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Cooperation and governance in international trade: The strategic organizational approach
392
Book revie,vs
Beth V. Y~rbrough and Robert M. Yarbrough, Coopel,~on and Governance in International Trade: The Strategic Organizational Approach (Princeton University Press, Princeton, NJ, 1992) pp. xi+182. The back cover of this book quotes Oliver WiUiamson as saying of Yarbrough and Yarbrough, 'their work itwites follow-on research'. This observation is well justified. While this is one of the most interesting and thought-provoking books on trade agreements to come along in some time, it also contains enough ambiguity and over-generalization to invite considerable follow-on research. The book's objective is to explain historically observed vafi~.tion in the ir,sti*.utional form of international trade agreements. The 'strategic organizational approach' to this problem begins with the assumption that international trade agreements, like contracts generally, are not costless to write, monitor or enforce, and then seeks to explain institutional variation as a response to differences in these costs. The approach is the same as that of Williamson, who used it to ¢~evelop theories of the firm a~.d market structure. The book distinguishes ,eour different historical forms of trade regime: unilateral, multilateral, bilateral! and minilateral. A unilateral regime is one in which countries choose to liberalize their trade policies autonomousiy, as did mid-nineteenth-century Britain In its repeal of the Corn Laws. A multilateral regime is one in which r,iany countries agree to obey some well-defined inte;national trade policy rules, as in the post-war GATT. Recently proliferating agreements between small groups of countries are defined as either minilateral or bilateral, with minilateral agreements relying on supranational, or third-party, enforcement (e.g. Europe 1992) and bilateral ones being self-enforcing (here 'bi' does not necessarily mean two,). These forms arise in response to the presence or absence of relationshipspecific investment and third-party enforcement. Relationship-specific investment (RSI) is defined as that 'to be used in specific transactions with a specific partner: the value ['of which] in alternative uses is low' (p. 25). Specialized vertical productien linkages across countries and assets devoted to trade capacity are the predominant forms of RSI in international trade. These are tempting targets for government 'opportunism' in trade policy. Without the protection of detailed and enforceable trade agreements between governments, firms may abstain from RSI at the cost of efficiency. Without third-party enforcement, trade agreements must be reciprocal so that opportunism is balanced, while the presence of third-party enforcement enhances the efficacy of trade agreements to the extent that self-enforcement falls short. Final!y, the book interprets history in light of this theory. Britain in the mid-nineteenth c~ltury enjoyed the luxury of unilateralism, because of the absence of RSI. By the end of World War II, the world was ~eeming with RSI and had a hegemon, the United States, to act as enforcer: the result was
Book reviews
393
GATT. (Yes, the book contains the seemingly obligatory chapter on the hegemonic stability hypothesis.) More recently, with the relative decline of the United States but not RSI, countries with e~ceptional levels of RSI have sought bilateral and minilateral agreements. The authors admit they paint this historical picture with a very broad brush, and I am not well qualified to discuss just how broad the brush is. Instead, I confine my criticisms to the theory itself. , m,~ it provides a tight definition of RSI early on, the book uses the idea quite loosely to delineate the theory and find support in the historical data. The usage is so loose that at times RSI appears synonymous with the much broader concept of monopoly power in trade. For example, it is argued that Britain's unilateralism was due to its being virtually the sole world supplier of manufactures, importing its raw materials from many small countries, whose individual trade policy actions it deemed irrelevant. But this sounds like the standard terms-of-trade argument, which does not rely on RSI. Moreover, the argument implies that, had the small countries been a cartel, Britain would not have acted unilaterally; rather, it would have had to negotiate bilateral concessions. Thus, bilateralism does not rely on RSI either. That monopoly power in trade provides an explanation for trade agreements is nothing new. Perhaps the merit of considering RSI is that it leads us to look for monopoly power in trade where traditional notions based on country 'size' would not. The case for the importance of third-party enforcement also proves disappointing. First, the argument that the presence of absence of effective third-party enforcement is 'central in dete~'Tnining the form of organization that will be successful in liberalizing trade' (p. 22) is tautological, particularly considering that minilateral and bilateral forms are defined by the presence and absence, respectively, of third-party enforcement. Second, the impetus for third-party enforcement is said to stem f, om the limits to self-enforcement: the complexity of large groups, imperfect monitoring and the need for reciprocity. This argument is not wcll supported. In particular, it is not clear why third-party enforcement is superior on the first two counts (this is compounded by the book's lack of distinction between moral hazard and adverse selection), and the question of why sovereign nations would ever cede control to a third party without reasonable assurance of reciprocity, remains unanswered. In summary, the book is quite innovative, given that most of the existing economic literature on trade agreements confines its attention to e~plaining the scope and degree of trade liberalization, instead of its form. Moreover, considering the impact Williamson's approach has had on the industrial organization literature, it seems likely to influence the trade policy literature similarly. The book makes solid contributions in highlighting the importance of RSI in creating bilateral dependencies where one might not otherwise IZ11.. ~'|~
"
394
Book reviews
expect them to exist, and in describing how trade agreement form adapts to govern these relationships. Follow-on research is needed to formalize the:,e ideas. Rodney Ludema University of Western Ontario
Ad Koekkoek and L.B.M. Mennes, eds., International Trade and Global Development: Essays in Honour of Jagdish Bhagwati (Routledg¢, London and New York, 1991) pp. x, 251. On 8 November 1988 Professor Jagdish Bhagwati of the Department of Economics of Columbia University was awarded the degree of Doctor honoris causa by Erasmus University of Rotterdam. The University graced the occasion by inviting a number of economists to conduct a symposium on 'International Trade and Global Development', the papers of which form the core of this book. Papers were presented by five attending economists, but one, by Giorgio Basevi, was already committed for publicatinn elsewhere. To piece out a shapely book, the editors invited other contributions, and included Bhagwati's Harms prize lecture, 'Is Free Trade Pass6 After All?', which had been delivered at the lnstitiit fiir Weitwirtschaft in Kiel the previous Ju~e. The papers t~re3~: ~ov:t~ into four parts: Part I, with an introduction by H. Onno Ruding, Dutch ba,',.ker, briefly Dutch Minister of Finance, and onetime ExecutLe Director c.f the I~MF, plus the Harms lecture; Part II, a series of five papers or, trade poli;,'y by L. Alat~ Winters, James Riedel, Martin Wolf, Robert Feens.tra, and Bri:~. Hiedley; Part III, three papers on direct foreign investment (FDI) by teams of authors, on Japan intra-lirm trade by Leo Sleugagen and Hideki Yamawaki, on so-called quid pro quo investment by Elias Dinopoulos and Kar-yiu Wo:~g and the third on the relationship of DFI to export promotion and import substitution in developing countries by V.N. Balasubramanyam and M.A. Salisu; and Part IV on international economic coordination in macro-economic policy by Jeffrey A. Frankel, and an overview of the issues by Professor Bhagwati himself. So much of the received analysis in international trade policy has come from Jagdish Bhagwati, and so widely has he been honoured for his contributions that there is no need for a reviewer to gild the lily. Along with distinguished colleagues such as T.N. Srinivasan he has introduced a series of pregnant concepts into the theory of tariffs, quotas, intervention in the presence of market distortions, immiserizing growth, voluntary export restraints (VERs), directly unproductive profit-making activities (DUP), the cost
Book revie,vs
Beth V. Y~rbrough and Robert M. Yarbrough, Coopel,~on and Governance in International Trade: The Strategic Organizational Approach (Princeton University Press, Princeton, NJ, 1992) pp. xi+182. The back cover of this book quotes Oliver WiUiamson as saying of Yarbrough and Yarbrough, 'their work itwites follow-on research'. This observation is well justified. While this is one of the most interesting and thought-provoking books on trade agreements to come along in some time, it also contains enough ambiguity and over-generalization to invite considerable follow-on research. The book's objective is to explain historically observed vafi~.tion in the ir,sti*.utional form of international trade agreements. The 'strategic organizational approach' to this problem begins with the assumption that international trade agreements, like contracts generally, are not costless to write, monitor or enforce, and then seeks to explain institutional variation as a response to differences in these costs. The approach is the same as that of Williamson, who used it to ¢~evelop theories of the firm a~.d market structure. The book distinguishes ,eour different historical forms of trade regime: unilateral, multilateral, bilateral! and minilateral. A unilateral regime is one in which countries choose to liberalize their trade policies autonomousiy, as did mid-nineteenth-century Britain In its repeal of the Corn Laws. A multilateral regime is one in which r,iany countries agree to obey some well-defined inte;national trade policy rules, as in the post-war GATT. Recently proliferating agreements between small groups of countries are defined as either minilateral or bilateral, with minilateral agreements relying on supranational, or third-party, enforcement (e.g. Europe 1992) and bilateral ones being self-enforcing (here 'bi' does not necessarily mean two,). These forms arise in response to the presence or absence of relationshipspecific investment and third-party enforcement. Relationship-specific investment (RSI) is defined as that 'to be used in specific transactions with a specific partner: the value ['of which] in alternative uses is low' (p. 25). Specialized vertical productien linkages across countries and assets devoted to trade capacity are the predominant forms of RSI in international trade. These are tempting targets for government 'opportunism' in trade policy. Without the protection of detailed and enforceable trade agreements between governments, firms may abstain from RSI at the cost of efficiency. Without third-party enforcement, trade agreements must be reciprocal so that opportunism is balanced, while the presence of third-party enforcement enhances the efficacy of trade agreements to the extent that self-enforcement falls short. Final!y, the book interprets history in light of this theory. Britain in the mid-nineteenth c~ltury enjoyed the luxury of unilateralism, because of the absence of RSI. By the end of World War II, the world was ~eeming with RSI and had a hegemon, the United States, to act as enforcer: the result was
Book reviews
393
GATT. (Yes, the book contains the seemingly obligatory chapter on the hegemonic stability hypothesis.) More recently, with the relative decline of the United States but not RSI, countries with e~ceptional levels of RSI have sought bilateral and minilateral agreements. The authors admit they paint this historical picture with a very broad brush, and I am not well qualified to discuss just how broad the brush is. Instead, I confine my criticisms to the theory itself. , m,~ it provides a tight definition of RSI early on, the book uses the idea quite loosely to delineate the theory and find support in the historical data. The usage is so loose that at times RSI appears synonymous with the much broader concept of monopoly power in trade. For example, it is argued that Britain's unilateralism was due to its being virtually the sole world supplier of manufactures, importing its raw materials from many small countries, whose individual trade policy actions it deemed irrelevant. But this sounds like the standard terms-of-trade argument, which does not rely on RSI. Moreover, the argument implies that, had the small countries been a cartel, Britain would not have acted unilaterally; rather, it would have had to negotiate bilateral concessions. Thus, bilateralism does not rely on RSI either. That monopoly power in trade provides an explanation for trade agreements is nothing new. Perhaps the merit of considering RSI is that it leads us to look for monopoly power in trade where traditional notions based on country 'size' would not. The case for the importance of third-party enforcement also proves disappointing. First, the argument that the presence of absence of effective third-party enforcement is 'central in dete~'Tnining the form of organization that will be successful in liberalizing trade' (p. 22) is tautological, particularly considering that minilateral and bilateral forms are defined by the presence and absence, respectively, of third-party enforcement. Second, the impetus for third-party enforcement is said to stem f, om the limits to self-enforcement: the complexity of large groups, imperfect monitoring and the need for reciprocity. This argument is not wcll supported. In particular, it is not clear why third-party enforcement is superior on the first two counts (this is compounded by the book's lack of distinction between moral hazard and adverse selection), and the question of why sovereign nations would ever cede control to a third party without reasonable assurance of reciprocity, remains unanswered. In summary, the book is quite innovative, given that most of the existing economic literature on trade agreements confines its attention to e~plaining the scope and degree of trade liberalization, instead of its form. Moreover, considering the impact Williamson's approach has had on the industrial organization literature, it seems likely to influence the trade policy literature similarly. The book makes solid contributions in highlighting the importance of RSI in creating bilateral dependencies where one might not otherwise IZ11.. ~'|~
"
394
Book reviews
expect them to exist, and in describing how trade agreement form adapts to govern these relationships. Follow-on research is needed to formalize the:,e ideas. Rodney Ludema University of Western Ontario
Ad Koekkoek and L.B.M. Mennes, eds., International Trade and Global Development: Essays in Honour of Jagdish Bhagwati (Routledg¢, London and New York, 1991) pp. x, 251. On 8 November 1988 Professor Jagdish Bhagwati of the Department of Economics of Columbia University was awarded the degree of Doctor honoris causa by Erasmus University of Rotterdam. The University graced the occasion by inviting a number of economists to conduct a symposium on 'International Trade and Global Development', the papers of which form the core of this book. Papers were presented by five attending economists, but one, by Giorgio Basevi, was already committed for publicatinn elsewhere. To piece out a shapely book, the editors invited other contributions, and included Bhagwati's Harms prize lecture, 'Is Free Trade Pass6 After All?', which had been delivered at the lnstitiit fiir Weitwirtschaft in Kiel the previous Ju~e. The papers t~re3~: ~ov:t~ into four parts: Part I, with an introduction by H. Onno Ruding, Dutch ba,',.ker, briefly Dutch Minister of Finance, and onetime ExecutLe Director c.f the I~MF, plus the Harms lecture; Part II, a series of five papers or, trade poli;,'y by L. Alat~ Winters, James Riedel, Martin Wolf, Robert Feens.tra, and Bri:~. Hiedley; Part III, three papers on direct foreign investment (FDI) by teams of authors, on Japan intra-lirm trade by Leo Sleugagen and Hideki Yamawaki, on so-called quid pro quo investment by Elias Dinopoulos and Kar-yiu Wo:~g and the third on the relationship of DFI to export promotion and import substitution in developing countries by V.N. Balasubramanyam and M.A. Salisu; and Part IV on international economic coordination in macro-economic policy by Jeffrey A. Frankel, and an overview of the issues by Professor Bhagwati himself. So much of the received analysis in international trade policy has come from Jagdish Bhagwati, and so widely has he been honoured for his contributions that there is no need for a reviewer to gild the lily. Along with distinguished colleagues such as T.N. Srinivasan he has introduced a series of pregnant concepts into the theory of tariffs, quotas, intervention in the presence of market distortions, immiserizing growth, voluntary export restraints (VERs), directly unproductive profit-making activities (DUP), the cost