International Political Economy, institutions and trade- Overview (from Nau (2007))

o Realism: HST, Gowa (1994)o Liberalism: Smith (1776), Coase, North (1990), Milgrom, North, and Weingast (1990)o Identity: Weber, Smith, Ricardo, Marxo Economic ideas

Keynesian (1930s): Polanyi (1944), Ruggie (1982) Hayekian (1944)

- Hegemonic Stability Theoryo Overview: Gallagher and Robinson (1953), Olson (1965), Kindleberger (1973), Gilpin

(1975), Krasner (1976), Keohane (1980)o Critiques, general: Conybeare (1984), Snidal (1985), Baumgartner and Burns (1975),

Gilpin (1982), James and Lake (1989), Gowa (1989), Cohen (1990)o Critiques, with declining US hegemony, regimes still matter (hegemon not necessary or

sufficient for cooperation/states pursue power and wealth): Gilpin (1983), Keohane (1984), Rosecrance (1986), Gilpin (1987), Conybeare (1987), Lake (1988), Milner (1988), Young (1986)

- Regime Theory (not just hegemonic coercion matters, but bargaining matters)o Overview: Keohane and Nye (1977), Keohane (1982), Ruggie (1982), Haggard and

Simons (1987), Milner (1992), Grieco (1988), Haas (1989)o How to cooperate? Regimes and issue linkage: Axelrod and Keohane (1985), Haas

(1980), Oye (1979)o Beyond transaction costs, regimes have additional purposes, states bargain and create

linkages: Aggarwal (1993), Aggarwal (1998)o Critiques: Strange (1982), Kratochwil and Ruggie (1986), Abbott and Snidal (1998)

- Explicitly adding international organizations (IOs) to regime theory o Adding in a constructivist view: Barnett and Finnemore (1999)o Differential effects on third world: dependency theorists + world systems (see CPE,

developing outline), Krasner (1981)o Critique: Gallarotti (1991)

- Looking specifically at institutions in trade – regimes (see IPE, CPE, globalization outline) and national institutions/politics

o Theories: Frieden (1991), Alt et al. (1996) o Overview: Odell (1990), interdependence

Market conditions: Milner (1988) Leaders’ values/beliefs: Goldstein (1988) National institutions: Destler (1986) Global political-economic structures

o Protectionism: Aggarwal, et al. (1987), Aggarwal (1985)

- Historical overview in context of theories: Nau (2007)o Realism – attributes Europe’s ascendance primarily to demography, geography, and the

decentralized distribution of power; see trade and economic activities flourishing only under favorable security conditions like alliances and hegemony or imperialism; free trade, exploiting comparative advantage, enhances economic efficiency, and economic efficiency frees up resources for military purposes; world economic expansion should be least robust in a multipolar world where countries cannot be sure of stable alliances, more robust in a bipolar world because alliances are more predictable, and most robust in a unipolar or imperial world because there is no significant challenge to the military power of the dominant power

Gowa (1994): free trade more likely within than across political-military alliances; alliances have had a much stronger effect on trade in a bipolar than in a multipolar world

Age of mercantilism and colonial expansion : central objective of state policy was to increase the state’s wealth relative to that of other states in a zero-sum struggle for material advantage (Jean Baptiste Colbert); alliances were temporary and formed to fight adversaries, not to develop wealth with allies; each state sought to export more than it imported (because this would translate into military power); western and eastern Europe developed symbiotic relationship in agriculture, colonial areas became places of slavery to increase labor force—trade fueled European industrial expansion; religions followed colonialists

Wallerstein (1974): overseas expansion cannot be explained by the “crusading spirit” or the need to evangelize; religious enthusiasm was rationalization – belief systems are not primary factors in explaining the genesis and long-term persistence of large-scale social action; material factors trump religious or ideological ones; European expansion exploited other regions of the world from the very outset and must be understood in the context of the world-system of core (western Europe), periphery (Asia, Africa, and Latin America), and semi-periphery (eastern Europe)

Pax Britannica (industrial revolution – WWI) :industrial revolution around 1750, by 1850, England was dominant country; it was free to pursue efficiency and expand global, not just national, wealth because its interests were global while those of other countries were only local or regional (it faced no significant military challenger and therefore did not fear that economic gains by others might be used to harm England)

Kindleberger (1973), Keohane (1980): hegemonic stability theory states that a hegemonic power is necessary to support a highly integrated world economy

o As long as power is evenly distributed among several great powers, no single power can influence the system as a whole – so, no single power takes the lead to organize the world economy

o At the extreme, where there are many powers that are equally competitive, the world economy approaches the model of a perfect market (because no single actor exerts significant

influence on other actors, each acts to maximize its own national self-interests); in a perfect market, we would see higher gains for all since competition maximizes efficiency – this assumes that some hegemon – such as a domestic government – has already organized the market to provide for safety

o But, the international market has no such hegemon normallyo Hegemonic power overcomes obstacles like the fear that

economic gains by another state may harm a state militarily (hegemony is a prerequisite to providing collective goods – these are indivisible goods that cannot be provided selectively to some and not to others and their consumption by one nation does not diminish the benefits available to other nations)

The hegemon provides security for global markets (example: Britain dominated the seas by 1850 and ensured safety of traders and their investments)

The hegemon provides a large market for the exports of other countries (example: Britain opened its markets in the latter half of the 19th century by repealing the Corn Laws protecting agriculture and reducing other tariffs – this was unilateral trade liberalization – Britain didn’t ask other countries to reciprocate)

Hegemon supplies a dominant currency in which international transactions can be conducted (example: Britain in 19th century adopted the gold standard – gold fixed in price with respect to local currencies)

Hegemon supplies loans to world economy, which provides a large and deep capital market in which other countries can conduct sophisticated investment and hedging activities (example: London became world economy’s financial center in 19th century)

o First era of globalization was under Pax Britannica – from 1870-1913, British FDI increased 250 percent and by WWI nearly half of British assets other than land were invested overseas, almost 90 percent in primary product areas like agriculture

o World economy achieved levels of interdependence prior to WWI that would not be seen again until the 1970s

But, most exports and investments involved inter-industry trade (after WWII, this switched to intra-industry trade)

Interwar period : Britain declined after WWI, US grew, but withdrew to political isolationism world economy lost its hegemon, so the world economy shrank and fragmented

Kindleberger (1973): “part of the reason for the length, and most of the explanation for the depth of the world recession was the inability of the British to continue their role as underwriter to the system and the reluctance of the US to take it on”

Reparations – though countries had already gone off the gold standard, reconstruction efforts pressured prices even more; Versailles Treaty

imposed severe reparations on Germany to rebuild war-torn Europe severe inflation

Demise of the gold standard – no stable common monetary unit currencies fluctuated; by 1926, US held 45 percent of world’s gold supply, so leading economy was now US, but in isolation; when raised interest rates in 1928 due to domestic concerns, international lending and payments system crashed (hegemon was no longer willing to finance the system) every country for itself

Beggar-thy-neighbor policies – countries engaged in unrestrained, competitive policies to reduce imports, increase exports, and devalue currencies shrinking world markets in the 1930s bilateral and regional markets that were discriminatory – countries often sought to balance trade through quotas

Pax Americana (post-WWII – early 1970s) : US clearly dominant and led the effort to provide for postwar security

Bretton Woods – wanted to open trade markets, but fixed exchange rates in terms of the dollar rather than gold (dollar standard) and countries could change their exchange rates under specified circumstances (“fundamental disequilibrium” – less rigid than gold standard); established mechanism for multilateral trade liberalization – nations would negotiate reciprocal tariff reductions and apply the same low tariff to all nations that they offered to the “most-favored nation” (to avoid discrimination); provided external financing to give countries more time to adjust to trade imbalances (IMF); allowed countries to control capital flows

Second era of globalization – “Golden Age”; trade follows the power; the ebb and flow of international markets are largely determined by the ebb and flow of the distribution of power; global markets flourish under a dominant power and decline under competition among many powers

o Liberalism – traces Western success to technology, specialization, and institutional innovations, such as the modern factory, markets, and domestic and international bureaucracy; technology taken as exogenous; specialization, the division of labor in which two parties specialize to make common or different products, offered unique advantages because it meant that workers became more efficient; this perspective emphasizes relationships and repetitive interactions; recognition of comparative advantage at international level (trade)

North (1990) Increasing specialization and trade raised the transaction costs of

exchanges (meaning the additional expenses incurred to find appropriate buyers and sellers and establish appropriate prices); international institutions help to lower the costs of long-distance trade

Milgrom, North, and Weingast (1990) How to promote trust necessary for efficient exchange when people

have incentives to cheat? o By establishing a continuing relationship – a bond in which a

trader would be unwilling to cheat unless the gain from dishonest behavior was large.

Reputation system – informal way to bond good behavior, but not adequate on its own

o Transferable reputations (because two traders can’t meet face to face often enough, have to hear the reputation from others) are only an adequate bond for honest behavior if members of the trading community can be kept informed about each other’s past behavior

Early Middle Ages (“Champagne Fairs”) – without state enforcement of contracts, merchants created their own private code of laws, “the law merchant,” with disputes adjudicated by a judge who might be a local official or private merchant

o Judges were not substitutes for reputation, but made the system more effective as a means of promoting honest trade

o Formal system allowed them to transmit just enough information to the right people at the right times to enable the reputation mechanism to function for enforcement

o How? The judge bundles the services which are valuable to the trader with services that are valuable to the community

Reputation system and institutions are complementary parts of a total system (neither sufficient on its own)

Industrial Revolution – expansion of world economy dates from onset of the industrial revolution (1750s England), which created new rules and institutions for both domestic and international societies; created modern manufacturing economy crucial role of technological change

Efficiency of specialized trade – the key to this revolution was the harnessing of mechanical power to the production of goods

Laissez-faire trade rules (free trade) – starting in the 1820s, England began to lower tariffs on imports; new rules based on comparative advantage; a country reduced tariffs and specialized in products that it produced most efficiently, while importing products that other countries produced more efficiently non-zero sum, laissez-faire policy

Gold standard – pressures moved various countries to gold standard – England in 18th century, Germany in 1871, then France, then US in 1879

o So, sequential and path-dependent interactions, not British power or ideas, explain economic change

o Path dependence: countries started on a certain path and accumulated advantages or disadvantages along that path

Pre-WWI rules/institutions were weak and crises occurred, but as a start, the new market rules generated more prosperity than before

o Confirmed Smith (1776): “invisible hand” – if each nation acted on its own best interests, the common good would be served; generally beneficial outcomes could be obtained from decentralized initiatives rather than centralized institutions

Increasing/innovative role of international institutions – breakdown from pre-WWI global economy need for stronger international institutions; Bretton Woods thus created:

General Agreement on Tariffs and Trade (GATT) – focused on liberalizing trade in industrial or manufactured products only; agreement, not organization; concluded in 1947, supervised multilateral trade negotiations to reduce tariffs and other trade barriers on manufactured goods; through eight major rounds of trade negotiations starting in 1948, GATT cut tariffs and quotas dramatically in a non-discriminatory, or “most-favored-nation,” basis; became World Trade Organization in 1994 after the eighth (Uruguay) round

International Monetary Fund (IMF) – supervised the system’s fixed exchange rate system and provided external loans to countries undergoing balance of payment adjustment; by 1959, currencies became fully convertible

International Bank for Reconstruction and Development (IBRD)o World Bank – set up to provide additional long-term financingo Marshall Plan – supplied bulk of postwar financing

Note: these institutions were not universal – excluding most developing countries(colonies), Soviet Union, and communist satellites

o Identity – attributes the rapid development of Europe relative to the rest of the world largely to Renaissance, Reformation, and Enlightenment ideas that inspired the Protestant ethic of scientific, technological, and commercial achievement; emphasizes the role of ideas, norms, values, and identities in spurring material/institutional change

Protestant ethic – Weber: Reformation created the Protestant ethic, the idea of a specific calling of the individual by God to a life-task, a definite field in which one was divinely inspired to work; idea of worthiness preceded and now made possible specialization (opposite of what liberalism argues); ethical justification of the modern specialized division of labor; so, ideas influenced institutions such as specialization in the economic sphere, which significantly altered the existing distribution of power (and ultimately weakened the Catholic Church); religion inspired commerce and conquest

Economic liberalism – Smith (1776) and Ricardo (1815): relationships facilitate specialization but they do not necessarily direct it toward the production of wealth; relative equality of the parties in a relationship (Locke); marketplace of free and competitive exchange – ensured through competition and relative equality of participants that the value of goods and services would be on the basis of economic price and not on inheritance or where one came from (like liberals emphasize with path dependence); assuming protection of property rights and existence of competition, the two ideas of equal status and free exchange put a high value on efficiency and hence specialization

Ideas drove development, not institutions or power Economic nationalism/Marxist socialism – approach of assisting national

industries to catch up with and compete with more advanced foreign industries; Marx: markets distribute wealth unevenly, concentrating economic and social power in the hands of bankers and corporations and exploiting the labor of workers and farmers, so Marxist socialism called for strong labor unions to match big corporations and state regulations and ownership to control substantial sectors of the economy

So, the clash of economic ideas and ideologies explains the course of world economic events better than weak institutions or the absence of a strong power

Keynesian/Hayekian economics (Chicago School) Keynes: 1930s, called for more activist government intervention to

stimulate domestic growth, protect imports, and adjust exchange rates more frequently; adjust external trade and exchange rate policies to meet domestic goals of full employment rather than to adjust domestic demand to maintain free trade and fixed exchange rates

Polanyi (1944)o Idea that self-regulating markets never work; their

consequences are so great that government intervention becomes necessary and the pace of change is of central importance in determining consequences; “myth of the free market” – in their transformations, governments of today’s industrialized countries took an active role in protecting their industries through tariffs and in promoting new technologies

o Stresses the interrelatedness of the doctrines of free labor markets, free trade, and the self-regulating monetary mechanism of the gold standard

o Supported more government intervention and called for “the Great Transformation” from market rationality to social regulation and planning, moving beyond the laissez-faire policies of the gold standard

o Problem is that rapid transformation destroys old coping mechanisms, old safety nets, while it creates a new set of demands, before new coping mechanisms are developed (example: in industrial age, a farmer might lose his crop, but never lacks employment; in modern industrial age, individuals can do little about unemployment – they can’t simply offer to work for a lower wage)

Bretton Woods as “embedded liberalism” (Ruggie 1982) – governments accepted the discipline of free trade in the international economy, but ”embedded” this liberalism in the domestic economy by commitments to intervene to achieve full employment, control prices, and prevent disruptive capital flows

o Emphasized aspects of Bretton Woods that sided with Keynesian policies – countries facing balance of payments deficits could alter their exchange rates, control capital flows, GATT provided rules for safeguards and exceptions, IMF/World Bank were first international institutions ever to make loans for balance of payments and reconstruction purposes (though didn’t go as far as Keynes wanted)

Chicago School: allowed for fiscal and monetary policies to manage domestic demand, but sharply limited government spending and taxation and reduced tariffs to encourage a more robust private economy and competitive international marketplace

Hayek (1944): supported greater market competition to preserve basic economic and political freedoms and warned that the move toward social regulation and planning was “the Road to Serfdom”

o Bretton Woods as “neo-classical liberalism” – system of international free trade and fixed exchange rates which effectively limited the ability of governments to intervene in the domestic economy

Emphasized aspects of Bretton Woods that sided with US policies

Sided with moderate (not aggressive) Keynesian approach – accepted some government intervention in the domestic economy to achieve high, but not necessarily full, employment

Commitments to fix exchange rates, open markets, and limit financing for trade deficits meant that domestic policies would have to adjust (conservative policies)

Collapse of Bretton Woods in 1970 Embedded liberalism advocates – this was a consequence of

contradictions in the system (like insufficient gold and financing) that could be corrected by extending the social safety net to international markets

Chicago School/neo-classical liberalism advocates – this was a consequence of changing ideas, like the US abandoning moderate Keynesian policies of fiscal/monetary discipline in mid-1960s and inflating US economy, thereby causing other countries to be less willing to hold dollars

- Overview of standard schools of thought on institutional development:o “Neorealist institutionalism” (HST) – demise of global-level institutions is inevitable

result of relative decline of US in international economic system; focus on distributional consequences of international regimes

o Neoliberal institutionalism – institutions more robust; transaction cost approaches; global accords help foster cooperation among states and provide them with ongoing benefits, so cooperation “after hegemony” can be sustained; states are able to reduce organizational and information costs through use of institutions, particularly when “issue-density” is high; regimes reduce costs that would come from having to negotiate a host of bilateral agreements with other states

o Institutional innovation and change – role of expert consensus and interplay of experts and politicians; new knowledge may lead decision-makers to calculate interests differently; can use linkages; helps increase our understanding of dynamics of institutional change

- Hegemonyo Gallagher and Robinson (1953)

Assumption that British governments in the (Victorian) free-trade era considered empire unnecessary arises from over-estimating the significance of changes in legalistic forms – responsible government, far from being a separatist device, was simply a change from direct to indirect methods of maintaining British interests

If this age was “anti-imperialist,” why were colonies retained and obtained?

British industrialization caused an ever-extending and intensifying development of overseas regions

Only when the polities of these new regions failed to provide satisfactory conditions for commercial or strategic integration and when their relative weakness allowed, power was used imperialistically to adjust those conditions

By slackening the formal political bond at the appropriate time, it was possible to rely on economic dependence and mutual good-feeling to keep the colonies bound to Britain while still using them as agents for further British expansion

Formal (political supremacy) and informal (economic expansion, commercial penetration) empire are essentially interconnected

o Perhaps the most common political technique of British expansion was the treaty of free trade and friendship made with or imposed upon a weaker state (Turkish treaties of 1838, 1861)

o Essentially, the policy of the free trade empire was not “trade not rule,” but “trade with informal control if possible; trade with rule when necessary”

- Hegemonic stability theory (one theoretical approach – structural – to regime change)o Kindleberger (1973)

The maintenance of free trade requires a “benevolent despot” to provide certain institutional public goods, like pressures for low tariffs, acceptance of non-discrimination, and provision of stable monetary relations

Following Olson (1965), without “selective incentives,” these international public goods are unlikely to exist unless the group is “privileged” so that a single state has sufficient interest in the good to be willing to bear the full costs of its provision (“the small exploit the large”)

Hegemony as both a necessary and sufficient condition for the maintenance of order in international economic relations; for the world economy to be stabilized, there has to be a stabilizer, one stabilizer

Only the hegemonic power with the biggest stake in the system could be expected to take a firm interest in the responsibility for regime management, even if this also entailed bearing a disproportionate share of the cost

Others might be tempted into mercantilist “free riding,” risking a collective “market failure” of systemic breakdown

Only the hegemonic power could be counted on to be willing to pay the price of providing the “public good” of stability

Evidence: tripartite collective action among US, Japan, and West Germany must fail; private interests of latter two states will lead them not to cooperate, leaving little hope for cooperation after decline of US hegemony

Conclusions: the presence of a dominant actor will lead to the provision of a stable international regime of free trade and although the dominant leader benefits from this situation, smaller states gain even more

This implies that states will want a hegemon so they can free rideo Gilpin (1975)

There is a fundamental difference in emphasis between economics and politics

Economics (liberal version) emphasizes absolute gains where all participants may benefit, though perhaps to varying degrees

Politics emphasizes relative gains where the distribution of value occurs among participants caught in a zero-sum game

o But, economics cannot be understood beside from politics What accounts for change in international system – why do dominant powers

decline? The spread of economic growth and industrialization cannot be

prevented and, in the long run, diffusion of industry and technology undermines the position of the great power

Shows effects of FDI on the home country through two case studies Britain – strategy of portfolio investment in 19th century US – strategy of direct investment and the transnational corporation

o Problems: over-emphasis on rentier role leads to political dangers, namely the deceleration of growth in domestic economy, increased/paradoxical dependence on the dependents, negative effects on domestic welfare, income distribution, and labor conditions; neglect and consequent decline of domestic industry; decay in the national heritage

What to do? National industrial strategy to increase domestic competition and

development of new technology – not defensive investment abroad US should focus on trade, not FDI

o Krasner (1976) International economic structures can be described along a central continuum

of openness: complete autarky (if all states prevent movements across their borders) complete openness (no restrictions exist)

Focuses on structure of international trade (degree of openness for the movement of goods)

Since beginning of 19th century, this structure has gone through several changes, which can best be described by the “state-power theory”: the structure of international trade is determined by the interests and power of states acting to maximize national goals

There are four basic state interests that relate to the degree of openness for the movement of goods, depending on the potential economic power of any given state (relative size and level of economic development of a state): aggregate national income, social stability, political power, and economic growth

Different distributions of potential economic power, like multipolar and hegemonic, relate to different international tradition structures

The hegemonic distribution of potential economic power is likely to result in an open trading structure; openness is most likely to occur during periods when a hegemonic state is in its ascendency

But, must not only consider state power – also need to consider the impact of past state decisions on domestic social structures as well as on international economic ones.

o For example, the UK and US have both been prevented from making policy amendments in line with state interests by

particular societal groups whose power had been enhanced by earlier state policies.

Descriptions of international trading systems are comparative, not absolute, so we need to consider what is happening to indicators of openness like tariffs, trade proportions, concentration of trade within regions composed of states at different levels of development (if falling, rising, and becoming less extreme respectively, then structure becoming more absolute)

Structure of international trade changes in fits and starts, not smooth flowing with the redistribution of potential state power

- Critiques of hegemonic stability theoryo Conybeare (1984)

“Standard international trade theory” Notes difference between public goods and prisoner’s dilemma arguments:

while both can produce sub-optimal outcomes, in prisoner’s dilemma, maximum gains can only be made by excluding the cooperative player(s), but in a public goods situation, there is nothing to be gained from attempting to exclude an actor (as long as there is not a rivalry)

Free trade may be a prisoner’s dilemma, but it is not typically a public goods problem – it exhibits excludability (countries can penalize a country that tries to impose a nationally-advantageous tariff) and rivalry, and is fundamentally a problem of predatory income transfers (make everyone refrain from taking action which is only in their individual interest)

The public good situation centers on the problem of inducing free riders to contribute to the supply of the public good (need to convince everyone to contribute to the provision of the public good)

Any state large enough to influence its terms of trade – the relative price of its exports – maximizes its real income by imposing an “optimum” tariff, that is, a tariff set at a level that maximizes the net gain that accrues from the improved terms and reduced volume of trade

If optimum trade tariffs are used by all states, an individually and collectively suboptimal outcome results: the volume of trade is reduced, but the terms of trade do not change (so the mutually preferred outcome of free trade is difficult to achieve) prisoner’s dilemma

o The solution to a prisoner’s dilemma international trade game is to have a system of deterrent threats to prevent unilateral initiation of a tariff

o Snidal (1985) Uses game theoretic analysis to show Kindleberger (1973) is wrong: no reason

to expect a decline in hegemonic power will lead to the collapse of economic order; secondary powers will be willing to participate in collective action provided that they have incentives to avoid the collapse of the regime

Assumptions of HST: jointness, non-exclusion, and collective action is impossible So, if collective action likely, HST will be incorrect Across issue areas, these assumptions do not hold (example: institutions

like GATT show that collective action in trade is not impossible)

HST fails to clearly define size – hegemonic decline can occur either from the absolute decline of the dominant actor or from positive but differential growth rates through which secondary powers “catch-up” to a former leader – in the second case, the impact of the changed distribution of power is unclear, while relative size declined, absolute size increased (in this case, won’t the hegemon be more inclined to provide the public good because it fears that the second or third power will set in to take its place?)

“k” groups – because small groups can also provide public goods, either a hegemon or small group of states can stabilize free trade system

Benevolent strand of hegemonic stability theory: public goods strand Kindleberger (1973) Keohane (1980)

o Greater absolute size of the largest actor means it has a greater interest in providing the good; thus, maintenance or growth of the largest actor is the key factor in regime stability and absolute decline is the source of decay

o Focuses primarily on interest, capabilities follow (economic focus)

Coercive strand of hegemonic stability theory: impact of hegemony on the emergence of an open trading system – no stipulation of generalized benefits as in the public goods argument

Baumgartner and Burns (1975): asymmetrical control relationships between states work heavily to the advantage of dominant countries and to the disadvantage of weaker countries; these regimes may be stable, but certainly not mutually beneficial

Gilpin (1975): argument about FDI premised on notions of hegemonic self-interest with no necessary connection to the provision of public goods

Krasner (1976): hegemonic power will use its superiority to structure the trading system to its own advantage; open trading system will result, but may or may not be beneficial to other states, depending on their particular circumstances

Does the theory extend to issue areas? Gilpin (1982)

o Coercive strand of HST argumento war and hegemonic stability – presence of a hegemonic power

is central to the preservation of stability and peace in the international system; international order is a public good that benefits subordinate states; the dominant state is not only capable of providing the public good, but it is capable of extracting contributions toward the good from subordinate states (subordinate states will be reluctant, but due to hegemon’s power, will succumb); if the subordinate powers receive net benefits, they may recognize hegemonic leadership as legitimate and so reinforce its performance and position

Here we see a big shift: ability of hegemon to provide a public good ability of hegemon to coerce; this implies that there is no longer any reason to assume

that the distribution of benefits will favor smaller states (why would hegemon use its powers to provide only public goods?)

o Relative size is foremost here – the key to centralized provision is the ability to force subordinate states to make contributions, and this ability rests primarily on the relative power of states (absolute size can also matter for giving legitimacy based on public goods provision, but is secondary)

o Interest in providing the public good follows from capability (military focus)

o James and Lake (1989) There is a link between hegemony and openness, but the policies pursued are

often more subtle and indirect than commonly presumed Three “faces” of coercive hegemony, the second of which (the “Trojan horse

strategy”) is inadequately understood and is central to the Walker Tariff of 1846 Hegemon implants positive or negative sanctions aimed directly at

foreign governments in an attempt to influence their choice of policies (economic sanctions, military support, foreign aid)

Hegemon uses international market power or its ability to influence the price of specific goods to alter the incentives and political influence of societal actors in foreign countries; these individuals/sectors/firms then exert pressure on governments for alternative policies that are more consistent with dominant power’s interests

o Based on invisible hand; alterations in hegemon’s trade policy have greater impact and are most likely to shift balance of power in favor of country’s free trade coalition

Hegemon uses ideas and ideology (propaganda) to structure public opinion and the political agenda in other countries to determine legitimate/illegitimate forms of behavior

Walker Tariff of 1846 – promotion of export agriculture, reversed protectionist principles embodied in “black tariff” of 1842 and inaugurated decade and a half of freer trade; key was the repeal of the Corn Laws in Britain (the hegemon at the time) in 1846, which allowed access to its lucrative grain market by unilaterally lowering tariffs, Britain succeeded in laying the basis for and constructing a liberal economic order

o Gowa (1989) HST bases representation of international trade on a Prisoner’s Dilemma or the

public goods literature – so, dominant strategy of each player is to defect, or refuse to contribute to, the supply of the public good a hegemon must exist to achieve a stable free trade equilibrium

Olson (1965): logic of collective action, the “privileged group” Critique: Both HST and standard theory of international trade analyze economic

exchange in a political vacuum by focusing exclusively on the real income gains that accrue to a state that opens its borders to trade

In fact, national power is engaged in free trade agreements because such agreements produce security externalities: the removal of trade barriers can affect not only the real income but also the security of the states concerned

Trade increases the potential military power of any country that engages in it, meaning it can disrupt the existing balance of power

Great powers will thus be interested in the relative power effects of trade (so security externalities of any free trade accord render military alliances the natural basis of such agreements)

Bipolar military alliances are more likely to evolve into free trade coalitions than multipolar ones because:

Exit risks are lower Lower incentives of the great power members to forgo the use of their

market power to exploit the smaller members of the alliance (to discriminate in terms of investment)

- Trade, with HST and decline of US hegemony in the background: Cohen (1990)o Studies of the politics of trade form an integral part of the broader field of IPE; writings

on the political economy of trade tend to focus on either or both of two central sets of questions

Actor behavior – meaning, in particular government behavior, since the fundamental unit of authority in the international system still remains the sovereign nation-state

How best to explain or analyze the foreign economic policy behavior of governments? Question of level of analysis (Waltz 1959, 1979)

o System (structural) level/”third image” – sovereign state itself, a rational/unitary actor; makes state preferences constant (exogenous) rather than variables (endogenous)

o Unit level/”second image” – attention on the strategic interactions among all domestic actors, inside or outside the government, with actual or potential influence on a state’s foreign actions

o Cognitive level/”first image” – encompasses base of consensual knowledge or “economic culture” that legitimates policymaking at the unit level

For most purposes, both the unit and cognitive approaches can be subsumed under the single heading of domestic-level analysis, which is in contrast to system-level analysis

What is needed: methodology that considers domestic- and system-level variables simultaneously, rather than sequentially, and specifies whatever interactions there may be among all relevant variables in a rigorous manner

What is it that fundamentally motivates states in their international economic relations? Or, formally, what is a state’s preference ordering?

o Tend to subsume all non-economic motivations under the convenient catch-all heading of “power,” conceived as a single means to a variety of ends

o Power is the ability to influence outcomes

o So, governments care about power along with “wealth” (or income maximization) – but which matters more? How do they relate?

o Need to incorporate both goals into the presumed utility functions of individual governments and treat them as inextricably linked (absolute gains versus relative gains are in constant competition for policymakers)

- The following authors all see the future of the liberal world economy threatened; the postwar multilateral trading system is at a crossroads, “poised” between different modes of organization; this problem is closely related to the decline of American economic leadership, but question the assumptions of HST – is hegemony necessary and/or sufficient for stability?

o Gilpin (1983) Updated his assumptions of hegemonic stability theory There is no necessary connection between political hegemony and economic

liberalism; both political hegemony and economic efficiency are necessary ingredients for a nation to promote a liberal world economy

The decline of hegemony will not inevitably lead to the collapse of a liberal world economy, but the decline of a dominant liberal power does weaken the prospects for the survival of a liberal trading system

Liberal international economy rests on three political foundations: (1) dominant liberal hegemonic power or liberal powers able/willing to manage and enforce the rules of a liberal commercial order, (2) set of common economic, political, and security interests binding liberal states together, and (3) shared ideological commitment to liberal values

Since end of WWII, American hegemony, anti-Soviet alliance, and Keynesian, welfare-state ideology cemented together economic relations among three centers of industrial power outside USSR – US, Japan, and Western Europe

So, crisis of world economy was at least partly a consequence of the erosion of these foundations: relative decline of US hegemony, increasing strains with anti-Soviet alliance, and waning of commitment to liberal ideology

o Keohane (1984) “After hegemony” Deterministic view of hegemony is incorrect; hegemony can facilitate a certain

type of cooperation, but it is neither a necessary nor sufficient condition for the emergence of cooperative relationships

After international regimes have been established, cooperation does not necessarily require the existence of a hegemonic leader

Theories of hegemony should seek not only to analyze dominant powers’ decisions to engage in rule-making and rule-enforcing, but also to explore why secondary states defer to the leadership of the hegemon (legitimacy? cooperation within hegemony?)

Many relationships in US-hegemonic international policy economy post-WWII actually approximated the ideal type of “complex interdependence” (Keohane and Nye (1977)), with multiple issues, channels of contact among societies, and inefficacy of military force for most policy objectives

So, military power was only a background condition, not a variable explaining US hegemony

Common interests in the leading capitalist states, bolstered by the effects of existing international regimes (mostly created during the time of American hegemony), are strong enough to make sustained cooperation possible, though not inevitable

Gramsci: “ideological hegemony” – hegemony is the unity between objective material force and ethico-political ideas (ideology incorporating compromise or consensus between dominant and subordinate groups) this explains why secondary states would defer to hegemonic leadership (they must feel they are benefitting; hegemon must be willing to sacrifice short-term benefits for long-term gains)

o Rosecrance (1986) Objective of government policy: territorial states seek power and trading states

seek wealth (“nations at all times and places have to decide to emphasize one method or the other”)

Liberalism implies that all states are like trading states, caring only about the absolute gains from trade and indifferent to the gains achieved by others

Realism implies that every state is like a territorial state, valuing relative gains (positional advantage) above all

World presently poised “between two fundamentally different modes of organizing international relations”

Territorial system, composed of states preoccupied with the accumulation of power, defined in terms of land mass: “the more territory, the more power”

Trading system, composed of states preoccupied instead with economic development, defined in terms of improvements in consumption standards and in the allocation of productive resources: “progress sustained by the medium of international trade”

Taking a long historical perspective, a triumph of the trading system in international relations today would be the best possible guarantee of sustained world peace in the future

Critique : improvement over approach emphasizing pursuit of wealth alone, but remote from real world because every state can legitimately have an interest in both power and wealth

o Gilpin (1987) Objective of government policy: simultaneous concern with wealth and power Central issue is the decline of American economic leadership of the postwar

order: “with the relative decline of American power and the rise of economic powers that have different conceptions of legitimacy, the future of the liberal world economy has become severely threatened”

In trading relations, this has meant the emergence of a “mixed” regime combining multilateralism with elements of economic nationalism and regionalism which “may or may not prove stable over the long run”

Following Gilpin (1983), again rephrases his views on hegemonic stability theory (previously attributed past periods of trade liberalism exclusively to presence of hegemonic leadership – Pax Britannica/Pax Americana)

“The mere existence of a hegemonic power is not sufficient to ensure the development of a liberal international economy”

o Possibility of alternative organizing principles to preserve an open trading regime such as “an-agreed-upon set of rules binding all”

o Conybeare (1987) Objective of government policy: income maximization

Power is purely instrumental and not a goal in itself Nature of strategic setting at international level is the ultimate

determinant of policy choices at national level (uses game theory) Need for an integrated analytic framework that would help explain “why trade

conflicts (including trade wars) occur, how they escalate, and the types of bargaining behavior that one may expect to observe during them”

An actor’s relative size plays a central role in determining these bargaining strategies and outcomes

Optimum tariff argument – income maximization at the national level; suggests country with monopolistic or monopsonistic (market condition that exists when there is only one buyer) power in international markets can shift the terms of trade to its advantage and thereby capture a greater share of the total gains from trade

Hegemony is not sufficient for stability since “the purely economic interest of hegemons is better served by restricting, rather than maintaining, the freedom of international economic transactions”

o Large countries would selfishly and single-mindedly prefer trade restriction, even at the risk of destructive trade wars

Institutions like GATT can play a positive role in limiting conflict or preventing trade wars

o Lake (1988) Objective of government policy: simultaneous concern with wealth and power Accepts basic logic of HST, but questions whether hegemony is really a

necessary condition for stability There is no grounding in collective goods theory, so no a priori reason to

conclude that international cooperation under a non-hegemonic system is impossible

“Theory of trade strategy” – protection and free trade are both conceived as “legitimate and effective instruments of national policy”

National trade interests and political choices ultimately are shaped and influenced by the constraints and opportunities of the international economic structure: “protection and free trade are not simply the result of domestic political pressures but the considered response of self-seeking nation-states to varying international structures

Large states “possess incentives voluntarily to provide the infrastructure necessary for a liberal international economy”

o Critiques (of game theoretic focus generally, like Conybeare (1987) and Lake (1988) ) : (1) why must internal political and cognitive factors necessarily be relegated to secondary importance in explaining state behavior? (2) system-level model does not differ from models of strategic trade policy developed by economists if focus is on rational unitary actors with goal of income maximization, and (3) game not generalizable due to likelihood of multiple equilibria in game models set in iterated format (there could be

significant changes in key variable over time like number of players, so poor tool for predictive purposes); problem with specifying player motivations – how are the configurations of payoffs determined in the first place?

o Milner (1988) Domestic level of analysis Role of corporate trade preferences are influenced by changing degrees of

international economic integration over time Questions HST – empirical observations appear to contradict the presumed

correlation between hegemonic decline and rising protectionism Compares preference formation and policymaking among a number of

different industries in the US during the 1920s and 1970s and France during the 1970s

“The consequences of interdependence are internal to states: they affect domestic social actors’ policy preferences, not states’ policy instruments”

The persistence of interdependence (a legacy of US hegemony) may promote the maintenance of an open trading system, even after hegemony has passed

o Young (1986) Studies of international regimes must start with the proposition that

international regimes are social institutions and thus tie the analysis of regimes directly to the study of institutions more generally

Social institutions are recognized practices consisting of easily identifiable roles, coupled with collections of rules or conventions governing relations among the occupants of these roles

Such practices often possess a remarkably coercive quality Organizations are physical entities possessing offices, personnel, equipment,

budgets So, IMF and World Bank are organizations, but Bretton Woods is an

international institution/regime There is no simple relationship between institutions or regimes and

organizations Consensus exists about the reasons why the actors in the international

community allow themselves to be drawn into regimes or social institutions They experience powerful incentives to accept the behavioral

constraints associated with institutional arrangements in order to maximize their own long-term gains regardless of their attitudes toward the common goal

Krasner – the development of regimes constitutes a response to a “political market failure” on the part of actors who assess their options in terms of a kind of rule utilitarianism and who employ reasonably low discount rates

o “Demand” exists for international regimes; actors deliberately enter into institutional arrangements through some sort of bargaining process so long as marginal benefits outweigh costs

There is much confusion about the actual processes through which regimes come into existence (imposition, negotiation, or spontaneity?):

Coercion: HST

Bargaining: process of bargaining or negotiation in which the members of a group perceive a zone of agreement, or contract zone, and gradually come to terms on a set of mutually satisfactory institutional arrangements

o This is confusing because nothing in theories of bargaining or negotiation suggests that a dominant party is needed to produce an agreement – usual assumption is rational actors will find a way to realize feasible joint gains, not that coercion is key

Spontaneous: spontaneous processes of “self-generating institutional arrangements arising in the absence of either conventional bargaining or coercive pressure”

HST is dead. Strange: US continues to be an enormously powerful actor in the

international system Central issue addressed in efforts to devise workable social contracts

regarding institutions is the search for mutually acceptable constraints on the actions of those who are, in at least some rough sense, equals

Ideology of capitalism extolls virtues of a world of numerous equals over world of a dominant power

Need to go “beyond hegemony,” not “after hegemony,” because institutions change in response to a number of political, economic, technological, sociocultural, and even moral developments

- So what’s needed? Need to rethink institutions and regime theory – go “beyond hegemony” - First step connecting previous section: need to go beyond the basic premises of HST and

understand that regimes also produce demands (not just a supply-side problem)o Keohane and Nye (1977)

“Complex interdependence” [see approaches outline]o Keohane (1982)

Why establish institutionalized patterns of cooperation? Focuses on the strength and extent of international regimes, not their content or effects

Regimes: sets of implicit or explicit principles, norms, rules, and decision-making procedures around which actors’ expectations converge in issue areas in IR

Regimes are not quasi-governments – they are more like contracts where actors with long-term objectives seek to structure their relationships in stable and mutually beneficial ways (lack of binding authority; exit is ever-present option; pervasive uncertainty)

HST focuses only on the supply of international regimes – the more concentrated power is in an international system, the greater the supply of international regimes at any level of demand (public goods)

Public goods are crucial, but we must also consider that public goods give rise to demand (rational choice perspective, “constraint-choice” analysis, systemic level, seeks to account for modal behavior)

We expect states to join regimes in which they expect the benefits of membership to outweigh the costs and when regimes will be efficient

Regimes facilitate making specific agreements on matters of substantive significance within the issue-area covered by the regime; help to make governments’ expectations consistent with one another; actors believe

they help make mutually beneficial agreements that would otherwise be difficult to attain

“market failure” – economic activities uncoordinated by hierarchical authority lead to inefficient results

o Transaction costs, including information costs, create barriers to effective cooperation

o Regimes established through voluntary agreement are, at least in part, devices to overcome the barriers to more efficient coordination

Demand for international regimes varies directly with the desirability of agreements to states and the ability of international regimes to actually facilitate the making of such agreements (thus, need sufficient common interests to exist so agreements benefiting all essential regime members can be made)

Regimes will be formed if at least one of these applies (from Coase): Lack of a clear legal framework establishing liability for actions Information imperfections (information is costly)

o Asymmetric informationo Moral hazard (example: property insurance may make people

less careful with their property and thus increase risk of loss)o Deception and irresponsibility

So, regimes can reduce uncertainty and risk by linking discrete issues and improving information available

Positive transactions costs (like costs of organizations, making side-payments)

o “Issue density” – number and importance of issues arising within a given policy space

If low ad hoc agreements likely to be adequate If high more highly interdependent issues and

agreements; “complex linkages” organizational costs increase demand for frameworks/regimes rises

Regimes thus facilitate side-payments and spillover (or lead to generalized commitments/norms of reciprocity)

Increasing returns international regimes So, development of international regimes depends not merely on interests and

power or the negotiating skills of diplomats, but also on expectations and information

o Ruggie (1982) Alternative to HST is “embedded liberalism” – power is necessary to establish

regimes, but the content of the regimes is also determined by social purpose/norms – this fusion “plays a mediating role, by providing a permissive environment for the emergence of specific international economic transactions”

Pre-WWI to post-1971: power of hegemon has eroded and instruments of rules and procedures changed, but the norms and principles need not

Norms changed depending on the goals of states (like to uphold the gold standard) – there were inter-subjectively shared meanings and

understandings on how to achieve commonly held ends, though these can and do change

o Example: a lack of liberalization of agricultural trade barriers reflects the compromise between power and norms, despite the existence of GATT

Post-WWII – compromise characterized by multilateralism, predicted upon domestic interventionism

o Industrial world shared set of social objectives – namely preserving domestic stability – and this combined with US power accounts for the formation of embedded liberal institutions

These institutions were made at the expense of the third or non-industrial world

Post-1971 – US declined, but normative framework of embedded liberalism remained

o Examples: shift from fixed to floating rates of exchange; lower tariffs combined with domestic safeguards and negotiated export restraints

So, if social purposes held constant, more continuity can attend hegemonic decline that would be predicted by HST

- What are international regimes?o Haggard and Simons (1987)

Scholars assume that patterns of state action are influenced by norms, but that such norm-governed behavior was wholly consistent with the pursuit of national interests (reconciles idealist and realist traditions)

Definitions of “regimes” Puchala and Hopkins: patterned behavior (too broad) Krasner (1977): implicit or explicit principles, norms, rules and decision-

making procedures around which actors’ expectations converge in a given area of IR (what’s a norm?)

Ruggie (1982): “embedded liberalism” – broader ideological framework which will endure as long as there is some accommodation of economic efficiency to social stability (bias in favor of continuity/order)

Aggarwal (1985): multilateral agreements among states which aim to regulate national actions within an issue-area; regimes thus define the range of permissible state action by outlining explicit injunctions

Regimes are examples of cooperative behavior, and facilitate cooperation, but cooperation can take place in the absence of established regimes

Regimes are not institutions – they can aid institutionalization by regularizing expectations, but international institutions like the balance of power are not bound to explicit rights and rules

Regimes do not mean the same as order or stability (though they may or may not facilitate them)

Theoretical approaches to regime change: Structural – state-centered, presuming unified rational actors; attempt

to show how international conditions define possibilities for cooperation

o Hegemonic stability – links regime creation and maintenance to a dominant power’s existence and the weakening of regimes to a waning hegemon

Problems: since structure alone is a poor predictor of regime characteristics and national policies, these theories continually revert in an ad hoc way to domestic political variables; structural explanations show correlations, but fail to describe process; ignore grand scheme of things – structure is the distribution of power within international capitalist system rather than within world political system as a whole

Game-theoretic – state-centered, presuming unified rational actors; incorporate exogenously determined preference orderings; actors primarily constrained by the structure of the interstate game

o Say little about whether regimes will actually arise, how they will be institutionalized, and the rules and norms which will comprise them

Functional – state-centered, presuming unified rational actors; introduce market imperfections, transactions, and information costs and uncertainty; explains behaviors or institutions in terms of their effects

o Keohane (1984) and Aggarwal (1985) – regimes reduce transaction costs and facilitate decentralized rule-making

o Better at specifying when regimes will be demanded than suggesting how or when they will be supplied (not causal)

Cognitive – unlike the first three, have central insight of interdependency: foreign policy is integrally related to domestic structures and processes; regimes as conditioned by ideology and consensual knowledge and evolving as actors learn; cooperation affected by perception and misperception; important in explaining the substantive content of regime rules and why they evolve

All these theories of international regimes tend to ignore domestic political processes – this neglects the substantive issues over which states are likely to seek cooperation and the basic forces leading to regime change

How do regimes affect state behavior? Functionalist/game theoretic – regimes have altered the setting in which

states interact so that cooperation is more likely (example: iterated Prisoner’s Dilemma, by lengthening shadow of the future, increasing transparency of state action, and altering payoff structure, can increase incentives to cooperate)

Cognitive – regimes can alter actors’ interests or preferences (which game theoretic/functionalists generally hold constant)

Suggestion: building a theory of cooperation and regime change demands interdependency; growing interdependence means the erasure of the boundaries separating international and domestic politics; domestic political issues spill over into international politics and foreign policy has domestic roots and consequences

How? Maybe through two level games that recognize the reciprocal influence between domestic and international affairs and note that decision-makers strive to reconcile domestic and international imperatives simultaneously; there will always be domestic conflict about what the “national interest” requires (Putnam (1988))

o Milner (1992) Keohane (1984): Cooperation occurs “when actors adjust their behavior to the

actual or anticipated preferences of others, through a process of policy coordination”; policy coordination implies that the policies of each state have been adjusted to reduce their negative consequences for the other states

Disagreements are not about what constitutes cooperation; they are about what causes it

Imposed cooperation – stronger party can force other side to alter policies (hegemonic stability theory)

Negotiated cooperation – explicit bargaining process (Keohane, Oye, Grieco, Haas)

Tacit cooperation – occurs without communication or explicit agreement (Axelrod – iterated prisoners’ dilemma)

Hypotheses about what affects cooperation: gains (absolute, Axelrod’s tit-for-tat, versus relative, Grieco (1988)), number of actors, and iteration

International regimes: Regimes facilitate cooperation through the functions they perform for states; they mitigate the effects of international anarchy for states by aiding in the decentralized enforcement of agreements; they provide information, reduce transaction costs, and can cluster issues to facilitate side payments (linkages)

Grieco (1988) – GATT has informational functions that promote cooperation, like periodic reviews and safeguard clauses that let states seek redress to problems connected with the obligations of membership; there are also periodic reviews and renegotiation efforts, which make states more willing to join in the first place and, if problems do arise, to remain loyal to them; furthermore, the EC lowered transaction costs by reducing the number of actors involved

Haas (1989) – provision of information by other international organizations was key in the establishment of the Med Plan; members of the UN Environmental Program publicized the problem of marine pollution and persuaded Mediterranean governments about the importance of accepting the new goal of environmental protection (even with nominal economic sacrifices); the UN made side payments to states that would have to pay high costs in the Med Plan to get them to agree to start the regime

Critique of regime literature – Where is domestic politics? What about the problem of ratifying cooperative agreements domestically? Example: failure of European Defense Community

Payoffs are assumed and exogenous to the model, but how are they determined in the first place?

The problem with assessing relative national gains is that one has to add up the net benefits for different domestic groups to arrive at a national assessment; the aggregation of preferences domestically is a difficult

theoretical and practical issue, as we don’t know how to count costs and benefits to different groups; calculating national payoffs implies a theory of domestic politics

Hypotheses about cooperation supposedly depend on structural conditions in the international environment, but the strategies of states and the perceptions of decision makers affect these conditions

- How to cooperate? Regimes and issue linkageso Axelrod and Keohane (1985)

What affects prospects for cooperation: Mutuality of interests (payoff structure – example: Van

Evera (1984)) Shadow of the future (long time horizons, for example) Number of actors and their relationship (example:

reciprocity)o “Sanctioning problems” – many actors make

cooperative conditions more difficult to satisfy (example: terrorist bombings – how to identify defectors?)

Multi-level games make outcomes mutually contingent (issue-linkage)

One way to maintain cooperation: Construct international regimes to provide standards

against which actions can be measured and responsibility can be assigned

Interactions, though, take place in context of norms and institutions

Institutions can alter payoff structures, lengthen shadow of future, and enable N-person games to be broken down into games with fewer actors

International regimes can reinforce and institutionalize reciprocity and develop new norms

o Haas (1980) Need for collaboration arises from recognition that the costs of

national self-reliance are usually excessive Channels of international communication are more numerous,

decentralized, and diverse than ever; relative unimportance of force; pervasive disagreement on how issues on global agenda should be ordered (“complex interdependence”)

Complex interdependence suggests states are no longer certain how various goals should be ranked when the opportunity costs of adopting new goals at the expense of old ones must be evaluated explanations that rely on the structure of power assume a constancy of state interests; power still matters, but states are uncertain how much power should be applied to which of several competing interests

Regimes are norms, rules, and procedures agreed to in order to regulate an issue-area

How to link issues? “tactical linkage” – not connected by intellectual coherence,

but introduced to obtain additional bargaining leverage “fragmented linkage” – attempted to maintain the cohesion

of one’s coalition (commitment to some overriding social goal, but disagreements on knowledge necessary to attain it)

“substantive linkage” – proceeds on basis of cognitive developments based on consensual knowledge linked to agreed-upon social goal

o This leads to the construction of regimes (there are issues, but instead of being ends in themselves, they become means toward a more complicated end – instead of being effects, each issue is a cause leading to new effects, say wealth, prestige, status, or autonomy)

The emergence and effectiveness of these regimes, though, depends on the actors that negotiate them, whether eclectic, rational, skeptics, or pragmatists (for example, if negotiating conference characterized by eclecticism, issues linked tactically and regime unlikely to emerge)

o Oye (1979) Types of issue linkages Back-scratching: welfare-enhancing, meaning the backscratcher

offers to refrain from acting in own interest in return for compensation (a promise – for example, debtor country agrees to keep servicing debts if compensated with new loans/easier payment schedule – if offer rejected, debtor defaults, which it would have done anyway)

Blackmailing: a threat which may reduce welfare levels, is when one threatens to act against own interests unless compensated (debtor will be hurt by defaulting, but may threaten to do so anyway unless compensation offered)

- Regime effects in addition to lowering transactions costso Aggarwal (1993)

Factors other than HST have and will affect developments in the Asia-Pacific region

Framework: types of governance structures Meta-regimes – principles and norms underlying international

arrangements International regimes – rules and procedures; arrangements that

regulate the imposition of unilateral controls and negotiation of bilateral accords

o Regimes can be examined in terms of their strength (stringency of the multilateral rules that regulate national behavior), nature (degree of openness promoted by accord), and scope (number

of issues incorporated in the regime and number of actors involved)

National actions – only partially regulated by regimes; unilateral actions or ad hoc bilateral or multilateral accords

Interactions – primarily result from nongovernmental activities by private actors, including trade, investment, or short-term capital flows

Framework: theoretical elements accounting for governance structures and interactions (to analyze trading order)

Cognitive approach – supply of consensual knowledge and political demands by policymakers has a direct impact on development of meta-regime

Structural considerations – affect international regime and have both supply and demand side

o When making decisions on whether to “supply” regimes, actors will be particularly concerned with maintaining compatibility with existing security and economic systems (not just hegemony)

o From a demand perspective, regimes may be helpful in reducing transaction costs, but two additional things:

(1) decision makers may try to bring more specific arrangements into conformity with broader institutions (“institutional nesting”)

(2) actors may wish to control the behavior of others through rule-based systems rather than employment of power capabilities

Domestic politics – affect national controls; why do states decide to comply (or not) with regime injunctions? Depends on degree to which state decision makers insulated from interest group pressure and dominant ideology motivating them

Tastes, technology, and organization – affect interactionso Feedback loop – interactions may then drive changes in the

basic causal factors that influence both governance structures and interactions

“Proto-regimes” in Asia-Pacific that have made special efforts to maintain consistency with the GATT

Pacific Economic Cooperation Council (PECC) – formed 1980, unofficial academic, business, and government grouping

Asia Pacific Economic Cooperation (APEC) – created 1989, governmental body

o Meta-regime formation: PECC leadership in formation of principles and norms, APEC following; idea of “open regionalism,” which encourages regional liberalization in the context of GATT norms: “inclusive most-favored-nation,” where all non-member countries are considered eligible for this in APEC; unilateral liberalization is dominant strategy; norm of reciprocity; multilateralism (but not “principal supplier”)

GATT norms missing: safeguard and economic development

Concern for consistency with the GATT, or institutional nesting, has been dominant theme, but absence of a strong/stable commitment to the institutionalization of cooperation has contributed to the extreme weakness of the APEC “regime”

o Regime formation: APEC and PECC’s rules deal mainly with issues like accepting new members, voting rights

o National controls and interactions: APEC has not constrained national actions, but meta-regime does have some influence on state policies; example: Australian government argued that domestic trade policy must be consistent with APEC meta-regime of trade liberalization to justify its policy of tariff reductions

o Aggarwal (1998) Bargaining among states is generally stimulated by some type of impetus, which

comes from significant changes in the patterns of interaction as a result of changes in governance patterns or economic changes, which significantly alter the pre-existing bargaining context

Examples: 1971 Bretton Woods collapse, 1973 oil shock, Cold War end This often creates some type of externality or affects the provision of goods

Goods: public, common pool resources, inclusive club goods, private (depends on jointness, extent to which goods are affected by consumption, and the possibility of exclusion)

States respond to these changes in light of their individual situations Depends on actor’s international position, domestic coalitional stability,

elite beliefs and ideologies Actors decide on how to adapt or create institutions through a bargaining game

among states in either an institutional or non-institutional setting Institutional context: may provide focal point solutions for coordination

games, help states overcome collective action problems, have important distributive consequences, influence actors’ bargaining behavior, lead to changes in basic interests, facilitate cooperation

Three options:o Attempt to directly manipulate the types of goods involved in

negotiations (forming an alliance)o Alter either their own or their opponent’s individual situations

(attempt to change views of decision-makers in other countries)o Change the institutional context within which actors are

operating Then, decide if want to create a new institution or

modify existing one; choose characteristics of institution (scope); select bargaining route (multilateral, bilateral, unilateral); decide whether to engage in issue linkages

Type of linkage: nesting or by parallel connections in either issue areas or regional perspectives

Nature of linkage: tactical or substantive Nested institutions

o Issue area: relationship between international regime for textile and apparel trade with respect to the GATT; 1950s – European protectionist measures inconsistent with GATT and eroded American efforts to bolster open multilateral trading system; 1960s – JFK faced strong protectionist lobbying efforts from cotton, textile, and apparel industries (for tariff reductions); so, US promoted formation of sector-specific international regime under GATT auspices; deviated from some of GATT’s norms in permitting discriminatory treatment of developing countries, but did adopt and adapt most-favored-nation norm, treating all developing countries alike

o Regional: APEC’s “open regionalism” Parallel connections

o Issue area: institutional division of labor between IMF (fixed exchange rates) and GATT (liberalization of trade following ITO’s failure); Bretton Woods lending institutions (IMF and IBRD)

o Regional: European Economic Coal and Steel Community (strengthen cooperation in economic matters) and Western European Union (coordinated defense effort)

Dynamics of issue-linkage: Substantive link stable issue-area Failed substantive link (perceived as tactical) temporary solution to

externalities Tactical link unstable issue-area Failed tactical link (perceived as substantive) “contingent” (to

unstable issue-area with knowledge change)- Critiques of regime analysis

o Strange (1982) Passing fad – American power is not falling as much as scholars assume (not a

lot of military or economic power distribution changes in favor of other states) International organizations serve different purposes: strategic, adaptive, and

symbolic In early post-war period, served all three purposes at once, but

becoming more differentiated Imprecise definition of “regime” Term “regime” is value-loaded

In normal political use, applies to the government of a society; in a given regime, everyone knows and understands where power resides and whose interest is served by it and thus, whence to expect either preferment or punishment

o So, government, rulership, and authority are key – not consensus, justice, nor efficiency in administration

o The analogy with national governments implied by the use of the word regime, therefore, is inherently false! It suggests an exaggerated measure of predictability and order in the system and it takes for granted that what everyone wants is more and better regimes (greater order and managed interdependence)

“Regime” tends to exaggerate the static quality of arrangements for managing international system – examples:

“Bretton Woods regime” – the original Articles of Agreement were never fully implemented, there was a long “transition period” in which most of the proposed arrangements were put on ice, and hardly a year went by in the entire postwar period when some substantial change was not made in the way the rules were applied/the system functioned

o These decisions were all taken in response to national governments’ changing perceptions of national interest or in deference to volatile market forces that they didn’t control

Trade “regime” – different principles governed trade between market and centrally planned economies; preferential market access practiced by European countries and former colonies; for European countries, first in OEEC, then EFTA and EC

State-centered paradigm is too limiting Risks overvaluing positive and undervaluing negative aspects of

international cooperation – there are more issues of non-agreement and controversy than areas of agreement

o In fact, many “regimes” are simply agreements to disagree Example: IMF amendments to the Articles of Agreement

which legitimized the resort to managed floating exchange rates are no more than a recognition of states’ determination to decide for themselves what strategy to follow in light of market conditions

Ignores vast area of non-regimes that lie beyond international bureaucracies and diplomatic bargaining

Better agenda: pay attention to key bargains and how they have affected outcomes

o Kratochwil and Ruggie (1986) International regimes constrain and condition the behavior of states toward one

another, despite systemic change and institutional erosion; four parts = principles, norms, rules, and decision-making procedures – seen as relating instrumentally and the greater the coherence among them, the stronger the regime will be

Critiques : Imprecision in boundary conditions – where does one regime end and

another begin? The idea that expectations converge in international issue areas implies

a type of inter-subjectivity, but does actor behavior give inter-subjective meaning or vice versa?

What distinguishes international regimes from other international phenomena like strategic interaction is a specifically normative element, but norms don’t cause behavior (they can affect it, but don’t cause it) and no counterfactual occurrence can refute a norm (perceptions key)

It is not always possible to separate goals (say principles and norms) from means (rules and procedures) and to order them in a superordinate-subordinate relationship

o Abbott and Snidal (1998)

Offers critique: regime theory deals with institutions at such a general level that it has little to say about particular institutional arrangements organizing it; sees regimes as passive, but they have active and agential roles

Role of IOs best understood as a synthesis of rationalist and constructivist approaches

States use them both to reduce transactions costs and to create information, ideas, norms, and expectations

There are two functional characteristics that lead states, in appropriate circumstances, to prefer IOs:

Centralization – increases efficiency of collective activities and enhances organization’s ability to affect understandings and interests of states

o Formal organizations embody the precise terms of state interaction; can lead to disproportionate influence for powerful states, but may constitutionalize protection for weaker states

Example: EU Council/Security Council – most powerful members can block affirmative actions but, even if united, cannot approve actions without support from smaller states

o Perform organizational, consultative, and supportive functionso Act as vehicles for pooling activities, assets, or risks (promotes

burden sharing in providing a collective good and can reduce individual risk; NATO/common war plans)

o Enhance development and transmission of ideas, technical assistance (WHO and smallpox, for example) shapes interests

Independence – ability to act with a degree of autonomy within defined spheres; highly constrained by member states, but participation by even a partially autonomous, neutral actor can increase efficiency and affect the legitimacy of individual and collective actions

o Able to initiate in addition to support – able to call together member states to consider current problems; members of epistemic communities pushes negotiation forward

o “Laundering” – activities that might be unacceptable in their original state-to-state form become acceptable when run through an independent (or seemingly) IO (UN Peacekeeping Missions, IFIs – development assistance, will accept if independent; donor states – more flexible if goes through IFIs)

IOs have influence over substance of activitieso Neutrality – information providers and trustees

But problems: UN Peacekeeping in Bosniao Allocators and arbiters

IO as community representative (able to develop and express community norms and aspirations – example: Universal Declaration of Human Rights) and enforcer (managerial role, facilitate decentralized action, monitor, withhold IO benefits)

Example of combining rationalist and constructivist views: Gulf War – Security Council, Chapter VII invoked, but approved national

military action led by the US – why? (1) obtaining Security Council approval gave US unilateral action a more legitimate appearance of

collective action (so organization not sufficiently independent of US influence to convert the measures into community action), but also, (2) institutional underpinnings of Chapter VII were never put in place, so lacking these arrangements (like agreement on provision of national forces), council carried out its community responsibilities in the only practicable way: by shifting from direct to indirect enforcement, lending its institutional authority to legitimate action by willing nations (so it was still representing the community of states)

- Adding in international organizations to regime theory – impact of international organizations and regimes (dissipating power of hegemonic states – the impact of dependency theory on regimes), particularly for the third world

o Barnett and Finnemore (1999) Views IOs through constructivist lens Most theories explain IO creation as a response to problems of incomplete

information, transaction costs, and welfare improvement, but IOs often stray from these efficiency goals after they are created – many IOs exercise power autonomously in ways unintended and unanticipated by states at their creation

The rational-legal authority that IOs embody (Weber) and the control over technical expertise and information gives them power independent of the states that created them and channels that power in particular directions

Can be unresponsive to their environments, obsessed with own rules, have inefficient behavior, and be unaccountable

IOs not only facilitate cooperation, but create actors, specify responsibilities and authority among them, and define the work these actors should do, giving it meaning and normative value

o IOs as constitutive IOs should be treated as autonomous actors in world politics – they are

purposive actors (not mechanisms through which states act); they have power – create categories of actors/action, fix meanings in social world, articulate and diffuse new norms, principles, and actors around globe

Example: UNHCR – “expert” status and authority in refugee matters; classifies “refugee”; makes life and death decisions about refugees without consulting the refugees, and compromises the authority of states in various ways by setting up refugee camps

o Krasner (1981) Impact of the third world on international regimes:

By building or altering international institutions, rules, principles, and norms, weaker countries can both ameliorate the vulnerability imposed by their lack of national material-power capabilities and their weak domestic political structures and increase resource flows

While developing countries are weak, at the international level all states are afforded formal equality as sovereigns even though underlying power capabilities are highly differentiated (the hegemon, the US, gave autonomy to international organizations during the period of regime formation and third world countries have used this to their advantage)

Most proposals for regime change by third world have been made in international organizations

Regime restructuring is an attractive foreign policy strategy because it offers a level of control over states with much larger resources that could never be accomplished through normal statecraft grounded in dyadic interactions

International regimes can limit external vacillations or automatically provide resources to compensate for deleterious systemic changes

Third world has been able to turn regimes against creators Third world has exhibited extraordinary unity on questions associated with

regime transformation (Group of 77) – dependency theory essentially turned the South into a unified block on questions related to fundamental regime change

Example: developing countries have used GATT in the area of trade to legitimate concessional treatment; Tokyo Round – provides non-tariff barrier codes for special and differential treatment for developing countries; these changes go against the post-war trading order principles of non-discrimination and reciprocity

Bizarre example: claim “common heritage of mankind” for things like control over radio frequencies and outer space, even though the South does not have the technical capability to use them

o Gallarotti (1991) Traditional IO literature has been heavy on the positive side, but light on the

negative (failures of management) Typology of the systematic failures of IOs (inherent, not mistake-related):

IO can be destabilizingo When it attempts to manage complex, tightly coupled systems

(difficult to understand and thus manage successfully)o When solutions discourage nations from pursuing more

substantive or long-term resolutions or if it serves as a substitute for responsible domestic/foreign policy (reduces incentives of nations to come up with better alternatives)

o When it is source of moral hazard (reduces incentives of nations to eliminate the underlying problem – the behavior itself)

IO can intensify international disputeso When used as a weapon of confrontational statecrafto When it creates road-blocks to resolution of disputeso When source of destabilizing linkageso When it takes sides in international disputes

- Trade (overview)o Frieden (1991)

Ricardo-Viner trade model/specific-factors – economy is organized into sectors to which factors are specific, along with factors that can move freely from activity to activity; the result is that changes in the prices of goods have their principal effects on the specific factors, with ambiguous effects on the mobile factors

Price increases benefit specific factors in that sector, which implies that an increase in free trade increases returns to the factor specific to the export sector

o This assumes that only labor is mobile (not capital)

o Factor specificity is very high, since some factors are “stuck” – specific factors within an industry (sector) rise and fall together whether they are the same type of factor or not

o This is a short-run model Heckscher-Ohlin trade model – effects of goods movements on returns to

factors will vary according to whether the factors are locally scarce or abundant Increased capital mobility (like increased world trade) benefits capital

where it is abundant and hurts capital where it is scarce; capital flows out of capital-rich countries, raising the return to local capital, and flows toward capital-poor countries, lowering the return to local capital

Countries export products using their abundant (cheap) factors and import products that use their scarce factors

Stolper-Samuelson theorem (part of H-O model) – protection (decreased trade) benefits the locally scarce factor – protection is good for labor in a labor-poor country and is good for capital in a capital-poor country

Logic: with trade, demand for the product in which the country has a comparative advantage will rise, and this comparative advantage is a function of how well-endowed the country is with various factors; thus, a labor-rich country tends to export products that use labor intensively; the more the country trades, the more labor is used, and the more wages rise

This is just saying that owners of abundant factors favor free trade while owners of scarce factors favor protectionism

o The H-O model (and S-S theorem) assume capital and labor are mobile factors

o Factor specificity is low – all factors move costlessly among industries; the fortunes of owners of a particular factor rise and fall together regardless of which industry (sector) employs them

o This is a long-run modelo Alt, et al. (1996)

Trade-policy coalitions – from models above, factor specificity (ease with which factors can move among sectors of the economy) seen as key

More appropriate for IR: Increasing-returns-to-scale (IRS) model – the factor endowment models

do not account for intra-industry trade, two-way trade in similar products, between regions of similar factor endowments (north-north rather than north-south trade); this can be devoid of distributional consequences – there is possibility that everyone can gain from trade

Collective action problems and political institutions (domestic) interact with economic characteristics, mainly the degree of factor specificity, to affect trade policy coalitions

To get the two “ideal” types of trade policy coalitions associated with the H-O and R-V models, researchers must really make assumptions not only about factor specificity but also about collective action costs and policy-making institutions

Institutions – incentives to develop long term political organizations/alliances may be a function of the specificity of

socioeconomic agents’ assets; more specific assets better organization more incentives to lobby for protection

- Overview of approaches to tradeo Focus on explaining national policies that affect imports; central questions located at

national, rather than international or regime, level of analysis (Odell (1990) review)o Perspectives on trade policies:

Market conditions – free trade is best for the nation as a whole, but certain national industries are weak in the market; they organize politically to press for protection, and government provides protection for their products

Markets change over the long term through structural shifts in factor endowments (when any factor’s economic fortunes decline, it transfers efforts out of economic activity into lobbying/political activity)

Milner (1988): there were sizable differences in US trade policy outcome between the 1920s and the 1970s; a primary reason for these different policy outcomes was the growth of international economic interdependence after WWII; by the 1970s, the expansion of these international economic ties helped to dampen pressures for trade barriers as the preferences of industries turned against protectionism; by altering domestic actors' preferences, aspects of America's greater integration into the international economy worked against recourse to protectionism; while increased interdependence has subjected some areas of the economy to new foreign competition, it has also greatly augmented international economic ties for some firms in the form of exports, imports of critical inputs, multinational production, and global intra-firm trade; despite pressures for closure, the growth of these international ties is a major reason for the maintenance of a relatively open market in the 1970s

Leaders’ values and beliefs matter (cognitive approach) Goldstein (1988): state structure is used to explain policy; state

structures are historically determined and reflect the biases of decision-makers present at their creation; critical in decisions of protection is the evaluation by the state of the legitimacy of claims brought forth by social actors; what the law designates as a legitimate claim for aid has varied systematically over time depending on the belief in the efficacy of free trade, “fair” trade, and a welfare component; institutions reflect a set of dominant ideas translated through legal mechanisms into formal government organizations; if ideas become encased in institutions through legal procedures, they will continue to have policy impact over time

National political institutions – effects of institutional change on broad patterns of trade policy; focuses on structural constraints that confront governmental actors in policy-making

Destler (1986): change in tariff-setting institutions during the 1930s crisis was pivotal for the subsequent liberalizing trajectory and creation of GATT; Congress voluntarily delegated authority to the president in the 1934 Reciprocal Trade Agreements Act; before then, Congress had voted on the specific tariff for each industry, but afterward, the president had the authority to reduce tariffs if he could negotiate

reciprocal cuts abroad (gave congressmen protection – could make a lot of noise on behalf of constituents and blame president for tough decisions); during 1970s/1980s, system came under stress and eroded – opening of the economy permitted greater local stress due to import penetration, which generated intensified demands from well-known industries; at same time, democratization of Congress made management more difficult (strong committees became weaker and less able to keep protective bills off the floor)

Global political-economic structures – trade policy as a product of the international structure of which the state is a unit or as a response to specific interactions between states

- Protectionismo Aggarwal, et al. (1987)

Much protectionism in the 1970s/1980s has been negotiated, not unilaterally imposed

“Voluntary export restraints” (VERs) have become the means by which the US has sought to cartelize industrial sectors threatened by imports, like textiles and apparel, steel, footwear, television sets, and autos

In US, after a deal reached, what happens to negotiated protectionism? Trade barriers do not persist automatically, as is generally assumed

Three patterns of protectionism: Temporary – US negotiates agreements with one or several exporters,

but allows them to lapse after some initial periodo Examples: color TV and footwear

Institutionalized – protectionist agreements expand over time, becoming more complex and gradually encompassing larger numbers of exporting countries and more categories of products, persisting across administrations

o Examples: textiles and apparel since mid-1950s Sporadic – initial agreements lapse, but protectionism subsequently

renegotiatedo Example: steel industry

How to account for these patterns? Three key variables: size of the industry, height of economic barriers

restricting entry of foreign producers into an industry, and exit or adjustment strategies of domestic firms

Negotiated protectionism is NOT the same as tariffs or auctioned quotas Unilateral forms of protectionism attempt to shift the burden of

adjustment from an importer to an exporter, while VERs constitute cross-national cartel agreements that seek to allocate market shares between exporters and importers, thereby sharing the benefits and burdens of protectionism

VERs restrict exports from specific countries in specific product categories and are generally negotiated on a country-by-country basis

High barriers to entry should produce a relatively stable cartel; conversely, low barriers to entry should weaken the effectiveness of a VER because unrestrained foreign producers will immediately begin exporting to the US

If high barrier to entry, expect protection will be temporary in initial round; if firms can exit, protection will not be renewed; in industries with high barriers to exit: if they do not adjust, will lead to renewed protectionism

If low barrier to entry:o If protectionism fails to raise profits for a domestic industry,

then firms will increase the intensity of their demand for future trade barriers and the US government will generally be sympathetic towards supplying additional protection

o If trade barriers improve an industry's economic health, then firms in that industry will reduce the intensity of their lobbying efforts, and the government will be less receptive to those pleas

o Aggarwal (1985): “Institutionalized protectionism” case Textile and apparel industries followed a joint strategy in securing protection

from imports since the late 1950s Eisenhower administration opted for VER with just one country, Japan, in 1957

These two industries combined were the largest employers in the manufacturing sector in the US in mid-1950s

Labor intensive, low barriers to entry, capital requirements low, industry profitability low

Model predicts with low barriers to entry, non-Japanese manufacturers would seek to capture any scarcity rents that might be generated by the proposed cartel, making it difficult to protect the US market effectively

Yes, the 1957 VER failed to protect US producers – Asian exports bound for the US in cotton boomed rising imports low profits increased protection demands government supplied protection

Kennedy administration, 1961 – “short-term arrangement” “long-term arrangement” brought new players into the cartel

But new players continued to enter and exporters shifted tactics (unrestrained fabrics, like wool) to avoid the “long-term arrangement”

The US players had few exit or adjustment options (minorities, women, and semi-skilled workers little job mobility)

sympathy on part of US government; despite protectionism, still low returns on sales and equity 1974 Multifiber Arrangement (MFA), renewed on multiple occasions

Despite all of this, industry’s low barriers to entry have prevented a stable cartel from forming