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Do No Harm: Evaluating Proposals for US Intervention in the South China Sea

 

The South China Sea has long been a focal point in US-China relations. Home to large fishing grounds and abundant oil reserves, the sea provides most food and energy to its 620 million inhabitants and serves as a waterway for 1/3rd of global maritime trade, $1.2 trillion of which travels either to or from the US. But all is not well in paradise. Six governments currently contest sovereignty over the sea’s islands and resources, including China, Brunei, Malaysia, Taiwan, Vietnam, and the Philippines. Although no single government has ever dominated the region, China has employed increasingly aggressive tactics to assert control over the waterway, delineating a supposed ‘nine-dash’ line within which it proclaims ‘undisputed sovereignty.’ Since 2014, the People’s Republic of China (PRC) has reclaimed 3,000 acres of land, constructed military facilities on artificial islands, harassed foreign ships in nearby waters, and blockaded reefs in foreign exclusive economic zones. In response, Southeast Asian nations have turned to the United States as their most powerful military and economic ally to help deter Chinese maritime advance and reclaim disputed land. Although the US remains officially neutral, whichever policy it chooses to adopt in the coming years will surely define its relationship with both China and its Southeast Asian neighbours, thereby shaping the regional – and possibly, global – balance of power.

 

SIMON SAYS

 

In July’s publication of Foreign Affairs, former US-policy advisor Mr. Ely Ratner argues that Chinese regional hegemony would represent a ‘devastating blow’ to the United States, whose current policies he condemns as risk-averse and ineffective. According to Mr. Ratner, deterrence has failed principally because American leadership never explicitly stated how it would respond to further Chinese transgressions in the South China Sea. Likewise, international organisations such as the UN, the G-7, the EU, and the Association of Southeast Asian Nations (ASEAN) have never instated concrete sanctions to enforce their condemnation of Chinese expansion, thereby undermining their influence over Beijing’s maritime policy. President Trump’s recent pledge to increase military expenditure in the South China Sea is equally vain: Chinese leadership may be intimidated by America’s military might, but it also knows that the US does not value the South China Sea enough to enter a costly and difficult confrontation over it, especially given Mr. Trump’s regular assertions that he champions ‘American First.’ No matter how many US warships are deployed in the sea, China will not change its policy so long as US statesmen don’t concretise theirs.

 

Mr. Ratner proposes a series of measures which would function as strategic deterrence against China’s maritime advance. First, the United States should issue a clear warning that if China continues the construction of artificial islands and military bases, the US will forgo its position of neutrality and declare its opposition to ‘Chinese coercion.’ It should then cooperate with the region’s nations to ‘reclaim land’ and ‘fortify bases’ within their exclusive economic zones. Second, Mr. Ratner proposes that the United States conduct joint military exercises à la NATO, as well as sell ‘counter-intervention capabilities’ to their partner countries. If Chinese militarisation continues despite these measures, Mr. Ratner advices the US to negotiate deals which permanently station US troops at local military bases. Such negotiations would be paired with strong economic support to the region, in case China responds with economic sanctions. Finally, Mr. Ratner encourages the United States to complement these measures by supplying intelligence on Chinese manoeuvres and military developments to Southeast Asian news outlets, thereby engaging the public and placing more pressure upon China’s leadership to halt maritime expansion.

 

However, Mr. Ratner’s proposals are both unrealistic and disproportionately aggressive. Considering that China is already wary of American presence in the region, these proposals would increase hostilities and the risk of escalation between China and the US. Furthermore, Mr. Ratner fails to account for mitigating circumstances, such as North Korea’s nuclear program, which require the United States to compromise with China on other issues of relatively lesser importance. Finally, Mr. Ratner overestimates the risk Chinese regional hegemony poses to the US’s economic and political power, making his proposals inappropriate and reckless. In order to maintain regional stability and reassure its allies, the United States should employ much tamer policies which enforce freedom of navigation in the South China Sea without overtly provoking or alarming Chinese leadership.

 

WHO’S AFRAID OF XI JINPING? 

 

First, Mr. Ratner’s policy proposals are somewhat idealistic. For instance, he defends the need for American assertiveness with reference to the Obama administration’s threat of economic sanctions in 2015, which succeeded in stemming China’s state-sponsored theft of U.S secrets. However, Mr. Ratner does not acknowledge that Beijing is virulently opposed to letting the United States tilt the regional balance of power in favour of Western allies. Besides, Mr. Trump’s penchant for brash rhetoric suggests that any ‘warning’ about shedding neutrality and opposing China would likely be dismissed as hollow showmanship. Furthermore, the US cannot afford to provoke the PRC over the South China Sea given the current imperative to collaborate in response to North Korea’s nuclear threats. The ongoing crisis means the United States will inevitably have to compromise with respect to this – and other issues – in order to encourage China’s cooperation.

Mr. Ratner’s proposals also have high risk of backfiring, causing needless hostilities between the US and China. At the moment, three scenarios circulate regarding the latter’s future. Some suspect that the PRC aims to surpass the United States economically and politically, becoming the new global hegemon in the next 100 years. Alternatively, it could remain a mere regional hegemon, albeit one with significant global influence. More likely, China will become increasingly powerful in global governance and will share this power with the United States. In step with these predictions, US-China relations are often characterised with reference to the ‘Thucydides trap,’ the ancient Greek historian’s observation that rising powers often engender fear and insecurity in neighbouring hegemonies. Thucydides contended that this insecurity always increases hostilities, distrust, and the risk of misunderstandings, making confrontation inevitable. Although the notion of ‘inevitable’ conflict is exaggerated, international power imbalances certainly create fertile ground for conflict, where diplomatic miscalculations can rapidly exacerbate existing tensions. In the case of China and the US, Thucydidean risks are compounded by their civilizational differences. The two states have radically different conceptions of good regional governance, with China adopting more of an authoritarian approach, and the US favouring an international rule of law. These competing visions increase the risk of misperceptions within both governments regarding activities in the South China Sea. Indeed, political scientist Graham Allison warns that American policymakers have yet to improve their understanding of Chinese leadership’s attitude toward military force, which is intensely pragmatic and largely unconcerned with international norms. Therefore, placing US troops on local bases and conducting joint military exercises would probably alarm Chinese leadership and motivate further militarisation rather than deter it.

 

In his History of the Peloponnesian War, Thucydides also recounts how Athens’ intervention in a dispute between Corinth and Corcyra sparked a series of clumsy diplomatic manoeuvres which the Spartan alliance interpreted as aggressive and tyrannical, thereby serving as a pretext for Sparta’s involvement. What was originally a relatively minor conflict escalated into a dramatic confrontation between the two greater powers of the ancient Greek world. The US should heed this precedent and take care to evaluate whether Chinese hegemony in the South China Sea presents enough of a security threat to warrant hostile policies which increase the risk of escalation and, as in ancient Peloponnese, lead to confrontation. If the United States’ priority is to avoid confrontation – as opposed to contest Southeast Asian hegemony – it may be best to eschew Mr. Ratner’s proposals and opt instead for strategic reassurance, whereby states decrease mistrust and the likelihood of confrontation by establishing joint political and economic commitments. As of yet, this seems to have been the preferred strategy for both the US and China, exemplified, for instance, by the latter’s efforts in devising an EU-China Investment Agreement. Strategic reassurance is also enforced by the two nations’ important economic co-dependency: the US is China’s top trading partner, whilst Beijing is the biggest purchaser of US government debt. Ultimately, this suggests that Chinese regional hegemony is not as much of a threat to the US as Mr. Ratner claims.

 

Nevertheless, American allies such as Japan and Vietnam are unnerved at the thought of leaving China in control of the waterway, which some statesmen believe could compromise their traders’ freedom of navigation. For instance, the People’s Liberation Army (PLA) have bolstered their ‘area-denial capabilities,’ which aim to prevent other states from navigating or occupying vast stretches of the South China Sea. In order to reassure these allies, the United States should adhere to the aforementioned strategic reassurance as well as enforce its ‘freedom of navigation’ patrols in the region, which help defend exclusive economic zones without provoking Chinese leadership.

 

Ultimately, Mr. Ratner’s proposals for US economic and political intervention in the South China Sea are excessively agressive, increasing hostilities between two nations which instead need to prioritise cooperation in other, more pressing issues of military and economic importance. The United States would do better to pursue a middle ground, whereby it continues strategic reassurance whilst also conducting legally authorised naval patrols which reassure its allies and mitigate China’s assertiveness.

 

Elina Solomon is the editor of the Defence and Diplomacy Policy Centre, King’s Think Tank.

                       

REFERENCES:

 

[1] Firestein, David J. “The US-China Perception Gap in the South China Sea.” The Diplomat. August 19, 2016. Accessed October 01, 2017 from http://thediplomat.com/2016/08/the-us-china-perception-gap-in-the-south-china-sea/

 

[2] Graham, Allison. “Managing the Next Clash of Civilisations.” Foreign Affairs 96(5) (Sept/Oct 2017): 80-89

 

[3] Ratner, Ely. “How to Stop China’s Maritime Advance.Foreign Affairs 96(4) (July/Aug 2017): 64-72

 

[4] Scobell, Andrew. “China Engages the World, Warily: A Book Review.” Political Science Quarterly. 132(2) (July/Aug 2017): 341-345

 

[5] Thucydides. History of the Peloponnesian War. Translated by Rex Warner. Middlesex: Penguin Books, 1954.

 

Summer is coming & how will we solve Collective Challenges? An Ostromian view of Game of Thrones.

 

It is not often that one may relate policy to banal aspects of our daily lives; in this article, Ewa Puzniak has done so applying Ostrom to Game of Thrones!

(Beware! This article is full of spoilers! Read at your own risk.)

The Game of Thrones craze has indeed swept the world. The show is perceived as great entertainment but we can still learn about public and social policy from the Emmy winning series. Game of Thrones has introduced us to a world  that is heavily based on analogies rooted in the War of Roses, Hobbes and Machiavelli. This article seeks to relate the policy-heavy works of Elinor Ostrom to a dilemma that the protagonists face in the seventh series, with the wider aim of proving that policy is not simply a dry field restricted to academics and bureaucrats alone. Rather, I seek to demonstrate intrinsically linked to issues that we deal with on a daily basis. In fact, as this article shall establish, the approach of solving collective challenges presented in Ostrom’s works may be applied to climate change, financial crises, every day scenarios and even Game of Thrones!

During the first six seasons of the show, the scramble for the legendary Iron Throne has left the continent of Westeros divided and weak amidst the harsh bleak winter. Three characters play a significant role in series 7: Cersei Lannister currently in possession of the Westerosi crown; Jon Snow – The King in The North; and Daenerys Targaryen, the descendent of the former ruling dynasty now coming back to Westeros to claim the throne. Only at first the intrigues and the bloody battles are the major themes of the show. A deadly threat is coming from the North and every inhabitant of Westeros is now in danger. The enormous army of Whitewalkers, zombies created and led by the Night King is about to pass the mythical Wall and invade the continent.

The three protagonists are faced with an extremely difficult situation that might be described by economists as a “collective action problem”[1]. Jon Snow, as he is in direct danger and he will not be able to defeat Whitewalkers alone, seeks help from the South. He manages to form an alliance with Daenerys. However, their forces may still not suffice to overcome the threat. The support of Cersei would definitely give them the edge and it would assure Daenerys that Westeros will not be conquered by Cersei in the meanwhile.

 

We can use basic Game Theory to analyse this scenario. Cersei and Daenerys have different pay-offs resulting from their different characters. Daenerys as an agent willing to contribute proves that she definitely is a “conditional cooperator” [2]. She stands in contrast to Cersei, who displays the signs of rational agent pursuing self-interest and willing to “free-ride”, in order take advantage of the public good; which is in this case the defence of the continent. Moreover, the utilities of both players are contrasting. Cersei definitely prefers to die rather than to see Daenerys on the Iron Throne. As a rational agent, Cersei’s best response is betrayal. She considers two situations. First, if Daenerys and Jon defeat the Whitewalkers, their army will be weakened and thus, easy to beat. Second, if Daenerys and Jon lose, the Whitewalker army will be depleted and in consequence, easier to defeat. This is a variant of the classic game of Prisoners’ Dilemma where the best personal outcome is always to defect[3].

 

A way out of this impasse is to transform the Prisoners’ Dilemma into the Stag Hunt. This action involves increasing the benefits so as to create an additional equilibrium where both actors cooperate[4]. This way the players do not have an incentive to defect anymore. They both know that by not working together they will not achieve higher pay-offs. Thus, in the Stag Hunt scenario players will cooperate as long as they trust each other. In order to overcome the Collective Action Problem and create a “collaborative equilibrium”, Cersei’s incentive must be altered. Jon and Daenerys need to increase Cersei’s benefits. Yet, to achieve that, Daenerys would have to abstain from her life mission to retake the Iron Throne. Even though she is a conditional cooperator, she would not abandon her principal purpose. Therefore, the Nash equilibrium and Prisoners’ Dilemma will prevail.

 

The question stands though; if both sides cannot come to the all-encompassing agreement does it mean that Westeros is destined for total annihilation? Not necessarily. We can observe many economists and political scientists trying to understand the collective action problems in real life. The example might be environmental protection. Going even further, we could compare the Whitewalkers to climate change [5] since both could be seen as collective action problems. Many addressed this issue but I will focus mainly on Elinor Ostrom who adopted a different approach to the role of institutions in policy making. She stresses the priority of acting locally instead of waiting for an agreement on the global scale[6]. Ostrom also argues against a single solution policy to overcome such a complex problem. Hence, she and Vincent Ostrom advocate for the polycentric way of providing services that involve polycentric governance [7]that rely on decision-making at a local level[8]. Namely, if lower tiers of governance seek to collaborate together they can scale up on an ad-hoc contractual basis in order to address the issue that requires higher resources and a higher scale of production in order to endogenously match the scale of the problem.[9] An example of the combination of global and polycentric approaches might be a policy involving pricing the externality.

 

A prime example of this is the approach towards Carbon Tax. Carbon Tax introduced and set on a certain level by international organisations is a global action. However, the detailed strategy for reducing the emission is developed on a state and sub-state level. The weak point of the aforementioned policy is path dependency. We need to consider a position when the global agreement places us on a wrong path. Here, it imposes the tax on the wrong level. If the tax is not suitable, the cost of Carbon might surpass the cost of climate change and thus, this tax defeats its purpose. In this situation, local efforts will not be able to reduce the cost of climate change.

Furthermore, the danger of the Whitewalkers resembles financial shocks. During the 2008 financial crisis, banks experienced liquidity shortage. This had a dramatic impact on the global economy, especially because banks did not react and coordinate monetary policy with adequate speed. Since polycentric governing is characterised by its better responsiveness due to contextual knowledge and faster feedback, [10]this strategy could have been viable in the crisis circumstances. Instead of waiting for the state to intervene, banks could arrange themselves privately in so-called ‘clubs’. [11]Thanks to this decentralised system, clubs could have  quickly and efficiently foreseen and recognised where the financial imbalances would occurred and provide the liquidity.

Another complementary aspect of the solution for climate change recommended by Ostrom is public entrepreneurship. This approach consists of “creating focal points for coordination”. [12]Public entrepreneurs convince communities to come together to tackle a problem. For instance, after Hurricane Katrina hit the US, many people abandoned their home without the intention of returning as long as their neighbourhoods’ remained empty. It created a situation whereby nobody was prepared to return first. This collective action problem was solved by churches who acted as social entrepreneurs by convincing people to come back.[13]

Henceforth, both polycentric governance and public entrepreneurship offer a real answer to the collective action problems such as climate change and financial shocks. Nonetheless, the question emerges as to whether these approaches work even within the Game of Thrones scenario.

We already established that bargaining cost of Daenerys, Jon and Cersei reaching a cooperative consensus that is far too high. Instead of waiting for the global agreement, Jon and Daenerys should have decided to pursue local steps and act as public entrepreneurs by establishing focal points for coordination.

In the last episode of series 7, Jon and Daenerys present a previously caught Whitewalker to Cersei in order to prove the dire nature of their present situation (and to convince her to join forces). What they should have done instead, was to show the creature to Cersei’s bannermen (vassals that supply Cersei with their armies) and convince them to fight the threat together. Assuming that some of them are “conditional cooperators” [14]they would want to join the side of Daenerys and Jon despite Cersei’s wrath. The forthcoming Whitewalkers pose a much more pressing risk to local folk than the inner-rivalry of Westrosi Houses. Therefore, Jon and Daenerys would have been able to provide the public service of defence on a massive scale. Arriving to the Pareto efficient outcome due to scaling up the resources and production of the service would have been possible thanks to Ostromian multi-party agreements on an an ad-hoc basis (as well as Coasian bargaining). At the same time, Cersei would be helpless and too weak to conquer Westeros.

Similarly, not every lord under Cersei’s rule needs to provide military service to Daenerys and Jon. Ostrom [15] stresses the importance of diverse local institutions addressing the issue in diverse ways using their comparative advantage. Certainly, further down South, the less Westerosi sense the threat coming and their incentive to actively fight is weaker. Hence, they might contribute in a different way. After all, war requires different resources such as military force, strategic thinking, weapons, ammunition, logistics, finances, food and supplies, as well as means of transport. For instance, the Reach, famous for its fertile lands may grant its crops and feed the soldiers on ad-hoc con contracts, creating Coasian bargains with the rest of Westeros. This polycentric approach will definitely provide a potential alternative and an emergency solution in a faster and more effective way by involving the local actors and thus, avoiding the “Tragedy of the Commons”.

In conclusion, the Prisoners’ Dilemma which appears in Game of Thrones as well as in real life (when dealing with climate change or financial shocks) is an issue that is undoubtedly  extremely difficult to solve. The purpose of this article is to draw attention to Ostromian alternatives to solve these real social dilemmas in a manner that is radically different to the narrow-minded single global policy solutions. This article has also sought to prove that polycentric systems of governing have huge potential not only to replace the existing systems; but rather to compliment them as well (such as with Carbon tax). Furthermore, a polycentric policy approach allows us to act immediately instead of waiting helplessly for an international agreement, much bureaucracy and state-scale procrastination.

This article has been written by Ewa Puzniak, editor at the Business & Economic policy-centre of King’s Think Tank.  She would also like to thank Professor Mark Pennington a great deal for his support & feedback (Department of Political Economy, KCL) as well as Pablo Paniagua Prieto. 

 

 

 

[1] (Rugaber, Wiseman & Boak, 2017)

[2] (Ostrom, 2014)

[3] (Tarko, 2017)

[4] (ibid.)

[5]  (Rugaber, Wiseman & Boak, 2017)

[6] (Ostrom, 2010)

[7]  (Tarko, 2017)

[8] (Ostrom, Tiebout & Warren, 1961)

[9] (Tarko, 2017)

[10]  (Paniagua, 2017)

[11] (ibid.)

[12] (ibid. p. 160)

[13] (ibid.)

[14] (Ostrom, 2014)

[15] (Ostrom, 2010)

References:
Ostrom, E. (2010). Polycentric systems for coping with collective action and global environmental change. Global Environmental Change, 20(4), pp. 550-557.

 

Ostrom, E. (2014). Collective action and the evolution of social norms. Journal of Natural Resources Policy Research, 6(4), pp. 235-252.

 

Ostrom, V., Tiebout, C. M. & Warren, R. (1961). The Organization of Government in
Metropolitan Areas: A Theoretical Inquiry. American Political science Review, 55(4): 831-42.

 

Paniagua, P. (2017). The institutional rationale of central banking reconsidered. Constitutional Political Economy, 28(3), pp. 231-256.

 

Rugaber, C.S., Wiseman P. & Boak J. (2017) What We Can (Seriously) Learn About Economics From ‘Game Of Thrones’. Huffington Post Canada. Available from: http://www.huffingtonpost.ca/2017/07/10/what-we-can-seriously-learn-about-economics-from-game-of-thro_a_23023842/ [Accessed 30th September 2017].

 

Tarko, V. (2017). Elinor Ostrom. An Intelectual Biography. London; New York: Rowman & Littlefield International.

 

Brexit: Turmoil for our NHS?

 

There is little doubt that Brexit is a decision that polarised our nation in a way few decisions ever have before. As the primary source of much recent political, social and economic turmoil, Brexit’s implications are far reaching. Indeed, few doubt that its backlash will affect all corners of life within the UK. But with so much uncertainty shrouding the Brexit negotiations, what will this mean for health in Britain and our NHS in particular ?

In short, it will mean uncertainty. On one hand, the decisions and deals brokered due to Brexit could potentially help strengthen the NHS for the years to come. Or conversely, this could plunge the NHS into a state of further disarray. After all, the outcome of Brexit negotiations will affect many areas of the NHS, from funding to employment, even cross-border healthcare.

NHS funding and budgetary issues are closely linked to the outcome of Brexit. The rallying call of the “Vote Leave” campaigners was a pledge to take the £350 million that was paid to the EU per week and  instead use this money to fund the NHS. However, this was swiftly retracted by Nigel Farage the morning of the referendum result and replaced with a more genuine pledge of £100 million per week. Yet, despite the immediate boost in budgets arising from this pledge, this would do little to help an already underfunded NHS. Furthermore, the short-term slowing of the economy associated with leaving the EU will result in lower tax revenue and higher welfare spending from the government. The Office of Budgetary Responsibility (OBR) forecast a £15.2 billion reduction to public finances by 2020/2, resulting directly from Brexit. This would mean that if this were to be shared proportionally throughout the public sector, based on its current make up there will be a £2.4 billion reduction in annual NHS spending in England alone.

However, the situation is not as hopeless as one might think. There are in fact measures that can be taken by the State to help prevent this financial burden from impacting the NHS. An example of such measures would be raising taxes and introducing austerity measures in other sectors to help lessen the projected deficit. In addition to these suggested measures, the Conservative party have pledged to deliver an £8 billion increase in real terms for the NHS over the next 5 years. However, where this money will come from given the current economic climate remains to be seen. Indeed, this pledge should be treated somewhat skeptically considering the government’s inconsistent and decidedly opaque leadership since the EU referendum.

The aforementioned tax rises and austerity measures to counteract the projected financial burden is, however, conditional upon the government making a firm commitment to continue allowing substantial nurse migration once we have left the EU, as the alternative is extremely costly. Currently there are 58,000 EU nationals working within the NHS and the UK imports approximately 10,000 nurses per year from Europe to staff our NHS. With a 92% decrease in post-referendum arrivals coupled with the possibility of nurse migration shutting off completely, the Department of Health estimates a shortage of 20,000 nurses by 2025/26 ( This would augment the issue of our already chronically understaffed NHS.) Additionally, this means that a commitment from our government allowing nurse migration to continue once we leave the EU is the only viable option, (with the alternative being a rigorous increase in domestic training of doctors, nurses and healthcare staff.)  An increase in domestic training then, would be ideal as it would reduce our dependence on the EU to staff our NHS.

Nonetheless, the facts remain,  funding this would cost an inordinate amount of money and time. Even if this were to be implemented immediately, it would take three years from training to joining the workforce, taking us a year past the Brexit date and resulting in a period of chaos for the NHS.

Cross-border healthcare is another area that requires our attention. Currently the EU’s policy on healthcare for pensioners states that they have the right to travel to any member state and receive the same healthcare rights as nationals. With approximately 190,000 expat pensioners living abroad it is paramount to secure a deal in which they retain their healthcare rights. This is because the burden will fall to the NHS to care for those who are legally required to leave by their circumstances. The financial burden posed by the forced return of our expat pensioners is costly; the Department of Health pays roughly £500 million to other countries to cover the cost of care for our expats, and upon return the increase in annual costs for the NHS could amount to an extra £1 billion. This figure however neglects the need for increased resources and staff needed to provide care. Estimates suggest that we would need 1,600 additional nurses and 900 hospital beds (equivalent to two new hospitals being built) to provide care for those returning. As previously discussed, the NHS is already understaffed and with hospital bed admissions maintaining a fairly high rate. This, too is a serious problem for the NHS. Furthermore, the additional funding required to make this possible only contributes to the already heavy financial burden associated with Brexit.

Therefore,  leaving the EU poses a serious risk to the future of the NHS. Even prior to the Brexit referendum, the NHS was challenged with limited funding and understaffing.Furthermore, there are clear signs that the Brexit negotiations will exacerbate these issues and drive the NHS to an irreparable state. To ensure the sustainability of our NHS post Brexit, it is paramount that the government provides us with firm commitments protecting the legal status of healthcare workers from the EU, residing in Britain. This is specifically needed for nurses, who need to be legally protected from any migration restrictions that may be implemented post-Brexit. Such a commitment on the government’s behalf would not only relieve any potential issues that would surface due to insufficient staffing but this would also allow us to circumvent the need to increase domestic training of healthcare professionals.

Moreover, with regards to the NHS’ budgetary issues, there is little that can be done to lessen the impact of the OBR’s projected £2.4 billion reduction to NHS spending by 2020/21, (that is to say, other than implementation of higher tax rates and stringent austerity measures in other sectors.)  As for the Conservative pledge to increase NHS spending by £8 billion over the next 5 years, although it has not materialized yet, there is little doubt that this could help current circumstances.

It is also extremely important to maintain the cross-border healthcare policy that is currently in play or perhaps, implement a new one as similar to it as possible. An influx of expat pensioners seeking care in the wake of Brexit would, of course, be detrimental to the NHS. Furthermore, failing to maintain this cross-border healthcare policy will only contribute to the aforementioned financial burdens and apply a great deal of extra pressure to the currently insufficient workforce.

Lastly, it is imperative that the Conservative government who have promised a strong and stable leadership be more transparent with their intentions. The opaque leadership style we have witnessed heading into the Brexit negotiations clearly demonstrates contempt and actively diminishes the gravitas of the matter at hand. This negotiating stance that has been taken is only exacerbating the veil of uncertainty that shrouds the outcome of the Brexit negotiation, placing the fate of the NHS in jeopardy.

 

Luke Symons currently holds the position of PC President for Global Health at King’s Think Tank.

 

 

 

 

 

 

References

Blitz, J. (2017). The Brexit risk for the NHS. Financial TImes. [online] Available at: https://www.ft.com/content/7658ec98-202f-11e7-b7d3-163f5a7f229c [Accessed 1 Sep. 2017].

Conservative Party (2017). The Conservative and Unionist Party Manifesto 2017. London: Conservative Party, pp.66-73.

Content.digital.nhs.uk. (2017). Hospital Episode Statistics – NHS Digital. [online] Available at: http://content.digital.nhs.uk/hes [Accessed 8 Sep. 2017].

Mason, R. (2017). European leaders can ‘go whistle’ over EU divorce bill, says Boris Johnson. The Guardian. [online] Available at: https://www.theguardian.com/politics/2017/jul/11/european-leaders-can-go-whistle-over-eu-divorce-bill-says-boris-johnson [Accessed 1 Sep. 2017]. Nhsconfed.org. (2017). The Implications. [online] Available at: http://www.nhsconfed.org/regions-and-eu/nhs-european-office/brexit/implications [Accessed 8 Sep. 2017].

Nuffield Trust (2017). Getting a Brexit deal that works for the NHS. General Election 2017. [online] London: Nuffield Trust, pp.1-17. Available at: https://www.nuffieldtrust.org.uk/resource/getting-a-brexit-deal-that-works-for-the-nhs [Accessed 1 Sep. 2017].

Office for Budget Responsibility (2016). Economic and fiscal outlook. [online] Office for Budget Responsibility. Available at: https://www.gov.uk/government/publications [Accessed 8 Sep. 2017].

Pearson, A. (2017). Forget the nursing crisis. Here’s how Brexit can save the NHS. The Telegraph. [online] Available at: http://www.telegraph.co.uk/women/politics/forget-nursing-crisis-brexit-can-save-nhs/ [Accessed 1 Sep. 2017].

Stone, J. (2016). Nigel Farage backtracks on Leave campaign’s ‘£350m for the NHS’ pledge hours after result. Independent. [online] Available at: http://www.independent.co.uk/news/uk/politics/eu-referendum-result-nigel-farage-nhs-pledge-disowns-350-million-pounds-a7099906.html [Accessed 1 Sep. 2017].

 

 

 

The Policy and Making of Smart Contracts in English Law

  It is often taken for granted the fact that law and policy are inextricably intertwined. A general member of the public would more or less identify policy as the pattern of reasoning behind a government or organisation’s actions. Yet what we often forget is that the implementation of a certain law is also a stellar example of policy. This is especially the case in England, where previous court rulings, known as “Common Law” serve as integral precedents to every legal judgement in the country (primarily because English law has no formal codification). In this article,  the President of the Law Policy Centre at King’s Think Tank has chosen to  explore “The Policy and Making of Smart Contracts in English Law”, specifically in relation to “Exclusion Clauses”.

 

 

Ever since L’Estrange v Graucob in which the notable Mr Denning persuaded the Court of Appeal that provided the terms of an exclusion clause were clear enough, any liability for breach of contract can be excluded, there has been much pressure to outlaw unreasonable terms of exclusion if they are contained as part of a contractor’s standard terms of business.

Indeed, L’Estrange v Graucob continues to be a primary illustration and analytical starting point of contractual “exclusion clauses”. Much of the modern law and economic literature that examine exclusion clauses use this bargaining scenario or “game.” This scenario usually focuses on a consumer protection issue whereby one powerful contracting party forces a standard-form contract upon another much weaker contracting party.  And, because the economics of exclusion clauses are often examined in  such scenarios, bargaining is  made almost impossible making the use of these clauses as bargaining tools a frequently a neglected topic. Instead, significant research and attention are directed towards the use of exclusion clauses as an allocation of risk.

This risk-analysis approach is generally correct.  In some cases it may even identify instances where consumers take on too much risk. However, its limits are that it may only explain the effects of an exclusion clause in economic terms. It does not examine how exclusion clauses can be used as  consideration in contractual bargaining. The failure to do so is understandable, since in the classic scenario of parties with unequal bargaining powers there is no question of how or why the more powerful party insists on using an exclusion clause. Instead, there is usually no bargaining over the inclusion of the term in the contract and the term becomes either ineffective or is invalidated by either Unfair Contract Terms Act or the Consumer Rights Act.

Thus, it is only until an exclusion clause is disputed between parties of equal strength (as in African Export-Import Bank), that the use of exclusion clauses as bargaining tools becomes relevant. Instances whereby exclusion clauses are being used in arms-length negotiations are only increasing, boosting the relevance of the study of exclusion clauses as an economic bargaining tool.

There are two main ways in which exclusion clauses affect bargaining. Firstly, an exclusion clause is an instrument of risk, as explored in previous literature. An exclusion clause may be used to transfer and hedge risks. Thus, in a perfect bargaining environment, an exclusion clause should eventually be structured in such a way that it balances the allocated risks with benefits found elsewhere in the transaction. Secondly, the exclusion clauses and rules of interpretation affect the transaction cost of contracts. As the Courts have maintained a “hands-off” approach to exclusion clauses in commercial contexts, contracting parties must not only spend the time to watch out for exclusion clauses carefully, but they must also be ready to bargain over them.

In a hypothetical perfect market where all exclusion clauses are effective, the use of exclusion clauses in contracts should follow the same pattern as any other risk management device, such as negative pledge clauses or cross default clauses. The transactional cost of using exclusion clauses in commercial contexts however, is further complicated by Unfair Contract Terms Act and the growing use of standard form contracts. African Export-Import Bank illustrates the possibility for cat-and-mouse games between UCTA and the use of industry-wide standard-form contracts.

In African Export-Import Bank, the claimants, an Egyptian bank and two Nigerian banks syndicated a loan facility to the defendant, a Nigerian oil exploration and a production firm. When the defendant defaulted on the loan payments, the claimants accelerated the loan and began proceedings immediately. The defendant attempted to make a set-off claim. The claimants relied on a clause of their loan agreement which excluded the defendant’s right to set-off. In response, the defendants claimed that the exclusion clause was invalidated by section 3 of UCTA.

The Commercial Court ruled that this section did not apply to this case, as it only applies to written standard terms of business. In this case, the defendants were unable to adequately demonstrate that this exclusion clause was a standard term of business.

The commercial world is moving towards standardising contracts across more industries.  If these contracts are drafted with the intention of being used, such as in the most common transactions, then each term must be reviewed carefully before it is included in the standard-form contract. The test for what the standard term of business is precisely what will incentivise industries in such a way. That is to say, drafters of standard-form contracts will primarily choose not to use exclusionary clauses and commercial firms will choose to use standard-form contracts that do not have exclusionary clauses. Then to avoid section 3 of UCTA, the bargaining party that would like an exclusion clause in the contract will have to induce further negotiation so that the resulting exclusion clause is a product of arms-length bargaining and not a standard term of business. The positive and expected result of this policy is that bargaining parties will be forced to take note of an exclusion clause. There is, however, a clear increase in transaction cost. It will almost become a requirement that parties take time out to discuss and negotiate each exclusion clause, ensuring that the term does not appear to be a standard term of business.

Section 3 of UCTA will increasingly be an issue as standards-form contracts and it will become increasingly common to facilitate transactions that are time-sensitive and frequent. Indeed, standard-form contracts are already common-place in most transactions involving product-sales. However, the use and nature of standard-form contracts is rapidly transforming. The next evolutionary step of standard-form contracts is smart-contracts; these have in fact already become more prevalent in the derivatives industry. In fact, they are arguably the technology behind the latest cryptocurrency, Ethereum, which is a rival of the block-chain based Bitcoin.

The appeal of smart-contracts may also be a point of concern regarding the law surrounding exclusion clauses. Smart contracts are contracts or assets that are programmed to be executed as soon as possible. If derivatives or cryptocurrencies are supported by a smart-contract platform, each transaction could amount to hundreds or thousands of “standard-form” contracts being executed simultaneously. Furthermore, it is difficult to imagine that smart-contracts would be programmed and designed without trying to exclude some form of liability. The nature of smart-contracts is such that these transactions will go through with little supervision. If an unexpected issue arises during the transaction and it produces economic loss, then there is potential liability for the parties to this automatic transaction, as well as the one who programmed their smart-contract.

Thus, as the terms of a smart-contract will inevitably become standard terms of business, it becomes difficult to reconcile smart-contracts and standard-form contracts with law and legislation which are designed to encourage arms-length bargaining and careful thought before implementing a contractual term.  Although exclusion clauses are not common in the current implementations of smart-contracts, such as derivatives, repo financing, and cryptocurrency, the scope of smart-contracts will soon expand to include everyday transactions where exclusion clauses are common. One example is the potential for smart-contracts to be used in apartment rentals or Airbnb, where parties will try to exclude liability for losses such as property damage.

In conclusion then, the law of exclusion clauses must adapt to a world where standard-form contracts are becoming the norm in commercial contexts, and smart-contracts are becoming widely available. With recent developments in artificial intelligence and smart-contract technology, it will not be long before the tech industry decides to re-think a long-established industry by implementing smart contracts. The current state of the law, with its hands-off approach to exclusion clauses except where they are a standard term of business, favours careful examination of each exclusion clause and causes higher transaction costs across commercial industries. There must be reconciliation if exclusion clauses are to remain an important instrument of risk allocation and bargaining, as the remainder of the commercial world is, with no doubt, moving to lower transaction costs through digitising and standardising contracts.

 

Jospeh Lai currently serves as Policy Centre President of Law at King’s Think Tank. 

 

References:

[1] L’Estrange v Graucob [1934] 2 KB 394

[2] Qi Zhou, ‘What Can Contract Lawyers Learn From Law and Economics?’ [2011] 30(1) University of Tasmania Law Review 157

[3] African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017] EWCA Civ 845

[4] Persimmon Homes Ltd v Ove Arup & Partners Ltd & Anor [2017] EWCA Civ 373 [35]

[5] Krish Maharaj, ‘Limits on the Operation of Exclusion Clauses’ [2012] 49(3) Alberta Law Review 635

[6] ibid

[7] [2017] EWCA Civ 845

[8] [2017] EWCA Civ 845

[9] relying on British Fermentation Products Ltd v Compair Reavell Ltd [1999] 2 All E.R. Comm 389