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Gang GUO
Department of Political Science
University of Rochester
March 24th, 2000
Question 3: What roles do power, international institutions, domestic institutions, and domestic endowments play in international trade? What is the relative importance of each of these variables? Are there other variables that are equally or more important? Discuss with respect to the relevant theoretical literature and cite historical examples.
One of the most important independent variables in international trade, according to the theory of hegemonic stability, is the relative power of the countries in the world. Charles Kindleberger (1973) contends that free trade will be most likely when some single state, the hegemonic power, is sufficiently large relative to all others that it will capture a share of the benefit of the public good larger than the entire cost of providing it. Using the language of Mancur Olson (1965), he argues that, given the absence of "selective incentives", 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. Thus, the maintenance of free trade requires what he calls a "benevolent despot" to provide certain institutional public goods. As Kindleberger puts it, "for the world economy to be stabilized, there has to be a stabilizer, one stabilizer" (1973:305). Keohane also emphasizes that "the relative benign attention that the United States gave to the political economy of Western capitalism, rested on American industrial and financial dominance, as well as on American political and military power" (1984:178).
The hegemonic stability theory seems to be supported by the historic experience of the British hegemony in the last century and the American hegemony in this century ("the United States played this role during the first fifteen or twenty years after World War II; hegemonic cooperation was a reality" (Keohane 1984:244). Both hegemons brought about relatively free trade in the world. On a much smaller scale and in just one issue area, Alt, Calvert and Humes gives another historical episode which "represents an effort to maintain an oil producers' regime under Saudi hegemony" (1988:456). However, the relative decline of the American power from the late 1960's and the persistence of international trade regimes present a puzzle. International cooperation did not collapse during the 1970's as it had during the 1930's, when British hegemony declined (Krasner 1983:viii). In trade, the advanced states completed the Tokyo Round negotiations under the GATT (Lipson 1983:233-272). To solve this puzzle, more variables than just power had to be looked at, and that was when international institutions drew the attention of international relations scholars.
Keohane argues in After Hegemony that "the contemporary world political economy is endowed with a number of important international regimes, created under conditions of American hegemony but facilitating cooperation even after the erosion of U.S. dominance" (1984:246). International regimes perform the valuable functions of "reducing the cost of legitimate transactions, while increasing the costs of illegitimate ones, and of reducing uncertainty", and their "most important function is to facilitate negotiations leading to mutually beneficial agreements among governments" (1984:107). Therefore in international trade, given that mutual or complementary interests exist, regimes have a positive effect on international cooperation, whether with a hegemon or not. At the end of World War II, the United States was clearly the leading power in the world political economy, with respect to essential resources of hegemony: productivity in manufacturing and control over capital, markets, and raw materials. There was also a high degree of perceived complementary interests between the United States and its partners in Europe and later, Japan. In the area of international trade, the United States actively worked to reduce tariffs and took the lead in pressing for the removal of discriminatory restrictions, in particular its efforts to construct formal international regimes such as the General Agreement on Tariffs and Trade (GATT). Despite its inauspicious beginnings, GATT was remarkably successful during the 1950's, being transformed from a mere multilateral agreement providing for "joint action" by its Contracting Parties into the centerpiece of a new international trade regime. After the relative decline of American hegemony started in the 1960's, there has been continuity in trade regime principles and actually tariff levels were lower in 1983 than in the mid-1960's, as a result of two major tariff-cutting negotiations: the Kennedy Round, concluded in 1967, an the Multilateral Trade Negotiations, or "Tokyo Round", which was completed in Geneva in 1979 (Keohane 1984:187).
International institutions are important in international trade, yet even Keohane had to admit that domestic politics in the United States, especially pressures from the Congress, put a limit on the extent of cooperation in international trade. As Milner puts it, "international negotiations often fail because of domestic politics, and such negotiations are commonly initiated because of domestic politics. Domestic considerations affect all aspects of cooperation" (1997:234). Therefore, domestic institutions is another important explanatory variable in international trade. Ikenberry argues that domestic political institution as a conceptual variable is important in two respects. First, politicians and executive officials, embracing a distinctive set of policy objectives, may be of decisive importance in shaping outcomes. In this respect, state officials may be instrumental in interpreting the nature of international pressures or imperatives, and may be able to activate and reshape the play of societal groups, influence the character of their preferences, or ignore them altogether. Second, the organizational structure of the state exerts an influence over policy choice. It shapes the entire course of political battles and sometimes provides the resources and advantages necessary to win them. State structure are also important in setting the framework that facilitates or inhibits access to political resources and the policymaking apparatus, including the role and influence of gevernment officials themselves (1988:221).
Milner argues that domestic politics, even in its simplest form, made cooperation more difficult for countries and also affects the terms of any international agreement. She discussed three internal factors that condition a state's ability to cooperate: the structure of domestic preferences, the nature of domestic political institutions, and the distribution of information internally (1997:234). A country's domestic political institution determine the nature of power sharing domestically, which in turn shapes the likelihood and terms of international cooperation. In the area of international trade, the institutional process of ratification was an important part of the domestic contest over the international agreement. She argues that, for example, a key difference between the International Trade Organization (ITO), which failed to be approved, and the GATT, which was successful, was their ratification process. The GATT remained an executive agreement, unlike the ITO (1997:156). She also pointed out that another important feature of domestic political institution that affects the outcome in international cooperation is the distribution of legislative powers (1997:127).
On the role of domestic institutions in international trade, Frieden and Rogowski seemed less pessimistic than Milner ("domestic politics made cooperation less likely" (1997:234)) when they hypothesized that "on average, democratic regimes will liberalize more readily than nondemocratic ones; among equally democratic regimes, and among different elective bodies within the same country, the tendency to liberalize will increase as the number of distinct constituencies decrease; all else equal, the likelihood of liberalization will decline with increasing partisan fragmentation" (1996:43). They used the example of the Reciprocal Trade Agreements Act (RTAA) of 1934 to illustrate the effect of domestic institutions on international trade. According to Haggard, the RTAA set the fundamental institutional framework for trade politics, as with the transfer of tariff-making authority to the executive, the United States could make credible commitments and thus exploit its market power to liberalize international trade (1988:91). Using this example, Haggard showed that expanding the executive presence in the trade area created new expertise and institutional interests in liberalization while broadening the context for formulating trade policy. The new institutional structure also changed the relationship between business and government (1988:117).
In addition, domestic institutions may interact with international institutions to influence international trade ("as most scholars understand, domestic considerations are intertwined with international factors" (Milner 1997:233)). As Ikenberry put it, "paradoxically, when states become enmeshed in international commitments or negotiations, these external constraints may loosen domestic obstacles and impediments; for this reason, states may even seek these external commitments" (1988:240).
The above three factors in international trade are mainly from the perspective of political consideration. Yet another variable, the domestic endowment, starts from an economic point of view. In almost any society, according to the Stolper-Samuelson theorem, protection benefits (and liberalization of trade harms) owners of factors in which, relative to the rest of the world, that society is poorly endowed, as well as producers who use that scarce factor intensively. Conversely, protection harms (and liberalization benefits) those factors that - again, relative to the rest of the world - the given society holds abundantly, and the producers who use those locally abundant factors intensively (Rogowski, 1989:3). Therefore, in terms of political effects of changes in international trade, increasing (or decreasing) exposure to trade results in urban-rural conflict in advanced, land-poor economies and backward, land-rich economies. Expanding (or declining) trade leads to class cleavage in advanced, land-rich economies and backward, land-poor economies. In advanced economies where both land and labor are scarce and in backward economies where both land and labor are abundant, changes in international trade will result in Red-Green coalition (1989:15).
Because Rogowski's arguments are mainly about how changes in exposure to trade affects nations internal political cleavages (that is, the causal direction is similar to "the second image reversed" (Gourevitch 1978:882)), and he tells us nothing about the actual results of the domestic political struggles, it is hard to infer the role that domestic endowment plays as an explanatory variable in international trade from his theory. Also, by aggregating domestic endowment factors into three categories (land, labor, and capital), his theory overlooked many important differences, such as those between tradable and non-tradable sectors, import-sensitive and export-sensitive sectors, and competitive and non-competitive sectors, etc. (Gourevitch 1986:56, Milner, Resisting Protectionism, Verdier 1993:367). He himself admits that "this model of factor endowments inevitably oversimplifies reality and require amendment" (1989:6). In a later work, Frieden and Rogowski conjectures that "an exogenous easing of international trade will (holding all else equal) increase pressure within each country to liberalize international trade and payments, including dismantling structural impediments to trade" (1996:35). This seems to be an even more sweeping conclusion.
Another weakness of the domestic endowment model, in terms of the role in international trade, is that the effect of domestic political cleavages, whether it's urban-rural conflict, class cleavage, or Red-Green coalition, on international trade has to be realized through domestic institutions. This could be done, for example, by stimulating "countries to alter their political institutions in ways that favor more cooperative bahavior" (Milner 1997:252).
Besides power, international institutions, domestic institutions, and domestic endowments, it seems that ideas and beliefs are also an important explanatory variable in international trade. In examining American trade policy, Goldstein emphasized the theme that "each policy is identified with a set of legitimate ideas", namely, the liberal idea, the defense of fair trade, and the idea of trade adjustment (1988:186). His article "looks to a dominant role for ideas, as embedded in institutional design and laws, and the beliefs of central decision-makers as an additional explanation for policy". In international trade, "protectionism should be viewed in its historical context" (Goldstein 1988:214). Rogowski also explicitly stated that "it would be foolish to ignore the importance of ancient cultural and religious loyalties" in studying the exposure to international trade (1989:20). Ruggie argues in his article about multilateralism that the domestic characteristics, including normative principles and official beliefs, of the leading power in an international trade regime have profound effect on the international order that comes into existence (1993:30). For example, Nazi Germany's spiderweb of bilateral trade regime reflected its internal principle of conduct, and the GATT regime formed under the U.S. hegemony manifested the "permissive domestic environment" in America (1993:8-9). However, ideas and beliefs, as an explanatory variable in international trade, do not seem to be as important as the other factors, especially domestic institutions. In the first place, to have an impact on international trade, according to Goldstein, the sets of legitimating ideas and beliefs have to be embedded into organizational designs that translate these ideas into law, and with a unique set of political processes (1988:186). Haggard also pointed out that in the political debate on RTAA, "conflicting norms were institutionalized" (1988:117).
As to the relative importance of each of these variables, I have discussed about the importance of domestic institutions vis-?vis domestic endowment and ideas and beliefs. For international power structure and international institutions, it's probably more proper to regard their relative roles as complementary rather than dialectic. On the one hand, as Krasner pointed out, "changes in the relative power of states have led to changes in international regimes" (1993:234). On the other hand, Keohane himself didn't regard his emphasis on international institutions as a substitute for a power-oriented position, but is rather a supplement to these "traditional modes of political analysis" (Keohane 1990:22-23). According to Keohane, "I have no intention of seeking to replace a power theory with a functional one. In world politics, power is always important. Any functional explanation, which deals with the value of a given process or pattern of interaction, must be embedded in an understanding of political structure, especially the distribution of power among actors. When structure changes radically, the processes and institutions embedded in it will also be transformed" (1984:206). On the comparison of the relative importance of international institution and domestic institution in explaining international trade, since explanations based on international institutions are essentially a structural approach, and since a large part of the international trade outcome is the direct result of foreign economic policies of different states, it seems that domestic institutions approach is more powerful, although there certainly exists important interaction between international and domestic institutions, as shown in the edited volume of Internationalization and Domestic Politics (Keohane and Milner 1996).