The Optimal Design of International Trade Institutions: Uncertainty and Escape

Abstract

International institutions that include an escape clause generate more durable and stable cooperative international regimes, and are easier to achieve ex ante. The escape clause is endogenous in a model of repeated trade-barrier setting in the presence of symmetric, two-sided, political uncertainty. They permit, along the equilibrium path, countries to temporarily deviate from their obligations in periods of excessive, unexpected political pressure at some prenegotiated cost. The architects of international agreements optimally choose a cost so that escape clauses are neither too cheap to use (encouraging frequent recourse, effectively reducing the benefits of cooperation) nor too expensive (such that they are rarely used leading to an increased chance of systemic breakdown). The international institution's crucial role is one of an information provider (verifying that the self-enforcing penalty has been paid (voluntarily)), rather than one of enforcer coercing payment. Escape clauses also make agreements easier to reach initially. Their flexibility allows states to be reassured that the division of the long-term gains from the agreement is not immutable.