Multilateral Determinants of Regionalism 839 ber are likely to have relatively little bearing on the performance of the multilat- eral regime,cheating is less likely to weaken the GATT system.5o Further,increased membership tends to introduce greater heterogeneity of pref- erences,as well as trade and business practices,within GATT/WTO.For exam- ple,when there are more negotiating partners,trade liberalization tends to influence more goods and adversely affect a greater number of potent interest groups.s1 Add- ing developing countries to the multilateral regime creates further complications, because the trade barriers these states most want removed (for example,those on textiles and agriculture)have long been the sacred cows of protectionist interests in the advanced industrial states.The accession of developing states to GATT/ WTO also has intensified North-South divisions on intellectual property and labor and environmental standards.The WTO Director General admitted after the failed Seattle Ministerial meeting in 1999 that "the reason we had problems was the diversity of our members."52 Even the addition of a single member can hamper efforts to promote multilateral liberalization.For example,the EU Trade Commissioner recently stated that "a round with China in is going to be much more difficult than a round without China in."53 Because of China's WTO acces- sion,Prime Minister Junichiro Koizumi has proposed a dramatic shift away from Japan's historical aversion to regionalism,starting with a PTA involving Singapore.54 Faced with heightened difficulty arriving at any overarching agreement on eco- nomic matters as the number of members grows,s5 parties to GATT/WTO may find it advantageous to form smaller,preferential arrangements composed of states with common interests on trade policy.s6 Such arrangements provide insurance against future disruptions of trade that might occur if multilateral negotiations buckle under the weight of a large number of participants with disparate commercial pref- erences,thereby enhancing the members'bargaining power within the regime. GATT/WTO Disputes While MTNs and membership growth are two of the most obvious achieve- ments of the multilateral regime,the daily business-indeed,the "jewel"57 or 50.Krugman1993,74. 51.Ethier1999,136. 52.New Straits Times (Malaysia),30 January 2000,19. 53.Financial Times,25 May 2000,14. 54.See International Trade Reporter,6 September 2001,1389:and Australian Financial Review. 24 April2002,4. 55.The first MTN,in 1947,took six months to complete,whereas the last one took nine years. 56.See Ethier 1999;and Westhoff,Yarbrough,and Yarbrough 1994.In the same vein,Downs,Rocke, and Barsoom argue that PTAs have an easier time achieving deep integration than GATT/WTO be- cause they generally have a more homogeneous set of members.Downs,Rocke,and Barsoom 1998. 57.Hudec1993,9
ber are likely to have relatively little bearing on the performance of the multilateral regime, cheating is less likely to weaken the GATT system+ 50 Further, increased membership tends to introduce greater heterogeneity of preferences, as well as trade and business practices, within GATT0WTO+ For example, when there are more negotiating partners, trade liberalization tends to influence more goods and adversely affect a greater number of potent interest groups+ 51 Adding developing countries to the multilateral regime creates further complications, because the trade barriers these states most want removed ~for example, those on textiles and agriculture! have long been the sacred cows of protectionist interests in the advanced industrial states+ The accession of developing states to GATT0 WTO also has intensified North-South divisions on intellectual property and labor and environmental standards+ The WTO Director General admitted after the failed Seattle Ministerial meeting in 1999 that “the reason we had problems was the diversity of our members+” 52 Even the addition of a single member can hamper efforts to promote multilateral liberalization+ For example, the EU Trade Commissioner recently stated that “a round with China in is going to be much more difficult than a round without China in+” 53 Because of China’s WTO accession, Prime Minister Junichiro Koizumi has proposed a dramatic shift away from Japan’s historical aversion to regionalism, starting with a PTA involving Singapore+ 54 Faced with heightened difficulty arriving at any overarching agreement on economic matters as the number of members grows, 55 parties to GATT0WTO may find it advantageous to form smaller, preferential arrangements composed of states with common interests on trade policy+ 56 Such arrangements provide insurance against future disruptions of trade that might occur if multilateral negotiations buckle under the weight of a large number of participants with disparate commercial preferences, thereby enhancing the members’ bargaining power within the regime+ GATT/WTO Disputes While MTNs and membership growth are two of the most obvious achievements of the multilateral regime, the daily business—indeed, the “jewel” 57 or 50+ Krugman 1993, 74+ 51+ Ethier 1999, 136+ 52+ New Straits Times (Malaysia), 30 January 2000, 19+ 53+ Financial Times, 25 May 2000, 14+ 54+ See International Trade Reporter, 6 September 2001, 1389; and Australian Financial Review, 24 April 2002, 4+ 55+ The first MTN, in 1947, took six months to complete, whereas the last one took nine years+ 56+ See Ethier 1999; and Westhoff, Yarbrough, and Yarbrough 1994+ In the same vein, Downs, Rocke, and Barsoom argue that PTAs have an easier time achieving deep integration than GATT0WTO because they generally have a more homogeneous set of members+ Downs, Rocke, and Barsoom 1998+ 57+ Hudec 1993, 9+ Multilateral Determinants of Regionalism 839
840 International Organization "backbone"58-of the GATT/WTO system is settling commercial disputes among its members.59 Formal GATT/WTO disputes occur with striking frequency and are another factor likely to affect the establishment of PTAs.0 In a dispute,one state-the "complainant"-notifies GATT of its objections to trade practices of a counterpart-the "defendant."The disputants consult bilaterally and may request an independent legal judgment by a GATT/WTO-appointed panel of experts.En- forcement,however,is left to the complainant alone.Accordingly,a disputant is more likely to prevail-that is,to induce concessions from a defendant or with- stand a complainant's retaliatory threats,as appropriate-if it possesses signifi- cant market power.5!Because PTAs possess more market power than any constituent member,states may enhance their leverage in trade disputes by entering a prefer- ential grouping.62 Of course,the stakes involved in any single dispute-while often surprisingly large-are small compared to those involved in forming a PTA.63 It is therefore unlikely that,by itself,participating in a single GATT/WTO dispute would be sufficient to prompt a state to seek a preferential arrangement.Involvement in a dispute,however,dramatically raises a state's chances of participating in other future disputes.54 Consequently,the costs of forming a PTA are at least partially offset by what are likely to be a long stream of improved dispute outcomes. Further,many disputes concern policies,such as export subsidies,aimed at in- creasing competitiveness in a third party's market.An unsatisfied disputant may seek a PTA with that third party as a way of bypassing the dispute process.For instance,one of Argentina's primary motives for entering and deepening its com- mitment to Mercosur was to secure preferential access to the Brazilian wheat mar- ket.Brazil was Argentina's leading export market for wheat,and its competitiveness in that market was threatened by Canadian and U.S.export subsidy programs, which Argentina had challenged ineffectually in a GATT dispute.55 In some dis- putes,third parties also face the possibility that disputants will arrive at a settle- ment that discriminates against them,thereby increasing the incentives for third parties to form a PTA with either disputant(separately)to ensure that their market access is not jeopardized.Thus,we hypothesize that if either of a pair of coun- tries has recently participated in a GATT/WTO dispute with a third party,the two will be more likely to form a PTA with each other.67 58.Moore2000. 59.Reinhardt forthcoming,chap.1. 60.From 1948 through 1998 there were over 600 GATT/WTO trade disputes. 61.See Hudec 1993.318,324,326;and Mavroidis 2000. 62.See Bagwell and Staiger 2001;and WTO 1995a,53. 63.On the size of the stakes involved in GATT/WTO disputes,see Reinhardt forthcoming. 64.Busch and Reinhardt 2002. 65.See Los Angeles Times,9 December 1994,D3;and GATT 1994,24. 66.Busch and Reinhardt 2002. 67.A good part of the U.S.emerging interest in regionalism in the 1980s derived from its frequent GATT disputes (often incompletely resolved)with the EU.Indeed,in February 1988,Treasury Secre- tary James Baker publicly chastised the EC's recalcitrance on several outstanding disputes and threat-
“backbone” 58—of the GATT0WTO system is settling commercial disputes among its members+ 59 Formal GATT0WTO disputes occur with striking frequency and are another factor likely to affect the establishment of PTAs+ 60 In a dispute, one state—the “complainant”—notifies GATT of its objections to trade practices of a counterpart—the “defendant+” The disputants consult bilaterally and may request an independent legal judgment by a GATT0WTO-appointed panel of experts+ Enforcement, however, is left to the complainant alone+ Accordingly, a disputant is more likely to prevail—that is, to induce concessions from a defendant or withstand a complainant’s retaliatory threats, as appropriate—if it possesses signifi- cant market power+ 61 Because PTAs possess more market power than any constituent member, states may enhance their leverage in trade disputes by entering a preferential grouping+ 62 Of course, the stakes involved in any single dispute—while often surprisingly large—are small compared to those involved in forming a PTA+ 63 It is therefore unlikely that, by itself, participating in a single GATT0WTO dispute would be sufficient to prompt a state to seek a preferential arrangement+ Involvement in a dispute, however, dramatically raises a state’s chances of participating in other future disputes+ 64 Consequently, the costs of forming a PTA are at least partially offset by what are likely to be a long stream of improved dispute outcomes+ Further, many disputes concern policies, such as export subsidies, aimed at increasing competitiveness in a third party’s market+ An unsatisfied disputant may seek a PTA with that third party as a way of bypassing the dispute process+ For instance, one of Argentina’s primary motives for entering and deepening its commitment to Mercosur was to secure preferential access to the Brazilian wheat market+ Brazil was Argentina’s leading export market for wheat, and its competitiveness in that market was threatened by Canadian and U+S+ export subsidy programs, which Argentina had challenged ineffectually in a GATT dispute+ 65 In some disputes, third parties also face the possibility that disputants will arrive at a settlement that discriminates against them, thereby increasing the incentives for third parties to form a PTA with either disputant ~separately! to ensure that their market access is not jeopardized+ 66 Thus, we hypothesize that if either of a pair of countries has recently participated in a GATT0WTO dispute with a third party, the two will be more likely to form a PTA with each other+ 67 58+ Moore 2000+ 59+ Reinhardt forthcoming, chap+ 1+ 60+ From 1948 through 1998 there were over 600 GATT0WTO trade disputes+ 61+ See Hudec 1993, 318, 324, 326; and Mavroidis 2000+ 62+ See Bagwell and Staiger 2001; and WTO 1995a, 53+ 63+ On the size of the stakes involved in GATT0WTO disputes, see Reinhardt forthcoming+ 64+ Busch and Reinhardt 2002+ 65+ See Los Angeles Times, 9 December 1994, D3; and GATT 1994, 24+ 66+ Busch and Reinhardt 2002+ 67+ A good part of the U+S+ emerging interest in regionalism in the 1980s derived from its frequent GATT disputes ~often incompletely resolved! with the EU+ Indeed, in February 1988, Treasury Secretary James Baker publicly chastised the EC’s recalcitrance on several outstanding disputes and threat- 840 International Organization