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/lp/ou_press/exit-from-trade-agreements-a-reputational-analysis-of-cooperation-and-RgWEeaePR8
- Publisher
- Oxford University Press
- Copyright
- © The Author(s) 2018. Published by Oxford University Press. All rights reserved.
- ISSN
- 1369-3034
- eISSN
- 1464-3758
- DOI
- 10.1093/jiel/jgy018
- Publisher site
- See Article on Publisher Site
Abstract
Abstract The last three years have been marked more by exits from trade agreements than by the successful completion of major additional pacts. While most of the international trade literature focuses on the best methods of better integrating national markets, this article seeks to examine the effect of exit on international relations. We generally assume that the costs of severing economic ties is enough to maintain trade agreements, but that proposition no longer seems robust in our current moment of widespread dissatisfaction with trade relations. This article, therefore, seeks to look outside of trade-related costs of exit to possible extralegal costs, particularly reputational or community costs, of exit. The article also aims to provide the first cut of distinguishing between the two types of reputations—one for being ‘uncooperative’ and one for being ‘unfair’. Drawing on behavioral theories, the article begins to develop a distinction between an audience’s belief that a state is acting ‘uncooperatively’ as compared to ‘unfairly’ and what the consequences of this distinction may be. The article illustrates how different types of exit can have divergent reputational effects. INTRODUCTION The last three years have been marked more by exits from trade agreements than by the successful completion of major additional pacts. The UK stunned global markets when it announced that it would withdraw from the European Union (EU). Other core EU states, including France and Italy, have recently debated also leaving the EU in their national elections. Across the Atlantic, the United States (US) is threatening to withdraw from the North American Free Trade Agreement (NAFTA) if it is not renegotiated. The US additionally withdrew from the Trans-Pacific Partnership negotiations and is even hinting that it might also withdraw from the World Trade Organization (WTO), although that threat seems more remote. This follows a broader trend in a growing disillusionment in global trade liberalization. The WTO has been unsuccessful in concluding a comprehensive agreement in the Doha Round of multilateral negotiations, and multiple members have stated that they wish to end the round entirely. 1 While most of the international trade literature focuses on the best methods of better integrating national markets, this article seeks to examine the effect of exit on international relations. We generally assume that the costs of severing economic ties is enough to maintain trade agreements, but that proposition no longer seems robust in our current moment of widespread dissatisfaction with trade relations. This article, therefore, seeks to look outside of trade-related costs of exit to possible extralegal costs, particularly reputational or community costs, of exit.2 Specifically, what are the reputational effects of withdrawing from trade agreements? Does a withdrawal from trade agreements hurt the state’s ability to form new trade agreements? Does it influence other states’ willingness to sign agreements on non-trade issues? And, if so, how long do these effects last: are these effects limited to the current government, or do they attach to the state itself? Finally, how do states hurt by another’s exit respond? Do they continue to deal with the state but more cautiously, or do they seek to suspend cooperation with the state, at least in the trade realm? The effect of exit on state relations is one of the more understudied areas of international relations theory.3 In most cases, exit is explicitly allowed by a treaty’s terms and, so long as the government abides by the terms of the exit provisions, does not breach any international obligations. As a result, IR–IL scholars would be hard pressed to say that exiting a treaty harms a country’s/government’s standing as a law-abiding entity. Such actions, however, may make the country/government appear less reliable and could change the public’s view of the entity as cooperative or dependable. Although many analyses of reputation conflate the reputation for law-abidingness and cooperativeness, it is a particularly important distinction in discussions of treaty exit. The country/government has stuck to the letter of the agreement, so there is less of an immediate reaction that the entity is a scofflaw, betraying the trust of its partners and disregarding its promises. Instead, the audience is left with a more nuanced analysis of whether the exit demonstrates bad faith or opportunism and how this alters the audience’s expectations of the actor’s or actors’ future behavior. This article sketches out these reputational questions about exit and illustrates how different types of exit can have divergent reputational effects. The article aims to provide a first cut analysis of how extralegal reputational concerns may unfold in the context of exit. The article does not attempt to provide a comprehensive analysis of all exits from trade agreements but focuses on two representative cases for our current moment of widespread trade skepticism and populist politics.4 The most significant costs of exiting trade agreements will obviously come from severing the economic ties with partner states. Nonetheless, anti-trade policies seem to have a particular currency right now. As such, this article looks outside of the direct economic costs of exit to the political and social ramifications of treaty withdrawal to analyze what the effects may be, both now and in future treaty negotiations. Section One begins by theorizing how an international audience may understand a state’s decision to exit a trade agreement. Although exit is legal, it might not be undertaken in good faith. This section discusses how exit may be viewed along a continuum from a clean break, at one end, to a forced renegotiation, at the other. Section Two explores the roles of reputation in constraining a state from abusing its exit options. This section reviews how reputational considerations can influence government decision-making and the limits of this influence. Drawing on behavioral theories, the section also tries to tease out a distinction between an audience’s belief that a state is acting ‘uncooperatively’ as compared to ‘unfairly’ and what the consequences of this distinction may be. Section Three applies this framework to two examples of exit: the US’s threat of exit from NAFTA and the British exit from the EU. In each of these examples, the audience’s analysis depends on the perception of motives of the exiting state, and the reputational change can attach to the state, the government, or the population. Section Four concludes by examining the consequences of exit for the future of trade negotiations. This section highlights how high reputational costs may deter exit but, when exit occurs, reputational costs may hamper further trade negotiations. As a result, low reputational costs might actually be the outcome most likely to support future agreements in our current moment of exit from trade agreements. I. UNDERSTANDING EXIT IN INTERNATIONAL LAW AND INTERNATIONAL RELATIONS Exit inhabits an odd middle space in international law and international relations. Exit from trade agreements is generally a legal action so long as the government involved follows the treaty’s provisions for withdrawal. Nonetheless, it can impose unexpected costs on partner states that have made investments (economic or political) dependent on the continuation of the treaty agreement. The puzzle might actually be why exit is generally so easy given the economic stakes involved. Most trade treaties simply require one year’s notice5 (the Lisbon Treaty has a default rule of two years for leaving the EU6), although there are certainly examples of longer exit provisions in other treaties with economic consequences, such as the Paris Climate Agreement’s requirement that the agreement be in force for three years before a state has the ability to give notice of exit (which would take effect after one year).7 There are two types of reasons why states might choose to make exit easy in economic agreements. The first type of rationale is an ex ante bargaining one. There can be a trade-off between the treaty’s flexibility, including the ability of a state to exit quickly, and the state’s willingness to make greater concessions or join the trade agreement at all.8 If a state is uncertain of how a trade agreement will affect its domestic economy, then the state might put a premium on maintaining its legal right to withdraw from the treaty. Without such an assurance, the state might refuse to join or might only make shallow commitments. Of course, the flip side of this reasoning may also be at play. If other states know that other parties can exit with little notice, then they might rely less on the promises that other states have made through the treaty.9 States will understand that exit is possible and hedge their commitment to the treaty because they fear that parties could withdraw. This balance between commitment and the right to exit is an institutional design question that treaty makers must address. The fact that so many trade treaties have short notice periods before a state can exit (generally one or two years) indicates that most negotiators are willing to risk subsequent exits to get more states to join the agreement. We can imagine that states may ex ante be willing to sign on to short exit times because of the difficulties of keeping an unwilling partner in the agreement. A reluctant partner may not offer existing members many benefits if the state deviates from the agreement’s rules. In addition, there are other administrative costs. Frequent breaches can overwhelm a regime’s dispute settlement system (whether that system involves diplomatic negotiation, mediation, or third-party adjudication). Reluctant members may also slow negotiations on deeper agreements or the admittance of new members. Given these costs, members might reasonably be willing to just let a reluctant member exit even though the continuing members may face losses from their reliance on the treaty. From an ex post view, there is also a rationale for making exit relatively easy. Trade is generally considered to be a club good, and thus a state that exits an agreement will be forgoing significant benefits. The exit from the agreement eliminates the state’s obligations from the agreement, but it also deprives the state from the benefits of membership. An exiting state regains more policy discretion in directing its economic policy, but it faces higher barriers to accessing other states’ markets. In this sense, exit appears to be an honest approach for a state that wants to deviate significantly from existing trade obligations. Rather than selectively breaching trade obligations in an opportunistic fashion, the state simply withdraws from the agreement. The complicated part of this analysis is that states often use exit—either formal exit or the threat of exit—to force a renegotiation of the agreement. Renegotiation has much of the same flavor as an opportunistic breach. The state wants to keep the part of the agreement that it likes, but wishes to discard aspects of the agreement that it does not—aspects that presumably benefit others. For states with the market power to demand renegotiation, exit is less of a clean break (an acceptance of the loss of benefit with the removal of legal obligation) than an attempt to reshape the agreement. Exit thus provides an interesting window to look into the reputations for cooperativeness. Unlike breaching a trade agreement, the act of withdrawal is not forbidden by the treaty. A state exiting an agreement is not likely to harm its reputation as a law-abiding actor. However, the state might suffer some reputational harm as ‘uncooperative’ and possibly ‘unfair’. This is a much subtler analysis than breach though. It goes to the motives for exit and the consequences for affected states. One way to work through these reputational effects is to imagine a continuum of exit behavior from a ‘clean break’ to a ‘forced renegotiation’. At the clean break pole, the state plans to completely end its treaty relationship with other partners. Such an exit may require some follow-up negotiations but fundamentally signals the end of a relationship. A clean break exit is the clearest example of treaty withdrawal where the state accepts the loss of benefits as a condition for ending a state’s legal obligations. From a cooperativeness viewpoint, it is not entirely clear what reputational effects exits closer to the clean break pole will lead to. The exiting state may arguably be seen as unreliable in the sense that it failed to follow through on an established relationship, but the audience may also see the state as legitimately exercising an option that was negotiated into the agreement. In some instances, the audience might actually expect the state to be more cooperative in the future as it seeks to establish new relationships to replace the old. At the other end of the continuum is a forced renegotiation. This is a situation in which the state threatens to exit purely to change the allocation of treaty benefits in its own favor. In this situation, the state does not intend to end the treaty relationship but wants to restructure it by taking the status quo of the existing treaty relationship out of the policy space. Determining whether the party threatening to exit would actually prefer to leave the agreement if the terms do not change requires calling their bluff, which can be a costly strategy for all involved. In exits closer to the forced renegotiation pole, it seems more likely that a party would suffer a reputational effect for being non-cooperative. The threat of exit may be legal, but here it goes to the heart of whether or not the party is willing to stick to the terms of its deals. The audience may view the claim of exit as a fiction—the party does not have the intent (or only a low probability of an intent) to walk away—and is instead using legal language (the right to exit) to redistribute gains from cooperation. This is a paradigmatic example of where a state’s reputation for law-abidingness and its reputation for being a cooperative partner may diverge. This continuum of exit, together with a larger framework for considering reputational effects, can provide a first cut into analyzing the effects of exit in current trade relations and future negotiations. Section Two elaborates a framework for applying reputational analyses to state action. Section Three applies this reputational framework and the exit continuum to the UK’s exit from the EU and the US’s threat to exit from NAFTA. Sections Two and Three also aim to expand the range of reputational effects by highlighting the possible difference between conceptual and consequential differences in having a reputation for being uncooperative versus having a reputation for being unfair. II. REPUTATIONAL ANALYSES OF STATE ACTIONS Before turning to the question of how an exit from a treaty will alter a state’s reputation, it is useful to provide a broader framework for reputational analysis. Part A of this section does so. It describes the three main axes that reputational analyses can involve: (i) what the reputational assessment regards (e.g. law-abidingness, cooperativeness, general good policies), (ii) how far the reputational analysis extends (e.g. only to trade agreements or to non-trade issues as well), and (iii) to whom the reputation assessment attaches. Part B then develops a distinction between the audience’s response to ‘uncooperative’ actions and its response to ‘unfair’ actions. The dominant approach in the law and economics literature is to assume that the audience recalculates the probability that the exiting party will be cooperative in the future. This may lead to the state having to pay a risk premium in future negotiations. An alternative approach is to consider a fairness framing, where actors simply avoid exchanges with other actors deemed to behave unfairly. Adopting some of the work of behavioral economists, this article argues that a fairness approach might lead to boycotts of states, not just higher risk premiums. A. The existing reputation framework: cooperation For international law and international relations scholars, reputation functions as a type of backstop against illegal or uncooperative acts. The logic is that states (or governments) recognize that there are benefits to engaging in international relations. These benefits can include economic gains, greater security, and stopping environmental degradation. States thus want to be able to join these treaties.10 However, if a state breaches international law or otherwise acts uncooperatively, the state may develop a reputation for being a poor treaty partner.11 The state is thus concerned with its reputation and wants to maintain its image with the international audience of being a good partner. The state’s concern with its reputation will make the state hesitant to undertake illegal or uncooperative actions even if there are no formal sanctions that other states could undertake. That is, even if other states do not impose sanctions or otherwise retaliate, the acting state can nevertheless face reputational costs. That is because reputation is fundamentally just the audience’s beliefs about the actor. States reevaluate their beliefs about what type of actor the state is (or the government is) even if they have no intention of imposing costs—it is simply an informational function.12 Reputational costs also could apply when there are official sanctions, such as WTO authorized countermeasures.13 As a result, international relations and international law scholars often rely on the concept of reputation as a method of policing state action even in an anarchic world where there can be few mechanisms for enforcing cooperation and the rule of law.14 Reputational costs can apply all the time, not just when other states have the economic or military power to respond to a state’s illegal or uncooperative actions. The universality of this mechanism has made it the final backstop for why states should not abuse other states even when there will be no formal response: a state can always be worried about its reputation and its ability to make future agreements. The reputational analysis can be more complicated, however. The ability of reputation to act as a general backstop can be undermined if reputation is not a general concept. When applied to a complicated world of international relations, several key questions become relevant.15 First, what is the state trying to develop a reputation for? A reputation for being law-abiding and a reputation for being cooperative are different reputations that can push in opposite directions.16 For instance, if a state refuses to sign a treaty to improve the global environment, it might develop a reputation for being uncooperative but maintain its reputation for being law-abiding because it did not breach any treaty obligations. Other times, states might actually prefer to have a ‘bad’ reputation, such as being irrational or a bully. This matters for the reputational analysis because actors can try to develop differentiated and complex reputational portfolios—such as a reputation for being law-abiding but not necessarily cooperative. Second, there is a question of how far the state’s reputational effects go.17 Does an action in one issue area or in one treaty regime have ramifications outside of that issue or regime? A state may consistently breach its international environmental obligations but have a near perfect record of upholding its security agreements. Does the state’s problematic environmental record matter to partners who are considering forming a military alliance with the state? If the audience does not view poor behavior in one arena as having an influence on an actor’s behavior in another arena, then the reputational effects of a state’s actions may be cabined to a narrow area. When reputational costs are limited to narrow areas, then actors might be able to behave poorly in some issue areas or treaties and yet maintain a good reputation generally. In short, the constraining power of reputation may be significantly curtailed.18 Third, it is not entirely clear to whom reputation belongs. The most common usage is to say that the ‘state’ has a reputation. This implies that the abstract entity of the state has a reputation that is ongoing and independent of the government in power. Alternatively, other actors could have reputations different than that of the state. For instance, a government or even other substate entities could have a reputation.19 Reputation is fundamentally an informational function: it is the audience’s assessment of whether past actions are predictive of future actions. Thus to whom a reputation belong depends on the audience’s beliefs about whether past actions will influence current actions. For instance, if the audience believes that how the US acted while led by President Obama will not be indicative of how the US will act under President Trump, then past US acts under President Obama are not informative. Similarly, if President Trump’s actions are not indicative of how a future US president will act, then the US’s current actions will not be relevant to the future beyond the Trump presidency. In these circumstances, the reputation would belong to the administration, not the state as a state, because the audience does not expect a consistent state approach. This issue of to whom a reputation attaches is important because it determines how long reputational costs may last. If the audience believes that the US will act differently with a new administration, then the reputational effects of the past administration may simply no longer be relevant.20 This is not because the audience does not wish to punish past bad actions (it may), but, rather, the audience views the new administration as likely to act under a different set of norms. This does not have to be all or nothing. A new administration from the same political party might have high levels of reputational overlap with the old administration because the audience expects a similar approach. When reputation attaches to an administration rather than the state, however, the ability of reputation to act as a constraint becomes time limited. The reputational costs for poor behavior can be quite small if there is a change in government and the past administration’s reputation is no longer predictive of the new government’s action. Here again, the constraining power of reputation on state action may be limited. These reputational limits are critical when evaluating real instances of state exit. Also relevant is how the audience reacts to instances of exit. As Part B discusses, the audience may draw a distinction between acts that are uncooperative and acts that are unfair. Drawing on the behavioral economics literature, Part B discusses how these two different framings may lead to very different audience responses to exit. B. A new reputational framework: fairness What are the consequences to the state of losing a reputation for cooperativeness? In the law and economics literature, scholars argue that the loss of a reputation for cooperativeness can lead to higher ‘prices’ for treaty entry. The standard way that scholars discuss the costs of reputational loss is to assume that the audience recalculates (or ‘updates’, to use the economic term) its beliefs about the exiting state ‘type’. The audience will then adjust its strategy based on its new beliefs. For instance, the audience might have previously believed that the state would only be uncooperative in 5% of interactions but recalculates its beliefs to assume that the state will now act uncooperatively in 15–20% of interactions. This recalculation of beliefs about the exiting state’s cooperativeness can have a real impact on the exiting state. The state might have to pay a premium in future interactions to make up for the fact that potential partners find the state to be less reliable. In this section, I want to explore an alternative way to discuss the consequences of exit, particularly forced renegotiations. Instead of framing this as uncooperative, the audience might alternatively (or additionally) view such actions as ‘unfair’. Fairness is a different concept from cooperativeness in that it goes to the audience’s desire to engage with (or desire to isolate) a party, not just the audience’s expectation of how the party will behave in the future. It may seem odd to discuss trade agreements as fair or unfair in the sense that there is not a very clear normative benchmark for what trade agreements should include. Trade is often considered at the height of negotiability—what is fair is whatever the parties end up agreeing on. However, once the parties have agreed to a set of terms, the parties’ expectations become set.21 Uncompensated movements from this equilibrium are viewed as ‘unfair’ losses that the audience may resent, in addition to causing the audience to negatively update their beliefs about cooperativeness. To further explore this fairness framing, consider Richard Thaler’s example of snow shovel sales.22 There is not necessarily any one fair price for a snow shovel. A store might have a lot of discretion (depending on competition in the area, perceptions of quality, or other issues) in setting the price. But once it establishes a price, consumers view higher prices during an April snowstorm as unfair.23 Unfair behavior may decrease the audience’s willingness to engage the actor at all, even if there are possible gains from continued transactions. I might avoid doing business with a store that I view as engaging in unfair business practices even if that decision imposes significant costs on me (going out of my way to travel to a different store, taking on search costs to find other retailers, or perhaps even paying generally higher but consistent prices).24 This borders on economic ‘misbehavior’, (to use Thaler’s term) but it conforms to conceptions of fair dealing that seem ubiquitous in human interactions.25 Interestingly, a store’s decision to stop selling snow shovels entirely is likely to be viewed as fair even though it might result in a higher loss of consumer surplus than the ‘gouged’ price. This idea also circles back to the clean break exit and why that may be viewed as fair even if there are higher reliance losses. At the outset, it may be useful to discuss whether these fairness concerns apply to states. Most of the work on fairness focuses on individuals and businesses, but these same concerns work at the level of states. Just as individuals respond to perceived unfairness, states can do so as well. International relations scholars are increasingly making the case that the individuals who lead states are themselves best understood as human decision makers rather than an idealized version of rational actors.26 Concerns with fairness and reciprocity are not limited to individuals and businesses but are part of the fabric of states’ discourse and relationships. Similarly, in international law, Anne van Aaken has explored how human psychology can explain treaty design and compliance.27 She argues that political psychology is critical to understanding how states view law and understand their choices in the international arena. All of these approaches highlight how the psychological concerns that we associate with community relations continue to exist as government leaders interact on the international stage. Applying Thaler’s fairness framework to states, a reputation for fairness can exist independent of concerns with cooperation. The two reputations are not mutually exclusive but they may lead to different strategies. Calculations of the likelihood for uncooperativeness may lead states to ask for more in negotiations, analogous to charging a higher price when you are unsure of payment. In comparison, the concerns with unfairness may lead to the exclusion of the party from future negotiations even if this results in a loss for excluding states, analogous to a boycott. At the extreme, we could speculate that views of unfairness may even lessen parties’ belief in the legal bindingness of a renegotiated agreement, although formally the agreement may qualify as a valid treaty. If parties believe that the renegotiation took place due to the unfair actions of a partner, then they may not feel the need to comply in good faith and may continue to resist new rules, even if that resistance is mutually costly. Concerns about unfairness are at their height when states are engaged in legal, but opportunistic, activities. Although conceptions of unfairness are likely to coexist with concerns about a state’s cooperativeness, the two ideas have distinct cognitive bases—one in calculation, one in social relations—and lead to different expectations regarding the audience’s likely response—one based on updating based on information, one based on a willingness to engage in costly social sanctioning. Examples of treaty exit may be one of the most fertile areas to attempt to separate out these effects. III. EXIT IN ACTION: BREXIT AND NAFTA This section applies these frameworks to two examples of exit: the UK’s exit from the EU as an example of a clean break and the US renegotiation of NAFTA as something closer to a forced renegotiation. The discussion examines (i) what the reputational effects in each situation are, (ii) the scope of the reputational effects, and (iii) to whom the reputational effects will attach. The NAFTA example further examines how a reputation for unfairness may also exist in the context of forced renegotiations. A. Brexit The UK surprised international observers when British citizens voted against remaining in the EU in a popular referendum in 2016.28 The vote was particularly surprising given that the leadership of both political parties were in favor of staying in the EU Prime Minister David Cameron resigned from office the next morning, claiming that he should not be the person to lead exit negotiations since he had favored remaining in the union.29 These somewhat unusual circumstances may have several effects on the reputational consequences of exit. At the outset, it is not clear that UK political elites will be seen as less cooperative internationally on trade issues.30 Although the referendum vote demanded an exit from the EU, the UK government has been explicit that it plans to try to deepen its commonwealth ties and establish new trade agreements to make up for its loss of access to the European market.31 Rather than signaling a wholesale retreat from trade agreements, the exit from the EU may signal resistance to the EU’s social and political demands rather than economic ones. Furthermore, the current government’s increased need for access to non-European markets may make their trade commitments more credible rather than less. Thus Brexit may be a situation where, at least for trade issues, the state or top government leaders are not necessarily viewed as less cooperative due to a treaty exit. The scope of reputational effect and the actor-placement of the reputational effect are somewhat uniquely tied together in the Brexit context. Due to the fact that Brexit was the result of a popular referendum, this decision may be viewed as a one-off (decisions by referendum are rare in the UK) and not representative of how the British government will make decisions going forward (indeed, referenda might even become even more rare in British politics post-Brexit). Instead, this action might reflect less on the British government elites than on the views of the British public on social issues. Rather than having an impact on future trade agreements, the reputational ripples may be seen more in the human rights context: the British public’s reluctance to sign on fully to the European social project that includes immigration and, probably, aspects of the European Convention on Human Rights. In short, the British exit from the EU may not lead to an uncooperative reputation for the ‘state’ or current government, at least in the context of trade negotiations. Depending on the framing of Brexit in the minds of other government leaders, the UK may be viewed as less cooperative on social issues and thus have a more difficult time concluding treaties in these arenas. Interestingly, most discussions of reputation after the Brexit vote have focused on the EU officials leading exit negotiations. The UK is not the only government contemplating withdrawal and thus EU negotiators are interested in decreasing the incentives of other states to follow suit.32 One of the more notable effects of exit may be for the trade pact to try to develop a ‘tough’ reputation in withdrawal negotiations to maintain the integrity of existing agreements. B. NAFTA The US demand to renegotiate NAFTA comes out of a very different political context. Although the US has not officially declared that it will exit the treaty, the Trump Administration has explicitly tied the idea of exit to the success of renegotiation talks. It is purposefully unclear if the US would actually walk away from NAFTA if renegotiation efforts fail.33 Unlike Brexit, the threat to exit from NAFTA has come from top political officials. As a candidate, President Trump ran on a platform of rolling back American trade obligations, as well as implementing a stricter immigration policy. Once President Trump was elected, his administration put the renegotiation of NAFTA forward as a top policy priority. Moreover, the administration’s demands were explicitly about creating a deal that emphasized American economic goals. Here, the state’s leadership was focused on changing a trade agreement for economic reasons. Although there is certainly an overlay of immigration concerns, at least in the background, this instance of exit is more solidly about the desire of the top officials of the state to alter their trade commitments. This is a situation where an actor would expect to develop a reputation for being uncooperative. The threat of exit is legal, so the state could not be accused of breaching international law so long as it adhered to the treaty’s demands for withdraw. However, the international audience would certainly view the actor as less reliable and less willing to stick to the spirit of the deals they strike. In the NAFTA context, this uncooperative reputation may also attach more to the current government than the state. Any reputation analysis depends on the cognitive frames of the audience, but there are many administration-specific elements here. The characterization that Mexico has disproportionally benefited from NAFTA and the particular focus on bilateral trade balances are unique to the Trump Administration. In contrast, most past US administrations have embraced regional trade agreements (particularly NAFTA) and not sought wholesale renegotiations. Moreover, the US is a large economic market, so the audience is likely to have a greater awareness of changes in the US government and, thus, more likely to attribute a policy to a government than a state. As a result, a reputation for uncooperativeness may be cabined to this administration. It is certainly possible, however, that the US as state is viewed as uncooperative because of the demand to renegotiate NAFTA. At the very least, the US may develop a reputation for being unreliable between presidential administrations. The NAFTA example also provides an opportunity to explore ideas of unfairness in exit. The terms that the Trump Administration is now bargaining for might not have seemed out of the ordinary if they were part of the original NAFTA negotiations. But once the agreement is set, parties’ expectations change. The audience may understand the demand to renegotiate a deal as an act of sheer economic power. The audience will most likely view a state’s forced renegotiation of an agreement because it has the power to do so as an inappropriate and unfair act. It is the state leveraging its power to redistribute gains in a very overt way—much like hiking up the prices of snow shovels because the demand suddenly increases. An unfairness framing of this type of exit highlights the possibility that the audience may view such acts as worthy of avoidance behavior, even if it is mutually costly. This is categorically different from a probabilistic analysis of the likelihood of future cooperative activity. If they act like individuals, states may be willing to take on non-trivial costs to avoid dealing with such actors in the future. In the NAFTA context, the result may be that Canada and Mexico resist demands for renegotiation—or impose their own difficult-to-meet counter-demands—not because of their updated belief that the US will not abide by its new agreement, but because they do not wish to validate the American insistence on renegotiation. IV. CONCLUSION In the international realm, treaty exit is not a uniform process that can be analyzed as a single event. If exit is permitted by the treaty’s text (which it almost always is outside of core human rights agreements), then a state’s decision to exercise its option to exit falls outside of the compliance/non-compliance category of legal judgment. A state’s decision to exit can have broader reputational effects, but the audience’s reputational analysis will depend on a larger set of contextual issues. In practice, this may mean that there is a wider distribution of audience views regarding what the state’s exit portends for future behavior. The possible loss of a reputation for cooperativeness may be a meaningful constraint on a government when considering exit from trade agreements. Ex ante, reputational concerns may tilt states toward remaining in their treaty agreements. Once a state chooses to exit or officially demands renegotiation, reputational losses are realized. Reputation is no longer a constraint on government decision-making; the audience simply changes its view of the state. This ex post reputational analysis can hamper future trade negotiations. If a state is viewed as uncooperative, other potential partners may demand more of the state as a condition of entering the treaty regime (potential partners discount the state’s promises and demand a premium to make up for its less reliable reputation). All things being equal, this higher cost to join a trade agreement will make trade agreements harder to conclude, because the possible set of mutually acceptable deals narrows.34 It might also make trade agreements shallower, because parties do not trust each other sufficiently to make deeper commitments. If a state develops a reputation for unfairness, the consequences can be more extreme. Potential partners may wish to avoid entering into trade agreements with the state altogether. Here, potential partners may be acting in a manner that is not strictly economically rational: that is, they are opting not to form agreements that are perceived as unfair even if the unfair agreement is the best the parties can do under the circumstances.35 Such actions are consistent with cognitive theories of how individuals respond to unfairness and potentially how states do as well.36 The best hope for future trade negotiations given the current trends in the international system toward exit may be for reputations to be short. In particular, if the audience assigns the uncooperative or unfair reputation to the state’s government, not the state, then the reputation may last only as long as the government. Short reputations may impose less of a constraint on state decision-making ex ante, but they are better for restoring cooperative activity if exit occurs. The author would like to thank Curt Bradley, Larry Helfer, Ed Swaine, Joel Trachtman, and two anonymous reviewers as well as the participants of the 2017 Duke–Yale Foreign Relations Law Roundtable and the MC11 Think Conference for helpful comments and suggestions. Bo Stewart provided outstanding research assistance. Footnotes 1 The 2015 Nairobi Ministerial ended with a joint statement to highlighted members disagreements over whether to reaffirm the Doha Development Agenda. See, World Trade Organization, Ministerial Declaration of 19 December 2015, WTO doc. WT/MIN(15)/DEC, 30. Several commentators have read this statement to mean that the Doha Round is now effectively over, including the contemporary US Trade Representative. See Michael Froman, ‘Opinion: we are at the end of the line on the Doha round of trade talks’, Financial Times (December 13, 2015), https://www.ft.com/content/4ccf5356-9eaa-11e5-8ce1-f6219b685d74 (visited 24 April 2018). The WTO has concluded several non-comprehensive trade deals including pacts on trade facilitation and information technology. 2 Many trade scholars have focused on the reputational, as well as economic, dynamic of trade agreements. See generally, e.g. Joost Pauwelyn, ‘Optimal Protection of International Law: Navigating Between European Absolutism and American Voluntarism’ (2012); Andrew Guzman, ‘The Design of International Agreements’, 16 European Journal of International Law 579, 596 (2005); Warren F. Schwartz and Alan O. Sykes, ‘The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization’, 31 The Journal of Legal Studies S179, S196–97 (2002); Rachel Brewster, ‘Pricing Compliance: When Formal Remedies Displace Reputational Sanctions’, 54 Harvard International Law Journal 259 (2013). 3 The major exception is Laurence R. Helfer, ‘Exiting Treaties’, 91 Virginia Law Review 1579 (2005). For an analysis of domestic laws on how governments can exit treaties, see generally Curtis A. Bradley,‘Treaty Termination and Historical Gloss’, 92 Texas Law Review 773 (2013); Curtis A. Bradley and Laurence R. Helfer,‘Treaty Exit in the United States: Insights from the United Kingdom or South Africa?’, 111 AJIL Unbound 428 (2017). 4 For a more comprehensive tally of exits from trade and other treaty agreements, see generally Helfer, n 3. The article also does not discuss exits from investment treaties, although, in that context, there is an interesting question about how long international investment treaties (or investment chapters in trade agreements) last post-exit. Generally, investment agreements include provisions that extend protections for investments made during the time when the treaty was in force for a certain number of years. Arguably, the length of post-exit protection could be even longer if the treaty includes an applicable Most Favored Nation clause and the exiting state has other Bilateral Investment Treaties with longer periods of protection. 5 See Helfer, n 3, at 1592–95. The one-year period is not unique to trade agreements. The Vienna Convention on the Law of Treaties establishes a one-year default for many treaties where the parties do not explicitly include an exit clause. The treaty states that for treaties where either ‘the parties intended to admit the possibility’ of withdrawal or where the right to withdraw ‘can be implied by the nature of the treaty’, that parties may withdraw if they give other parties at least twelve months’ notice. See Vienna Convention on the Law of Treaties art. 56, opened for signature May 23, 1969, 1155 UNTS 331. The short exit period for trade treaties may nonetheless be puzzling because states may rely on trade agreements more heavily than other agreements. As the article discusses, however, there are trade-offs in the architecture of multilateral agreements that help explain this phenomenon. 6 Consolidated Version of the Treaty on European Union art. 50, June 7, 2016, 2016 O.J. (C 202) 1, 43–44. 7 Paris Agreement to the United Nations (UN) Framework Convention on Climate Change, art. 28, December 12, 2015. As multiple commentators have noted however, the US could exit the UN Framework Convention on Climate Change (and with it, the nested Paris Agreement) in one year. See, e.g. Jean Chemnick, Could Trump Simply Withdraw U.S. from Paris Climate Agreement? (Scientific American, 2016), available at https://www.scientificamerican.com/article/could-trump-simply-withdraw-u-s-from-paris-climate-agreement/ (visited 24 April 2018); David Wirth, ‘While Trump Pledges Withdrawal from Paris Agreement on Climate, International Law May Provide a Safety Net,’ Lawfare Blog (2 June 2017), https://lawfareblog.com/while-trump-pledges-withdrawal-paris-agreement-climate-international-law-may-provide-safety-net (visited 24 April 2018). 8 There is a lot of work that examines these ex ante treaty design issues in law, political science, and economics literature. See generally, e.g.Barbara Koremenos, Charles Lipson, and Duncan Snidal, ‘The Rational Design of International Institutions’, 55 International Organization 761 (2001); Barbara Koremenos, ‘Loosening the Ties that Bind: A Learning Model of Agreement Flexibility’, 55 International Organization 289 (2001); Alan O. Sykes, ‘Protectionism as a “Safeguard”: A Positive Analysis of the GATT “Escape Clause” with Normative Speculations’, 58 The University of Chicago Law Review 255 (1991); Laurence R. Helfer, ‘Flexibility in International Agreements’, in Jeffrey Dunoff and Mark A. Pollack (eds), Interdisciplinary Perspectives in International Law and Internal Relations: The State of Art (New York: Oxford University Press, 2013) 175; Kyle Bagwell and Robert W. Staiger, ‘Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause’, 34 The Journal of Legal Studies 471 (2005). 9 See generally B. Peter Rosendorff and Helen V. Milner, ‘The Optimal Design of International Trade Institutions: Uncertainty and Escape’, 55 International Organization 829 (2001). 10 See Guzman, n 2, at 596 (‘When making a promise, a state pledges its reputation as a form of collateral. A state with a better reputation has more valuable collateral and, therefore, can extract more in exchange for its own promises.’) 11 See generally Andrew Guzman, How International Law Works: A Rational Choice Theory (New York: Oxford University Press, 2008); see also Schwartz and Sykes, n 2, at S196–97 (discussing how a loss of reputation may diminish the future value of trade concessions). 12 See Reinhard Selten, ‘The Chain Store Paradox’, 9 Theory and Decision (1978) 127 (economics; using reputation as the monopolist’s history of driving entrants out of the market as a deterrent for future entrants into the market); Jonathan Mercer, Reputation and International Politics (Ithaca: Cornell University Press, 2013 1996) 6 (political science; defining reputation as ‘a judgment of someone’s character (or disposition) that is then used to predict or explain future behavior’); James Morrow, Game Theory for Political Scientists (Princeton: Princeton University Press, 1994) 241–44 (political science; noting that states will take costly actions in international relations to establish a reputation for toughness that is later useful to deter future challenges). 13 Compare Joost Pauwelyn, ‘The Calculation and Design of Trade Retaliation in Context: What is the Goal of Suspending WTO Obligations?’, in Chad P. Bown and Joost Pauwelyn (eds), The Law, Economics and Politics of Retaliation in WTO Dispute Resolution (New York: Cambridge University Press, 2010) 34 (arguing that reputational costs and countermeasures are additive), with Rachel Brewster, ‘Pricing Compliance: When Formal Remedies Displace Reputational Sanctions’ 54 Harvard International Law Journal 259 (2013) (arguing that countermeasures may be substitutes for reputational costs). 14 See generally Oona Hathaway, ‘Between Power and Principle: An Integrated Theory of International Law’, 72 The University of Chicago Law Review 469 (2005); Laurence R. Helfer, ‘Response, Not Fully Committed? Reservations, Risk, and Treaty Design’, 31 Yale Journal of International Law 367, 369 (2006); Paul R. Milgrom, Douglass C. North and Barry R. Weingast, ‘The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs’, 2 Economics and Politics 1 (1990); Kal Raustiala, ‘Form and Substance in International Agreements’, 99 The American Journal of International Law 581 (2005); Schwartz and Sykes, n 2; Beth A. Simmons, ‘International Law and State Behavior: Commitment and Compliance in International Monetary Affairs’, 94 The American Political Science Review 819 (2000). 15 For a longer discussion of these issues, see Rachel Brewster, ‘Unpacking the State’s Reputation’, 50 Harvard International Law Journal 231 (2009). 16 Legality and good policy can also move in opposite directions as the phrase ‘illegal but legitimate’ highlights. See Rachel Brewster, ‘Reputation in International Law and International Relations Theory’, in Jeffrey L. Dunoff and Mark A. Pollack (eds), Interdisciplinary Perspectives on International Law and International Relations: the State of the Art (New York: Oxford University Press, 2013) 524, 529 (noting that, ‘In some circumstances, a state’s global standing and its reputation for compliance with international rules run in opposite directions. The phrase “illegal but legitimate” highlights the gap between actions that are widely understood to be good policy and actions that are legally permissible.’) 17 See generally George Downs and Michael Jones, ‘Reputation, Compliance, and International Law’, 31 The Journal of Legal Studies S95 (2002). 18 Ibid. 19 Unlike the state, these individual leaders do not plan to stay in office forever and thus have shorter time horizons. Leaders may thus discount their reputational capital as they approach the end of their time in office. See generally Brewster, n 15; Barbara Walter, Reputation and Civil War: Why Separatist Conflicts Are So Violent (New York: Cambridge University Press, 2009). 20 See generally Brewster, n 15. 21 The status quo can be an important baseline. This is true both for welfare analysis such as Pareto optimality and also for psychological analysis. In explaining their ‘prospect theory’ of human behavior, Kahnman and Taversky note that individuals tend to be both risk averse and risk acceptant around a baseline of current wealth endowments. Individuals are risk averse to losses below their current wealth endowment, but risk acceptant to gains above it. See generally Amos Tversky and Daniel Kahneman, ‘The Framing of Decisions and the Psychology of Choice’, 211 Science 453 (1981). 22 See Richard Thaler, Misbehaving (New York: W.W. Norton & Company, 2016) 127–39; see also Daniel Kahneman, Jack L. Knetsch and Richard Thaler, ‘Fairness as a Constraint on Profit Seeking: Entitlements in the Market’, 76 The American Economic Review 728, 729 (1986). 23 See Thaler, n 22, at 127–39; Kahneman et al., n 22, at 729. Tversky and Kahneman also engage with the idea of actors setting important behavioral responses to benchmarks (current wealth endowments). This is not necessarily ‘irrational’, but a persistent and predictable quirk of human decision-making. See generally Amos Tversky and Daniel Kahneman, ‘Rational Choice and the Framing of Decisions’, 59 The Journal of Business S251 (1986); Ernst Fehr and Klaus M. Schmidt, ‘A Theory of Fairness, Competition, and Cooperation’, 114 The Quarterly Journal of Economics 817 (1999). 24 Behavioral economists emphasize individuals’ willingness to undertake avoidance behavior to enforce fairness norms even though it might be financially costly. See generally Daniel Kahneman, Jack L. Knetsch and Richard H. Thaler, ‘Fairness and the Assumptions of Economics’, 59 The Journal of BusinessS285 (1986); Richard H. Thaler, ‘From Homo Economicus to Homo Sapiens’, 14 The Journal of Economic Perspectives 133 (2000); Fehr and Schmidt, n 23. 25 See generally Thaler, n 22. 26 There is burgeoning literature on applying behavior economics to states. Recent work in international relations theory has started to incorporate insights from behavioral economics and has applied these insights to states’ behavior. See generally Emilie M. Hafner-Burton et al., ‘The Behavioral Revolution and International Relations’, 71 International Organization S1 (2017); A. Burcu Bayram, ‘Due Deference: Cosmopolitan Social Identity and the Psychology of Legal Obligation in International Politics’, 71 International Organization S137 (2017); Jonathan Renshon, Julia J. Lee, and Dustin Tingley, ‘Emotions and the Micro-Foundations of Commitment Problems’, 71 International Organization S189 (2017). 27 See generally Anne van Aaken, ‘Behavioral International Law and Economics’, 55 Harvard International Law Journal 421 (2014). For a discussion of fairness issues in particular, see generally Joshua D. Kertzer and Brian C. Rathbun, ‘Fair is Fair: Social Preferences and Reciprocity in International Politics’, 67 World Politics 613 (2015). 28 For a fuller analysis of the many legal issues that have followed from the Brexit vote, see generally Jennifer A. Hillman and Gary Horlick (eds), Legal Aspects of Brexit: Implications of the United Kingdom’s Decision to Withdraw from the European Union (Washington D.C.: Institute of International Economic Law, 2017). 29 Heather Stewart, Rowena Mason and Rajeev Syal, ‘David Cameron Resigns After UK Votes to Leave European Union’, The Guardian, 24 June 2016, https://www.theguardian.com/politics/2016/jun/24/david-cameron-resigns-after-uk-votes-to-leave-european-union (visited 24 April 2018). 30 The British government had embraced an economic reform agenda in EU negotiations long before the Brexit vote. Although this can be viewed as a first step towards Brexit, both Labor and Conservative government leaders had advocated staying in the EU and advocated reform from within rather than exit. 31 See, e.g. Rossella Brevetti, ‘U.K. Open for Business, Trade Secretary Says’, BNA International Trade Reporter, 26 July 2016, 33 ITR 1074; Tim Ross, ‘U.K. Eyes Wall Street Access In Post-Brexit U.S. Trade Deal’, BNA International Trade Reporter, 20 April 2017, 34 ITR 624. 32 In popular discussion, see, e.g. Tom Kibasi, ‘Britain Is Still Clueless About the EU’s Motives in Brexit Negotiations: Brussels’ Main Aim Is to Contain and to Prevent Contagion’, The Guardian, 6 March 2018). 33 See Jennifer Jacobs, Andrew Mayeda, and Toluse Olorunnipa, ‘Trump Says NAFTA Pullout Still Possible If Renegotiation Fails’, BNA International Trade Reporter, 4 May 2017, 34 ITR 705. 34 For a political science analysis of how smaller win-sets constrain international bargaining, see generally Robert D. Putnam, ‘Diplomacy and Domestic Politics: The Logic of Two- Level Games’, 42 International Organization 427 (1988); Keisuke Iida, ‘When and How Do Domestic Constraints Matter?’, 37 Journal of Conflict Resolution 403 (1993). 35 See n 21–24. 36 See n 26 and 27. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)
Journal
Journal of International Economic Law – Oxford University Press
Published: May 16, 2018