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Boosting trade through legal harmonisation
WORLD trade is in the throes of a major crisis. While the United States and China have recently reached a trade deal, the protracted trade war between the world's largest economies is by no means over. In fact, its damaging effects - reduced commercial activity, higher costs for businesses and consumers, discouraging of investment, to name a few - may be felt for decades.
Add in the trade conflict between the US and the European Union; the shock waves that might accompany Britain's recent exit from the EU; and the paralysis of the World Trade Organization's (WTO) dispute settlement mechanism, which has made it harder to relieve trade tensions.
Together, these developments have deteriorated global trade, posing a direct threat to jobs, livelihoods, and the health of the global economy. Export-dependent countries like Singapore are already seeing their exports fall as a result of weak demand.
In times like this, many efforts will focus on reducing barriers to trade. Plans will be drawn up to remove existing governmental interference in trade, such as tariffs or subsidies. While these measures may indeed facilitate commerce, they do little to tackle other uncertainties and obstacles, namely those resulting from disparate laws.
Each country has its own body of commercial law, and this could pose a problem for businesses trading across borders, as they may be unfamiliar with the laws that apply to their transactions.
Big corporations can successfully navigate a complex legal environment consisting of different national laws. But smaller actors, with limited legal resources, will face difficulties trading globally and might be deterred from doing so.
The lack of legal convergence might also lead to misunderstandings and disagreements that could result in disputes and litigation. There is often doubt about which country's laws apply, and the parties cannot be certain of their rights and obligations. In these and other ways, the diversity of commercial laws across countries might hinder international trade. But an underappreciated tool might change that.
THE HOPE IN HARMONISATION
With legal harmonisation, states establish and adopt uniform legal rules that apply to commercial matters. The logic is simple: if different countries have similar rules, the legal foundation for cross-border transactions becomes simpler and more certain, and costs of entering and managing such transactions are lowered. Businesses will have a better understanding of the legal environment and will no longer fear that an unfamiliar foreign law will bring unwanted surprises.
Legal harmonisation offers several advantages over other measures used to boost trade, such as preferential trade agreements. These grant signatory states easy access to each other's markets and have worked well in cases like the North American Free Trade Agreement (now known as USMCA). But the success of those agreements very much depends on politics; changing political winds can disrupt them.
As evidence of this, one only has to look at the American departure from the Trans-Pacific Partnership, which has left the agreement's fate uncertain. But even when they are up and running, trade agreements often face fierce resistance from those who stand to lose: firms and industries threatened with greater competition from imports. In contrast, legal harmonisation appears less political as well as less threatening to consumers, firms or industries.
Another attractive feature of harmonised laws is their flexibility. The use of broad, open-ended standards allows significant variation in the application of the formally uniform law. Countries with different legal systems and cultures can all interpret vague or ambiguous language in a manner consistent with their domestic legal principles.
Harmonisation is slowly taking off around the world, thanks to groups like the UN Commission on International Trade Law (UNCITRAL). UNCITRAL established the Convention on Contracts for the International Sale of Goods (CISG) and the Model Law on Cross-Border Insolvency: two important examples of harmonised rules that can help businesses manage challenges of cross-border commercial activities.
The CISG includes rules for making and managing routine commercial contracts for international sale of raw materials or manufactured goods.
The Model Law aims to better regulate corporate insolvency and financial distress of companies with assets or creditors in more than one country.
The Singapore-based Asian Business Law Institute (ABLI), with its mission to promote the convergence of Asian business laws, has also embarked on several projects to harmonise rules in relation to commercial activities. For example, in light of the growing importance of data in everyday life and the myriad of regulatory responses, ABLI is working with its partners, including regulators, to reduce variations and improve compatibility among Asia's regulations of cross-border personal data transfers.
But implementing legal harmonisation is by no means easy or costless. It can face resistance from local legal communities that prefer the familiar law they have been practising for years. Traditional legal education and expertise often creates status-quo bias, which makes it difficult for lawyers and judges to accept and adapt to a new kind of legal thinking.
States also have to consider the rising nationalism of our times and the growing concern about ceding legal sovereignty to international bodies. After all, one of the demands of Brexit supporters was "take back control of our laws".
Legal harmonisation, however, in no way entails a sacrifice of sovereignty. It is up to states to decide whether to incorporate the harmonised law into their domestic legislation. If they do, they remain in charge of interpreting and applying the law.
In these trying times for the world trading system, when the US turns its back on the trade-liberalisation principles and institutions it had built, it is time to consider some alternatives.
Harmonising commercial laws offers a promising alternative, and one that is within relatively easy reach.
Educating governments and firms about the benefits of harmonisation and the limited costs it entails will bring us closer to realising the potential of this tool - to the benefit of trade and economic activity.
- The writer is associate professor of government at the Interdisciplinary Center (IDC) at Herzliya, Israel.