Cojanu the Integration Game FINAL

8/6/2019 Cojanu the Integration Game FINAL

1/160

Valentin COJANU

The Integration Game: Strategic Interaction

in the Process of the EU Enlargement


2/160

Redactor:

Coperta: Adriana POPESCU

Tehnoredactare computerizat: Luminia DRAGOMIR

Descrierea CIP a Bibliotecii Naionale a RomnieiCOJANU, VALENTIN

The Integration Game: Strategic Interaction in the Processof the EU Enlargement

/ Valentin Cojanu -Bucureti:ISBN 973-


3/160

Valentin COJANU

The Integration Game: Strategic Interaction

in the Process of the EU Enlargement


4/160


5/160

To my wife Aura,

for her generosity, so lovely shared


6/160

CONTENTS

List of Tables ................................................................................... List of Figures .................................................................................. Foreword.......................................................................................... Acknowledgments ........................................................................... Abstract............................................................................................

I. Introduction .................................................................................

II. Problem statement .....................................................................

A. Rationale for the research........................................................B. Research questions and objectives ...................................... ....C. Scope and limitations of the study ...................................... ....D. Definition of terms ....................................... ...........................

III. Review of the Literature......................................................... A. Overview..................................... ........................................... .B. Discussion ..............................................................................

1. Objectives of integrating countries: Theoreticalperspective..........................................................................

2. Objectives of integrating countries: Empiricalarguments .......................................... .................................

3. Constraints ..................................... .....................................4. Preferences and strategic structures ...................................

5. Summary ............................................................................

IV. Research methodology ............................................................. A. Background on Community decisional mechanism................B. Situational variables and constraints ...................................... .

1. The international level of dependence ................................2. The national level of independence ....................................3. The issue area of interdependence .....................................

C. Instrumentation .......................................................................D. Data collection ........................................................................E. Data analysis ...........................................................................

V. Bargaining power: resources and constraints ......................... A. The agriculture dossier ...........................................................

B. Bargaining position of the European Union ...........................


7/160

1. Uncontrollable sources........................................................2. Controllable in the long-run (CLR) sources........................3. Controllable in the short-run (CSR) sources .......................

C. Bargaining position of Poland........................................ .........1. Uncontrollable sources........................................................2. Controllable in the long-run (CLR) sources........................3. Controllable in the short-run (CSR) sources .......................

D. Bargaining position of Romania..............................................1. Uncontrollable sources........................................................2. Controllable in the long-run (CLR) sources........................3. Controllable in the short-run (CSR) sources .......................

E. Summary..................................................................................VI. Formulation and solutions of strategic negotiations..............

A. Assessment of issue bargaining power....................................1. Enacted power for EU ................................. ........................2. Enacted power for Poland .................................... ...............3. Enacted power for Romania................................................4. Summary ...................................... .......................................

B. Assessment of general power and institutional stability..........1. A qualified view on general power .....................................2. Institutional stability............................................................

C. Outcomes of negotiations......................................... ...............1. The EU-Poland strategic game............................................2. The EU-Romania strategic game ....................................... .

3. Discussion ...................................... .....................................D. Anticipation of objections ........................................ ...............

1. Objections on methodology.................................................2. Objections on analysis.........................................................

VII. Conclusions ..............................................................................

Bibliography .................................................................................... Appendix A ...................................................................................... Appendix B ...................................................................................... Appendix C ...................................................................................... Appendix D ...................................................................................... Index .................................................................................................


8/160

List of Tables

Table 1. A comparative view of the non-traditional gains from

integration ...................................... .....................................Table 2. Estimations of relative decisional power within the

enlarged EU Council...........................................................

Table 3. Estimates of indices of institutional stability ......................Table 4. Negotiating agenda of the EU-Poland game.......................

Table 5. Negotiating agenda of the EU-Romania game....................

Table 6. Overall view on the possible outcomes when the EU

plays PD ..................................... ........................................Table 7. Estimations of payoffs with Agricultural Trade

Policy Simulation Model (ATPSM)...................................Table 8. Overall view on the possible outcomes when the EU plays

'issue weak'..........................................................................

List of Figures

Figure 1. Theoretical model of bargaining power in strategic

negotiations.......................................................................

Figure 2. A generic game of strategic interaction .............................

Figure 3. Deduced constrained preference order from Rowsperspective ....................................... .................................

Figure 4. Deduced symmetric ordinal games....................................Figure 5. The EU-Poland strategic game: Representation ................

Figure 6. The EU-Poland strategic game: Solutions.........................

Figure 7. The EU-Romania strategic game: Representation.............Figure 8. The EU-Romania strategic game: Solution .......................

Figure 9. Simulation of multilateral strategic negotiations in

agricultural trade with cardinal payoffs ............................

Figure 10. Simulation of multilateral strategic negotiations in

agricultural trade with ordinal payoffs..............................


9/160

FOREWORD

he Romanian economic literature needs realism, in-

depth analytical treatment, and genuine, distinctive

approach on behalf of the researchers with intellectual zest for

multi-disciplinary study. It is for this reason extremely promising

to see a new generation of economists who stand out on grounds ofboth solid methodological design and insightful alternatives to the

established body of economic knowledge.

The study on The Integration Game anchors well in the

parameters of an economic analysis of such a caliber, by a

courageous handling of factual issues, conflicting arguments, and

demanding dilemmas in a field of research, which apparently has

little new to discover. The investigation begins with a survey of

game-theoretical contributions with application to international

economics and, particularly, international trade, just to makeclearer the point that the analysis of games of strategy is

particularly suited to offer perceptive venues for research on the

topic of integration. The author's choice is for the subject of

negotiations in the process of the EU enlargement, which

conveniently fits a twofold objective of investigation: to adapt

established models of analysis to the practical needs of

understanding the benefits a country may reasonably expect to

derive from negotiations.

T


10/160

An elaborated and thoroughly searched section on the

literature sheds light on those key contributions, which could

enrich the practical meaning of strategic negotiations in the context

of integration. The reader is thus invited to extend its intellectual

journey beyond the informational-rich text and actively take part in

the debate. The lead topic evolves around the strategy dimension. It

is in this key that investigative questions are proposed and

hypotheses formulated to design an arguably perfectible research

methodology. It would hardly be more appropriate to make thus a

perfect match between an objective analysis and a subjectively

imposed need to deal with such sensitive issues as the expected

results of negotiations, the political nature of integration process,

or the intricate web of interests in the agricultural dossier.

To stick with that central theme and still reach valid

conclusions based on a substantive investigation, an inevitable

trade-off with relatively marginal matters has to be decided. That

hardly has any impact on the flow of arguments. Rich

developments of concepts, as well as a comprehensive review of

literature position the study on an appropriately equidistant

research path toward diverse approaches, which have been making

up the theory and policy of economic integration for the last 50

years, including the provoking debates on its macroeconomic

effects. A point in case is the analysis of the objectives the

negotiating countries pursue on the way to integration, and

particularly in that setting which characterizes the European

process. The author remarks the good strand of researches, which

attempted to build support in favor of the benefits the theory on

integration claims to exist. The book excels at this point, as it aims

at assessing comparatively various results of the quantitative


11/160

analyses and accompanying rationales about parameters used to

ascertain the likely impact of integration on negotiating countries.

Along the presentation, advantages and disadvantages of various

perspectives are contrasted in order to get a clearer picture of the

economic evolutions and a better understanding of the relationship

between political conditions and economic behavior.

Besides proposing an interesting view on past works, the

book is however about original research. The design of

methodology is constructed on the rationale that the issue of the

Central and Eastern European Countries' accession to the

European Union was not actually the object of negotiations. A

whole chapter tries to argue instead that the terms on which

negotiations proceeded were depended on an interactive

relationship of decision-making processes, policy developments,

and institutional settings. A deconstruction analysis is carried

out to observe potential and real reactions based on both factual

evidence, and findings from the literature. Results of

negotiations are simulated given specific constraints and

existing resources of bargaining power. The rigorous treatment

combines with social and political details, which eventually

prove decisive to experiment the negotiating behaviors of both

the EU, and the two candidate countries Poland and Romania

considered for this application. What the reader eventually has

consists of various scenarios as to the strategic dimensions of

negotiations, which is probably the most challenging part of the

analysis.

The way is conceived and researched, this book may be

confidently positioned as a reference paper, which consistently


12/160

voices those reasoned and realistic arguments of the economic

literature on European economic integration. It is a worthwhile

contribution of Valentin Cojanu to that analytical thinking,

which rests on such premises as elaborated style, attention to

methodology design, commendable conceptual developments,

and reliable argumentation. Even the reader, which is not

familiar with the conventional theses of economic integration,

may still find a convincing path to understanding negotiations in

international relations, all this with a sense of scientific

investigation and meaningful conclusions. In other words, he is

about to read a book with capital "B".

Professor Dr. Dumitru Miron

Academy of Economic Studies Bucharest


13/160

Acknowledgments

he work to this study has benefited from

encouragements and suggestions kindly addressed by

friends, professors, and family. Although the author retains the sole

responsibility for the ideas and commentaries expressed therein,

recognition for the valuable support received is certainly due.

The quality of the investigation was greatly enhanced by the

dedicated supervision of Dr. Jerry Haenisch, Chancellor of Preston

University. The author was particularly privileged to have kept

with him a professional working relationship during the years spent

on this research, a source of advice, which finally proved so

constructive.

For their comments on earlier drafts of this study, the author

remains grateful to Professors Mihai Korka and Dumitru Miron

from the Academy of Economic Studies in Bucharest. They helped

the text improve its readability and convey a more comprehensible

message.

This book makes inroads into unexplored themes of research

in Romania, but this assertion ought to sound like a confession

T


14/160

rather than an ambition. The point is that substantial time was spent

with collaborators on finding out a relevant approach for Romania

on integrating game theory and enlargement negotiations. It is thus

worth mentioning that many working hypotheses took shape in the

framework of Pre-Accession Impact Studies Programs at the

European Institute of Romania in Bucharest. The intellectual and

constructive atmosphere created during the numerous workshops

and conferences, which accompanied that process, has proved

uniquely inspiring.


15/160

Abstract

his study presents an adapted model of 2 2 games of

strategy to provide arguments for understanding the

various levels of interaction between the parties during

negotiations and attempts to identify the strategic structures of the

integration process of the CEECS into the EU. The arguments are

elaborated against the background of negotiations on agricultural

trade issues, whose conclusion became effective also for the last

two candidate countries Bulgaria and Romania in June 2004.

The research model builds on the existing analytical framework

developed in the works of Aggarwal and Allan, Aggarwal and

Cameron, Brams and Kilgour, Conybeare, and Leaps, and Grigsby.

The method considers three levels of interaction dependence,

independence, and interdependence and gathers each partys

strategic capabilities in a game-theoretical context with the help of

three variables: institutional stability; overall power; and issue

bargaining power.

The findings present a detailed analysis of bargaining power

and consider the predicted solutions to negotiations. Bargaining

power is transformed from potential to effective influence a party

can wield during negotiations by transformational factors. Analysis

T


16/160

of these factors is illustrative of the bargaining strength on the

issue and helps square the determinants of strategic interaction.

The models predictions closely follow the results of

negotiations in every significant detail. Moreover, the overview

tableau of possible solutions helps assess better the gains and

losses from negotiations given the interplay of interests.


17/160

I

Introduction

ehind the Iron Curtain, the Central and Eastern

European Countries (CEECS) have long aspired to become part of the civilized world, in the sense that they were

seeking a more prestigious economic status and the fundamental

right to share the universal libertarian values. At the time the political openness had arrived at the beginning of the 1990s,

Western Europe, with the European Union (EU) at its core, ideally

represented the object of their veneration. Geographic proximity,historical tradition, and relatively close economic ties all indicated

that a negotiated rapprochement between the two parts of Europewould naturally come next.This imperative eventually led to the conclusion of legal

arrangements between the EU and individual CEECS - Poland,

Hungary, the Czech Republic, Slovenia, Estonia, Bulgaria,

Romania, Slovakia, Lithuania, and Latvia - in the form of the

Europe Agreements (EAS), and the accession negotiations startedin 1998. With these initiatives, the EU embarked on the fifth wave

of enlargements since its founding in 1957. This process proveddifferent from the past especially because it simultaneously had to

confront a large number of candidates and to consider their evident

development gaps vis--vis the EU. The income differences are

prominent whether they are measured at official exchange rates or

at purchasing power parities; whether the comparison is made with

B


18/160

the EU-15 average or with the lowest ranked EU-15 member

states. As for the countries this study particularly considers, when

negotiations began the income level in Romania (at officialexchange rates) was 8% of the EU-15 average and ca. 17% of the

levels in Greece or Portugal, the less developed EU countries. For

a relatively wealthy and developed CEEC as Poland, the

corresponding numbers were 20% and ca. 40% (Quaisser and Hall4).

The present enlargement process stands out for anotherreason as well: the CEECS are taking on a far more complex body

of legislation than did previous applicants. The EU institutional

accomplishments of the Single Market and European MonetaryUnion, as well as its policy developments in the field of judicialand foreign affairs significantly stretch the legal and technical

capacity of the applicants as they are starting with much more

simple institutional framework at national level. It is only the

eastward enlargement, which formally makes the adoption ofacquis communautaire the whole body of the EU legislative acts,

along with secondary legislation and policies derived thereof -

mandatory by accession.In annually issued Regular Reports, the EU identified 31

chapters of the acquis, covering virtually all fields of Community

governance, such as free movement of production factors,

education, statistics, judicial system, property rights, international

relations, competition and industrial policies, and, in chapter seven,of particular interest for this study, agriculture.

Agriculture is considered to be a particularly sensitive

subject because agriculture in the CEECS is simply much more

important, in terms of its share in production, employment and

foods consumption, than in the EU on average, while its impact onevery-day situations of life and work is crucial for countries like

Romania and Bulgaria. The CEECS would constitute 22% of thepopulation of the enlarged EU; would contribute to the GNP, and

thereby to the budget, only around 4%; would increase agricultural

area of the EU by 45%; and would nearly double employment in

agriculture. By consequence, according to figures of the EuropeanCommission (EC), the enlarged EU will be more agricultural than

the EU-15 (Analysis of the Impact15). While the EU agricultural


19/160

exports to these countries rose substantially after 1990, the CEECS

exports to the EU only increased slightly, making most of those

countries net importers of agri-food products from the EU(European CommissionRegular Reports; Frohberg and Hartmann).

As these considerations suggest, unveiling the interests at

stake is expectedly a different matter for the two partners. While in

the West the emphasis is put on maintaining a desired level of ruraldevelopment, along with the privileges acquired historically for the

farmers, in the East concerns about the viability of agriculture as aneconomic activity take the leading role in shaping a certain position

in negotiations.

The constraints of the acceding countries are mostly due to along history with central-planned policies. Although favorable landendowment and climatic factors should have sharpened their

comparative advantages in agro-food business, systematic neglect

of this industry evolved in precarious regional development.

Hallets study reports how the regions dependent on agricultureprevalently rank among the most socially vulnerable. One notable

result emphasized by Pouliquen is that the contribution of the semi-

subsistence sector to the total agricultural production of the tenCEECS is at least in the order of half against approximately 20% in

the EU (41, 63).

The privatization and restructuring processes of the 1990s

have not succeeded in revitalizing the sector in spite of continuing

convergence of average farm prices towards Community levels asreported in the literature (e.g. Pouliquen 15; EuropeanCommission, Agricultural Situation and Prospects 31). Low

productivity levels, estimated by the EC at around 11% of the EU

level ( Agricultural Situation) and increased fragmentation of

production in the form of individual holdings reported by severalother studies (e.g. Josling and Tangermann; Pouliquen) have

placed considerable restraints on the agriculture development.An immediate consequence of the convoluted evolution of

agriculture was the near absence of farm lobbies at the outset of the

negotiating process, a time when all efforts and energy were

directed to re-introduce the elements of the market economy, suchas land reform, price liberalization or the opening-up of foreign

trade. A partial exception was Poland, where private ownership


20/160

prevailed in the agricultural sector during the communist regime

(Note on Polish Agriculture) and allowed thus for a continued and

more assertive defense of private interests.The conventional analysis represented by the theory of

economic integration helps in explaining the rationale underlying

negotiations set in such a context, but leaves aside the strategic

considerations inherently associated with that process. As the waynegotiations are structured and the inherent conflicting nature of

dossiers like "agriculture" eloquently shows the analysis of the process of strategic interaction proves essential in understanding

the economic terms on which the integration negotiations proceed

and conclude.This study presents an adapted model of 2x2 games of

strategy to provide arguments for understanding the various levels

of interaction between the parties during negotiations and attempts

to identify the strategic structures of the integration process of the

CEECS into the EU. Constructs are accordingly identified fromgame theory and economic theory and integrated. The research

model builds on the existing analytical framework developed in the

works of Aggarwal and Allan, Aggarwal and Cameron, Brams andKilgour, Conybeare, and Leaps and Grigsby.

The arguments are elaborated against the background of the

interaction pattern of European Union enlargement process and the

issue of agricultural negotiations, whose conclusion became

effective also for the last two candidate countries Bulgaria andRomania in June 2004. The strategic analysis of negotiationsaddresses first the theoretical framework in which to build a model

of bilateral negotiations; then, the model is used to test and predict

the possible outcomes of negotiation on specific issues in general,

and specifically for the purpose of this study in relation tonegotiations on agriculture. Resemblance with other classes of

interactions, e.g. debt rescheduling, enforcement of internationalagreements, and security aspects, indicates the option of

considering 2x2 games in an empirical context, an issue that is

developed in the section on methodology.

As the CEECS negotiated separately their accession, achoice had to be made as to the most appropriate case(s) to

consider. The option was to include an application of the model on


21/160

Poland and Romania, the largest agricultural countries in CEECS

according to data on agricultural land and the contribution of

agriculture to GDP.The findings present a detailed analysis of bargaining power

and offer predicted solutions to negotiations for the two cases

considered in the application. Bargaining power is transformed

from potential to effective influence a party can wield duringnegotiations by transformational factors. Analysis of these factors

is illustrative of the bargaining strength on the issue and helpssquare the determinants of strategic interaction.

The initial presumption that the cases of both Poland and

Romania would provide adequate inputs for the analysis provedright. The model's predictions closely follow the results ofnegotiations in every significant detail. Moreover, the overview

tableau of possible solutions helps assess better the gains and

losses from negotiations given the interplay of interests and so

makes the methodological contrast with conventional approachesto integration more visible.

A concise introduction to the subject of strategic negotiations

is provided in Chapter II. Despite the major achievements in theeconomic research, the theme proposed here still finds at the

junction of conventional with innovative approaches to the study of

economic interaction when several countries integrate. Chapter III

on the literature seeks to make evident these various and often

conflicting intellectual strands and to show how they resonate withthe present research. In Chapter IV on methodology a model is proposed to find solutions of strategic negotiations. The method

considers three levels of interaction dependence, independence,

and interdependence - and three corresponding variables - overall

power, institutional stability, and issue bargaining power toframe each party's strategic capabilities in a game-theoretical

context. This study's findings are grouped in two chapters: ChapterV analyzing bargaining power and Chapter VI presenting the

solutions to negotiations. Before concluding, a section on

anticipation of objections attempts to identify clearly the range of

situations to which the proposed model applies. Chapter VII endsthis study with conclusions and suggests implications for further

application of games of strategy in negotiations.


22/160

IIProblem statement

A. Rationale for the research

he choice of an appropriate approach to the subject has been eased by a considerable scholarly tradition. The

research on explaining strategic interactions by means of game-

theoretical concepts has made significant headway for long. Fromthe early development of the theory in the interwar period, the

approach gained progressively in acceptance until its virtual

dominance of economics (Foss 6) around the end of the 1980s.

The explosive dominance of game theory as an analytical tool hasmade a wide array of disciplines, such as industrial organization,

labor economics, public finance, monetary policy, economic

history, law, marketing, political science or sociology, accept andexplain behavior of companies, governments or groups of actors in

terms of strategic options.

In the field of international trade alone, the interest stretchesover an ever more expansive range of topics, from games of trade

liberalization (McMillan, Game Theory; Conybeare; Kennedy;

Patterson) or settlement of disputes (Btler and Hauser) to the new

theories of strategic trade policy (Benchekroun et al.; Abbott andKallio) or politics of trade (Grossman and Helpman; Helpman). At

the same time, arguments emerging from adjacent fields, such aseconomic development (Wolkoff; Grabowski), economic history

(Greif), institutional economics (Juli), political science (Milner and

Rosendorff), industrial organization (Graham), international

relations (Allan and Schmidt) all contributed to adding new

T


23/160

insights, and evidently broadened the view over the international

trade issues against a unified background.

One of the findings this rich scholarship proposes is thatlittle refinement may be expected for both trade theory and

mathematics of games; instead, the main advantage of the new

approach has proved to be an improved and practical

understanding of how states and firms wield commercial policieswhen their interests interact. The work of Schelling has the merit of

both pioneering the strategic analysis of interdependence amongnations and emphasizing the risk of misappropriation of game

theory for understanding the proper meaning of decision-making

processes in situations of conflict. He remarks:We change the character of the game when we drastically

alter the amount of contextual detail that it contains It is often

contextual detail that can guide the players to the discovery of a

stable or, at least, mutually nondestructive outcome. We have to

recognize that the kinds of things that determine the outcome arewhat a highly abstract analysis may treat as irrelevant detail (162).

What makes this approach the more so problematic is its

versatility in yielding provoking results even if the texture betweentheory and economic evidence is somewhat loose. Economists

must confront a theoretical construct imported from mathematics

that has its own laws and grows as such autonomously. Snidal

conceptually presents that sort of dilemma in the following

statement:To apply the deductive power of game theory directly, we

must tighten up correspondences between empirical situations and

game models, and separate assumptions from predictions. As we

do this, the model and theory will provide a guide to relevant

empirical evidence, just as the evidence will provide a guide forevaluating and revising the model (36).

Additional insights may be found in the papers of Jervis andKreps, who remark that the flawless logic of different game models

may often run counter common intuition, or worse, be mostly

invalidated by experimental research. Caves also considered

similar concerns, but only recently Ghemawat (Games) took on thetask to investigate the predictions of game-theoretic models. His

choice of cases makes sufficiently clear that some competitive


24/160

moves are well grounded on inside information about rivals

internal organization or their muted strategic plans, which renders

futile the use of econometrics techniques in predicting the outcomeof the game.

A series of other papers (e.g. Brandenburger; McGahan)

establishes the tradition of looking for strategic aspects of

competition amenable to be treated as games, and then extractingthe rationale behind the interaction by means of a suitable formal

treatment. Instead of assembling game models around sometypologies of games or situations, there is this time a focus on the

peculiarity of the case, with a correspondingly increased

contribution of managerial insight.In observance of these precautionary references to

methodology, this study presumes that the search for the empirical

assessment of bargaining outcomes should specifically lie at the

core of integration negotiations, and that it should appropriately

make use of insightful and practically relevant techniques.The value of the proposed research framework thus

predominantly rests on both the structure and form of the

arguments. That invites the researcher to an analytical workbalanced between the specifics of how the outcome actually comes

about and the generalizations of the formal model. While the

former choice is closely suggestive of the contextual detail, the

latter rests on normal representations of game theory. An early

example is the Conybeare's work, which seeks for explanatoryfactors of commercial dealings in an economic context wherestates purposefully act to maximize their welfare through trade and

do that by trying to understand the other states strategies. He

favors a mixed approach thereby game theory, political science,

history and economics make up a common theoretical background.On the whole, it seems that, although the analysis may weigh

differently the share of contextual detail, according to thespecific research objectives, there are at least two components,

which ought to validate the use of game method. First, the

resembling logic of models and reality should not be taken for

granted. The more the analysis aims at meeting some practicalrequirements, such as decision rules or strategic plans, the more

intensely the logic of competitive assessment should guide the


25/160

investigative questions. A higher degree of abstractness would, of

course, reverse the balance, and ascribe the formal logic to a more

central role.Second, wherever the logic of the interplay would stem from,

it must explain the competitive behavior in a predictable way.

Research, which is careful both of economic detail and systematic

investigation may usually achieve this objective through formationof relevant classes of empirical evidence. It is for this reason that

good part of the works dealing with the applicability of gametheory to economics (e.g., McMillan, Game Theory; Gibbons;

Rasmunsen; Osborne and Rubinstein) is dedicated to several

established sets of economic games. The rigor of such formaltreatment eventually is the ingredient, which lays the foundationsfor further research, whatever practical goals the analysis may

have.

The case of integration negotiations offers various instances

of what a practical purpose could stand for. Some papers (e.g.Grossman and Helpman) simply assume a matter of choice

between preferential trade agreements (PTAS) or no other

alternative. Other models (e.g. Whalley) are constructed withnations acting as welfare-maximizing players for its representative

consumer. In a different line of argumentation, authors like

Conybeare (13) or Baldwin (67) consider more realistic to direct

the analysis to the process in which the parties adopt decision rules

when they face strategic options. Basic economics draws attentionto the fact that there is an inherent conflict between national and private interests: lowering barriers at home results in increased

competition from abroad and hence lowered firm profits.

Given these various treatments, the strategic perspective on

the integration process poses the problem of research design so thatthe investigation reveals the underlying causes of conflict. Before

the next chapter takes up this task, preliminary research guidancetakes to the center stage the cautious approach towards integrating

the individual case into the generic model. The analysis of strategic

aspects of integration negotiations is conveniently apt to make use

of game theory, but the procedure for analysis is peculiarlydependent on the research objectives.


26/160

B. Research questions and objectives

If research is conditional upon the particular context ofnegotiations, the negotiation process itself is influenced by a set of

variables, which models the strategic interaction. One of the

objectives of the study is thus to define and justify these variables

as determinants of negotiations in the accession process.

The issue of integration between groups of countries withdissimilar economic potentials brings inevitably into debate

strategic considerations. Not only does the development gap make

the negotiating agenda arduously disputed because of differentrepresentations of gains, but other contiguous matters as well, such

as economic security, viability of the nation-state, and disruption of

the social order, raise vital questions on the way to integration.The agricultural dossier of the EU enlargement suits

particularly well in this picture because of the diversified nature of

its conflicting topics. A first hint is inferred from nuances of itsimportance: the negotiations over agriculture has been described as

a political landmine, implying large conflicts of interest (Gacs

and Wyzan), but nevertheless a win-win project, that, ifsuccessful, will leave no losers by the wayside (Fischler).

The latter consideration, which aptly belongs to a former EU

Commissioner for agriculture, encapsulates the rationale for ananalysis of the strategic aspects of negotiations: each party aspires

to a winning position in rather improbable terms of what successmay be taken for. Because the interplay of interests is precisely

based on these different representations of the terms in which

negotiations are to be concluded, the analysis proposed by thisstudy is required to shed light on the underlying determinants of

possible outcomes and to suggest with anticipation improved waysof conduct.

The interaction between nation-states is then modeled in

classes of games or strategic structures of interaction on the basis

that the incentives of each party are revealed by their behavioralstance, while their negotiating agenda is either explicitly or

implicitly formulated in official documents, historical contexts or publicly voiced statements. It is this attempt, which makes the

game-theoretical construct necessary because both behavior and


27/160

negotiations are predominantly based in the integration process on

the interplay of expectations.

C. Scope and limitations of the study

The debate on negotiations regarding the integration processof the EU has been enriched from a considerably large variety of

analytical perspectives. As previously suggested, the economics of

integration seems particularly suited to engender cases of strategic

integrations. The paper consequently limits its scope to thoseaspects of understanding strategic responses in an interactive

context. Attention is particularly laid on the building blocks of thelogic of choice in situations that involve rivalry. The way game

theory facilitates a better design of strategic behavior, and,

reciprocally, how negotiation moves can be thought of as part of a

game are the guidelines of the present investigation. Indeed, aforay into the governments behavior given the challenges of

integrating countries with very different economic potential will try

to highlight possible strategic policy interrogations.

Because of this narrow framework and practical objectives of

the analysis, important aspects of integration negotiations have been inevitably left aside. In the strategy realm, a minimal list

would include such topics as: time sequence of negotiations;choice of productive locations; spread of financial risk; and market

entry. The game-theoretical literature on integration also takesaccount of problems like voting power indices or influences from

pressure groups, aspects to which this study does ascribeexplanatory power even if the focus here shifts on a hopefully

more encompassing range of determinants. The interest is to focusmore on breadth than depth of the analysis; to enlarge the

perspective on integration is important in so far as the underlying

analytical purpose rests on practical considerations.

The analysis nevertheless stops short of formalizing thenegotiation procedure in the sense Binmore suggests, i.e. how to

conduct the negotiations under all possible eventualities and howfinally to choose a strategy contingent on the course the

negotiations took. Although there are solid theoretical references,

they are used in so far as they appropriately set out the


28/160

investigation; the issue-specific aspect of negotiation is thought

essential as to the contextual detail and consequently left to

further, analytically renewed game-theoretical bargaining analysis.

D. Definition of terms

The strategy and strategic words prove to be remarkably

versatile in the relevant literature. For example, Mintzberg et al.'s

exhaustive search for schools of strategy (24-5) finds distinct ten

interpretations of the strategy process but none relates directly orindirectly to games of strategy or situations where the choices

of two or more rational decision makers together lead to gains andlosses for them (Krishna 1).

The topic of negotiations as focus of research shares a

similar fate. Behavioral theories are very often considered to be

able to offer the proper analytical framework to begin with. Theapplication of game-theory concepts to a wide range of research

problems has had the adverse result of an innovative terminology,

which in some instances bears little semblance of its original

mathematical meaning. This study compounds the problems of

terminology by making reference to strategic negotiations. It isfor these reasons that a review of the meaning of concepts, which

this analysis starts upon, becomes necessary.Binmore presents the game-theoretic approach as a

descriptive (vocabulary and basic ideas) and analytical (formaltools) use of game theory. It enables quantitative predictions, as

well as qualitative insights but only to the extent the study decideson what aspects of the situation are of particular interest to the

research. From this perspective, the research design is to a lesserextent constrained by the formal model, and thus basically rests on

the study objectives.

It is increasingly accepted the argument (Schelling;

McDonald; Branderburger and Nalebuff) that the economiccontexts are amenable to analysis of games of partial conflict, i.e.

variable-sum games, in which the players preferences are notdiametrically opposed. A strategic process may accordingly be

thought as the opposition of the interests of the players in an

interdependent process whose outcome may involve a situation of


29/160

conflict or not. It is not the conflict, which exclusively describes

the strategic nature of interaction; the whole variety of anticipated

events in association with gains orpay-offs in game-theoretical parlance, whose predictable occurrence depends on the other

players' decisions, is instead the proper description of a strategic

interaction.

A game refers in this study to strategic negotiationsconducted within the process of the EU enlargement. It is basically

a study of conflict of interest by rational players, devoid of anyethical or behavioral considerations (Binmore 6).

Negotiation for the purpose of the study is largely

interchangeable with bargaining, although it does not borrow itsclassical formal interpretation from game theory. Grossman andHelpman provide a definition of bargaining which is significantly

closer to the particular situation this study envisages: bargaining

can lead to a trade agreement in which each country makes

concessions in exchange for desired changes in the policies of itspartners (1). Preference is given to the former for describing the

strategic interaction, while the latter proves its importance in

devising another useful term, bargaining power. According toone of the original definitions, the display of power in bargaining is

the ability or skill in duping the other fellow as John Nash

initially highlighted (quoted in Binmore).

The sense in which the negotiating parties exert bargaining

power is certainly deprived in this study of that merchant facet.The inquiry attempts instead to assess the strength of bargainingpower by comparing the degree in which the initial demands find

themselves in the final results of negotiations and the conditions

conducive to that outcome. A mathematical interpretation of

bargaining power has normally nothing to add on conditions.This study however embraces both aspects of bargaining power

capability to command influence and possibility to behave thisway. There is thus promoted a concept based on the exercise of

power, which induces learning experiences in the negotiation

process.


30/160

IIIReview of the Literature

A. Overview

he topic of beneficial enlargement of an integration

structure is theoretically exposed to a large variety ofarguments. This review focuses on how both orthodox and

unconventional explanations translate into strategic options the

negotiating parties may consider.

Integration negotiations are typically understood as acontinuous process in which countries' preferences for a certain

outcome are shaped by constraints originating from three levels. A

country's dependence on its partners' decisions and the influence ofits domestic politics represent two levels of analysis, which have

received considerable treatment in the literature. Lately, arguments

on contextual areas of negotiations or the interdependence levelhave been considered as equally significant for proper

understanding of interaction.

The use of game-theoretical techniques has evolved as a

widely accepted approach of integrating different sources ofconstrained behavior into analysis. The way parties may conceive

under constraints their ranking of the mutually preferableagreements distinctively lies at the core of the bargaining problem.

It is thus possible to infer various strategic structures of

negotiations and subsequently predict the preferred course of

settlement on a specific issue.

T


31/160

B. Discussion

1. Objectives of integrating countries: Theoretical

perspective

The economics of integration has been traditionally regarded

as a theoretical body on the benefits the participating countriesenjoy in the form of static and dynamic effects of establishing a

free trade area with or without a common commercial policy.

Recent research has however challenged this conventional view

and added various arguments in explaining why countries seek tonegotiate integration agreements (IAS).

At a general level, the theory falls short of providing aunified approach to the representation of countries' objectives in an

integration game. Some authors (e.g., Snidal 25) find metho-

dologically correct to model nations as goal-seeking actors, while

others (e.g. McMillan, Games 77) question the plausibility of thecoherence and consistency of such an endeavor. Zrn shares a

more balanced view when he dispels the theories of interest

formation that assume one fundamental motivation in all states

across all issue areas (299).

These different perspectives are nowhere better revealed asin the contrasting debate on traditional and nontraditional gains

from integration. While the early analysis of Viner has given rise toa remarkably standard terminology to describe the effects on

welfare, economists are less convergent toward a similar cohesiveapproach as to other objectives integrating countries could pursue.

In the traditional vein, the central tenet rests on the classical proposition that economic integration creates trade and thus

improves welfare by moving participating countries closer to freetrade (Markusen et al. 320). The expected benefits should not

however be taken for granted. The Viner-inspired research stresses

the importance of trade diversion as a possible welfare-worsening

effect of an IA.A special case, when trade diversion could either improve or

leave welfare unaffected, is illustrated by several studies which

account for relaxed assumption on domestic consumption and pro-duction patterns (Markusen et al. 315-18; Fernndez 5). Additional

research (e.g. Schiff) makes the point of how dependent the


32/160

welfare impact is upon the underlying conjectures such as country

size, rules of origin, and the likelihood of illegal transactions.

The traditional analysis also emphasizes that no alternativetrade agreement, including free trade, could make a member

country better off in the presence of an optimum tariff (Markusen

et al. 318). The argument is based on Johnson's seminal study on

tariff retaliation and concerns the foregone opportunity of a largecountry to improve its income (the terms of trade effect) by

imposing a sufficiently small tariff on imports and/or taxing itsexports.

The picture of the net effects is further obscured if one

considers the unequally distribution of gains among the membercountries. Some authors (e.g., Helleiner 759; Lindert 187) arguethat the integration process disproportionately favors the smaller

countries thanks to the larger impact of the new trade opportunities

on the structure of their markets incentives. According to some

other studies surveyed by Fernndez, there are the economicallyweaker countries, which supposedly bear the heaviest adjustment

burden as a result of their previously larger protectionist structures

(5).The dynamic strand of analysis surveyed in the work of

Baldwin relegates these results to some marginal importance (9),

and underscores instead the overwhelming impact of scale

economies and investments on welfare thanks to increased

opportunities for growth in a larger market. Casella howevercautions against the reliability of theoretical predictions beforesearching for the actual determinants of market access (23-24).

Salvatore escapes the difficulty of providing a clear-cut answer by

recommending an indicative list of various presumptions against

which countries could judge the attractiveness of the integrationchoice (293-4).

In the light of these findings, the traditional objectivessupposedly underpinning IAS appear ambiguous (Schiff and

Winters 1; Abrego et al. 3), subject to critical assumptions

(Markusen at al. 312-22) or rather of little relevance (Whalley 22).

Moreover, the ramifications of economic theories trying to explainintegration unexpectedly leave one with predictions that are

sometimes diametrically opposed (Reiner 39). These uncon-


33/160

vincing results make Abrego et al. conclude that no set of gene-

rally accepted propositions regarding their effects has yet emerged

to guide policy makers and public officials (2).A positive message emerges instead from the research on

nontraditional gains. Countries are now given a more active role in

deciding on the terms of an IA. Several studies (e.g., Schiff and

Winters 2-6; Whalley 15-20) suggest that the motivating factorsshould be better ascribed to the externalities accompanying this

process, including here military security, credibility of reforms,trade leverage, as well as other non-economic aspects.

Table 1 offers a glimpse of the nontraditional gains of the

IAS. Although largely overlapping, the wide range of arguments isnevertheless indicative of the sophistication underlying thedecision-making process. According to the objectives highlighted

by Table 1, bargaining power is seemingly the most pervasive

rationale underlying negotiations. The integration context favora-

bly exposes negotiating countries to various opportunities in theirsearch for improved bargaining power.

In its simplest form, the exploitation of bargaining power

normally involves an exchange of concessions to derive changes inthe policies of the partners (Grossman and Helpman 1), but it

should not be seen however as an inevitable consequence. Some

countries have to negotiate the accession just to be in the position

of exercising this possibility (the level playing field option in

Table 1), while others are much better positioned in order toimpose their own rules (policy autonomy option in Table 1). Adose of caution is therefore to be expected in the case of smaller

countries for which Helleiner thinks the access to the integration

arrangement is likely to be highly conditioned (780).


34/160

Table 1

A Comparative View of the Non-Traditional Gains fromIntegration*

Whalley Fernndez Baldwin

Domestic policyreform: by binding a

country to the

provisions of aninternational trade

treaty, any futurereversal of domestic

policy reform becomes

more difficult toimplement. (15)

Time inconsistency:

a country pursues

policies that are

welfare improvingbut time-

inconsistent, i.e. tem-ptations of surprisetrade policy actions

when other first-bestinstruments are una-

vailable, in the ab-

sence of the PTA. (7)

Level playing field:

to compensate for the

potential loss of

relativecompetitiveness (the

threat of not beinginside) (71)

Multilateral bargai-ning power: indivi-

dual country may have

limited leverage in

international nego-tiations, including

multilaterally, but if

all member countriesacted cooperatively in

using a common trade

policy they would

increase theirleverage. (17)

Signaling: a countrywants to persuade

other that certain

circumstances, e.g. a

liberal type ofgovernment, the

underlying condition

of the economy, doin fact prevail. (15)

Gerrymandering:changing the

political boundary of

a district tends to

change the objectivesof the policy makers

representing that

district. (74)

Guarantees of access:

to make access to the

larger country market

more secure for the

smaller country. (17)

Insurance: the

unfavorable terms of

the PTA may consti-

tute a type of insu-

rance premium paid

by one country to theother against

possible (unfavo-

rable) events. (17)

Voting power: the

capacity to influence

decisions by forming

winning coalitions.

(76)


35/160

Whalley Fernndez Baldwin

Strategic linkage: the

security arrangements

among the integrating

countries are better

supported byintegration

agreements. (18)

Bargaining power:

the transaction costs

involved in reaching

an optimal negotia-

ting position are re-duced by greater

coordination of trade

policies with respectto third countries.

(19)

Multilateral/Regional

interplay: the actualor potential use ofregional agreements

for tactical purposes

by countries seeking

to achieve their multi-lateral negotiating

objectives. (19)

Coordination

device: uncertainty isreduced as to whowill be the gainers

from liberalizing.

(20-21)

* This presentation remains faithful to the order of the arguments asoriginally exposed in the referred authors works.

The argument is used to explain the outward behavior aswell. Generally, economists like Fernndez admit a common sense

approach based on the belief that the integrating countries shouldin fact have greater bargaining power combined than separately

(19). He proposes a subtle mechanism (coordination device) to

explain how integrating countries are effective in making tradeoffs

between different policy areas more often at a regional rather thanmultilateral level (21). As the argument goes, increased transpa-

rency due to relatively few participating countries possibly helps

substantiate better a wide range of issues - from support for free

trade to environmental and labor standards and thus favors thestrength of the economic bloc.

Some studies observe that IAS could induce participating

countries to play strategically against third countries in a non-cooperative, tariff-setting game (Abrego et al. 5; Grossman and

Helpman 1). McMillan (Game Theory) gives this topic a solid


36/160

theoretical background, while Kennedy applies it to real nego-

tiations. The case rests largely on the same hypothesis presumed by

the terms of trade argument and is thus as much informativeexcept for the possibility to enter a retaliatory game.

Domestic politics interferes with IAS when countries imple-

ment reform policies or contemplate partnership with unstable or

economically weak countries. The argument has initially emergedfrom the literature on time-inconsistent policies, which Fernndez

describes as that circumstances under which governmentalbehavior undermines the credibility of optimal public policies (7).

According to Hagen, standard solutions to overcome this

problem consist in the creation of appropriate institutions and of atrack record of consistent policies (35). There is a widespreadbelief that the integration process is apt at creating an enforceable

mechanism including both those solutions (Whalley 16; Helleiner

762), and in general superior than other possible alternatives

(Fernndez 10). The commitment to integrate thus credibly provi-des an agency of restraint on any future reversal of previously

announced policies. Countries are assumed to find costs far

outweighing the benefits when reneging on reforms explicitlyundertaken through negotiations, such as trade liberalization or

democratic change.

The security issue has accompanied the debates about the

importance of trade at least since Kant famously asserted in 1795

that commercial ties would reduce the risk of European wars (qt. inSchiff and Winters 1). Schiff and Winters assume not muchdifferently from the original Kantian discourse that the larger the

level of imports, the lower the likelihood of a security threat among

the partner countries. They conclude, perhaps unsurprisingly, that

an economic bloc provides strong incentives in the form of securitydividends to non-member countries (28-29).

Other researchers put more emphasis on contextual details toshow that integration negotiations purport to a complex balance of

interests in order to inhibit any danger of conflict. Serdar describes

economic alliances as groups of states seeking to improve their

security in front of others by cooperating (3). But even in economicterms, trying to seek refuge from any potential protectionist

measure should be thought as a realistic objective especially for a


37/160

small country (Whalley 17; Fernndez 17), the more so it is

admittedly secured by means of side payments (Whalley 18; Schiff

and Winters 28) from the more affluent member states.Further descriptions of objectives borrow from adjacent

political science, and try to capture the economic significance

especially in the pursuit of regional power or influence. Baldwin

thus presents gerrymandering and voting power as likelynegotiating purposes. As they do not add conceptually much to the

previous discussion, but are nonetheless relevant to the nature ofthe interdependence, the topic is to be reexamined in section 3

below.

2. Objectives of integrating countries: Empirical arguments

The attempt to produce empirical support in favor of one or

more of the theoretically anticipated benefits has been based on

two main categories of research data: quantitative measurements of

economic variables and direct evidence from the integrationnegotiations. As one of the oldest and most dynamic, the

experience within the European area has compelled much

attention. In spite of the quantitative emphasis the theory inspires,the formation of the Economic European Community (EEC) in

1957 is historically presented rather in terms of strategic

considerations than as a result of conscious computations of

economic benefits.

Whalley exemplifies the original motivation behindEuropean integration as a cooperative game in using common tradepolicy to increase the founding members' leverage in negotiations

with the U.S., including at a multilateral level (17). The

justification is by and large maintained by Fernndez to present the

individual search when most of the former European Free TradeAssociation (EFTA) countries sought the entry into the EU (20).

Arguments put forth by Moravcsik suggest that the postwarincrease in European trade can hardly be attributed to policy

changes, but rather, at least until the 1980s, to structural factors

such as geographical proximity and per capita income (490).

Other arguments leave the economic incentives aside alto-gether. Prevailing initially integration objectives are thus ascribed

to helping preventing further European war (Whalley 18) or to the


38/160

weight of American interest in the 1950s to deter the influence of

communism in Europe (Brabant 7). Even classical presentations of

the economics of integration do not resist underlining that thedriving force behind the formation of the EU was the political

unity of Europe with the aim of realizing eternal peace in the

Continent (El-Agraa 13).

Along with the successive waves of enlargement, EUmembership has been seen as a way to be part in the European

political system of liberal democracy, explaining at least accessionnegotiations relative to Greece, Spain, Portugal, and, most recently,

the Europe Agreements (EAS) (Fernndez 14). Presently, it is also

argued that the EU enlargement process is critical to a relativelystable, prosperous, and peaceful Europe (Josling et al.), carrieswith it a kind of peace dividend (Hagen 3), and attracts the

Central Eastern European Countries (CEECS) for geopolitical

reasons (Baldwin et al. 147). A further note on strategic behavior is

given by evidence that some Member states made demands inorder to compensate for their willingness to accept the widening of

the Community in such cases like the Integrated Mediterranean

Programs IMP in 1985 or the formation of the Single EuropeanMarket in 1986 (Reiner 78; Bache 68; Moravcsik).

This kind of argumentation has proliferated not only due to

its inbuilt credibility, but also as a secondary result of less than

impressive cost-benefit analyses. Pelkmans finds inconclusive the

estimates on the welfare effects of trade creation and diversion forthe EEC from the period up to 1970 in the range of 0.15 per cent tomaximum 1 per cent of GDP (94, 113). Dyker presents estimates

of the static trade effects of the creation of original Common

Market in the order of 1 per cent. Taking economies of scale and

competition effects into account raises the estimate, but only to astill modest 3 per cent. Bolder assertions even claim that all

estimates of trade creation and diversion by the EC which havebeen presented in the empirical literature are so much affected

that the magnitude of no estimate should be taken too seriously

(El-Agraa 150).

Research conducted on the ongoing EU enlargementsimilarly reveals a fragile balance between costs and benefits,

taking into account how much of the integrating countries' GDP is


39/160

affected as a result of trade liberalization. Lejour et al. report

model simulations indicative of modest welfare improvement for

the EU, at the level of 0.1 per cent, and significantly varyingwelfare gains for the CEECS, in the range of 1.5 to 9 per cent (8),

results largely confirmed by numerous other researches surveyed

by Quaisser and Hall (20-22). Other studies (e.g. Gacs and Wyzan;

Kohler) compound the ambiguity about these evaluations bypredicting a net cost for the EU on the average of 0.15-0.20 percent

of GDP for the accession of five countries, and 0.37 per cent in thecase ten countries are absorbed. Additional research with respect to

changes in stock market indices and investments rates show that,

with the exception of the 1986 entrants, nothing automatic can beinferred about the benefits, just the opportunity to catch-up(Baldwin et al. 143-5; italics added).

Available data for non-European experiences with integra-

tion suggest a similar mixture of objectives. Fernndez provides a

detailed account on the 1988 Canada-U.S. IA, as well as the 1992Canada-U.S.-Mexico North American Free Trade Agreement

(NAFTA). While the economic estimates of the direct macroe-

conomic effects on the U.S. were tiny and statistically insigni-ficant, a more beneficial exchange of concessions has seemingly

played the salient role for all parties concerned. Canada sought to

obtain some degree of exemptions from the use of anti-dumping

and countervailing duties and safeguard measures by the U.S.

producers (17); the U.S. sheltered itself against future unfavorabledomestic policy disciplines undertaken by Canada in certain areas(18); Mexico concerned much with domestic policy reform and

secured very little in concrete tariff reductions or other concessions

from the U.S. (23). Improvement in the individual bargaining

positions is seen also central to the negotiators both for NAFTAwith respect to the EU and Japan (Fernndez 24) and for

MERCOSUR countries as subsequent leverage in accessionnegotiations to NAFTA (Whalley 17).

3. Constraints

The discussion so far has raised the important issue ofovercoming the problem of reliable representation of disparate

integrating objectives. The economic factor is by no means a


40/160

predominant explanation of integration, although one should

consider it more realistically diffused into a multiple-level inte-

raction among negotiating countries. Some authors assign power aprecise meaning only when the analysis is applied to a particular

situation (e.g. Leap and Grigsby 204), or only in relationship with

the other party (Rao and Schmidt 671).

A comprehensive literature surveyed by Reza suggests thatthe states' behavior is determined by a three-layered system of

basic constraints embodying elements of independence,dependence, and interdependence (44), which eventually shed light

on the available and desirable courses of actions.

Conventionally, the formation of policy preferences has beenexplained in terms of domestic the independence level orinternational the dependence level constraints or both. The

work of several authors (e.g., Schelling; Mo; Putnam; Helpman)

models bargaining as domestic and international games that are

played simultaneously, and shows that the bargaining outcome isresilient on the effective way a decision is reached in the first

place.

According to several studies (e.g., Patterson; Pahre andPapayoanou) this approach is inconclusive. What they suggest is

that negotiations rather encompass simultaneous effects on state

behavior of a third level of interactive decisions as well. As

proposed by Lehman, to make this conjecture explicit amounts to

value the relative power of negotiating partners, an implication atlarge exposed by the literature on neo-functionalism andintergovernmentalism (e.g., Moravcsik; Bache). The concept is

suggestive of the supplementary constraints impeding choice

selection, beyond the commonly described dichotomy of interna-

tional and national levels of analysis.This search for robust results induced a good strand of

applied research (e.g., Aggarwal and Allan; Lenway and Murtha;Patterson L.A.; McDonald) to develop the two-level framework

into variants of three- and four-level games with the intent to refine

the strategic analysis. Papayoanou exemplifies such additional

factors that shape the preferences in the forms of domesticsentiment, power considerations, stakes in a particular situation,


41/160

leaders' foreign and domestic policy interests, and leaders'

assessments of the value of their alliance.

What eventually emerges from these last studies consists ofvaried solutions to define constraints, which poses a task of

elimination, which can only be accomplished by an examination of

the cases (Conybeare 53). A precise interpretation is thus

subsequently sought for at the three presumed constraining levelsof analysis. The debate reveals the problem of representation of

constraints at each level.

a. The international level of economic dependence

Putnam gives a classical representation of constraints atinternational level:

National governments seek to maximize their own ability to

satisfy domestic pressures, while minimizing the adverse

consequences of foreign developments (434).

The definition points to the dependence of domesticobjectives on the interstate relationship as the key determinant of

behavior in international relations.

Analytically, the concept of power conveys the message onthe constrained resources a nation has in the conventional sense

that more power means better chances to arrive at the preferred

outcome. Serdar emphasizes two main approaches to power: power

by which states pursue and control others' behavior; and capacity

stemming from their capabilities (2). The distinction is suggestivefor the analytical procedures to measure power. Various indicatorsof power asymmetry reveal the hegemonic context depicted by the

former case, while the latter indicates a more laborious process to

influence decisions in international relations.

Hirschman's early work on economic dependency distin-guishes between countries, which can act either as object or as

subject of a policy using foreign trade to influence other countries'behavior (68). He develops statistical measures of geographic and

commodity concentration of trade to discuss the extent a country

could bilaterally constrain its commercial partners' choice.

Holzman applies a similar framework and argues that suchexercise of power has been used frequently in recent history (64-

66). His examples include the U.S. against all communist


42/160

countries; the U.S.S.R. against China, Albania, Yugoslavia and

Eastern European countries; the Middle East oil producers against

Western Europe, Japan, and the U.S. (55).Other approaches to asymmetry give a country's size a

subjective predictive value depending on the particular interaction.

The underlying rationale offered by Lindert assumes that a country

is small if it is likely to be more dependent on a particular traderelationship with its partner country, viz. it trades exports and

imports with low price elasticity of demand (191).Conybeare exemplifies this kind of economic warfare in his

model of trade war. The presumption correspondingly asserts that

as the disparity in size increases, the ability of the large country toextract gains from the small or hurt it with retaliation increases; theability of the smaller country to gain from a tariff or hurt the large

country by retaliation diminishes (26); the conflict engenders a

mutual loss if both countries are either large or small (27-28).

The benefits of size are documented in other contexts aswell. Alesina and Spolaore ascribe size a positive function of the

heterogeneity of population's preferences, and a negative function

of the fixed costs per capita of government, including such costsfor creating and maintaining a monetary system, a bureaucracy, a

tax collection system (3-4). Their model is consistent with the

widely accepted view that international conflict increases the

chances for success the larger is a country's size (14-15), but its

predictions become highly improbable in a tariff-formation setting.They conclude first that a world of few, large countries increasesthe probability of conflict, and second that the mass of observable

conflicts may go up among small countries (16, 23), although both

types of countries would rationally have no reason to embark on

such mutually harmful conflicts.An appropriate inference from these results would be that

power-based relationships predictably do constrain countries'behavior in a bilateral game. It is at the same time obvious that this

asymmetric perspective does not provide for a comprehensive

understanding of interaction between states. On the one hand,

when conflict among similarly sized countries is involved theexplanations are contradictory depending on how size is defined in

the first place.


43/160

On the other hand, asymmetrical dependence is not by nece-

ssity indicative of relative power. Bottom et al. weigh experience

heavily in forging a much greater willingness and ability to exploitthe power differential in the negotiation process. Experienced

players, they claim, use their risk preferences to achieve a more

advantageous division of value (162).

Similarly, Wagner thinks that countries more realisticallyface unexploited opportunities to trade economic resources for

political concessions (463), a process which, if successfullymanaged, could leave a country better off independent of the

degree of asymmetry. According to Grossman and Helpman,

policy constraints are relaxed, for instance, when a governmentcredibly makes use of domestic political contributions of variousspecial interests as an exchange currency for desired outcomes in

international negotiations (12).

In contexts where political economy plays a rather powerful

role it may be assumed a complex process to determine theoutcome of negotiations (Bottom et al. 147). Coalitions of partici-

pants and counter-coalitions, pivotal players are the normal

representations of a country's objectives and preferences. Countriesare rather prone to negotiate alliances in order to strengthen their

influence or to reduce their dependence by improving their

capabilities in competition with others (Serdar 3; Rao and Schmidt

671).

Manzini and Mariotti's study aims at modeling such acontext in which bargaining behavior is regulated by somecollective decision mechanism. Although majority vs. unanimity

voting are likely to result in different bargaining's outcomes, they

argue that during the process proposals are made using an internal

procedure, i.e. a set of ex-ante rules of how to play the game (7)and thus add an institutional structure to attain equilibrium. In

international negotiations, for instance, Conybeare remarks that theMost Favored Nation (MFN) rule may constitute such a

mechanism later internalized in the politics of the domestic agents

by each player (72).

b. The national level of economic independence


44/160

Rodrik observes that trade policies are almost always biased

against trade, rather than in favor of it (26). Several studies (e.g.

Conybeare 50; Rodrik 17; Helpman 1) point indeed that a country'sexpected behavior may deflect from rational income-maximizing

objectives as politically-influential groups can be made better-off

by policy interventions in trade.

Although a theory of domestic politics has yet to come to life(Helpman; Milner and Rosendorff), there is commonly ackno-

wledged that nation-states embody country-specific governancecapabilities (Lenway and Murtha 513), which bear on the strategic

interaction a highly influential mixture of domestic politics. When

trying to substantiate what those governance capabilities reallymean, economists like Bhagwati typically admit a composite ofideology, interests, and institutions as the key factors in settling on

a certain outcome of trade negotiations.

Several attempts have been proposed to understand the way

domestic political decisions shape strategic interactions. Romerconstructs a model in which misconceptions, i.e. individuals'

correlated errors, about how the economy functions play the key

role. According to his theory, voters' and politicians' beliefs arerelevant to political outcomes (29). The search for institutionally

conceived means to expose political representatives to information

is the solution he accepts in order to provide any insights about

the source of seemingly inefficiently political decisions (3).

Rodrik's approach is more specific. He conveniently dicho-tomizes between demand-side of trade policy individualpreferences and interest groups, and supply-side of trade policy

policymakers' preferences and the institutional setting. His analysis

however shows that a satisfactory treatment of all these issues

would likely be intractable (3). What nevertheless makes thisdistinction important is the manner in which political influence

translates into bargaining advantage to a country. In this bargainingenvironment, Mo argues that a negotiator operates with constraints

because she has to obtain the support of at least some of the other

domestic interests.

Several studies considerably enlarge the subject to correlatemore directly political conditions with economic behavior. Olson

explains slow economic growth as a positive function of the


45/160

stability of the overall pattern of rent-seeking interests or

distributive coalitions. July similarly ascribes economic

performance to the absence of ideological divisions in thegovernment.

Milner and Rosendorff reach complementary results from a

perspective they call electoral uncertainty, i.e. the majority in the

legislature and the executive are unlikely to share similar policy preferences. They predict that an executive's ability to find

domestic consensus on an international agreement diminishes asdivisions in government increase, and the expected outcome

becomes more protectionist. These authors' evidence refers to the

1993 nearly failed NAFTA ratifications; the U.S. rejection of boththe League of Nations in the interwar period and the InternationalTrade Organization in the late 1940s. Ameldung also documents

the Turkey's choices of trade strategies in the postwar period and

shows how liberal trade policies regularly got promoted in the face

of non-factional domestic politics.The attempt to reveal the mechanism in greater detail

nonetheless remains subject to analytical approaches with varying

degree of explanatory power. Schelling's and Putnam's worksadvance the conjecture that, given sufficiently great domestic

constraints, a country can have a bargaining advantage in

international negotiations. Mo attempts to model the predicted

behavior, and his results show that the precise outcome depends on

the institutional setting whereby domestic political power isdistributed in the medium range. However elusive this result maysound, it nonetheless underscores that a negotiating country has to

make in fact more concessions under greater domestic constraints.

Miller strengthens the case of failure to avoid international

conflict due to domestic problems when he finds that democraticand autocratic states indeed behave differently: the latter appear

more prone to escalate the conflict (399). His response, as well asthe Conybeare's lay emphasis on political vulnerabilities of leaders,

such as economic recessions, levels of domestic, cyclical decline of

specific industries, which discount the benefits of future

cooperation, and hence allow for protectionism.Grossman and Helpman capture the concept of trade

cooperation as a measure of political well being. By their


46/160

reasoning, trade war equilibrium is highly dependent on the way a

government's behavior reflects political conditions at home. A

liberal stance in international negotiations could thus be as muchexpected as a protectionist one under the circumstances of credible

commitment on behalf of the executive to support various

industries' interests.

Recent research in institutional economics is an appropriatefield, which economists turn to in order to comprehend this

diversity of factors. North views institutions as humanly devisedconstraints that structure human interaction (10), faithful

reflection of the underlying incentive structure. In that sense, Juli

exemplifies cooperative behavior in trade policy area as a result ofalterations in the institutional framework (19).

In a comprehensive study, Easterly and Levine make a strong

case for the institutions, understood in the form of diverse

instances like political stability, property rights, legal systems,

patterns of land tenure and so on. Their findings explain cross-country differences in GDP per capita once one controls for

institutions. In their words, institutional quality seems to be a

sufficient statistic for accounting for economic development (33).As easily can be inferred from these descriptions, the institutional

context is eventually made recourse to in order to gather

convergent, even if disparate, explanations for domestic policy

influences.

c. The issue-area level of economic interdependence

Aggarwal and Allen suggest that it is reasonably to think of

cases where overall power may not always be fungible across

issue-areas (12). By consequence, the most preferred outcomes a

large country would normally envisage might be seriously distorted by an apparently weak specific bargaining position, a conclusion

also supported by the previous discussion on power asymmetry.Trade negotiations, and particularly integration arrangements, have

become increasingly multilateral. Large-numbers trade games

increase the complexity of interaction and admittedly change the

expectations about countries' behavior (Alesina and Spolaore 23;Conybeare 55).


47/160

Papayoanou devises the concepts of collaborative-type vs.

unilateral-type preferences in order to deal appropriately with cases

when compromises and even submission to the other's party proposals represent reasonable conduct. Similarly, Langlois and

Langlois conceive three possible classes of strategy whose

characteristics lie in the way the act of deviating from expected

play is moderately, severely or not punished by the partner (819).This literature enriches the influence tactics in a considerab

Documents

Cojanu the Integration Game FINAL