Managing political exchange: Multilateralism in global trade policy

Multilateralism in global trade policy is institutionalized in the GATT/WTO system. Its central features are reciprocity, which requires approximate equality in trade-barrier reductions, and nondiscrimination, which prohibits preferential application of trade barriers. Despite its centrality to trade policy coordination, the multilateral system does not monopolize international trade policy interactions. Powerful states can circumvent the system by conducting negotiations outside of the GATT/WTO and by selective application of multilateral rules. Thus the conduct of international politics by powerful states within the institutional context, which imposes constraints on bargaining power, is puzzling. I argue that institutional restrictions on power are employed to overcome impediments to cooperation posed by incomplete information, uncertain costs and benefits of trade liberalization, and the possibility of opportunistic behavior. This argument is made through an examination of political exchange between states subject to domestic-level political pressure. I find that powerful states prefer to constrain their use of bargaining power in negotiations with weaker states when the latter are subject to capture by domestic interest groups. When a weak negotiating partner has a more competitive political system, powerful states prefer extrainstitutional negotiation, which permits unconstrained deployment of power. Examining the dynamic properties of institutionally constrained trade negotiation, I find that the reciprocity rule contributes to the stability of agreements when states share similar preferences for trade policy. The unconstrained deployment of power generates agreements that are more prone to defection and collapse. The nondiscrimination rule, along with prohibitions on quantitative restrictions and subsidies, is employed as a means of reducing the likelihood of opportunistic policy changes leading to politically costly trade diversion. These rules expose producers to random economic shocks that are transmitted through the price mechanism. In industries especially susceptible to large random shocks, powerful states have effectively suspended application of multilateral rules. Rule-adherence in the multilateral system has declined as intra-industry trade has come to predominate in industrial-country trade patterns. Despite efforts at institutional reform in the multilateral system, powerful states have continued to apply its rules selectively, and they are expected to continue to do so as intra-industry trade increases in the share of total trade.