With globalisation in reverse, different countries and jurisdictions around the world are no longer converging on a common rulebook. Instead, the bigger players are trying to make their own rules apply to the wider world. The rules reflect different normative standards in areas such as the probity of financial markets, the integrity of information markets and the protection of the environment.
This desire to project their own standards into the wider world raises two basic questions. First, what governments can do to make their own rules affect the behaviour of those outside their own jurisdiction. Secondly, what, if anything, can be done to avoid conflict between different rules.
External effect: the motivation
The world is no longer converging on common rules of behaviour. However, countries and regions are still impacted by the behaviour of those outside their own territories. As a result jurisdictions are responding by trying to extend the reach of their own legislation into the wider world outside. They are taking preventative action against bad influences coming in. They are, at the same time, hoping to gain outside support for their own rules.
An example of US rulemaking that aims to have effect outside the US itself is contained in the Dodd-Frank legislation of 2010 that applies US anti-fraud law to reach those outside the US. An example of EU rulemaking that aims to have affect outside the EU is the 2016 General Data Protection Regulation.
The aim of jurisdictions to reach outside their own borders represents a major departure from a long tradition, on both sides of the Atlantic, that laws only have domestic application.
The tools to wield effect in the wider world
The first question that arises is how exactly the EU or US or others can make their rulemaking effective in altering the behaviour of those outside. The menu of possible measures can be divided into two main classes. The legislation can offer positive reasons for outside jurisdictions to adopt or respect the same practices. Alternatively, it can apply penalties if they do not comply.
Jurisdictions can offer positive incentives to those outside by simply setting out the standard of behaviour that is expected of others, by monitoring their compliance, and by reporting on and reviewing the standards of others. Penalties involve ‘black listing’, imposing fines, levying border taxes and erecting barriers to entry.
Monitoring, review and benchmarking can all be influential in persuading countries to change their practices, particularly if there are domestic constituencies that want to see changes anyway. But in some cases, differences are deeply embedded and imposing penalties may be necessary.
When positive inducements fail to achieve agreement, what is called ‘dual targeting’ can be effective. This means that action will be taken against offshore businesses with the aim that, in turn, they will pressure their own home governments to change their standards. Switzerland changed its banking secrecy laws because its banks were targeted by US courts.
With the possibilities of getting full international agreement on standards of behaviour in decline, we can expect to see greater use of laws that are framed to have external affect. Big players can go it alone. Like-minded groups of countries can also act in concert.
In weighing how far to go in this direction, countries always have to take into account that their actions may backfire. For example, the EU’s carbon border tax may have the result of raising consumer prices within the EU. The more general issue is about the potential for conflict with other rule makers. The potential for conflict is partly with internationally agreed rules. For example, the EU’s border tax will have to be designed in a way that does not infringe WTO rules. However, the potential for conflict is with all other rules from whatever source.
There are three main approaches that can be taken in order to avoid head to head conflicts:
The first approach involves looking to see whether other jurisdictions offer similar or equivalent standards. This is sometimes referred to in terms of ‘sameness’ tests. The tests can be strictly applied according to the standards of the law. They can also be applied in a more political, judgemental way. If some form of equivalence or mutual compatibility can be established then the rules can live side-by-side.
The second approach involves remaining silent over differences. Timing is important. There is no point in picking a fight if there is a possibility that the other jurisdiction may change its own practices. When reactions are unpredictable the old adage may still apply, ‘discretion is the better part of valour’. Discretion may allow for differences to be sorted out quietly through negotiation.
Silence is not always seen to be appropriate. It may be seen to condone highly undesirable standards of behaviour. The third approach thus involves asserting the difference and claiming normative superiority for the jurisdiction’s own standards. In this case standards will remain in conflict until one side or the other backs down. If it goes ahead with a carbon border tax the EU is in effect claiming superiority for the environmental standards in its market compared with those in say Asia or Africa or America.
We are no longer living in a world with the happy expectation that norms will converge over time and where we will all arrive at some globally agreed common position. The differences reflect the different underlying character of governments. Authoritarian governments and democracies apply different values to their rulemaking and justify their choices in different ways. The differences spill into international rulemaking. As long as the world fails to converge on the relative merits of democracy compared with other forms of government the disagreements in rulemaking will continue. Fully international rulemaking will be largely blocked. Jurisdictions will assert their own standards in their own ways.