Comment: China—Measures Affecting the Protection and Enforcement of Intellectual Property Rights
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The fundamental premise of Saggi’s and Trachtman’s analysis of this dispute is that the WTO TRIPs agreement should be viewed as an ‘incomplete contract’. Should multilateral treaties be analogized to incomplete contracts? What are implications of doing so for the proper approach to treaty interpretation? We have to begin with the theory of incomplete contracts, which is not really explained in Saggi’s and Trachtman’s report. As developed by Hart and Moore (1988), the notion of ‘incomplete contracts ’ represents the intuition that, while a large number of possible future states of the world may affect the value and cost of performance of a contract, the transaction costs of the parties bargaining ex ante about the legal consequences of all of these possible eventualities are prohibitive. Therefore, taking account of transaction costs, we will expect ‘incomplete contracts’ to be efficient; these contracts generally will either provide various mechanisms for renegotiation triggered by the occurrence of certain future events or allow for the application by an adjudicator or arbitrator of default or background rules to ‘complete’ the contractual bargaining in the face of such eventualities. Equally important to contract theory is the problem of moral hazard: a party to a contract may have incentives to engage in behavior ex post the bargain that increases the riskiness of the contract to the other party. A classic example is insurance contracts. Effective ex ante mechanisms for controlling moral hazard often entail effective means of monitoring the behavior of contracting parties ex post. Although the concept of ‘incomplete contract’ and that of moral hazard have in common that both are concerned with the transaction costs of addressing future events that can affect the cost and value of contractual performance, moral hazard deals specifically with what might be called a form of opportunistic behavior by one of the parties. Unfortunately, these concepts are often (implicitly) blurred in the analysis of Saggi and Trachtman, as I shall go on to explain. I agree with those trade economists and lawyer economists who find both these concepts useful for understanding specific features of bargaining in the GATT/WTO and specific features of the covered Agreements. For example, ‘incomplete contract’ is a powerful concept for understanding those provisions of the GATT that provide a structure for renegotiation of a Member’s tariff concessions (GATT Article XXVIII) and of the GATS that address renegotiation of a Member’s specific commitments (GATS Article XXI). Contract theory makes sense of these provisions, which could actually allow for renegotiation upwards of particular trade barriers (with compensation), whereas a constitutionalist view of the WTO as a regime progressively moving towards complete removal of all such barriers could not easily do so. Along similar lines, the notion of moral hazard is powerful in understanding the concept of nonviolation nullification and impairment. This entails that a Member that has acted in such a way as to undermine the expected benefit to another Member of a specific negotiated concession provide compensation to the latter. But it does not follow that because these ideas of contract theory (which are really an application of broader conceptions of information and transactions costs, useful in bargaining contexts far removed from contractual bargaining between private parties, such as political bargaining) necessarily explain or illuminate all kinds of WTO obligations, and, much less, that because these insights are, as a matter of intellectual history, closely connected to the emergence of contract theory in law and economics, the canons of treaty construction should be replaced by canons of contract interpretation. What conceptual tools are appropriate with respect to particular provisions, and how the resulting understanding of ‘object and purpose’ relates to the other relevant canons in Vienna Convention 31 and 32 are separate, if obviously interconnected, questions.
Source Publication
The WTO Case Law of 2009: Legal and Economic Analysis
Source Editors/Authors
Henrik Horn, Petros C. Mavroidis
Publication Date
2011
Recommended Citation
Howse, Robert L., "Comment: China—Measures Affecting the Protection and Enforcement of Intellectual Property Rights" (2011). Faculty Chapters. 854.
https://gretchen.law.nyu.edu/fac-chapt/854
