The empirical cases studied in the remainder of this section are selected from a universe of cases which encompasses all those instances in which a group of states which was dissatisfied with the distribution of cooperation gains within an existing focal institution decided to exercise CM after institutional adjustment bargaining had failed. Out of this universe of cases, we selected two empirical cases according to the following criteria:
First, we chose to analyze cases which allow us to maximize variation on a range of dimensions that we expect to have a systematic effect on how the exercise of CM impacts the realization of cooperation gains. Thus, our two cases include a) both variants of CM: “competitive regime creation” (development finance) and “regime-shifting” (trade in GMOs), b) strategic interaction between different types of actors: in the WB/AIIB case, a group of established powers led by the US interacts with a group of rising powers led by China, whereas in the WTO/CBD case, both groups are led by established powers, namely the US and the EU; c) “strategic inconsistency” not only in different issue-areas, but also between different types of international institutions: the WB and the AIIB fulfill operative purposes, whereas the WTO and the CBD perform regulatory functions, d) the two different types of inter-institutional accommodation described in Section
4.2: co-governance in the WB/AIIB case and jurisdictional delimitation in the WTO/CBD case.
Second, by selecting cases which both feature significant distributional conflicts between major powers, we made sure that we analyze empirical cases which are not biased towards our theoretical argument that, under certain conditions, CM can have a positive effect on international cooperation. While we do not claim that these cases constitute “least-likely cases” for our theoretical argument, we are confident that, since both of them feature distributional conflicts between major powers, they are not biased towards a positive outcome. Having selected our cases according to these criteria enables us to claim that our two empirical case studies corroborate a theoretical argument that applies to a broader universe of cases (see Conclusion for scope conditions) without subjecting it to a rigorous test.
In each case study, we start by highlighting the nature of the conflict between defenders and challengers, then continue to describe the process of CM and identify the costs involved in the process, in line with our Proposition 1. After that, we turn to the process of inter-institutional accommodation theorized in Proposition 2.
5.1 CM in the global governance of development finance: The WB and the AIIB
On 16 January 2016, a group of 57 states led by China opened the AIIB for business. This exercise of CM in the form of “competitive regime creation” resulted primarily from China’s efforts to put pressure on the defenders of the institutional status quo in the WB.
9 It was a reaction to a reform of voting shares in the WB that proved insufficient to accommodate the rise of China and other Non-Western states, continuing to severely under-represent them, in their view (Yang
2016: 766).
10 In this regard, the creation of the AIIB was analogous to the creation of the NDB by the five BRICS countries.
How did China arrive at this exercise of CM? Starting in 2010, China vehemently voiced discontent that its increase in economic power and financial contribution to the WB did not translate into greater WB vote shares.
11 True, the WB underwent a “voice reform” to increase the voting powers of developing states. In 2010, the Bank announced that developing and transition countries increase their voting power from 42.60 to 47.19% and developed countries reduce their share from 57.40 to 52.81% as part of a deal struck during the Great Recession (Vestergaard and Wade
2015: 6). China thus became the largest shareholder after the US, Japan, South Korea, Turkey, and Mexico. Nevertheless, the changes in the WB’s decision-making rules did not satisfy the world’s second largest economy’s longing for more equitable vote distribution. Its efforts to redistribute influence in the WB more significantly were proving unsuccessful.
To be sure, the creation of the AIIB was motivated also by the desire to close the funding gap in regard to infrastructure development in Asia (estimated to be about $8 trillion between 2010 and 2020) that existing institutions proved unable to close (Reisen
2015). However, if China’s primary objective would have been to boost funding in infrastructure development in Asia, a much less costly and risky solution would have been to increase its capital subscription to the Asian Development Bank, which already spent more than half of its budget on infrastructure (Wilson
2019: 165). However, China decided to take the more demanding path, creating the AIIB, to demonstrate its resolve to contest the institutional status quo in the WB.
12
As a result, on October 24, 2014, China signed an agreement to establish the AIIB together with 21 Asian states which are simultaneously members of the World Bank. Especially given the US campaign against joining the AIIB, it was by no means certain that the AIIB would be able to attract many members (Freeman
2019). It was therefore not only costly but also risky for China to exercise CM by establishing the AIIB. In spite of that, the Bank proved able to attract considerable support in other world regions, most notably in Europe.
13 Today, the AIIB has 102 approved members (which include many members of the WB and some close allies of the US), making it the world’s second-largest MDB. With an initial paid-in capital stock of $100 billion, the AIIB focuses on international development financing for infrastructure projects in the Asian region.
At the same time, China enjoys a dominant position in the Bank. It possesses 26.64% of the vote shares, which contrasts with the 4.45% of the vote shares it holds in the WB.
14 Thus, the creation of the AIIB increased the leverage of China (and other Non-Western members) within the WB. In short, China resorted to “competitive regime creation” in response to its dissatisfaction with the institutional status quo in the WB and a reform of its governance structure which it perceived to be too meager (Knoerich and Urdinez
2019: 341, 353).
In line with Proposition 1, a number of negative effects on international cooperation in development finance was expected by major actors. The worry of many was that by giving Non-Western borrowers more institutional choices, the AIIB weakened the bargaining position of Western donors and the WB’s enforcement mechanism. The availability of an alternative source of developing financing means that borrowing countries have weaker incentives to comply with the terms and conditions set out by the WB (Reisen
2015: 88).
To highlight the perceived dangers represented by the AIIB’s creation to the existing order, China’s exercise of CM has been described as “a masterful diplomatic coup, arguably the most ambitious project of multilateral institution-building to be accomplished by a non-Western power after the end of the Cold War” (Andornino
2019: 605). The AIIB constitutes “China’s first major foray into leading an international organization with global membership” and thus “an extraordinary development in global governance” (Gutner
2019: 2). At the same time, it has been seen as being part of “China’s shadow global diplomacy that aims at undermining the U.S.-led governance structures established after World War II” (Reisen
2015: 82). Thus, some commentators speculated that the establishment of the AIIB might lead to a “world of fragmented governance” (Subacchi
2015). In the Washington Post, Larry Summers wrote that “[t] his past month may be remembered as the moment the US lost its role as the underwriter of the global economic system. . . I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out” (Summers
2015).
According to the 2019 White Paper on the Defense of Japan, China’s regional rival interprets the creation of the AIIB as representing Beijing’s attempt to create “its own international order.” On an issue-area specific level, commentators feared that the establishment of the AIIB signifies the creation of an institutional structure that competes against the World Bank as the central institution of development finance (Subacchi
2015; The Economist
2014). More precisely, it was argued that the AIIB may serve to institutionalize a “Beijing Consensus,” based on the norm of non-interference with the internal affairs of countries, which competes against the “Washington Consensus,” based on the norm of conditional lending (Chow
2016: 1263). The US in particular feared that the AIIB would be characterized by standards for environmental and social safeguards, transparency and accountability that diverge from those prevalent in the WB and, thus, reduce the joint gains realized through institutionalized cooperation in international development finance by reintroducing uncertainty about the behavior of lenders and borrowers alike (Desierto
2015). In other words, as Proposition 1 leads us to expect, the expectation was that diverging conditionalities across the two banks induce a race to the bottom in the standards of international development finance and, by implication, lessen behavioral adaptation by the borrowers to the preferences of the lenders and vice versa (Knoerich and Urdinez
2019: 357). In short, the expectation was that diverging conditionalities turn out to be detrimental to development.
However, in line with our theory and Proposition 2, the effects of the creation of the AIIB on international cooperation are anything but unequivocal. The very creation of the AIIB almost immediately triggered a process of inter-institutional accommodation between the two development banks. Thus, actually, only relatively few cooperation gains got lost, which is completely in line with our theory (see Section
4.2). To start with, China was only able to attract a global membership because it started to work towards inter-institutional accommodation with the WB early in the process of exercising CM (Rodrigues Vieira
2018; Wilson
2019).
15 The members of the WB, in particular those with strong ties to the US, demanded a commitment to established norms and practices in multilateral development finance (Freeman
2019: 668, 670). In practice, they demanded that the AIIB is set up in a way that ensures at least basic complementarity with the WB and thus prevents large losses of cooperation gains due to a “race to the bottom” in the international standards of development finance.
16
The ensuing process of inter-institutional accommodation manifested itself in two main ways.
First, with the exception of the non-resident board of directors, the governance structure of the AIIB closely resembles the governance structure of the WB (Wilson
2019: 164). This is unsurprising because the AIIB used the WB mandate as a template for its own regulatory framework (Lichtenstein
2018).
17Second, inter-institutional accommodation between the AIIB and the WB is institutionalized in Memoranda of Understanding. The AIIB has developed a formal partnership with the WB which includes agreements on co-financing, knowledge-sharing, technical cooperation, risk management, policy strategy and staff exchanges, among others (AIIB
2019; World Bank
2017; see also Freeman
2019: 668). As a result, the AIIB and the WB became able to co-finance projects efficiently. Since the AIIB started to operate in 2016, a “significant portion of the AIIB’s projects” have been co-financed with the WB (Freeman
2019: 672).
18 Within these arrangements, AIIB and WB agreed on joint supervision during project implementation with the WB being the lead supervisor (e.g. AIIB
2016). The AIIB, for its part, regards the WB loan conditions as “satisfactory” (AIIB
2017) and even “rel [ies] on the WB’s determination of compliance with the […] WB policies and procedures” (AIIB
2016: 5).
Both development banks effectively ensure environmental and social standards as part of project implementations. In sum, not only does the AIIB’s governance structure resemble that of the WB, but also are its operations compatible, and executed jointly, with the WB. Thus, the inter-bank cooperation institutionalized in the Memoranda of Understanding arguably demands more inter-institutional adjustment from the AIIB than from the WB.
This case illustrates well the emergence of an institution-overarching governance arrangement that encompasses the two formerly rivaling institutions, as one of the two pathways to inter-institutional complementarity developed in Section
4.2. The exercise of CM through the creation of the AIIB by a group of states led by China started as a direct challenge to the WB, but resulted in a process of inter-institutional accommodation between the two institutions. During this process, China has adapted its behavior to the preferences of those members of the AIIB that are simultaneously members of the WB (Knoerich and Urdinez
2019). Likewise, then US President Barack Obama backtracked on earlier US hostilities toward the AIIB by saying ‘let me be very clear and dispel this notion that we were opposed or are opposed to other countries participating in the [AIIB.…We] look forward to collaborating with the [AIIB], just like we do with the [Asian Development Bank] and with the [WB]’ (Obama
2015). Thus, also the US has adapted its behavior to the preferences of those members of the WB that are simultaneously members of the AIIB.
While it may be still relatively early to say, the AIIB seems to have become a “broad-based multilateral institution” with “transparent governance arrangements” that has adopted “policies consistent with international best practices for development financing” (Wilson
2019: 151). In many regards, it has transformed itself from a competitor with, to a collaborator of, the WB (Wilson
2019: 151). Against this backdrop, we acknowledge that the process of mutually complementary inter-institutional accommodation implies more accommodation on the part of the AIIB than on the part of the WB. While the central task of this case study has been to demonstrate that the evolving relationship between WB and AIIB has led to inter-institutional accommodation rather than to permanent competition or outright conflict, an important task for future research is to study in greater detail the degree to which processes of mutually complementary institutional accommodation are (a) symmetrical across institutions.
5.2 CM in the global governance of trade in GMOs: The WTO and the CBD
Our second case – the governance of trade in GMOs – illustrates the potential of CM to be conducive to cooperation in a regulatory area, while exploring the second type of CM, regime-shifting. At the center of the case is the conflict between diverging regulatory approaches pursued in the US and in the EU to regulate international trade in GMOs (Drezner
2007: Chapter 6): The US applies the principle of “substantial equivalence” which treats conventional and genetically modified products equally. The EU, by contrast, applies the precautionary principle which allows treating both types of products differently. The precautionary principle legitimizes the introduction of restrictive regulatory standards even if there is no sound scientific proof that GMOs are hazardous (Vogel
2003). Those regulatory standards are, however, perceived as non-tariff barriers to trade by the focal institution of international trade, the WTO. According to WTO rules, international trade in GMOs may only be restricted if the hazardousness of a product is either proven by a sound scientific analysis or based on the standards of pertinent international institutions.
The regulation of international trade in GMOs therefore features a strong distributional conflict between the exporters of GMOs (led by the US) and their importers (led by the EU) (Drezner
2007: Chapter 6). Since the rules initially institutionalized within the WTO revolve around the principle of “substantial equivalence,” the gains realized through cooperation in this focal institution were distributed unevenly among importers and exporters of GMOs (Pollack and Shaffer
2009: Chapter 4). Thus, GMO-importing countries became dissatisfied with the institutional status quo. However, institutional change in the focal WTO proved impossible.
In response to this stalemate, around the turn of the millennium, the importers decided to shift the process of institutional adjustment from the intra-institutional to the cross-institutional level by exercising “regime-shifting”. More precisely, they moved their efforts to adjust the rules that govern trade in GMOs from the WTO to the CBD (Schneider and Urpelainen
2013). By deliberately creating “strategic inconsistency” with the pertinent WTO rules, the importers increased pressure on the exporters (Drezner
2005: 853–855). As expected, the GMO-exporting countries were opposed to these efforts and to adopting the so-called Cartagena Protocol on Biosafety, in particular to institutionalizing the precautionary principle within it (Graff
2002: 411).
19 Thus, the US and Canada countered the “regime-shifting” of the GMO-importers by putting the regulation of international trade in GMOs on the agenda of the WTO Ministerial in Seattle. However, the negotiations within the WTO failed, because importing countries pointed to ongoing negotiations within the CBD framework (Falkner
2000: 305).
The adoption of the Cartagena Protocol allowed the members of the CBD to restrict international trade in GMOs more strongly on the basis of legitimate interests in the protection from hazards than the pertinent WTO rules.
20 Thus, by allowing GMO-importing countries to resort to precautionary measures, it serves as “a counterweight to the WTO SPS Agreement’s narrower focus on science-based regulatory measures” (Pollack and Shaffer
2009: 156–157). As a result, states (in particular GMO-importers) gained greater leeway in determining their own regulatory rules.
In line with our Proposition 1, costs accrued to both sides. Regulating the relationship between the WTO and the Cartagena Protocol was subject to long and controversial negotiations which did not lead to a clear result. In essence, those negotiations failed because of the prevailing distributional conflict between importers (defending the rules of the Cartagena Protocol) and exporters (defending the WTO rules). As Drezner concludes, “[t] he result is a legal stalemate, with the Biosafety Protocol’s precautionary principle flatly contradicting the trade regime’s norm of scientific proof of harm” (Drezner
2005: 854).
This stalemate reduced the stability of states’ expectations in regard to the regulation of international trade in GMOs. By implication, it reduced the realized joint gains (Pollack and Shaffer
2009: 117–119). The rivalry of both regulatory principles caused a fragmentation of the international markets for products that include GMOs. This fragmentation of markets, in turn, led to decreasing economies of scale, which contradicted the interests of exporting countries. At the same time, rivaling rules undermined the protection of consumers and the environment from the hazards emanating from GMOs. In sum, the exercise of CM by the GMO-importing countries turned out to be costly for both importers and exporters because it reduced the realized cooperation gains. Moreover, since the Cartagena Protocol created the need to navigate through a thicker, less organized and therefore more confusing web of institutionalized rules, it increased the transaction costs of regulating international trade in GMOs for importers and exporters alike. Thus, the exercise of CM by the GMO importers sent a credible signal of their resolve to contest the institutional status quo.
At the same time, in line with Proposition 2, both groups of actors developed an interest in mutually complementary institutional accommodation which would enable them to reap more cooperation gains than under continued “strategic inconsistency” (rivaling rules) between the WTO and the Cartagena Protocol. However, based on their diverging regulatory principles, both groups had diverging preferences in regard to how inter-institutional accommodation should be arranged. Thus, they found themselves in a “Battle of the Sexes” situation.
Given the sustained divergence of regulatory principles in the two groups of states, a process of mutually complementary institutional accommodation between the WTO and the Cartagena Protocol was triggered. The institutional adaptation of the Protocol to the pertinent WTO-rules is reflected,
first, in the attempt to make the rules of the Protocol as compatible with the WTO as possible, the “strategic inconsistency” between the two regulatory approaches notwithstanding. The design of the Protocol reflects the “chill effect” which implies that, given that the WTO enjoyed a “first mover advantage” on regulating trade in GMOs, the Cartagena Protocol, as the second mover, was designed by its members to at least partially prevent outright contradiction (Eckersley
2004). Moreover, institutional adaptation is reflected in the restricted area of application of the Protocol’s central regulatory instrument – the Advance Informed Agreement (AIA) – which implies that the Protocol does not apply to a considerable part of trade in GMOs (Eggers and Mackenzie
2000: 526).
On the side of the WTO, the search for complementarity proved more problematic, as the deadlock in the Doha Round made it impossible for the WTO to react to the creation of the Cartagena Protocol through its legislative body. However, the institutional adaptation of the WTO to the Cartagena Protocol could be pursued by its judicial body. In the Biotech case between the EU and the US, the WTO’s Dispute Settlement Mechanism decided that every country can decide independently how stringently it regulates its own market (World Trade Organization
2006). This decision responds to the claim put forward by three GMO-exporting countries (the US, Canada and Argentina) that the restrictive regulations of the EU are incompatible with WTO law (Lieberman and Gray
2008: 38–40). It emphasizes that pertinent WTO rules provide a basis to put in place precautionary measures even when risk assessment has not reached a conclusive or unequivocal result (Krisch
2010: 196). The decision repeatedly takes up the consequences of scientific uncertainty and accepts that GMO-importing states may take scientific risk assessment into account (World Trade Organization
2006: 7.3044).
This decision clearly diverges from previous decisions which rejected the precautionary principle (Schneider and Urpelainen
2013). Over an extended period of time, the WTO Dispute Settlement Mechanism had consistently decided that environmentally motivated trade restrictions – such as those enshrined in the Cartagena Protocol – contradict the central principles on which the liberal trade order is built (Schoenbaum
2002: 701–703). This strongly suggests that the novel decision adopted in the Biotech case indeed responds to the “strategic inconsistency” created when GMO-importing countries shifted their regulatory efforts to the CBD. In line with our Proposition 2, it adapts the WTO to the “strategic inconsistency” created by the Cartagena Protocol and thus contributes to mutually complementary inter-institutional accommodation. In combination with the limitations of the Protocol’s applicability mentioned above, the steps by the WTO lead to a de facto split of the area of overlap between the two institutions. The accommodation process by the two institutions thus represents an example of the second type of inter-institutional complementarity where the bodies seek to demarcate their spheres of applicability, limiting the amount of direct overlap and regulatory rivalry (see Section
4.2).
21
In sum, the outlined process of mutually complementary institutional accommodation considerably reduced the behavioral uncertainty that characterized the regulation of international trade in GMOs after the creation of the Cartagena Protocol. It therefore increased the joint gains that states can reap through institutionalized cooperation.