Bipolarity,Multipolarity,and Free Trade STOR Joanne Gowa The American Political Science Review,Vol.83,No.4.(Dec.,1989),pp.1245-1256. Stable URL: http://links.jstor.org/sici?sici=0003-0554%28198912%2983%3A4%3C1245%3ABMAFT%3E2.0.CO%3B2-D The American Political Science Review is currently published by American Political Science Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use,available at http://www.istor org/about/terms html.JSTOR's Terms and Conditions of Use provides,in part,that unless you have obtained prior permission,you may not download an entire issue of a journal or multiple copies of articles,and you may use content in the JSTOR archive only for your personal,non-commercial use. Please contact the publisher regarding any further use of this work.Publisher contact information may be obtained at http://www.jstor.org/journals/apsa.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world.The Archive is supported by libraries,scholarly societies,publishers, and foundations.It is an initiative of JSTOR,a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology.For more information regarding JSTOR,please contact support@jstor.org. http://www.jstor.org Thu Jan1016:24:462008
Bipolarity, Multipolarity, and Free Trade Joanne Gowa The American Political Science Review, Vol. 83, No. 4. (Dec., 1989), pp. 1245-1256. Stable URL: http://links.jstor.org/sici?sici=0003-0554%28198912%2983%3A4%3C1245%3ABMAFT%3E2.0.CO%3B2-D The American Political Science Review is currently published by American Political Science Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/apsa.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Thu Jan 10 16:24:46 2008
BIPOLARITY,MULTIPOLARITY, AND FREE TRADE JOANNE GOWA University of Pennsylvania Iecent literature typically attributes the relative scarcity of open international markets to the prisoner's dilemma structure of state preferences with respect to trade.I argue that the prisoner's dilemma representation does not reflect the most critical aspect of free trade agreements in an anarchic international system:security externalities.Explicit consideration of these effects suggests that a bipolar international political system has an advantage relative to its multipolar counterpart with respect to the opening of markets among states.Less credible exit threats and stronger incentives to engage in altruism within its alliances explain the advantage of a two-power system. Lhe real income and illustrative rather than systematic em- gains that motivate free trade are also the pirical referents are used.These restric- source of the security externalities that tions are appropriate given my purpose: impede it.Their ability to internalize to demonstrate analytically the advantage these effects makes military alliances the of a bipolar international political system natural basis of agreements to open inter- with respect to free trade. national markets.The evolutionary pros- pects of alliances vary,however:ones that are the products of bipolar systems are more likely to evolve into free trade Open Markets,Prisoner's coalitions than are their multipolar Dilemmas,and State Power counterparts.I argue that less credible exit threats and stronger incentives to engage The earliest variant of hegemonic sta- in alliance altruism explain the advantage bility theory bases its representation of in- of a two-power system. ternational trade as a Prisoner's Dilemma Several important limits of the argu- (PD)on the public good literature ment should be made clear immediately.I (Kindleberger 1973).It claims that a stable argue at the systemic level:I attempt to system of international free trade involves isolate the political and economic incen- the supply of a public good.Such goods tives for free trade that occur at the level are joint in supply and nonexcludable of the international system.I do not, that is,(1)any individual's consumption therefore,consider the impact of unit- of these goods does not preclude their level factors on the pursuit of these incen- consumption by others;and (2)no indi- tives.For example,neither the role of vidual can be excluded or prevented from special interest groups nor the organiza- consuming such goods,whether he or she tion of domestic exchange via hierarchies has contributed to their production or instead of markets is considered (Doyle not.As a result,the preferences of each 1986);Frieden 1988;Ruggie 1982).The member of a large,or of any short-lived, conditions I assume are those of standard group facing a public good problem con- international trade theory (Ethier 1983), form to a PD.The corresponding payoff AMERICAN POLITICAL SCIENCE REVIEW VOLUME 83 NO.4 DECEMBER 1989
BIPOLARITY, MULTIPOLARITY, AND FREE TRADE TOANNE GOWA Recent literature typically attributes the reLaioe scarcity of open international markets to the prisoner's dilemma structure of state preferences with respect to trade. I argue that the prisoner2 dilemma representation does not reflect the most critical aspect of free trade agreements in an anarchic international system: security externalities. Explicit consideration of these effects suggests that a bipolar international political system has an advantage relative to its multipolar counterpart with respect to the opening of markets among states. Less credible exit threats and stronger incentives to engage in altruism within its alliances explain the advantage of a two-power system. The real income gains that motivate free trade are also the source of the security externalities that impede it. Their ability to internalize these effects makes military alliances the natural basis of agreements to open international markets. The evolutionary prospects of alliances vary, however: ones that are the products of bipolar systems are more likely to evolve into free trade coalitions than are their multipolar counterparts. I argue that less credible exit threats and stronger incentives to engage in alliance altruism explain the advantage of a two-power system. Several important limits of the argument should be made clear immediately. I argue at the systemic level: I attempt to isolate the political and economic incentives for free trade that occur at the level of the international system. I do not, therefore, consider the impact of unitlevel factors on the pursuit of these incentives. For example, neither the role of special interest groups nor the organization of domestic exchange via hierarchies instead of markets is considered (Doyle 1986); Frieden 1988; Ruggie 1982). The conditions I assume are those of standard international trade theory (Ethier '1983), and illustrative rather than systematic empirical referents are used. These restrictions are appropriate given my purpose: to demonstrate analytically the advantage of a bipolar international political system with respect to free trade. Open Markets, Prisoner's Dilemmas, and State Power The earliest variant of hegemonic stability theory bases its representation of international trade as a Prisoner's Dilemma (PD) on the public good literature (Kindleberger 1973). It claims that a stable system of international free trade involves the supply of a public good. Such goods are joint in supply and nonexcludable, that is, (1) any individual's consumption of these goods does not preclude their consumption by others; and (2) no individual can be excluded or prevented from consuming such goods, whether he or she has contributed to their production or not. As a result, the preferences of each member of a large, or of any short-lived, group facing a public good problem conform to a PD. The corresponding payoff AMERICAN POLITICAL SCIENCE REVIEW VOLUME 83 NO. 4 DECEMBER 1989
American Political Science Review Vol.83 Table 1.The Prisoner's Dilemma price of its exports-maximizes its real in- come by imposing an "optimum"tariff, Column that is,a tariff set at a level that maxi- mizes the net gain that accrues from the Row Cooperate Defect improved terms and reduced volume of Cooperate 2,2 4,1 trade.1 If optimum tariffs are used by all Defect 1,4 3,3 states,however,an individually and col- lectively suboptimal outcome results:the Note:Payoffs are ranked from 1(best)to 4(worst); volume of trade is reduced,but the terms row's payoffs are listed first. of trade do not change.2 The mutually preferred outcome of free trade is difficult to achieve because it is not a stable or matrix is illustrated in Table 1.Given Nash equilibrium of the one-shot game: these payoffs,the dominant strategy of each state is better off defecting to an opti- each player is to defect,or refuse to con- mum tariff if others do not.Thus,stan- tribute to,the supply of the public good. dard trade theory also characterizes trade This leads to an equilibrium outcome of among large states as a PD game. DD that is Pareto-inferior (i.e.,another Both the public good variant of hege- equilibrium exists in which at least one in- monic stability theory and standard inter- dividual would be better off and no one national trade theory,however,analyze would be worse off than at the existing economic exchange in a political vacuum: equilibrium).In this equilibrium no one they focus exclusively on the real income contributes,no public good is produced, gains that accrue to a state that opens its and another-albeit unstable-Pareto- borders to trade.Yet national power is en- superior outcome exists(CC).To achieve gaged in free trade agreements because a stable free trade equilibrium,hegemonic such agreements produce security exter- stability theory asserts,a hegemon or nalities:the removal of trade barriers can dominant state must exist(Kindleberger affect not only the real income but also 1973,305).This is the equivalent of Man- the security of the states concerned.3 cur Olson's privileged group;that is,a The security externalities of trade arise group"such that each of its members,or from its inevitable jointness in produc- at least some one of them,has an incen- tion:the source of gains from trade is the tive to see that the collective good is pro- increased efficiency with which domestic vided,even if he [alone]has to bear the resources can be employed,and this in- full burden of providing it"(Olson 1971, crease in efficiency itself frees economic 50).While they accept the PD representa- resources for military uses (Root 1984). tion,critics assert that the logic of public Thus,trade increases the potential mili- good analysis itself indicts hegemonic tary power of any country that engages in theory:because small,or k,groups can it(Albert O.Hirschman,cited in Baldwin also provide public goods,either a hege- 1985,211).In doing so,it can disrupt the mon or a small group of states can stabil- preexisting balance of power among the ize a free trade system (Keohane 1984; contracting states (McKeown 1982,225).4 Snidal 1985;Yarbrough and Yarbrough Because it is locked into the insecurity 1987). that an anarchic international system The PD representation can be derived almost invariably produces,s a great as easily from standard international power is less likely to be concerned about trade theory (Conybeare 1984).The latter the absolute income than about the rela- points out that any state large enough to tive power effects of trade.The structure influence its terms of trade-the relative of international politics makes all states 1246
American Political Science Review Vol. 83 Table 1.The Prisoner's Dilemma Column Row Cooperate Defect Cooperate 2, 2 4, 1 Defect 1,4 3, 3 Note: Payoffs are ranked from 1(best) to 4 (worst); row's payoffs are listed first. matrix is illustrated in Table 1. Given these payoffs, the dominant strategy of each player is to defect, or refuse to contribute to, the supply of the public good. This leads to an equilibrium outcome of DD that is Pareto-inferior (i.e., another equilibrium exists in which at least one individual would be better off and no one would be worse off than at the existing equilibrium). In this equilibrium no one contributes, no public good is produced, and another-albeit unstable-Paretosuperior outcome exists (CC). To achieve a stable free trade equilibrium, hegemonic stability theory asserts, a hegemon or dominant state must exist (Kindleberger 1973,305). This is the equivalent of Mancur Olson's privileged group; that is, a group 'Such that each of its members, or at least some one of them, has an incentive to see that the collective good is provided, even if he [alone] has to bear the full burden of providing it" (Olson 1971, 50). While they accept the PD representation, critics assert that the logic of public good analysis itself indicts hegemonic theory: because small, or k, groups can also provide public goods, either a hegemon or a small group of states can stabilize a free trade system (Keohane 1984; Snidal 1985; Yarbrough and Yarbrough 1987). The PD representation can be derived as easily from standard international trade theory (Conybeare 1984). The latter points out that any state large enough to influence its terms of trade-the relative price of its exports-maximizes its real income by imposing an "optimum" tariff, that is, a tariff set at a level that maximizes the net gain that accrues from the improved terms and reduced volume of trade.1 If optimum tariffs are used by all states, however, an individually and collectively suboptimal outcome results: the volume of trade is reduced, but the terms of trade do not change.2 The mutually preferred outcome of free trade is difficult to achieve because it is not a stable or Nash equilibrium of the one-shot game: each state is better off defecting to an optimum tariff if others do not. Thus, standard trade theory also characterizes trade among large states as a PD game. Both the public good variant of hegemonic stability theory and standard international trade theory, however, analyze economic exchange in a political vacuum: they focus exclusively on the real income gains that accrue to a state that opens its borders to trade. Yet national power is engaged in free trade agreements because such agreements produce security externalities: the removal of trade barriers can affect not only the real income but also the security of the states concerned.3 The security externalities of trade arise from its inevitable jointness in production: the source of gains from trade is the increased efficiency with which domestic resources can be employed, and this increase in efficiency itself frees economic resources for military uses (Root 1984). Thus, trade increases the potential military power of any country that engages in it (Albert 0.Hirschman, cited in Baldwin 1985, 211). In doing so, it can disrupt the preexisting balance of power among the contracting states (McKeown 1982, 225).* Because it is locked into the insecurity that an anarchic international system almost invariably produces,5 a great power is less likely to be concerned about the absolute income than about the relative power effects of trade. The structure of international politics makes all states
Polarity and Free Trade aware that each seeks to exploit the persuade either Britain or the United wealth of others to enhance its own States to guarantee its security,France power.That trade is a means to this end is regarded the retention of the superior also common knowledge:as David Bald- position accorded to it in the treaty as its win observes,private international trade only alternative.Thus,"the sanctity of "is by far the most [cost-Jeffective .. treaties and the strict enforcement of the way for one country to acquire the goods status quo"became the first principles of or services of another"(Baldwin 1985, French foreign policy (Wolfers 1940,19). 116).As a result,states do not calculate Because it viewed any treaty revision as their payoffs from trade only in real in- setting a dangerous precedent,France en- come terms:relative power effects are gaged in a determined effort to compel likely to affect their calculations strongly. Germany to comply with its reparations The interwar period provides a com- obligations. pelling example of the power of the secur- Repeated negotiations on German pay- ity dilemma to contribute to a free trade ments did little to reconcile the underlying deadlock.The acrimony of the interna- conflicts of interests among the great tional economic diplomacy that preceded powers.Neither Britain nor the United the 1933 World Economic Conference States came to appreciate the French sense suggested that the conference would not of acute vulnerability;France never ac- secure a free trade truce.In the early inter- cepted the Anglo-American vision of an war years,the payment of German repar- economically prosperous and politically ations was the subject of repeated negotia- satiated Germany;and Germany never tions.Ostensibly a technical issue whose deviated from its strategy of destroying resolution depended upon expert testi- the Versailles settlement. mony regarding Germany's ability to pay, Thus,the economic diplomacy that the payment of reparations was in reality preceded the 1933 World Economic Con- a highly political issue:the integrity of the ference left a very unpromising legacy:a entire Versailles settlement was at stake pattern of intense conflict over fundamen- (Trachtenberg 1980,122). tal security issues among the great In negotiations that extended from the powers.It is no surprise that conflict Paris Peace Conference of 1919 to the rather than cooperation marked the 1933 Lausanne Conference of 1932,the issue of Conference as well,although factors reparations exposed the political roots of other than historical precedent contrib- international economic diplomacy.Deter- uted to its conspicuous lack of success mined to minimize its involvement in con- (Eichengreen 1988;Oye 1985). tinental politics,Britain insisted that the The interwar example obviously does stabilization of Europe depended on the not imply that political conflicts neces- restoration of financial stability and eco- sarily obstruct the realization of gains nomic prosperity to Germany.It opposed from trade.In theory,these conflicts need the provisions of the Versailles settlement not paralyze states.They can instead be that it believed either inhibited the resolved through the use of a two-step economic recovery of,or contributed to process in which states initially dismantle financial instability in,Germany (Schuker trade barriers between them;subsequent- 1976,384).As a result,Britain was sym- ly,each adjusts its defense strategy to ac- pathetic to German demands for a reduc- commodate any changes in the balance of tion in reparations. power that occur as trade barriers fall France,however,was reluctant to en- The danger that a window of vulnerabil- dorse any revision of the Versailles settle- ity may open between stages,however,is ment favorable to Germany.Unable to a powerful deterrent to this approach:the 1247
Polarity and Free Trade aware that each seeks to exploit the wealth of others to enhance its own power. That trade is a means to this end is also common knowledge: as David Baldwin observes, private international trade "is by far the most [cost-]effective . . . way for one country to acquire the goods or services of another" (Baldwin 1985, 116). As a result, states do not calculate their payoffs from trade only in real income terms: relative power effects are likely to affect their calculations strongly. The interwar period provides a compelling example of the power of the security dilemma to contribute to a free trade deadlock. The acrimony of the international economic diplomacy that preceded the 1933 World Economic Conference suggested that the conference would not secure a free trade truce. In the early interwar years, the payment of German reparations was the subject of repeated negotiations. Ostensibly a technical issue whose resolution depended upon expert testimony regarding Germany's ability to pay, the payment of reparations was in reality a highly political issue: the integrity of the entire Versailles settlement was at stake (Trachtenberg 1980, 122). In negotiations that extended from the Paris Peace Conference of 1919 to the Lausanne Conference of 1932, the issue of reparations exposed the political roots of international economic diplomacy. Determined to minimize its involvement in cantinental politics, Britain insisted that the stabilization of Europe depended on the restoration of financial stability and economic prosperity to Germany. It opposed the provisions of the Versailles settlement that it believed either inhibited the economic recovery of, or contributed to financial instability in, Germany (Schuker 1976, 384). As a result, Britain was syrnpathetic to German demands for a reduction in reparations. France, however, was reluctant to endorse any revision of the Versailles settlement favorable to Germany. Unable to persuade either Britain or the United States to guarantee its security, France regarded the retention of the superior position accorded to it in the treaty as its only alternative. Thus, "the sanctity of treaties and the strict enforcement of the status quo" became the first principles of French foreign policy (Wolfers 1940, 19). Because it viewed any treaty revision as setting a dangerous precedent, France engaged in a determined effort to compel Germany to comply with its reparations obligations. Repeated negotiations on German payments did little to reconcile the underlying conflicts of interests among the great powers. Neither Britain nor the United States came to appreciate the French sense of acute vulnerability; France never accepted the Anglo-American vision of an economically prosperous and politically satiated Germany; and Germany never deviated from its strategy of destroying the Versailles settlement. Thus, the economic diplomacy that preceded the 1933 World Economic Conference left a very unpromising legacy: a pattern of intense conflict over fundamental security issues among the great powers. It is no surprise that conflict rather than cooperation marked the 1933 Conference as well, although factors other than historical precedent contributed to its conspicuous lack of success (Eichengreen 1988; Oye 1985). The interwar example obviously does not imply that political conflicts necessarily obstruct the realization of gains from trade. In theory, these conflicts need not paralyze states. They can instead be resolved through the use of a two-step process in which states initially dismantle trade barriers between them; subsequently, each adjusts its defense strategy to accommodate any changes in the balance of power that occur as trade barriers fall. The danger that a window of vulnerability may open between stages, however, is a powerful deterrent to this approach: the
American Political Science Review Vol.83 historical record suggests that such win- eth centuries (Downs,Rocke,and Siver- dows can open surprisingly quickly son1985,119-20). (Trachtenberg 1988). Thus,although states can in theory suc- An obvious alternative is to negotiate cessfully confront the problems inherent trade and security agreements simultan- in the security externalities of free trade eously.Suppose,for example,that the agreements,analysis and evidence suggest Soviet Union and the United States that such successes will be rare events in wanted to trade freely with each other but world politics.It is,as a result,not sur- were concerned that the balance of power prising that students of trade regimes between them might shift as a result.In either explicitly or implicitly link their theory,the two countries could resolve analyses to the postwar Western alliance their fears by simultaneously negotiating (cf.Haggard and Simmons 1987,134; an arms control accord.In effect,this Keohane 1984;Yarbrough and Yarbrough solution compresses the sequential proc- 1986).Nor is it surprising that some ob- ess just outlined into a single stage. servers argue that tariff cuts are more like- The costs of implementing this solution ly between allies than between states be- may be prohibitive,however.As the longing to different military coalitions opening shots in the Uruguay Round (cKeown1982,225). make clear,the negotiation of a trade Not all military alliances are equally agreement alone,even among allies,is likely to evolve into free trade coalitions, very complex;its success is uncertain at however.I shall argue that alliances pro- best.If the merger of negotiations itself duced by bipolar systems are more likely, does not affect the incentives to conclude and ones formed within multipolar sys- either accord,an explicit linkage of trade tems are less likely,to so evolve. and security issues between potential or actual adversary states raises the costs and lowers the probability of success by Great Powers,Alliances, several orders of magnitude.Thus, and Free Trade assuming that gains from trade do not International systems are distinguished vary widely across potential negotiating here in terms of individual states rather partners,it is cheaper for states to negoti- than in terms of alliances (Rapkin 1988). ate with their allies on trade alone than to Thus,the definition of multipolar and bi- link trade and security issues in a compre- hensive negotiation involving possible or polar systems used here follows that of Synder and Diesing:the structure of an actual adversaries. The historical record demonstrates that international system more powerful incentives than the gains is defined by the number of major actors in the from trade have been necessary to control system and the distribution of military power arms races.Analyses of the nineteenth and potential among them.In a multipolar sys- and twentieth centuries conclude that the tem there are several (more than two)'Great Powers'whose military power is roughly equal, majority of arms races that have ended and whose rivalry and cooperation dominate peacefully have done so because of politics in the system.,··A bipolar system is changes in the macropolitical order- one with only two Great Powers and a number specifically,the emergence of a threat by of smaller states.(Snyder and Diesing 1977, 419-20) a third state to both participants in the race (Downs,Rocke,and Siverson 1985). If the security externalities of any free The rise of German power,for example, trade accord render military alliances the ultimately ended the British-French naval natural basis of such agreements,the PD race of the midnineteenth-to-early-twenti- incentive structure confronting states that 1248
American Political Science Review Vol .83 historical record suggests that such windows can open surprisingly quickly (Trachtenberg 1988). An obvious alternative is to negotiate trade and security agreements simultaneously. Suppose, for exdmple, that the Soviet Union and the United States wanted to trade freely with each other but were concerned that the balance of power between them might shift as a result. In theory, the two countries could resolve their fears by simultaneously negotiating an arms control accord. In effect, this solution compresses the sequential process just outlined into a single stage. The costs of implementing this solution may be prohibitive, however. As the opening shots in the Uruguay Round make clear, the negotiation of a trade agreement alone, even among allies, is very complex; its success is uncertain at best. If the merger of negotiations itself does not affect the incentives to conclude either accord, an explicit linkage of trade and security issues between potential or actual adversary states raises the costs and lowers the probability of success by several orders of magnitude. Thus, assuming that gains from trade do not vary widely across potential negotiating partners, it is cheaper for states to negotiate with their allies on trade alone than to link trade and security issues in a comprehensive negotiation involving possible or actual adversaries. The historical record demonstrates that more powerful incentives than the gains from trade have been necessary to control arms races. Analyses of the nineteenth and twentieth centuries conclude that the majority of arms races that have ended peacefully have done so because of changes in the macropolitical orderspecifically, the emergence of a threat by a third state to both participants in the race (Downs, Rocke, and Siverson 1985). The rise of German power, for example, ultimately ended the British-French naval race of the midnineteenth-to-early-twentieth centuries (Downs, Rocke, and Siverson 1985, 119-20). Thus, although states can in theory successfully confront the problems inherent in the security externalities of free trade agreements, analysis and evidence suggest that such successes will be rare events in world politics. It is, as a result, not surprising that students of trade regimes either explicitly or implicitly link their analyses to the postwar Western alliance (cf. Haggard and Simmons 1987, 134; Keohane 1984; Yarbrough and Yarbrough 1986). Nor is it surprising that some observers argue that tariff cuts are more likely between allies than between states belonging to different military coalitions (McKeown 1982,225). Not all military alliances are equally likely to evolve into free trade coalitions, however. I shall argue that alliances produced by bipolar systems are more likely, and ones formed within multipolar systems are less likely, to so evolve. Great Powers, Alliances, and Free Trade International systems are distinguished here in terms of individual states rather than in terms of alliances (Rapkin 1988). Thus, the definition of multipolar and bipolar systems used here follows that of Synder and Diesing: the structure of an international system is defined by the number of major actors in the system and the distribution of military power and potential among them. In a multipolar system there are several (more than two) 'Great Powers' whose military power is roughly equal, and whose rivalry and cooperation dominate politics in the system. . . . A bipolar system is one with only two Great Powers and a number of smaller states. (Snyder and Diesing 1977, 419-20) If the security externalities of any free trade accord render military alliances the natural basis of such agreements, the PD incentive structure confronting states that