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. 

Michael J. Hiscox. 2001. Inter-Industry Factor Mobility and the Politics of Trade

Michael J. Hiscox, “Inter-Industry Factor Mobility and the Politics of Trade,” International Organization, 55, 1 (Winter 2001), pp. 1-46.

Hiscox uses the standard economic theory of trade to highlight the importance of inter-industry factor mobility. For owners of factors of production (land, labor, and capital) that can move between industries in the domestic economy, the income effects of trade and divide individuals along class lines, setting owners of different factors at odds with each other regardless of the industry in which they are employed. When the factors are immobile between industries, the effects of trade divide individuals along industry lines, setting owners of the same factor in different industries (labor in the steel and aircraft industries, for example) at odds with each other over policy. 

He relies on the measurements of the difference between rates of return for factors employed in different industries. If a factor is highly mobile, rate-of-return differentials should be arbitraged away by factor movement; smaller differentials indicate higher mobility. 

Technological innovations and regulations profoundly affect inter-industry factor mobility and that is reflected in the changes in wage differentials within countries over time. Initially,the rise of machine-manufacturing created demand for unskilled workers who could shift between manufacturing industries and the lifing of legal restrictions on factor movement and deregulation lowered the costs of factor movement. Recent trends with a growing emphasis on specialized human capital has been increasing the importance place on specialized physical capital and knowledge and, thus, increased wage differentials.

In terms of mapping class preferences over trade, classes that own scarce resources should promote a protectionist platform while classes that own abundant factors should promote a free-trade platform. At low levels of mobility, Ricardo-Viner effects tie factor returns more closely to the fortunes of each industry, giving labor unions and management associations an incentive to lobby for trade policies that will confer rents by either limiting import competition or boosting exports. At high levels of mobility, industry rents are eliminated, and Stolper-Samuelson effects mean that any benefit tobe had from lobbying will be dispersed among all other owners of the same factor.

Jeffry A. Frieden and Ronald Rogowski. 1996. The Impact of the International Economy on National Policies: An Analytical Overview,

Jeffry A. Frieden and Ronald Rogowski, “The Impact of the International Economy on National Policies: An Analytical Overview,” in Robert O. Keohane and Helen V. Milner, eds., Internationalization and Domestic Politics (New York: Cambridge University Press, 1996), pp. 25-47.

The independent variables in the analysis are the exogenous changes in costs or regards of international economic exchange. The dependent variables are:

1. the policy preferences of relevant socioeconomic and political agents within countries toward national policies and national policy-making institutions.

2. given these preferences, the adoption or revolution of national policies and of national policy institutions

3. given preferences, policies, and institutions, the relationship between a given set of institutions and a given set of policies.

The conjecture is that an exogenous easing of international trade will, ceteris paribus:

1. increase pressure within each country to liberalize international trade and payments, including dismantling structural impediments to trade

2. create such broad political pressure as an increasing function of the degree to which the national economy was previously closed

3. generate such aggregate pressure for change as an increasing function of the degree to which the economy has readily exploitable gains from trade available (such as high levels of total factor productivity).

On average, democratic regimes should liberalize more readily.

Among equally democratic regimes, and among different elective bodies within the same country, the tendency to liberalize should increase as the number of distinct constituencies decreases.

Ceteris paribus, the likelihood of liberalization should decline with increasing partisan fragmentation.