James McCall Smith. 2000. The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts

James McCall Smith. 2000. "The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts." International Organization 54(1): 137-80.

This paper investigates the conditions under which member states adopt legalistic mechanisms for resolving disputes and enforcing compliance in regional trade accords. To account for variable levels of legalism, he offers a theory of trade dispute settlement design based on the domestic political trade-off between treaty compliance and policy discretion.

I. Introduction

• Parallel trends in international trade:
1. Rise of regionalism and new integration initiatives drawn along geographical lines
2. Move toward legalism in the enforcement of trade agreements; trading states have given impartial third parties the authority to review and issue binding rulings on alleged treaty violations, at times based on complaints led by non-state or supranational actors.

II. Defining the Spectrum: From Diplomacy to Legalism

• Level of legalism depends on (see Table 1 on page 143):
1. Third-party Review - an explicit right to third-party review of complaints regarding treaty application and interpretation is more legalistic (as opposed to diplomatic). 
2. Third party Ruling - (secondary concern if there is an automatic right to third-party review) - if judicial rulings are formally binding in international legal terms, then it is more legalistic.
3. Judges - how legalistic each treaty is depends on the the number, term, and method of selecting arbitrators or judges. 
• Standing tribunals are likely to be more consistent over time with their rulings—and thus more legalistic—ad hoc panels whose membership and rulings changes with each dispute.
4. Standing - whether actors have standing to file complaints and obtain rulings is the measure of legalism. 
• In general, the more expansive the definition of standing, the more legalistic the dispute settlement mechanism. 
5. Remedies in cases of treaty violation. 
• The most legalistic remedy is to give direct effect in domestic law to dispute settlement rulings made at the international level. Where rulings are directly applicable, government agencies and courts have a binding obligation under national law to abide by and enforce their terms.
• Where treaties have no direct domestic effect, another remedy is the authorization of retaliatory trade sanctions by the complaining state. 

III. The Model Scope

• Model assumptions:
1. The model takes as unproblematic the motivation and capacity of domestic political leaders to negotiate a trade pact.
2. The substantive terms of a trade agreement are exogenous; the model focuses only on the procedures chosen by parties to enforcement commitments.
3. There is only one bargaining forum.
4. Regime type does not affect preferences.
5. Trade policy changes over time are external to the strategic interaction of disputants and independent third parties.

IV. The Actors and their Motivations

• Actors: political leaders
• Why the actors might be wary of legalistic trade dispute settlement: the threat that legalistic trade dispute settlement poses to policy discretion of political leaders is threefold. 
1. It may constraint their ability to manage the unforeseen costs of adjustment, making it more costly to provide relief or protection to specific groups injured by trade liberalization.
2. It may limit their general policy autonomy across a range of domestic regulations, which it judges against treaty commitments to eliminate nontariff barriers to trade.
3. The delegation of authority to third parties may constraint their ability to pursue trade policy bilaterally, a strategy with distinct political advantages. 
• Why the actors might want legalistic trade dispute settlement: legalistic dispute settlement improves the value of trade agreements through two principal channels:
1. By defining, monitoring, and enforcing compliance, it constraints the opportunistic behavior of foreign governments that are tempted to provide protection to their constituents. 
2. As an institutional commitment to policy stability, it promotes the confidence of the private sector, inducing traders and investors to take risks that increase the aggregate benefits of liberalization. These activities improve the rates of unemployment, inflation, and growth.

V. How Governments Specify Determine Dispute Settlement Preferences Ex Ante 

• How political leaders assess the trade-off between policy discretion and treaty compliance happens in two stages:
1. National preference formation
2. International bargaining
• The level of legalism preferred by a particular government in a specific trade negotiation depends on:
1. Intrapact trade-dependency - the extent to which its economy depends on trade with other signatories in the accord. The more trade-dependent the economy , the more legalistic the dispute settlement mechanism its government will tend to favor. Legalistic dispute settlement is more valuable politically where trade with prospective partner countries accounts for a larger share of the domestic economy. 
2. Relative economic power. The more powerful the country in relative terms, the less legalistic the dispute settlement mechanisms the government will favor. 
3. The proposed depth of liberalization. The more ambitious the level of proposed integration, the more willing political leaders should be to endorse legalistic dispute settlement because deeper integration promises to generate larger economic gains.

V. Hypotheses

• Observations suggest that the relative value of liberalization--and, by implication, of legalistic dispute settlement--is usually lower to larger economies than to smaller economies. So the signatory state with the largest economy is most likely to wield the unit veto that determines the level of legalism in a given agreement.
• Legalistic dispute settlement is expected only in accords among parties whose relative size and bargaining leverage are more symmetrical; when there is a hegemon, it can impose its preferences can more effectively use unilateral trade measures. 
• In settings of low economic asymmetry--provided the proposed legislation is sufficiently deep--all member governments have an incentive to improve treaty compliance through impartial third parties. 

VI. Results from Empirical Data

• Levels of economic asymmetry and legalism are inversely related given the preferences and negotiating leverage of regional hegemons. Highly legalistic forms of dispute settlement generally do not occur in highly asymmetric settings. 
• When asymmetry is low, high levels of legalism occur only where the proposed level of integration is high. 
• Evidence generally confirms a positive relationship between the level of proposed integration and legalism.
• Anomalous combinations of high integration and low legalism in trade agreements share high asymmetry.
• The most robust predictor of dispute settlement design is the interaction of asymmetry and proposed integration. If the level of proposed integration is relatively low, there is less legalism in the appointment of judges. 

VII. Conclusion

• This approach is grounded in a political calculation of costs and benefits in the domestic arena, not in expectations about absolute or relative gains internationally. 
• Given a regional trade initiative, negotiations over dispute settlement design are driven by domestic political concerns. 

Barry R. Weingast and William J. Marshall. 1988. The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets

Barry R. Weingast and William J. Marshall, "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy 96, 1 (Feb. 1988): 132-63.

The purpose of this paper is to extend the theory of the firm to the study of political organizations and to explain the pattern of institutions within the legislatures that facilitates decision making.

I. Introduction

• The diversity of interests within the legislature creates gains from exchange.
• Legislative institutions are like market institutions because they reflect:
1. the goals and preferences of individuals (legislators seeking reelection)
2. transaction costs that are induced by imperfect information. 

II. The New Economics of Organization

• Firms emerge to avoid the costs of using markets and the price system; their set of contractual mechanisms substitute for the price mechanism.
• The literature on vertical integration argues that organizational form is largely an endogenous response to ex post contractual problems and ex post opportunism that arise when ex post incentives of the bargaining parties are inconsistent with performing ex ante agreements.

III. Representatives and Their Constituencies

• Perspectives in this paper, that legislative institutions can be analyzed as market institutions/firms, rest on the following assumptions:
1. Congressmen represent the (politically responsive) interests located within their district. Electoral competition induces congressmen, at least in part, to represent the interests of their constituents. Because groups are not uniformly distributed across constituencies, different legislators represent different groups.
2. Parties place no constraints on the behavior of individual representatives.
3. Majority rule is a binding constraint.

IV. The Gains from Exchange: The Problem to Be Solved

• Given the diversity of interests legislators represent, each can bargain and cooperate (vote trade, logroll, etc.) with other legislators in order to benefit their respective constituents.
• The new economics of organization suggests that institutions evolve to enforce cooperation.
  
• Previous work viewed logrolling/vote trading as a market in votes in which legislators give away votes on issues that have lower marginal impact on their district (and therefore on their electoral fortunes) in exchange for votes on issues having a larger marginal impact. 
• Shortcomings: assumes there are no random or unforeseen future events that may influence outcomes or payoffs. Either the time dimension is suppressed or enforcement of agreements over time is left exogenous. Does not explain how legislators cope with agreements that cover more than one legislative session.
• Uncertainty over the future status of today's bargain come from:
1. Noncontemporaneous benefit flows - occurs when benefit flows to one party can be curtailed when the other party reneges on the agreement after they have already received their benefits.
2. Nonsimultaneous exchange - occurs when bills do not come up for a vote simultaneously. Bills evolve and public opinion can change. 
• Legislative institutions reduce the circumstances in which breakdown occurs; it is not a substitute for reputation building and trigger strategies commonly used in repeat play, but rather complement those strategies for circumstances in which those strategies fail.
• In the model in this paper, instead of trading votes, legislators exchange special rights affording the holder of these rights additional influence over well-defined policy jurisdictions. The extra influence over particular policies institutionalizes a specific pattern of trades and because the exchange is institutionalized, it need not be renegotiated each new legislative session and it is subject to fewer enforcement problems.

V. The Legislative Committee System

• Committees are decentralized decision-making units compose of those legislators with the greatest stake in their jurisdiction.
• The legislative committee system is defined by the following three conditions:
1. Committees are composed of a number of seats or positions, each held by an individual legislator. 
• Associated with each committee is a specific subset of policy issues over which it has jurisdiction; within their jurisdiction, committees possess the monopoly right to bring alternatives to the status quo up for a vote before the legislature.
• Committee proposals must command a majority of votes against the status quo to become policy.
2. There exists a property rights system over committee seats called the "seniority system." 
• A committee member holds his position as long as he chooses to remain on the committee; subject to his reelection, he cannot be forced to give it up.
• Leadership positions within the committee are allocated by seniority, the length of continuous service on the committee.
• Rights to committee positions cannot be sold or traded to others. 
3. Whenever a member leaves a committee, his seat becomes vacant and is filled using a bidding mechanism amongst the congressmen.
• Assertions about committee operation:
1. The assignment process operates as a self-selection mechanism.
2. Committees are not representative of the entire legislature but instead are composed of "preference outliers," or those who value the position highly.
3. Committee members receive the disproportionate share of the benefits from programs within their jurisdiction.
• Committee jurisdiction resolves noncontemporaneous benefit flows; a party cannot renege on an agreement to support a bill in another party's jurisdiction by later passing a new bill to revoke that original bill because the reneging party will not have the jurisdiction to bring that bill to a vote. 
• The legislative committee system effects on coalition formation:
1. Agenda power held by committee members implies that successful coalitions must include the members of the relevant committee or else the bill will not reach the floor for a vote; the committee veto reduces the feasible set of policies.
2. Trades among committee members are more likely to succeed that those across committees; inter-committee agreements have to bring separate bills to be voted on while intra-committee agreements can present a single bill that satisfies trading partners simultaneously once it is passed.
3. Policy will respond only to large changes in political circumstances or to major shifts in the electorate because forming new coalitions is difficult. 
• The majority rule condition precludes any one committee from extracting too many gains at the expense of others. 
• Policy in a particular area can remain stable if committee membership is relatively stable.

VI. Conclusion

• Legislative institutions enforce bargains among legislators.
• Given the peculiar form of bargaining problems found in legislatures, specific forms of nonmarket exchange are superior to market exchange.
• Empirical evidence supports four implications that follow from this model of legislative institutions but do no follow from a simple market exchange mechanism.
1. Committees are composed of "high demanders," that is, individuals with greater than average interest in the committee's policy jurisdiction.
2. The committee assignment mechanism operates as a bidding mechanism that assigns individuals to those committees they value most highly.
3. Committee members gain a disproportionate share of the benefits from their policy area. 
4. As the interests represented on tghe committee change, so too will policy, with the interests of non-committee members held constant.