RESEARCH AND ANALYSIS

Votes, Vetoes, and Preferential Trading Agreements

Edward D. Mansfield (Department of Political Science, University of Pennsylvania)
Helen V. Milner (Department of Politics, Princeton University )

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Preferential trade agreements (PTAs) are proliferating rapidly. Scores of these institutions have formed over the past half-century and almost every country currently participates in at least one. By 2006, according to the World Trade Organization (WTO), nearly 300 PTAs were in force, covering approximately half of the overseas trade conducted worldwide (Lamy 2009). Why states have chosen to enter such arrangements and what bearing the spread of PTAs will have on international affairs are issues that have generated considerable controversy. Some observers fear that these arrangements have adverse economic consequences and have eroded the multilateral system that has guided international economic relations during the post-World War II era. Others argue that such institutions are stepping stones to greater multilateral openness and stability. This debate has stimulated a large body of literature on the economic and political implications of PTAs. Surprisingly little research, however, has analyzed the factors giving rise to these arrangements. The purpose of this article is to help fill that gap.

Although just about every country now belongs to a PTA, some states have rushed to join many of these arrangements, whereas others have joined very few of them. Moreover, states have entered them at different points in time. What explains these variations? Some studies have emphasized that states enter PTAs to generate economic gains. Taken as a whole, however, there is considerable evidence that preferential arrangements have ambiguous welfare implications, which sheds doubt on the claim that countries join them for economic reasons alone (Baldwin and Venables 1995; Hine 1994; Viner 1950).

Instead, we emphasize the domestic political benefits and costs for leaders contemplating membership in such an arrangement. First, a country’s regime type affects its propensity to enter a PTA: democracies are more likely to accede to these arrangements than other states. National leaders face the prospect of being turned out of office when the economy performs badly because voters think that the head of state is either incompetent or engaged in excessive rent seeking when the downturn is actually due to factors beyond his or her control. Leaders lack domestic instruments that allow them to reassure voters that they are not captured by special interests and to provide information to voters about their economic policy. However, entering a trade agreement helps leaders to address these problems. Further, the PTA itself and member-countries have incentives to publicize deviations from the trade accord. Thus, some leaders have political reasons to enter such arrangements. Equally, leaders are more likely to rely on trade agreements to address these domestic political problems in more competitive political settings, where they can be turned out of office fairly easily. In other work, we show that political leaders in competitive systems last longer in office if they have signed a PTA. As such, chief executives of more democratic countries are particularly likely to sign PTAs. PTAs may then have a lot to do with political benefits, rather than just economic ones, for leaders.

Second, one of the domestic impediments to entering a PTA is the transaction costs associated with ratifying the agreement. Trade accords involve the exchange of market access among countries. Some agreements also aim to coordinate members’ trade regimes. These policy changes have domestic consequences. Certain groups gain from these barrier reductions; other groups lose. If these distributional losers have political clout, they can delay or block such policy change.

Veto players represent political interests other than the leader’s party and have the institutional capacity to prevent change. Assuaging these groups can be time consuming and expensive. Leaders may have to alter the trade policy changes they would prefer and they may have to bribe veto players to gain their acquiescence. The more veto players that exist, therefore, the greater are the potential costs for leaders and the harder it is to gain the ratification of a PTA.

Based on a battery of tests covering all country pairs from 1950 to 2005, we find strong support for our hypotheses. States become more likely to ratify PTAs as they become more democratic and as the number of veto players shrinks. Both factors have a statistically significant and substantively important impact. Moreover, these results are quite robust.

Clearly, we need to be cautious in interpreting these findings. There could be variables that we did not include in our statistical models that influence either regime type or the number of veto players, on the one hand, and PTA formation, on the other. However, we have tried to account for as many of these variables as possible.

Alternatively, PTA ratification may be affecting regime type or the number of veto players. Some scholars have argued that joining an international institution can help a country become more democratic (Pevehouse 2005). Yet it is hard to think of more than a small handful of cases where a PTA had an influence on a country’s domestic political institutions. Even in these cases, such change is likely to happen over a long period of time, not the short time periods that we analyze in this study.

In addition to domestic politics, economic conditions and international factors guide PTA formation. Eroding hegemony and the end of the Cold War have prompted states to form PTAs. Very distant states are unlikely to form PTAs, but so are states that are contiguous. States with a former colonial relationship seldom form (reciprocal) PTAs, but allies tend to form such arrangements.

GATT/WTO members tend to enter PTAs, and countries tend to be more likely to ratify agreements with equals than with those of much greater or smaller capability. Global diffusion pressures are evident. But in addition to these influences, we find strong evidence that domestic politics has a strong and sizable impact on the proliferation of PTAs since the Second World War.

 

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Edward D. Mansfield is the Hum Rosen Professor of Political Science, Chair of the Political Science Department, and Director of the Christopher H. Browne Center for International Politics at the University of Pennsylvania.  His research focuses on international security and international political economy.

Helen V. Milner is the B. C. Forbes Professor of Politics and International Affairs at Princeton University and the director of the Niehaus Center for Globalization and Governance at Princeton's Woodrow Wilson School. She is currently also the chair of the Department of Politics. She has written extensively on issues related to international political economy, the connections between domestic politics and foreign policy, globalization and regionalism, and the relationship between democracy and trade policy.

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