Nations keep agreements, keep their treaties so long as they continue to do them good.
In 1976 the United States and Mexico discussed the construction of a natural gas pipeline that had the potential to improve both countries’ welfare through gains from trade. However, Mexico expressed concerns that once the pipeline was built, the United States could violate the agreement's terms to extract political concessions from Mexico (Grayson 1981, 37–49). For example, the United States might threaten to curb imports or even seize the pipeline unless Mexico met its demands. The two states therefore failed to reach an agreement at the time.
Such political hold-up problems pervade relations between many states in the absence of international institutions. When states trust each other not to use trade for coercion, economic cooperation can occur. However, when they worry that their partner will use the cooperative arrangement to exercise coercive diplomacy, as Mexico feared the United States would, they avoid engaging in bilateral trade and investment.
These suspicions exist between two types of states in particular: those with dissimilar capabilities and those with dissimilar policy preferences. Consider the impact of asymmetric power on bilateral trade and investment. When one country possesses much stronger capabilities than another, it is typically much more difficult to coerce than the weaker state because it relies on cooperation with the weaker state much less than the weaker state depends on cooperation with it. For example, if a weak state invests in trade relations with a strong state, it may incur a large cost from the investment but reap little reward, because the strong state can then use the cooperative arrangement to coerce the weak state to make concessions. By contrast, the weak state is generally unable to hold up the strong state, because the strong state places a lower value on the bilateral arrangement. Because weak states anticipate powerful states’ attempts to use agreements for coercive diplomacy, they frequently fail to undertake investments whose profitability requires cooperation with their stronger partners.
Now consider the effect of dissimilar policy preferences on the prevalence of hold-up problems. Asymmetric foreign policy interests indicate that states are more likely to espouse views and prefer actions contrary to their partners’ wishes.
To gain insight into the relationship between political hold-up problems and coercive diplomacy, I develop a formal, game-theoretic model. Although I cannot provide a fully specified account of coercive diplomacy because of the complexity of such an endeavor, this basic model strives to elucidate states’ key considerations when they attempt to coerce their partners. In so doing, I generate testable empirical hypotheses, providing the foundation for the empirical analysis conducted in the remainder of the book.
The model features two states, a Coercer and a Target. At the beginning of the game, the Target must decide whether to make an irreversible investment that would allow it to produce a good to export to the Coercer. Next, with some probability, a shock occurs that increases the Coercer's desire to influence the Target's behavior. In the advent of a shock, the Coercer may offer threats and assurances to the Target using some combination of tariff and foreign aid policies in exchange for foreign policy concessions. However, if the states are WTO members, the Coercer cannot alter its tariff policy for these coercive purposes. After it receives the offer, the Target chooses whether to accept it, and the game ends.
This simple model predicts that the Target will not invest when it expects the Coercer to use its tariff opportunistically. This risk is greater when the Coercer wields more power than the Target and when the probability of a shock is high, which occurs when the states have dissimilar policy preferences. However, the states can use WTO membership to circumvent these political hold-up problems because the WTO requires the Coercer to commit to not manipulating its tariff policies to extract concessions. The Coercer can, for example, increase its use of foreign aid instead, although this results in diminished leverage over the Target.
Tactics mean doing what you can with what you have.
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.
The theoretical account provided in this study posits that political hold-up problems represent a central feature of interstate relations. Although international institutions can help to solve them, spurring investment, they displace coercive behavior into other policy areas. The statistical evidence shown in the previous chapters comports with the hypotheses developed in the formal model. Nonetheless, questions may remain regarding the underlying mechanism at work. In this chapter, I thus turn to a qualitative assessment of the process driving states’ observed behavior and test an additional observable implication of the model.
In particular, in addition to the argument presented thus far, the theoretical account developed in Chapter 2 also clarifies the impact of international institutions on their members’ abilities to exercise coercive diplomacy. This question is particularly important as states hold memberships in numerous international institutions, and yet they still seek to exert influence over other members. However, the theoretical framework showed that these institutions reduce their members’ capacities for coercion. The model specifically predicted that whereas non-WTO members may rely on both trade and other tools to influence their partners, WTO members face higher costs from using trade for coercion against other WTO members. Because members rely less on a key source of leverage, these members should forfeit some coercive power.
This chapter integrates this additional insight with the findings from previous chapters to demonstrate how the model's many predictions all work together to explain the interplay between international institutions and coercive diplomacy. I focus in particular on coercion in the domain of human rights, showing that WTO membership diminishes states’ capacities to influence their partners’ human rights records. However, my purpose is not to develop a full theory of human rights treatment; rather, the limited objective is to demonstrate that accepting trade constraints limits leverage over human rights, with potential negative implications for human rights outcomes. Analyzing the causal relationship between WTO membership and human rights outcomes more generally is beyond the scope of my analysis.
The use of intimidation of one kind or another in order to get others to comply with one's wishes is an everyday occurrence in human affairs.
The argument developed in this study starts from the premise that political hold-up problems represent a central feature of international relations. The theoretical model presented in Chapter 2 developed predictions regarding the conditions under which these hold-up problems pervade interstate interactions, generating testable implications to help account for variation in outcomes across WTO members. The statistical results of the previous chapters, both the baseline results and the tests of the mechanism at work, comport with these hypotheses. Yet doubts may remain about whether the particular mechanisms that my theory identifies drive the findings. It is therefore important to take a closer look at the case-study evidence to try to tease out the causal processes. Moreover, a case study analysis can help to support and enhance the theoretical approach taken in Chapter 2.
Because the theory suggests that the WTO's impact depends on the degree of similarity between pairs of states, in terms of both capabilities and political interests, it is logical to select states based on variation in these key independent variables. In particular, I consider three countries at a time: a state, which I refer to as a “primary” state for clarity, and two of its trading partners. Because I am interested in the impact of joint WTO membership, I require both trading partners to be WTO members at the time of the primary state's WTO accession. Out of this pool I then select one partner state that possesses capabilities and political interests that are highly dissimilar to those of the primary state, along with a second partner that is very similar to the primary state along these dimensions. I also ensure that primary states and their partners represent diverse regions and that primary states’ WTO accession dates differ.
The case studies analyzed in this chapter thus pull together the prior chapters' discussion and findings to illustrate how these dynamics manifest themselves in specific examples. In each case I show that political hold-up problems were ubiquitous prior to the primary state's WTO accession, particularly with its dissimilar partner. These problems resulted in underinvestment and low bilateral trade, which WTO membership then remedied.
In 1876, the United States signed a trade agreement with the Kingdom of Hawaii which eliminated high U.S. sugar tariffs. Hawaii responded by ramping up sugar production for export to the United States, so much so that these exports increased fivefold from 21 million pounds in 1876 to 114 million pounds in 1883. Boosting sugar production required a large investment: sugar producers adopted new sugar-processing technologies, bought government and private land, undertook large-scale irrigation projects, and invested in fertilizers. The Hawaiian government signed the treaty expecting other markets for its sugar exports to open up soon thereafter. However, when the treaty expired in 1883, Hawaii had no viable alternative export market. Thus, during negotiations over the treaty's renewal, the United States demanded exclusive rights to Pearl Harbor; otherwise, the United States threatened to reinstate the high sugar tariff. The Hawaiian government conceded.
Almost 140 years later, this type of pressure remains a widespread phenomenon. Consider several recent examples: the European Union (EU) threatened not to renew trade agreements with Mongolia, Sri Lanka, Vietnam, and Nepal unless they improved their human rights records; the United States warned that it would not renew trade agreements with China, Vietnam, Cambodia, Romania, and Russia until they made political concessions; and China refused to renew many of its trade agreements unless its partners supported its “one China” policy. Indeed, incentives to renege on agreements abound as the intermingling of political and economic arrangements offers many opportunities for states to coerce their partners into making foreign policy concessions.
These examples of coercive diplomacy – the use of threats and assurances in combination to influence another state's behavior – highlight the dangers of cooperating with other states in the international system: states may hold their partners hostage at a later date to extract concessions from them. Yet the possibility that states will be taken advantage of has an unfortunate consequence: states often refuse to cooperate in the first place, preferring to “go it alone” rather than be subjected to extortion. When states cannot promise to refrain from holding their partners hostage, cooperation failures abound, making states worse off than they would be if they could commit to not exercising coercive diplomacy over their partners.
Making this kind of commitment is difficult, however, because coercive diplomacy is such a useful tool.
Attempts to support national interests and achieve political objectives without waging war engross leaders worldwide. Yet despite its importance, coercive diplomacy has remained something of a mystery. When do states succeed in coercing their partners, and how do their targets defend themselves? What are the political and economic implications of these efforts?
This book considered these questions in detail, showing that the capacity to coerce other states can create political hold-up problems, as states reduce cooperation that would make them vulnerable to opportunistic behavior. Because coercive diplomacy represents an indispensable part of interstate interactions, hold-up problems are pervasive in international relations. However, states can use membership in international institutions to solve these problems because these bodies both allow members to credibly commit to not wielding certain tools to extort concessions from other members and protect members from having these instruments used against them. Yet, because institutions ban the use of some forms of leverage, members attempt to do so using alternative means, altering the sites of coercion in international relations and reducing the effectiveness of their efforts.
In support of the theory, I supplied evidence obtained using a multimethod approach. After developing this logic formally, I tested the implications of the model using statistical analyses, case studies, and other descriptive evidence. While none of my results on its own demonstrates irrefutable proof of the theory's claims, as a whole my findings present a compelling picture of the relationship between political hold-up problems and the practice of coercive diplomacy, particularly in the context of international institutions. In this concluding chapter, I explore the possibility that states are held up during the process of accession to international institutions, and explain what this might mean formy argument. I then close the chapter with a discussion of the theory's implications for both policy making and scholarship.
hold-up at accession
While membership in an international organization can solve political hold-up problems, states may also hold up their partners that try to join one. Often, once states comply with initial entry requirements, existing members demand additional concessions. However, because states fear that memberswill increase their demands once they invest in meeting the initial criteria, they hesitate to invest in the first place. Therefore, accession may not occur even when it could benefit both current and aspiring members.
Unless commitment is made, there are only promises and hopes.
I have shown that states attempt to extort concessions from weaker states with dissimilar interests in bilateral settings because have both the ability and the incentive to do so. As a result, these states invest and trade inefficiently to protect themselves from extortion. To allow trade to flourish, states need to credibly commit to respect their trade agreements. This chapter demonstrates that the WTO allows states to do just this, solving otherwise intractable political hold-up problems by increasing the costs of members reneging on their WTO regulated commitments. But although it is widely recognized that the WTO can increase cooperation (Keohane 1984), this chapter incorporates the insight that coercive diplomacy causes political hold-up problems to provide a more nuanced view of the institution's role. I demonstrate that WTO membership improves trade cooperation primarily between states that would otherwise suffer from these hold-up problems.
However, WTO membership represents a trade-off for some states: they must relinquish a powerful coercive tool to reap the economic benefits of cooperation. States often elect to do so to obtain these large economic rewards; for example, the United States's desire to tie its own hands has been cited as a motivation for the GATT's creation after World War II (Yarbrough and Yarbrough 1992, 61–65). Furthermore, when the WTO replaced the GATT in 1995, its improved enforcement capacity was in part due to U.S. efforts to prevent itself from violating the institution's laws. The United States had passed domestic legislation called Section 301 in 1974 that allowed it to unilaterally retaliate against any nation that it deemed to have violated a trade agreement.
It turned to Section 301 with increasing frequency during the 1980s, which reduced other states’ willingness to trade with it (Elliott and Bayard 2004; Goldstein and Gowa 2002). Because the United States exercised discretion over what constituted a violation, it could use the act to further its foreign policy preferences. By strengthening the GATT's enforcement capacity, the United States could encourage other states to trade and invest with it more, benefiting the United States economically.
The WTO's power to reduce its members’ abilities to use their trade policies for coercion is also evident in a variety of states’ WTO accession decisions, as many states enter the WTO to prevent their partners from wielding trade as a coercive tool against them.
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