Alliances, preferential trading arrangements and sanctions.

AuthorMansfield, Edward D.
PositionContemporary Issues in World Trade

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...

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