1989 Rational Hegemons, Excludable Goods, And Small Groups_An Epitaph for Hegemonic Stability Theory

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Rational Hegemons, Excludable Goods, and Small Groups: An Epitaph for Hegemonic StabilityTheory?Author(s): Joanne GowaReviewed work(s):Source: World Politics, Vol. 41, No. 3 (Apr., 1989), pp. 307-324Published by: Cambridge University Press

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RATIONAL HEGEMONS,

EXCLUDABLE GOODS, AND SMALL

GROUPS:

AnEpitaphforHegemonicStability

Theory?

By JOANNE GOWA*

THE political orrelatesfa stableworldmarket conomy emainunclear.Early n the 97os, a burst fscholarlynterestnthis ubject

producedwhat at thetimeappeared to be a compelling hesis:the worldwas safe fromtariffwars and great depressions nlyifa singlestateorhegemonicpowerdominatedthe nternational olitical ystem. efining

international ree trade as a public good, "hegemonic stability heory"concludedthat ts reliablesupplydepended upon a distribution f inter-nationalpoweranalogous tothatwithin privilegedgroup.

In relativelyhort rder,however, ritics hallengedthree ssumptionsfundamental o hegemonictheory.They argued that: i) rationalhege-mons,accordingto standard nternational rade theory, dopt an opti-mumtariffather hanfree rade; 2) smallgroups, s public-goodtheoryitself laims,are close substitutes orprivilegedgroups; and (3) thepro-

vision of open internationalmarkets mplies the supplyof excludablerather hanpublic goods. Thus, they oncluded,hegemony s not neces-saryfor, nd indeedmaybe antitheticalo, stableworldeconomybasedon marketexchange.

The potentialpowerof these riticismss considerable: persuasive r-gumenton theirbehalfwould destroyhe nalytic oundations fa theorythat s alreadythetarget fattackon empiricalgrounds.I n thispaper I

* The first ersion f thispaperwas presented t theConference n BlendingPolitical ndEconomic Analysis f nternational rade Policies,Universityf SouthernCalifornia,Marchi987. I am grateful o participantst that onference or omments, articularlyeff rieden,Stephan Haggard, StephenMarks,John . Odell, J.David Richardson, nd Thomas D. Wil-lett. am also grateful o BenjaminJ.Cohen,YoussefCohen, JohnA. C. Conybeare,AveryGoldstein,RichardJ.Herring,Robert0. Keohane, TimothyJ.McKeown, and Kenneth A.Oye for omments n laterversions f thepaper.

TimothyJamesMcKeown, "The Rise and Decline of the Open Trading Regime of theNineteenthCentury,"Ph.D. diss.,StanfordUniversity,982; McKeown, "Hegemonic Sta-



308 WORLD POLITICS

argue, owever,hat hese ttacks renotfatal othe heory:neconomicgrounds alone, a nonmyopic ational hegemon may reject an optimumtariff;xclusionrom free-tradeccord s tself public ood;andheg-

emons njoy clear dvantageelativeo mall roupswith espectothesupply f nternationalublicgoods.Strategicnterdependence,ncom-plete nformation,nd barrierso"k" roupformationrethecoreele-ments fthe rgumentresentedere.

I conclude hat hemost ignificantlawnhegemonicheorys tsne-glect fthe ssence f hedomain owhich t pplies: hepoliticsf nter-state rade nan anarchicworld.Because hesecurityxternalitieshatinevitablyccompanyheremoval ftrade arriersan shift hebalance

ofpower mong tates, ny nalyticepresentationf nternationalreetrademustmodelthese ffectsxplicitly.n short, egemonictabilitytheorymust nclude ecuritys anargumentntheutilityunctionst s-signs o states pening heir orders o trade.

Several mportantimitationsf this nalysishouldbe stated t theoutset. ecause hepublic-goodariant fhegemonicheorys cast t thesystemicevel,thispaperalso focuses xclusivelyn the incentives otrade reelyhat rise tthe evel fthe nternationalystem. sa result,

it doesnotconsider he nfluencefdomestic actorsn thepursuit fthese ncentives:eitherheorganizationfdomesticxchange iahier-archiesnstead fmarkets ortheroleofspecialnterestroups, or x-ample, s considered.2

The argumentlso assumes sgiven he onditionsnderwhich tan-dard nternationalrade heorypplies,ndthepaper ontainsnly llus-trativeather han ystematicmpiricaleferents.3heserestrictionsreappropriatenviewof the ssay's bjectives:i) to demonstratehat heassumptionsbout rationalhegemons, ublicgoods,and privilegedgroups ctuallyllowhegemonictabilityheoryorepresentnalyticallyseveral riticallymportantarrierso free rade mong tates,nd 2) tomakeclearthat nytheoryf nternationalrade n an anarchicworldmust xplicitly odel ts ecurityxternalities.

After brief xplanationfhegemonictabilityheory, careful e-viewofthe rgumentsf tsmost ersuasiveriticsspresented.he pa-

bility heory nd i9th-Centuryariff evels nEurope," nternationalrganization7 (Win-ter I983), 73-91; JohnA. C. Conybeare, TariffProtectionn Developed and DevelopingCountries,"nternational rganization7 (Summer 983), 441-68.

2 JohnGerardRuggie, International egimes, ransactions,nd Change: Embedded Lib-eralism n thePostwarEconomicOrder," nternational rganization6 (Spring I982), 379-415; Jeffrieden,"SectoralConflict nd U.S. Foreign EconomicPolicy," nternationalrga-nization 2 (Winter 988), 59-90.

3 WilfredEthier,ModernnternationalconomicsNew York:W. W. Norton, 983).



HEGEMONIC STABILITY THEORY 309

perconcludeswith he uggestionhathegemonicheorysproblematiclargely ecause tneglectshepolitical onsequencesfagreementsotrade reely.

HEGEMONIC STABILITY THEORY

In 1973,Charles . Kindlebergeraid thefoundationsfwhatRobert0. Keohane, lmost decade ater,abeled hegemonictability"heory.4The term s also frequentlypplied o the rgumentsf bothRobertG.Gilpin ndStephen . Krasner, lthough indleberger'smphasiss onthe tabilityfthe nternationalystem,ndGilpin's ndKrasner'ss on

the elf-interestfthedominanttate.5 ommon o allthree, owever,sthe laim hat, ecause stableystemf nternationalree rade nvolvesthe upply f public ood, thasa political rerequisite:he xistencefa hegemonic ower.AsKindlebergeruts t, for heworld conomy obe stabilized,here astobe a stabilizer,ne stabilizer."6

The analyticsfhegemonic heoryre drawnfrom he iteraturenpublicgoods.Unlikeprivate oods cookies rBig Macs),publicgoods(nuclear eterrencer cleanair) are oint nsupply nd nonexcludable.

That is, any ndividual'sonsumptionf these oodsdoes not precludetheir onsumptionyothers,nd no individualan beexcluded r pre-vented romonsuminguchgoodswhetherrnothe has paid for hem.

As a consequence,risoners' ilemma PD) preferencesharacterizeeachmemberf large roup rof ny hort-livedroup acing public-goodor collective-actionroblem. he correspondingayoffmatrixsfoundnFigure (P.3 O). Confrontinghese ayoffs,hedominanttrat-egyofeachplayersto refusedefect)ather han o contributecooper-ate)tothe upply fthepublic ood:DC > CC > DD > CD. A Pareto-inferiorquilibriumutcomeDD) results: o onecontributes,opublicgood sproduced,nd another-albeit nstable-outcomeCC) existsnwhich all would be better ff.7

Kindlebergerrgues hat,fstatesocked ntoan internationalree

4 Kindleberger,The World n Depression,929-I939 (Berkeley:University f CaliforniaPress, 973); Keohane, "The Theory ofHegemonicStabilitynd Changes in InternationalRegimes, 967-I977," in Ole Holsti,ed., Change n the nternationalystemBoulder,CO:WestviewPress, 980), I32.

5Gilpin, U.S. Power nd theMultinational orporationNew York:BasicBooks,1975); Gil-pin,ThePoliticalEconomy f nternational elationsPrinceton:PrincetonUniversity ress,i987); Krasner,"State Power and theStructure f International rade," WorldPolitics 8(April I 976), 3 I 7-47.

6 Kindleberger fn. ), 305.

7 A Pareto-superiorquilibriumsone inwhich t least one individualwould be better ffand no individualwould beworseoff han t theexisting utcome.



310 WORLD POLITICS

COLUMN

Cooperate Defect

Cooperate 2,2 4, 1

ROW

Defect 1, 4 3, 3

FIGURE I

Note: Payoffs re ranked from (best)to 4 (worst);Row's payoffs re listedfirst.

tradePD are to be able to escape theirdilemma,a hegemonmust exist.Because of its relative size in the international ystem,Kindleberger's

hegemon stheequivalentof whatpublic-good heory alls a "privileged"group: that s, a group "such that each of itsmembers, r at least someone ofthem,has an incentive o see thatthe collectivegood is provided,even ifhe has to bear the fullburdenofprovidingthimself."8

Casual empiricism ppearsto confirm indleberger's rgument.Brit-ishhegemony n the nineteenth nd U.S. hegemonyn themid-twentiethcentury oexistedwithrelatively pen internationalmarkets.The inabil-ity f Britain nd theunwillingness f the United States o ead coincidedwiththe construction f "beggar-thy-neighbor"radingblocs in thein-terwarperiod.9The apparentdecline n U.S. hegemonynrecentdecadesand the simultaneous ncrease ntradebarriersmongthe ndustrializedcountries lso appeartosupportKindleberger's ssertion.Whether cor-relationbetweenhegemony nd freetradeactually xistsor representscausal relationship as becameextremelyontroversial."'

Much ink has also been spilledover threeanalytic ssues: (i) Do ra-

8Mancur Olson, The Logic of CollectiveAction Cambridge: Harvard University ress,

I971), 50.9Kindleberger fn.4),28.10For examplesof the arge iteraturehatviolently nd sometimes ersuasively bjectsto

everyhistoricalnterpretationnthisparagraph,ee McKeown (fn. ); KennethA. Oye,"TheSterling-Dollar-Franc riangle: Monetary iplomacy 929-I937," World olitics 8 (Octoberi985), I73-99; and Bruce Russett, The Mysterious ase ofVanishingHegemony," nterna-tional Organization 39 (Spring i985), 207-32.




tional egemons ave ninterestn free rade?2) Is free rade ecessarilynonexcludable?nd (3) Does a hegemon rovide heonly olution owhatever ublic-good roblemsxist?Although nalyses f these ssues

appeartodamagehegemonicheoryrreparably,hecritics ave nfactchosen oomerangss theirweapons.

RATIONAL EGEMONS ANDFREE TRADE

Some observersontend hat he ttributionffree-tradereferencestoa hegemon iolatesheprinciplesfstandardnternationalrade he-ory.11 ccordingo the atter, hey ote, ny tatearge nough oinflu-

ence tsterms ftrade-the relative rice f tsexportsn worldmar-kets-willmaximize tsreal ncome y mposingnoptimumariff:hatis,a taxon trade et t thepoint hatmaximizes henetgainwhich c-cruesfrom heresultingmprovedermsndreduced olume f trade.Thus,they uggest,nly n irrationalegemon ould onformothebe-havioral rescriptionsfhegemonicheory.12

Flawed premisesndercuthepower f his rgument.t mplicitlys-sumes hat hehegemon'snfluencever ts erms ftrade s themost f-

ficientource f everagevailable o t.More mportantly,he rgumentignores trategicariableshat anaffecthegemon'shoice ftariffev-els.As a result,teffectivelyiolates he ogicofgame-theoreticodelsofprice etting ydomesticmonopolists,herebynflatinghe costs neconomic egemonncurswhen t bandonsts rade arriersor oliticalreasons.

The possessionfpower n thetrade-theoryense, or xample, ec-essarilymplies heuseof tariffnlyf hehegemonannot ind moreefficientay o redistributencome romts rading artnerso tself. e-causeother tatesose more han hehegemon ains, tariffis an infe-riorwayto redistributencome etweenountries."13n its wn ong-runinterestnenhancingtsrevenue ase, herefore,hedominant tatehasan incentiveopursue ither ftwopotentiallyareto-superiorlterna-tives o trade arriers: ribes rtaxes.14

In practice,hetransactionosts ssociatedwithboth lternativesre

" JohnA. C. Conybeare, PublicGoods,Prisoners' ilemmas and the nternational olit-ical Economy," nternationaltudiesQuarterly8 (March 984), 5-22.

12This argument s intended o apply onlyto single-minded egemons.Critics cknowl-edge that hegemonswhich pursue political s well as economicgoals may prefer ree radeforpoliticalreasons. ee, for xample, bid.

13RichardE. Caves and RonaldW. Jones,World rade nd Payments: n ntroductionBos-ton: Little,Brown, 973), 244.

14For a brief iscussion f bribery s an alternative o tariff etaliationnthecontext f twostates fequal size,seeConybeare fn. I), I4-I5.



312 WORLD POLITICS

likelyto exceed thedeadweight oss produced bya tariff.n thecase ofsmall states ngaged in a collective ffort o bribethehegemonto adoptfree trade,a public-good problemarises: each small state that s poten-

tially party o suchbribery as an incentive o let theothers ssume itscosts.Free ridingcan be preventedonly in theunlikelyevent thatthehegemoncan cheaplydiscriminatemongtheexports fa large numberof small countries.

Designing, mplementing,nd enforcing system otax other tates slikelyto be prohibitivelyostly o thehegemon. Althoughthe interna-tionalequivalentof a lump-sumtaxmay eave small statesbetter ff hanwould an optimum tariff,hese statesmay recognizethattheywould be

even better ff s free iders: hehegemon's hreat osanction axevadersmay notbe credibleto them. The situation f thehegemon s analogousto that of the incumbent irm n thechain-store aradox: it confrontstrade-off etweentheshort-termosts oit f tpunishesdefiance nd thelonger-termosts to itsreputationf tdoes notdo So.15 In any case, uni-lateral mposition f an optimum ariffs ikely o be lesscostly o theheg-emon than thetheoreticallyareto-superiorlternative ftaxation.

Despite thedearthof alternativemeans to redistributencome in its

favor, clear-thinking,onmyopic egemonmaystillreject heoptimumtariff ecommended oitbystandard radetheory.tsinterestndoingsowould be thepreservation f itsmonopolypower. Thus, it would act onthe same logic that motivates domesticmonopolist o setpricesbelowtheir hort-runmaximizing evels: the ncumbent irm hereby ttemptsto deterentry ntoits markets.By "limit"pricing, hemonopolist eekstosignal potential ntrants hat tscosts fproduction re lower thantheyare in reality.l6ts abilityto sacrifice hort-run ains in order to earnhigher ong-runreturns ependson theexistence f coststoentry s wellas asymmetricnformation bout themonopolist's ostsofproduction.'7

A rational,nonmyopichegemonmayset tstarifft lessthantheshort-run optimumlevel under analogous conditions-if, forexample, it hassomeprivate nformation bout theelasticityfglobal demand and sup-ply curves, and if small countriesorganizing to exert countervailingpower in worldmarkets ncursomecosts ndoing so.18A hegemonmay

I5For a formal nalysis f thechain-store aradox, eeDavid M. Kreps andRobertWilson,"Reputation nd Imperfectnformation,"ournalfEconomicTheory7 (August 982), 253-

79-6 Paul Milgrom ndJohnRoberts, LimitPricing nd EntryUnder Incomplete nforma-

tion:An Equilibrium Analysis," conometrica0 (March 982), 443-59.17Since potential ntrantsre aware of the ncentivesfestablished irmsoengage n imit

pricing, he established irm's trategymaynotwork.See ibid.i8 In his most recentwork,Conybearenotesthatheavy xport axes may inducesubstitu-

tionthat, nturn, ictates heuseof ighter axes nthe nterestfmaximizingong-run rof-




indeed have private nformation boutglobal marketsbecause of its in-centives obecome nformed boutthem; smallcountry, ycontrast, aslittle ncentive oacquire such information ecause it cannot nfluence ts

termsof trade. Significant ransaction ostsmaybe incurred n thepro-cess offorming ustomsunionsbecause of the distributionalffects othwithinand across thepotentialmembersthat resultfromthe setting funiform xternal rade barriers.19

The trading practicesof bothBritainand theUnited States suggestthat the analogy to limitpricing s of more than just analytic nterest.Mid-nineteenth enturyBritain, ccordingto one observer,maintaineditstariffst less thanoptimum evels norderto fix ts monopolyof man-

ufactures n the rest ftheworld for fewmoredecades than tsnaturalterm."20 The logic of limitpricing apparently mpresseditselfon theUnited States when it attempted, n the 1930 Smoot-Hawley tariff, oturn heterms ftrade n itsfavor.This effortrovokedtheconstructionoftradingblocsabroad,21and apparentlynducedtheUnited Statestotryto lowerglobal barriers o tradeafter he war.22

In short, ecause an attempt o exploit tspower in theshortrunmayunderminethatpower over time, a nonmyopic, ationalhegemon may

reject n optimumtariff. lthough the limit-pricingrgumentdoes notsupport n inference hatfree rade-the internationalnalogue ofcom-petitive rices t thedomestic evel-will prevail, t does suggest hatuni-lateralrestrictionsn the use of an optimumtariffan be in thestrictlyeconomicself-interestf a far-sighted,lear-thinking egemon.

Because thelimit-pricing nalogue suggests hat tmaybe cheaperto

its.Conybearedismisses his rgument npersuasively: e maintains hat long-termlastic-ity .. argumentsmerely ssert hatthehegemon s notreally hegemon."See JohnA. C.Conybeare,Trade Wars: The Theorynd Practice f nternational ommercial ivalryNewYork:ColumbiaUniversity ress, 987), 72.

19JohnMcMillan, Game Theoryn International conomics New York: Harwood Aca-demic Publishers,986), 67.

William Cunningham,cited in Donald N. McCloskey,"Magnanimous Albion: FreeTrade and BritishNational Income, 84I-I881," Explorationsn EconomicHistory 7 (Julyi980), 303-20, at 304; but see also fn. 3 below.

21 For an analysis hat uggests hat heGreat Depressionwouldhave led tothesameout-come even without hisprovocation ytheUnited States, eeBarry ichengreen, The Polit-ical Economy oftheSmoot-HawleyTariff,"NBER WorkingPaperNo. 200I, i986 (cited n

Jagdish hagwati, rotectionismCambridge,MIT Press, 988], 22).

22The present nalysis eemsto suggest hat heAmerican ncouragement f what becametheEuropeanEconomicCommunitywas illogical. ven withoutntroducing ecurity actors,however, he U.S. action can be interpreteds taking ontrol f,rather hanwaitingfor, heinevitable: n promoting heformation f the EC whenitdid, the United States had an op-portunityo exert ignificanteverage ver the direction f theunion.Thus, it could success-fully emand,for xample, hat he EC treatforeign irect nvestments itdid national n-vestment,hus nsuring hatU.S. firmswouldbeableto circumventEC tariffs,lbeit tsomecosttothosefirms. ee Gilpin fn.5).



314 WORLD POLITICS

forgo n optimumtariff han standardtradetheorymplies, t also sug-gests thatthe incidenceofdecisionsto do so forpoliticalreasons may behigherthanwould otherwisebe expected.Thus, forexample,the intro-

ductionof long-term lasticitiesntoempiricalestimates f thewelfarelosses incurredbyBritainas a consequenceof its unilateral doptionoffreetradein the mid-nineteenth entury uggests hat themagnitude ofthese losses was "extremely mall."23AlthoughBritain's repeal of theCorn Laws is conventionallyttributed o domesticpolitics, heBritishcase neverthelessuggests hat hegemondoes not need very trongpo-litical ncentives oadoptfree rade: theeconomic osses t ncursby doingso maybe insignificant.

In sum,even theexclusively conomic self-interestf a rationalhege-mon maynotpersuade it to adopt theoptimumtariff f standardtradetheory.ts preferenceswill depend on therelative ostsofbribery, axa-tion, nd tariffs,nd on itsability o deter ntry hrough hestrategic seof itsmonopoly power. It is certainly ossible that,under some circum-stances, hegemonwill choose an optimumtariff s conventionally e-fined. Under different ircumstances, owever-even in situations nwhich politicalfactors o not nfluencets choice-it maynot do so.

FREE TRADE AND PUBLIC GOODS

The public-goodpremise fhegemonic heory as also become contro-versial. Arguingthat the "benefits ffreetrade are largely xcludable,"JohnA. C. Conybeareasserts, or xample,that countriesmay, ndivid-uallyor collectively, enalize a country hat ttempts o imposea nation-ally advantageoustarifft theexpenseof the nternationalommunity."24

Thus, Conybearecontends hatfree rade s not a publicgood because itfailsto fulfill henonexcludabilityttribute f suchgoods.

Arguingthatfreetrade s, instead, Prisoners'Dilemma, Conybearenotes that an optimumtariffmaximizes thegains of a large state. f allstatesemploy tariffs, owever,the outcome is inferior o a free-trade

23DonaldMcCloskeyhasarguedthatBritainost at most"4% of national ncomewhenitchose free trade rather hanan optimumtarifffn.20, p. 305). Bhagwati notesthatMc-Closkey'sanalysisrelies n "intuition";he observes hatDouglas Irwinhas

estimatedBritish oreignrade lasticitiesor hatperiod nd calculated hewelfare ossof unilateral ariff eduction t about 0.5 percent f national ncome n the very hortrun. As Irwinpointsout,though,onger-runlasticitiesmply n extremelymall wel-fare oss,and ifforeign ariff eductions re factoredn (resulting romBritain'sdem-onstrationffect romoting ree rade) rwinfinds hatBritainwas made better ff.

Irwin,"WelfareEffects f British ree Trade: Debate and Evidencefrom he i840s," pre-sented oMid-West nternational conomicsMeetings,AnnArbor,Michigan, 987, cited nBhagwati fn. I), 29-30.

24Conybeare fn. i), 6.




truce, s it reduces thevolume but does not change the termsoftrade.25The mutuallypreferred utcomeof freetrade s difficult o achieve be-cause it is not a stable or Nash equilibriumof the one-shotgame: each

statehas an incentive o deviate to an optimumtarifffothers dhere tofree rade.Thus, Conybeareobserves, radetheory ffectivelyssigns PDpreferenceso largestates whereC represents ree rade and D an opti-mumtariff).

Conybeare s correct:freetrade s excludable,and his argument s animportantmodification f hegemonictheory.But implicit n this argu-ment s an assumption hat ach statebenefits rom anctioningwould-befreeriders. f,however, he policingof a cooperative greement s costly,

enforcementtselfbecomesa public good.26As Michael Laver observes,costly xclusion"simplyreplacesone collective ctionproblemwith an-other, heproblemofraising xclusion osts."27

Wheneverdefections either mbiguous or easilyconcealed,sanction-ing is likelytobe costly.28mbiguity hreatens o make punishment p-pear as provocation, hus nitiating feudthat will not eliminatethe al-legedoffense, utwill imposecostson the would-be enforcer.Ambiguityis virtuallyndigenousto PDs because incentives o conceal cheating re

strong; s George Stiglerobservesof industrial artels, the detection fsecretprice-cheatingwillof coursebe as difficults interested eople canmake it."29

Informational symmetries ervade trade agreements, risingfromthevaried sources ofambiguitynherentn them.Among these sourcesare: theneed totranslatenternationalgreementsntodomestic aw; thedifficultyfdeterminingfconditionsof breachhave occurred;the in-ability ospecifyllegalbehaviorprecisely; nd thepossibilityfcurrencymanipulationas a substitute orovertactionon trade.30Would-be freeridersmayalso conceal cheatingby shipping heir xports hrough hirdcountries.

25This assumesthat tates ossess imilardegrees f market ower. fthey o not, t spos-sible for ne state obe better ff, ven after hecyclehas been completed, han f thad pur-suedfree rade.See H. G. Johnson,OptimumTariffs nd Retaliation," eviewofEconomicStudies I (No. 55, 953-54), I42-53-

26Robert Axelrod ndRobert . Keohane,"AchievingCooperationunderAnarchy: trat-egies and Institutions,"World olitics 8 (October 985), 226-54.

27 Laver, "PoliticalSolutionsto the CollectiveActionProblem,"PoliticalStudies 8 (Junei980), I95-209, at 200.

28 KennethA. Oye, "ExplainingCooperationunderAnarchy: trategiesnd Institutions,"World olitics 8 (October 985), I-24, at 5.

29 Stigler, A TheoryofOligopoly," ournalfPolitical conomy 2 (February 964), 44-6i,at47.

3? BethV. Yarbrough nd RobertM. Yarbrough, Cooperation ntheLiberalization f n-ternational rade: AfterHegemony,What?" International rganizationI (Winter i987),I-26, at 7-9.



316 WORLD POLITICS

Thus as is trueofmany PDs-monitoring, assessing, nd punishingattemptsto cheat are crucial but costlyaspects of international radeagreements.As a result, tbecomesindividually ationalbut collectively

suboptimalfor states to freeride on the enforcementfforts f others:whenever incomplete nformation xists,exclusionof deviantsfromatradeagreement tself ecomesa public good.3'

In short,while technically xcludable,freetradenonethelesspresentspublic-goodproblemsunderrealistic ssumptions bout the costsof sanc-tions.Even ifthepublic-goodproblems hatmay nhere n otherregimesancillaryto the trade regimeare set aside, therefore,pen internationalmarketsdo involve hesupply f a publicgood.Although, s thenext ec-

tiondemonstrates, variety fgame-theoreticolutionsto enforcementproblems xistthatdo notrequirethepresenceof either privileged rasmallgroup,theirrelevance nthecontext f nternational olitics scon-siderablyess than s their bstract nalytic ppeal.

PRIVILEGED AND SMALL GROUPS

FollowingThomas C. Schelling, mall-group ritics fhegemonicthe-

ory contendthateven large-numberystems an successfullyesolvecol-lective ction problems fthere xists korsubgroupofactorswhowouldprofit ydoingso evenifthey lone absorbed tscosts.32mall-groupthe-ory,however,does notsatisfactorilyonfrontwo issuesthatare criticalto theability f a groupof states o substitute or hegemon:thetheoryaddresses neitherthe originsnor the enforcementmechanisms of thegroup adequately.Although game-theoreticolutionsto bothproblems

exist, heir ssumptions rovide poorfit othesituation f states hat re

engaged in trade n an anarchicpolitical tructure.

ORIGINS

The originof small groups is typically pproached as an empiricalrather han as an analytic ssue: the egacyofhegemony xplainsthecre-ation fkgroups.33n somerespects,heneglectft-group enesissun-

3 Thus, thesupply f nformationssumes central ole n recent nalyses f nternationalregimes. ee, for xample,Robert . Keohane,After egemony: ooperationnd Discord ntheWorld oliticalEconomy Princeton:PrincetonUniversity ress, 984), 259; Russett fn. io),222.

32Schelling, HockeyHelmets,Daylight avings, nd OtherBinaryChoices," n Schelling,ed., MicromotivesndMacrobehaviorNew York:W. W. Norton,1978), 21 1-44.

33Keohane (fn. I), 6; Duncan Snidal,"The Limitsof Hegemonic Stability heory," nter-nationalOrganization9 (Autumn I985), 579-614, at 603; cf. StephanHaggard and BethA.Simmons, Theoriesof nternational egimes,"nternationalrganization1 (Summer1987),

491-517, at 5o6.




impeachable: proponentsof small-grouptheory hemselvesreadily ac-knowledge that theydo not systematicallyddress the issue,34 nd notheory f international oooperation houldbe indicted implybecause it

cannotexplaincompletely he evolutionofinter-stateooperation.The reliance on hegemony,however,remainstroublingforseveral

reasons.First, t implies thattheinternational ystem volves peacefullyfrom a hegemonicto a nonhegemonic tructure, espiteevidence thatsuch powertransitionsan bepotent ourcesofwar.35 econd, tsrecourseto historyeavessmall-group heorymutebefore problem hat s centralto thefieldof international oliticaleconomy:because thegreatpowersare alwaysfew nnumber, hetheory annotexplainwhywide variations

exist in the capacityof differentystems o supportmarket exchangeamong their onstituenttates.

The role attributed o history lso dismantles xiomatically formi-dable barrier o entry hata smallgroupwould otherwise onfront: heneed to agree on the cooperative quilibrium t will thereafter nforce.The literaturen oligopolistic upergameshas beenstronglyriticized orits ilenceon thisaspect follusion:'6 thiscriticismpplies a fortiori odiscussionsof free-trade groups.37f neither ligopoliesnor would-be

internationalk roupscan reachagreement n what is tobe enforced,tis, as James riedmanobserves nthe ndustrial ontext, cold comfort oknow thatthefirms,houldthey verfind hemselves t theequilibrium,would neverseektodeviatefrom t."38

Agreement n any singleequilibrium s problematic ecause differentequilibria implydifferent istributions f the net benefits f coopera-tion.39 lthough everalgame-theoreticolutions o thisproblem xist,nosinglesolutioncurrentlyommandsgeneralacceptance.40Moreover, n-sofar s they ssume thattheutility unctions f all players re commonknowledge,thesesolutions end to assumeaway rather hanconfront i-rectlywhat R. Duncan Luce and Howard Raiffarefer o as the "real"bargainingproblem:theexistence fstrategicncentives o conceal pref-erences.4'

34Keohane's book (fn. 1) is titled, fter ll,AFTER Hegemonyemphasis dded).35See, for xample,A.F.K. Organski ndJacekKugler,The WarLedger Chicago: Univer-

sity f ChicagoPress,1980).36 Carl Shapiro, Theories ofOligopolyBehavior," iscussion apers nEconomics,No. 126

(PrincetonUniversity:WoodrowWilson School,March 987), 56-58 citedby permission).37Snidal, however,providesa good discussionof thedistributional roblemsthatsmall

groupsencounterwithrespect o collective ctiongenerally. ee Snidal (fn.33),604-12.

38 Friedman,Oligopolynd theTheory fGames Amsterdam:North-Holland, 977), 15.

39 R. Duncan Luce and Howard Raiffa,Games nd Decisions: ntroductionnd Critical ur-vey New York: JohnWiley& Sons,1958), 121.

40 JamesW. Friedman,Game TheorywithApplicationsoEconomicsNew York: OxfordUniversity ress, 986), 170.

4' Luce and Raiffa fn.39), 134.



318 WORLD POLITICS

Apart fromabstractgame-theoreticolutions, everal solutions existthatare arguablymore feasible.As is true of firms ttempting o formcartels, tatescan readilyagree to maximize their oint profits r gains

from rade either f the distributionfprofitshat resultswill benefit llequally,or if side-paymentsre possible. t is unlikely hat collusiononthe joint maximum will lead to a symmetrical istribution f benefits.This will occurwithin n industrial artelonly n the highly mprobableeventthat all firms re "absolutely" dentical o each other.42n the con-textof international rade, twill occuronly freciprocaldemand curvesare identical n the negotiating ountries an equally improbable vent.

The jointmaximumtheoretically etains ts appeal if side-payments

are possible. Side-payments edistributehenet benefits f cooperationamong therelevant ctorspreciselyn order "to equalize any inequitiesarisingfrom their cooperation."43 ignificant mpediments o their useexist,however:utilitymust be transferable;hecontracting artiesmustagree on a redistributive echanism;44nd,most mportantly,ecipientsmust acceptthepotential hreat hat nheres n theirrelianceon what is,in effect, heextension f subsidiesto themfrom thers.Oliver William-son's assessment ftherisksto subsidizedfirmsppliesto states s well:

Firmswhich reauthorizedoexpandrelativelys a result ftheagree-mentwillbepowerfullyituatedo demand renegotiatedettlementt alater ate.Wary f uchopportunism,irms orwhich etrenchmentsin-dicatedwill declinefrom heoutset oaccept full-blownrofit-poolingarrangement.45

If neithernaturalnor inducedsymmetryfprofit istribution endersthe joint maximuma workablepointofagreement, he "intrinsicmag-

netismofparticular utcomes"may yet singleout one from mong thesetofPareto-optimal oints.46he "egalitariannature" of the Swiss tar-iff-reductionroposalat theTokyo Roundnegotiations, or xample,re-portedly ed to itsgeneral acceptance.47 et thisexample onlyservestoillustrate ow difficulttmaybe for unique focalpointto emerge:be-hindagreement n equityas the standardfor heTokyo Round formula

42 Friedman fn.38),28.43Luce and Raiffafn.39), i8o; seealso Snidal (fn.33),605.44 Oran R. Young, "Introduction,"nYoung, ed.,Bargaining: ormalTheories fNegotia-

tion Urbana: Universityf llinoisPress,1975), 32,n.40.45 Williamson,Marketsnd Hierarchies: nalysisndAntitrustmplications, Study n the

Economics f nternal rganizationNew York:Free Press,1975), 224.

46 Thomas C. Schelling, ited nDavid A. Baldwin, Politics, xchange, nd Cooperation,"paperpreparedfordelivery o the 28thAnnual Convention f the nternationaltudiesAs-sociation,Washington, C, i987, p. 30.

47 KennethS. Chan, "The International egotiatingGame: Some Evidence from heTo-kyoRound,"ReviewofEconomicsndStatistics7 (Augusti985), 456-64, t 463.




stood therelatively qual powerofthe fourprincipalpartiesto that ne-gotiation, long history ftariff uts and a relativelyow level oftariffsamongthem, nd no discernible ecurity amificationso theaccord.

In theabsence ofanyof thesefacilitating onditions,would-be inter-nationalk roups mayfaceinsuperable bstaclesto organization.More-over, ftheplayof thegame violates the "heroic" assumptionof super-game analysisthat the payoffmatrix does not change over time,48hisproblemwill arise notonlyat the nitialbutatevery tageof theiteratedgame in which changeoccurs. The international ontextposes particu-larlydifficult roblems n thisrespect, s any distribution f the gainsfrom radecan affect otonly the economic but also the military alance

ofpower among participatingtates. n theinternationalystem, here-fore, mallgroupsare poorsubstitutes orprivilegedgroups.

EN FORCEMENT

Despite theiremphasison enforcement,mall-groupadvocates havenot yet ddressedadequatelythedeterrence nd punishment fcheating.The discussionthatfollowsfocuses n the threehostages ogood behav-ior nany single regimethat re prominentnthesmall-group iterature:

linkage to existingregimesand, throughreputation, o futureregimes,and the breakdownof theregime nwhich the defection ccurs.49

What is notexplained,however, swhy exclusion from therexistingregimes s a credible threat: heliterature oes not specify ither he ex-cludable goods they supply or the cooperators' nterests n punishingthosewho freerideon a differentegime.As boththeoreticalnd empir-ical analysessuggest, inkagemayas easily torpedoas reinforce oopera-tion nany specificssuearea: the nterestsfstates nlinking ooperationon one to cooperationon other ssues can as easilydivergeas converge.50Analytically, hen, here s no reasonto assume that inkagesstabilizeco-operation.

Analogously, n order to attribute ignificantxplanatoryweight toreputation, mall-groupadvocates must show that: (i) extrapolationsfrompastto future ehavior rereliablebecause the nterests fstates re

48 MichaelD. McGinnis, Issue Linkageand the Evolutionof nternational ooperation,"

Journal fConflict esolution0 (March 986), 141-70, at I 64.49 Keohane (fn. 1), 100, 104-5.

5? Fordiscussion, ee JamesK. Sebenius, NegotiationArithmetic: dding and SubtractingIssues and Parties," nternational rganization 7 (Spring 983), 28i-3i6; RobertD. Tollisonand Thomas D. Willett, An EconomicTheoryofMutuallyAdvantageous ssue Linkages,"International rganization3 (Autumn 1979), 425-49; Kenneth A. Oye, "The Domain ofChoice: International onstraints nd the CarterAdministration,"nKennethA. Oye, Don-ald Rothchild, nd RobertJ.Lieber, eds., Eagle Entangled:U.S. Foreign olicy n a ComplexWorldNew York: Longman, 979), 3-33.



320 WORLD POLITICS

thesame in boththepastand thepresent ituations,nd (2) informationalasymmetries xistbetween thecontracting arties.5' heoreticaland em-piricalwork on strategic eterrence, owever, uggests hat tate nterests

and behaviorvarywidely crosstime nd place.52 s a consequence, tatestendto discount thepast heavily s a predictor f thebehavior of otherstates n latersituations.

In addition,theregimecontext uggests hat nformational symme-trieswill be rare: regimes re createdspecificallyo correct he"marketfor lemons" problem.53 ecause regimes supply information o statesabout the behaviorofothers, heydo notprovide opportunities or tatestodevelop a reputation orhonesty.As RobertH. Frank observes,

ifpeople ctrationally,. . we [cannot] iscoverhat omeoneshonest yobserving hathe does n situations here hedetectionfcheatings notunlikely... These are situationsn whichwe frequentlyiscover owapersonhas acted.For precisely hisreason,however, t will notbe rationalto cheat in these cases. To observe that someonedoes not cheat would tellus only thathe is prudent,not honest. .. The kinds of actions thatarelikelyto be observed re justnotverygood tests f whether person shon-est.54

That statesunderstand he ogicof Frank's argument snicely llustratedbyLord Salisbury's omment bout Prussian ntentions. e noted"thatthey hould havebeenpacificwhentheywereweak is notunnatural,butifwe wish to know the character f theirdispositionwhen left o itself,we must ask whattheywere whentheywerestrong."55

In theabstract,t least, tmaynot mattermuch that hesetwohostages

5 It is this ombination hatmotivates heroleofreputationsn suchgamesas thechain-store aradoxandformal nalyses f cooperationn finite Ds. SeeKrepsandWilson fn. 5);

also David M. Kreps,Paul Milgrom,JohnRoberts,nd RobertWilson, "RationalCoopera-tionin theFinitelyRepeatedPrisoners'Dilemma," Journal fEconomicTheory7 (Augusti982), 245-52.

52 RichardNed Lebow, "Conclusion," n RobertJervis, ichardNed Lebow, and JaniceGrossStein, ds.,PsychologyndDeterrenceBaltimore:The JohnsHopkinsUniversityress,i985), 303-32.

53Moreover, ny government nowntoputstock npastbehavior nvites thers o cheat t.L. G. Telser observes:

The accumulation f a fundof goodwillofa buyer oward seller hatdependson pastexperience tands s a ready emptationo the eller o cheatthebuyers nd convert heirgoodwillinto ready ash.It is theprospect f the oss of future ainthatdeters nd the

existence fpastgoodwillthat nvites heating. herefore, ational ehaviorbythe par-tiesto an agreement equires hattheprobabilityfcontinuing heirrelationdoes notdependon theirpastexperiencewitheachother.

See Telser,"A TheoryofSelf-enforcinggreements,"ournal fBusiness 3 (January980),

27-44, at 36.

54Frank,PassionsWithin eason: TheStrategic ole oftheEmotionsNew York: W. W.Norton, 988), 74-75;emphasis noriginal.

55Lord Salisbury, The TermsofPeace," inTheQuarterlyeview 29 (October 870), 540-

56,at 546.




do not dequatelyecure ooperation.ufficientower odeter ree id-ing nheresn theonemechanismowhich he xistingiteratureener-allygives elativelyhort hrift:ach tate's ecognitionhat, because e-

gimes redifficultoconstruct,tmayberational oobey heir ulesf healternatives their reakdown..."56 Endowedwith dditionaltructure,thisrecognitionlone renders hecooperative Nash or self-enforcingequilibrium.f each state ealizes hat ts ttempto free idewill ead tothe ollapse f theregime,t has no incentiveodefect,nd theproblemof enforcementoes not arise.A critical missionn existing nalyses,however,showsuch self-destructechanism ight e builtnto re-gime.57

A credible hreat hat heresponseoany ttemptofree idewillbethe ollapse f theentire egimereatesust uch self-destructecha-nism.Existingworkontacit ollusionmongoligopolistselies npre-ciselyhis hreatn order o stabilizeooperation:ll firmsgree oreverttotheCournot rnoncooperativequilibriumor omeperiodf nyfirmattemptsofree ide.58 he threatscredible ecause t sinevery irm'sinteresto execute tprovided ll others o so: bydefinition,fone firmbelieves hat ll other irmswill, fter ny deviation, egin oproduce

their ournot utputs,hat irmannot o betterhan o so tself.59hus,no firmhas an interest ndeviatingfrom he collusiveequilibrium:sanc-tionsneed neverbe implemented.

In effect,his olutiongeneralizesthetwo-person it-for-Tat olutionto then-persongame,with nalogousrestrictionsn thediscountraterel-ative to thepayoffs,nd on the nformationvailable to eachplayer bouttheothers.6oUnlike thetwo-persongame, however,then-person itua-tionconfronts henondefecting layerswiththetemptationorespondtoanydefectionn either f twowaysthatreturn hort-termrofits igherthan thoseof thenoncooperative quilibrium:to offer hedefector sec-ond chanceor torecontractmongthemselves norderto maximizetheirprofitsn lightof the defection. he fact,however, hatbothalternativestend tounleash a chainof defectionstrengthensncentives o execute the

56 Keohane (fn. 1), ioo. One article hatdoesbriefly iscussthissolution s Beth V. Yar-brough nd RobertM. Yarbrough, Reciprocity,ilateralism,nd Economic Hostages': Self-

enforcingAgreements n InternationalTrade," InternationaltudiesQuarterly0 (Marchi986), 7-22.

57Snidal (fn.33), 6io-i i.

58See Jonathan endor and Dilip Mookherjee, Institutional tructure nd theLogic ofCollectiveAction,"American olitical cienceReview8i (March i987), 129-54.

59JamesW. Friedman,Oligopoly heory New York: CambridgeUniversity ress, 983),

'3'.60 For a discussionof these imits, ee Friedman, bid., 33; also Bendorand Mookherjee

(fn. 8), 133-34-



322 WORLD POLITICS

originalthreat.6'Thus, this solution s a self-enforcinggreementthatsustains ooperationwithout he need for inkageto otherPDs or to rep-utations.

The relevanceof this olution n the context f nternational olitics sconsiderably maller than is its abstract nalytic ppeal, however. ts ap-plication requiresagreement mong thecontractingtatesthat a devia-tionhas occurred; t also requiresa consensuson theresponse.Yet, notonlythe economicbut also thepolitical nterests f states nfluence heirjudgmentson these ssues: ncentives operceive nd sanction deviationcan varywidely s the dentity f theallegeddeviantvaries.Kindlebergerobservesthatfreeridingcan resultwhen "the police are politically p-

posed to a rule ... or to its application in a given case . . .": he points outthatthe UnitedNations and theLeague of Nations before tdemonstratethatattempts o protect he international ollectivegood are highlyvul-nerable to the tendency f states to interpret ny alleged threatto thatgood in a highly elf-interestedashion.62hus, in enforcing coopera-tiveequilibrium, nysmallgroupof states ncounters oliticalproblemsthatdo not confront egemonic tates.

CONCLUSION

Althoughcritics fhegemonicstability heoryhave notdestroyed tsanalytic oundations, heyhave achieved several ess ambitious bjectives.They have,for xample, rgued persuasivelyhat hegemonicpreferenceforfree radecannotbe assumed: a morediscriminatingnalysis s essen-tialto establish he conditions nderwhich a rationalhegemonwill, n itsown interests,ct benevolently ather hancoercively owardothers. naddition,the criticshave forced rigorous xaminationof theassumedpublic character of freetrade.Moreover, theyhave successfully hal-lengedtheassumption hat nternational ublic goods can,under ll con-ditions,be providedonly bya privileged roup.

Theyhavenot,however,deprivedhegemonic tabilityheory f tsan-alyticbase: hegemonscan rejecttheprescriptionsfstandard trade the-ory; whenever asymmetrical nformation revails, open international

marketsdo present ublic-goodproblems; nd privilegedgroupsenjoy astronger dvantagethansmall-group dvocatesacknowledge.More importantly,ts criticshave notchallengedthepublic-goodvar-

6' Friedman fn.59), 133-34-

62 Kindleberger, Systems f International conomicOrganization," n David P. Calleo,ed., Money nd theComingWorldOrderNew York: New York University ress,1976), 24-

26, quotation t 24.




iantofhegemonic heoryt itspointofmaximumvulnerability.ocusingexclusively n the real incomegainsthat ccrueto a statewhichopens itsbordersto trade,the theory nalyzes economic exchange in a political

vacuum. Yet,nationalpower s engaged nfree-tradegreements ecausesuchagreements nevitably roducesecurityxternalities:he removaloftradebarriers ffects otonly thereal income butalso thesecurity f thecontractingtates.6-

The security xternalitiesftradearise from ts nevitable ointness nproduction: hesource ofgainsfrom rade s the ncreased fficiency ithwhich domesticresources an be employed, nd this ncrease nefficiencyitself rees conomic resourcesformilitary ses. 4Thus, trade enhances

thepotentialmilitary owerofanycountry hatengagesin it.65 n doingso, freetrade can disruptthepre-existing alance of power among thecontractingtates.66

Thus, themost durablebarrier oopen internationalmarketsmay notbe the trade preferences f a rationalhegemon,the effectivelyubliccharacter f free rade, r the nability f smallgroupsto substituteasilyforprivileged roups. nstead, tmaybe theanarchic nternationalystemthatmakes two facts ommon knowledge among states: i) each seekstoexploitthewealthof othersto enhance its own power,and (2) trade isinstrumentalothis nd.67 he structure f nternational olitics,nshort,may lead a stateto prefer he statusquo ante because it fears thatanychange maybenefit thersmore than tself.68

In a first-best orld,ofcourse, hesefearswould notparalyzestates.Atwo-step processwould neutralize them: stateswould firstmaximizetheir bsolutegainsfrom rade, ndwould then djusttheirdefense trat-

egiestocompensatefor nychanges nthebalanceofpowerthatoccur astradebarriers all. n a morerealistic,ess than first-best orld, however,

63 More generally,n external conomy is said tobe emittedwhenan activity ndertakenby n individualorfirm ieldsbenefitso other ndividuals r firmsnaddition othe benefitsaccruing o the emitting arty." xternaldiseconomiesnflictnjury ather han confer en-efits. ee RobinW. Boadwayand David E. Wildasin,Public Sector conomics, nd ed. (Bos-ton: Little,Brown, 984), 6o.

64 WilliamA. Root,"Trade Controls hatWork,"Foreign olicy56 (Fall i984), 6i-8o.65 David A. Baldwin,Economic tatecraftPrinceton: rincetonUniversity ress, 984).66 McKeown (fn. ), 225.

67 As Baldwinobserves, rade is byfar hemost cost-] ffective.. wayfor necountry oacquirethegoodsor services f another."Baldwin fn.65), i 6.

68 In theory,t is possiblefor tatesnegotiatingwitheach other o concludean agreementthat mproves he bsolutewelfare f each while tpreserveshepre-existingalanceofpowerbetweenthem.The prerequisites fsuchan agreement re formidable, owever:theutilityfunctionsf the statesmustbe commonknowledge, nd the contractingtatesmust greeona utility cale thatwill determine oththestatus uo ante and thedivisionof benefits romcooperation.AnatolRapoport, ights, ames, nd Debates AnnArbor:UniversityfMichi-ganPress, 9741, hap. i.) In practice,t seemsunlikely hat hese onditionswillbe fulfilled.



324 WORLD POLITICS

the time ag that ntervenes etweenthesetwostepsmay open a windowofvulnerabilityhatcan allow one state to threaten heexistenceof an-other.

As a consequence, statesmay prefer he conservative ourse. Openmarkets thus become victimsof theprimacyof security oncerns n ananarchic international oliticalstructure. he failureofhegemonic sta-bility heory o acknowledgethisbarrier o trade constitutes hetheory'smostprofoundflaw.Progresstoward a morepowerful heory fthe po-liticaleconomyof international rade mustbeginwith an explicitrecog-nition of the influential oleplayed by security oncerns n the determi-nation of national tradepolicies.

Documents

1989 Rational Hegemons, Excludable Goods, And Small Groups_An Epitaph for Hegemonic Stability Theory