Regionalism and Global Economic Integration

Europe, Asia and the Americas

William D. Coleman, Geoffrey D. Underhill

• Publisher: Routledge
• Year: 2012
• eBook ISBN:
  9781134716272
• Topic: Economia
• Subtopic: Globalizzazione

This scholarly and interdisciplinary volume sheds much needed light on the realtionship between national policies, regional integration patterns and the wider global setting. It covers regional patterns in Europe, Asia and the Americas. Individual chapters focus on topics ranging from industrial or financial policies to social welfare regimes, as well as broader assessments and comparisons of regional arrangements in a global context. The chapters point to the diversity of regional patterns in the world economy and the continuing importance of national regulatory structures, yet they also point to the common pressures of globalisation felt by all, especially in the domain of capital markets. With broad coverage and clear but sophisticated analysis this new book will be vital reading to all those seeking to clarify their understanding of the contemporary regional/global paradox.

Part I

Regionalism economic integration in the global economy

1 Regional economic co-operation, global markets and domestic politics

A comparison of NAFTA and the Maastricht Treaty¹

Helen Milner

INTRODUCTION

Global economic interdependence has created incentives for greater international economic co-operation. In many instances, these incentives have led states to accept important and controversial co-operative agreements, despite other constraints. A crucial element of contemporary international economic policy co-operation is the development of regional patterns of economic integration. In the early 1990s, regional economic co-operation took two large steps forward. In 1992, the US, Canada and Mexico signed the North American Free Trade Agreement (NAFTA). In 1993, the Maastricht Treaty initiating a process of monetary union among the twelve European Union (EU) countries came into effect. These agreements represented significant but costly co-operative measures. In both cases, the countries agreed to give up substantial policy autonomy and some measure of national sovereignty. These agreements also provoked much domestic opposition. Indeed, Prime Minister Brian Mulroney of Canada faced a major challenge in the 1988 elections because of his backing of Canadian-American Free Trade Agreement (CAFTA), while political leaders in Europe, such as John Major in the UK and Paul Schulter in Denmark, suffered electorally for their support of monetary union. Policy-makers thus faced significant costs in accepting both NAFTA and Economic and Monetary Union (EMU).

The central question asked by this chapter is why did these countries choose to co-operate economically, especially given the costs they faced. This question is addressed in three parts. First, why did political leaders initiate these negotiations? That is, given the costs of such far-reaching economic change as the accords involved, why were leaders interested in pursuing them? Free trade agreements in North America and monetary union among European Community (EC) countries had both been attempted before, and had failed. While different leaders were in power by the early 1990s, these earlier events still should have alerted them to the potential costs involved. Why did political leaders initiate these negotiations?

The second issue is why were the countries able to reach agreement? A number of factors, such as the end of the Cold War in the late 1980s and the economic difficulties experienced by the advanced industrial countries after 1987, could easily have undermined such co-operation. Finally, the chapter asks what made domestic ratification and implementation possible. For each of these agreements, the political leaders who negotiated them had to obtain domestic approval from either their legislatures or electorates. Ratification proved to be a problem in both agreements, as did implementation, particularly in the case of Maastricht. The NAFTA accord faced a difficult fight in the US Congress, and then the new Canadian prime minister almost vetoed the agreement. It took two years to ratify the Maastricht Treaty; Denmark failed to pass it the first time; Britain and Denmark passed it only with significant amendments; France barely ratified it in a popular referendum; and the Germans were the last to implement it only after a constitutional court ruling. These three phases of the international agreements—their initiation, negotiation and ratification/implementation—are the focus of this chapter.

The argument is that the answers to these questions lie in the intersection of domestic and international politics. Like arguments about two-level games, it stresses the linkage between domestic and international events (Putnam 1988; Evans et al. 1993). Unlike such games, the argument here emphasizes more the domestic logic of these agreements. International economic co-operation results from the calculations of political leaders, whose first priority is getting re-elected, and is constrained by the need for domestic ratification of any agreement negotiated. These domestic factors are, however, linked to international ones. The political calculations of leaders about initiation and ratification depend on the extent of international economic ties that a country possesses. A country’s degree of international economic openness importantly affects the policy options available to leaders and the distribution of costs and benefits associated with co-operation.

Furthermore, the costs do not end with successful ratification of the agreements in question. The uncertainty for political leaders continues with the implementation process. John Major’s own party, when facing a likely electoral disaster in 1997, remained severely divided on the question of EMU and the single currency. Pitched battles raged in the cabinet and wider parliamentary party, leading to a challenge to Major’s leadership in the summer of 1996. As stage three of EMU approaches and, in particular, the date on which EU member countries must qualify for entry approaches (1 January 1998), conflict is far from abating. The Maastricht agreement will figure prominently in the upcoming campaign. Both the French and German political systems are experiencing similar turmoil. The NAFTA implementation process has been somewhat less turbulent, but in the recent campaign which saw the re-election of Bill Clinton, trade issues and ‘globalization’ continued to dog both main candidates. Environmentalists and trade unionists have not forgotten the claims they made in the ratification debate concerning the harmful effects of NAFTA on US and Canadian labour standards, or on standards of pollution control. It is a safe bet that the politics of global economic interdependence as illustrated in the two cases developed here will continue to raise ongoing controversy.

The chapter proceeds in two steps. First, it presents a domestic politics argument. This argument links the logic of elections to that of co-operation and spells out the conditions necessary for domestic ratification. It emphasizes the role of national political leaders in launching co-operation, and the way international and domestic concerns interact in shaping international negotiations. The second step is to examine the argument as it relates to the two cases. The initiation, negotiation and ratification phase of each will be explored. It should be noted, however, that this chapter does not claim to be a thorough and systematic test of this theory. Given the large number of variables and few cases, it cannot possibly constitute a valid test. But it can provide some initial evidence.

A THEORY OF INTERNATIONAL CO-OPERATION: ELECTORAL AND RATIFICATION POLITICS

This chapter presents an argument about the interaction of domestic and global influences on international co-operation. It draws on arguments from the ‘second image reversed literature’, two-level games and ‘intergovernmentalism’ (Gourevitch 1978; Milner 1988; Rogowski 1990; Putnam 1988; Moravcsik 1991, 1993; Frieden 1991). It argues that the existence of national political leaders (executives) who have a preference for such co-operation is a necessary precondition. It spells out why and when political leaders might have such an interest, thereby linking preferences back to international factors. Second, it shows that the structure of domestic preferences—both societal and political—matters crucially. Divided government, where the policy preferences of the legislature and the executive are far apart, is a recipe for failure. Finally, the institutions of ratification matter. In particular, changes in those procedures in the course of an international negotiation can be fatal for co-operation, and the implementation process holds further pitfalls in store. Global, domestic, and regional factors interact continuously in attempts at international cooperation.

The argument here uses a game-theoretic, rational choice model. It assumes that actors are rational and seek to maximize their utility, but that they can only do this contingent on the actions of others. It also assumes that actors, like the executive branch, are unitary. These assumptions are all questionable. Indeed, over the years numerous challenges to the basic assumptions of rational choice theory have arisen (Simon 1955; Tversky and Kahneman 1981). None the less, rational choice theory still seems to have at least heuristic value. It allows one to articulate clearly the microfoundations for individual action and to examine systematically the results of strategic interaction among actors. It is hoped that these advantages outweigh the costs of such assumptions.

The domestic model

International negotiations to conclude regional co-operative agreements and domestic politics are intertwined. In most countries, the executive branch— that is, the prime minister or the president—controls foreign policy. It has the authority to begin negotiations with other countries to reach co-operative agreements and generally controls the international policy agenda. The legislature, however, is likely to have a say in accepting international agreements. In some countries, such as the US, international treaties must be ratified by the legislature. Even where there is no constitutional right to ratify, parliament usually needs to approve any changes in domestic laws and/or the constitution that are a result of these agreements. Votes on these matters will in effect be motions to ratify or reject the international agreement. In some countries, parliament may be bypassed through a popular referendum. In all cases, anticipated reaction will be at work: the prime minister or president and the foreign country will always try to negotiate agreements that the parliament and/or public will ratify. This means that domestic considerations will affect the international negotiations even before they begin, and by implication they will continue after ratification is complete and implementation the main concern.

Parliament’s role in this process is often constrained. First, parliaments cannot initiate and conduct international negotiations; they must accept the agenda-setting role of the executive. Second, parliaments are usually constrained in how they can vote on international agreements. They seldom can do more than accept the agreement as made, or reject it. Amending the agreement would force renegotiation at the international level. This is also true for popular referenda. Parliaments may have some capacity to affect or constrain implementing legislation despite the fact that they are limited by the broad outlines of the ratified treaty itself.

In this game, the executive and foreign country negotiate and propose an agreement, anticipating the reaction of the legislature, which in turn disposes. In such a situation, the executive has much power to shape the outcome in favour of its own preferences. The legislature, however, is not without influence. The proposal can be rejected by the legislature, thus forcing a reversion to the status quo or no-agreement point. This reversion point sets the limit on how much of a compromise the legislature is prepared to make. The legislature cannot be pushed to accept an agreement that lies beyond the no-agreement point. If the proposal’s utility is less than that obtained from this reversion point, the legislator will rationally reject the proposal. The status quo, or no-agreement point, is thus crucial to the game. Its location critically affects whether co-operation can be achieved.

In this game the role of societal groups, like labour and capital, is not formally modelled. These groups are assumed to affect the internal and external negotiations through the political actors. That is, the preferences of domestic interest groups shape the preferred policies of executives and legislators. Since these political actors are concerned with (re-)election, they must take into account the preferences of important social interest groups. How domestic groups react to international agreements is important for the executive since this may well affect the willingness of legislators who depend on these interest groups for campaign contributions or votes to ratify the agreement. Keeping domestic interest groups happy may be a central goal of the executive in negotiating an international agreement, and this concern will continue all the way through to eventual implementation. Domestic interest groups thus affect this process of executive-legislative bargaining indirectly through the pressures they exert on political actors to take their preferences into account.

A key point of this simple game is that the executive must be willing to initiate negotiations in the first place. The model suggests that the willingness of the executive to initiate depends on her preferences about the agreement, especially relative to those of the foreign country and her own legislature. She must be ‘dovish’ enough relative to both of these other actors so that some potentially profitable agreement exists.

Preferences of political actors

Why would political leaders ever initiate international negotiations to co-ordinate economic policies? More directly, when will executives have preferences that are ‘dovish’ relative to both their own legislature and to the foreign country? As argued above, if the executive does not initiate negotiations, no matter what the preferences of other domestic actors, international co-operation will not occur. It is critical then to understand what might induce political leaders to favour cooperation over unilateral policy-making.

There is at least one central reason: if we assume that the political actors making this choice are politicians who must be (re-)elected to office, their reasons can be related to electoral concerns. If politicians want above all else to remain in office and their re-election depends on economic conditions, politicians will worry about the economy. They will be concerned with the prospects for economic growth, employment and inflation. This is a fairly standard set of assumptions, but it says nothing about why co-ordinated, multilateral policy-making should be preferred.

The choice of co-ordinated policy-making depends on the degree of a nation’s economic openness. Openness refers to the extent of integration between a country’s economy and the world economy. The growth of economic openness for a state means that other countries’ policies have greater reverberations on that country’s economy. Greater openness means that a country’s prices of goods and capital are increasingly constrained to the level of world prices. Only by co-ordinated action with many countries can this constraint be overcome. ‘The gains [from co-operation] are supposed to come specifically from taking into account externalities, or “spill-over” effects, that one country’s policies have on other countries’ economies, which the countries would have no incentive to do in the absence of coordination’ (Frankel 1988:354). Rising openness means greater economic externalities. As these externalities grow, so do the gains from co-operation, and hence so do the incentives for it.

Differences between countries in the expansiveness of macroeconomic policy spill over into trade balances… Thus, as international trade becomes more important, countries face larger international payments imbalances as a consequence of divergent macroeconomic policy choices, and each government’s interest in international policy coordination to reduce its burden of adjustment increases.

(Webb 1991:316)

What this means is that a country’s level of economic growth, employment and/or inflation may depend critically on the behaviour of other states, rather than just on one’s own policies.

If countries’ economies are tightly woven together through trade and capital flows, they may not be able to achieve their economic goals without other states’ help. If rates of growth, employment, and/or inflation in one state depend on the policies chosen in other states, politicians’ re-election hopes are tied to the behaviour of these foreign countries. Getting them to alter their policies to promote the economic outcomes that you desire may require a co-ordinated approach to policy-making. For example, in an interdependent world economy, one country’s efforts to increase growth may be unsuccessful without the coop...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Contributors
• Acknowledgements
• Introduction Domestic politics, regional economic co-operation, and global economic integration
• Part I Regional economic integration in the global economy
• 1 Regional economic co-operation, global markets and domestic politics A comparison of NAFTA and the Maastricht Treaty1
• 2 The international political economy of regionalism The Asia-Pacific and Europe compared*
• 3 Asia-Pacific regionalism versus globalization Competing forms of capitalism1
• 4 In the whirlwind of globalization and multilateralism The case of emerging regionalism in Latin America
• Part II Public policy, globalization and regionalism
• 5 ‘Subversive liberalism' Market integration, globalization and West European welfare states
• 6 The social democratic predicament and global economic integration A capital dilemma*
• 7 Globalization, corporate identity and European Union technology policy1
• 8 Regional versus global discipline Export credit insurance in the European Union1
• 9 Strapped to the mast EU central bankers between global financial markets and regional integration
• Part III Supranational governance and regulation
• 10 Regionalism, globalization, and ‘professional society' Between state, law, and the market for professional services
• 11 Globalization, regionalism and the regulation of securities markets1
• Index