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Alliances, preferential trading arrangements and sanctions.

Policy makers, scholars and executives have been devoting an increasing amount of attention to preferential trading arrangements (PTAs). The advent of the North American Free Trade Agreement, the ongoing process of economic integration in Europe, the demise of the Council for Mutual Economic Assistance and the possible formation of a Pacific bloc have led to lively and widespread debates concerning the causes and effects of preferential trading arrangements. Many of these debates center on the economic implications of commercial blocs, a topic on which a large and rich literature exists. But whereas it is also clear that international political factors guide the formation of PTAs and that these blocs are likely to influence the tenor of international politics, relatively little attention has been devoted to the political economy of PTAs.

This article addresses a number of topics that are central to the international political economy of PTAs. Although many scholars have focused on explaining patterns of international trade, neither economists nor political scientists have sufficiently appreciated the extent to which commerce has been organized along political-military lines. The tendency for alliances to guide trade was especially obvious during the Cold War, but there is ample reason to expect that this tendency was neither idiosyncratic nor coincidental. In this article, I shall analyze the political influences on the formation of commercial blocs, with particular emphasis on whether political incentives exist for states to engage in freer trade with allies than with adversaries and whether alliances influence when discriminatory commercial unions form and how states choose commercial partners.

In addition to the political influences on PTAs, I will also examine the implications of trade blocs for the conduct of economic statecraft. Economic sanctions continue to be especially important and widely used instruments of foreign policy, and during the last decade a number of seminal studies were conducted on this topic. Much of this research has centered on the conditions that facilitate the effectiveness of multilateral sanctions. Yet the proliferation of PTAs is likely to have important implications for both those states considering the use of sanctions and those at which sanctions are directed. Since little account has been taken of this issue, I present a preliminary overview of it in this article.

Before turning to the substantive issues addressed in this article, it is important to understand what is meant here by PTAs. PTAs refer to arrangements whereby signatories impose lower barriers to each others' imports than to the imports of third parties; they are a class of trade arrangements that include regional trading blocs, free-trade areas, customs unions and common markets.(2) Since my purpose here is to advance a set of general propositions that apply to most discriminatory trading agreements, I focus primarily on PTAs rather than on any of these more specific commercial unions.

It is also important to note at the outset that the analysis in this article is cast largely at the systemic (or international) level of analysis. My primary focus is therefore on the constraints imposed and the opportunities fostered by the global system rather than on domestic political and economic factors or psychological features of policy makers.(3) Although any comprehensive analysis of international trade should consider both systemic and domestic factors, a systemic focus is adopted in this article for a number of reasons. First, many of the issues taken up here center on systemic factors. Second, systemic theories emphasize the global context in which states act; and, as Robert Keohane argues, "Systemic theory is important because we must understand the context of action before we can understand the action itself."(4)

POLITICAL-MILITARY ALLIANCES AND TRADE

Central to the effects of alliances on trade are the security externalities to which commerce gives rise.(5) These externalities are products of the gains from trade. The efficiency gains that commerce fosters augment each participant's national income, which can, in turn, be used to bolster its military capacity. As such, commerce is likely to influence the distribution of power among trade partners. These considerations are important to states because the anarchic nature of the international system compels each state to attend to its own security.(6) States cannot neglect the implications of commercial relations for their potential political-military power.

The nature of these implications, however, depends on the character of the political relationships among the trading partners. Trade among political allies is not expected to undermine the security of the participants. In the aggregate, the efficiency gains fostered by free trade will increase the potential military strength of the alliance, and, because the contracting parties share common security goals, the distribution of the gains from trade among them is unlikely to degrade the security of any participant. Alliances therefore help to internalize the security externalities associated with commerce, thereby reducing trade barriers and increasing the flow of trade among members.

In contrast, trade among actual or potential adversaries generates a security diseconomy. States must consider the possibility that augmenting the political power of an adversary by engaging in commerce with it may undermine their own security.(7) But economic actors within states typically have little incentive to take these social costs of trade with an adversarial country into account. This divergence between the private and social costs of trade can, in principle, be remedied with recourse to a tariff or other commercial instruments.(8) As a result, unilateral free trade policies may not be optimal for states in an anarchic international system.

Tariffs and other trade barriers will ameliorate the security externalities produced by commerce only if they impact the real income of a trading partner. It is well-known that if a state has some influence over its terms of trade, the imposition of a tariff by this state will increase its real income while degrading the real income of its target. The resemblance between this argument and optimal tariff arguments for protection is unmistakable. But unlike traditional optimal tariff arguments, the argument presented here emphasizes the tendency for the Prisoners' Dilemma (P.D.) structure of state preferences with respect to trade to vary systematically between allies and actual and potential adversaries, and the tendency for allies to more easily solve the P.D. than adversaries.

The available empirical evidence supports this argument. A recent study of the relationship between alliances and bilateral trade flows among the major powers during the twentieth century concluded that higher levels of trade have been conducted between allies than between actual or potential adversaries.(9) The results of this study also indicated, however, that alliances have had a larger and stronger influence on bilateral trade during periods of bipolarity than during periods of multipolarity. This finding reflects the fact that major alliances in bipolar systems are less susceptible to exit by members than alliances in multipolar systems, since far fewer alliance alternatives exist for a state that withdraws from an alliance in the former than in the latter type of system, and that bipolar alliances tend to be more stable and long-lived than multipolar alliances.(10) These factors, in turn, enhance the ability for bipolar alliances to internalize the security externalities associated with free trade and lead allies in bipolar systems to view the benefits that arise from commercial openness within the alliance as more durable than in multipolar systems. It should also be pointed out that these results were quite robust with respect to the sample of states that was analyzed and whether or not other factors that might be expected to influence both alliances and trade (including the occurrence of wars or military disputes, the existence of PTAs involving the trading partners and whether the trading partners were democracies or not) were considered.

ALLIANCES AND THE FORMATION OF PTAs(11)

In addition to influencing trade, alliances are also likely to influence the timing of the formation of PTAs and the selection of PTA partners. Yet few economists or political scientists have explicitly addressed this topic. It is clear that, especially since the conclusion of the Second World War, PTA partners have tended to be political-military allies. While it is also clear that economic unions have formed in the absence of a preexisting alliance among members, the extent to which trade blocs historically have been comprised of political-military allies is striking.

The effects of alliances on trade may help to explain this tendency. PTAs serve to reduce trade barriers among the contracting parties. In so doing, they typically increase the flow of trade among these states, thereby generating security externalities. The increase in commerce that PTAs yield is likely to influence the distribution of power among members: A PTA comprised of adversaries therefore threatens to undermine the national security of at least

some of its members. Hence, commercial unions among adversaries are likely to be short-lived in those rare cases when they form.

A PTA comprised of allies poses fewer problems of this sort for its members. From the standpoint of states' national security, increases in trade are welfare-enhancing if the gains from this trade that accrue to a given party do not jeopardize the security of any other party. This condition is especially likely to be met if the participants are allied. The formation of a PTA that reduces or eliminates trade barriers among a group of states is therefore likely to be far less deleterious to their security when they are engaged in an alliance than when they are not.

Besides internalizing the security externalities fostered by PTAs, alliances also enhance the reliability and predictability of trade relations. These considerations are particularly important for the purposes of ensuring that those investments made in dedicated assets to service a specific foreign market are not jeopardized, and they further contribute to the tendency for PTAs to be comprised of allies. Since "transaction-specific" investment is particularly vulnerable with respect to the imposition of trade barriers and since, all other things being equal, trade barriers tend to be lower among allies than among adversaries, future access to the markets of PTA partners is likely to be more secure -- and fixed assets in which firms invest to service these markets are therefore likely to be more profitable -- when PTA partners are allied than when they are not.(12)

In addition to the tendency for PTAs to form among political-military allies, it is clear that the expansion of commercial unions has also occurred along these lines. The tendency for PTAs to expand among -- but not beyond -- allies may help to explain why, in contrast to a well-known proposition advanced by Murray Kemp and Henry Wan, PTAs do not "form and enlarge ... until the world is one big customs union, that is, until world free trade persists," despite the fact that under certain conditions economic incentives exist for this to occur.(13) The possibility that customs unions will form and enlarge in this manner hinges on their both setting common external tariffs and providing compensatory payments to members in order to ensure that no state would suffer economically because of their formation. But it is obvious that, to the extent that customs unions and other PTAs are embedded within alliances, policies designed to ensure the absence of harm to any state outside the economic union are antithetical to the political purpose of the union. Since alliances are formed primarily to bolster the security of the contracting states, it clearly makes little sense from a political standpoint to compensate, thereby augmenting the political power of, adversaries. Similarly, the expansion of a PTA, particularly one that becomes global, would involve increasing trade with both friends and foes, thereby threatening the security of at least some states that are parties to the commercial agreement.

The tendency for customs unions and other PTAs to be embedded in alliances may also help to explain why commercial blocs are often considered trade-diverting rather than trade-creating. Indeed, allies have substantial political incentives to divert trade away from adversaries. This line of argument seems consistent with those of Harry Johnson and of Charles Cooper and Benton Massell.(14) As Richard Pomfret describes their explanations of why customs unions are formed, "If the sole aim is to replace imports from outside the union by production within the union, then trade diversion is a benefit."(15) Similarly, in many cases alliances are designed to shift production from external to internal sources for security reasons. This, in turn, provides political benefits for those states that wish to minimize their economic dependence on an adversary and the likely political repercussions of such a relationship.

PREFERENTIAL TRADING ARRANGEMENTS AND ECONOMIC SANCTIONS

Having discussed the effects of alliances on trade flows and PTAs, it is useful to examine some of the effects that alliances and PTAs have on other aspects of international relations. Of central importance for present purposes are the effects of PTAs on economic sanctions. A great deal of extant research on economic sanctions has centered on the conditions that promote their effectiveness. Debates regarding this issue continue to be heated and widespread.(16) One influential position on this issue holds that the effectiveness of sanctions depends on their ability to impose economic costs on targets (i.e., the recipient of sanctions).(17) A second influential view holds that the effectiveness of sanctions depends only partially on their economic impact on targets. As David Baldwin, the chief exponent of this position, argues, "Economic sanctions may be effective not because of their economic impact, which may be nil, but rather because of the signal they send about the intentions of the state imposing the sanctions."(18)

In the following analysis, I focus largely on the first of these positions. This tack is taken because, as I argue below, PTAs influence the frequency and effectiveness of sanctions by affecting the ability of senders (i.e., states imposing sanctions) to impose economic damage on targets. Although my focus is not on the implications of PTAs for the use of sanctions as signals, this is not meant to deny the potential importance of preferential commercial agreements in this regard. PTAs may, for example, affect the ability of states to use sanctions as signaling mechanisms and as symbolic instruments by enhancing their credibility and by improving the clarity and magnitude of the signal, among other means.

The impact of PTAs on economic sanctions is hardly new: For example, it is widely recognized that PTAs played a significant role in the conduct of economic statecraft during the periods preceding both world wars and during the Cold War.(19) But few studies have examined in any detail the implications of PTAs for economic sanctions. Since PTAs seem to be growing in number and in terms of the variety of states involved, and since sanctions continue to be used widely, it is useful to examine this issue.

The Imposition and Coordination of Sanctions

Central to most sanction attempts is the issue of how to coordinate the behavior of multiple senders. Sanctions tend to be multilateral because individual states rarely possess sufficient market power in the item being sanctioned to exert substantial costs on the target. Sanctions impose the maximum amount of economic damage when the sender possesses monopoly or monopsony power in the item being sanctioned and the target's demand or supply is inelastic with respect to the item's price. Under these circumstances, a sender that is a monopolist can unilaterally increase the cost of the sanctioned item (if it is not completely embargoed) to the target. Or, if it chooses to embargo an item, this sender can unilaterally ensure that the target must forgo it. Rarely, however, are these conditions met by an individual state imposing a sanction. As a result, the vast majority of sanctions are multilateral.

It is virtually axiomatic that multilateral sanctions are fraught with collective action problems: Sanctioning states (and firms) face incentives to cheat on sanctions agreements. For example, since multilateral sanctions that restrict an item's supply serve to increase its price, individual senders face economic incentives to defect from these sanctions, thereby collecting the rents that they generate. This incentive is particularly acute for relatively inefficient producers of an item, which face very limited demand for it by states that can choose among various suppliers (i.e., states that are not the targets of sanctions).(20)

Closely related to this problem is the issue of how the costs of sanctions will be distributed among the senders. Countries that impose sanctions bear a variety of costs, including reductions in output and employment because trade is restricted, costs associated with directing trade away from its "natural" channels and the expense of administering sanctions (particularly that associated with organizing the behavior of other senders and monitoring and punishing violators).(21) Distributing these costs is likely to prove difficult, since the preferences of states concerning these distributional issues approximate a Prisoners' Dilemma. Yet the failure to resolve this issue can undermine sanctions unless a single state (or small group of states) is willing to bear unilaterally the costs of providing sanctions.

The Effects of PTAs on Senders of Sanctions

PTAs are likely to influence sanctions if either the sender or the target is a member of such a commercial union. One obvious implication of PTAs for the imposition of economic sanctions concerns their effects on the aggregate economic size and the number of both senders and targets. As noted above, sanctions generate the maximum amount of economic damage when senders possess monopoly or monopsony power with respect to the item being sanctioned. Yet it is also clear that only in the rarest of cases does a single state possess this degree of market power.

One way that PTAs are likely to influence the effectiveness of sanctions is by increasing the monopoly or monopsony power of the collective sender relative to that which would exist if only a single state imposed sanctions. As Beth Yarbrough and Robert Yarbrough argue, "The dynamic economic effects of preferential trade agreements include ... increased bargaining strength vis-a-vis nonmembers."(22)

Another way that PTAs may enhance the effectiveness of sanctions is by providing a preexisting institutional setting within which to negotiate the distribution of sanction-related costs among senders, the extent of the restrictions to be imposed and other related matters. The existence of this institutional framework permits states to link compliance among senders with other commercial issues that fall under the purview of the PTA (and relevant security issues in those cases where PTAs are embedded within alliances).(23) The failure by a given PTA member to cooperate on sanctions might, for example, lead the remaining states to erect trade barriers against the recalcitrant member that are lower than those faced by nonmembers but higher than those among the other members. In this way, PTAs can increase the costs of free-riding in sanctions efforts. They can also reduce the transaction costs associated with monitoring and enforcing sanctions.(24) Further, by linking sanctions to other economic issues pertaining to the PTA, commercial unions provide a forum within which to negotiate compensation for those senders that bear the brunt of the sanction-related costs.

Moreover, by providing a preexisting institutional setting within which to impose multilateral sanctions, PTAs can serve to improve the economic efficiency with which they are imposed. For example, side payments can be made that both are sufficient to placate those senders that bear disproportionate costs due to the sanctions and are less than would be necessary for this purpose in the absence of a PTA.(25) In the same vein, Thomas Bayard, Joseph Pelzman and Jorge Perez-Lopez argue that, for the purposes of allocating costs of export sanctions among senders most efficiently,

a reduction in exports should be shared among producers so as to

equalise incremental production costs across all producers; that is,

in order to maximize collective cartel profits or minimise collective

losses. In practice, this would mean that high-cost and relatively

inefficient producers would be allotted larger production and

export reductions than lower-cost producers. In principle, following

the efficiency rule will increase the resources available to compensate

the high-cost producers for their disproportionate losses.(26)

They go on to note, however, that this method of allocating production cutbacks is likely to sow substantial dissention on the part of relatively high-cost (i.e., inefficient) producers. In the absence of an institutional setting - including PTAs or alliances - in which to negotiate these cutbacks, sanctions are likely to be more difficult to coordinate.

The importance of enhancing efficiency among sanctioning states is not limited to economic considerations: Just as the gains from trade generate a security externality, the gains associated with imposing sanctions efficiently can be used to augment the potential political-military power of the senders. For the reasons discussed above, senders are likely to be particularly interested in maximizing these efficiency gains if they are signatories to a PTA that (as is often the case) is embedded in an alliance. PTAs also facilitate the imposition and effectiveness of multilateral sanctions because, as discussed below, they can foster interdependence among member states.(27) High levels of interdependence, in turn, raise the costs of noncompliance by members in sanctions efforts directed at nonmembers, since defectors are especially vulnerable to retaliation by other parties to the PTA. It has also been argued that commercial blocs are formed in part to mitigate the effects of interdependence. In this vein, Yarbrough and Yarbrough posit that "PTAs arise as a strategic organizational response when trade involves large relation-specific investments subject to opportunism, particularly opportunistic government policies."(28) Cooperation in external sanctions efforts may be induced by threatening to retaliate against defectors. Of course, the credibility of these threats depends on the costs that will be borne by the remaining members of the PTA. For example, credibility is enhanced if: (1) punishing the noncompliant state by stemming the flow of trade between it and other members of a PTA would jeopardize the value of dedicated assets in which it had invested specifically to service the PTA, and (2) the defector had little opportunity to inflict similar damage on the remaining members of the PTA.

The credibility of these threats is also bolstered in the event that the noncompliant state is a relatively inefficient producer and therefore depends disproportionately on the protected market offered by the PTA. Under these conditions, PTAs - particularly those embedded within alliances - foster interdependence by increasing the opportunity costs associated with severing commercial ties among members of the economic union.(29) This is especially true of those PTAs that divert trade from more efficient sources outside of the economic union to less efficient producers within it: Under these circumstances, less efficient members are acutely dependent on internal markets and protection from external competitors. Interdependence can be used to foster compliance with sanctions by those inefficient states that depend on PTA markets and that, in the absence of a PTA, would be particularly likely to defect from sanctions efforts, since sanctions increase the demand (on the part of the sanctioned states and others) for their relatively uncompetitive products.(30)

The Effects of PTAs on Targets of Sanctions

The potential effects of PTAs on sanctions are not limited to senders. As noted above, PTAs serve to increase the aggregate economic size of targets of sanctions, as well. From the standpoint of a target, this allows the costs of the sanctions to be more widely diffused, thereby reducing the costs that any single state will have to bear. Moreover, because many PTAs (such as customs unions and common markets) are characterized by common external tariffs and the absence of internal protection, it is extremely difficult, if not impossible, to target a single member.

Few incentives exist for states to ostracize a PTA partner that is targeted by a source external to the PTA, especially if the PTA is embedded in an alliance, since doing so will degrade its potential military strength. Even in the unlikely event that members of a PTA do agree to economically ostracize a member that is the target of a sanction by an outside actor, it would probably be very difficult for the outside actor to monitor compliance with this agreement by the PTA members, which face considerable economic incentives to engage in transshipment and other forms of "cheating." As a result, sanctions are likely to be directed against entire PTAs rather than against specific members, even if the sanctions are imposed primarily to punish a single state. This is especially likely to occur if the PTA is embedded within an alliance, since states have little interest in economically ostracizing allies, thereby undermining their security. One obvious example of this tendency involved CoCom's policy of sanctioning the export of strategic goods to all members of COMECON/the Warsaw Pact, even though the Soviet Union was clearly the primary target of these actions.

This tendency, however, engenders a number of serious problems for the sender. First, the costs that must be borne in order to sanction an entire bloc are likely to be substantial, even in the event that the sender is also a PTA (which, as noted above, increases the likelihood of exerting substantial economic damage on a target). Second, targets of sanctions have a greater incentive to retaliate if the damage imposed by the sanctions is limited, since the greater the damage the greater the likelihood that the target will be compelled to comply with the sender's demands.(31) By limiting the damage imposed on any single country, PTAs therefore increase the likelihood of retaliation. In this way, they may also precipitate trade wars and political conflict among PTAs: Indeed, many observers fear that the proliferation of PTAs will generate economic and political conflicts.(32)

Although direct evidence bearing on this topic is quite limited, trade sanctions would obviously stem the flow of commerce among PTAs, and there is ample evidence that political conflict and war become increasingly likely as trade flows are stemmed.(33) Senders must therefore consider whether the imposition of sanctions will heighten the prospects for military conflict with a target.(34) While this concern is hardly limited to multilateral sanctions imposed by PTAs, it is likely to be especially pressing if the PTAs in question are embedded within political-military alliances.

It is clear that the effects of PTAs on both senders and targets of sanctions will be most pronounced when discriminatory commercial blocs are most stable. As the stability of PTAs erodes, so too do the institutional features that bolster the effectiveness of sanctions sent by PTAs and the ability of targets to use PTAs to minimize the economic damage imposed by sanctions. Further, to the extent that PTAs are embedded in alliances and PTA erosion is due to an alliance breakdown, PTA members may view one another as increasingly attractive sanction targets, since the ability of an alliance to internalize the security externalities associated with trade is weakened as the alliance fragments. Since alliances and PTAs are likely to be more stable and durable in bipolar than in multipolar systems, there is reason to expect that the influence of PTAs on sanctions will vary based on the system's structure.(35)

CAPTURING INTERNATIONAL INSTITUTIONS

The final issue that is addressed here concerns the susceptibility of PTAs - as well as other international institutions - to being captured by states and interest groups. As I argued earlier, the preexisting institutional structure that PTAs provide may facilitate the imposition of sanctions and enhance their efficiency and effectiveness. Indeed, this is consistent with the prevailing view among scholars of international organization that institutions promote cooperation among members, thereby increasing social welfare.(36) However, international institutions - including PTAs - also have the potential to undermine the efficiency and effectiveness of sanctions (among other institutional outputs) if they become captured by, and hence come to reflect and serve the interests of, specific states or groups within states. That international institutions can be captured is suggested by what is referred to as the economic theory of regulation. This theory holds that instead of regulating industries in a manner consistent with the maximization of social welfare, domestic regulatory agencies and public officials are often captured by the industries they are charged with regulating.(37) In return for regulating an industry in a manner consistent with the interests of firms that comprise it (rather than the "public interest"), firms and agents of an industry provide financial and other inducements to public officials. Much of the contemporary literature on the domestic political economy of trade policy draws heavily on insights generated from the economic theory of regulation, (38) and one recent study has used this approach to explain domestic decisions to impose sanctions.(39)

The economic theory of regulation can also be applied to the study of international institutions, including PTAs, many of which are likely to be especially susceptible to capture. Bruno Frey, for example, argues that

the characteristics of bureaucracies [that render them susceptible

to capture! are more pronounced in the international than in the

national setting. The main reason is that international

bureaucracies have greater room for discretionary action because

neither the opportunity nor the incentive to control these

bureaucracies exist.(40)

It has also been argued that international bureaucracies tend to be especially large and bloated, and, because collective action problems limit the incentives for member states to oversee the behavior of these bureaucracies, they are often far more autonomous than is usually appreciated.(41) These features contribute to the vulnerability of international institutions to capture.

So too does the fact that international institutions are often able to obscure the costs to constituents associated with their policy decisions because they have a relatively easy time regulating the flow of information regarding their activities.(42) This, in turn, impedes the ability of those constituents who bear the costs of the institution's activities from accurately assessing these costs. Also, international institutions are able to distribute the costs associated with their actions more widely than, for example, national governments. This further hinders the ability of constituents to assess these costs and exacerbates the well-known tendency for small, well-organized groups to exploit large groups whose members are widely dispersed and face serious collective action problems.(43)

It is obvious that the degree to which international institutions are susceptible to capture will vary based on their internal structures, the power relations among the actors that comprise them and a host of other factors. But since at least some international institutions possess characteristics that render them especially prone to capture, it should come as no surprise that a variety of studies have concluded that they do in fact tend to supply favors to pressure groups more readily than do national governments.(44)

Capture, PTAs and Sanctions

The susceptibility of international institutions to capture has a number of implications for the previously discussed effects of PTAs on sanctions. First, if PTAs become captured and if the parties that capture a PTA stand to gain from the imposition of sanctions, sanctions may be relatively easy to coordinate and impose via the PTA. The economic and political gains that will accrue to certain members of the PTA are likely to induce them to press for the imposition of sanctions by the PTA, and, as noted above, international institutions may be able to obscure the magnitude of sanction-related costs and provide a wide cross-section of constituents across which to distribute these costs. To the extent that special interests capture a PTA that coordinates sanctions, however, these sanctions are likely to be less effective than in the absence of capture. Rather than being imposed so as to maximize the economic damage exerted on a target, sanctions are likely to reflect the interests of those actors (both state and non-state) that have captured the PTA.

Second, one recent study found that international institutions facilitate cooperation among senders of multilateral sanctions.(45) But if sanctions reflect the interests of private actors or specific states, the cooperation that PTAs and other institutions promote may be gained only at a large economic cost. Rather than enhancing the aggregate welfare of members, actors that have captured an institution have an incentive to use the institution as a vehicle to facilitate cooperation among states in order to further their myopic interests.

Third, the capture of international institutions and collusion among parties to them can impede both exit and voice.(46) In a landmark study, Albert Hirschman argued that voluntary withdrawal (i.e., exit) and the expression of dissatisfaction (i.e., voice) by members are the two principle means by which organizations can be resuscitated when their performance declines.(47) By hampering both of these means, capture reduces the capability of organizations in decline to recover. And because captured institutions are likely to be relatively inefficient, they are particularly prone to declines in performance. Although a complete treatment of this issue is beyond the scope of the present analysis, it seems likely that captured institutions will suffer in various ways, including a reduction in the ability to impose economically effective sanctions.

CONCLUSION

In this article, I have examined the effects of political-military alliances on international trade and the extent to which alliances influence the formation of PRAs. The tendency for alliances to shape trade relations is a consequence of the security externalities associated with commerce. These externalities arise due to the gains from trade, which enhance the efficiency with which domestic resources can be employed and can, in turn, be used to bolster a state's political-military power. Since alliances help to internalize these security externalities, incentives exist for states to trade more freely with allies than with adversaries. Further, given the effects of alliances on commerce, it is not surprising that PTAs have tended to form and expand among allies.

I have also analyzed the effects that PTAs exert on the imposition and effectiveness of economic sanctions. PTAs are useful venues through which to impose multilateral sanctions. They increase the market power of the sender, provide an institutional forum within which to negotiate the distribution of sanction-related costs, facilitate the linkage of other commercial issues to compliance with the sanctions (thereby ameliorating collective action problems) and increase the interdependence among member states (thereby increasing costs for each state of being punished for noncompliance in sanctions efforts). These factors enhance the prospects for imposing sanctions that exert the maximum amount of economic damage on a target. By the same token, targeting states in a PTA enhances their ability to withstand the economic costs engendered by the sanctions, thus reducing their effectiveness. Further, sanctions of this sort may increase the prospects for political conflict among senders and targets.

Finally, I have argued that international institutions - including PTAs - are susceptible to capture by member states and private actors in these states. To the extent that PTAs are captured, sanctions are likely to reflect special interests within it rather than the public interest, and this is likely to reduce their effectiveness and efficiency. Further, capture limits the ability of exit and voice to function in organizations, thereby hampering the ability of international institutions to redress declines in performance. This is likely to inhibit the long-run usefulness of institutions for the purposes of imposing effective sanctions and otherwise.

Among policy makers, scholars and executives, there is a widespread belief that the multilateral trading system and its attendant institutions are coming under severe strain. The arguments presented in this article suggest that these strains may be outgrowths of (among other factors) changes in international politics, especially the composition of political alliances. These arguments also imply that changes in patterns of international commerce will, in turn, serve to alter the international political landscape. In order to manage these changes effectively, a fuller understanding of the international political economy of trade is needed. (1.) I am grateful to Marc Busch, Eileen Crumm, Arvid Lukauskas and Sunita Parikh for comments on this article. (2.) See Richard Pomfret, Unequal Trade: The Economics of Discriminatory Trade Policies (Oxford: Basil Blackwell, 1988); and Kym Anderson and Richard Blackhurst, "Introduction and Summary," in Kym Anderson and Richard Blackhurst, eds., Regional Integration and the Global Trading System (London: Harvester Weatsheaf, 1993) pp. 4-5. (3.) For an analysis of regionalism cast at the domestic level ofanalysis, see Marc L. Busch and Helen V. Milner, "The Future of the International Trading System: International Firms, Regionalism, and Domestic Politics," in Richard Stubbs and Geoffrey Underhill, eds., Political Economy and the Changing Global Order (London: Macmillan, 1994) pp. 255-69. (4.) Robert O. Keohane, "Theory of World Politics: Structural Realism and Beyond," in Robert O. Keohane, ed., Neorealism and Its Critics (New York: Columbia University Press, 1986) p. 193. (5.) Security externalities refer to uncompensated benefits or costs that accrue to, and bear on the security of, one party due to the actions of another party. For a =fuller discussion of this and the other issues addressed in this section, see Joanne Gowa, Allies, Adversaries, and International Trade (Princeton, NJ: Princeton University Press, 1994). (6.) On this point, see Kenneth N. Waltz, Theory of International Politics (Reading, MA: Addison-Wesley, 1979). (7.) Of course, a state may have an incentive to trade with an adversary if it expects its gains from trade to exceed those of its rival. Under these circumstances, however, the adversary has an incentive to curtail trade, since the distribution of gains from this commercial relationship is likely to degrade its security relative to that of its trading partner. (8.) For example, in addition to tariffs, nontariff barriers (such as embargoes) that are designed to limit the military capacity of an adversary are likely to serve much the same purpose. (9.) See Joanne Gowa and Edward D. Mansfield, "Power Politics and International Trade," American Political Science Rezhew, 87, no. 2 (June 1993) pp. 408-20; and Gowa, chapter 4. (10.) See Waltz. (11.) This section draws on Edward D. Mansfield, "Effects of International Politics on Regionalism in International Trade," in Anderson and Blackhurst, pp. 199-217. (12.) For an insightful analysis of the ways in which PTAs can be used to safeguard dedicated assets, see Beth V. Yarbrough and Robert M. Yarbrough, Cooperation and Governance in International Trade: The Strategic Organization Approach (Princeton, N.J.: Princeton University Press, 1992). (13.) Murray C. Kemp and Henry Y. Wan, Jr., "An Elementary Proposition Concerning the Formation of Customs Unions," Journal of International Economics, 6, no. 1 (February 1976) p. 96. (14.) See Harry G. Johnson, "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, 73, no. 3 (June 1965) pp. 256-83; Charles A. Cooper and Benton F. Massell, "Toward a General Theory of Customs Unions for Developing Countries," Journal of Political Economy, 73, no. 5 (October 1965) pp. 461-76; and Charles A. Cooper and Benton F. Massell, "A New Look at Customs Union Theory," The Economic Journal, 75, no. 3 (December 1965) pp. 742-47. (15.) Pomfret, p. 144n24. (16.) See, for example, the differences between the conclusions reached by David A. Baldwin, Economic Statecraft (Princeton, NJ: Princeton University Press, 1985); and Gary Clyde Hufbauer, Jeffrey J. Schott and Kimberly Ann Elliot, Economic Sanctions Reconsidered: History and Current Policy (Washington, DC: Institute for International Economics, 1990,2nd ed. . (17.) See, for example, Klaus Knorr, "International Economic Leverage and Its Uses," in Klaus Knorr and Frank N. Trager, eds., Economic Issues and National Security (Lawrence, KS: University Press of Kansas, 1977) pp. 99-126; Thomas O. Bayard, Joseph Pelzman and Jorge Perez-Lopez, "Stakes and Risks in Economic Sanctions," World Economy, 6, no. 1 (March 1983) pp. 73-87; and Hufbauer, Schott and Elliot. (18.) Baldwin (1985), p. 24. (19.) See, for example, Albert O. Hirschman, National Power and the Structure of Foreign Trade (Berkeley, CA: University of California Press, [1945] (1980); Pomfret; and Michael Mastanduno, Economic Containment: CoCom and the Politics of East-West Trade (Ithaca, NY: Cornell University Press, 1992). (20.) On this point, see Bayard, Pelzman and Perez-Lopez, pp. 80-81. (21.) See ibid., pp. 74-76; Knorr; Hufbauer, Schott and Elliot; and Lisa L. Martin, Coercive Cooperation: Explaining Multilateral Economic Sanctions (Princeton, NJ: Princeton University Press, 1992). (22.) Yarbrough and Yarbrough, p. 107. See also Knorr. (23.) For a discussion of the potential for PTAs to facilitate issue-linkage, see Shlomo Weber and Hans Wiesmeth, "Issue Linkage in the European Community," Journal of Common Market Studies, 29, no. 3 (March 1991) pp. 255-67. (24.) See Martin. See also, Robert O. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, NJ: Princeton University Press, 1984). (25.) On this point, see Bayard, Pelzman and Perez-Lopez, p. 82. (26.) ibid., p. 80. (27.) In the context in which the term is used here, interdependence refers to vulnerability among states. For a discussion of the various ways in which interdependence has been defined and the importance of vulnerability interdependence for the study of international relations, see David A. Baldwin, "Power and Interdependence: A Conceptual Analysis," International Organization, 34, no. 4 (Autumn 1980) pp. 471-506. (28.) Yarbrough and Yarbrough, p. 87. (29.) On this point, see Hirschman ([194511980); and Helen V. Milner, "The Evolution of the International Trade Regime: A Three Bloc Trading System?" Paper delivered at the Fifteenth World Congress of the International Political Science Association (Buenos Aires: July 1991). (30.) Bayard, Pelzman and Perez-Lopez, pp. 82-83. (31.) ibid., p. 85. (32.) See, for example, Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987) chapters 9-10; and Milner. For a more sanguine view of these developments, see Kenneth A. Oye, Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s (Princeton, NJ: Princeton University Press, 1992). (33.) See Solomon W. Polachek, "Conflict and Trade," Journal of Conflict Resolution, 24, no. 1 (March 1980) pp. 67-80; Brian M. Pollins, "Conflict, Cooperation, and Commerce: The Effects of International Political Interactions on Bilateral Trade Flows," American Journal of Political Science, 33, no. 3 (August 1989) pp. 737-61; and Edward D. Mansfield, Power, Trade, and War (Princeton, NJ: Princeton University Press, 1994) chapter 4. (34.) On this point, see Stefanie Ann Lenway, "Between War and Commerce: Economic Sanctions as a Tool of Statecraft," International Organization, 42, no. 2 (Spring 1988) pp. 397-426. (35.) My discussion of the global distribution of power in this article has been cast in terms of polarity because this is the feature of the system's structure on which studies of international relations typically focus. This is not, however, to suggest that polarity is the only - or the most important - feature of the distribution of power. For many purposes, the concentration of power is both a conceptually and an empirically more salient aspect of this distribution. On this point, see Edward D. Mansfield, "Concentration, Polarity, and the Distribution of Power," International Studies Quarterly, 37, no. 1 (March 1993) pp. 105-28; and Mansfield (1994). (36.) See, for example, Keohane (1984). (37.) For landmark contributions to this literature, see George J. Stigler, "The Theory of Economic Regulation," Bell Journal of Economics and Management Science, 2, no. 1 (Spring 1971) pp. 3-21; Sam Peltzman, "Toward a More General Theory of Regulation," Journal of Law and S. Becker,"A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, 98, no.3 (August 1983) pp. 371-400. For an excellent overview of this literature, see Sam Peltzman, "The Economic Theory of Regulation After A Decade of Deregulation," Brookings Papers on Economic Activity (Special Issue, 1989) pp. 1-59. (38.) For excellent surveys of this literature, see Douglas Nelson, "Endogenous Tariff Theory: A Critical Survey," American Journal of Political Science, 32, no. 3 (August 1988) pp. 796-837; and Edward John Ray, "Empirical Research on the Political Economy of Trade," in Colin A. Carter et al., eds., Imperfect Competition and Political Economy: New Trade Theory in Agricultural Trade Research (Boulder, CO: Westview Press, 1990) pp. 175-214. (39.) See William H. Kaempfer and Anton D. Lowenberg, International Economic Sanctions: A Public Choice Perspective (Boulder, CO: Westview Press, 1992). (40.) Bruno S. Frey, "The Public Choice View of International Political Economy," in Roland Vaubel and Thomas D. Willett, eds., The Political Economy of International Organizations: A Public Choice Approach (Boulder, CO: Westview Press, 1991) pp. 18-19. (41.) See ibid., p. 19; and Roland Vaubel, "A Public Choice View of International Organization," in Vaubel and Willett, pp. 27-45. (42.) See Vaubel. (43.) See Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA: Harvard University Press, 1971). (44.) See, for example, Vaubel. (45.) See Martin. (46.) See Vaubel, p. 32; and Bruno S. Frey and Beatgygi, "International Organizations from the Constitutional Point of View," in Vaubel and Willett, pp. 58-78. (47.) Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, MA: Harvard
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Title Annotation:Contemporary Issues in World Trade
Author:Mansfield, Edward D.
Publication:Journal of International Affairs
Date:Jun 22, 1994
Words:7414
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