—Economic aspects. I. Title.
KZ1252.T73 2008
341—dc22 2008017648
For Lauren

law that often emphasizes advocacy over analysis. A social scientific ap-
proach would use theory, in the tradition of the sciences, as a source of
testable hypotheses, not as a source of dogma.
A social science–based account of international law requires great com-
plexity, as it addresses a number of phenomena, including the rise, stabil-
ity, and efficiency of custom; compliance with treaty; the establishment of
international organizations; the use of dispute settlement in international
treaty structures; and a host of other topics. While these are varied sub-
jects, the treatment of which requires a variety of tools, it is possible to de-
velop an overarching analytical model of international law. The approach
developed in this book is consequentialist: it is based on an attempt to de-
ix
termine the effect of law on behavior. However, this book does not address
substantive international law relating to particular fields, such as interna-
tional environmental law, international trade law, international human
rights law, or the laws of war. So it does not examine, for example, how
human rights treaties affect the human rights performance of states.
Rather, this book provides a systematic framework by which to understand
and evaluate the formation and application of law in all of these areas.
At the core of analysis of international law as a system, and permeating to
the very periphery, is the question of jurisdiction: the legal manifestation of
power, or authority. Even issues of “cooperation,” which are the focus of
much of international law and international politics scholarship, are just a
subset of the problem of allocation of authority. When states cooperate,
they agree not to exercise authority that they had ex ante, they agree to ac-
cept exercise of authority by other states that the other states lacked ex ante,
or they agree to pool authority in an international organization. We may also
assimilate an agreement on substantive law—an agreement to exercise au-
thority in a specified way—to a transfer of authority. These agreements may
be implicit or explicit. While this allocation of authority-based understand-

on rules whose main purpose is to deal with the formation of law and the
allocation of jurisdiction. This book begins with a study of jurisdiction as
power, follows its transfer through custom and treaty, and examines the
way states share it through organizations. Thus, jurisdiction is the core
issue in all of international law. Jurisdiction is the power of states in a legal
setting. All international law is concerned with establishing or restraining
the power of states.
This book represents the culmination of a number of years of study of the
economic analysis of international law. It is not a mere restatement of my
study of economic analysis of international law over these years, but an at-
tempt to consolidate, integrate, rectify, and extend that study.
A book takes a village, and is a record of an education. I have had the op-
portunity to learn from many others in the course of this study, including
especially three scholars who coauthored with me papers that formed the
basis for important parts of this work. The process of coauthorship with Jef-
frey Dunoff, Phil Moremen, and George Norman has been for me a won-
derful and challenging exploration, and this process has made it difficult to
delineate responsibility. Portions of this work draw on works initially coau-
thored with Professors Dunoff (some ideas in Chapters 1 and 4), Moremen
(parts of Chapter 7), and Norman (Chapter 3)—and so while I accept full
blame for this work, I cannot take full credit. Chapter 2 draws substantially
from my 2001 article, Economic Analysis of Prescriptive Jurisdiction and
Choice of Law, originally published in the Virginia Journal of Inter-
national Law. Chapter 3 draws substantially from my 2005 article with
George Norman, The Customary International Law Game, originally pub-
lished in the American Journal of International Law. Chapter 5
draws some material from my 1996 article, The Theory of the Firm and the
Theory of the International Economic Organization. Excerpts reprinted by
special permission of Northwestern University School of Law, North-
western Journal of International Law.

for Comparative Public Law and International Law, New York University
School of Law, UCLA Law School, the Wharton School, and Yale Law
School. I thank the hosts and the participants for these valuable opportu-
nities to expose my work to helpful critical review.
Throughout my work on this book, I benefited from able research assis-
tance by many students at the Fletcher School of Law and Diplomacy and
Harvard Law School, including Aadeesh Aggarwal, Javier Diaz, Meg
Donovan, Alexander Gazis, Jeremy Leong Zhi Jia, Christine Makori, Al-
fredo Munera, Vijay Palaniswamy, Elisabeth Shapiro, Ekaterina Trizlova,
Nirmalaguhan Wigneswaran, and John D. Wood.
xii Preface
The Economic Structure of
International Law
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CHAPTER ONE
Introduction
A Social Scientific Approach to International Law
LAW AND ECONOMICS is the application of economic methods to legal
analysis.
1
However, economics itself is not so much a methodology as an
epistemology. Economics encompasses a broad range of methods. In this
regard, economics is simply another word for rational social scientific
analysis—properly applied, it rejects no method that is rational. While it is
true that economics is learning to accept the irrational as well, it does not
accept irrational theory or methodology, but seeks to apply rational analy-
sis to irrational human behavior.
2
Economics is a strong social science be-
cause it is an open system. The only conditions for inclusion in the system

sequences.
It is also important to note that there is an essential unity to the social
sciences, of which economics is only one. Others include political science,
sociology, social psychology, and anthropology. They all seek descriptively,
or positively, to understand how humanly created institutions (including
laws) affect behavior and, normatively, to understand how changes in these
institutions would affect behavior to align it more closely with specific
preferences. On the other hand, many legal scholars have relinquished any
pretensions to autonomy for law as a discipline,
3
and seek theoretical justi-
fication in other disciplines, such as economics, politics, and sociology.
Economic methodologies, or social science methodologies, are there-
fore inclusive in their application to law: they accept all rational ways of
knowing about the consequences of social rules.
Economic analysis holds great promise for international law. This prom-
ise lies in the ability of economic analysis to suggest useful methods for an-
alyzing the actual or potential consequences of particular legal rules. This
approach is consequentialist, and it has everything to do with lex ferenda. In
determining what the law should be, what else is required than to know
what the desired consequences are, and the extent to which the available
legal rules achieve these consequences? Of course, we have complex de-
sires. We want both to preserve local prerogatives and to prevent genocide.
We want both to promote environmental protection and to increase free
trade. We want both predictability and flexibility. Economic analysis cannot
tell us how to value these preferences, but it can tell us how to maximize the
2 The Economic Structure of International Law
things we value. Economic analysis is intensely comparative, comparing the
achievement of particular preferences under different circumstances. In
law and economics, we focus on the consequences of different legal rules.

in the allocation of individual authority: efficiency in the market. So it is
important from a political standpoint to recognize that the law and eco-
nomics of international law may depart from concerns for market effi-
ciency. Cost-benefit analysis would assume that individuals would seek to
design governmental institutions, and their powers of intervention, so as
Introduction 3
to maximize the combined efficiency of market allocations and govern-
mental allocations.
Finally, economic analysis is committed to liberalism, as it comes to law
with no preferences of its own, other than the overarching respect for the
preferences of individuals. This is the most challenging part of economic
analysis for international law. International legal analysis has often allowed
itself to become a scholarship of advocacy. While it is often difficult to crit-
icize the consequences sought by the advocate-scholars of international
law, and we may share their goals, advocacy is not scholarship. Ideals are
the prerogative of each of us as individuals, but the responsibility of schol-
ars is to illuminate, not to promote their own ideals. On the other hand,
good scholarship holds great promise for advocacy, for it can clarify causal
relationships that are otherwise obscure. Illumination is not neutral.
Theory and Empiricism
There are two main activities in social science, as in science: modeling and
empirical testing. A model is based on theory, and sometimes also on em-
pirical testing. It is a source of predictions and hypotheses. Once a model
has been validated by empirical testing, it might be appropriate to engage
in normative public policy on the basis of the model itself. This type of use
would depend on the degree of validation and the extent to which the fac-
tual parameters that have been tested accord with the factual parameters
in the setting being evaluated without its own empirical testing. However,
economics has often been guilty of prescribing on the basis of theory, with-
out sufficient relevant validation.

analysis recognizes that there may be several causal variables, and tries to
determine mathematically, in contexts of multiple experiences, which causal
variables are having the effect, and the magnitude of the effect. (To be sure,
regression analysis, like other statistical analysis, tells us nothing about cau-
sation, but only about correlation. It is up to us, using theory, to draw causal
inferences from correlations between variables.)
I will now provide some examples of the application of price theory,
transaction costs analysis, game theory, and empirical analysis in inter-
national law. Recall that the first three are sources of theory and are
hypotheses, while the last relates to a method of falsifying or supporting
hypotheses.
Price theory is the basis for cost-benefit analysis: in seeking to achieve
our preferences, we seek to maximize benefits and minimize costs (benefits
and costs are measured in terms of the achievement of our preferences,
which are not necessarily monetized or monetizable). Therefore, if my
preferences include engagement in ethnic cleansing, I would examine the
costs of weapons, of retaliation by my target, or of my reputation. If there
exists an international legal rule against ethnic cleansing that is enforced
and could result in my punishment, I would examine the discounted costs
of punishment. The discount factor would relate to the likelihood of my
apprehension and punishment, and the delay until my apprehension and
punishment. Therefore, based on the price theory model, we would
hypothesize that, mutatis mutandis, a reliably enforceable legal rule with
substantial punishment would reduce the likelihood of ethnic cleansing.
Introduction 5
Here, it is worth emphasizing that economists work with the marginal
case. This legal rule would not prevent every case of ethnic cleansing.
Rather, it would place a finger on the scale of the potential perpetrator’s
cost-benefit analysis, increasing the costs of ethnic cleansing. If in a partic-
ular case the costs are still less than the perceived benefits, we would still

game structures. Although there are many types of games, and each one
only essentializes in order to help understand complex real-world prob-
lems, the most popular game is the prisoner’s dilemma. The prisoner’s
6 The Economic Structure of International Law
dilemma, described in detail in Chapter 3, provides a way of understand-
ing the problem of cooperation in circumstances where each individual
state can do better by violating a customary international law rule or treaty,
but both states will do worse if both violate the rule or treaty. The bilateral
prisoner’s dilemma, resulting in inefficient violation by both sides, may be
escaped by repetition. If you violate the first time, I can retaliate later. If
you understand this and value the future sufficiently (i.e., are sufficiently
patient), you may determine not to violate the first time. The shadow of
the future provides incentives for cooperation. The development of cus-
tomary international law may be understood this way.
International legal scholarship has in the past provided strong descrip-
tions of particular international legal rules and of behavior. It also has a tra-
dition of prescription: of urging action to enhance the rule of international
law, to comply with moral or ethical mandates, to protect the environment,
to protect human rights, or to end war. These are often valuable goals, but
simply labeling a rule as a human rights rule or an environmental rule does
not make it normatively attractive, and does not make it necessarily pre-
emptive of other values. If it did, we would seek every human right, and
every environmental protection, to the maximum extent and at all costs.
This is clearly not what we do, descriptively, and it is unlikely that we
would desire to do it, normatively.
Descriptive or positive economic analysis simply seeks to explain our
world: what observable effect do independent variables have on depen-
dent variables? This type of consequentialism is critical to institutional and
legal reform—to normative economics: how do we know what changes to
prescribe if we have no plausible basis for predicting their effects? If you,

Consequentialism rarely succeeds without empiricism: in order to know
what the consequences of a legal rule are, we must examine how similar
legal rules have worked in similar circumstances. The trick is in distinguish-
ing between similar and different rules and circumstances. Is there a useful
role for theory without empiricism? One might posit that theory can assist
with, or can be a form of, institutional imagination. So, while we may not
have empirical support for a particular institutional change, the change may
be desirable as a conjecture, to be tested through experience. In a sense,
much of human institutional development over time has taken place by con-
jecture and critique. This amounts to a kind of serial gestalt testing, and trial
and error, and it may be the best approach to institutional change in particu-
lar cases. It is only more recently that we have become self-conscious
enough to develop the prospect of more disciplined empirical analysis.
In the absence of this type of data, we may decide to make decisions
based on theory—supposition—derived from past experience. After all,
we cannot abstain for lack of information: in the real world, not to decide
is to decide. Our existential choice is not whether to decide, but whether
to obtain more information before we decide. Economic analysis of law
provides a framework for determining which information is important, and
in what ways. Theory allows us to put information in context. As Kant
pointed out, “Experience without theory is blind, but theory without
8 The Economic Structure of International Law
experience is mere intellectual play.”
6
Keynes said almost the same thing
as Kant’s first clause, referring specifically to economics: “Practical men,
who believe themselves to be quite exempt from any intellectual influ-
ences, are usually the slaves of some defunct economist.”
7
Some international lawyers engage in the “mere intellectual play” of

or firms. These individuals seek to further their self-defined interests
through the most efficacious means available. While each individual acts
for himself, “from the action of like units emerges a structure that affects
and constrains all of them. Once formed, a market becomes a force in itself,
and a force that the constitutive units acting singly or in small numbers
Introduction 9
cannot control.”
10
It is important that Kenneth Waltz, known as a realist,
suggests here that this “market” exerts behavioral power exogenous to
states. The world only starts out anarchic. The theory of international law
expounded in this book develops an understanding of the legal form that
this market and institutional power can take.
So according to the economic perspective, the international system, like
economic markets, is formed by the interactions of self-regarding units—
largely, but not exclusively, states.
11
These utilitarian states interact to
“overcome the deficiencies that make it impossible to consummate
mutually beneficial agreements.”
12
Actors in each system are willing—to
some extent—to relinquish autonomy in order to obtain certain benefits.
13
Both the international and the domestic systems, then, are seen as individ-
ualist in origin, spontaneously generated and unintended products of indi-
vidual preference-maximizing behavior.
14
The assets traded in this international “market” are not goods or services
per se, but assets peculiar to states: components of power, or jurisdiction.