Financial reform has driven many changes in American governance, but the most dramatic one may prove to be the government’s cautious, but wide-ranging, embrace of a revised global regime to regulate international finance. That reform has moved the equilibrium of the separation of powers in foreign affairs towards Congress and uses the informal way that financial regulatory standards spread across the globe to do the work that customary international law used to do.
Both of these developments derive from the way that international financial cooperation has evolved. The agencies charged with implementing Dodd-Frank have embraced “soft law” in their international work. Soft law— often, although not exclusively, agreements between regulators in two or more countries—does not create formal legal obligations, but nonetheless contains substantive commitments that the parties are expected to take seriously. Because it involves regulators rather than diplomats, soft law broadens the set of American actors who make foreign policy. My new paper, available here, shows how Congress has authorized largely independent agencies, which are removed from presidential control, to conclude agreements with their foreign counterparts to create a set of international rules for finance that are not under the control of the president or the secretary of state.
This change also has an important implication for international law doctrine, displacing two functions of customary international law. First, the new approach to financial regulation has sought to facilitate conversation among international actors and provide them with a platform for greater international cooperation. In doing so, it has replaced the “rules of the road” function of custom. Those rules used to be set by customary international law doctrines, such as diplomatic immunity, state responsibility and others that served to facilitate international cooperation, without requiring substantive commitments. In finance now, it is informal cooperation that is creating the institutions for agreement. Soft law networks of regulators now set the critical terms of domestic financial reform regulation, and international summits by heads of state and finance ministers are the places where the fruits and agendas of that cooperation are set and reviewed.
Second, the new approach has been used as the vehicle for creating innovations in human rights, which have been a second, if controversial, function of customary international law. Financial reform in America includes new human rights commitments set not by claims of custom but by regulatory example meant to be adopted by the rest of the world. In particular, Dodd-Frank requires the Securities and Exchange Commission (SEC) to privilege international human rights values in a novel way. Its Conflict Minerals Rule requires manufacturers who use resources extracted from war-torn Central Africa to disclose that use, or to disclose the steps taken to ensure that they are not using such African resources, in an effort to reduce the funding for civil conflict in the region. Dodd-Frank’s Resource Extraction Rule requires extractive industries such as mining and oil companies to disclose every payment made to a government in a country in which they do extractive business. Both regulations are controversial, as they impose costs and do not address causes of the financial crisis. Some critics have wondered why the United States would begin a global human rights campaign without requiring other countries to adopt the same rules as a matter of formal law.
This function of financial reform’s internationalism offers evidence of a shift away from using traditional international law and international diplomacy and towards technocratic, soft law decisions driven by agency agreements and regulations. It is a different kind of international governance, but there is no doubt that it has captured the attention of American policymakers.
The changes in the domestic balance of power in foreign affairs and in the international relevance of customary international law are intertwined. Public international law used to very much be the province of the executive, and turning to different means to effectuate international governance opens gaps for other actors—in this case, financial regulators—to fill. The reliance on regulators disempowers the diplomats who, in part, made foreign policy by engaging with the traditional ways that customary international law operates. The turn away from custom and the empowerment of independent agencies that are the critical components of financial reform’s internationalism are, in many ways, two sides of one coin that Congress has cashed in an effort to change the balance of power between the branches of government in foreign affairs.
This post comes to us from David T. Zaring, an associate professor in the University of Pennsylvania Legal Studies Department. It is based on his recent article, “Financial Reform’s Internationalism,” available here.