One can take the analysis a step further and imagine that the parties write an
elaborate contingent contract, specifying industry-by-industry where the national
treatment rule applies and where it does not. Sykes (1991) solves a mathematically
analogous continuous problem (here one might imagine a continuum of industries). For
present purposes, it is enough to note that the solution has the following properties: For
any point on the parties’ Pareto frontier (and thus associated with an optimal treaty), a
shadow price exists that allows units of each party’s utility to be converted into units of
the other’s utility. An optimal treaty will provide that the parties forego enforcement of
the national treatment rule (or any other rule, for that matter) in any industry for which
the political utility gain to officials in the violator state “outweighs” the political utility
loss to officials in the state harmed by the violation, using the treaty’s shadow price to
convert utilities into the same units.
A detailed contingent contract of that sort would be extremely costly to write,
however, especially given the wide array of rules found in modern trade agreements. The
parties may thus prefer cruder and cheaper rules. A simple rule with considerable
potential appeal is that parties will not bring enforcement actions on behalf of politically
weak industries. As long as the poorly-organized export industries in state A are not as
poorly organized on average in state B, and vice-versa, an exchange of reciprocal
promises to forego enforcement on behalf of poorly-organized industries can leave both
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sides at a considerably higher level of utility.
How might the parties implement such a rule? The obvious way is to omit any
private rights of action from their agreement. Because it is costly for the parties to bring
enforcement actions themselves, they will only bring actions on behalf of exporters who
offer sufficient political rewards in exchange. It is precisely the group of politically
weakest exporters whose cases will be ignored under this arrangement.
It is perhaps instructive here to note how the investment situation is different.
Because the goal of the capital importing nation is to lower its cost of capital, it has an
interest in assuring all capital exporters that it will respect their investor rights, not just
the ones who are politically efficacious in their home countries. The reason is the
distinction emphasized earlier—capital importing countries benefit directly from making
foreign exporters more secure, but goods and services importing countries only benefit to
the extent that foreign exporters reward their governments for greater security and induce
them to grant reciprocal commitments.
Two further considerations support this general line of analysis. First, in newer
trade agreements such as NAFTA and much of the WTO, each member state confronts a
number of transition issues. The task of ferreting out all national and sub-national
regulation that might run afoul of the WTO Technical Barriers Agreement, the Sanitary
and Phytosanitary Measures Agreement, and so on, is not a trivial one. Thousands of
regulatory measures are potentially in play (especially after the WTO agreement made
clear that its obligations apply to state and local regulation as well as national regulation),
and many nations may be constrained in their capacity to make conforming changes
quickly (especially developing countries). In the face of many potential “transition”
violations, therefore, the parties may well desire to limit enforcement actions to those of
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the greatest political importance to aggrieved exporters. Private rights of action, by
contrast, might tax the resources of nations seeking to comply with their obligations, and
distort the timing of the compliance agenda (from the standpoint of maximizing joint
political gains). This problem is likely to be far less acute in the investment area, where
the basic rules have been established for a long time (although NAFTA decisions have
shaken them up, perhaps unwisely, as noted earlier).
Second, legal interpretations developed in one case inevitably have consequences
for others. Officials concerned with their political welfare must worry that precedents
established in an enforcement action brought on behalf of their exporters will come back
to haunt them in an action brought against them by foreign exporters. Only by reserving
standing to themselves, and thereby retaining control over the arguments put forward in
litigation, can officials ensure that their export interests do not advance legal theories that
are lacking in “net” political value. The same issue can arise in the investment arena, to
be sure, and one might interpret the uneasy reaction of NAFTA member governments to
recent decisions as a manifestation of this problem. Trachtman and Moremen (2003)
make a similar point. Levy and Srinivasan (1996) make the related point that private
actors may bring actions when,