National Cultures of Innovation & Governance in International E-Commerce Law

Tsinghua University School of Law Beijing, China Spring 2024 International E-Commerce Law Professor Jane K. Winn University of Washington School of Law, Seattle Topic 4 National Cultures of Innovation & Governance Competition 11 May 2024

Winn Intl E-Comm Law 2024-05-11Topic 4 Framework for Analysis 1. Globalization & the Return of Great Power Politics 2. Impact of Technological Change on Commerce 3. Decline of Nation-State Law & Rise of Governance 4. National Cultures of Innovation & Governance Competition Examples 5. Technology Neutral Commercial Law: Writing & Signature 6. Electronic Contracting & Framework Contracts 7. Banking, FinTech & Future of Money 8. Data Protection vs. Knowledge Governance 9. Machine Learning/AI, Transactive Cognition, Kasparov's Law

Themes of the Course 1. During the Modern Era, Western nations dominated the international economic system, but if the Great Divergence is now being reversed, then a new, as yet unnamed era is beginning ( Governance Era ?) Whenever there is a major change in technology, there are always winners and losers, and conflict between them may be intense Nations that respond quickly and effectively to Nexus of Forces innovations, digital transformation and the fragmentation of the Post-WWII international trade system will be able to compete more effectively and may emerge as the new era s Great Powers Technology is never a driver of social change, it is only an enabler because what really drives technology adoption is that some people who desire to change their relationships with other people discover they can achieve their goals by using the new technology The design of technology mirrors the institutions and values of the society that designs it, making its adoption easier for individuals in those institutions and with those values to get what they desire using that technology Every society tries to keep its most fundamental social conflicts hidden inside black boxes that only the most powerful individuals in a society have access to When the technological foundation of a society changes rapidly, its black boxes that hide social conflicts may break open, temporarily bringing social conflicts out in to the open before new black boxes can be built to hide them again The power of modern lawyers in Western liberal societies arises out of their status as guardians of the black boxes that hide the most fundamental conflicts in modern societies Nexus of Forces innovations, digital transformation and the fragmentation of the Post-WWII international trade system are breaking open the black boxes of modernity, but it is not yet clear what new black boxes will be built or who will emerge as guardians of those new black boxes ( Governance Designers ?) If a Reverse Great Divergence has begun, then the guardians (Governance Designers) who emerge with control over the new black boxes will probably not be modern lawyers This course in International E-Commerce Law provides case studies illustrating these ideas 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

04B Freeman National Systems of Innovation 1995 excerpt Modern word Engineer derived from Roman war engines Rise of Modern Europe In 1500, Europe was overshadowed by China and India Restoration of commerce with Renaissance 1400-1600 Advances in military technology during religious wars (Catholic v. Protestant) 1500-1700 Rise of the nation state and capitalist economy 1600-1800 United Kingdom industrialized first 1600s Civil War and establishment of first liberal, constitutional legal order 1750s mechanization of textile production to compete against cheap Indian imports Napoleon famously called England a nation of shopkeepers because their nobility intermarried with wealthy commoners France industrialization followed 1600s Louis XIV and Colbert: industrialization controlled by the state ( dirigisme ) 1700s Economic decline and Revolution followed by Napoleon German industrialization lagged behind Prussia, Holy Roman Empire and Austria-Hungary humiliated after being defeated by Napoleon 1830s Friedrich List proposed National System of Innovation to help a unified Germany catch up List admired American Alexander Hamilton s scheme to help America industrialize behind high tariffs and with strong government leadership

What is regulation? OECD 1997 Report on Regulatory Reform: No generally accepted definition http://www.oecd.org/dataoecd/17/25/2391768.pdf Instruments used by governments to set requirements on people and organizations laws, formal and informal orders and subordinate rules issued by all levels of government, and rules issued by non-governmental or self-regulatory bodies to whom governments have delegated regulatory powers Economic regulations intervene directly in market decisions such as pricing, competition, market entry, or exit. Reform aims to increase economic efficiency by reducing barriers to competition and innovation, often through deregulation and use of efficiency-promoting regulation, and by improving regulatory frameworks for market functioning and prudential oversight. Social regulations protect public interests such as health, safety, the environment, and social cohesion. The economic effects of social regulations may be secondary concerns or even unexpected, but can be substantial. Reform aims to verify that regulation is needed, and to design regulatory and other instruments, such as market incentives and goal-based approaches, that are more flexible, simpler, and more effective at lower cost. Administrative regulations are paperwork and administrative formalities -- so-called "red tape" -- through which governments collect information and intervene in individual economic decisions. They can have substantial impacts on private sector performance. Reform aims at eliminating those no longer needed, streamlining and simplifying those that are needed, and improving the transparency of application.1997 OECD report on regulatory reform

04C Williams Globalization & Regulatory Competition 2004 I Regulatory Competition Charles Tiebout, A Pure Theory of Local Expenditures, 64(5) J. Pol. Econ", Journal of Political Economy 416 424 (1956) Governments use regulation to compete with other governments to attract mobile economic resources Delaware Effect Race to the Bottom ( Laxity ) New Jersey attracted New York corporations with less regulation, then Delaware attracted New Jersey corporations with less regulation California Effect Race to the Top ( Stringency ) Air pollution from automobiles was so bad in California that it mandated cars have catalytic converters to reduce pollution, now every country in the world does the same

04C Williams Globalization & Regulatory Competition 2004 II How can a government decide which strategy is the best? Lowest-cost-location World s best practice Deregulation-liberalization Strategic trade What mechanisms can a government use to carry out its strategy? Market competition International coordination Value-driven change (Napoleon said, In war, the moral is to the material as 3 is to 1 Modeling (de facto standards, learning by observing) Who has the power to force through the strategy? Nation state governments International Business Citizens and transnational advocacy networks Hirschman s Exit or Voice or Loyalty framework

04D Hall Soskice Varieties of Capitalism Liberal market economies: if it isn t prohibited, then it is permitted Freedom to fire workers when economy turns down Freedom to use bankruptcy to cancel debts when business fails Freedom to raise money from banks and investors Strong protections for investors, competition in banking Freedom to innovate even when risky Freedom from high taxes or heavy regulatory burdens Narrow social protections for citizens Coordinated market economies: if it isn t permitted, then it is prohibited Strong protections for workers Strong protections for established businesses Limited access to finance Weak protections for investors, oligopoly in banking Precautionary Principle to insure the safety of innovation Heavy tax and regulatory burdens on businesses Broad social protections for citizens

Costs & Benefits of Legal Cultures Bottom Up Liberalism Top Down Authority Solidarity Europe Germany, Scandinavia China, Singapore Anglo-Saxon US, CA, AU, NZ Strong Growth All other Europe India Weak Growth All other

Filial Imprinting Konrad Lorenz 1930s German scientist Newborn animals are imprinted with the characteristics of those who care for them first http://t3.gstatic.com/images?q=tbn:XbUr_jrMt8j6TM:http://www.deeppencil.com/images/chimp-mothers-baby-white-tiger1.jpg http://t0.gstatic.com/images?q=tbn:-7uAFHNTDv0HAM:http://e-ducation.net/scientists/350px-Lorenz.gif http://t1.gstatic.com/images?q=tbn:3VuJ6Udeqz250M:http://sundancestablesfl.com/art/horses/imprinting/imprinting_4.jpg Cognitive psychology: schemas (schemata)

Institutional Isomorphism (imprinting, schemas)

04E Internalize Externalities What is an externality? Negative externality: polluter doesn t pay for harm to victims Positive externality: joining network benefits existing members who don t pay Example: Pollution Manufacturer uses lead oxide for white paint, pollutes water near factory, injures workers without compensation Builder uses lead oxide white paint for building, injures residents without compensation Changing the legal framework can force businesses that externalize harms to internalize them If legal system only uses civil law (property, contract, tort) to regulate the economy, then businesses will often be able to externalize costs If a legal system uses modern administrative law/regulation, it can force businesses to internalize costs of remediation before putting products on the market

Calabresi, Cost of Accidents: Legal & Economic Analysis (1971) What is the optimal legal framework to lower the cost of accidents to society as a whole? Hypothetical: Lawnmowers sold with clear warnings printed on box not to use in bare feet Yet many homeowners mow lawns barefoot, amputating toes What is the social cost? Emergency room medical treatment of homeowners, disability Four regulatory tools available: Intentional tort: but no intentional wrong, does not apply Negligence by homeowner, so no recovery from manufacturer, rate of accidents unchanged Strict Liability for manufacturer, creates incentive to design safer lawnmower Insurance to average the cost of accidents over the whole population Who is the cheapest cost avoider? Maybe homeowner, but pain & disability are sufficient non-pecuniary costs to motivate Manufacturer can improve design by adding safety features, reducing cost of medical treatment Once losses are at the lowest possible level, who is the best risk spreader? Manufacturer can spread cost over all lawnmowers by raising prices to recapture costs of research & development, so de facto insurance Homeowners who mow with shoes are taxed to pay for stupidity of barefoot homeowners

How to Reduce the Number of Toes Amputated in Lawn Mower Accidents? Increase Lawn Mower Safety No safety features Rear safety flap Safety Bar/Kill Switch on Handle

04F Principal-Agent Conflict Principal contracts with Agent to perform tasks for Principal Agent may shirk instead of performing Principal s tasks unless Principal has a good system for monitoring Agent Principal can reduce risk that Agent will shirk by putting incentives in contract (e.g., profit-sharing, performance targets) but incentives may have unintended consequences Shareholder is principal, company manager is agent Client is principal, attorney is agent

Attorney-Client Conflict of Interest In every big transaction, ... there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on. If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient's blubbering thanks. Kurt Vonnegut, God Bless You Mister Rosewater

04G Beniger Control Revolution 1986 excerpt Before the Industrial Revolution and the rise of modern bureaucracy, the power of one person to control another was exercised primarily through personal relationships and face-to-face communications After the Industrial Revolution and the rise of modern bureaucracies in government and business, the power of one person to control another increased By imposing formal, impersonal, objective criteria on the collection and storage of information, bureaucracy: Increases the amount of information that can be analyzed using statistics, computers, etc. Decreases the richness and depth of the information

Max Webers Theory of Legitimate Authority Traditional Authority: based on tradition and custom, personal & flexible Tribal/Clan/Patriarchy Monarchy/Aristocracy Charismatic: personal and flexible but based on an individual Vision of one person mobilizes others to follow (later may be routinized ) Pope and bishops of Catholic Church Dalai Lama Hitler, Stalin, Mao, Pol Pot, Saddam Hussein Legal-Bureaucratic impersonal authority, formal, rigid Obedience to rules, institutions & institutional roles, not to individuals Clear hierarchical order, promotion based on merit based on objective criteria Division of labor and specialization

Thinking like a bureaucrat Context is stable: government, law, corporation, religion [complicated problems] Superiors decision making criteria are formalized into rules Bureaucrat creates information artifact by distilling complex reality into standardized, condensed form Another bureaucrat would create the same artifact if confronted with the same complex reality Same bureaucrat can recreate complex reality from information artifact in the future Another bureaucrat could recreate same complex reality from information artifact in the future Bureaucrat stores and transmits information artifact to superior

Why does bureaucracy have such a bad reputation?

From Bureaucratic Check-Box Thinking (Knowledge is Power) to Evidence-Based Problem Solving (Working is Learning, Learning is Working) Linear, Abstract Bureaucratic Check-Box Thinking Destroys Information, Restricts Information Analysis, Blocks Discussion of Outcomes by Hiding Goals Evidence-Based Problem Solving Increases Information, Promotes Information Analysis, Opens Discussion of Outcomes by Sharing Goals Top Down TO-BE Happy State Bottom Up

04H Navigating Imposed Innovation 2020 excerpt In a competitive market, firms compete based on their understanding of what the customer s Value Proposition When firms are pressured to innovate by non-market actors (government regulators, NGOs, pressure groups, the media), this may take their attention away from discovering the customer s value proposition Market Types of Innovation Projects Strong Weak Strong Win-Win Imposed Non-Market Market- Motivated Weak Spontaneous

04I Complicated v. Complex COMPLICATED: components can be separated and dealt with in a systematic, logical way based on STATIC rules or algorithms Risk COMPLEX: unpredictable, uncertain Uncertainty

04J You can't impose a culture of innovation If a firm is successful, it probably was innovative once After it matures, however, its goals usually become efficiency and profitability Clayton Christensen s Innovator s Dilemma: When New Technologies Cause Great Firms to Fail suggested two methods: Skunkworks isolate the innovators from the bureaucracy Buy innovative startups and try to incorporate them Impose innovation on the old firm Invest in long-term change Fair evaluation, compensation, rewards Remove hazards and uncertainty Define a common problem solving method Training Identify and recruit more innovators

04K Bayart Fact Theory Dialogue in Industrial Context 2006 "But when do symbols mean the same to a given group of people? The modern logician will likely answer that a symbolic statement means the same to two or more persons when it leads to the same action on the part of each of them. Walter A. Shewhart, The role of statistical method in economic standardization, Econometrica: 23-35 (1933) This is a paraphrase of the American Pragmatist philosopher Charles Sanders Peirce s Pragmatic Maxim, it show that Shewhart s idea of continuous improvement embodies American Pragmatist ideas of truth and knowledge Success in organizations may be a function of the organization s epistemic culture. Continuous improvement is part of a different epistemic culture than modern bureaucracy

04L Who Will Lead World in Innovation US EU CN Higher Education Are American universities really the best in the world? Josh Mitchell, The Debt Trap: How Student Loans Became a National Catastrophe (2022) Cultural Attitudes If Chinese culture reveres tradition so much, why is it the world leader in FinTech? Funding & Financial Incentives If America is so good at investing in R&D, why did it contribute so much to Global Financial Crisis? The Cryptocurrency Bubble? Legal Framework If America has such a great legal system, why are 70% of Americans unable to afford legal services? Intangibles Why does America attract so many educated people from less developed countries?

04M Clinton-Gore Framework for E-Commerce Principles Private sector should lead Government should avoid undue restrictions Regulation should be predictable, minimal, consistent, simple Recognize Internet is unique Global harmonization [on US norms] Tax-free zone? E-payments: innovation versus crime Technology-neutral, party control over commerce Strong IPR protection Narrow privacy protection: notice, consent, access, security Encryption: confidentiality versus crime Telecom deregulation Minimal content regulation Private sector standards, not public standards

04N CFR US Industrial Policy Making a Comeback 2023 Industrial Policy is indicative planning practiced by Coordinated Market Economies Germany France Japan After WWII, regulators, trade unions and managers coordinated the US economy, but this broke down in the 1970s in the turmoil created by two oil price shocks Presidents Jimmy Carter and Ronald Reagan started dismantling this In the 1980s when Germany & Japan were more successful than the US, there were calls for industrial policy, but the US never went back to coordination After the Internet Revolution started in the 1990s, Americans were happy not to have a coordinated market economy Americans support government intervention to correct market failures but not to replace private firm management

What is a market failure? What is a market failure and what causes it? Information asymmetry Unequal bargaining power Cognitive bias: optimism bias, anchoring, loss aversion, status quo bias, context, heuristics Externalities What can be done to correct market failures? What is regulatory failure? Cost of market intervention higher than benefits Rent-seeking Regulatory-lock in Taxation by regulation

European Union Institutions European Council (27 member states) Heads of state summit meetings 1-2x per year to set high-level strategy, e.g., Lisbon Agenda Loyalty: ruling party, voters in home country EU Council of Ministers Ministers of each EU member state coordinate specific areas E.g., all transportation ministers meet to decide transportation policy Loyalty: ruling party, voters in home country EU Commission Bureaucracy in Brussels that makes European Union work Not enough money or employees to demand compliance, must depend on member state money and employees Loyalty: European Union EU Parliament Directly elected by citizens of Europe Loyalty: voters in home country European Court of Justice Rule on EU law questions, trained in civil law, but created a de-facto EU constitution by case law Loyalty: EU treaties NOT EU: Council of Europe 47 members, European Convention on Human Rights

Lisbon Agenda 2000 Goal: EU should be the most competitive, dynamic knowledge- based economy in the world with more growth, better jobs and greater social cohesion Who bears the costs and who enjoys the benefits of: Information society for all More European research & innovation Internal market without national barriers Open Method of Coordination Member states set benchmarks Member states implement policy, collect information, report back on progress

Will EU Leaders Learn from Failure of Lisbon Agenda? 2001 Dot Com Bubble burst, recession Restated Lisbon Process in 2005, then Global Financial Crisis Sustainable economic growth requires risk management not risk avoidance Precautionary principle: do nothing until you can prove it is safe Opportunity (upside) risk/business strategy/ Economic Regulation Hazard (downside) risk/risk mitigation/ Social Regulation Anglo-Saxons more willing to tolerate increased hazard risk to get new opportunities EU Commission regulators like mitigating hazard risk, ignore the difficulty of managing opportunity risk Economic growth is the driver, law is the enabler Countries that are willing to make reforms for growth will grow, countries that are not willing to make painful reforms will not Countries that are not competitive will try to block the spread of the internal market to protect local industry

European Union Digital Economy Policy 2000 Lisbon Agenda Make the EU the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs, and greater social cohesion, and respect for the environment by 2010. 2005 Re-launch, information society issues Assess EU regulation to achieve integrated approach to digital convergence Single European Information Space Innovation and investment in ICT research & development: integrate academic research & private enterprise & standards Inclusive European Information Society 04P Sweden Admits Lisbon Strategy Failure 2009 2015 Digital Single Market Better Consumer Access Level Playing Field (regulate US platforms like Google) Engine for Economic Growth Europe 2020 Strategy

04Q Digital Markets Act Primer Europe has no global platforms to compete with Google, Apple, Facebook, Amazon, Microsoft, Netflix, AirBnb, Uber, Baidu, Alibaba, Tencent So it is imposing regulations on global platforms to try to limit their success in European Markets But if nothing arises in Europe to take their places, such a policy cannot succeed as long as EU is in WTO

04R EU Digital Dilemma 2020 In the 1980s and 1990s, Europe and the US were seen as equally powerful in global markets Europe remains as competitive as the US in traditional industries, but those industries are shrinking and information economy industries are growing Today, no one thinks Europe is successful in the global information economy Europe is not addressing the root causes of the problem, keeps trying to trigger a California Effect by setting global standards for economic regulation

04S Mody's India Boom Is a Dangerous Myth 2023 Gandhi and Nehru were high-caste Indians who believed Indians living in the countryside were happy, so did not want to disrupt their agricultural economy Government of India chose a few big industries to invest in, but this did not help small and medium sized industries in India to become globally competitive Government of India has not invested in modernizing infrastructure or logistics In some Indian states, 50% of the adult population is illiterate, the poor have been trained to expect government handouts, and vote for whoever gives them the most handouts

04T Problem with China's Soft Power 2019 Soft power is a way of getting people to follow you because they are attracted to you and want to be like you CCP s leadership style works well inside China, but not so well outside of China

04U CNN Kenyan Railway Built by Kenya 2019 Britain forced Kenyan laborers to build a railway from the coast up to Nairobi a century ago After Kenyan independence, the railroad fell into disrepair, the Kenyan government never replaced it China built a modern high-speed rail connecting Nairobi to the sea Is Kenya being helped or not? Benjamin Mutuma won a contract to help build the train, but lost money because the Chinese expected him to do the contract work correctly for the contract price Why was he surprised? What would a Kenyan government enterprise expect?

04V Red Carpet China's Soft Power in Kenya 2022 Who are are 9 year old Kenyan Lucky s heros? Monkey King Dwayne Johnson the Rock Jet Li Is China s soft power in Kenya growing through the satellite TV services it offers?

04W HBR China's New Innovation Advantage 2021 excerpt In 2014, the Harvard Business Review published an article about Why China Can t Innovate In 2021, the Harvard Business Review admitted it was wrong