Jean Monnet Center at NYU School of Law

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1. The Tradeoff Problem and the Structure of the Argument

a. The Trade and . . . Problem

The world community is increasingly concerned with international commerce, with domestic regulatory actions that can impede international commerce, and with international commercial rules that can restrict domestic regulatory actions. As tariffs and quotas have been reduced since the inception of the General Agreement on Tariffs and Trade ("GATT") in 1947, conflicts between trade values and other social values[2] have arisen,[3] like undersea mountains that come into view as the sea is drained.[4] While these conflicts are now apparent, their contours and ramifications are largely uncharted. Furthermore, the explicit formulas or approaches provided to resolve these conflicts in treaties, constitutions and precedent seem incomplete and incoherent.

It is obvious, but not always accepted, that neither trade values nor other social values are, by themselves, preeminent.[5] Rather, we are forced to choose the extent to which each value is to be implemented, to make tradeoffs among these values. We do so through legislative processes and through adjudicative processes. The main way by which adjudicative bodies have done so in the

trade arena is through rules that relate the burden on international or interstate trade to the local, or at least locally-determined, regulatory benefit, including anti-discrimination rules,[6] simple means-ends rationality tests, least trade-restrictive alternative tests (including the "necessity" test under article XX of GATT[7]), proportionality tests stricto sensu,[8] balancing tests and perhaps cost-benefit analysis. While diverse, these doctrines share a common feature: the willingness to juxtapose, and in some cases to commensurate between, trade values on the one hand and non-trade values on the other hand.

This article uses comparative institutional analysis to analyze certain formulaic and other institutional[9] means to address the conflict between trade values and other social values.[10] This article compares institutional solutions to these problems used by adjudicative bodies in the European Union ("EU"), the World Trade Organization ("WTO")[11] and the United States (U.S.) in comparative perspective.

b. The "Trade and . . . Problem" as a Multi-Level Institutional Choice Problem

The "trade and . . . problem" of course manifests itself in particular circumstances, and each circumstance must be addressed separately, except to the extent that benefits arise from analyzing similar problems together. This problem is one of synthesizing and maximizing complex preferences: for example, how much environmental protection do "we" want, and how much allocative efficiency from free trade do "we" want. We need some of each, and the only question is how much? The difficult word is "we": of which community are we speaking?[12] Is it a geographical grouping like a city, state or province, country or regional organization, or is it the global community?

If we had a discrete community to govern, the problem would be much more manageable. We (this time we know who we are) would simply leave it to our political process to determine how much of each "good" we want, or alternatively, to determine when the market should do so. While both the political process and the market are no doubt imperfect, we have no others, and politics is often the default means for choosing among incommensurables, such as allocative efficiency (which can be measured in currency, albeit with costs and limitations) and environmental protection (which is considerably more difficult, although perhaps not impossible, to monetize).[13] On the other hand, the reason we do not have a single global community to govern is because there are important benefits of diversity, which allow smaller groups of people to express and satisfy diverse preferences more effectively.[14] However, there are horizontal spillovers that cause one group to be affected by the legal rules and policy decisions of another group. Finally on this point, the "trade and . . . problem" may be interpreted as a problem of overlapping vertical allocation of power, wherein the discrete organs of vertical power, including the state, regional organizations and global organizations, must share power in particularized ways. That is, broad allocations of power, over "trade" or over "health" or "environment," are found to overlap, and these overlaps must be reconciled. For example, in the United States, the constitution allocates potentially complete power over interstate trade to the federal government, while the states are generally competent in relation to health regulation issues. Given the overlap between these issues, the "trade and . . . problem" amounts to a question of federalism.

Therefore, the "trade and . . . problem" is a problem of intersecting jurisdictions, on both horizontal and vertical axes, each with varying interests. The "trade and . . . problem" is the multijurisdictional incarnation of the market versus regulation problem often analyzed in domestic society.[15] In a single jurisdictional context, society is required to collate and synthesize its values: to make domestic tradeoffs.[16] It does so in a number of institutional settings: market, legislative, administrative[17] and adjudicative. In the U.S., there has been some trend toward use of cost-benefit analysis to make these tradeoffs in political settings.[18] Cost-benefit analysis seems patently useful, but there are latent problems and cost-benefit analysis begs a number of important questions, including questions about which costs and benefits, their valuation and to whom.[19]

Once a multijurisdictional society is introduced, the domestic tradeoffs seem insufficient. How do they take account of the interests of foreign persons; how do they take account of trade values; how do they take account of international law? In fact, these domestic tradeoffs, the product of a number of vectors in the domestic sphere, may be viewed as simply a single vector in a larger multijurisdictional sphere, to the extent that the state is the vehicle for their expression. These similarly-produced vectors must be subjected to another level of analysis and synthesis, with resultant vectors from other domestic spheres, and with international policy vectors, to form global policy. There are a number of possible devices that could be used to resolve the conflicts among these domestic vectors, and between particular domestic vectors and other international policy vectors. These devices in the adjudicative contexts examined in this article include anti-discrimination rules, simple means-ends rationality tests, least trade-restrictive alternative tests, proportionality tests, balancing tests and cost-benefit analysis. For example, if international cost-benefit analysis were to be applied, it would take the domestic vector as an input--as a cost or benefit--and collate it with these other vectors to derive a net cost and benefit profile, and thus to synthesize a final international policy. If the conflict between the market and regulation is a chess game, then the conflict between trade values, or more generally, international values, and other social values is a three-dimensional chess game, with geometrically increased complexity. In addition to choosing between laissez-faire and intervention, the level of intervention must also be chosen.[20]

Institutional choice has multiple parameters. The first parameter to be addressed is the level of society at which choice takes place. Second is the type of institution--for example, legislative versus adjudicative--to be assigned the task of choice. Third is the rule that the selected institution will follow. This article focuses on this last parameter as a device, applied at a central adjudicative level, to select between the assignment of power to local legislatures and the denial of power to local legislatures. However, we will see that there is a complex and interesting relationship between the rule applied at the central adjudicative level, and the choice between central adjudication and legislation as the institutional setting for decision.

c. A Taxonomy of Tradeoff Devices

In this section, we examine the tradeoff devices used by the European Court of Justice ("ECJ"), GATT or WTO dispute resolution panels, or the WTO Standing Appellate Body ("SAB"), and the U.S. Supreme Court in connection with "trade and . . . problems" within the EU, GATT/WTO and U.S. systems, respectively.[21] The major categories of tradeoff devices are listed and briefly defined below. It is worth noting at the outset that in each of the jurisdictions studied, these tradeoff devices appear in combination, rather than alone. Furthermore, each category of tradeoff device conceals considerable latitude for heterogeneity. Thus, despite the list of only six categories, far more combinations and variations are possible.

1. National Treatment Rules ("NTR"). A national treatment rule is a type of anti- discrimination rule that examines whether different legal standards are applied to comparable cases, as between the domestic and the foreign. National treatment rules entail surprising complexity. In order to deal with more difficult cases, they sometimes incorporate some of the tests set forth below in this list.

2. Simple means-ends rationality tests ("SMERT"). These tests consider whether the means chosen is indeed a rational means to a purported end. SMERT is often combined with limitations on ends ("SMERT--LE"). Analytically, SMERT is included in all of the tests described below in this list, and is sometimes used as a proxy to detect discrimination. As it imposes little real discipline, and is often included in other tests, we do not analyze the use of SMERT in detail below.

3. Necessity or least trade restrictive alternative tests ("LTRAT"). This type of test goes a significant step beyond SMERT. It inquires whether there is a less trade restrictive means to accomplish the same end. The definition of the end is often outcome-determinative. In some cases LTRAT is qualified by requiring that the means be the least trade restrictive alternative that is reasonably available ("LTRAT--RA"). In addition, LTRAT is sometimes combined with limitations on the categories of ends permitted ("LTRAT--LE").

4. Narrow Proportionality ("NP"). Narrow proportionality (proportionality stricto sensu) inquires whether the means are "proportionate" to the ends: whether the costs are excessive in relation to the benefits. It might be viewed as cost-benefit analysis with a margin of appreciation, as it does not require that the costs be less than the benefits. Narrow proportionality may be either static or comparative, in the same way as cost-benefit analysis. A comparative approach to NP ("CNP") would include in its calculus the costs and benefits of alternative rules.

5. Balancing Tests ("BT"). Balancing tests purport to decide whether a measure that impedes trade is acceptable, balancing all of the factors. BT may be viewed as a kind of amorphous or imprecise cost-benefit analysis.[22] More charitably, and perhaps more correctly, it may be viewed as a kind of cost-benefit analysis that recognizes the difficulty of formalizing the analysis, and seeks to achieve similar results informally.[23]

6. Cost-benefit analysis ("CBA"). Static cost-benefit analysis in the context at hand[24] juxtaposes the regulatory benefits of regulation with the trade costs of regulation, as well as other costs of regulation, and would strike down regulation where the costs exceed the benefits. CBA in this context may be viewed as stricter scrutiny than the domestic cost-benefit analysis that has recently become popular, as it adds a cost dimension not normally included: detriments to trade. Adding trade detriments to the calculation would presumably have the marginal effect of causing some regulation to fail a CBA test. It is worth comparing static CBA, simply juxtaposing the costs and benefits of a single rule, with a more dynamic comparative CBA ("CCBA"), comparing the net benefits of multiple rules, and recommending the rule with the greatest net benefits.

d. Toward Comparative Institutional Analysis

This article recognizes, following Coase,[25] Demsetz,[26] Komesar,[27] Wolf[28] and countless others, that neither the market nor the state are perfect or perfectible institutions, but that our existential task is to choose the least imperfect combinations of institutions. "In a world of institutional alternatives that are both complex and imperfect, institutional choice by implication, simple intuition, or even long lists of imperfections is deeply inadequate."[29] However, this article extends their analysis to ask which state and which market: to evaluate different markets (including both the private market and the "market" among competitive governments) and different governmental entities at different vertical levels as appropriate repositories of authority.

This article examines strategies for management that have been established pursuant to constitutional or treaty language, and used in dispute resolution fora in the EU's common market, in the multilateral trade system under the GATT and WTO and in the United States' internal common market.[30] While these strategies for management are based on legislative or constitutional texts, the texts are consistently indeterminate--perhaps more than most laws--and thus the task of constructing strategies for management has often fallen on dispute resolution bodies.

Within this comparative analysis, it is important to keep in mind the two leading alternatives to the tradeoff exercise as a means to moderate between trade values and other social values: (i) laissez-régler[31] (used here to denote a permissive attitude taken by the international system, allowing local freedom to regulate in the domestic sphere) and (ii) international regulation (a decision to moderate between these values in a more specific, and in a positive,[32] international legislative manner). The first alternative may allow the erosion of international commitments in ways that may be unacceptable in at least some international economic law settings, but may be acceptable in other settings where few externalities exist, or where states may make ad hoc bargains at low transaction costs. In fact, mechanisms for managing the conflict between trade values and other social values have the effect of constraining state intervention, either in favor of laissez-faire, or, where combined with international legislative devices, in favor of international regulation. "The modern regulatory state inevitably produces burdens on trade, if only because of the unavoidable lack of regulatory uniformity."[33] Prof. Petersmann argues in favor of international disciplines on national regulation--against laissez- régler--in order to protect laissez-faire.[34]

A "laissez-régler" approach to local regulation is a decision to decentralize decisions about regulation. Prof. Kitch explains why decentralization is not necessarily the enemy of free trade: that centralized supervision or control is only one way that local units can cooperate to achieve their goals.

The fact that there is decentralized authority over the laws and government practices affecting commerce does not mean that there will not be free trade. Free trade among decentralized authorities will result from voluntary cooperation, motivated by the fact that free trade will produce greater wealth for all to share. In the short run, this approach to free trade may cause significant bargaining instability, as each jurisdiction tries to establish a bargaining position through bluff, threat, and implemented threat. But in the long run, this system may provide more free trade than centralized authority because it places stronger incentives on each jurisdiction to promulgate efficient rules for both its internal and external commerce.[35]

Kitch is implicitly comparing two different centralizing structures: one mandatory and the other voluntary. As Prof. North has pointed out, Kitch's perspective seems to be based on an assumption that it is cheaper in transaction cost terms for states to get together on an ad hoc basis to cooperate, than it is for this cooperation to be imposed by the federal government: Kitch is making an assumption as to which is the more efficient instrument of cooperation.[36] North responds that we do not "know that decentralized authority would promote more efficient rules than would centralized authority."[37] The tradeoff devices examined herein may be viewed as heuristics for determining, in particular settings, whether decentralized authority or centralized authority is more satisfactory.

As instruments of negative integration, these tradeoff devices may serve another dynamic purpose, by providing incentives for positive international regulation where they strike down domestic regulation. Furthermore, these tradeoff devices clarify and cull the appropriate topics of and scope for international regulation, by indicating what domestic regulation is acceptable.[38] Once domestic regulation is identified as acceptable pursuant to the rules applied by courts, it is for the legislative process to determine whether the international values are great enough to justify superseding domestic law by international regulation. In this respect, these tradeoff devices may serve to allocate work between adjudicative and legislative decision-making processes.

From a horizontal, as opposed to vertical, perspective, these tradeoff devices may be viewed as intended not to limit local autonomy, but to restrain "state interference in the affairs of other states."[39] Thus, local autonomy is on both sides of the equation, although in some instances it is represented by international institutions. "Interference arises from two basic causes, state protection of local commerce against external competition, and extra costs that result when more than one sovereign regulates or taxes the same person or transaction. The latter costs are of two kinds--multiple burdens, and conflict costs caused by inconsistent regulation."[40]

In current or static terms, tradeoff devices serve as heuristics for determining when domestic regulation should be suppressed: they moderate between the domestic (laissez-régler) and the international on a case-by-case basis. In intertemporal terms, perhaps they serve in some cases as bridges through time from laissez-régler to international regulation. From a vertical perspective, it is not a paradox that while the U.S. commerce clause is the "Constitution's primary epoxy of national cohesion,"[41] it serves as the leading design feature of vertical federalism in the U.S. "The issue is a federal system choice between states and the nation, 'determining the locus of power in a federal union.'"[42]

This article pursues a roughly comparative methodology,[43] finding significant similarities in the texts and approaches applied in the three jurisdictions examined. Beginning with comparative cost-benefit analysis as a theoretically uniform first-best alternative, this article seeks to explain moves to second-best[44] approaches based on problems with cost-benefit analysis, and seeks to explain variation among second-best approaches based on institutional and aspirational differences. These relationships cannot be drawn precisely, as there are many variables and only a small number of cases to compare, but it is hoped to suggest lines of further inquiry.

Part Two evaluates CCBA (comparative cost-benefit analysis). Part Three examines the EU, GATT/WTO and U.S. approaches to NTR (national treatment), NP (narrow proportionality), LTRAT (least trade restrictive alternative tests), BT (balancing tests) and CBA (cost-benefit analysis) in comparative perspective. Part Four concludes, examining these devices as mechanisms for "doing subsidiarity."

[2] This article will often fall into the error of identifying trade values as the only type of international value, while all other values are domestic. While this is the way we often think of these problems, and while this article focuses on trade values, it is important to recognize that there are additional international values. In fact, as we both think globally and act locally, and think locally and act globally, there may be no fixed distinction between a domestic value and an international value.

[3] See, e.g., TRADE AND THE ENVIRONMENT, LAW, ECONOMICS AND POLICY (Durwood Zaelke, Paul Orbuch & Robert F. Housman, eds. 1993); DAVID VOGEL, TRADING UP: CONSUMER AND ENVIRONMENTAL REGULATION IN A GLOBAL ECONOMY (1995); Richard Blackhurst & Arvind Subramanian, Multilateral Co-operation on the Environment. in THE GREENING OF WORLD TRADE ISSUES (Kym Anderson & Richard Blackhurst, 1992); Vincent Cable, The New Trade Agenda: Universal Rules Amid Cultural Diversity, 72 INT'L Aff. 227 (1996); Steve Charnovitz, The World Trade Organization and Social Issues, 28 J. WORLD TRADE 17 (1994); Geza Feketekuty, The Link Between Trade and Environmental Policy, 2 MINN. J. GLOBAL TRADE, 171 (1993); Philip M. Nichols, Trade Without Values, 90 NW U. L. Rev. 658 (1996).

[4] This metaphor is now common. The earliest use that I find is John H. Jackson, Introduction, in EMERGING STANDARDS OF INTERNATIONAL TRADE AND INVESTMENT: MULTINATIONAL CODES AND CORPORATE CONDUCT 2 (Seymour J. Rubin & Gary C. Hufbauer, eds. 1983) ("[t]he receding waters of tariff and other overt protection inevitably uncovers the rocks and shoals of a variety of other barriers.")

[5] See Jeffrey L. Dunoff, Reconciling International Trade with Preservation of the Global Commons: Can We Prosper and Protect?, 49 WASH. & LEE L. REV. 1407, 1449-50 (1992). See also Richard B. Stewart, International Trade and Environment: Lessons from the Federal Experience, 49 WASH. & LEE L. REV. 1329, (1992) ( "It thus seems appropriate, for the present, to proceed on the premise that environmental protection policy as well as trade policy are both appropriately aimed at promoting, in different ways, human welfare, broadly understood.").

[6] The careful reader will object that anti-discrimination or national treatment rules do not relate regulatory benefits to trade burdens, but simply prohibit application of more burdensome standards to non-nationals. However, as will be shown below, in cases other than those of de jure or intentional discrimination, these rules inevitably compare regulatory benefits and trade burdens.

[7] The General Agreement on Tariffs and Trade, opened for signature Oct. 30, 1947, 61 Stat. A3, T.I.A.S. No. 1700, 55 U.N.T.S. 187, reprinted in 4 GATT, BASIC INSTRUMENTS AND SELECTED DOCUMENTS [hereinafter "B.I.S.D."] 1 (1969) ("GATT 1947"). GATT 1947 has now been replaced by the GATT 1994, which is a part of a larger group of treaties established in 1994 under the auspices of the World Trade Organization. The GATT 1994 is textually substantially identical to the GATT 1947, but its legal effects have been modified by numerous collateral agreements. Final Act Embodying the Results of the Uruguay round of Multilateral Trade Negotiations (Marrakesh, as signed on April 15, 1994), reprinted in H.R. Doc. No. 316, 103d Cong., 2d Sess. 1381 (1994) [hereinafter "Final Act"]. Except where otherwise specified, GATT 1947 and GATT 1994 are referred to interchangeably herein as "GATT." Also agreed in the Uruguay Round were the Agreement on Technical Barriers to Trade [hereinafter "Standards Agreement"] and the Agreement on the Application of Sanitary and Phytosanitary Measures [hereinafter "S&P Agreement"], each contained in Annex 1A to the Final Act.

[8] Proportionality stricto sensu requires that the costs of action not be excessive in relation to the benefits of action. NICHOLAS EMILIOU, THE PRINCIPLE OF PROPORTIONALITY IN EUROPEAN LAW: A COMPARATIVE STUDY 6 (1996). A wider definition of proportionality developed in the EU context includes three tests: (i) proportionality stricto sensu, (ii) a least trade restrictive alternative test, and (iii) a simple means-ends rationality test.

[9] In this context, institutional means include both formal institutions such as dispute resolution bodies, legislative bodies and executive bodies on the one hand, and rules to be applied by these bodies on the other hand. Thus, when the Supreme Court of the United States applies the commerce clause to invalidate a state law, at least two "institutions" are implicated in the institutional structure designed to respond to conflicts between perceived state interests and interests of the interstate system.

[10] This is a central problem in any federal, regional or international free-trade system. Other scholars have addressed these issues in important articles, including John J. Barcelo, Product Standards to Protect the Local Environment - the GATT and the Uruguay Round Sanitary and Phytosanitary Agreement 27 CORNELL INT'L L.J. 755, 759-760 (1994); Daniel A. Farber & Robert E. Hudec, Free Trade and the Regulatory State: A GATT's-Eye View of the Dormant Commerce Clause, 47 VAND. L. REV. 1401 (1994) (comparing dormant commerce clause analysis with GATT art. XX analysis); Jan Klabbers, Jurisprudence in International Trade Law: Article XX of the GATT, 26 J. WORLD TRADE 63 (1992); Donald Kommers & Michel Waelbroeck, Legal Integration and the Free Movement of Goods: The American and European Experience, in INTEGRATION THROUGH LAW: EUROPE AND THE AMERICAN FEDERAL EXPERIENCE (Mauro Cappelletti, Monica Seccombe & Joseph Weiler, eds. 1986); Stewart, supra note 4.

[11] The WTO is the organizational structure established in 1994 to provide the common institutional framework for the General Agreement on Tariffs and Trade, the General Agreement on Trade in Services, the Agreement on Trade-Related Aspects of Intellectual Property Rights, and certain institutional and plurilateral agreements agreed as a result of the Uruguay Round of trade negotiations. Agreement Establishing the World Trade Organization, Apr. 15, 1994 [hereinafter the "WTO Agreement"], reprinted in 1 Law & Practice of the World Trade Organization, Marrakesh Declaration Booklet, Release 95-1 (issued Mar. 1995). The WTO is intended to follow the "acquis" developed under the 1947 General Agreement on Tariffs and Trade: "Except as otherwise provided . . . the WTO shall be guided by the decisions, procedures and customary practices followed by the CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947." WTO Agreement, art. XVI(1). Thus, the jurisprudence of GATT under art. XX, providing proportionality-type requirements, is relevant in the context of the WTO. Also relevant are the interpretations of the 1979 Standards Code, especially in interpreting the 1994 Agreement on Technical Barriers to Trade.


[13] It is tempting to think of politics as the preeminent means for groups to use to choose among values that are otherwise incommensurable. However, the inability analytically to engage in interpersonal comparison of utilities renders all values incommensurable from an analytical standpoint. Politics and the market are tools of making tradeoffs--of engaging in interpersonal comparison of utility in practical, rather than analytical, terms. The correct distinction, then, appears to be one of degree, between things that are monetized more frequently, and thus subject of greater intersubjective valuation, and things that are monetized less frequently, and thus are not frequently evaluated. In the former case, markets dominate, while in the latter case, politics seems the appropriate mechanism for decision.

[14] See, e.g., Joel P. Trachtman, International Regulatory Competition, Externalization and Jurisdiction, 34 HARV. INT'L L.J. 47 (1993).

[15] The literature of the debate between regulation and the market is infinite. For a recent work employing a perspective similar to that used in this article, see CHARLES WOLF, MARKETS OR GOVERNMENTS: CHOOSING BETWEEN IMPERFECT ALTERNATIVES (1988).

[16] See Joel P. Trachtman, The International Economic Law Revolution, 17 U. PA. J. INT'L ECON. L. 33, 52-55 (1996).

[17] This paper does not consider the important role of regulatory agencies. Often, these agencies engage in the kind of trade-offs and cost-benefit analyses discussed herein. See, e.g., W. Kip Viscusi, Economic Foundations of the Current Regulatory Reform Efforts, 10 J. ECON. PERSP. 119 (1996).

[18] See, e.g., Cass R. Sunstein, Congress, Constitutional Moments, and the Cost-Benefit State, 48 STAN. L. REV. 247 (1996).

[19] See generally Robert W. Hahn & John A. Hird, The Costs and Benefits of Regulation: Review and Synthesis, 8 YALE J. REG. 233, 242 (1990).

[20] See the matrix of choice presented in Joel Trachtman, The Theory of the Firm and the Theory of the International Economic Organization: Toward Comparative Institutional Analysis, forthcoming in NW. J. INT'L L. & BUS. (1997).

[21] The selection of these systems is somewhat arbitrary. For example, Canadian or Australian federal systems, and NAFTA or MERCOSUR regional systems, could be examined, but it is hoped here to begin the comparative analysis.

[22] See Michael E. Smith, State Discriminations Against Interstate Commerce, 74 CAL. L. REV. 1203, 1205 (1979) (". . . the Justices take all relevant circumstances into account and render judgment according to their overall sense of the advantages and disadvantages of upholding the regulation"). At their most precise, balancing tests are the same as cost-benefit analysis. See Earl M. Maltz, How Much Regulation is Too Much--An Examination of Commerce Clause Jurisprudence, 50 GEO. WASH. L. REV. 47, 59-60 (1981).

[23] "If we had a way of quantifying all the appropriate inputs, and a way of comparing them, and a theory that told us how to do so, we would not call it balancing. Rather, it would be called something like 'deriving the most cost-effective solution,' or just 'solving the problem.'" Stephen E. Gottlieb, The Paradox of Balancing Significant Interests, 45 HASTINGS L.J. 825, 839 (1994). See also T. Alexander Aleinikoff, Constitutional Law in the Age of Balancing, 96 YALE L.J. 943, 1002-1004 (1987).


[25] RONALD COASE, THE FIRM, THE MARKET AND THE LAW 95-185 (1988), incorporating and commenting upon earlier work, including Coase's seminal articles: The Nature of the Firm, 4 ECONOMICA 386 (1937) and The Problem of Social Cost, 3 J.L. & ECON. 1 (1960). See also Ronald Coase, The Nature of the Firm: Influence, 4 J.L. ECON. & ORG. 33, 33 (1988).

[26] Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J. L. & ECON. 1 (1969).


[28] Wolf, supra note 14.

[29] Komesar, supra note 26, at 6.

[30] See Richard B. Collins, Economic Union as a Constitutional Value, 63 N.Y.U. L. REV. 43 (1988).

[31] I use "laissez-régler," instead of the conventional "laissez-faire," as the international system is permitting governments to regulate, rather than regulating the regulators. By doing so, I avoid the paradox that arises from the fact that laissez-régler is antithetical to laissez-faire.

[32] It is common to distinguish between negative integration, by virtue of invalidating local rules that burden commerce, and positive integration, by virtue of central legislation that pre-empts or supercedes the local law.

[33] Farber & Hudec, supra note 9, at 1402.

[34] ERNST-ULRICH PETERSMANN, CONSTITUTIONAL FUNCTIONS AND CONSTITUTIONAL PROBLEMS OF INTERNATIONAL ECONOMIC LAW 210-221 (1991); see also Jan Tumlir, Need for an Open Multilateral Trading System, 6 WORLD ECON. 393, 406 (1983).

[35] Edmund Kitch, Regulation and the American Common Market, in REGULATION, FEDERALISM AND INTERSTATE COMMERCE 13-14 (A. Dan Tarlock, ed. 1981). But see Mancur Olson, The Principle of Fiscal Equivalence: The Division of Responsibilities Among Different Levels of Government, 59 AM. ECON. REV. 479, 480-81 (1969) (explaining why simple bargaining is insufficient to achieve Pareto optimality under circumstances of positive transaction costs). See also Robert P. Inman & Daniel L. Rubinfeld, A Federalist Fiscal Constitution for an Imperfect World, in FEDERALISM: STUDIES IN HISTORY, LAW AND POLICY (Harry N. Scheiber, ed. (1988).

[36] Douglass C. North, An Economist's Perspective on the American Common Market, in REGULATION, FEDERALISM AND INTERSTATE COMMERCE at 78 (A. Dan Tarlock, ed. 1981).

[37] Id. See also Trachtman, supra note 19.

[38] The European Community's so-called "new approach to technical harmonization and standardization" is a legislative program that responded to the European Court of Justice's Cassis de Dijon jurisprudence. Case 120/78, Cassis de Dijon, [1979] E.C.R. 649, 662, [1979] C.M.L.R. 494 (1979). See also Communication from the Commission Concerning the Consequences of the Judgment Given by the Court of Justice on 20 February 1979 in Case 120/78 (Cassis de Dijon), Official Journal of the European Communities C 256/2 (March 10, 1980). In this communication, the Commission interpreted Cassis de Dijon to require that barriers to trade resulting from regulatory differences must be (i) "necessary, that is appropriate and not excessive," (ii) to satisfy mandatory requirements including public health, protection of consumers or the environment, etc., (iii) and must be the means which are the most appropriate and least hinder trade. See also Jacques Pelkmans, The New Approach to Technical Harmonization and Standardization, 25 J. COMM. MKT. STUD. 249 (1987).

[39] Collins, supra note 29, at 109. In this regard, the problem can be viewed as having a reciprocal nature. For an analysis of the reciprocal nature of property rights, see RONALD COASE, THE FIRM, THE MARKET AND THE LAW 96 (1988), incorporating and commenting upon earlier work, including Coase's seminal articles: The Nature of the Firm, 4 ECONOMICA 386 (1937) and The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).

[40] Farber & Hudec, supra note 9, at 1402.


[42] Collins, supra note 29, at 111 (citations omitted).

[43] See Arend Lijphart, Comparative Politics and the Comparative Method, 65 AM. POL. SCI. REV. 682 (1971).

[44] This article does not purport to find direct support in the economic theory of the second best. See Richard G. Lipsey & Kelvin Lancaster, The General Theory of the Second Best, REV. ECON. STUDS. 1 (1956). The economic "theory of the second best" holds that if one or more conditions for Pareto efficiency is not satisfied, it is not true that efficiency is enhanced by satisfying other conditions for Pareto efficiency. On the other hand, it might be argued that the economic theory of the second best renders the methodology employed by this article suspect. However, this article operates outside the market context where this theory is applicable; this article suggests cost-benefit analysis as a theoretical approach to support recommendations to the political process. In this context, the test of Pareto efficiency, or of potential Pareto efficiency, is simply political approval. Thanks to Jeffery Atik for making me aware of the theory of the second best.

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