Multi-Lateralisms: Explaining Variation in Regime Instruments

Abstract

Different international regimes are built from legal instruments that vary in terms of whether they are multilateral or bilateral. We investigate the reasons for such variation. The choice between multilateralism and bilateralism is a function of the trade-off between each instrument's relative flaw—multilateralism is wasteful in incentives whereas bilateralism multiplies transaction costs. We illustrate some of these propositions by looking at four regimes: foreign direct investment, human rights, climate change, and international trade.

International regimes are built on instruments that vary in terms of whether they are multilateral, bilateral or a combination thereof. For example, the current trade regime has a strong multilateral component as its core, centered on the World Trade Organization (WTO), while the foreign direct investment (FDI) regime is mostly constituted of bilateral agreements. Notably, many regimes combine two or more instruments: the nuclear nonproliferation regime combines a multilateral treaty with bilateral deals pursued mostly by the United States (Verdier 2008).

Moreover, it is important to note that the type of instrument on which a regime rests does not seem to correlate with the strength or depth of the regime—the foreign investment regime prima facie is no weaker than the trade regime. In other words, multilateralism, defined as the signature of one treaty by a large number of countries, is not merely a more advanced state of regime development than more decentralized alternatives.

From a legal perspective, the question of "lateralism" points to the scope of the legal rules in force: do they apply to two countries or to many? From a bargaining perspective, it points to the negotiating format that presided over the creation of the regime, as captured by the arrangement at the negotiating table. With multilateral agreements, many governments negotiate around a single table; with bilateral agreements, governments negotiate in sets of two across many tables. States must coordinate on this decision before they can make substantive rules and institutional design choices, which may in turn be influenced by the format adopted.

From a normative perspective, the question of lateralism relates to whether countries should be treated equally under international law or differently based on disparities in capacity or power. Multilateralism, according to Ruggie, implements "generalized principles of conduct" whereas bilateralism "differentiates relations case-by-case based principally on a priori particularistic grounds or situational exigencies" (1992: 571). How this issue is addressed in practice is usually seen as a result of prevailing norms or of bargaining power, with some states advocating more uniform rights and obligations and others calling for differential treatment. We argue that the outcome is also influenced by the variables highlighted here and hence by efficiency concerns.

Why do regimes vary in terms of their lateralism? We investigate the reasons for such variation and argue that the mix of lateralisms in an international regime is a function of two variables: transaction costs and a new concept—the member surplus. The member surplus captures the idea that the multilateral strategy can be wasteful in incentives, since incentives are calculated to elicit the participation of the state that is burdened with the highest cost of compliance, thereby creating rents for the other members. The bilateral strategy, in contrast, allows the customization of rights and obligations to each individual member state. But because the bilateral strategy is more wasteful in transaction costs than the multilateral strategy, states face a trade-off.

This allows us to make three claims: (1) multilateralism is most attractive with high transaction costs and a low member surplus, (2) bilateralism is more likely to obtain when transaction costs are low and the member surplus is high, and (3) when both transaction costs and the member surplus are high, we encounter combinations of multilateralism and bilateralism. Such combinations come in two forms, regimes that contain a mix of multilateral and bilateral agreements and regimes that rely on multilateral agreements that are customized to the needs of different members. We develop a formal model to capture the logic behind these institutional outcomes.

The next section situates our topic in the theoretical literature. We then introduce the notions of transaction cost and member surplus and present a formal model and a set of predictions that flow from it. In an empirical section, we demonstrate the plausibility of our claims in the context of four prominent regimes: the foreign direct investment regime, the human rights regime, the climate change regime, and the trading regime. A penultimate section offers an extension of the model to incomplete information and the concluding section highlights implications for our understanding of international institutions.