Abstract
In his 1960 seminal contribution to game theory and its applications, The Strategy of Conflict, Thomas Schelling suggested that in international negotiations, strong international opposition may be an asset rather than a liability. Rather than constraining it, the opposition would enlarge the opportunity set thus making it easier to successfully conclude international negotiations. This property, which is also known as the Schelling-conjecture, shares some aspects with constitutional economics, namely the two-level approach suggesting that it might be beneficial for all parties to give up some power by tying one’s hands. In this paper we examine by means of a simulation study how far we can take this notion in the politics of trade integration. In explicitly marrying Schelling’s 1960 idea with the 1988 two-level approach by Putnam and embedding the result into the political economy of trade we find that the threat of a domestic opposition or national institution having a veto power frequently but not always delivers a more favorable outcome for the respective trade representative at the international table. Whether the Schelling-conjecture applies or not actually depends on the subtle interplay of a “bully effect” and a “serenity effect”.
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Notes
The KORUS FTA was finally concluded on December 3, 2010. See the website of the USTR for details: http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta (retrieved March 26, 2011).
See for instance, Humphreys (2007) for a survey, albeit from a political science perspective.
However, Iida also gives some hints as regards applications by drawing on protectionism as an example (p. 407). The underlying notion that the opposite party is interested in the other party lowering barriers to trade while keeping his own does not generally hold though which underscores the need for a detailed interdisciplinary analysis that also brings in the exact economic implications of trade policy. See Sects. 3 and 4 (and Fig. 1) of this paper.
This is characteristic of many contributions, e.g. Leventoğlu and Tarar (2005).
What’s missing though is the link to the economic literature on linkages and de-linkages in trade policy negotiations (as is the discussion of variable geometries with respect to the future of GATT/WTO-rounds) e.g. Conconi and Perroni (2002), Horstmann et al. (2005), Fung and Siu (2008). This is probably due to the fact that both perspectives, the political and the economic, emerged at about the same time.
Butler (2004), though, criticizes Nash bargaining on theoretical grounds, especially because it underrates compromise in negotiations. Achen (2006), carefully weighing the pros and cons of various modeling approaches shows that for practical matters, differences seem to be less relevant and less sophisticated models perform comparatively well as regards predictive power. See also Schneider et al. (2010) for a recent evaluation of various modeling approaches. Since our paper is geared towards two players with a clear economic reason for who moves first, we can leave this methodological dispute somewhat aside.
Due to the principal-agent reminiscence of two-level games, the mushrooming literature on strategic delegation as pioneered by Jones (1989) and Segendorff (1998) also seems to be of particular relevance in this context. Accordingly, appointing a delegate who acts on behalf of the principal may appear reasonable as it may twist outcomes in favor of the principal. Prima facie, this reasoning results in selecting a status quo biased delegate in order to strengthen one’s own bargaining position. Several contributions applying this approach to a variety of issues such as federal structures by Lorz and Willmann (2005) and the institution of fast-track authority of US-presidents by Conconi et al. (2008) seem to lend support to this notion. However, recent work by Harstad (2010) has shown that results of the theory are highly contingent on voting rules. And, on the empirical side, for instance with respect to the political economy of the US, the “status-quo bias” assumption conflicts with the widely acknowledged “presidential liberalism” thesis (see Wood and Lee 2009 for a recent discussion), and has therefore to be dismissed. In addition, much of this literature is on how actors of domestic institutions make strategic use of international delegation in order to change the political power structure at the domestic level (see recently Ginsburg 2009 on this account; Voigt and Salzberger (2002) provide a compilation as regards the reasons to delegate power) whereas our focus is the reverse, and its impact on the international level.
Garriga (2009) challenges those results at least when it comes to formalized bilateral trade treaties in presenting evidence that autocratic regimes tend to enter more of those treaties. Aidt and Gassebner (2010) in examining the nexus between political regime and trade flows also find evidence of autocracies trading less than democracies. However, rather than putting Schelling to a test, their focus is on trade flows with the difference in political regimes due to stronger possibilities and incentives for rent-extraction in autocracies, even when controlling for differences in trade policies. Souva et al. (2008), on a similar account, find a significant impact of market protecting rather than democratic political institutions.
Tarar (2001) also finds that there is a second-mover advantage, provided constraints in both countries are the same. However, there, the advantage is not based on the impact of trade policies as mediated by income and price effects. The majority of studies simply assumes who moves first (e.g. Mansfield et al. 2000). For a setup without trade policies being strategic complements due to different characteristics of the traded goods (see Dluhosch 2009) thus underscoring the need for closely tracking the impacts of trade. There is economic reason in that the order of moves is tied to what kind of goods are actually being traded (rather than for instance supposing that nature decides who moves first), and so is the reaction of any party to the proposal made by the opposite number. Yet, the literature usually assumes that reaction functions are downward sloping in policy space, and with Home’s TR preferring lower to higher barriers abroad while preferring higher barriers at home. While this notion might be in line with intuition, Sects. 3 and 4 and Figs. 1 and 2 will show that this does not necessarily hold in a full-fledged trade analysis tracking income and price effects.
For e.g., see Hug (2009) and Schneider (2005) for a treatment of the implications of multilateralism, however, from a predominantly political perspective. Hammond and Prins (2006) also shortly dwell on multilateralism. Chae and Yang (1994), who, as well, concentrate on the politics, try to split multilateral aspects into a number of two-dimensional issues.
Other than Bagwell and Staiger (forthcoming) who consider the terms-of-trade (TOT) motive and thus welfare-economics as crucial for trade policy and international negotiations with the latter a means to solve the TOT-related international prisoner’s dilemma, we thus reside more with the Krugman-side (1997) who considers national interest groups as the main reason for international trade negotiations. Recall also Vanberg (1992) who convincingly points out that the prisoner’s dilemma (PD) is not so much an actual PD at the international level than a perceived PD at the international level due to the interest groups’ stake in trade policy. On this account see also Lohmann and O’Halloran (1994). Ziegler (2009) provides an extensive treatment on avenues to overcome opposition to trade liberalization and to promote cooperation in an interest-group ridden world.
The median-voter assumption serves to facilitate the analysis. Notably, deviations in the aggregation of preferences via other voting rules do no affect the essence of our reasoning.
Incomplete information does not fundamentally alter the analysis but adds considerable complexity.
Without loss of generality, parameters α, β, κ, λ may be merged with the size of interest groups as measured by \(\overline{L}, \overline{n}\).
They are implicit in the opportunity costs of \(\left. U\right\vert_{S_{H}} - \left. U\right\vert_{S_{F}}\). Hence, there is no incentive to issue an empty threat. The latter requires that there is a chance that Foreign’s TR does not give in.
On the choice of the ratification instrument in case of international treaties and the strategic use of constraints see also Finke and König (2009) with special reference to public and parliamentary referenda. However, see also Conconi and Perroni (2009) who discuss situations in which weak domestic constraints strengthen self-enforcing institutions at the international level.
Even the bureaucracy in enjoying some discretionary power for a number of reasons may in effect constitute a veto point. See Hammond (2003) for a discussion on what might constitute a veto point. Yet, in order to provide for a credible signal veto points have to enjoy a certain amount of stability and reputation (see Tsebelis 2000).
The criterion as regards relative stakes may also be interpreted along the lines of recent findings on audience costs and the credibility of international threats by Tomz (2007), though they are not explicitly modeled here.
This “serenity effect” reminds us of the role of “patience” in a traditional Rubinstein (1982) bargaining game.
For the parameter range covered by the tables, conditions for feasible agreements always hold, i.e.
$$ U_{M}\left( S_{H}\right) \geq U_{M}\left( N_{2}\right) \wedge U_{M^{\ast }}\left( S_{F}\right)\geq U_{M^{\ast}}\left( N_{2}\right) $$.
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We would like to thank the editor (Alan Hamlin) and two anonymous referees for suggestions and helpful comments on the paper. Earlier versions have been presented at conferences of the Austrian Economic Association and the European Public Choice Society. Comments from participants of these conferences are much appreciated. Any remaining errors are ours.
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Dluhosch, B., Ziegler, N. The paradox of weakness in the politics of trade integration. Const Polit Econ 22, 325–354 (2011). https://doi.org/10.1007/s10602-011-9109-9
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DOI: https://doi.org/10.1007/s10602-011-9109-9