To this point, I have shown that international institutions help states to solve political hold-up problems, which occur when one state fails to undertake an otherwise productive investment due to the increased ability it would give another state to extract political concessions. While ameliorating these issues facilitates cooperation within the domains of the institutions, member states also experience limitations in their abilities to exercise coercive diplomacy within these policy areas. Because states often offer (or retract) foreign policy concessions to influence other states, such as lowering trade protection, increasing foreign aid, or granting security concessions, the policy rigidity induced by these institutions constitutes lost political leverage over other members.

However, the model developed in Chapter 2 predicted that rather than abandoning their attempts to engage in coercive diplomacy, members of international institutions replace policies made more costly by institutional membership with more flexible policy options. In fact, cost represents a key factor shown to govern foreign policy substitution; leaders choose between economic, military, and diplomatic levers of influence as a function of the costs of the policies available to them. But while scholars have proposed numerous factors which shape the burdens imposed by certain policies, the role that international institutions play remains under theorized. This chapter demonstrates that by limiting members’ options in specific policy realms, institutions lead these states to coerce their partners using tools the institutions do not regulate. International institutions thus create ripple effects across policy arenas, bolstering cooperation in some areas, while politicizing others.

Specifically, I show that because the WTO constrains its members’ abilities to condition their trade policies upon their political relationships with their trading partners, members instead manipulate policies that remain unregulated by the WTO to pursue their political objectives. In what follows, I first detail the alternative instruments of coercion that WTO members rely on. Next, I illustrate WTO-induced policy substitution by providing specific examples from the EU's experience with coercive diplomacy. I then test these claims systematically, demonstrating that once states join the WTO, their trade flows become less correlated with political tensions, while other levers of influence become more responsive to these political issues.