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The Optimal Design of International Trade Institutions: Uncertainty and Escape

Published online by Cambridge University Press:  09 July 2003

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Abstract

International institutions that include an escape clause generate more durable and stable cooperative international regimes and are easier to achieve ex ante. The escape clause is endogenous in a model of repeated trade-barrier setting in the presence of symmetric, two-sided, political uncertainty. They permit, along the equilibrium path, countries to temporarily deviate from their obligations in periods of excessive, unexpected political pressure at some prenegotiated cost. The architects of international agreements optimally choose a cost so that escape clauses are neither too cheap to use (encouraging frequent recourse, effectively reducing the benefits of cooperation) nor too expensive (making their use rare and increasing the chance of systemic breakdown). The international institution's crucial role is to provide information, verifying that the self-enforcing penalty has been paid (voluntarily), rather than to coerce payment. Escape clauses also make agreements easier to reach initially. Their flexibility reassures states that the division of the long-term gains from the agreement is not immutable.

Type
The Rational Design of International Institutions
Copyright
Copyright © The IO Foundation 2001

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References

We thank the editors of the Rational Design project for their efforts: Barbara Koremenos, Charles Lipson, and Duncan Snidal. We are also grateful to two anonymous reviewers, and to James Morrow, Robert Pahre, Lisa Martin, Chris Canavan, and the editors of IO, David Lake and Peter Gourevitch, for many helpful comments and suggestions.

1. Hoekman and Kostecki 1995, 161.

2. See Hoekman and Leidy 1989; and Hansen and Prusa 1995.

3. Koremenos, Lipson, and Snidal, this volume.

4. For analytical tractability, we assume in the model that the shocks in each country are independent. Price shocks—for example, an unexpected, rise in the price of an input or the emergence of a third-country competitor—that affect the lobbying strength of firms at home may simultaneously affect the lobbying strength of firms abroad. Allowing for correlated shocks would not alter our central result; agreements with escape clauses allow countries the option to temporarily exit when political pressure is unexpectedly intense, and when this defection is tolerated by the trading partners in the interests of the system's stability.

5. Uncertainty here concerns the “future state of the world”: the configuration of political pressure in future periods is not known with certainty. Uncertainty regarding the preferences of key domestic players is another possibility, one we consider elsewhere in an investigation of the effect of elections on the design of international agreements (Milner and Rosendorff 1997). Alternatively, the agreement itself is too complex (or time is too valuable) for the domestic policymakers to fully understand the consequences of its passage, and policymakers therefore rely on the information provided by lobbies and other interested third parties. Milner and Rosendorff 1996.

6. Putnam 1988.

7. See Axelrod 1984; and Oye 1986.

8. Downs and Rocke 1995.

9. Very little retaliation for treaty violations is actually observed. Under current WTO rules, any punishment can only come after a finding by the dispute settlement procedure at the WTO, and frequently the dispute is “settled” before punishments are applied. The pre-Uruguay Round rules in fact made findings of allowable retaliation quite rare. Rosendorff 1999.

10. Milgrom, North, and Weingast 1990.

11. Fearon 1998, 282.

12. Baldwin 1987.

13. Grossman and Helpman 1994.

14. The reader may be tempted to draw a contrast with Milner 1988. There export interests organize in favor of lower domestic tariffs. That is an equilibrium outcome, however, not a statement about preferences. In that model, exporters simply prefer lower tariffs abroad, and adopt, for strategic reasons, political action domestically so that tariff concessions at home can be traded for concessions abroad. A similar dynamic is at work here: firms are willing to trade lower tariffs at home for lower tariffs abroad.

15. Trebilcock and Howse 1995.

16. Ibid., 172.

17. Ibid., 227.

18. Between 1975 and 1990, ninety-two cases under sec. 201 were initiated, of which thirteen industries received relief and seven more received trade adjustment assistance. High profile cases included color televisions in 1982, which received protection on $1,543 million of imports that year, and nonrubber footwear, $2,480 million in 1981. Hufbauer and Rosen 1986.

19. Cass et al. 1997, 24.

20. Between 1994 and 1999 alone, 77 antidumping petitions were filed in the United States. Stern 1997. Worldwide, the antidumping clause has been invoked over two thousand times since 1970.

21. Cass et al. 1997, 24.

22. Oatley, this volume.

23. Canavan and Rosendorff 1997.

24. Morrow, this volume.

25. Hansen and Prusa 1995, 299, tab. 1.

26. Hoekman and Kostecki 1995.

27. Schott 1994, 94.

28. Hoekman and Kostecki 1995, 168–69.

29. Similarly, Rosendorff establishes that voluntary export restraints are preferred by policymakers to antidumping duties because they generate higher electoral returns at lower costs when policymakers experience political pressures for protection. Rosendorff 1996.

30. Schott 1994, 94.

31. See Preeg 1995, 100–101; and Schott 1994, 94–97.

32. Hoekman and Kostecki 1995, 169.

33. Canavan and Rosendorff 1997.

34. Ruggie 1982.

35. Hoekman and Kostecki 1995, 191.

36. Sykes 1991, 259.

37. Dam 1970, 99.

38. Sykes 1991, 279.

39. Dunoff and Trachtman 1999, 24.

40. Ibid., 26.

41. Koremenos, Lipson, and Snidal, this volume.

42. Richards, this volume.

43. Koremenos 1998.

44. Sykes 1991, 280.

45. Rawls 1971.

46. Maggi 1999.

47. See Milner and Rosendorff 1996; and Milner 1997.