Economy and Society Volume 37 Number 2 May 2008: 193Á223

Regional trade agreements and the pursuit of state interests: institutional perspectives from NAFTA and Mercosur
Francesco Duina and Jason Buxbaum

Abstract
Are regional trade agreements (RTAs) carefully crafted projects that systematically advance their member states’ interests or do they instead generate outcomes that frustrate those interests? Works on the most prominent RTA Á the European Union Á have traditionally been split over this question. New research on international organizations parallels that literature. Combining rational choice and historical institutionalism, this article makes a middle-ground case: the limited rationality of national representatives and the complexity of RTAs ensure both the advancement and frustration of national interests. The focus is on shifting national preferences, the unpredictable implications of decisions over time and the pursuit of short-term gains to the benefit of some constituents but not others. Evidence from NAFTA and Mercosur supports these claims while highlighting, in line with recent scholarship, the need to include politics in institutionalist accounts of integration. The conclusion reflects on the findings and explores whether alternative, more flexible designs for RTAs might satisfy more fully the interests of the member states. Keywords: regional trade agreements; rational choice institutionalism; historical institutionalism; NAFTA; Mercosur; international organizations.

Francesco Duina and Jason Buxbaum, Department of Sociology, Bates College, 263 Pettengill Hall, Lewiston, ME 04240, USA. E-mail: fduina@bates.edu Copyright # 2008 Taylor & Francis ISSN 0308-5147 print/1469-5766 online DOI: 10.1080/03085140801933264

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Introduction Regional trade agreements (RTAs) Á legal frameworks liberalizing the movement of goods, services, capital and labour across the borders of a select group of countries Á are in vogue. At the closing of the twentieth century, they became ‘almost a craze in the sedate world of economics, springing up here, there and everywhere’ (Urata, 2002, p. 21). Between 1990 and 1994, officials from the World Trade Organization were notified of thirty-three new RTAs, more than doubling the total to sixty-eight. Then, between 1995 and 2001, another 100 RTAs formed (Duina, 2006, p. 3). Today, almost every country on earth belongs to an RTA. This impressive trend raises an important question: to what extent are these RTAs carefully crafted projects that systematically advance the interests of their member states? This question, of course, has been on the minds of legal scholars of the European Union (EU) Á the oldest and most prominent RTA Á for decades. The primary debate has been between intergovernmentalists, who have argued that states control the course of integration and thus ensure the systematic fulfilment of their interests,1 and an assorted variety of neo-functionalists, neoinstitutionalists and others intent on showing that the EU has acquired an unpredictable life of its own to the detriment of those interests.2 The polarized debate continues to date, since the EU Á with its complicated and multifaceted structure and processes Á provides both camps with strong evidence in support of their claims. The question is also very much at the heart of the growing debate over institutions in general, where we also find a split in perspectives (Campbell, 2004). A number of scholars argue that institutions strongly reflect the ‘instrumental, calculative choices of goal-oriented’ actors (Miller, 2000, p. 537). Others view them as ’dysfunctional’ and unpredictable entities, evolving according to a logic that does little to promote the interests of their architects and key constituents (Pierson, 2000, p. 478). Given their increasing importance in world affairs, international institutions Á such as the World Trade Organization, the World Bank and the International Court of Justice Á have, in particular, received much attention. Proponents of ‘rational design’ and other similar theories have argued that the structure and daily functioning of these institutions reflect the ability of ‘rational, self-interested’ actors Á usually nation-states Á to translate their preferences into customized arrangements that serve them well (Koremenos et al., 2001, p. 766; Rosendorff & Milner, 2001, p. 829). Others have instead stressed the difficulty that those actors have experienced in controlling decision-making processes, key structures and information flows (Kapoor, 2004; Lipson, 2004; Chorev, 2005). Our understanding of whether RTAs advance or undermine state interests is to date quite limited. Unlike the EU, virtually all of the new RTAs are fundamentally intergovernmental. This has led some observers to describe them as carefully designed projects that systematically advance the interests of their savvy member states. Some researchers have thus emphasized that no

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new laws or agreements are passed without the approval of all the member states (Grieco, 1997; Mansfield & Milner, 1997). Others have argued that the member states have extracted ‘the maximum economic and political benefits from integration while forgoing as little sovereignty as possible’ (Kaltenthaler & Mora, 2002, pp. 90, 92). Yet others have documented the extent to which the presidents and prime ministers of the member states retain control over the course of integration (Malamud, 2005). In this article, we propose that these emerging interpretations underestimate the extent to which RTAs in fact frustrate the interests of their member states. We do not intend, however, to suggest that RTAs never advance those interests. Departing from the widespread tendency to cast international organizations as either favourable or unfavourable to state interests, we take a more nuanced perspective that emphasizes the partial fulfilment of national interests. We rely on a combination of rational choice and historical institutionalism to depict RTAs as complex institutions and national representatives as limited in their ability to know their objectives and how to pursue them. Given this combination of factors, we argue that RTAs can both advance and undermine member state interests. The challenge is to understand how these complex dynamics take place. For empirical evidence, we turn to the two most important RTAs besides the EU Á NAFTA and Mercosur Á and developments in a number of policy areas, ranging from agriculture to exchange rate regimes. The data support our claims while also emphasizing, in line with the work of Bulmer (1998) and other scholars of the EU, the importance of including politics in institutionalist accounts of integration. In the conclusion, we reflect on our findings and explore how they raise important questions about the design of RTAs. The partial fulfilment of interests suggests that no clear-cut conclusions can be advanced about the usefulness of RTAs for the member states. Instead, it prompts us to search for ways in which the basic architecture of RTAs might be adjusted so as to increase positive results and minimize negative ones Á a discussion that echoes the broader debates on soft versus hard law in international relations and stable versus robust governance systems. We suggest that the introduction of greater flexibility, in line with the design of other types of international organizations, might prove rewarding. We proceed as follows. We first develop our institutionalist argument about RTAs and discuss the choice of case studies. In the following section, we present evidence from NAFTA and Mercosur in support of our argument. The last section reflects on the implications of the findings for our institutionalist framework and for the design of RTAs.

The institutionalist framework and case study selection RTAs have multiplied in recent years. This has not gone unnoticed. Scholars and journalists alike have pondered the causes of this collective embrace of free

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trade, its implications for vulnerable segments of the population (such as labour, the poor and women), and whether RTAs will help or hinder the rise of a global economy (Duina, 2006). The question of state interests, however, is only beginning to be addressed: should we see the new RTAs as the product of nation-state leaders eager to advance their countries’ interests and capable of designing institutions that faithfully deliver on that front or, instead, have those leaders crafted RTAs which have challenged those interests in important and consequential ways? We propose here a middle-ground answer. State representatives certainly work, as they craft the basic legal architecture and more specific policies of RTAs, to advance the interests of their countries. But both the complexities of RTAs and the modus operandi of those representatives ensure that RTAs at once advance some interests and frustrate others. More specifically, we draw from rational choice and historical institutionalism to develop three claims about RTAs and state interests. Rational choice institutionalists believe that most social phenomena are best understood as reflecting the actions and choices of individual actors. Such methodological individualism contrasts sharply with more ‘macro’ approaches focused on variables such as culture, the formal or informal structure of organizations and questions of how power is distributed in a given social space. Those same theorists pay much attention to ‘how individuals build and modify institutions to achieve their interests’ (Kiser & Kane, 2001; Campbell, 2004, p. xv). Unlike pure rational choice theorists, however, rational choice institutionalists also maintain that formal and informal rules, structures of various kinds and other variables limit the range of choices those individuals are likely to make as they pursue their interests (Alt & Shepsle, 1990; Scharpf, 1997). This is especially so when actors find themselves operating in spaces that are already structured Á such as most organizations. Historical institutionalists start, in a sense, where rational choice institutionalists stop. They are less concerned with bottom-up explanations for how institutions are created and later modified, and more interested in high-level principles of how they evolve over time (Thelen, 1999). On that question, they pay far less attention to issues of rationality and instead point to certain principles of institutional growth and change, such as path dependency and coerced compliance with certain paradigms and blueprints (Hall, 1986; March & Olsen, 1989), all of which often have little to do with instrumentality or the satisfaction of particular actors. Indeed, individual preferences, to the extent that they are considered, are not even assumed to exist in any clear or fixed fashion, but are instead thought to reflect broader and changing variables (Powell & DiMaggio, 1991; Pierson, 1996; Stone Sweet et al., 2001). Despite the obvious tensions between rational choice and historical institutionalism, the two approaches can, if not taken to extremes, be combined to generate interesting theories of human and institutional behaviour. After all, the former can be said to focus on the efforts of individuals to pursue their objectives given certain constraints, while the latter can be seen as emphasizing

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the role of the broader environment in shaping and limiting outcomes over time. A focus on both the purposive dimension of actors and the independent impact of the environment seems both faithful to reality and promising in terms of explanatory power. We therefore leverage the insights from both theoretical schools to generate three claims about RTAs and state interests. Our first claim has to do with preferences and their evolution over time. We can assume for the moment that national representatives approach RTAs with a set of preferences that reflect the interests of their countries. For this and the other claims, we define those interests to include the welfare of major business, financial, labour and agricultural interest groups, as well as the retention of national sovereignty over critical issue areas and practices. We can also assume that representatives in the first instance manage, as rational choice institutionalists would expect, to craft RTAs with basic features and specific policies that, given the existing constraints, satisfy those interests. As Moravcsik put it in his classic book on the EU, most agreements lie on a ‘Pareto-frontier’, a zone where all agreements without exception ‘improve welfare for all governments’ (1998, p. 25) and subject no member state to unexpectedly harmful principles or policies. We, however, proceed to note that preferences can change dramatically (something that rational choice institutionalists could certainly envision) but that, as historical institutionalists would stress, the institutional environment in which actors find themselves remains fairly fixed, despite attempts by some actors to change it. Thus, as Pierson put it with regard to the EU, over time a member state’s government is ‘likely to find institutional and policy arrangements considerably out of synch with its own preferences’ (1996, p. 140). When these dynamics occur, we see that national interests are fulfilled earlier in time but, because of the stickiness of institutional arrangements, frustrated later on. Our second claim has to do with the complexity of RTAs themselves and the problem of unanticipated consequences later in time. National representatives may be working with a stable set of preferences, devising institutions and pursuing policies that, in line with the insights of rational choice institutionalism, are at a given moment congruent with those preferences. Their ability to predict all the effects of their choices, however, is limited. As Pierson noted for the EU, ‘unintended consequences are likely to be widespread’ (1996, p. 136), an observation that was recently echoed by European Commission President Jose Manuel Barroso: ‘if you ask me what academic concept tells us the most ´ about political and social reality, it is the idea of unintended consequences . . . it is almost a miracle when we arrive at a final outcome . . . that is exactly as it was originally planned’ (EUSA, 2007, p. 4). This is because, as historical institutionalists would argue for most organizations, the complexity associated with any given RTA Á the number of issues at hand, the knowledge required to understand the many technical aspects of any legislation and so on Á is extremely high. The result is that, in the words of Stone Sweet, Sandholtz and Fligstein, integration generates ‘outcomes that actors could not expect or foresee’ (2001, p. 3). This can seriously challenge the interests of the member

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states: original preferences may go unmet or other elements of national interests, not originally envisioned to be impacted by integration, may be affected. The result is one and the same: state representatives agree to broad organizational arrangements and specific policy initiatives which, in the early stages, appear reasonable but later in time have surprising and unforeseen consequences for member state interests. Our third claim focuses on the actual process by which interests are defined and pursued in the first place. Rational choice institutionalists would correctly argue that national representatives manage at times to achieve their objectives successfully. But historical institutionalists would add that there exists an overall cacophony of competing interests that is seldom fully understood or smoothly resolved to the satisfaction of all key constituents. Among those competing interests, we find those of national representatives themselves, who depend heavily on elections for their continued hold on power. These representatives are likely to pursue popular arrangements and policies to the benefit of some constituents without focusing on the negative consequences of their choices for other constituents, especially if these consequences become clear only with time (Pierson, 1996, p. 135). The emphasis here is on political contexts, fashionable trends in world society about what is desirable for countries to do and the composite nature of ‘state interests’. This leads us to our third claim: driven by election cycles, national representatives pursue at times policies and arrangements that are popular and beneficial to some constituents but harmful to others. The combination of these three claims yields a picture of national representatives as actors generally eager to advance their countries’ interests, but operating in environments that significantly shape what they can achieve. It follows that RTAs neither fully fulfil nor completely undermine national interests. Rather, they are spaces where those interests are, on the whole, only partially advanced. In the next section, we provide evidence in support of this view by considering the two most important RTAs besides the EU: NAFTA and Mercosur. As the largest free trade area in the world, NAFTA deserves our attention. Comprising Canada, Mexico and the US, it was put into effect in 1994 with the aim of liberalizing the trade of most goods, capital movement and selected services by 2003. Having made impressive progress towards those goals, NAFTA is both closely watched and emulated by countries in other regions of the world. Started in 1991 with the signing of the Treaty of Asuncion, Mercosur brings together Argentina, Brazil, Paraguay, Uruguay ´ and, as of 2006, Venezuela (pending parliamentary ratification by Brazil and Paraguay), into the world’s second largest common market after the EU. Despite some serious challenges, Mercosur has surprised critics and admirers alike with its longevity and impressive intra-regional trade increases in a continent previously marred by failed integration efforts. We present evidence from both NAFTA and Mercosur in support of our three claims, for a total of six case studies. Any given RTA generates countless dynamics. We focus on those that have had significant consequences for state

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interests and, as a result, have generated much debate among politicians, concerned citizens, academics and others. The case studies span a variety of policy areas Á agricultural protectionism, investor rights against governments, trade initiatives with non-member states, industrial diversification and support mechanisms, and the management of currency crises Á so as to increase the reliability of our conclusions. We do not intend to present data that are exhaustive or statistically representative. Neither approach would be possible when we recognize all that happens in a given RTA and the difficulty of quantifying and measuring those developments. Our aim is instead to show, with powerful data about highly consequential events, that RTAs can have multifaceted and very important implications for state interests.

The challenge of shifting preferences Our first claim asserts that state interests can change but the architecture and specific legal principles of RTAs are difficult to alter. The result is the partial fulfilment of those interests. Early arrangements are consistent with state interests; when interests change, actors seek to revise those arrangements without success. This is precisely what took place in two important cases: the US’s position regarding dairy and NAFTA and the desire of Mercosur’s member states (with the exception of Brazil) to leave the common external tariff (CET) regime.

The US, the dairy industry and trade with Canada In the NAFTA text, Canadian agricultural trade with the US and with Mexico is simply exempted from trade liberalization. Chapter 7 in fact permits Canada to continue to protect its dairy producers. In the case of trade with the US, Article 702 incorporates into the NAFTA text a series of articles found in the 1989 free trade agreement between the US and Canada (CUSTFA). One of these articles states:
Unless otherwise specifically provided in this Chapter, the Parties retain their rights and obligations with respect to agricultural, food, beverage and certain related goods under the General Agreement on Tariffs and Trade (GATT) and agreements negotiated under the GATT, including their rights and obligations under GATT Article XI. (CUSFTA, Article 710)

Article XI of the GATT states that countries have the right to use selected trade restrictions on dairy products, including various types of quotas. Chapter 7 spells out similar provisions for trade between Canada and Mexico (Annex 703, Section B). Measures were taken to liberalize trade of dairy products only between the US and Mexico by 2003 (Annex 703.2, Section A).

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These arrangements reflected Canada’s explicit desire to continue to protect its dairy producers and a related desire, on the part of Mexico and the US, to protect their dairy sectors from the heavily subsidized Canadian producers. The US in particular had a long-standing and very complex protectionist policy towards its farmers Á including major quantitative restrictions on imports, price setting and subsidies for exports (Doyon & Novakovic, 1996, pp. 3Á4; Bailey, 2002). From their perspectives, a deal with Mexico Á a relatively small dairy producer and exporter Á primarily meant access to a new market. Canada presented, on the other hand, serious problems. Thus, throughout the negotiations over the NAFTA text, dairy protectionism was openly debated on numerous occasions and in no unclear terms (Bailey, 2002, p. 9). It was clear to all that little would change between the US and Canada. Ira Shapiro, Ambassador from the US Trade Representative Office, would, for example, unambiguously state in testimony before the House Committee on Agriculture’s Subcommittee on Dairy, Livestock, and Poultry that ‘there were no agricultural market access negotiations between the US and Canada during the NAFTA negotiations’ (Federal News Service, 1996). The position of the US began to change, however, in the mid-1990s. The larger dairy producers were pushing for open borders (Brasher, 1993). Heeding their calls, the government began revisiting its protectionist policies. With regard to Canada, it took unilateral steps to open its borders to Canadian products. The Canadian government responded, however, by continuing to impose tariffs on dairy products that reached 350 per cent. In 1996, for instance, Canadian tariff-rate quotas were 343 per cent for butter, 275 per cent for cheese and 270 per cent for milk and cream. The Canadian government indicated that those quotas would be lowered only by around 10 per cent by 2001 (US Department of Agriculture, 1997, pp. 19Á20).3 Canada was simply not interested in change. The situation proved utterly frustrating for the US. In a dramatic turnaround, officials from the US filed a complaint against Canadian tariffs on imported dairy products, arguing that they went against certain provisions found in NAFTA (US Department of Agriculture, 1997, p. 19).4 The Canadians responded with disbelief. Claude Rivard, President of Dairy Farmers of Canada, bluntly stated: ‘The US is trying to secure through the NAFTA dispute settlement process something that was never agreed to through eight years of bilateral, trilateral and multilateral trade negotiations.’ These were agreements made, he added, ‘openly and in good faith’ (Canada NewsWire, 1996). A frustrated Richard Doyle, executive director of the same organization, would in turn note: ‘The story is always the same with the Americans. They sign an agreement, and then when they find it doesn’t suit them exactly, they turn around and try to get out’ (Gazette, 1996). The NAFTA panel mechanism for dispute resolution was used for the first time on this occasion. After some deliberation, the five judges (two of whom were from the US) unanimously concluded that the tariffs were perfectly legal

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and in line with both the GATT and the NAFTA texts. The US could do nothing else to change a provision it no longer wanted. The Canadians, in turn, were jubilant. Peter Clark, a representative of the Canadian dairyprocessing industry, reacted with relief: ‘this is a very important victory for Canada . . ..There could have been very serious political problems, including a rapid adjustment program that would have been difficult to manage’ (Financial Post, 1996). The mood among some in the US was, of course, quite different.

The CET and bilateral negotiations in Mercosur Mercosur’s founding members committed themselves not only to duty- and customs-free trade of goods, services and factors of production among themselves, but also to the implementation of a CET. The CET Á the first in the history of integration efforts in the region Á would harmonize disparate member states’ tariff policies with the outside world and thus ensure fair competition between firms of different nationalities, since no firms could rely on their country’s comparatively lower tariffs to access goods at lower prices (Treaty of Asuncion, 1991). ´ There was broad support among the Mercosur members for a CET. Indeed, questions focused primarily on its level, with Brazil favouring more protectionism and Argentina more openness. In late 1994, the details were finalized: an average 15 per cent CET would enter into force on 1 January 1995. President Lacalle of Uruguay put the significance of the customs union on a par with independence, adding that because of it Uruguay was ‘entering an important stage with enormous possibilities’ (Madrid EFE, 1994). Argentine Foreign Relations Secretary Jorge Campbell declared that the new Mercosur would become ‘the most powerful tool that Argentina possesses to reach dynamic and sustained growth over time’ (Campbell, 1995). The CET imposed a fundamental requirement: that no member state could engage in bilateral negotiations with third parties. The requirement was explicitly laid out in Decision 32/00 of 2000: the ‘foundation of a common market implies, among other things, the necessity of presenting a common external political front.’ The decision then set out that no member state would be permitted ‘to sign new preferential accords . . . that have not been negotiated by Mercosur’ (Aggarwal & Espach, 2004, p. 21). The arrangement Á logical given the desire for a CET Á also helped the member states increase their collective negotiating power in trade negotiations with other states. In time, however, the member states’ positions towards the CET began to shift. Hit by a major currency crisis in 2001, the Argentine government started to eye other markets to fuel its recovery. In May of that year, Minister of Economy Domingo Cavallo declared in Washington, DC, that Mercosur ‘should follow Chile’s lead and negotiate bilateral trade treaties with the US’. ‘If Mercosur can’t do it together,’ Cavallo remarked, ‘Argentina can’t discard the possibility of going it alone’ (Wisnefski & Loughran, 2001). Cavallo then

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unilaterally exempted capital goods, including computer and telecom equipment, from Argentine collection of the Mercosur CET (Calbreath, 2001). While the Brazilians were understandably frustrated by this clear violation of Mercosur law, the policy was widely praised in Argentina. Prominent intellectual Carlos Escude, for instance, urged the Argentine government to ´ ignore Mercosur rules and to negotiate directly with the US, a country that ‘in 2000 grew the equivalent of a Brazilian economy’ (MercoPress, 2001a; Goodman, 2002). Uruguay followed suit. Frustrated by lack of Mercosur progress in negotiating with the US as well as by Brazilian lack of interest in the Free Trade Area of the Americas negotiations, President Jorge Batlle told a regional forum on free trade in 2001 that Uruguay ‘need[s] a bilateral agreement with the United States’ (MercoPress, 2001b). Wary of other states ‘obstructing’ Uruguay’s efforts, Batlle then took the step of retaining Chilean and Mexican experts to aid in the negotiation process. He backtracked soon thereafter. Yet, his economy minister continued to voice the government’s dissatisfaction in December 2001, reminding all of Uruguay’s willingness to negotiate independently. April 2002 brought more warnings from Batlle: ‘since I see no collective negotiations, I need to re-establish bilateral negotiations [with the US] and I have to do so quickly’ (BBC Monitoring, 2002). In May 2003, however, the Uruguayans backtracked again, agreeing to stick to ‘four plus one’ negotiations with the US. But soon after Batlle changed tone yet again, declaring that it would be some time before ‘we will have to subject our trade and general political decisions to a higher order’ (Grassi, 2003). Thus, in February 2007 Uruguay signed a Trade and Investment Framework Agreement with the US Á essentially a prelude to a real free trade agreement. But Uruguay cannot afford to upset its major trading partners, especially Brazil, and has therefore little choice but to respect the status quo. Most recently, Paraguay has voiced its desires for independent negotiations with third countries. Eager to export its clothing, beef and organic sugar to other markets, Vice President Luis Alberto Castiglioni has expressed his desire for a ‘waiver’ and the right to ‘negotiate trade agreements with the US and other countries’ (Economist, 2005, pp. 36Á7). With strong geopolitical ties to the US especially, Paraguay’s position has caused significant concern. But Brazil’s foreign minister made it clear that ‘Paraguay must understand that the choice is between Mercosur and other possible partners’ (Economist, 2005, pp. 36Á7). No member state Á Paraguay included Á is in fact poised to leave Mercosur. With the exception of Brazil, all have expressed strong dissatisfaction with the CET. But none has so far been able to change matters.

Unanticipated consequences Even if we assume that national representatives from a given country work with a stable set of preferences, we must question their ability to predict the

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consequences of their choices over time and, therefore, their ability to fulfil the interests of their constituents. We consider here the unforeseen effects of NAFTA’s Chapter 11 for national sovereignty and the negative economic consequences for Mercosur’s member states of pursuing close market integration without a parallel effort to coordinate macro-economic policies.

Unanticipated consequences: private investors and national sovereignty Chapter 11 of the NAFTA treaty concerns the protection of private investments in the member states. It sets basic standards for the treatment of investors by host governments, emphasizing mainly non-discrimination against foreign firms and investors (Gantz, 2004, p. 506). Chapter 11 is unique in granting private investors the right to sue sovereign foreign governments. Typically, international treaties permit one state (the home of the investor) to sue another state. In NAFTA, foreign individuals and foreign firms have the unprecedented right to challenge the policies of sovereign states if the value of their investment diminishes due to ‘any law, regulation, procedure, requirement or practice’ (Meltz, 2003, p. 113; Article 1102). Curiously, this striking departure from previous legal tradition was adopted largely unnoticed by the public or the various legislatures. Consider, for instance, the lack of any debate in the US. When the Senate Finance Committee (and several other committees of jurisdiction) reported the NAFTA Implementation Act (S. 1627), Chapter 11 was referred to only once and without reference to the possibility of a private party suing a state (Congressional Record, 1993: No. 161). During debate over the Act in both the House of Representatives and the Senate, investment protection requirements were referred to only in passing. When Chapter 11 was given any consideration at all, the focus was merely on how it would affect Mexico only (Congressional Record, 1993, nos. 159Á61, 163Á64). The prospect of a foreign party directly suing the US under Chapter 11, to quote journalist William Greider, ‘was not in the debate at all’ (Jones, 2002). Indeed, the junior senator from Massachusetts, John Kerry, would acknowledge in 2004 that, ‘when we debated NAFTA, not a single word was uttered in discussing Chapter 11’. When asked why there was no debate, the senator responded: ‘Because we didn’t know how this provision would play out. No one really knew just how high the stakes would get’ (Liptak, 2004). As it turned out, the stakes would become high indeed. Chapter 11 has generated major conflicts between investors and the member states (with claims reaching billions of dollars in the US alone), with serious consequences for sovereignty. Government officials, along with the media and the public, have voiced their surprise, anger and so far unmet desire that Chapter 11 be revised or eliminated. We consider here three of the most important disputes. Ethyl Corporation v. Canada Ethyl Corporation, a chemical manufacturing company based in Virginia, developed a gasoline engine performance-

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enhancing additive, commonly referred to as MMT, in the 1950s. In 1990s, a preponderance of evidence emerged indicating that manganese, a component of MMT, was a highly dangerous neurotoxin. In April 1997, the Canadian Parliament thus banned both the import and the inter-province transport of MMT. The same month that Canada passed the ban, Ethyl Á Canada’s sole supplier of MMT Á filed a NAFTA Chapter 11 claim against Canada, seeking US$250 million in compensation. Ethyl argued that the ‘Canadian MMT ban amounted to a NAFTA-forbidden indirect expropriation of its assets as defined in NAFTA Article 1110 [of Chapter 11]’ (Public Citizen, 2005, p. 22). In response, Canada contended that the MMT ban did not constitute a ‘measure’, as outlined in the chapter. However, in June 1998, a NAFTA panel ruled against Canada and declared that the suit could proceed. Shortly thereafter, the Canadian government decided to settle with Ethyl, paying US$13 million in legal fees and damages and agreeing to reverse the MMT ban. There was outrage in Canada. Politicians, journalists and members of the public expressed their dismay at the power that Chapter 11 gave foreigners. The chairman of the House of Commons’ environment committee, Liberal MP Charles Caccia, denounced the panel’s ruling. In a joint statement with Liberal Clifford Lincoln, Caccia argued that ‘commercial interests have prevailed over the environment . . . market forces over health protection’. Lincoln himself then stated: ‘I can’t believe that a foreign corporation can almost dictate its terms and we as a sovereign nation are completely powerless to do anything about it’ (Duffy, 1998). The outcome of the MMT case, MP Alexa McDonough said on the floor of the House of Commons, calls into question ‘the principle of whether Canada is going to have the democratic right and the freedom to protect our own interests and our own rights as we see them as a sovereign nation’ (Hansard, 1999, p. 1094). McDonough’s sentiments were shared with her fellow MP Bill Blaikie, who, in the aftermath of the ‘harassment and intimidation of the government with respect to the issue of MMT’, saw a ‘sabotaged Canadian democracy’ that has given ‘excessive power to unelected and unaccountable international trade organizations . . . erod[ing] the ability of Canada’s elected representatives to act in the public interest’ (Hansard, 1999, p. 1094). ‘Canadians,’ Blaikie (1999) wrote, ‘have had enough of this self-inflicted powerlessness.’ Public watchdogs were similarly upset. They attacked Chapter 11 for encouraging Canada to ‘pay the polluter’ (Public Citizen, 2005, p. 22), and directly infringing upon the ability of a sovereign government to protect public health. Under the threat of Chapter 11, critics contended, governments may be pushed to renege on their ‘responsibility to err on the side of safety’ (ibid., p. 22). Loewen Group v. Mississippi and Mondev International Limited v. City of Boston The Loewen Group, a funeral home company from Canada, was hit with a US$500 million verdict in a 1996 civil suit in Mississippi. Rather than

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accepting this outcome, the group appealed to a NAFTA arbitration panel under Chapter 11, arguing that it had been the victim of a capricious court and biased jurors. Mondev, a Canadian real estate company, won a 1990 court case against the City of Boston for breach of contract. In 1998, however, the Supreme Judicial Court of Massachusetts reversed the judgment. Mondev responded by bringing the case to the US Supreme Court. After the latter declined to hear it, Mondev submitted its claim to arbitration against the US under Chapter 11. After years of deliberation, the two NAFTA tribunals ruled in favour of the US. If the outcome pleased the winners, the process itself shocked legal experts, politicians and rights groups in the US. In both cases, for the first time ever, foreign actors were able to challenge, on the basis of international law, judicial decisions made within the US (one, no less, by the US Supreme Court itself Á whose decision not to hear a case typically spells the end of that case). They did this without any explicit right-of-action under Chapter 11 for alleged judicial wrongs (Chapter 11 states only that foreigners can take action against unfair treatment). The arbitration panels showed no concern about hearing the cases; on the contrary, the Loewen panel held that Chapter 11 actually covers judicial decisions. In reaction to this, leading legal scholar John Echeverria of Georgetown University bluntly stated that ‘this is the biggest threat to US judicial independence that no one has heard of and even fewer people understand’ (Liptak, 2004). Chief Justice Ronald M. George of the California Supreme Court reasoned that ‘it’s rather shocking that the highest courts of the state and federal governments could have their judgments circumvented by these tribunals’ (Liptak, 2004). In reference to the Mondev case, Chief Justice Margaret Marshall of the Massachusetts Supreme Court noted that ‘to say I was surprised to hear that a judgment of this court was being subjected to further review would be an understatement’ (Liptak, 2004). Most telling were perhaps the words of Abner Mikva, former Chief Judge on the US Court of Appeals for the District of Columbia, former congressman and one of the three NAFTA judges on the Loewen panel: ‘If Congress had known that there was anything like this in NAFTA,’ he said, ‘they would never have voted for it’ (Liptak, 2004). Chapter 11 has had unforeseen and rather troubling consequences. Sometimes governments have fought back. In other, often less publicized instances they have had little choice but to adapt to investors’ requests. In all instances, Chapter 11 has proven far more consequential for sovereignty than anyone envisioned.

Integration and currency instability in Mercosur Upon signing the Treaty of Asuncion, Brazilian President Collor de Mello ´ stated that the agreement represented a ‘starting point for overcoming the

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effects of economic recession, of technological inadequacies, and of social backwardness in our countries’ (Latin America Regional Reports, 1991). His enthusiasm was widely shared by the other leaders. The treaty focused mostly on trade liberalization. Far less attention was paid, by contrast, to the harmonization of macroeconomic policy across the member states. Article I of the Treaty of Asuncion simply committed members to the ‘co-ordination of ´ macroeconomic and sectoral policies’, in areas including ‘fiscal and monetary matters, foreign exchange and capital’. However, no actual steps were specified to address differences among the member states in inflation rates and exchange rates (Behar, 2000, p. 108; Guira, 2003). There was instead hope that increased trade would inevitably lead to coordination without formal agreements, as the comments of Argentine Economy Minister Domingo Cavallo in 1991 reflected: ‘co-ordination will come almost automatically if we continue to pursue the present policies and, fundamentally, maintain . . . fiscal discipline’ (Latin America Regional Reports, 1991). The approach worked at first Á trade certainly boomed. By 1995, with internal tariffs nearly eliminated, intra-Mercosur trade reached US$14 billion Á an increase of over 350 per cent since 1990. By 1997, the figure reached US$21 billion. The Brazilian and Argentine economies were growing and were quite dependent on one another; the correlation of their GDP growth rates was 0.9 between 1996 and 1998 (Devlin et al., 2001). In 1996, President Carlos Menem of Argentina would thus buoyantly proclaim that ‘we are not only growing, we are growing together with other countries in the region’ (Boustany, 1996). On the macroeconomic side, governments pursued fixed exchange rate regimes and observers agreed that there had been ‘de facto convergence on macroeconomic, particularly exchange rate policies’ (Bouzas, 2003, p. 71). Problems began to arise, however, after Mexico’s 1995 peso crisis. The Brazilian government, recognizing the dangers of an overvalued currency, announced that the real would be devalued by 7.5 per cent against the dollar each year. Towards the end of 1997, continued overvaluation of the real, poor fiscal discipline and a tight money supply led to large federal budget deficits and negative current accounts. The situation reached a breaking point when Russia suspended payment on its foreign debt and devalued the rouble in August 1998: investors grouped all developing markets Á including Brazil Á as poor credit risks and began to withdraw capital. Between August and October, US$50 billion was withdrawn from Brazil. In response, the Brazilian government spent over US$36 billion defending the real between August and October, increased taxes, cut spending dramatically and took US$41.5 billion in International Monetary Fund money. To prevent inflation, the Central Bank in turn repeatedly raised interest rates to strikingly high levels (Bulmer-Thomas, 1999; de Souza, 1999). This combination of measures could not possibly be sustained. Powerful industrialists and elites railed against the high interest rates. The budget squeeze, in turn, choked the daily functioning of government. ‘The market’s tenuous confidence in Brazil’ was quickly disappearing (de Souza, 1999, p. 58).

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The situation was grim: ‘for the first time in Mercosur’s history, the major macro-economic indicators of gross domestic product growth, productivity, external trade balances, and related measures of stability were all declining’ (Guira, 2003, p. 171). Without consulting any of the Mercosur partners (O’Keefe, 2003), President Cardoso responded by devaluing the real 8.5 per cent against the dollar in January 1999. Limiting the devaluation to 8.5 per cent proved impossible, however. By March, the real had lost 45 per cent of its value. Heavy trade dependence among the member states was now matched by ‘absolutely incompatible’ macroeconomic policies (de Andrade et al., 2005, p. 87). The situation proved disastrous for all parties. Argentina’s trade balance with Brazil, while still favouring Argentina, decreased by 75 per cent between 1998 and 1999 (O’Keefe, 2003). Uruguayan President Jorge Batlle reported an overnight 50 per cent loss of the country’s exports to Brazil. Given the inordinate reliance of Argentine and Uruguayan producers on the Brazilian market, such drops proved especially problematic (Krauss, 1999; Guidotti, 2001). On the other hand, cheap imports from Brazil were flooding into the other member states and undermining domestic producers. Protests against Brazil mounted. ‘With the death of the Plan Real,’ declared then-Uruguayan Foreign Minister Alvaro Ramos (referring to Brazil’s previous currency stabilization strategy), ‘Brazil changed the rules of the Mercosur game . . . by threatening the fate of its partners’ (Montero, 1999; BulmerThomas, 1999). Fernando de la Rua, in the week before being elected as Argentina’s president, declared that ‘there cannot be distinct roles within Mercosur, with one country producing primary products while another is industrialized’ (Dyer & Warn, 1999). ‘Argentine import-competing sectors,’ wrote two observers, ‘reacted vocally fearing that a flood of ‘‘cheap’’ imports from Brazil . . . would wipe out domestic firms from their own market. Exportoriented business, in turn [were] hurt by a devaluation that priced them out of the Brazilian (usually their largest) market’ (Albin & Bouzas, 2004, p. 170). Constrained by Mercosur’s terms of trade, Argentina, Paraguay and Uruguay responded to the new situation by introducing sloppy, inconsistent and largely illegal barriers to trade Á causing, of course, great irritation in Brazil. In late July 1999, Argentina, for instance, introduced quotas limiting textile imports from Brazil. The president of the Brazilian Textiles Industry Association, Paulo Skaf, called for a ‘forceful’ Brazilian response, decrying the move as threatening the future of Mercosur (Capela, 1999). Disputes between Argentina and Brazil spread to five additional industries: auto, steel, sugar, electronics and footwear. With respect to footwear, for instance, Argentina imposed bureaucratic roadblocks on Brazilian competitors and then an outright quota. Brazil reacted by imposing restrictions on 400 Argentine products. Newspapers talked about a ‘trade war’. The weak ad hoc dispute mechanisms of Mercosur proved ineffective. Ultimately, Argentina, Paraguay and Uruguay had little choice but to wait for Brazil’s currency to stabilize. By

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2001, ironically, Argentina itself would face devaluation, with major consequences for the other member states. Mercosur’s leaders have recently expressed a desire to revisit their approach and introduce measures that will encourage macroeconomic stability (BulmerThomas, 1999; Eichengreen, 2004). Concrete steps, however, have yet to be taken. Until then, the words of one Mercosur observer will apply: ‘the regional distribution of pain’ will continue to be ‘transferred from one member state to another like a rapidly mutating virus’ (Guira, 2003, p. 176).

Interests and national representatives Our third claim stresses the short time horizon of national representatives and that the ‘national interest’, rather than being an unequivocal concept, often comprises multiple and incompatible perspectives. National representatives, eager to stay in power, are bound to embrace regional trade arrangements and policies that are popular and appear broadly beneficial at the time while failing to weigh their impact on key constituents over time. In advancing some interests, those representatives may also undermine others. This is precisely what happened when Mexican officials hurriedly moved to sign NAFTA despite its implications for the corn industry, and when Paraguayan officials similarly rushed to join Mercosur without taking into serious consideration the structural fragility of numerous sectors of its economy.

The plight of Mexican corn farmers The Mexican government placed a great deal of importance on the successful negotiation of a free trade area with the US. ‘Staggering under a massive debt burden and in desperate need of new sources of capital,’ two observers wrote, ‘Mexico’s leadership [had] decided it had few attractive alternatives to a comprehensive trade deal’ (Cameron & Tomlin, 2000, p. 16). This attitude generated a great deal of Mexican impatience (ibid., pp. 16, 107, 235). One Mexican negotiator remembers the gist of a memo from Herminio Blanco, chief of the Mexican team, urging his associates to ‘show your cards, get to the bottom, there is no tomorrow’ (ibid., p. 107). The Mexican team accordingly offered stunning concessions in the all-important agricultural sector. With regard to corn and other grains in particular, deals were struck without ‘a serious, comprehensive and in-depth analysis of the implications’ (Nadal, 2000, p. 25). Corn made up 60 per cent of cultivated land and involved 11 per cent of Mexico’s labour force (Nadal, 2000, p. 11). Nonetheless, corn farmers were given fifteen years of protection under increasingly open tariff-rate quotas. They would then have to face unfettered competition from their more productive and heavily subsidized competitors in the US (Cameron & Tomlin,

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2000). As it turned out, the tariff reduction schedule was accelerated to dampen inflationary pressures, hold down tortilla prices following a drought and aid the Mexican livestock industry (Nadal, 2002, p. 8). NAFTA was duly signed but, as could have been easily expected, a few years later the Mexican government had a major problem on its hands. Mexicans simply could not compete with heavily subsidized imports from its northern neighbour: ‘[T]he subsidy component ‘‘implicit’’ in U.S. corn exports to Mexico,’ wrote two analysts, ‘amounts to between US$105 and 145mn each year. This is of the same magnitude as the annual incomes of the 250,000 corn farmers in Chiapas’ (Fanjul & Fraser, 2003, p. 12). Imports from the US surged by 83 per cent (US Department of Commerce, 2005). Between 900,000 and 1.3 million farming-related jobs were lost (Lambrecht, 2005). Most of the promised alternative job opportunities for campesinos, in turn, never materialized (Faux, 2003). The outcry from displaced Mexican campesinos was vociferous. On 31 January 2003, the farmers captured international media attention when nearly 100,000 descended upon Mexico City to demand renegotiation of NAFTA’s agricultural provisions (BBC News, 2003; Carlsen, 2003). According to the BBC:
Carrying banners and machetes as a show of defiance, the farmers travelled in from across the country. Leaders of the march said they expected up to 40,000 people to take part in the demonstration . . ..[T]heir message is clear Á the Mexican countryside is in crisis and free trade is making it worse. (BBC News, 2003)

A second correspondent from the BBC reporting from Mexico City described the main square as being ‘practically packed out with farmers from across the country’. Many of the banners, the correspondent reported, declared that ‘NAFTA has destroyed their livelihoods’. Others read ‘NAFTA means hunger and then migration’, while others said that the deal ‘is a genocide’. All farmers agreed that they ‘simply [could not] compete against the heavily subsidized imports from the US’ (Miles, 2003). Led by President Vicente Fox, Mexican officials responded to the massive farmers’ movement by announcing a new National Agreement with the Countryside. As part of this initiative, Fox agreed to the farmers’ demand to renegotiate NAFTA’s agriculture section: ‘We are certainly going to find formulas for dealing with corn and beans’ (Reforma, 2003), the President said. Alfonso Elias Cardona of the Mexican Rural Development Commission welcomed this announcement, stressing that an agreement would ‘give ‘‘oxygen’’ to millions of farmers in the countryside and their families who are being enslaved by the opening’ of the agricultural sector (Kuri, 2003). The administration went to work, lobbying their counterparts in Canada and the US to agree to some revised terms of agreement. Canada and the US, however, proved cool to Mexico’s pleas (El Norte, 2003). A surprised Canadian government said through its Latin American Foreign Ministry that ‘our position has always been that we are not willing to

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begin opening up parts of the agreement under any circumstances’ (Kuri, 2003). Neither the US nor Canada has, to date, yielded. The Mexican governments of Fox and now Felipe Calderon have had little choice but to ´ accept the devastating impact of their hasty predecessors. As former Mexican Under Secretary of Agriculture and NAFTA negotiator Luis Tellez observed, ‘It’s not that NAFTA failed, it’s just that reality didn’t turn out the way we planned it’ (Carlsen, 2003, p. 6).

Paraguay’s hasty embrace of Mercosur In the early 1990s, Paraguay’s political leadership Á fresh at the helm after decades of dictatorship Á was eager to prove its progressive mindset to the electorate. Facing the opportunity to join its richer neighbours in Mercosur and to win recognition in the world, the government hastily agreed to become a member without contemplating the negative economic effects of the new trade arrangements Á and thus without lobbying for financial and other remedies. It is certainly difficult to know what Paraguay’s fate might have been had it rejected the offer. It is nonetheless clear that, to use Pierson’s language, ‘actions taken for short-term political reasons’ have had ‘long-term’ consequences for the country (1996, p. 136). Consider, first, the government’s approach to the Mercosur negotiations. The momentum for the new common market came from Argentina and Brazil: already engaged in a free trade agreement since 1988, the two countries expressed their desire for a common market in 1990. It was only then that attention turned to Uruguay and Paraguay. Uruguay Á a stable, relatively wealthy and progressive country Á made for a strong third member. Paraguay’s inclusion was more questionable (Buenos Aires Herald, 1990; Telam, 1990). The country, by far the poorest of the four, had little to offer. Its appeal was perhaps political: the new democracies of Argentina and Brazil were interested in having some influence over their traditionally unstable neighbour. When invited to join, Paraguay’s relieved leadership eagerly accepted without imposing serious demands. The country was given several months to decide, but the government Á despite statements that it would carefully assess the invitation Á accepted the offer in less than two weeks (ABC Color, 1990; Cerro Cora Sistema Nacional de Television, 1990). The opportunity was seen by the ´ president and others in power as the best guarantee of internal political stability and ongoing democratic reform. When thinking about the economic impact of integration, they voiced only words of optimism. Unequivocal statements, such as those made by President Andres Rodrıguez in 1991 at the ´ ´ closing of the negotiations for the treaty, are representative: Mercosur, he said, will bring new ‘possibilities’ and ‘encourage the complementariness of our productive activities by eliminating the obstacles which hinder economic growth, employment and free competition’ (BBC Summary of World Broadcasts, 1991).

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In reality, Mercosur posed serious challenges. Paraguay, though poor, was a more open economy vis-a `-vis the rest of the world than Argentina, Brazil and Uruguay. Entry into Mercosur would imply an increase in its tariffs on goods from non-member states (to Mercosur’s 15 per cent average level). The resulting price increase would force Paraguayan businesses and consumers to buy many goods from the Mercosur member states at higher prices than they would have paid when purchasing them from non-member states (Manzetti, 1993Á4). At the same time, the removal of internal tariffs would expose Paraguay’s industries to fierce competition from the more efficient players in the region. The combination of more costly imports and stiffer competition could prove disastrous for the country. Paraguay’s leadership asked for a shortlived delay in adopting the 15 per cent CET. It did not, however, seek any form of compensation for the damage to its industries. Brazil made it clear in fact that it would accept only ‘limited’, if any, ‘positive discrimination for the benefit of the smaller economies of the bloc’ (da Motta Veiga, 1999, p. 25; Mattli, 1999, p. 160) Á a position it would keep (along with Argentina) despite later requests by Paraguay for help (Hennigan, 2005). Partly as a result of Mercosur’s terms, Paraguay has experienced a profound Á and rather troubling Á reorganization of its industrial and agricultural bases. Faced with more expensive import components and more efficient competitors, Paraguay’s more sophisticated industries (such as machinery, rubber products, oil refineries) have suffered significantly. The country is now a producer of relatively low-end agricultural and land-related products Á above all, food products, textiles and wood products (Sanguinetti et al., 2004, p. 45). Gross domestic product per capita has fallen by more than 30 per cent since its peak in 1996 (controlling for inflation). Exports of goods have diminished while the importation of high-end goods and supplies (such as electrical materials, chemicals and plastics) has increased. This has inevitably resulted in a ballooning trade deficit in goods. In 2005, the figure was around US$1 billion Á about 13 per cent of GDP and more than double the 1991 figure (Jurn & Park, 2002, p. 27). When entertaining the invitation to join, then, Paraguay’s leaders could have examined more closely the likely impact of Mercosur on key sectors of their economy and made their joining conditional on some EU-style adjustment aid, longer transition periods or other forms of protection. As it turned out, the thrill of the opportunity, the desire not to be left out and the short-term political benefits this brought to the country’s leaders proved sufficient to lure them in.

Reflections on institutionalist theory and the design of RTAs RTAs are complex spaces. Drawing from rational choice and historical institutionalism, we have shown that national representatives manage to advance the interests of their countries only in part. Our focus was on shifts in

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national preferences over time and the stickiness of institutional arrangements, the unpredictable consequences of given policies and decisions, and the cacophony of perspectives that make up the national interest Á not least of which are those of national representatives eager to stay in power and therefore willing to commit to popular institutional arrangements that can in fact hurt important constituents in their society later in time. Our evidence came from a variety of policy areas and situations. The analysis adds a middle-ground perspective to existing research on the most prominent RTA, the EU, and the growing literature on international institutions in general Á where, as we saw earlier in this article, we find scholars typically arguing either for or against the advancement of member states’ interests. Our major conclusion is that no clear-cut position about the usefulness of RTAs can be taken. While RTAs surely benefit member states in a variety of ways, they also lead to unexpected, unwanted and rather substantial disappointments. In this final section, we rely on the findings to address two important and related questions. First, can our institutionalist perspective be further refined in light of the evidence we have presented? Second, as we learn more about why RTAs generate such mixed results for the member states, what could be changed in their basic design that might lead to better outcomes? The evidence presented in the previous pages confirmed our institutionalist perspective, both in terms of the mixed outcomes of integration for the member states’ interests and the factors that explain those outcomes. Yet, we carried out our investigations by taking as given two types of variables which are often of central importance to these stories: the preferences of the member states in crucial moments and the content of key passages in the legal texts of RTAs. Specifically, when discussing the stickiness of institutional arrangements, we noted that preferences can change (this explains how national interests can be frustrated). But we said little about what might drive those changes. Hence, we simply took as fact that all of Mercosur’s member states (but Brazil) have wanted to revisit the CET. When examining the unexpected consequences of legal agreements, in turn, we showed how the member states were genuinely surprised by (and dissatisfied with) those consequences. We did not explain, however, how those agreements came into existence in the first place. How, for example, did Chapter 11 make it into the NAFTA? Finally, when we stressed that there is a cacophony of national interests and that political leaders tend to think short term (and thus compromise long-term interests), we did not specify why they might choose to favour certain constituents over others. Why, for instance, did Mexican officials sacrifice the interests of corn farmers during the NAFTA negotiations? A complete theory of RTAs and their partial fulfilment of national interests should account for these ‘givens’. If not institutionalist in nature, an explanation for them would complement Á rather than challenge Á our institutionalist approach. We cannot fully articulate such a theory here. But, in line with the work of Bulmer (1998) and others on institutionalist theories

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and the EU, we propose that politics be taken into consideration. Specifically, we suggest that asymmetries in the power of key domestic actors (business organizations, political parties, unions, etc.) influence how member states formulate their preferences on important issues at particular points in time as well as the specific content of legal agreements among those member states: powerful actors shape the stance of key countries and what those countries agree to. Power asymmetries among the member states themselves, of course, also play a major role. Politics affect things early on (i.e. before institutional factors play a role) and again later in time (after institutional factors make their impact). Thus, along with Bulmer (1998, p. 370), we submit that politics do not merely provide the initial ‘inputs’ which institutions then mediate but, rather, that politics and institutions interact with each other as events unfold. Let us return to the examples mentioned above for a more concrete view of these dynamics. What caused three Mercosur member states to change their stance, years after its inception, towards the CET? Macroeconomic realities were important, of course. But a major factor was a change in the political leadership of those countries. In Argentina, for instance, the complaints came from the leftist coalition of the Union Cıvica Radical and ´ ´ the Alianza, following its rise to power in 1999 with the defeat of the more mainstream Peronists (who had negotiated Mercosur in the early 1990s). And in Uruguay those complaints came from the leftist Colorado Party, after it took over from the conservative Partido Nacional (in power since 1990) in 1995. These political shifts coupled with the ‘stickiness’ of the CET explain how national interests became frustrated over time. Chapter 11 was introduced in the NAFTA text, in turn, by lawmakers from the US Á with the partial support of their Mexican counterparts but facing Canadian opposition Á in response to great pressures from large US corporations seeking assurances about investing abroad (Nolan & Lippoldt, 1998). It was ‘slipped’ in as quietly as possible in the preparation of the overall trade agreement in the hope it would not attract attention. Its surprising impact on questions of sovereignty cannot be explained without reference to its origins Á to the fact that it represented ‘an almost total victory for investor parties’ (Heindl, 2006, p. 673). Lastly, the Mexican government chose to ignore corn farmers during the NAFTA negotiations because most were small-scale enterprises with limited capacity for collective action and little influence on the voting process. The government’s decision to allow into Mexico heavily subsidized corn from the US pleased, at the same time, two sets of constituents who could benefit from the resulting lower prices: consumers, and a few but very powerful tortilla manufacturers (Nadal, 2002). Institutions and politics combine, then, to make RTAs spaces where member-state interests are only partly fulfilled. We must now wonder whether these politicalÁinstitutional dynamics are inevitable: can adjustments to the basic design of RTAs be made so that national interests are more faithfully

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realized? What might those adjustments entail? A current debate in international relations considers the relative merits of hard law (understood as agreements that bind member states to certain institutional arrangements) and soft law (understood as looser agreements among those states) (Abbott & Snidal, 2000). A parallel debate, often focused on federations, reflects on the advantages of robust systems of governance (where rules can shift and be revisited) over stable systems (where rules are fixed and removed from the bargaining table) (Bednar, forthcoming). Those discussions are fundamentally about rigidity versus flexibility. Which model do RTAs conform to? Could a shift improve matters for the member states? RTAs subscribe above all to an especially rigid hard-law model. This hardlaw approach could be retained but relaxed significantly. Let us first note that virtually all RTAs now rely on enduring agreements: once part of those institutions, member states find it difficult to exit. Those agreements are wide reaching: they normally cover numerous issue areas which the member states cannot selectively agree to take on. A member state can either participate in an RTA, in all or most if its dimensions, or not. Finally, let us observe that the basic architecture and scope of RTAs are generally agreed to by single political leaderships in the member states, with few, if any, planned occasions to revisit the status quo. International relations theorists such as Keohane (1984) are bound to attribute this design to a choice on the part of the participants to ‘lock’ themselves into situations that force them to accept certain negative effects in the light of larger positive ones. But we should not dismiss the possibility that, in line with the expectations of world society and diffusion theorists (Meyer, 2007), the architects of RTAs have subscribed to the dominant blueprint for integration (set by the EU decades ago) available at the world level without a good understanding of its implications. A less rigid approach might have important advantages. It seems therefore worthwhile to ask whether alternative designs are possible. Some international institutions resemble RTAs. Consider, for instance, the International Court of Justice. Once a member of the court, countries cannot easily leave and rejoin the court over time. The court has jurisdiction over a very wide variety of issues: countries cannot simply request specific combinations of issue areas over which they recognize the court’s authority. Very few of the court’s powers and activities in turn, are subject to periodic reviews. On the other hand, other international institutions are far more flexible. The Kyoto Protocol, for instance, allows for ongoing possibilities for revisions and very easy exit for the member states. These more flexible environments allow member states to take steps, as time goes on, to make sure that their interests are not compromised by earlier choices (Rosendorff & Milner, 2001). RTAs could be made more flexible. We suggest that a few key initiatives in particular could change things significantly, as Table 1 shows. First, commitments to any decision or programme in a given policy area could be made less permanent. Processes could be established to revisit

Francesco Duina and Jason Buxbaum: Regional trade agreements Table 1 Models of regional integration
Current integration model (e.g. EU, NAFTA, Mercosur) Permanence of decisions Decisions are generally taken as permanent; cumbersome and difficult steps required for revisions Advantages: predictability (for market and other actors); cohesion of measures in a given policy area Disadvantages: as economic and political reality change, decisions can prove harmful Extent of issue linkage

215

Alternative integration model Possibility of easily revisiting, revising and/or abrogating decisions Advantages: decisions closely reflect economic and political realities on the ground; higher compliance rates Disadvantages: incoherence in a given policy area; different regulatory frameworks may act as non-tariff barriers to trade

` A la carte integration: All-or-nothing approach member states can makes it very difficult to win exemptions from given issues choose which dimensions of integration (specific sectors, Advantages: deeper policies, etc.) they participate in integration; easier to Advantages: less domestic overcome obstacles from resistance to integration individual member states Disadvantages: selective on specific issues Disadvantages: likelihood of integration, inefficiencies due to interdependence between domestic pressures against dimensions of integration parts of the agreement Can be done by one political leadership (typically with support from legislature) Advantages: expediency (both domestically and internationally) Disadvantages: agreements more likely to come under attack later and be poorly implemented over time Requires at least two consecutive political leaderships (with support of legislatures) Advantages: stronger commitment by the member states Disadvantages: lower likelihood that agreements are reached or, when possibly needed, revised

Initial approval/ approval of major revisions

Redistributive mechanisms

Very limited pooled funds Collection and redistribution of significant funds and mechanisms to deal with Advantages: decreased strains impact of integration on on commitment to integration selected industries Disadvantages: richer Advantages: limited upfront countries may prove less costs of integration interested in integration; fewer Disadvantages: impact of integration can lead to unrest incentives for member states to prepare for and pressures for dissolution adjustments to integration of agreement

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agreements at certain points in time, with the understanding that revisions are likely. Member states could be expected to have to re-approve important or consequential measures, for instance, or to hold formal discussions to hear grievances about them. Revisions could be accepted on a simple or qualified majority principle, or even unanimity. If a majority is required, this would probably mean that some member states’ wishes go unmet. However, on the whole this would cause fewer problems for the advancement of national interests than a situation where most member states wish to undo a provision but cannot easily do so. The advantages of such an approach are clear: they ensure, at any given time, a closer alignment between an RTA’s policies and the member states’ interests. The downside is increasing incoherence in a given policy area, since measures which might at one point have been in line with each other (because they form part of a major initiative, for example) now become disjointed and follow different trajectories. This, in turn, might translate into confusion on the ground as regulatory frameworks succeed one another and thus lead to more difficulties associated with trade. Second, participation in different areas of integration could be made ` independent of each other, in an a la carte fashion. At the moment, almost all RTAs require member states to accept practically all their legal texts. Exemptions are seldom granted and require extended negotiations. Large sets of initiatives are, in turn, put forth by regulators as single bodies of policy: subscribing to one means subscribing to all those initiatives. Issues are intricately ‘linked’, as Pierson (1996) argued for the EU. Matters could be rather different, with any member state choosing to participate in some dimensions of integration or specific policy initiatives but not others. EU leaders have shown an interest in this sort of an approach, albeit quite tentatively, as more and more members have joined. Participating in the common market, for instance, does not mean adopting the Euro. Some countries have negotiated ‘opt-outs’ from certain legislative measures (e.g. the United Kingdom with the social ‘chapter’ in the 1990s or Denmark currently with citizenship). The Association of Southeast Asian Nations’ Free Trade Area also allows for selective participation across industry sectors (a country can choose, for instance, to liberalize trade in mining products but not cotton). Such an a la carte approach would surely mean ‘less’ overall integration. ` Fewer products or services would be subject to full liberalization across all the member states, and trade itself would rely on a smaller and rather uneven set of liberalization measures. In addition, it would be far easier for countries to resist any given initiative Á something that would complicate negotiations. On the other hand, the advantages are quite compelling: the interests of specific constituents from any given member state would have an opening for representation, instead of being neglected or ignored outright. Third, agreements about the essential characteristics of RTAs could require the approval of two (successive or not) governments in a given country. The

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support of the legislature would be required in each instance. This requirement would certainly make it more difficult for a member state to approve any new initiative (this explains why the US Congress has in the past given the President ‘fast-track’ authority to negotiate trade agreements). But it would also ensure that multiple stakeholders (with sometimes conflicting agendas) are exposed early on to the proposed agreements (this is the reasoning behind Congress’ failure to renew the fast-track permission in the summer of 2007). Their approval, albeit more difficult to obtain, would then decrease the chances of those stakeholders feeling ignored and mobilizing to undermine the entire project later on. Reliance on more than one government would also alter the calculations of political leaders who, as we have seen in this article, now have reason to discount the long-term impact of trade deals on any given constituent. A fourth initiative is less concerned about avoiding beforehand the frustration of national interests and more about compensating those who have suffered from integration. We should note here that the EU’s structural funds are not necessarily designed with this objective in mind but, rather, with the goal of aiding poorer areas in the EU to catch up with the richer ones. Our suggestion is that significant work be done to investigate and estimate the sort of damage that integration can bring to particular industry, service or agricultural sectors and sub-sectors. Causality is often hard to assess, of course. But in many cases it is fairly easy to see that certain constituents are not ready to compete internationally or, even if ready, will not be able to do so because of factors such as subsidies in other countries. To address such problems, the member states of an RTA could pool funds together. The exact formula for contributions could vary, of course, but in most cases a country’s size and wealth would determine those contributions to a large extent. ‘Transition’ programmes could then be developed for vulnerable actors. These would provide direction for how the funds should be spent (training, capital investments, etc.), the length of the support, reporting requirements and other related matters. Such funds would obviously increase the start-up costs of integration Á but these are likely to be ‘apparent’ costs only. First, some countries would actually gain overall from the transfers. Second and more importantly, if properly used the funds would promote the stability of an RTA, improve the region’s overall economic environment and stimulate growth Á all of which would benefit all the member states in the long-term. Overall, then, we suggest that the four initiatives just discussed would greatly diminish the likelihood that undesired and unforeseen consequences would arise or have long-lasting impacts on the member states. There would be negative side-effects, of course: above all, the intensity or depth of integration would lessen while the upfront costs might go up. The current blueprint for RTAs does bring certain advantages. Yet the advantages of more flexibility might outweigh those side-effects. Let us recall, after all, Walter

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Mattli’s (1999) observation that most RTAs throughout history have failed. Exploring alternative blueprints for integration may thus be very much in order.

Acknowledgements We presented an early version of this article at the European Union Studies Association (Montreal, May 2007), where members of our panel and the audience gave us very helpful comments. We are also grateful to Ove K. Pedersen (Copenhagen Business School) and the referees and editors of this journal for their outstanding insights.

Notes
1 Examples abound. See, for instance, Moravcsik (1998), Magnette and Nicolaıdis ¨ (2004) and Tallberg (2004). 2 For representative examples, see Bulmer (1998) on governance and the Single Market Programme of the 1980s, Heisenberg and Richmond (2002) on the European Court of Justice and the European Central Bank, Lindner and Rittberger (2003) on budgetary decision making and Williams (2003) on human rights. 3 These reductions were required by the Uruguay Round of negotiations related to GATT’s Article XI. 4 The complaint actually had two parts: that the member states had agreed to work towards the elimination of tariffs and that the NAFTA text states that no country can impose higher tariffs than were in place before NAFTA came into being (US Department of Agriculture, 1997, p. 19).

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Francesco Duina received a PhD in sociology from Harvard University in 1996. He taught in the Committee on Degrees in Social Studies at Harvard from 1998 to 2000. He is currently Associate Professor of Sociology at Bates College, Maine, and Visiting Professor at the Copenhagen Business School, Denmark. He is the author of The social construction of free trade: The EU, NAFTA, and Mercosur (Princeton University Press, 2006), Harmonizing Europe: Nation states within the Common Market (SUNY, 1999) and of articles in journals such as the Journal of European Public Policy, European Law Journal, Review of International Political Economy and Comparative European Politics. His current research focuses on law and institutions in NAFTA, the European Union and Mercosur.

Jason Buxbaum is an undergraduate at Bates College, majoring in politics and sociology. He is interested in institutions, public policy and issues surrounding free trade.