Interdependence, Transnational Opportunity Structures, and Cross-National Layering in Transatlantic Regulatory Conflict
By
Henry Farrell and Abraham Newman
Prepared for the American Political Science Association Conference, Chicago Ill, August 29-September 1.
How are regulatory disputes between the major powers resolved? Jurisdictions have different – and often incompatible – rules over issues such as consumer protection, the environment, health standards, or production processes.[1] These regulatory differences pose major questions for the study of international politics as regulations[2] determine how national and international markets work and often distribute their economic benefits across market actors.[3]
Existing literature generally characterizes such regulatory disagreements as system clash, in which fixed national systems of regulation come into conflict, so that one sets the global standard, and the other adjusts or is marginalized. State power arguments claim that internal market size and external coalitions of states determine winners and losers.[4] Liberal accounts are more interested in how national institutions shape bargaining strategies,[5]or how firm incentives and the fit between domestic and international institutions shape bargaining outcomes.[6] These accounts assume that regulatory preferences result from processes of domestic interest formation external to the theory, that bargaining takes place between relatively discrete jurisdictions, and that once an equilibrium outcome has been reached it will only change in response to major shifts in the external environment.[7]
The empirical record, however, suggests a different picture. If we look at the two great economic powers in the global system – the EU and the US[8] -- we find repeated evidence of compromise and adjustment rather than straightforward system clash. To list a few examples – a purportedly intractable dispute over genetically modified organisms has given way to effective agreement, by empowering a group of pro-GMO actors vis-à-vis GMO opponents within the European Commission.[9] An apparently irresolvable conflict over online privacy was moderated by a hybrid regulatory structure, which transformed the apparent options available to both states.[10] After years of U.S. intransigence in financial services disputes, the U.S. and the EU have negotiated agreements, fostering international rule compatibility that do not reflect the initial preferences of either.[11]
What explains this? This article integrates insights from two literatures – earlier accounts of interdependence and historical institutional explanations of institutional change from comparative politics – to develop an argument about the potentially transformative role of transnational cooperation for global regulatory politics.[12] Building on the work of Keohane and Nye, we argue that interdependence alters the opportunity structures that regulatory actors confront.[13] Specifically, it creates incentives for transnational actors, (e.g. multinational firms) to demand change, and opportunities for sub-national regulatory actors (e.g. bureaucratic units within the government, or self-regulatory authorities outside it, that can shape authoritative rules) to supply specific kinds of change. Where national regulatory actors are able to create or draw upon transnational regulatory networks,[14] with other regulators in the relevant jurisdictions, they can use these networks to build cross-jurisdictional alliances. Because not all regulatory actors have access to transnational networks, the solutions provided will privilege the interests of the participants. Resulting transnational institutions create a ‘cross-national layer’[15], which can reshape long term political relationships among the relevant domestic groups and constituencies. In a world of interdependence, then, regulatory disputes are less discrete international conflicts between sovereign jurisdictions than ongoing battles among regulatory actors within jurisdictions (and alliances across them).
We assess the plausibility of our arguments by examining how well they explain two cases of EU-US regulatory disagreement – surveillance information sharing and accountancy standards. Following a most different case selection, we show how our cross-national layering argument provides a more plausible account of these disputes than either traditional state power explanations or two level games approaches.
International Regulatory Politics as Systems Clash
Regulation is joining trade and money as a major pillar of IPE with scholarship focusing on variation in regulatory convergence.[16] When do global standards emerge and who influences their content? The dominant literature takes a state power approach. Jurisdictions with large markets can shape regulatory coordination through market access.[17] Both the US and the EU, for example, employ equivalency clauses in which market access is conditioned on the adoption of compatible rules in other jurisdictions. More passive processes such as “trading up” also reflect these power dynamics.[18] This approach sees interdependence between different national systems as causingregulatory clashes, but maintains that these clashes are resolved through national bargaining based on market size.
For much of the post-cold war period, state power scholars saw the US as the main driver of regulation.[19] More recently, Drezner (2007) argues that market size puts the EU and US at the center of most global regulatory debates. [20] When the two great powers share preferences, global standards emerge and when they disagree, rival or sham standards are more likely. To understand the great powers’ regulatory preferences, Drezner argues that states have an incentive to defend and replicate their domestic rule structures globally. He applies this basic logic, pitting US and European preferences for regulation against each other, across a host of policy domains.
Liberals generally agree with power scholars’ focus on large markets but emphasize institutions of interest aggregation at the domestic and international levels. Building on the classic two-level game metaphor, they argue that sector characteristics and factors of production shape interest group preferences. National institutions filter these preferences so as to constrain international negotiators.[21] Outcomes reflect not only market power, but domestic institutions. Interdependence activates the preferences of domestic interest groups - e.g. importers versus exporters - but it neither affects their bargaining power, nor leads directly to institutional change.
Emerging work within liberalism takes a less state-centric approach, examining how global regulation can emerge from either extraterritorial application of domestic law or soft law. Such regulation does not face the domestic ratification requirement depicted in the two-level game literature. These liberals focus more on market competition, information dynamics, and the network effects of standards than formal veto points.[22] Büthe and Mattli argue, for example, that private European standards organizations were better able to shape global rules even in the face of US opposition because European institutions fit better with the global standard setting process.[23]
Power and liberal approaches have similar empirical expectations across many dimensions. Both emphasize how powerful markets set global rules, rely on jurisdictional and sovereign borders as a means of distinguishing the key regulatory players, and assume states have fixed preferences. State power arguments expect global convergence to occur in cases where great power preferences converge. Given the historically rooted trajectories of regulation across the great powers, such convergence is probably rare. The more common outcome is rival standards projected by the largest markets or sham standards that have no real consequences. Where there is preference disagreement, liberals see some additional room for cooperation, when standards arise in a battle of the sexes type cooperation environment. Given different domestic and international institutional configurations, one large market may be better positioned to articulate its preferences versus a rival and gain first mover advantage over setting global rules.
We summarize the broadest contours of these approaches with regard to regulatory disputes in Figure 1. Interdependence produces new friction, which brings jurisdictions into contact with one another and differentially affects domestic interest groups. Depending on the approach, market power or institutions play the primary role in understanding how these different interests shape global rules.
[FIGURE 1 HERE]
Despite the significant contributions of both approaches to the field of international regulatory politics, empirical developments present a number of puzzling results. From agriculture to finance, the level of convergence has changed over time.[24] This has happened without any significant shift in the relative balance of power or change in the institutional setting. Moreover, jurisdictions that have long enjoyed first mover status have had to accommodate other great powers.[25]
Transnational Opportunity Structures and Cross-National Layering
Building on early interdependence literature, we develop an alternative analytic framework to explain international regulatory politics. In contrast to system clash, we emphasize the importance of intersocietal interactions. Within most jurisdictions, there is disagreement among actors over status quo regulatory bargains. Interdependence both makes these rules costlier, and allows regulatory actors with shared interests and access to transnational networks to create alliances across jurisdictions to challenge rules. Over time, the agreements struck in such transnational forums create cross-national institutional layers that can destabilize domestic institutions and weaken alternative coalitions.
This harks back to the original literature on interdependence, which was more interested in the causal consequences of cross-national relationships,[26] than in preference formation and the filtering role of national institutions and international organizations.[27] Scholars such as Joseph Nye and Robert Keohane argued that ‘intersocietal interactions’ provided opportunities for ‘transnational actors’ to shape international politics.[28] More than just describing new global challenges or actors, this was a structural argument about the changing nature of international politics with “situations characterized by reciprocal effects among countries or among actors in different countries.”[29] In discussing interactions among sub-state actors, in particular, Nye and Keohane (1971) highlighted the ability of such actors to serve two distinct roles in international politics: transgovernmental coordination and transgovernmental alliances. While much of the current literature on regulatory cooperation has focused on the former (i.e. regulatory cooperation as a functional response to interdependence friction), this article develops the latter more political and contentious phenomenon.
Fundamental to this earlier notion of transgovernmental alliances was the idea that interdependence created an opportunity structure, which regulatory actors may use in their efforts to reshape domestic institutional bargains (and in turn global rules).[30] This branch of earlier interdependence literature, however, was never fully developed as following work focused on issues of coordination. We, therefore, set out to develop a set of mechanisms by which such opportunity structures may alter global regulatory politics. First, we reject the usual assumption that the most fundamental condition of international politics is the rule-less space of anarchy. Instead, we begin from the assumption that increasing globalization (which we think of as increased flows of capital, goods and information) creates a condition of rule overlap in international markets. Cross-national interactions mean that domestic rules of different regulatory systems come to interfere with each other. Where those rules are incompatible, they impose extraordinary pressures on actors, in particular multinational firms, which need to work under the rules of different systems. Because these actors are politically important, this creates pressure on regulatory authorities to resolve these contradictions. While large firms have preferences over which regulator’s rules should obtain, these preferences are usually subordinated to the more urgent need to create regulatory certainty. In the face of rule overlap, businesses generate strong pressures to reach some kind of arrangement and thus destabilize existing domestic regulatory bargains.
Moreover, interdependence creates an opportunity structure for regulatory actors to forge cross-national alliances. Within jurisdictions, we assume that there are regulatory actors with a variety of preferences. Absent interdependence, those seeking to change their regulatory status quo have to work within domestic politics. Interdependence, however, opens up multiple political channels between jurisdictions, allowing actors to forge alliances with those holding similar preferences in other jurisdictions.[31]
The opportunity structure created by interdependence is not equally distributed among regulatory actors. Historical sequencing means that some regulatory actors will be better positioned than others to engage in intersocietal interactions.[32] When regulatory actors with a shared agenda have access to the transnational policy space, a transnational agreement is possible. In contrast to the theories of systems clash employed by state power-based and liberal arguments, neo-interdependence opens up the possibility for internal disagreements within jurisdictions and transnational alliances across them.
Transnational networks of regulatory actors may play a critical role.[33] Such networks rarely have direct power to impose formal rules. Instead, they develop soft law agreements, or recommend formal action at the national level. Nonetheless, they provide participating actors with considerable freedom to develop a joint regulatory agenda.[34] Cross-national dialogue within these networks ensures that regulators who are in direct contact with each other will have better information about what other jurisdictions are, or are not prepared to countenance than other national-level actors. They can informally coordinate their regulatory actions across borders, effectively moving the international reversion point. Actors who do not enjoy access to these cross-national networks, will have less information, and less legitimacy when they try to leverage international disputes for their own purposes. They will not be able to provide the same assurance to business that their own preferred solutions will resolve cross-national regulatory clashes. Rather than seeking to solve problems through expert consensus, as Anne-Marie Slaughter (2004) has suggested, actors in these networks will seek to reach solutions that favor their particular political interests rather than the interests of those without access.
Building on work in historical institutionalism in comparative politics we consider such transnational institutions as a possible sources of endogenous change within national jurisdictions. We term this process ‘cross-national layering’. Facing rule-overlap and mounting uncertainty, international business will have an incentive to look to the transnational agreement so as to mediate contradictory demands. Such transnational agreements create a cross-national informal institution which overlays domestic rules. Over time, the transnational agreement can subsume or replace the domestic rule, by making it less and less relevant to the actual behavior of key actors (e.g. businesses with cross-national exposure).[35] Business support for (and compliance with) transnational agreements reshapes the incentives of domestic regulatory actors who were previously inclined to block change. Given the context of rule overlap, these blocking actors may find that their best available strategy is to engage the transnational rule-making process rather than suffer further losses in influence. As support leaches away from these institutions, those actors will find themselves obliged to get the best deal that they can in the new transnational arena that is increasingly coming to dominate.
Figure 2 summarizes the logic of our cross-national layering approach. Interdependence produces rule overlap as jurisdiction 1’s rules begin to affect actors in jurisdiction 2. At the same time, interdependence creates opportunity structures for transnational networks between regulatory actors B and C. The cross-national layer constructed by B and C feeds back into the domestic institutional context of jurisdiction 2, buttressing the new global rules.
[FIGURE 2 HERE]
In the next section, we process trace two transatlantic regulatory disputes – surveillance information sharing and accountancy – so as to demonstrate the plausibility of the neo-interdependence account compared to the state power and liberal arguments. We chose surveillance and accountancy as cases of prominent transatlantic disputes which both state power and liberal arguments have sought to explain, and which represent very different policy areas.Following a most different case logic, applying the neo-interdependence approach across these two very different domains not only provides a plausibility probe of the causal argument but suggests that the argument has wider purchase.[36]
Interdependence and Surveillance Information Sharing
After the September 11, 2001 terrorist attacks, the United States government passed laws requiring increased information sharing from its European allies.[37] Owing to domestic differences over privacy – the ability of citizens to control the use and dissemination of their personally identifiable information – these new rules sparked a number of heated disputes lasting nearly a decade. Surprisingly, these conflicts have now been resolved but on terms that neither jurisdiction might have originally anticipated.
State power explanations depict these disputes as examples of systems clash. Drezner treats EU-US disagreements over commercial privacy as “a good example of the rival standards outcome”[38], which stemmed from differences in their domestic regulatory systems. One body of research suggests that the US post-September 11 used coercion to press for EU reform and as a result of imposition the EU has complied with US demands.[39] Another, however, supports the rival standards claim finding that differences in security culture has led to conflicting views of such information sharing.[40]
Liberal accounts highlight different sets of causal variables. Although the US executive has not had to seek Congressional approval during its negotiations with the EU over information sharing (these negotiations have involved executive agreements rather than treaties), there has been important variation in the European Commission’s need to seek the acquiescence of the European Parliament.[41] Before the Lisbon Treaty came into force, the Parliament had little influence over regulatory arrangements in the area of surveillance. After the Lisbon Treaty, the Parliament was granted an effective veto. This mattered because the Parliament on civil liberties grounds was strongly and vehemently opposed to compromises with the US.