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, Marx
o Economic ideas
 Keynesian (1930s): Polanyi (1944), Ruggie (1982)
 Hayekian (1944)
- Hegemonic Stability Theory
o 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)
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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 normally
o 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 18701913, 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 interindustry trade (after WWII, this switched to intraindustry 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
o
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
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.
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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  nonzero 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 preWWI 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
o
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 financing
o Marshall Plan – supplied bulk of postwar financing
 Note: these institutions were not universal – excluding
most developing countries(colonies), Soviet Union, and
communist satellites
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
Hegemony
o 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

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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 ride
o 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
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.
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o
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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 theory
o 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 argument
o 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
o
o
o
o
would hegemon use its powers to provide only public
goods?)
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)
Interest in providing the public good follows from capability
(military focus)
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
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 antiSoviet 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

o
o
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)
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
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
o
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
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 selfseeking nation-states to varying international structures
 Large states “possess incentives voluntarily to provide the infrastructure
necessary for a liberal international economy”
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
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
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

o
“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 information
o 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 sidepayments)
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
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 decisionmaking 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

o
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))
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-fortat, 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 linkages
o 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 (issuelinkage)
 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 costs
o 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 metaregime
 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 interactions
o 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
o
o
o
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”
Regime formation: APEC and PECC’s rules deal mainly with
issues like accepting new members, voting rights
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 metaregime of trade liberalization to justify its policy of tariff
reductions
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
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
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,
o
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
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 functions
o 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 activities
o Neutrality – information providers and trustees
 But problems: UN Peacekeeping in Bosnia
o 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 destabilizing
o 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 disputes
o When used as a weapon of confrontational statecraft
o When it creates road-blocks to resolution of disputes
o When source of destabilizing linkages
o 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
o
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 model
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 trade
o 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 decisionmakers 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
Protectionism
o 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 period
o 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
renegotiated
o 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

o
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
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”  “longterm 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