Regime type, veto points, and preferential trading arrangements.

• Author: Mansfield, Edward D.

1. WHAT ARE PREFERENTIAL TRADING ARRANGEMENTS? II. THE EFFECTS OF REGIME TYPE AND VETO POINTS ON PTA FORMATION III. EMPIRICAL TESTS OF THE HYPOTHESES IV. THE DEPENDENT VARIABLE: PTA RATIFICATION V. THE KEY INDEPENDENT VARIABLES: REGIME TYPE AND VETO POINTS VI. CONTROL VARIABLES VII. RESULTS OF THE EMPIRICAL ANALYSIS VIII. ROBUSTNESS CHECKS IX. CONCLUSIONS Preferential trading 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. (1) 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 in 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 nearly every country now belongs to a PTA, some states have rushed to join many of these arrangements, whereas others have joined very few. 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, shedding doubt on claims that countries join PTAs for economic reasons alone. (2)

   Instead, we emphasize the domestic political benefits and costs for leaders contemplating membership in such an arrangement. First, leaders cannot credibly commit to ignore special interest pleading for trade protection. Consequently, voters may hold heads of state responsible for bad economic times even if these economic conditions were not caused by policies stemming from the demands of special interests. Leaders can help address this problem by entering a PTA. Since this problem is more severe in more competitive electoral systems, democratic chief executives are especially likely to join preferential arrangements. Second, we argue that leaders face transaction costs when making trade agreements. The domestic ratification process contributes heavily to the magnitude of these costs. As the number of "veto points" expands, domestic ratification of an international agreement becomes more difficult. These two different domestic political factors--the nature of the regime and the number of veto points--play a significant role in determining whether countries are willing and able to establish a PTA.

   The results of our statistical tests furnish considerable support for these arguments. Based on an analysis of all PTAs formed since World War II, we find that more democratic states are more likely to establish PTAs than their less democratic counterparts. We also find that states are less likely to enter a trade agreement as the number of veto points increases.

1. WHAT ARE PREFERENTIAL TRADING ARRANGEMENTS?

   PTAs are international agreements that aim to promote economic integration among member-states by improving and stabilizing the access that each member has to other participants' markets. There are five different types of PTAs. (3) First, some arrangements grant each participant preferential access to select segments of the other members' markets. Second, a free trade area (FTA) is marked by the elimination of trade barriers on many (if not all) products within the arrangement. Third, customs unions (CUs) are arrangements in which members eliminate trade barriers on other participants' goods and impose a common external ta- riff (CET) on the goods of third parties. Fourth, a common market is a CU that is augmented by similar product regulations and the free flow of factors of production among members. Fifth, an economic union is a common market in which members also coordinate fiscal and monetary policies. Despite the differences among these institutions, empirical studies generally analyze PTAs as a group. We will do likewise since the argument we advance is focused primarily on why states join a PTA rather than on the particular type that they enter.

2. THE EFFECTS OF REGIME TYPE AND VETO POINTS ON PTA FORMATION

   All political leaders depend on the support of constituents to stay in power. However, the means by which leaders retain office depends on the type of political regime. In democracies, leaders must stand for office in regular and competitive elections. In autocracies, by contrast, they must maintain the allegiance of small, select groups within the country, often including the military, labor unions, key members of the ruling party or economic elites. Autocracies may hold elections, but such contests are much less likely to lead to leadership turnover than those held in democracies. Greater political competition for office spurs democratic leaders to sign international trade agreements.

   Leaders in many polities are caught between the pressures exerted by special interest groups and the preferences of voters. Special interests often press for policies--such as protectionist trade policies--that adversely affect the economy. Leaders may want to satisfy some interest groups in order to generate benefits like campaign contributions. But giving in to all interest group demands would have very harmful economic consequences and could imperil their hold on office. Leaders face a credibility problem. They have a hard time convincing the public that they will not accede to special interest demands. When elections take place in combination with poor economic circumstances, voters may blame incumbents for economic problems and turn them out of office. Leaders prefer to remain in office and to do less for interest groups if they can credibly convince voters of their actual behavior.

   Trade agreements provide such a mechanism. They allow leaders to commit to a lower level of protectionism than they might otherwise desire, but to signal to voters that they will not allow trade policy to be guided by special interests. Voters, if reassured that leaders are generally abiding by the terms of the agreement, have reason to believe leaders who claim that their policies did not cause bad economic times. In turn, leaders are more likely to remain in office since voters will choose to reelect them even during economic downturns. The more electoral competition there is, the more leaders have to worry about being ejected from office and the greater the problems they face from their inability to make credible commitments about trade policy.

   Of course, voters do not display much interest in many policy issues, but economic policy and performance are typically of great concern. (4) Voters may not know much about trade policy, but we do expect them to know something about economic conditions. When the economy sours, voters will be more likely to reject incumbents, unless leaders can furnish information that the downturn was due to circumstances beyond their control rather than rent seeking or incompetence. PTAs can provide such information, either by directly monitoring and reporting on members' behavior or because the participating countries have reason to publicize any deviation from the arrangement by a member. Hence, we argue that democracies--where the voting public determines whether the incumbent retains office--should be more likely to sign such agreements than other regime types.

   For autocracies, the calculations differ. Interest group pressures for protectionism in autocracies vest leaders of these countries with an incentive to resist entering PTAs that reduce the rents they can provide to supporters. Equally, electoral competition is less likely to determine their fate. Consequently, autocrats have less incentive to enter into agreements than their democratic counterparts.

   Like most international agreements, PTAs do not have direct effects in signatory countries. In order for the terms of the arrangement to take hold, it has to be ratified by some set of domestic veto points. (5) We argue that the number of veto points in a country affects the transaction costs that governments bear when ratifying a PTA. More veto points increase these costs, thereby reducing the incentives of leaders to try to negotiate and ratify PTAs.

   In this study, we view the state as an aggregation of institutions populated by actors with varying preferences who share decision-making authority. The distribution of decision-making power among these actors and the extent to which their preferences diverge define the number of veto points. Veto points have the ability to block policy change and their assent is necessary to alter existing policies. (6) Conceptually, regime type and veto points are distinct and we treat them as such. Veto points exist in all types of regimes. Even in non-democratic countries, domestic politics is rarely a pure hierarchy with a unitary decision-maker and no constraints on the leaders. Domestic groups with varying preferences who have veto power often compete for influence over policy, and dictators depend on them in making policy and retaining office. Democratic regimes are even more likely to have veto points than non-democratic regimes, although the number of such points varies considerably among democracies. Generally, the legislature and the executive vie for control over decision-making in democracies. Sometimes two or more political parties or...