The Optimal Design of International Trade Institutions: Uncertainty and Escape

Summary

International institutions differ greatly in their forms; the number of states included, the decision-making mechanisms, the range of issues covered, the degree of centralized control, and the extent of flexibility within them all vary substantially from one institution to the next. What accounts for such variation? In this article, as part of the larger Rational Design project on the design of international institutions, we claim that such variation can be accounted for as part of the rational, self-interested behavior of states. We show that at least one important aspect of institutional design can be explained as a rational response of states to their environment.

Almost all international trade agreements include some form of “safeguard” clause, which allows countries to escape the obligations agreed to in the negotiations. On the one hand, such escape clauses are likely to erode both the credibility and the trade liberalizing effect of international trade agreements. On the other hand, they increase the flexibility of the agreement by adding some discretion for national policymakers. The first question we address is the institutional design issue that escape clauses raise: when is such increased flexibility rationally optimal for states making international trade agreements? The answer to this question hinges on the costs of using escape clauses and retaining the overall agreement compared with not using them and abrogating the agreement.

Our second question concerns the effects of different institutional designs.