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The new interdependence

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The new interdependence market competition reconfiguring the inter-state system
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Adams, Nathan A.
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Business innovation ( jstor )
Capital mobility ( jstor )
Developed countries ( jstor )
Developing countries ( jstor )
Environmental regulation ( jstor )
Financial investments ( jstor )
International trade ( jstor )
North Atlantic Treaty Organization ( jstor )
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Dissertations, Academic -- Political Science -- UF
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Thesis (Ph. D.)--University of Florida, 1994.
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Includes bibliographical references (leaves 287-304)
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Typescript.
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Vita.
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by Nathan A. Adams, IV.

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THE NEW INTERDEPENDENCE:
MARKET COMPETITION RECONFIGURING THE INTER-STATE SYSTEM









By
NATHAN A. ADAMS. IV


























A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA

1994




THE NEW INTERDEPENDENCE:
MARKET COMPETITION RECONFIGURING THE INTER-STATE SYSTEM
By
NATHAN A. ADAMS, IV
A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
1994


Copyright 1994
by
Nathan A. Adams, IV


DEDICATION
I dedicate this dissertation, first, to Yahweh, second, to my
wife whom I adore, and. third, to my parents and the memory
of my Grandfather. Without the love, encouragement, and
inspiration that they have shown me I would not be who I am,
and this dissertation would never have been written. All that
it is, and all that I am I owe to Jesus Christ.
All things were made by him; and without him was not any
thing made that was made. In him was life; and the life was
the light of men.
John 1:3-4.


ACKNOWLEDGMENTS
In writing this dissertation, I benefited greatly from the help of many professors. First, I
want to thank the members of my dissertation committee. Professors Leann Brown. David
Conradt, Alfonso Damico, Gary Goertz, and Winston Nagan. One-time committee members.
Professor Walter Rosenbaum and Roy Crum, were also more than helpful. Professor Gary Goertz
went far beyond the call of duty in scrutinizing drafts of this dissertation and providing
constructive comments even after he left the University of Florida for the University of Toronto.
I owe him the most thanks. But Professor Brown has also been painstaking in her critique of
chapters, so I thank her. and I thank Winston Nagan for his thoughtftil reflections on the
implications of The New Interdependence for international law. my new love.
At the University of Florida. I was privileged to be among an outstanding group of
scholars. I would like to thank the Department of Political Science and its former Chairman,
Kenneth Wald, and former Graduate Coordinators, Alfonso Damico and Michael Martinez, for
supporting me throughout my doctoral studies. Also, special thanks are due to the Department's
secretaries. Debbie Wallen and Marty Swilley, for their technical support and constant good
cheer.
Since I completed this dissertation at the University of Texas and University of Virginia,
I owe library and technical staff at those institutions my gratitude, as well. More importantly. I
should acknowledge the continued mentorship of professors from Wheaton College in Wheaton.
Illinois, who introduced me to my fascination and love for political science: Professors Mark
Amstutz and Lyman Kellstedt. In particular. I thank Professor Mark Amstutz, whose primary
field is international politics, for the wise guidance that he has provided me throughout my
undergraduate and graduate training in my field of interest and in many other areas of life.
The University of Florida Graduate School provided me with a fellowship in 1992-93.
which enabled me to finish most of the research for this dissertation. I am grateful for this
financial support and for the Graduate School's editorial assistance. I have received only patient
iv


help and knowledgeable guidance from the Graduate School. Hence, I also gratefully
acknowledge the many people in the Graduate School who helped me administratively.
Last, but most importantly, my wife. Heather L. Adams, and parents, Nathan A. Adams.
Ill and Eleanor Adams, have helped me though the most challenging days of this project. They
have been long-suffering encouragers and my wife, an absolutely essential helpmate. Many was
the night after a long day of work that she gave up her own pursuits to type a Figure or Table to
add to the many in this dissertation. Thus, by rights, I consider this achievement, ours. To be
fair, it is also partly my dad and mom's. They have been wonderfully supportive of everything
that I have done. Thus, with love in my heart, I acknowledge my family, wife, and God, and
dedicate this work to them.
v


TABLE OF CONTENTS
ACKNOWLEDGMENTS v
TABLE OF CONTENTS vi
LIST OF TABLES *x
LIST OF FIGURES xi
ABSTRACT xii
CHAPTERS
1. INTRODUCTION 1
Understanding Old and New Interdependence 4
Methodology 10
Summary 17
2. STATE OF THE THEORY 27
The Interdependence Approach 28
Convergence 29
Collective Goods Problems 34
Lowest Common Denominator Agreements 35
Framework for the Interdependence Approach 39
Independent Variables 40
Mobility of Capital 44
Technological Innovation 46
A Contradiction, Not Compromise 47
The Competition State 49
Summary 51
3. WEAPONS PROCUREMENT POLICY 58
Convergence 60
Collective Goods Problem 70
Lowest Common Denominator Agreements 76
Weapons Cooperation in Western Europe 82
Capital Mobility and Technological Innovation 88
vi


Contradiction in NATO Procurement
93
Conclusion 95
4. MONETARY POLICY 104
Convergence 105
Collective Goods Problem 115
Lowest Common Denominator Agreements 121
The European Monetary System 127
Capital Mobility and Technological Innovation 132
The Contradiction of Embedded Liberalism 134
Conclusion 138
5. INTERNATIONAL TRADE 149
Convergence 150
Collective Goods Problem 157
Lowest Common Denominator 168
Capital Mobility and Technological Innovation 178
Embedded Liberalism in Trade 187
Conclusion 193
6. ENVIRONMENTAL POLICY 207
Convergence 208
Collective Good 221
Lowest Common Denominator 229
Capital Mobility and Innovation 235
Contradiction 245
Conclusion 248
7. CONCLUSION 257
Confirming the Hypotheses 258
Policy Responses to the New Interdependence 278
vii


APPENDIX A: POPULATION OF NON-REGIONAL, MULTILATERAL ENVI
RONMENTAL TREATIES 283
APPENDIX B: POPULATION OF REGIONAL, MULTILATERAL ENVIRON
MENTAL TREATIES 285
REFERENCES 287
BIOGRAPHICAL SKETCH 305
viii


LIST OF TABLES
Table Page
1-1 Country Stock Market Correlations with the World Stock Market 20
1-2 Growth in Unregulated Capital Markets, 1970-88 21
1-3 Relative Size of the Eurocurrency Market 22
2-1 Correlation Matrix of Measures of Innovative Activity 54
3-1 Number of Major Weapons Systems in NATO 99
3-2 Relative US/USSR Technology Level in Deployed Military Systems (late-1980s).. .100
3-3 Members of Systemic Weapons Standardization Groups 101
3-4 The MLRS: An Example of the Family of Weapons Approach 102
4-1 Financial Liberalization 142
4-2 Periods When the Collective Good of International Financial Stability was
Provided and its Results 143
4-3 The EMU Indicator 144
4-4 Innovation in International Financial Markets, 1950-80 145
4-5 Correlation of National Stock Markets 147
4-6 Major International Financial Agreements and Events, 1962-92 148
5-1 Trade Reform in Latin America 198
5-2 Liberalization in Regional Trade Blocs 199
5-3 Income Convergence Coefficients in Postwar, by Group 200
5-4 Long-Term Income Convergence Coefficients, by Group 201
5-5 Average Intra-Industry Trade in Selected EC Countries 202
5-6 Unfair Trade Practices Cited Under Sect. 301 203
5-7 Assessing the Strength of the GATT's Normative Structure 204
6-1 Comparisons of Actual Air Quality Control Costs to Estimated Least Costs 252
6-2 Comparisons of Actual Water Quality Control Costs to Estimated Least Costs 253
6-3 Summary of Regional and Non-regional Multilateral Treaties, Appendices 6-1
and 6-2 254
ix


6-4 Capital Expenditures of Nonbank Majority-Owned Foreign Affiliates as
Percentage of Total Manufacturing 255
6-5 Trade in Hazardous Substances as a Percentage of Total Annual
Merchandise Trade 256


LIST OF FIGURES
Figure Pa8e
1-1 Conceptualizing Interdependence 23
1-2 General Framework for the Interdependence Approach 24
1-3 Eroding Autonomy of the State 25
1-4 Case-study Variance 26
2-1 Interdependence Approach 55
2-2 Technological Innovation in Information Technologies 56
2-3 General Framework for the Interdependence Approach 57
3-1 The Co-Produced F-16 103
5-1 The Trilateral Commission -- Trade and Investment Flows 206
xi


Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy
THE NEW INTERDEPENDENCE: MARKET COMPETITION RECONFIGURING THE INTER
STATE SYSTEM
By
Nathan A. Adams, IV
December 1994
Chairman: Alfonso Damico
Major Department: Political Science
This dissertation develops and tests a new approach to the study of interdependence in the
international political economy that marries the insights of structural-realism with liberal political
economy: The Interdependence Approach. Three dependent variables define the approach: (1)
convergence in public policy toward a liberal, global equilibrium; (2) the transformation of domestic
regulatory problems into international collective goods problems; and (3) the tendency of the market to
restrain states acting multilaterally from enforcing regulations that exceed a lowest common denominator.
The two independent variables which primarily account for these processes are (1) the increasing mobility
of capital and (2) technological innovation.
Together, these variables illuminate the contradiction which an interdependent political economy
poses in the 1990s, for a state which is naturally inclined to govern autonomously, but which must
coordinate its regulatory apparatus with other states to solve problems effectively, if at all. The author
calls this new stage of interdependence, in which even the most economically influential countries are
limited: The New Interdependence. He contends that, contrary to the assertions of neo-realists,
technological innovation and capital mobility best account for the failure of multilateral regulatory
systems like Bretton Woods and the European Monetary System (EMS). Countries which try to regulate
the market more than others or which pursue macro-economic policies at variance with the norm in other
industrialized countries experience capital flight and declining industrial competitiveness.
Thus, the trend since the 1970s has been for the state to regulate the market less and, in fact, to
facilitate market competition. This dissertation finds this to be the case in four case studies that deal with
xii


some of the primary functions of the state: defense procurement policy, monetary policy, trade policy, and
environmental policy. Moreover, it finds the same trends in the context of both Western European
integration and industrialized countries, in general. Each case study tests a series of five hypotheses and
three corollaries, and reaches the conclusion that the modern welfare state is being transformed into a
competition state.
xiii


CHAPTER 1
INTRODUCTION
I believe that we are undergoing a major reorganization of
international life at the present time which will result in drastic
modification of the world order system that has prevailed since the
Peace of Westphalia in 1648.
(Richard Falk, 1975)
How can we explain the fact that, increasingly in international politics, even advanced
industrialized states appear constrained in their ability to pursue both their international and domestic
objectives? The assumption is now widespread that the world has become significantly more
interdependent and, thus, the state, less autonomous than before. Yet the way scholars have modeled
this difference has not always been persuasive. Hence, many structural-realists have come to the
conclusion that interdependence is just a new word for the same international politics in which states
have always participated.
Three processes accelerated in the 1980s, which cast doubt on this conclusion. I believe that
they are dramatically changing the character of the international political economy. When considered
together, these processes constitute what I call the Interdependence Approach. Those variables are (1)
convergence in public policy toward a liberal, global equilibrium; (2) the transformation of domestic
regulatory problems into international collective goods problems; and (3) the tendency of the market to
restrain states acting multilaterally from enforcing regulations that exceed a lowest common
denominator (LCD).
Scholars have traditionally associated none of these three processes with interdependence,
either theoretically or empirically. Instead, they have generally related it to so-called international
regimes in the 1990s. Despite the merits of diis association, I am convinced that it has been a major
oversight for scholars to overlook the three variables of the Interdependence Approach. They may
provide the best index of how the state is changing in die last decade of the Twentieth Century. In the
1


2
case-studies that follow I provide evidence that the state is shedding its Keynesian and, now, even
monetarist heritage to become a competition state designed to snatch the rents from imperfect
competition which modern trade in technologically innovative products and transnational investment
stimulates. This new state is not primarily a market regulator, so much as simply a market taker and
promoter.
The most important variable in die Interdependence Approach is convergence toward a liberal
global equilibrium in public policy. By "convergence," I mean (in the words of Alex Inkeles 1975,
472) a process, "Where social units start from diverse positions on some scale of organization,
sociopolitical structure, or culture, and then move toward some more common form on die given
dimension." More generally, if we imagine that a continuum extends from independence to integration
as in Figure 1-1, interdependence would be relevant only between die limits. Convergence would
occur in die zone beyond die median of the continuum to its end-point. The end-point represents
"integration." Thus, for our purposes, complete convergence is the same thing as integration.
Convergence is a critical process, because it suggests that industrialized countries which try to
regulate the market more tian odiers will face substantial repercussions. Most devastating, capital will
tend to flow out of the state which regulates it excessively in search of higher rates of return.
Likewise, industry will prove non-competitive in the long-term in the overly regulative state. Finally,
public policy, itself, will prove too costly for the state to enforce. In die end, die state will have to
abandon the very regulations diat cost it so dearly.
As for the transformation of domestic problems into international collective goods problems,
this process is denying the state its former control over substantive issue-areas. Now, effective
solutions to many regulatory problems diat die state used to solve by itself require multilateral
solutions. Even such classically low politik concerns as hazardous waste management and monetary
policy now require coordinated attention at die highest levels of government.
More disturbing is evidence diat not even die multilateral community can solve problems that
states formerly took care of individually. If states address collective goods problems at all, they are


3
likely to take largely symbolic actions to demonstrate their normative belief that they should cooperate
to resolve the problem, rather than to effectively regulate the problem. This posturing is likely to
center around the response least costly for the most powerful actors involved to take. For this reason,
I call these policy responses lowest common denominators (LCDs). As we shall see, the conflict and
unresolved problems this leaves us with are a powerful reason why some expect supra-national
governance in the future.
The two independent variables which I believe account for the acceleration of the three
processes of die Interdependence Approach in the 1980s are (1) the mobility of capital and (2)
technological innovation. Figure 1-2 should begin to make die outline of diis causation obvious. The
mobility of capital is die primary independent variable. It refers to die ability of both liquid and fixed
assetsthat is, money and investmentto change locations. The more mobile capital is, die more likely
die three processes of interdependence are to accelerate together.
The second independent variable, technological innovation, includes "not only technical
changes in production processes and equipment but also die discovery of new resources, the
development of new types of organization, and new methods of management" (Schumpeter cited in
Weber and Handfield-Jones 1954, 115). The primary technological innovations which are of interest to
me are in information technologies, e.g. computers, telecommunications, software, and micro
electronics.
The most important way in which technological innovations influence die diree dependent
processes that I have described is indirect. Technological innovation in information technologies allows
capital to be more mobile; diat is, it creates a more conductive medium through which capital can
move. However, technological innovation can also have an important independent effect on the
variables of die Interdependence Approach, since its increased pace makes research and development
(R&D) more important to firms diat want to remain competitive in die global market. This R&D has
become more costly with time, encouraging firms to join multinational consortia to develop new


4
products. Obviously, this increases interdependence and the tendency toward convergence in product
types.
Thus, capital mobility and technological innovation can co-vary, but not necessarily. Clearly,
some innovations have no effect on the mobility of capital. Likewise, the availability of capital does
not always advance technological innovation. Scarcity of ideas plays an independent role in the
innovation process. Yet, as R&D costs rise, scarcity of capital is becoming a more critical restraint on
innovation.
Why is this so important? Capital became mobile enough and technological innovation rapid
enough in the 1980s, that die three dependent processes of die Interdependence Approach began
seriously limiting die autonomy of even die largest industrialized states. To be sure, prior to the
1980s, these processes prompted a number of crises in die international political economy (like die
collapse of Bretton Woods), but diey seriously bound only die autonomy of industrialized and
developing countries widi relatively small national incomes in issue-areas where capital was highly
liquid (usually, areas related to low politics). The revolutionary change which began in die 1980s was
that the dependent processes began to bind even economically influential industrialized countries in die
area of high politics. This new, advanced stage of convergence, far to the right on Figure 1-1, I call
die New Interdependence. Since it is completely different from past periods of interdependence, I
believe that it deserves special exploration.
Understanding Old and New Interdependence
There are two primary dieoretical contributions diis research makes to die study of
interdependence diat are important to distinguish between, as well as to distinguish from classical
interdependence theory:
(1) The "Interdependence Approach" is die name I have given to the new approach to
interdependence which I take. It is concerned primarily widi three processes:
a. convergence in public policy toward a liberal, global equilibrium
b. the transformation of domestic regulatory problems into international collective goods
problems
c. the tendency of the market to restrain states acting multi laterally from enforcing
regulations that exceed a lowest common denominator (LCD).


5
(2) The "New Interdependence" refers to an empirical phenomenon-a new, advanced stage of
interdependence that is binding even the most economically influential industrialized countries,
in the areas traditionally regarded as sacrosanct to the state, i.e. high politics. Always
advancing, the three processes of the Interdependence Approach caused the level of
interdependence to increase and traverse the continuum in Figure 1-1 from left to right, until at
last we reached a level of interdependence-tlie New Interdependence-which suggests the
outlines of a radically new inter-state system.
Taking up the second of these themes, first, Figure 1-1 shows where the old interdependence
would fit in relation to the New Interdependence. If a y-axis were added to this continuum
(representing autonomy). Figure 1-3 would be the result. Here, as interdependence increases it is
likely to limit the autonomy of, first, small states in die area of low politics and, last, large developed
states in the area of high politics. Thus, whereas in die 1970s, interdependence forced northern
European states to remain attached to die German Mark in foreign currency markets, France, Britain,
and Italy detached themselves from it. In the 1980s, in contrast, interdependence forced even the most
economically powerful European states to follow die lead of die Bundesbank.
Overall, what is most important about the empirical condition of interdependence today is that
even die most influential industrial countries cannot pursue policies penalizing capital for long, no
matter die issue-area concerned. In this sense, the New Interdependence stands for an unprecedented
situation where die autonomy of even influential industrialized countries is limited by the market. For
example, in the 1970s, whereas die US could simply "close die gold window" and not worry about the
implications for its own economy, today it cannot significantly influence die value of its currency over
the long-term. Regulating investment is also a problem. When Germany decided in October 1987 to
authorize a 10% withholding tax on interest income (effective January 1989), German capital poured
into deutsch mark Eurobonds and other offshore assets. In the end, Germany had to retract die tax,
three months after it went into effect. Indeed, in an environment characterized by the New
Interdependence monetary policy has to be liberalized.
To demonstrate more generally how "new" interdependence is today, I will concentrate for a
moment on my primary variable (convergence) and steal a page from die literature on international
finance. According to diat literature, as long as developed countries are fairly independent of one


6
another, their stock markets should reveal randomly diverging average yields. In contrast, as the
markets of developed countries become linked or, in other words, converge, stock market yields should
begin to correlate. Table 1-1 shows a few examples of how dramatic this increasing correlation is. On
average, the correlation in yields between the hypothetical world market (die average of all stock
markets) and die individual G-51 stock markets increased from .58 in the late-1970s to .82 in the
1990s. Chapter Four discusses diese trends in more detail (see infra, Table 4-5).
Another variable which dramatically underscores how new contemporary interdependence is in
the 1980s is die mobility of capital. Table 1-2 reveals dramatic growdi in die eurocurrency and
eurobond markets.2 Within the eurocurrency market, eurodollars tripled in size from the time diey
were invented in 1959 to die late-1960s. Consistent widi our expectations, the primary reason had to
do widi restrictions that die US put on foreign investment and interest rates in die 1960s to preserve the
value of die dollar. Table 1-3 shows die relative importance of diis trend. By 1980, die net
eurocurrency market exceeded die total value of every major countrys individual time deposits (TDs),
including the United States. Thus, for the first time in die 1980s, die largest block of currency
floating around in die world economy was unregulated and extra-territorial.
Yet, neither diis trend toward increasing capital mobility, nor toward convergence are
emphasized as important variables in the old interdependence literature. Keohane and Nye defined
"complex interdependence" in terms of three characteristics: (1) multiple channels comiect societies
(including informal ties between governmental and nongovernmental elites and transnational
organizations), (2) there is no hierarchy among issue areas; hence, military security does not
consistently dominate the agenda, and (3) governments do not use military force against odier
1The G-5 countries include die U.S., Japan, Germany, Britain, and France.
2 Aldiough eurocurrency originally got its name from die fact diat die market originated in Europe,
"Euro-" now properly refers simply to "external." That is, die only restriction on location in diis currency
market is that it must be situated outside the country of die currency in which the claim is denominated.
For die most part, this market is a wholesale one that deals in sums exceeding $1 million and extends credit
primarily to well-known corporations, banks, or governments. Its most important advantage for die private
sector is the absence of public regulation.


7
governments within the area covered by the term. Although innovative, this approach has not led the
search for a compelling model of interdependence out of die wilderness of critiques by structural-
realists.
In general, die interdependence literature of the 1970s was hard to falsify because scholars
often reached conclusions deductively. They illuminated the burgeoning role of non-state actors in
international politics (Keohane and Nye 1971, 1977; Morse 1970; Taylor 1984; Inkles 1975),
increasing "interconnectedness" of the world community (Inkles 1975; Keohane and Nye 1971), the
merger of foreign widi domestic politics and "low" widi "high" politics (Cooper 1972; Morse 1970;
Keohane and Nye 1977), and die declining autonomy of the state (Morse 1970; Cooper 1972; Wagner
1974).
But scholars often were not clear on how to operationalize these changes in the international
political economy. They usually failed to distinguish between the dieoretical approach diey used and
die empirical reality diat they observed. This is why I have carefully maintained a distinction between
the "Interdependence Approach" (theory) and the "New Interdependence" (die new reality).
Another shortcoming of old interdependence scholarship is that many of the trends it pointed to
were really not new, nor perhaps as qualitatively different as diey might have imagined, at least until
die late-1970s. For example, Kenneth Waltz observed (1979, 158) that prior to World War I, trade as
a percentage of gross national product (GNP) was higher dian it is today. Furthermore, die
transnational corporation (TNC) had at least an early relative established in 1600, die English East
India Company. Finally, the first international organization can be traced to the Delian League of the
ancient Greek city-states.
These dated facts underscore why it is useful to operationalize the Interdependence Approach
as a process with unique stages leading to more and more convergence, radier than as an
epiphenomenon specific to a particular time period. The behavioral variables that I have chosen to
define the Interdependence Approach can be scaled and, for this reason, have inductive value. Once
again, those variables pictured on Figure 1-2 are: (1) convergence in public policy toward a liberal,


8
global equilibrium, (2) the transformation of domestic regulatory problems into international collective
goods problems, and (3) the tendency of the market to restrain states acting multilaterally from
enforcing regulations that exceed a lowest common denominator (LCD). All three variables tend to
move togedier and are really just different aspects of the same Interdependence Approach. The most
powerful of the variables is convergence toward market liberalization for reasons which I will explain
more below.
Unfortunately, only two approaches in international relations deal specifically with the three
dependent variables of the Interdependence Approach: regime theory and transactionalism.
Transactionalism is far and away the most significant influence on this research, as should be evident
from the fact that transactions are the units of analysis, rather than the institutions upon which most
interdependence scholars dwell. Nevertheless, regime theory has also influenced me in very specific
ways.
Regime Theory
Keohane and Nye (1977) first associated international regimes with interdependence. The
association is now so strong in the minds of most that few can examine the merits of either apart. Yet,
by operationalizing the Interdependence Approach without reference to regimes I hope that it is clear
that I intend to divorce this research from what at least many realists perceive to be a theoretical
muddle. Nevertheless, a specific element of regime theory has caused me to think deeply. Regimes
are theoretically a form of convergence. According to their most widely accepted definition,
international regimes are "sets of implicit or explicit principles, norms, rules, and decision-making
procedures around which actors expectations converge in a given area of international relations"
(Krasner 1983, 2) (emphasis added). Convergence is the central variable in this study.
But, in practice, regime theory has stressed the process of convergence less than institutional
forms of cooperation. I treat the process of convergence much more seriously, because my focus is
upon transactions rather than institutions. Thus, in Chapter Four, we examine theories in international
finance (Arbitrage Pricing Theory) and, in Chapter Five, theories in international trade (Factor-Price


9
Equalization Theorem) that explicitly model convergence. The regime literature never considered these
more exacting explanations of convergence. Still, I owe an intellectual debt to regime scholars, who
first pointed out the importance of interdependence to the world community.
In addition, regime scholars were among the first to relate the provision of collective goods
also called public goodsto interdependence, usually conceptualized as regimes. Regime scholars,
usually neo-realists, also interested me in the notion of international "hegemons" and hegemonic
decline. The grandfather of this literature, Charles Kindleberger (1973), argued that only a hegemon
could be counted on to pay the price of providing collective goods. Expanding on this work, Robert
Gilpin (1987) contends that regimes are likely to be underprovided when the power of hegemons
erodes. I argue that the more compelling explanation for the transformation of domestic regulatory
problems into international collective goods problems is the new mobility of capital and technological
innovation.
Transactionalism
However, more critical to the Interdependence Approach than regimes is transactionalism.3 In
fact, the primary reason that I can develop the idea of convergence to a greater extent than other
interdependence scholars have is due to transactionalisms emphasis upon exchange as a measure of
integration. Like Deutsch, I do not deny the independent causal importance of institutions, principles,
and norms on interdependence. I just believe diat it is most useful to concentrate upon transactions.
Gabriel Almond (1990) pointed out that the disadvantage of focusing upon institutions is that they vary
cross-nationally; that is, whereas the functions which the state performs are everywhere the same, the
institutions that they develop to perform diose functions vary. In contrast, transactions occur in
discrete units that can be measured and compared meaningfully, wherever their location. For example,
$1 has the same value to a banker in Europe as it does to one in the US.
3Tlie integration which Deutsch studied is simply the end-point toward which die process of
interdependence naturally leads. Hence, Deutschs (1957) ideas should apply to my framework, not just
to European integration studies.


10
So, is the Interdependence Approach just transactionalism writ largel It is not, because 1(1)
define the Interdependence Approach in terms of three processesthe most important leading to policy
convergencewhich Deutsch never emphasized; and (2) limit my focus on transactions ostensibly to
capital (liquid and fixed) and technological innovation in information technologies. In contrast, Deutsch
never explicitly referred to technological innovation. Once more, he liked to consider all kinds of
transactions, which I do not take into account; for example, mail service, exchanges through media,
phone calls, exchange students, and tourism. Clearly, the Interdependence Approach contributes
theoretically and empirically to the field of international political economy.
Methodology
One of the shortcomings of the old interdependence literature was its methodology. Over-
determination in regime theory, for example, is one of the reasons that the approach is in crisis. When
we agree with Keohane and Nye (1977) that since 1920 an oceans regime (x) has ensured the free
navigation of the seas (y), we are begging the question of what the absence of this regime (-x) would
have implied (-y) and whether the latter implication is even plausible. It would not be plausible to
insist, for example, that the absence of an oceans regime would have meant a complete inability to
navigate the seas. It might be reasonable, on the other hand, to argue that an absence of a regime
would have made navigation harder. But how do we know at what point the number of restrictions is
so great as to verify the absence of a regime?
No answer is necessarily better than another, a problem which has justifiably led many to
doubt the utility of interdependence theory. The methodology with which I have chosen to illuminate
the New Interdependence does not suffer from diese same methodological problems. To be sure, I use
a case-study methodology, based upon historical analysis like Keohane and Nye do,4 and I employ
statistical techniques like correlations and cross-tabulations only in limited ways to support my case-
4Tliis is because, first, die case-studies in which I am interested are simply too limited to permit
large-/? analysis; and, second, trend data related even to diese case-studies is often tenuous or unavailable.


11
study analysis; however, in contrast to Keohane and Nyes work, I preserve variance on the x and y-
axes of my analysis by distributing the case-studies that I consider along die curve of Figure 1-4. All
of the case-studies represent issue-areas, or primary functional areas in which die state is involved.
Whether I put convergence or eidier of my two odier dependent processes on die y-axis makes no
difference, since all diree processes basically move together. The processes are just diree aspects of
die same Interdependence Approach. Monetary policy and environmental policy are at opposite ends of
die curve because capital is the most liquid and innovative in die former instance and die least, in the
latter. I will explore diese differences and die odier case-studies in more detail below. For now, die
point that I want to emphasize is diat die Interdependence Approach succeeds where the old
interdependence literature failed by maintaining case-study variability.
The approach I use to analyze my case-studies comes from comparative politics: comparative
historical analysis (Skocpol 1979). Alternatively, Lijphart (1971; 1975) calls die same basic approach
die "controlled comparison" mediod; Harry Eckstein (1975), the "disciplined-configurative" mode of
analysis; and Alexander George (1974, 1979), the "mediod of structured, focused comparison." The
advantage of diis mediod is that it allows die researcher to structure his inquiry selectively around die
variables of interest to him or her and then to examine them cross-sectionally, cross-temporally, or
both. Theda Skocpol (1979, 36) explains diat there are two primary ways of proceeding with this
method: (1) try to establish diat a number of cases have variable y in common, as well as a set of x
variables or (2) contrast cases in which variable y and a set of x variables are present widi cases in
which both are absent. In practice, she continues, it is best to combine these two comparative logics.
This is precisely what Rudi and David Collier (1991) do. They combine Adam Przeworski
and Henry Teunes (1970) "most similar" and "most different" systems approach into one research
design. I will do die same. The Colliers consider a set of eight Latin American countries diat are
roughly matched on a number of variables and then proceed to analyze pairs of countries diat are as
different as possible in specific issue-areas. The countries diat I will consider are primarily
industrialized countries. Thus, in respect to dieir commercial and political development, they are fairly


12
matched. This is good for convergence. In other respects, however, the industrialized countries iat I
study are different. Most importantly, some are part of regional integration efforts (die EC) and others
are not. Once more, only one industrialized country is a hegemon in die classic sense diat
Kindleberger (1973) used the term.
The hegemon is especially important to isolate in die case-studies that follow, because I claim
that a primary reason that the New Interdependence represents a departure from the past is that now
even the most influential industrialized countries are subject to convergence. Of course, die hegemon
is die most important of diese powers diat could be so affected. In addition, by isolating die hegemon
we can determine what its special influence is, if any, on providing collective goods. I mentioned
above diat, whereas neo-realists contend diat die explanation for the break down of many multilateral
coordination efforts (i.e. Bretton Woods) is declining hegemony, I argue that it is capital mobility and
technological innovation. One way to segregate die hegemons influence is to consider it in a forum
where it is active and one where it is not; i.e. in monetary policy, the G-7 and EC.
The diird important difference among industrialized countries for my purposes has to do with
their state-society relationship. John Zysman and (1983) and Jeffrey Hart (1992) point out that most
European countries and Japan have pursued corporatist strategies to deal widi die challenges of die
international political economy. In contrast, the US and Great Britain retain fairly liberal economies,
lacking strategic industrial and trade policies.
The last important distinction that I make in this dissertation relates to die division scholars
have raised between "low" and "high" politics. I think that this division is artificial, but in order to
overcome the rift between structural-realists and the liberal school of political economists in research on
interdependence, I think diat it is important for me to deal with the division on its own terms. Hence, I
want to evaluate at least one issue-area that scholars have traditionally associated with high politics and
another with low politics.
The only issue-area which scholars universally recognize as part of high politics is national
defense. Thus, it represents a "crucial case" study, according to Ecksteins terminology (1975). If I


13
can show the New Interdependence in the context of national defense, then it is likely that it will also
be apparent in issue-areas in low politics to a more considerable extent. I cannot consider national
defense as a whole, however, without spending my entire dissertation upon it. Hence, 1 will consider
one aspect of national defense: weapons procurement policy.
The last methodological point tiat I should make before moving on to discuss the case-studies,
refers to the obvious gap in Figure 1-4 between weapons procurement policy and environmental policy.
That is, I consider no case-studies which fall into the low innovation/high capital mobility block of the
x-axis. This is because this block represents the null set. I cannot imagine any function which die state
performs that is characterized by low innovation and high capital mobility. This makes sense, too,
because of my previous argument that innovation and capital mobility tend to co-vary. In most
situations, it is difficult to have high capital mobility, premised upon low innovation.
Weapons procurement policy. Consistent widi my expectation, we shall see that die New
Interdependence poses a thorny dilemma for North American Treaty Organization (NATO) members.
Although NATO members want to ensure their defensive autonomy (and, hence, own national security)
and provide for international security (the collective good), diey camiot do both. In an age of "smart"
or technologically advanced weapons, defensive autonomy camiot be achieved fully even by the largest
industrialized countries. Moreover, die effort to be self-sufficient requires states to spend millions
trying to keep up with each other in similar R&D and production efforts. Much duplication occurs,
which, if eliminated and invested in NATO, would make NATO much more effective. Instead, an
increasing gap opened widi the Warsaw Pact in the 1980s. NATO members could buy fewer and
fewer weapons widi the same defense budget, causing diem to "structurally disarm" and NATO to lose
some of its deterrent effect.
NATO and, separately, Europe tried to respond in earnest to this problem in the mid-1970s,
but widi little overall effect at die systems level of weapons procurement. This is because die
standardization programs which they tried preserved state autonomy. For example, co-production and
co-licensing agreements diat guaranteed domestic defense contractors business, also eliminated many of


14
tlie econoniies-of-scale that cooperation was supposed to bring about. In addition, the end of the Cold
War reduced considerably the pressure on NATO to produce weapons efficiently. In the 1990s, most
NATO members are simply permitting structural disarmament to take place unimpeded.
While diis goes on at die systems level of weapons procurement, diough, die market is
undermining die defensive autonomy of industrialized countries at die components level of weapons
systems. The states inattention and, in many cases, inability to counteract this interdependence does
not square with the "realistic" understanding of world politics. However, it does square widi the
Interdependence Approach. Standardization at die components level is proceeding rapidly, because
defense contractors must purchase die lowest cost and highest quality parts that they can. Eventually
diis trend, togedier with the increasing multinationalization of defense contractors, must take-over
standardization at the systems level, too.
Monetary policy. The next case-study which I consider is monetary policy, which it is fair to
say has traditionally been treated as part of low politics. Although I think diat diis characterization
makes little sense now, I put monetary policy in diis category to remain true to die structural-realists
understanding of it. Not surprisingly, monetary policy deals with capital that is highly liquid and
financially innovative (see Figure 1-4). I have discussed its mobility already by referring to the
tremendous growdi in die eurocurrency and eurobond markets. Its imiovativeness stems from
government regulation and die risks associated widi cross-border transactions. The market is constantly
inventing unregulated capital instruments to get around regulated ones and trying to minimize its
vulnerability to exchange rate and interest rate fluctuations.
Overall, die combination of high innovation and capital mobility in monetary policy leads me
to expect diat die New Interdependence will be the most obvious in this case-study. And this is
precisely so. Liquid capital began to bind small states as early as 1971, when Bretton Woods
collapsed. Beginning in die 1980s, though, exchange rate intervention, interest rate controls, and
money targeting on the part of even large central banks became less effective. Since 1971, states have
tried to restore a degree of international financial stability by coordinating currency values, but only in


15
fits and starts and based upon LCD agreements. The glaring exception to this rule is the regional
coordination effort in Europe, the European Monetary System (EMS). Even it nearly collapsed in
September 1992, however, when the unwillingness of states to coordinate their fiscal policies, in
addition to monetary policies, prompted massive speculation.
In general, monetary interdependence was advanced enough by the 1980s, that industrialized
states could not sustain both financial autonomy and international financial stabilitythe so-called
"compromise of embedded liberalism" (Ruggie 1982). The reason had nothing to do with die decline
of the hegemon, either. Rather, the reason was that technological innovation linked national financial
markets.
Trade policy. The third case-study that I consider belongs somewhere between high politics
and low politics, albeit it leans more toward low politics. There is no more consensus than this in the
literature about what kind of politics trade policy represents. What is clearer is that trade generally
deals with fixed capital, rather than liquid capital. Hence, it belongs in Figure 1-4, to the right of
monetary policy. Even so, since trade per se deals with goods that are often innovative and flow more
easily between borders than many of the fixed investments in weapons manufacturing facilities, it
belongs to the left of weapons procurement policy. Thus, there should be considerable convergence in
trade policies. In fact, there is.
Convergence toward commercial liberalization in international trade policy is evident in two
respects: (1) most states have liberalized their trade policies since the late-1970sdeveloping countries
because of their efforts to restructure national debt; and (2) factor-price equalization has occurred
among industrialized countries in keeping with neo-classical trade theory. Even industrialized countries
continue to cut trade barriers in (1) areas historically associated with trade and (2) within regional trade
groupings like the EC and NAFTA. Another phrase for this type of liberalization is "shallow
integration"-"shallow" because it does not embrace so-called "competition policies" like antitrust
policies and domestic industrial subsidies.


16
But competition policies, which are outside of the framework of the General Agreement on
Trade and Tariffs (GATT) and, now, the World Trade Organization (WTO) are the source of a great
deal of trade tension among industrialized countries in the 1990s. Because industrialized countries are
driven to obtain the monopoly rents that imperfect competition promises in the 1990s, they are adopting
so-called industrial targeting and strategic trade policies that are largely GATT-consistent, because they
are extra-GATT in character. The challenge for the future will be to harmonize these competition
policies with die trend toward increasing liberalization of tariff and non-tariff barriers. In addition,
states will have to decide on whether to standardize their health, labor, environmental, and human
rights expectations, since these also affect trade.
Environmental policy. The last case-study which I consider was difficult to choose. To make
my research agenda manageable, 1 had to eliminate two of the possible six case-studies I could have
examined. To my knowledge, there are just six basic functions which die state performs. Besides
national defense, monetary policy, trade policy, and environmental policy, they are energy policy and
social welfare policy.
To maintain die variance evident in Figure 1-4, the most obvious case-study that I should
eliminate is one diat overlaps on the curve with another. Energy policy would have overlapped widi
environmental policy, since energy policy deals with fixed investments that have not changed
dramatically since die 1970s. I eliminated energy policy, first, instead of environmental policy,
because much has already been written about energy policy and because environmental policy is a new
issue-area of growing importance to the state. This left me widi a choice between social welfare policy
or environmental policy. I chose to eliminate social welfare policy for an obvious reason:
comparatively speaking, it has die least to do widi international relations.
Scholars generally agree diat environmental policy is a low politics concern. I have positioned
it far to the right on Figure 1-4, because, first, die capital that environmental policy deals with is fixed
in the sense diat traded goods like hazardous waste are fixed and foreign investment in so-called
"pollution havens" like die Mexican-Ameriean maquilladora corridor is fixed. Second, technological


17
innovation has so far not been a big factor in environmental policy, overall. One reason is that so-
called command-and-control environmental regulations eliminated the incentive that firms have to
innovate in cutting their pollution emisssion levels throughout the manufacturing process. This situation
has only recently begun to change. Thus, in general, I would expect convergence to be die least in
environmental policy of any of die issue-areas diat I have so far discussed. Again, what I expect holds
true.
Consistent with the novel character of environmental problems and environmental regulation,
convergence in environmental policy is nuanced. First, although the new tendency is for states to adopt
environmental regulations dial are market-friendly and consensual in nature, rather than rigid and
inefficient, another tendency affecting environmental policymaking since die 1970s is for die state to
regulate a broader variety of environmental problems. Whereas die first of these trends appears
consistent widi die Interdependence Approach, die second does not. However, in reality, the regulation
of a broader variety of environmental problems reflects the artificially low level of environmental
regulation which states enforced until the 1970s. Until even the 1980s, we were not aware of some of
the most serious environmental problems fundamentally at odds widi basic human needs. Eidier that,
or we could not imagine alternatives to them.
As this situation changed in the 1970s, industrialized countries first responded by passing
regulations that were insensitive to die market incentive structure. Then, in keeping widi Hypodiesis
One, as the costs of enforcing diis regulation escalated and industries in die most heavily regulated
sectors became less competitive globally, die state was forced to look for market-oriented and
consensual regulatory tools to accomplish its new regulatory function.
Summary
Is there something dramatically different about die international political economy in the
1990s? There is. Three empirical processes accelerated in die 1980s, diat began to bind even the most
influential industrialized countries. The most powerful of diese is convergence in public policy toward
a liberal, global equilibrium. Increasingly, it is convergence around die markets preferred equilibrium


18
which dominates. This is because the tendency of many goods that states previously provided on their
own to become collective goods problems means that more and more problems can only be effectively
addressed with a multilateral approach. The trouble is, each state acting on its own has an incentive to
defect from multilateral cooperation, so diat capital will flow its way.
This is not a trend limited to low politics, either. For example, states now have no choice but
to purchase weapons dependent upon parts sourced from around the world. They must set monetary
policies widiout resorting to exchange rate intervention, interest rate controls, and even money
targeting. Thus, their monetary policies and even fiscal policies compete with that of other states vying
for die same increasingly unregulated flow of capital.
Likewise, in international trade industrialized countries are now competitively pursuing the
initial monopoly rents diat technological innovation leading to imperfect competition causes. Not even
the US can afford any longer to ignore diis race. Last, diere is increasing pressure for convergence in
conservation efforts to deal with multilateral environmental problems. The trouble is, die market
creates strong incentives for some states to be less dian environmentally conscious.
For reasons like diese, it appears diat no less dian a revolution is occurring in world politics.
I have called this empirical reality, wherein even die most influential industrialized countries are bound
to universal market imperatives, die New Interdependence. The theoretical approach I have taken to
understand interdependence I call simply the Interdependence Approach. Its heuristic contribution to
die field of international political economy is to take diree variables never before concentrated upon to
measure nothing less dian an awesome leap in the level of interdependence.
How different is the organization of die international political economy under the New
Interdependence from prior periods in world politics? If we accept diat one of die primary functions of
die modern welfare state has been to prevent and counteract market failure and to remove some
activities from the marketplace, die importance of die shift away from these functions should not be
underestimated. Increasingly, the state looks more like a market-taker dian regulator. In diis kind of
"Brave New World" the choices diat we are left-widi are challenging, if not unsettling.


19
Indeed, unless we choose to decentralize and to use applied science, not as the end to
which human beings are to be made die means, but as the means to producing a race
of free individuals, we have only two alternatives to choose from: either a number of
national, militarized totalitarianisms, having as their root die terror of die atomic
bomb and as their consequence the destruction of civilization (or, if die warfare is
limited, die perpetuation of militarism); or else one supra-national totalitarianism,
called into existence by the social chaos resulting from rapid technological progress in
general and the atomic revolution in particular, and developing, under the need for
efficiency and stability, into die welfare-tyranny of Utopia. You pays your money
and you takes your choice.
(Aldous Huxley 1946, xiv)


Table 1-1: Country Stock Market Correlations with the World Stock Market
20
Japan World
1/77-1/82 .39
1/82-1/87 .63
12/89-12/92 .80
UK
1/77-1/82 .65
1/82-1/87 .69
12/89-12/92 .80
Germany
1/77-1/82 .48
1/82-1/87 .40
12/89-12/92 .96
France
1/77-1/82 .47
1/82-1/87 .58
12/89-12/92 .98
Switzerland
1/77-1/82 .54
1/82-1/87 .60
12/89-12/92 .79
Sweden
1/77-1/82 .30
1/82-1/87 .33
12/89-12/92 .76
Spain
1/77-1/82 .20
1/82-1/87 .34
12/89-12/92 .96
Source: Morgan Stanley, 1977-1992.
Note: Here, the "world market" is the average of all national stock markets.
It is only a hypothetical market.


Table 1-2: Growth in Unregulated Capital Markets, 1970-88
Year
Gross
Size
$ bill.
Annual
Rate of
Growth
Gross
Absolute
Size
$ bill.
% of World
Bond Issues
1970
110
n.a.
3.0
65
1974
395
.20
2.1
31
1978
950
.22
14.1
41
1982
2146
.10
51.6
66
1984
2359
.04
79.5
74
1986
3632
.22
188.7
83
1988
4493
.01
119.8
80
Source: Morgan Guaranty Trust Company of New York, 1970-90.


Table 1-3: Relative Size of the Eurocurrency Market
(billions of dollars)
22
End of
Period
Eurocurrency
Market (Net)
US
TDs
Japan
TDs
German
TDs
1965
17
141
42
30
1975
255
432
254
157
1980
755
739
677
286
1985
945*
901
1086
309
1990
n.a.
1305
2793
701
Source: International Monetary Fund, International Financial Statistics, 1965-90.
Note: TDs stand for time deposits; I have converted them into dollars using the
annual exchange rate listed in International Financial Statistics', stands
for net eurocurrency market figure for 1983.


23
Continuum of Interdependence
Independence
Integration
Zone of Convergence
Old Interdependence New Interdependence
Affects Small States Affects Big States
Figure 1-1: Conceptualizing Interdependence


24
Collective Goods
Problems
7N"
Convergence
7T\T
LCD
Regulations
Capital Mobility
/N I
I I
_J N11
Technological Innovation
Figure 1-2: General Framework for the Interdependence Approach
Note: The thickness of lines indicates the importance of the causal relationship. Dashed
lines indicate a causal relationship that is not constant.


Autonomy of the State
25
Figure 1-3
Zone of Convergence
Large States
High Politics
Eroding Autonomy of the State
Small States
Low Politics


Convergence
26
Figure 1-4: Case-study Variance
Note: "L" stands for low politics and "H" stands for high politics.


CHAPTER 2
STATE OF THE THEORY
Neither the modernists nor the traditionalists have an adequate framework for
understanding die politics of global interdependence. Modernists point correctly to the
fundamental changes now taking place, but they often assume without sufficient
analysis that advances in technology and increases in social and economic transactions
will lead to a new world in which states, and their control of force, will no longer be
important. Traditionalists are adept at showing flaws in the modernist vision by
pointing out how military interdependence continues, but find it very difficult
accurately to interpret todays multidimensional economic, social, and ecological
interdependence. (Keohane and Nye 1977, 4)
Time has only exacerbated die problem Keohane and Nye point out in this statement. For the
most part, interdependence scholars and structural-realists talk past one another, one concentrating on
so-called "high politics" and the state, and another, on "low politics" and non-governmental actors.
Very often, the level of analysis each chooses is also different. Structural-realists prefer the system
level of analysis and interdependence scholars, die sub-system levels of analysis. Hence, although the
claims of interdependence scholars and structural-realists are not fully reconcilable, neither are they
always clearly at odds. After all, their claims are about different phenomena in world politics.
This analysis tries to move beyond die stalemate between interdependence scholars and
structural-realists by developing a new approach to interdependence which takes both high and low
politics into account and which explains a qualitatively new level of interdependence which has
heretofore not been adequately explored. The Interdependence Approach refers to a new theoretical
paradigm for conceptualizing interdependence, based upon diree substantve processes:
1. convergence in public policy toward a liberal, global equilibrium
2. the transformation of domestic regulatory problems into international collective
goods problems
3. the tendency of the market to restrain states acting multilaterally from enforcing
regulations diat exceed a lowest common denominator (LCD).
Since diese processes have advanced togedier to die point that the market can bind even large
industrialized states now in the area of high politics, I believe diat a new, advanced stage of
27


28
interdependence has been reached that deserves exploration. I call this empirical stage of
interdependence the "New Interdependence." It represents a stage close enough to integration on die
convergence continuum shown in Figure 1-1 to begin to suggest die outlines of a radically new inter
state system. Interest in die cause and character of diis reshaping is what drives diis research.
In this chapter, my objective is to emphasize how die Interdependence Approach relates to the
old interdependence literature by structuring it around my dependent and independent variables.
Second, 1 will propose die hypotheses in this chapter diat 1 intend to pursue in each of my case-studies.
Last, I will present a general framework for die Interdependence Approach and show how it can be
useful in illuminating changes in the international political economy.
The Interdependence Approach
Deutsch argued in the 1950s (1978, 258-9) diat die real difference between die interdependence
which existed in die early-1900s and interdependence during his generation had to do with die greater
"range" and "scope" of interdependence during Deutschs time. That is, Deutsch argued that
interdependence in die 1960s more profoundly affected all of the goods, services, and activities it
influenced in 1913, and a larger array of new activities (greater scope). Second, he argued diat the
costs and benefits of interdependence in die 1960s were larger than in 1913. Deutsch said diat states
could not only help each other more in his time dirough programs like the Marshall Plan, but they
could also damage each other more widi devices like die hydrogen bomb.
If "range" and "scope" were useful analytic tools, we could make die same argument about the
difference between interdependence since 1980, and the interdependence that Deutsch observed (1950-
79). But like many odier terms in the old interdependence literature, Deutschs are difficult to
operationalize. They do not fully capture interdependence, eidier, since Deutsch represents them with
static events, rather than processes. I have defined die Interdependence Approach explicitly in terms of
diree processes, die first of which is the most important: convergence in public policy toward a liberal,
global equilibrium.


29
Convergence
Convergence is a process wherein "social units start from diverse positions on some scale of
organization, sociopolitical structure, or culture, and then move toward some more common form on
the given dimension" (Inkeles 1975, 472). More generally, on a continuum of interdependence
extending from complete independence to full integration, convergence occurs on the right half of the
continuum as in Figure 1-1. It is more complete the further right that we move, since it eventually
embraces both small and big states and low and high politics. Ultimately, convergence leads to
"integration."5
In the post-World War II period, the most fundamental form of convergence has been the
closing (in absolute terms) productivity and income gap among developed countries. Gross domestic
product (GDP) per person employed in die US was about twice tiat of die major European countries in
the 1950s. In contrast, by die early 1980s, West Germany and France and, to a lesser extent, Japan
had GDPs per person about equivalent to the United States. Data on patent applications and grants,
die percentage of youth attending college, R&D expenditures as a percentage of GNP, and the
percentage of trained scientists and engineers show a similar pattern (see Nelson in Heiduk and
Yamamura 1990), with die US and Japan die consistent outliers (the US because of its generally poor
performance and Japan, its excellent performance).
Nevertheless, from die last chapter we know diat only one literature in international relations
relates interdependence to convergence: regime theory. In dieory, regimes are a form of convergence,
whether it be in principles, norms, rules, or decision-making procedures (Krasner 1983). In practice,
regimes appear to be more like institutions than a process of convergence. In fact, die word
5In this dissertation, convergence is a process identical with "harmonization" and
"standardization." All of diese words connote movement toward a single equilibrium. NATO prefers the
concept "standardization," though,; and die EC more frequently uses the term "harmonization" dian
convergence. In the latter context, harmonization generally deals with eliminating unfair cost advantages
in commerce for some member states. On die odier hand, standardization usually arises in relation to
NATOs Rationalization, Standardization, and Interoperability (RSI) Program, which is stimulating the
development of "NATO" weapons. I will discuss this more in the weapons procurement case-study.


30
"convergence" never arises as a substantial theoretical construct in any of the major areas to which
regime theory has been applied.
In contrast, two theories outside of the field of international relations make the process of
convergence a central concern: die Factor-Price Equalization (FPE) Theorem in economics and the
Arbitrage Pricing Theory (APT) in finance. According to the Factor-Price Equalization Theorem of
the neo-classical Hecksher-Ohlin Trade Model, where there is perfect competition and no transportation
costs, trade between two countries completely equalizes the factor prices in both. Likewise, according
to the APT, barring government impediments to capital movements, foreign exchange fluctuations, and
individual "irrationality," capital markets will become perfectly integrated and asset prices will be
perfectly correlated, regardless of the location at which capital is traded. Table 1-1 illuminated die
dramatic extent to which this is really occurring. But convergence is also occurring in many odier
areas, besides finance and economics; for example, in law, weapons procurement policy, social welfare
policy.
This is despite the obvious invalidity of an assumption at least die economics and finance
dieories I have mentioned rest upon: diat the state will not interfere in the market. On the contrary,
the state jealously guards its autonomy from die market and often asserts a "right" to delink itself from
world processes of convergence at a political level. In the words of Edmund Dell:
It is of the nature of the state diat its principal responsibility, in economic matters as
in military, should be self-defense. There is nothing in economic theory diat could or
should persuade a prudent government to abandon that priority. . [This leads to)
one of die few reliable economic laws ... the law of instability in international
economic relations. . Governments will strive for national economic security.
They will not be dissuaded by the thought that in an interdependent world such an
objective can only be chimerical. They will shrug-off such defeatist teaching. They
will do dieir duty and try. (1987, 13)
Nevertheless, in the 1990s, states often fail. The market gives powerful incentives for states
to advocate die equilibrium for public policy which it prefers: one characterized by fiscal discipline
and oriented around die four capitalist criteriacost, quality, performance, and delivery time. This is
not a regulatory agenda, such as we associate with die Keynesian state. Radier, it is die basis for a
competition state, maneuvering strategically for commercial advantages over other states.


31
The worst penalty that a state faces for not being competitive is capital flight. Excessive
regulations encourage capital to look elsewhere for higher rates of return. Because of modern
technological advances, all else being equal, capital can evaluate and take advantage of differential rates
of return, worldwide. Therefore, these rates of return equalize across states over time. Again, Table
1-1 made this point with regard to national stock markets.
Likewise, literature in finance (Grubel 1968; Levy and Sarnat 1970; Agmon 1972; Solnik
1974; Grubel and Fadner 1971) underscores the attractiveness of international portfolio diversification
to investors. Benefits include, not only higher rates of return, but also risk-reduction. In comparative
terms, Donald Lessard (1974) judges the risk-reduction possible from cross-national diversification even
greater than from cross-industrial diversification within the same country.
Theoretically, die same benefits should exist for those interested in direct foreign investment
(DFI). The literature suggests (see Adler and Dumas 1983; Collins 1990) that DFI results from
imperfections or segmentation in eidier the goods or money market. In reality, findings suggest
(Collins 1990, 284) diat, in net terms, stockholders benefit from a companys decision to diversify only
into select countries. Diversification away from purely domestic operations to developed-country
operations, results in higher rates of return (279). But diversification into investments in developing-
countries reduces overall returns. This is why most DFI flows between industrialized countries.
This finding of bias in capital mobility is not surprising, since not "all else is equal" in capital
markets. In fact, die finding of bias relates to many others in finance (Allan 1982; Adler and Dumas
1983; Errunza 1983; Van Agtmael and Errunza 1982) which show that the correlations between the
equity markets of the US and those of developing states are much lower than those between the US and
developed states. For example, Van Agtmael and Errunza (1982) report correlations of .64 between
die US and Canada in 1976 and 1980 and -.033 between the US and Brazil during the same time
period. The conclusion we should draw is diat die New Interdependence is a concept which applies
primarily to industrialized countries. Labor, land, infrastructure, and markets are different in every
country, but the comparisons are most dramatic between developed and developing countries.


32
In sum, the pressure on developed countries to minimize the inter-state spread in their
marginal rate of return on capital (liquid and, to a lesser extent, fixed) is substantial. In addition, states
have an incentive not to "overly" regulate capital, because regulations can make industry non
competitive. In the final analysis, die market can even make public policy (i.e. exchange rate
intervention), itself, too costly for die state to enforce. For example, Germany abandoned a 10%
withholding tax on interest income after paying dearly in capital flight for its regulation effort. These
sorts of situations are the more likely, die furdier right that we move on the continuum of
interdependence.
It is this movement which separates the New Interdependence from die old, too. In the 1980s,
we crossed a critical point on die interdependence continuum, such diat smaller economic powers and
large ones and low and high politics are all die victim of convergence, now. Of course, smaller
economic powers are more subject to it than big ones,6 and low politics more than high politics. As
we shall see in die case-studies diat follow this chapter, convergence is occurring not just in economics
and finance now, but in a non-random representative sample of issue-areas and among a non-random
representative sample of states. This is a dramatic departure even from the 1970s, when economically
influential industrialized countries could still basically chart their own course in most issue-areas.
Thus, the first hypodiesis and corollary that I will examine in my case-studies deals with this change.
6Keohane and Nye were die first to point out that interdependence can be asymmetric. In fact,
they distinguished (1977, 12-19) two genres of asymmetrical interdependence: "sensitivity" and
"vulnerability." According to them, a state is "sensitive" to another when it rapidly experiences the costs
of anothers change in policy before it has the chance to adjust to die new environment. In this sense, die
state sensitive to another is asymmetrically interdependent. A state "vulnerable" to another finds it difficult
to adjust even over the long-term to a new, externally-imposed order. The costs of adjustment are simply
too exorbitant for it to pay.
Structural realists like Waltz insist (1979) that, because interdependence can be asymmetrical,
interdependence really does not exist. Waltz insists, for example, that "|al world in which a few states
can take care of diemselves quite well and most states cannot hope to do so is scarcely an interdependent
one" (1979, 159). But this argument does not seem to be a particularly damaging one. Just like structural-
realists refer to states as being "very" powerful or "somewhat" powerful, it seems reasonable to refer to
states as being "very" interdependent or "somewhat" interdependent. The one important theme Waltz and
even dependency theorists leaves us with, however, is that interdependence in the international political
economy can always increase without affecting underlying power relationships.


33
Hypothesis One: Every state and every issue-area, whether in high or low politics, is subject
to a pressure to converge toward a global equilibrium which the market prefers: commercial
liberalization.
Corollary One: Convergence more substantially influences countries with relatively small
national incomes and issue-areas in which capital is highly liquid (usually in low politics).
In keeping with this hypothesis and corollary, I will demonstrate below that even in the
"critical" case study on national defense, the pressure on industrialized countries to liberalize the
international sourcing of their parts and equipment is severe. The reason is that weapons have become
technologically more advanced, necessitating greater economies-of-scale for their production than even
die US market can deliver. States must collaborate in weapons procurement to obtain these economies-
of-scale or face structural disarmament, a term which stands for die decreasing weapons a constant and
even increasing military budget can supply widiout an offsetting increase in the quality of die weapons.
Smaller military powers within NATO and non-aligned countries have experienced diis
problem the most substantially, as Corollary One predicted. In contrast to odier case-studies, though,
the conclusion of die Cold War has allowed NATO die luxury of inefficient weapons procurement.
NATO members go on wasting millions on unnecessary R&D and production efforts and its defensive
readiness suffers, as a result. Nonedieless, even as die state continues to protect its self-sufficiency at
this level, at die components level of weapons systems convergence is accelerating rapidly. Ultimately,
convergence at diis level will overtake regulation of interdependence at the systems level of weapons
procurement.
This difference between the system level and sub-system level is not so obvious in monetary
policy. In keeping with Corollary One, far more dramatic convergence is occurring in this issue-area
at bodi die system and sub-system level than in any odier. This is because capital is the most liquid on
die currency exchange market and in domestic banking operations. We shall see diat this liquidity
enables the market to punish diose states which venture away from realistic exchange rates and
disciplined fiscal policies. Capital in die monetary policy issue-area flows in die direction which is
least regulated and has die highest return, diereby encouraging financial liberalization in countries diat
would otherwise starve for capital. The result is two-fold: (1) states are being forced to liberalize their


34
markets to a similar extent and (2) the standard for liberalization is being liberalized itself. I call this
shift in monetary policy, convergence toward "instrumental ineffectiveness."
Collective Goods Problems
The second process which makes up the Interdependence Approach has to do with the
expansion of collective goods problems.7 The expansion is occurring because innovation and capital
mobility are (1) driving many goods that states formerly considered it their autonomous duty to provide
to become collective goods and (2) creating many new problems that only the world community can
effectively address. What are some of these new problems? They usually relate to the so-called
"negative externalities" that the market generates; for example, pollution and proliferationproliferation
because, as we shall see in Chapter Three, pressure on die state to expand trade makes controls on
sensitive military technologies difficult to maintain.
Environmental problems, like many new collective goods problems, only came on to the
international political agenda in the 1970s and 1980s. Scientists, for example, did not discover die
"hole" in die ozone layer until die early-1980s. Once more, the problem of cross-border flows in
hazardous waste only began to touch developing countries in the late-1980s (see chapter six). The list
could go on, but the point is the same: many problems which we now call collective goods problems,
were not even recognized as problems until recently.
Even more important for my purposes than new negative externalities, however, are older
problems diat die state formerly regulated by itself, but only recently gave up as collective goods
problems. This foregone audiority is a more significant limitation upon the state dian simply depriving
the state of new areas to regulate. This is especially the case, since collective goods which formerly
were provided by die state tend to focus not on negative externalities, but regulations upon capital. For
Collective goods problems are characterized by (1) "jointness of supply" or "nonrivalness of
consumption" and (2) "nonexclusion." In odier words, a state must be able to consume a given product
widiout diminishing die quantity available to another (nonrivalness); and every state must be able to enjoy
die product, whedier or not the state helped to "pay" for it (nonexclusion).


35
example, the maintenance of international financial stability is now a collective goods problem. Such
stability would "simultaneously benefit all states" in a way diat "consumption could not degrade,"
whether or not die states paid part of the cost of enforcing die regulation. This is the case, so long as
some minimum number of states cooperated to enforce die regulation (i.e. a universal reserve
requirement) and make it meaningful.
Hypodiesis Two: Goods diat states formerly provided on their own are being substantially
transformed into collective goods problems.
1 will demonstrate diat, in fact, domestic security is becoming a collective goods problem,
because die weapons procurement needs of NATO and EC members can be met only as a result of
multilateral cooperation in high-technology areas. In addition, international financial stability now
depends on multilateral collaboration in monetary and fiscal policymaking. For that matter, a liberal
trade order depends increasingly on restraint in the competitive industrialization policies to which
industrialized countries have resorted. Last, many problems to which environmental regulations have
been addressed have always been collective goods problems, but there are a number of problems like
solid waste management and biodiversity conservation diat the state once tried to regulate on its own.
Now, these problems have also become collective goods problems.
Lowest Common Denominator Agreements
Related, but independent of die tendency of domestic goods to be transformed into collective
goods problems, is the new tendency of public policy coordination to center on a lowest common
denominator (LCD). The opposite of a LCD regulation is an effective regulation. Effective
multilateral regulations would plug the flow of capital to the most liberal states (in a regulatory sense),
because they would provide for a level playing field; that is, they would ensure diat every state was
equally liberal (or illiberal); dius, capital would have no incentive to migrate.
The trouble is, each state acting on its own has an incentive to defect from the multilateral
equilibrium, so diat capital will flow its way. "The consequence is diat die multilateral arrangement
tends to be cast in terms of least common denominators [LCDs] so far as concessions are concerned,
and most elevated standards so far as demands are concerned" (Rubin in Rubin and Hufbauer 1983,


36
15). In general, rather than agree to and enforce effective multilateral regulations, this approach saves
face and costs little. The permissive multilateral agreements which result, I call LCDs. They represent
hardly more than symbolic steps to address problems, centered on the response least costly for the most
powerful actors involved to take. At the same time, LCDs have the advantage of underscoring the
signatories normative conviction that they should cooperate to resolve a given problem.
This is a strategy consistent widi the new competitiveness of the state. The imperfect
competition diat technological innovation prompts by stimulating investment and trade in R&D-intensive
products encourages die state to offensively pursue fleeting commercial advantages. The powerful
temptation states now have not to effectively regulate capital is no better illustrated than by the $4,493
billion (in 1988 gross terms) Euromarket. In the words of some finance scholars:
. . imposing reserve requirements presents major practical difficulties. In order for
them to be effective, diey would have to be universally adopted. If just one country
refused, the Euromarket would relocate to that country and carry on business as usual.
Many countries do not have domestic reserve requirements and would be reluctant to
impose a control on die international part of dieir banking system diat diey have not
tried in dieir domestic sector. (George and Giddy 1983, 31)
In short, every state would prefer to be a "free rider"8 on die regulations of every other. The
regulation of capital or, for that matter, the conservation of biodiversity has become a prime instance of
what Garret Hardin (1968) calls die "tragedy of the commons": aldiough it may be in die collective
interest of the world community to conserve biodiversity, it may not be in the individual states interest
to do so. Brazil, for example, may prefer to cut down die Amazon Jungle, rather than to preserve
species. In general, the tragedy of die commons becomes more insoluble as convergence tightens
around a multilateral equilibriumundermining the argument of some functionalists diat successful
multilateral coordination in die past necessarily leads to more in die future.
To explain, consider a world in which every one of 180 states has a different regulation on
airline companies. In this setting, die gain to a state diat reduces its regulations to a point less
8A free rider will be understood diroughout this dissertation in its classic sense: a free rider is
any state which benefits from the initiative of another state, but does not help pay for it. In essence, it
tree-loads on the other state.


37
restrictive than all other states, so that it might attract airline carriers, might not be worth the costs in
lost lives, lost tax dollars, etc. In contrast, the gain to a state of reducing its regulations one notch
below a standard agreed to by 180 states might be substantial. Great Britain, for example, has lesser
regulations on airline traffic than the rest of the ECs hubs, which is why it is cheapest for Americans
to pass through London on their way to the continent. Great Britain is unlikely to give up this
advantage, except insofar as something else that it values more highly is threatened, e.g. its
membership in the EC.9
Not surprisingly, LCDs are more prevalent now that the number of actors in inter-state politics
that matter for reaching meaningful multilateral agreements has increased. This includes state and 11011-
state actors. David Hume was one of the first scholars to point out the hazard of multiple actors for
reaching a multilateral equilibrium. As early as the eighteenth century, he wrote:
. . two neighbors may agree to drain a meadow, which they possess in common,
because it is easy for them to know each others mind; and each must perceive that
the immediate consequences of his failing in his part is the abandoning of the whole
project. But it is very difficult, and indeed impossible, that a thousand persons should
agree in any such action; it being difficult for them to concert so complicated a
design, and still more difficult for them to execute it; while each seeks a pretext to
free himself of the trouble and expense, and would lay the whole burden on others. .
. (cited in Frohlich 1971, 4)
More recently, neo-realists have sounded this theme, too. They contend that international
coordination is always more problematic in a multi-polar and multi-actor world (Gilpin 1987). Even
Duncan Snidal (1985, 611), a critic of neo-realist literature, admits that N-person game theory
demonstrates time and again that when the power of individual actors and coalitions of intermediate size
is small, coordination is the most viable. In addition, Bruno Frey (in Vaubel and Willett 1991, 15)
demonstrates that moving from the Group of Five (G-5) countries (US, U.K., Germany, France, and
9In general, homogenous cultural and economic groupings are likely to be the most effective at
enforcing a multilateral equilibrium. But since these groups are primarily regional, they are likely to leave
out other powerful economic competitors, ie. Japan and the US. As such, capital will still have die ability
to penalize non-competitiveness. Furthermore, groupings, diemselves, are likely to continue experiencing
centrifugal forces, such as my airlines example, the near-failure of the European Monetary System, and
trade and foreign policy differences in die EC demonstrate (New York Times 1 July 1993, A:4).


38
Japan) to the Group of Seven (G-7) countries (add Canada and Italy) to the Group of Ten (G-10)
countries (add Belgium, die Nedierlands, and Sweden) and, finally, to the OECD (including thirteen
more countries and, now, Mexico) dramatically increases die marginal cost curve of coordination and
diminishes the amount of benefits diat each country can receive from coordination. Overall, since a
multilateral equilibrium requires more parties to make it effective and faces severe free rider problems,
I add a fourth hypothesis.
Hypothesis Three: Public policy coordination designed to regulate die market is increasingly
likely to center around agreement on a lowest common denominator (LCD).
Indeed, I will show that this is so in every issue-area that I consider. In weapons procurement
policy, LCDs are obvious in two principle areas: (1) NATOs standardization program and (2)
CoComs export restraints on sensitive technology. NATOs standardization program has produced
little results, overall, at die systems level of weapons procurement, because designed into the program
is an inconsistent insistence on self-sufficiency. Through mechanisms like co-production and co
licensing agreements, many of the potential gains from standardization at die systems level are lost. In
addition, the NATO Projects which result meet only LCD performance expectations.
As for CoCom, it has been divided into two camps, one more restrictive dian the other. The
less restrictive campthe free riders-have spoiled export controls for the more restrictive group.
Hence, overall, CoCom has had little effect in limiting the proliferation of sensitive military technology
to die East. But bodi CoCom and NATOs standardization program have served a symbolic function,
if nothing else.
Likewise, in monetary policy industrialized states were satisfied to agree to a series of ad hoc
accords following Bretton Woods (i.e. the Jamaica Agreement, the Plaza Agreement and Louvre
Accord) that merely ratified die monetary situation which die market had already created or that
managed to deceive the market for, at best, a few weeks. The agreements were more symbols of
resolve and a concern diat die value of the dollar was "inequitable" dian effective regulatory tools.


39
Also, in environmental policy the vast majority of environmental agreements are LCDs. But,
consistent with the exceptional character of environmental policymaking, there are a few, notable
exceptions to this trend, involving highly publicized, potential or actual environmental disasters (e.g.
die Bhopal tragedy) diat stimulate public concern and even moral outrage.
Framework for die Interdependence Approach
In sum, die three processes which make up the Interdependence Approach are diagrammed in
Figure 2-1. They each represent different aspects of the same revolution in world politics. To the
extent that convergence increases, collective goods problems and LCD regulations generally proliferate,
as well. This is because convergence around a multilateral equilibrium (e.g. a standard regulation for
airline companiessee supra) ironically contributes to a free rider problem and makes certain defections
from the equilibrium more likely. Second, convergence toward a universal market standard
collectivizes problems that states could formerly address on their own.
But there are some environmental treaties that violate my expectation about the trend toward
LCDs even when the prevalent convergence appears to be toward more liberalization; for example, the
Montreal Protocol. Whereas die dominant tendency in environmental policy is now for the state to
liberalize die regulation of a greater variety of environmental problems, some effective multilateral
regulations are being negotiated. These agreements are not LCDs; and they help to resolve
international collective goods problems.
Examining in reverse the linkage of collective goods problems and LCDs with convergence
shows that causality is not bi-directional within die Interdependence Approach; in odier words, more
collective goods problems and LCD regulations do not necessarily lead to more convergence. For
example, die fact diat more collective goods problems exist has no necessary bearing on whether or not
states will decide to solve them by agreeing to similar policies (convergence). These problems can
simply persist. On the odier hand, convergence necessarily makes formerly national problems,
international ones diat require collective action to resolve. Thus, where a state could formerly restrict
the proliferation of defense technologies by regulating its armed forces and defense contractors, now


40
the defense contractors are multinational corporations with multinational suppliers that can only be
effectively regulated multilaterally.
In addition, whereas convergence in the expected direction toward commercial liberalization
generally leads (with some notable exceptions like the Montreal Protocol) to LCDs, because states
prefer to maintain a competitive advantage and to leave regulation to another, it is not obvious that
LCD agreements necessarily prompt further convergence. Usually, LCDs simply ratify post hoc a
nominal public policy convergence that already exists. LCDs rarely inspire new regulatory steps.
Agreements that would inspire new steps would probably not be meaningless agreements; thus, they
would not be LCDs.
Thus, whereas convergence toward commercial liberalization always drives collective goods
problems and usually leads to LCD agreements, vice-versa is not necessarily the case. Moreover,
convergence in the opposite direction from what Hypothesis One predicts, i.e. toward more effective
regulation that is not market-friendly, definitely leads to effective regulation, not to LCDs, and to the
resolution of collective goods problems. What causes all three dependent variables of the
Interdependence Approach to increase are the factors to which I turn next.
Independent Variables
The independent variables which I believe drive interdependence as I have operationalized it
are the following: (1) the mobility of capital and (2) technological innovation. These variables tap die
intuition of many scholars (Kuznets 1966; Heiduk and Yamamura 1990; Ceniy 1990; Stopford and
Strange 1991) about what makes contemporary interdependence unique. In general, technological
innovation in this analysis refers to "not only technical changes in production processes and equipment,
but also the discovery of new resources, the development of new types of organization, and new
methods of management" (Schumpeter cited in Weber and Handfield-Jones 1954, 115).
The primary innovations which are of interest to me are in information technologies (IT), i.e.
computers, telecommunications, software, and micro-electronics. Information technologies are the only
one of five generic technologies that emerged in the 1970s and 1980s (including information


41
technology, biotechnology, materials technology, energy technology, and space technology) that a
special report of the OECD says are inspiring an on-going technological revolution. The report states
that information technologies are having "such pervasive effects on the economy as a whole that they"
are changing "the style of production and management throughout the system" (Freeman in OECD
1987, 130).
The diffusion of information technologies was evident in the 1970s, "but they have become
more accentuated in the 1980s" (UNCTC 1988, 18). Diffusion, not incidentally, is a necessary element
of innovation. Many inventions are never widely adopted; hence, they have little affect on die
international political economy and, thus, do not rise to die level of an innovation (see Van Duijn 1983,
175). It is important to keep in mind this distinction between inventions and innovations, as we begin
die case-studies.
As for die "mobility of capital," it is a phrase which refers in the following chapters to the
ability of both liquid and fixed assets to change location. For obvious reasons, liquid capital is likely to
be more mobile than fixed capital. In general, capital can become more mobile under two conditions;
(1) if it has a more conductive medium through which to move and (2) if it can take advantage of a
substantial cost-saving or profit-increasing opportunity. Technological innovation especially in
information technologies (IT) creates the medium for capital mobility. Entrepreneurs do the rest.
Therefore, under many (but not all) circumstances the mobility of capital and my secondary
independent variable, technological innovation, co-vary. In fact, die primary way in which
technological innovation affects die process of convergence is by facilitating die mobility of capital and
diffsing services and R&D. The important independent effect on interdependence diat technological
innovation can have is by making R&D more important to firms and states that want to maintain a
competitive edge in the global market. This R&D has become more expensive with time, encouraging
firms to join in multinational consortia to develop and market new products. Hence, in die automobile
industry, for example, competition is no longer centered around cross-national competitors; for
example, GM-Ford-Chrysler, Toyota-Nissan-Honda-Mazda, and Volkswagen-Mercedes-BMW. It is


42
also between international consortia; for example, GM-Opel-Saab-Isuzu-Suzuki and Ford-Mazda-Jaguar-
Aston Martin.
Even so, not all technological innovations influence the mobility of capital. Clearly, some
innovation never lubricates capital. The flip-side of this relationship, the extent to which capital is
necessary for innovation, is disputed in die innovation literature. For example, Van Duijn doubts diat
finance acts as much of a constraint at all on innovation. He writes,
Financial constraints rarely form a bottleneck factor in die innovation process.
Research and development have to be financed, of course, but many innovations reach
the market with only a moderate financial input. The financial requirements for
innovation have certainly increased over time, but here, too, the priority of market
demand reveals itself: it is recognition of demand potential for the innovation to be
developed which induces financiers to back a project. (1983, 130)
In contrast, Arnold Heertje contends.
If no venture capital market is available, many possible technical breakdiroughs are
forced to die before they have a chance to prove their commercial profitability. (1988,
10)
To my knowledge, die only reliable empirical research which has been conducted on this
subject in the 1990s is summarized on Table 2-1. Table 2-1 is based upon 1977 company R&D
expenditures from the Federal Trade Commissions Line of Business Survey and upon die total number
of innovations and patented inventions between June 1976 and March 1977 (for methodological details
see Acs and Audretsch 1991, 4-10). Most significantly, what it shows is a fairly strong relationship
between company R&D expenditures and total innovations (.75). This would suggest diat Herrtjes
conclusion is die most accurate one. Clearly, scarcity of ideas can play an independent role in die
innovation process. But rising R&D costs and die growing importance of worldwide market access
mean diat even large TNCs can no longer go it alone. McDonnell Douglass, for example, may go
bankrupt now that it camiot find a suitable partner to develop a new commercial jet, die cost of which
exceeds its net value.
The second important finding which Table 2-1 returns our attention is that innovation and
invention are not die same diing. The correlation Table 2-1 shows between company R&D
expenditures and patents is just .44 and between total innovations and patents, only .47. The reason is


43
that, whereas the relationship between firm size, innovative input, and R&D expenditures is roughly
proportional, diat between firm size and patent activity is less dian proportional (Scherer in Acs and
Audretsch 1991). In some cases, the relationship between firm size and R&D expenditures is more
than proportional (]d.). Therefore, smaller firms may have an advantage in patenting products and
services, but many of these inventions are not widely adopted, probably because small firms do not
have the capital to manufacture and market them effectively. Hence, they never become innovations.
This summarizes die positive relationship between capital mobility and technological
imiovation, but, some might ask: What effect would a decrease in either capital mobility or
technological imiovation have on die diree dependent variables of the Interdependence Approach?
Fortunately, this has not occurred in the past few decades, so I do not need to spend much effort
speculating about diis possibility. However, if die mobility of capital was to contract, it is likely diat
divergence from die multilateral equilibrium for public policy would result. States diat could
effectively regulate capital because of segmented markets would reassert dieir audiority; we would
move back in die direction of die Keynesian regulatory state. However, my expectation is die opposite,
as die next hypothesis makes clear.
Hypodiesis Four: As die mobility of capital increases, die diree dependent variables of die
Interdependence Approach will necessarily increase. And as technological innovation
continues, convergence is likely to increase.
In each of the case-studies that follow, more capital mobility and technological imiovation
promote interdependence. In die chapter on weapons procurement policy, innovation in information
technologies is making weapons "smarter" (more technological advanced) and, therefore more costly.
Countries are being forced to share die burden of R&D. Once more, capital is becoming more mobile
in the area of defense, because of two trends: (1) defense contractors can now search globally for the
best quality and lowest cost parts; and (2) to obtain economies-of-scale and access to new technologies
defense contractors are shifting toward New Forms of Direct Foreign Investment (NDFI), i.e. teaming,
subcontracting, joint ventures, consortium, acquisition, and stock options. NDFI is a form of the new
mobility of capital which is standardizing weapons from die components level up.


44
Second, in the case-study on monetary policy, innovations in computers and
telecommunications make fixed exchange rate systems less sustainable. Innovations in information
technologies even make fiscal undiscipline very costly, because they allow the market instantaneously to
draw money away from economies pursuing macro-economic policies not to their liking. This explains
why speculators were able to splinter the EMS in 1992. "Ultimately the whole structure of banking,
financial services and distribution is likely to be transformed as a result of the introduction of
electronic funds transfer" (Freeman in OECD 1987, 134).
Mobility of Capital
The mobility of capital is the primary factor which I contend accounts for the new level of
interdependence that we reached in the 1980s. It is not a variable upon which the old interdependence
literature reflects in any great detail. Even so, my use of it is consistent with a theory important to the
integration literature: transactionalism. In general, the father of transactionalism, Deutsch, argued
(1957, 58) that the best way to measure the integration of a community is to examine die volume of its
transactions or, in odier words, exchanges between countries. The transactions diat he counted
important were mail service, trade, exchanges through media like television and movies, phone calls,
exchange students, tourists, and international publications.
Although the only transactions I focus upon are financial and technological ones, I find
Deutschs general emphasis upon exchange as a measure of interdependence more persuasive and
theoretically useful than the functionalist (Mitrany 1966, 1975) and neo-functionalists (Haas 1958;
Haas and Schmitter 1966; Nye 1971) emphasis on the proliferation of international organizations (IOs).
Even functionalists (Mitrany 1966, 1975) admit that IOs are likely to vary cross-nationally, even when
die functions that they perform do not. That is, as Almond put it (1990), different institutions are
likely to develop to serve die same functional ends around die world. Transactions, in contrast, occur
in discrete units diat can be measured and compared meaningfully, whatever dieir location.
Furthermore, we know in retrospect diat it is not necessarily the case that institutions naturally
grow stronger and drive a community of states automatically toward integration like functionalists


45
insisted (Mitrany 1966; Soroos 1986). Rather, many supra-national institutions persist without states
transferring significant, new powers to them. Nor is it obviously the case that institutions are necessary
to bring about integration. The lack of any significant institutional framework for the North American
Free Trade Agreement (NAFTA) demonstrates this point. Finally, we know that significant integration
efforts have begun in developing areas that failed completely, never mind multiplied in functional
terms.
This is not to devalue the importance of institutions. Many criticized Deutsch (Mitrany 1975,
xiv) for this very thing, despite this statement:
. . integration requires, at the international level, some kind of organization, even
though it may be very loose. We put no credence in the old aphorism that among
friends a constitution is not necessary and among enemies it is of no avail. The area
of practicability lies in between. (1957, 6)
I agree and will make reference throughout this manuscript to IOs that are of fundamental
importance to the reconfiguration of world politics. Still, like Deutsch, I find it more useful to
emphasize the influence that transactions are having on the direction of the international political
economy than institutions.
Transactionalism even appears to have been a more important influence on the old
interdependence literature than functionalism. Consider Keohane and Nyes definition of "complex
interdependence" (1977). It has diree main characteristics: (1) multiple channels connect societies
(including informal ties between governmental and nongovernmental elites and transnational
organizations); (2) there is no hierarchy among issue-areas (hence, military security does not
consistently dominate the agenda); and (3) governments do not use military force against other
governments widiin the area covered by the term. "Multiple channels connecting societies" is just
another way of describing transactions.10 And Keohane and Nyes focus on pacific relations between
10This is the more evident when we dissect anodier term diat Keohane and Nye added to die old
interdependence lexicon, "transnational relations." According to Keohane and Nye, transnational relations
has to do with interactions with non-governmental actors (NGOs) and governmental subunits in other
words, "all of world politics diat is not taken into account by die state-centric paradigm" (383). The
"global interactions" (1971) diat interested diem are revealing for their transactional character, diough:


46
interdependent communities matches Deutschs characterization of integrated "security-conmiunities."
Technological Innovation
The second independent factor which I evaluate in the case-studies, technological innovation, is
also not integral to the old interdependence literature. The one literature in international relations
which deals explicitly with innovation as a variable is the long-cycle school. Within this school, the
most important cycle to which scholars relate innovation is the fifty-year Kondratieff cycle (1984)."
Most agree diat technological revolutions or "creative gales of destruction" are at die heart of these
long waves (Freeman in OECD 1987). The most important innovations, according to Schumpeter
(1939), have been:
1. cotton textiles and iron (1780s-1817)
2. railroads, steam, and steel (1840s-1875)
3. electricity, industrial chemistry, and die internal combustion engine (1890s-1920)
Rosecrance (1987) and Thompson (1990) argue diat in die post-World War II period, the most
important innovations have been automobiles, plastics, electronics, atomic fission, aerospace, and
biotechnology. However, in the 1980s and 1990s, it is information technology (IT), in general, which
is revolutionizing production and management throughout the economy. Among die most important
characteristics of IT are that it is: (1) continuing to experience high rates of technical change, leading
to rapid obsolescence in succeeding "generations" of end-products; (2) contributing greater flexibility
and speed to manufacturing processes, making "just in time" inventory systems feasible, (3)
encouraging a rapid rate of product and process change and more intense technological competition in
odier industries; (4) integrating the design, manufacture, procurement, sales, administration, and
technical service functions of enterprises; (5) merging the "manufacturing" economy with the "service"
movements of information, money, physical objects, people, or odier tangible or intangible items across
state boundaries.
xlOdier cycles include die following: (1) the Kitcliin or inventory cycle, which lasts 3-5 years,
(2) the Juglar or investment cycle, which lasts 7-11 years, and (3) the Kuznets or building cycle, which
lasts 15-25 years. Schumpeter (1939, 173-74) contended that all of these cycles were linked (1 Kondratieff
= 3 Kuznets cycles = 6 Juglars = 12 Kitchins). Others disagree.


47
economy; (6) contributing labor-saving, materials-saving, and energy-saving manufacturing techniques;
and (7) accelerating the international transfer of technology and capital (Freeman in OECD 1987, 132-
37).
There is a seemingly constant flow of innovations in information technology. Figure 2-2
shows some of diese innovations in IT and how they have increased with time. The opportunity which
IT has given modem TNCs to design "world" products and to manufacture diem simultaneously in
multiple locations around the globe means diat the stages of Raymond Vernons product life-cycle
(1966) are no longer clearly demarcated. They are fused and sped-up.
Recall diat according to life-cycle theory, products are (1) initially designed and manufactured
in developed countries for the home market, (2) exported to foreign markets, then manufactured in
foreign, developed countries, and, (3) manufactured in developing countries and exported back to the
home and other developed markets. In contrast, die current manufacturing process best implemented
by die Japanese circumvents diis entire cycle by bringing goods to market and allowing diem to mature
in the same location with the cost-saving advantage of automation. This process happens more rapidly
than the former product life-cycle, too. Hence, states must work harder now at presenting attractive
investment opportunities that will keep die competitive advantage within their borders.
Computers are perhaps die best case in point of rapid innovation. Every two years new
models render computers with less memory, slower central processing units (CPUs), and, oftentimes,
inferior data storage systems. In this environment, it is much more important for a firm to be the
product innovator. Competitors may not have time to develop clones before die cloned products are
outdated by a second generation of new products. Companies that fail to innovate lose-out on the
initial windfall profits that product innovation can bring and often fall behind the front-runners widiout
any hope of catching-up.
A Contradiction. Not Compromise
In diis environment of intense technological innovation leading to increased capital mobility, a
contradiction is emerging in nearly every functional area of die state between, on die one hand, the


48
states desire to pursue autonomy and, on the other hand, its need to ensure international stability. I
argue that the state cannot achieve both at die same time in die 1990s. This is a quite different thesis
from John Ruggies (1982), which states diat the inter-state system was designed around a "compromise
of embedded liberalism." I believe diat this so-called compromise was more of a latent defect.
Embedded liberalism could persist only so long as the economic liberalism that the inter-state
system was organized to facilitate remained adolescent. That is, embedded liberalism could be
sustained so long as economies remained segmented. When diis condition changed because of
technological innovation and increasing transnational flows of capital, embedded liberalism failed.
Thus, embedded liberalism was not so much a compromise between, on the one hand, economic
autonomy, and, on die other hand, international financial stability, as it was a basic contradiction.
This contradiction between autonomy, on the one hand, and international stability, on the other
hand, is not restricted to economic affairs, either. The contradiction is an inherent part of almost every
functional area in which the state is involved, whether national defense, trade, or the environment. It
seems that the architects of the post-World War II inter-state system wanted to "have their cake and eat
it, too." At the same time as they agreed that states should work together cooperatively to ensure
international stability in a host of areas, they likewise insisted that the state should be autonomous
enough to set its own agenda. This is as evident in the Charter of the United Nations as it is in GATT
and Bretton Woods. For, the UN Charter enshrined autonomy in the form of national sovereignty and
the right to self-defense with national means, as well as international stability in the form of a ius
cogens against unilateral aggression and the collective peace-keeping function of the Security Council.
Furthermore, to demonstrate that the contradiction between autonomy and international stability
is caused by capital mobility and technological innovation, not waning hegemony, I will illuminate the
contradiction in a context where the hegemon is excluded: die EC.12 Whereas neo-realists contend
diat eroding American hegemony accounts for die collapse of Bretton Woods and die GATT- die two
12By "hegemon" I mean what Kindleberger (1973) did: a global superpower like Pax Britannica
and Pax Americana.


49
principle institutions embodying Ruggies "compromise of embedded liberalism" (1982)I hypothesize
that diere were more rudimentary forces undermining diese international institutions, mobile capital and
technological innovation.
Hypothesis Five: A contradiction will be evident in every issue-area diat I research between
the states preference to preserve its policy autonomy and its desire to preserve international
stability in the given area.
Corollary Two: But capital mobility and technological innovation, not declining hegemony,
accounts for the failure of multilateral regulatory systems (e.g. Bretton Woods) to control die
market.
The four basic contradictions diat I will illuminate are between: (1) economic autonomy and
international financial stability, (2) self-sufficiency and efficiency in weapons procurement, (3) the
reciprocity norm of the GATT and its nondiscrimination norm, and (4) between environmental
autonomy and international environmental stability. Besides examining diese contradicrions, we shall
see diat, in general, capital mobility and technological innovation, not waning American hegemony,
best account for die failure of multilateral regulatory systems like the GATT, Bretton Woods, and die
International Tropical Timber Agreement.
Specifically, in trade policy, whereas neo-realists assert that eroding American hegemony
precipitated the collapse of Bretton Woods in 1971, it was (1) a decade after Americas share in world
trade and production stabilized diat the trade system came into jeopardy and (2) a decade after diat
before Americas willingness to absorb trade discrimination dissipated. Most of die decline in
Americas share of world production and trade took place as die natural result of Europe and Japans
reconstruction following World War II. Moreover, die GATTs most important successes occurred in
die 1970s, well after neo-realists claim they should have come.
The Competition State
Another consequence of die speed of technological innovation in die 1990s, and the new
mobility of capital, is diat states have reason to fear die loss of competitiveness and of the initial
monopoly rents from imperfect competition. Thus, states are trying to out-liberalize one another in
monetary policy and to subsidize innovation related to trade policy in the hopes of capturing fleeting


50
commercial advantages and investment. Philip Ceray is worth quoting at length in support of this
proposition (1990, 230):
In effect, die economic and social activities characteristic of the welfare state, as its
name implies, still conformed to the image of the state as an authoritative actor (or set
of actors), die main effect of die intervention of which was to take certain activities
out of the marketplace--^specially to attempt to prevent and counteract market failure
and to socialize them. The state, in this sense . was still primarily a
decommodifying agent in die wider economy. But what we are seeing in die world
today, die main impact of increasing openness on the state and on state actors, is the
reversethe re-emergence of die state as a commodifying agent, a role which it was
often seen to play in die emergence of capitalism itself. . (emphasis original).
This new competitiveness of die state relates to one implication of long cycle theory: the
notion diat leadership in die international political economy depends upon technological innovation.
Building on Kuznets work on "epochal innovations" (1966, 286), Kenwood and Lougheed (1970. 14-
16) argue diat, since innovation creates fresh opportunities for trade and financial flows, shifts in the
center of innovation importantly influence die international political economy.13
In a period as volatile and rapid as die present when it comes to innovation, the possibility for
sustained political upheaval in die inter-state system is significant. It is not my intent in die remaining
chapters to investigate how diis possibility translates into system war-proneness as most cycle theorists
do (see Goldstein 1985; Toynbee 1954; Modelski 1978, 1981, 1985; Modelski and Thompson, in
Midlarsky 1989; Thompson and Zuk 1982; Thompson and Vescera 1992; Organski 1958; Organski and
Kugler, in Midlarsky, 1989; Doran and Parsons 1980; Gilpin 1981). Ratier, I am primarily interested
in exploring what implications the increased speed of technological innovation in information
technologies in the 1990s, has for die structure of the international political economy. I propose to
treat this investigation as a corollary which I will refer to often throughout die case-studies that follow.
13William Thompson and Lawrence Vescera echo these arguments widi what they contend is a
summary of the long cycle literatures treatment of innovation: (1) economic growth is discontinuous and
dependent on spurts in die development of radical innovations that produce new products or technologies;
(2) states and dieir economies are organized hierarchically along a technological gradient, and radical
innovation is virtually monopolized at die top; (3) the sources of new products or technologies tend to be
spatially concentrated during a given period. The spatial concentration contributes to conferring lead
economy status on a single state as die principal source of new products or technologies (1992, 517-18).


51
Corollary Three: A defining characteristic of the New Interdependence is that states behave
more competitively in die new period of interdependence in dieir pursuit of commercial
advantage.
The case-studies which follow corroborate this hypothesis. Each state is trying to out-
liberalize die other in monetary policy in order to gain a fleeting advantage by making investment more
attractive. Moreover, in trade policy, many industrialized countries are turning to competition policies
and industrial targeting to snatch from each other the rents from imperfect competition. The state is
least competitive in environmental policy, albeit even here states are concerned about regulating die
environment more rigorously than odiers and, thus, subjecting diemselves to a commercial
disadvantage.
Summary
Figure 2-3 is the general framework which illuminates how each of my variables interacts with
every other. Convergence is on the top of die dependent processes of the Interdependence Approach to
signify its primary importance. Likewise, capital mobility is positioned above technological innovation
to show diat it is the most important independent variable. Advanced capital mobility is die primary
reason diat I expect to find a pressure to converge in every issue-area that I examine. This is why die
primary causal arrow in Figure 2-3 extends between capital mobility and convergence. I also expect
technological innovation to increase convergence, but not as directly or unambiguously. This is why a
dashed arrow extends from technological innovation to convergence in Figure 2-3. Finally, dashed
arrows also point in two directions between capital mobility and technological innovation to show that
the two can co-vary, but not necessarily.
The independent variables also point toward collective goods problems and LCD regulations,
because I predict that advanced innovation and capital mobility makes it more likely that (1) goods
which states could formerly provide upon their own will change into collective goods problems and (2)
die multilateral agreements which states will reach will tend to be LCDs. Arrows point in only one
direction from convergence to collective goods problems and LCD agreements for two reasons. First,
as I explained, convergence in public policy toward a liberal, global equilibrium makes defection from


52
coordination more attractive. Second, it collectivizes problems that states could formerly address on
their own. This linkage does not work backwards; that is, collective goods problems do not necessarily
bring about a convergence in public policy to solve them. Neither do LCD regulations necessarily
cause further convergence, since they, in effect, ratify convergence in public policy that has already
taken place. If LCDs prompted more steps toward agreement, they would be meaningful regulations
on the market and, thus, not LCDs.
The large arrow pointing to the New Interdependence in Figure 2-3, from the three processes
that make-up the Interdependence Approach underscores the new reality of interdependence which the
three dependent processes have advanced. Always advancing, die three processes caused the level of
interdependence to increase and traverse the continuum in Figure 1-1 from left to right, until at last we
reached an unprecedented level of interdependence in the 1990s. It was unprecedented because the
market began to limit the autonomy of even large industrialized states in issue-areas historically
sacrosanct to die state, e.g. in high politics.
Therefore, in diis sense the diree processes I have tapped in my dieoretical approach have
created a new environment of interdependence wherein no issue-area nor state is safe from its reach:
the New Interdependence. The next chapter is my "crucial case" study (Eckstein 1975), which will
demonstrate that high politics and industrialized states are caught up in die New Interdependence. The
Interdependence Approach, dierefore, suggests a solution to the initial problem with which I began this
chapterdie contradiction interdependent and realistic frameworks pose for understanding international
politics. The solution is to marry both perspectives, using the Interdependence Approach.
In general, I expect diat in every issue-area diat we consider, the Interdependence Approach
will illuminate a growing contradiction between die states preference to preserve its autonomy and its
desire to preserve international stability. Innovation and capital mobility make these objectives
dichotomous and encourage the state to act more competitively to promote its own commercial
advantage, even at die expense of odier states. This strategic action and the dichotomy from which it
arises in no way relates to declining hegemony, eidier. Rather, the de-segmentation of markets and


53
substantial realization of the liberalizing objectives of Bretton Woods, the GATT, and other post-World
War II multilateral institutions explains this shift. De-segmentation and liberalization are the
consequences of innovation and capital mobility, not waning hegemony.
This will be obvious in each of die case-studies which follow. Chapter Three deals widi
weapons procurement policy, my "crucial case" study. It is innovation which is making defensive
autonomy unaffordable and market competition which has made COCOM, an organization designed to
stem the flow of sensitive technology, largely ineffective. Chapter Four evaluates monetary policy and
finds that convergence is die most substantial in this issue-area. Capital mobility and technological
innovation in die context of monetary policy has undermined both Bretton Woods and the EMS. In
Chapter Five, I deal with trade policy and find diat liberalization of tariff and non-tariff barriers is
proceeding, even while extra-GATT or WTO competition policies and industrial targeting are becoming
attractive to industrialized countries. In Chapter Six, I examine environmental policy and find that the
tendency is for die state to liberalize regulations on a broader variety of environmental problems.
Finally, in chapter seven, I close with some over-arching observations and expectations for the future.
It should become obvious diat my foremost impression is diat the market is radically
reconfiguring die inter-state system, leading to die development of competition states in die short-term
and probably to supra-national governance in the long-term. In the words of E.H. Carr,
The conclusion now seems to impose itself on any unbiased observer diat the small
independent nation-state is obsolete or obsolescent and diat no workable international
organization can be built on a membership of a multiplicity of nation-states.
(1964, viii)


Table 2-1: Correlation Matrix of Measures of Innovative Activity
54
Large
Small
Total
Company
Total
Firm
Firm
R&D
R&D
Innov.
Innov.
Innov.
Expend Expend.
Large firm innovations
.92
Small firm innovations
.92
.70
Total R&D expenditure
.48
.53
.38
Company R&D expenditure .75
.74
.67
.76
Patents
.47
.40
.38
.33
.44
Source: Acs and Audretsch 1991,
8.


Figure 2-1: Interdependence Approach


56
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Source: Freeman in OECD 1987, 133.


57
The New Interdependence
Figure 2-3: General Framework for the Interdependence Approach
Note: The thickness of lines indicates the importance of the causal relationship. Dashed
lines indicate a causal relationship that is not constant.


CHAPTER 3
WEAPONS PROCUREMENT POLICY
In the coming decade, one of the most significant decisions facing European defense
planners, as well as their US counterparts, will concern the extent to which their
defence industries will be internationalized (Moravcsik 1990, 65). . If large
corporate alliances and takeovers, such as the Siemens-GEC raid on Plessey, are
successful, governments may be left with little practical alternative but to permit the
international integration of military electronics. (Id. at 70)
Self-reliance is a theme Americans from Ralph Waldo Emerson on have advocated. Yet, in
matters of defense it is now difficult to ensure, as the Gulf War demonstrated. The Gulf War was the
first in which silicon chips played a decisive role. At one level, silicon enabled the Joint Deployment
System to manage the movement of material for all US armed services; the Airborne Battlefield
Command Control Center (ABCCC III) to coordinate air, land, and sea operations; and the Modem
Age Planning Program (MAPP) to simulate battle scenarios for Schwarzkopfs Central Command. At
another level, silicon was at work in laptops, helping pilots to plot their missions; in magnesium-
encased portables, enabling artillerymen to plot trajectories; and in the Aegis Air Defense System,
permitting the Navy to protect itself.
The list could go on, but the point is that in the modern armory "smart" weapons-in other
words, weapons dependent on semi-conductors and other advanced micro-electronicsare a fact of life.
Consequently, foreign-sourcing of the components for these weapon systems is common, either because
they cannot be obtained domestically or because obtaining parts from overseas is more cost effective.
The unique questions this raises include: (1) Are the weapon systems of states sufficiently independent
to enable them to sustain a war effort against their component suppliers; and (2) Can a state reasonably
afford and even develop a viable national defense based upon strategic autonomy? Astonishingly, I
argue that the answer is no if present trends continue. Although the state still manages to limit the
58


59
extent to which it cooperates in building entire weapons systems,14 defense contractors are procuring
components internationally and, thus, standardizing weapons from the ground up. In addition, defense
contractors are forming international alliances through New Forms of Direct Foreign Investment
(NDFI) that promise to integrate the defense industry even further (OTA 1990).
This conclusion is a direct challenge to the structural-realists, who refuse to elevate
interdependence to the realm of "high" politics. Since I do just that in this chapter, weapons
procurement policy represents a "crucial case" study (Eckstein 1975) for my thesis that the market is
reconfiguring the international political economy at die end of the Twentieth Century. I find diat all of
the variables diat characterize the New Interdependence are as evident in weapons procurement policy
as in any other functional area of the state.
The structure of this chapter follows die order of the hypotheses presented in Chapter Two,
but beginning widi diose related to the dependent processes diat characterize the Interdependence
Approach. Hence, I start with Hypodiesis One, and examine die convergence taking place in die
weapons procurement policy area. I shall demonstrate diat it is less pronounced at die systems level
dian components level of weapons procurement; and that convergence is affecting small industrialized
countries die most substantially, in keeping widi Corollary One. Second, I turn to Hypodiesis Two
which states that goods states formerly provided on dieir own are being substantially transformed into
collective goods problems. Here, I will show that, aldiough states have made self-sufficiency in
weapons procurement their primary objective in the post-World War II period, diey have been forced to
accept diat their procurement needs can be met only by collaborative programs. Finally, I verify die
last hypodiesis dealing widi my dependent variables, Hypothesis Three, by demonstrating diat NATOs
systemic weapons cooperation and CoComs export controlsboth efforts to regulate die markets
natural inclination to liberalize commercerepresent LCD agreements.
14In diis chapter a "weapons system," as distinct from a sub-assembly or component, refers to die
entire weapon in question, e.g. die F-16 or M-l Abrams Tank. In contrast, a component of a weapons
system can be, for example, a semi-conductor or dram. A sub-assembly is an organized collection of
components that performs a particular purpose, e.g. the avionics equipment for the F-16.


60
In the last half of this chapter I take up, first. Corollary Two, which challenges the notion that
declining hegemony accounts for die failure of multilateral regulatory systems to control the market. I
show that, in fact, NATO and pan-European weapons collaboration failed because of die tendency of
the state to preserve its self-sufficiency. This was die case even diough, arguably, die US retains a
dominant position in die defense of die West. Second, I examine my independent variables found in
Hypothesis Four and discover that, in fact, die mobility of capital and technological innovation is
increasing die diree variables of the Interdependence Approach. Weapons are becoming "smarter" and
New Direct Forms of Investment is expanding die mobility of capital in defense. Last, I show that in
keeping widi Hypodiesis Five, a contradiction is evident in weapons procurement policy between self-
sufficiency and efficiency in weapons production, leading eidier to collective insecurity or security,
depending on how die contradiction is solved. Increasingly, it is being solved in favor of efficiency.
Convergence
Hypodiesis One states diat every country and every issue-area, whether in high or low politics,
is subject to a pressure to converge toward a global equilibrium which die market prefers: commercial
liberalization. Convergence in weapons procurement programs took longer to develop and has been
less complete than in the other case-studies diat we shall examine, particularly monetary policy where
capital is highly liquid. Europe has pursued standardized equipment the most wholeheartedly. This is
in keeping with Corollary One, which states that convergence more substantially influences countries
with relatively small national incomes and issue-areas in which capital is highly liquid. In diis case,
since even middle-range military powers like Switzerland and France could not achieve economies-of-
scale, diey eventually tried cooperation. In contrast, the sheer size and technological sophistication of
die US economy allowed it to efficiently produce virtually everydiing necessary for defense until the
1970s.
This was die case until the Ford Administration. Then, the US also pursued convergence in
weapons procurement through NATO projects. The term NATO uses to describe this trend is
Rationalization, Standardization, and Interoperability (RSI). In more specific terms, RSI stands for


61
efforts to achieve the closest practicable substitutability and interchangability of weapons equipment and
components, die most efficient use of R&D and production resources, and the most compatible
technical and operational procedures possible.15
"Rationalization" is the overarching term which describes any action diat makes more rational
use of defense resources. I will not refer to this term on its own, because of its over-inclusiveness. I
prefer "standardization," which refers to a process whereby military equipment, doctrine, and
procedures in NATO are made identical. NATO uses the term exactly as I do "convergence." Hence,
in this chapter "standardization" is the same as "convergence." Finally, "interoperability" refers to
steps taken to make different equipment more compatible. Interoperability permits interface with other
weapons systems (i.e. use die same radio frequency), but stops short of furdier standardization.
Usually, it is retrofitted on to equipment. Thus, interoperability reflects convergence, but only to a
limited degree.
Structural disarmament is the primary reason NATO inaugurated die Rationalization,
Standardization, and Interoperability program. Although I will discuss it in more detail later, structural
disarmament, in brief, describes die decreasing quantity of arms widiout an equivalent and offsetting
increase in dieir quality, which a stable and even increasing defense budget can purchase over time.
As weapons have become "smarter," obtaining economies-of-scale in production has required a larger
market dian even die US offers. This provides powerful incentive for NATO members to standardize
weapons systems, so that they can be procured in optimal lots and the cost of national defense can be
lowered. However, we shall see that RSI has not been as effective a program as it potentially could
be. This is because states jealously protect die well-being and self-sufficiency of their defense
contractors. This prevents die market from liberalizing die production of weapons systems to die extent
15This definition of RSI is a variant of die Pentagons, albeit die Pentagons is even broader. The
Pentagon argues that RSI includes efforts to procure common or compatible operational, administrative,
and logistics procedures, as well as common or compatible tactical doctrine (Taylor 1982, 8). Although
diese are clearly important elements of standardization, they are not related directly to weapons acquisition.
Thus, diey are outside die purview of diis chapter.


62
possible. Many more weapons manufacturers are in business than the market would permit without
subsidization.
On the other hand, standardization is occurring rapidly in defense-related components, where
the state has had little success regulating the market. In effect, the market is standardizing weapons
systems from the ground-up. It is also beginning to influence the form RSI is taking in the direction of
greater standardization, as a result of New Forms of Direct Foreign Investment (NDFI). As we shall
see, NDFI is beginning to link defense contractors globally, despite the state. This process probably
would have accelerated, except for die end of the Cold War. Its end has decreased substantially die
need NATO members feel to produce weapons efficiently. Nevertheless, the market continues to find
cost and quality incentives to standardize weapons components. Below, I will begin this chapter by
examining Hypothesis One in die light of RSI and offshore components sourcing.
NATO Procurement Policy
The first NATO agency to promote weapons standardization emerged at die same time NATO
did: the Military Production and Supply Board (MPSB). Neither this agency nor six reorganizations
of it had much effect. At first, diis was because NATO equipment was in fact standardized. It took a
decade for Europes defense industry to recover after World War II. The US supplied Europes
arsenal until then. However, by 1959 die situation had changed and divergence was the norm. One
commentator observed:
We still have not managed to obtain any worthwhile standardization of our equipment
in NATO. With one or two minor exceptions, we have not succeeded in properly
apportioning armament production tasks among die allies. We repeat experiments in
one country which have already been concluded in another; we insist on reinventing
what has already been invented; and we refuse to trust our friends with secrets which
have been known to the enemy for a long time. (Spaak cited in Taylor 1982, 20)
This situation is not completely different even in die 1990s. This is because capital is far less
fungible in amis markets dian money markets, and because states have more effectively guarded against
the loss of self-sufficiency in die production of weapons systems than in die governance of domestic
money markets. But, beginning in the late-1970s, market incentives encouraging the standardization of
weapons systems even caught up with the US and, thus, NATO The role that NATOs Conference of


63
National Armaments Directors (CNAD), a successor to the MPSB, began to play in the mid-1970s,
reflects this best.
CNAD was as feckless as its forebears at weapons standardization until roughly 1975.
However, in that year CNADs fortunes improved slightly when NATO members agreed to widen its
role and support it more strongly. CNAD began to deal with the future weapons needs of the Alliance
through an agency called the NATO Armaments Planning Review. At this stage, the impetus to
standardization was limited to co-production and co-licensing agreements. Co-production agreements
are government-negotiated arrangements in which the industries of two or more countries take part in
the production of a single weapon system, acquired by all of them (US DOD 1987). Co-licensing
arrangements, are really a subset of co-production agreements, except that, whereas co-producers may
also be co-developers, licensees are never co-developers; licensees must produce weapons according to
government regulations (US DOD 1987). The theoretical benefit of both of these approaches is diat
they permit weapons convergence, at the same time as they guarantee local manufacturing content and
technology transfer.
Five key weapons programs are associated with CNADs first stab at weapons standardization:
the multirole combat aircraft (MCRA), the Roland short-range air defense missile, the MAG-58 armor
machinegun, die US/German main battle tank competition, and the F-16 fighter aircraft. Only die last
of these was an unqualified success.16 Moreover, this is probably because die F-16 became a NATO
16As for the Roland Air Defense System and MAG-58 Machinegun, DOD purchased them in large
part to demonstrate that the US was committed to buying weapons from Europe and, in the case of the
MAG-58, as an incentive for Belgium to purchase F-16s. American producers alleged diat dieir systems
(the Maine-built M60E2 and Chaparral Missile System) were superior. Whether or not this is true, DOD
purchased only about $30 million worth of MAG-58s and installed them on M-l Abrams Tanks after
DODs plans survived a court challenge by American manufacturers. The purchase contract for die MAG-
58s provided for coproduction in the US of all machineguns in excess of the initial 10,000, in the event
the US preferred diis. For its part, die Roland Air Defense System was cancelled in 1979. Rather than
buy Roland as is, the US insisted on "Americanizing" it and co-producing die defense system under license.
Thus, whereas die French and German Armies began receiving operational Roland missiles in 1976, the
US version was still undergoing reengineering when Congress got tired of delay and canceled the program.
The final cost of the program was $1.9 billion.
Last, the US/German main battle tank competition was solved in favor of politics and
destandardization. It was supposed to be a wimier-take-all competition within NATO for main battle tank


64
project only after it was a demonstrated success in the US Air Force.
The F-16 remains the most successful co-production program within NATO to date. Initially,
the program was meant to produce 348 European and 650 US Air Force multi-role fighters. But by
1986, it had produced 515 planes for Europe, 2,821 for the US, and 756 for eight other countries--and
die number was still increasing (Numi 1986, Nexis Service). By 1990, the US had licensed or entered
into co-production agreements widi 17 countries, including seven NATO members (OTA 1990, 43-44).
Figure 3-1 breaks down die multinational F-16 fighter in its present multinational configuration. In
comparison, the RCRA or Tornado Fighter-Bomber, die next most successful of die NATO projects
announced in the 1970s, was co-produced in Italy, West Germany, and Britain. Canada, Belgium, and
die Netherlands wididrew from the Tornado Program because of cost over-runs, performance
disagreements, and delays.
Despite die success of the F-16, "minimal" is a fair assessment of die standardization which
die first five key NATO projects achieved in the 1970s. Coordination evolved in an ad hoc fashion,
and had limited overall effect on standardization in NATO. The primary reason was diat participation
in die NATO projects was limited to only a few allies. Usually, development and production lead time
on diese projects was long, too; and cost overruns, damaging.
The summary lesson of these experiences may be diat when die goal of
standardization has conflicted widi odier interestssuch as differing concepts of
military requirements, contracts for domestic firms, and national pridethe
compromises that have been made have tended to increase costs while increasing
standardization incrementally. (Committee on International Relations 1977, 26)
This is not to say that the programs had no effect. At the conclusion of the Tornado Fighter-
Bomber and F-16 procurement programs begun in die 1970s, NATO had plans to operate potentially
eight less fighter aircraft than in 1975. This would have left NATO with 18 basic fighter aircraft,
replacements (about 10,000 over the next couple of decades). This would have represented substantial
standardization in die Alliance. But DOD was more committed to RSI than Congress in the late-1970s.
Congress demanded an "American" tank. DOD finally agreed to this demand after winning some
concessions on interoperability.


65
rather than 26. Once more, the NATO projects demonstrated new thinking about standardization. The
fact diat they progressed as far as they did was unprecedented.
Failure may have also encouraged bureaucratic learning. CNAD shifted from an ad hoc
approach to standardization to a more forward-looking strategy in the mid-1980s. Rather than catalog
the weapons needs of countries and promote a procurement dialog once the countries were ready to
buy, CNAD began to take the initiative in developing weapons specifications to meet future Alliance
needs. The US paid for this shift in 1986, by setting aside $250 million for NATO cooperative R&D
projects. In addition, DOD increased its collaborative R&D expenditures from 3 to 25% of total R&D
expenditures that year. This funding represented a much more substantial commitment to
standardization than DODs support of co-production and co-licensing agreements. After all,
standardization through R&D eliminates die need to retrofit interoperability and integrates weapons
systems at the design stage.
The trouble is many of the NATO projects begun under the banner of R&D cooperation were
abandoned in die late-1980s and early-1990s. There are some exceptions. Many of these proved
critical to the successful prosecution of the Gulf War; for example, die NATO Navstar Navigation
System, coalition minesweeping forces, interoperable ammunition, interchangeable chemical warfare
protection suits, and interoperable maritime helicopter flight decks. But key joint R&D standardization
programs like die NFR-90 Frigate and Advanced Short-Range Air-to-Air Missile (ASRAAM)/Advanced
Medium-Range Air-to-Air Missile (AMRAAM)-the symbols of the new era of weapons cooperation
that NATO held up-were cancelled. Critics charged that the weapons had technical problems and
would be too expensive for post-Cold War defense budgets. In truth, in these instances efficiency and
structural disarmament proved less compelling interests dian die jobs domestic political coalitions
argued would be lost.
Hence, in die 1990s, despite die emergence of strong incentives for weapons standardization in
NATO, die state continues to protect, albeit not totally successfully, die self-sufficiency of its defense
contractors in the production of weapons systems. Recession and, more importantly, the end of die


66
Cold War made this decision easier. Because of a reduced security threat, Alliance members seem
willing to bear the cost of inefficient weapons procurement policies-most notably, structural
disarmament. Thus, although the benefits of CNADs shift in the mid-1980s to a more forward-
looking standardization process should have accrued in die early-1990s, they did not. Funds
contributed to joint R&D programs for prototypes of weapons were wasted. Table 3-1 shows that die
fairly steady growth in numbers of major weapons systems in NATO since 1962-63 continued dirough
1990. For example, although diere were ten tactical aircraft in NATO in 1962-63, diere were 42 in
1990; and, whereas there were 2 helicopter models in NATO in 1969-70, there were 38 in 1990.
Thus, contrary to Hypodiesis One, divergence in the procurement of weapons systems
continues to be the rule in NATO, despite its commitment to the opposite. This would seem to
undermine the Interdependence Approach, except that standardization of weapons systems is not die
only type of convergence important in defense procurement policy. Most importantly, divergence can
occur at die systems level, while convergence takes place at the components level of weapons systems.
Ultimately, the twain shall meet, since the convergence of parts of a system must lead to convergence
of die system itself. This is how I shall verify Hypothesis One in diis chapter. Interestingly,
convergence at die components level is occurring in spite of public policy. This is similar to die
pattern we shall see in Chapter Four, where despite the decision of die G-7 not to cooperate in setting
convergent monetary policies, convergent monetary policies are die result of financial innovation and
dramatic capital mobility. We turn to standardization at die components level of weapons next.
Offshore Component Sourcing
One of the oddest things from a neo-realiStic viewpoint about the standardization of weapons
components is that the state has largely ignored it. Standardization is occurring by default in the
Alliance because many weapons components are now purchased from offshore sources-either from
other NATO members (major subsystems and built-up components) or Japan (semiconductors). This is
despite the obvious direat to national security foreign dependence even at diis level causes. Although
there is no data on die precise extent of overall foreign component sourcing, informed estimates put the


67
number at 20% of the parts in US weapons systemsand growing (Vernon and Kapstein 1991). This is
compared to basically no foreign components sourcing just two decades ago. In general, European
members of NATO have had a higher level of components dependence upon die US, especially in
aviation and micro-circuits. Roughly 30% of the Tornado's components, for example, are American-
sourced (Moravcsik 1990, 78).
Of course, in some instances dependence on offshore component sourcing is much more severe
than 20 or 30%. In the US, for example, the single domestic supplier of ceramic package
manufacturing, one of four elements essential for micro-circuits used in defense applications, is
Kyocera America, Inc., a subsidiary of a Japanese firm. Its sales represent about 13% of sales in the
US ceramic packaging market. The rest of the market is controlled by overseas firms.
Three primary factors explain why this kind of interdependence is growing at the components
level: (1) defense contractors are becoming multinational, (2) "dual-use" technology, or technology
that has both a commercial and military application, is more common, and (3) capital can now search
internationally for optimal cost, quality, performance, and delivery time criteria. I will save the first
point for later. Evidence for die second became apparent in 1981, when the Reagan Administration
attempted to tighten export controls on technology potentially useful in military applications. The
Administration discovered diat so-called "dual-use" technologies had grown so much that "it direatened
the entire control process and dierefore the national security of the US (today, 90% of defense needs
are dependent upon dual-use technology)" (Parks 1990, 78). Dual-use technology permits access to
parts for which states could not otherwise achieve economies-of-scale. Indeed, during the 1970s and
1980s, die most rapid increase in international trade took place in products closely linked to battlefield
capabilities like data processing equipment, transistors, telecommunication equipment, engines,
measuring instruments, and artificial resins (Vernon and Kapstein 1991, 9).
Dual-use technology is die most pronounced in micro-electronics, a field critical to "smart"
weapons. It was also a field at one time dominated by DOD, but now far more commercial dian
defense-related. The military contributed handsomely to AT&Ts initial research on semiconductor


68
technology and later encouraged Bell Labs to disseminate technical data to its licensees. Military
orders provided early markets for new products and spurred American firms on to technological
leadership. As late as 1963, defense-related purchased accounted for over 35% of US semiconductor
output and over 90% of the market for integrated circuits. In contrast, by the late-1970s, defense-
related purchases of semiconductors amounted to just 10% of US output (Ziegler 1992, 157).
In the 1970s, military procurement exerted less and less leverage over the semi-conductor
industry. Whereas earlier DOD could count on receiving state-of-the-art chips specially designed for
its weapons systems, the new, defense-related specialty chips had low priority in the industry and were
often obsolete by the time weapons systems were deployed. This trend especially concerned DOD
when American domination of semi-conductor manufacturing and the production of equipment for
fabrication of chips shifted to Japan in the early-1980s. By 1981, Japan claimed 70% of the US market
for memory chips (DRAMs). Likewise, between 1984 and 1988, the share of world exports of semi
conductor fabrication equipment generated in the US slipped from 66% to 50%. In NATO,
convergence in the weapons-related procurement of DRAMS and semi-conductor fabrication equipment
is now around the exports of primarily Japanese manufacturers.
It will be difficult to reverse diis trend, as some American compames learned in the late-
1980s. Semi-conductor fabrication equipment and DRAM production depends on the geographical
proximity of so many factors "that the task of returning all production to US territory had become
technically, as well as financially overwhelming" by the late-1980s (jd. at 173-74). Nonetheless, DOD
determined to protect Americas still strong presence in the integrated circuit industry. Thus, it
abandoned its preoccupation with only defense-related research on semi-conductors and contributed to
die founding in 1988 of Sematech, an association of US-based integrated circuit manufacturers designed
to disseminate technology. In so doing, DOD embraced Japans strategy of encouraging commercial
success in the industries that indirectly benefit national security. DOD thought that Sematech would
rejuvenate specifically American semi-conductor manufacturers. It has, but, as we might expect based
on the New Interdependence, it has also benefited foreign producers through the joint research and


69
manufacturing agreements that American firms have, ie. IBM-Siemens and Texas Instruments-Toshiba.
Moreover, it was still the case that in 1989, 30% of the semiconductor purchases of the US military
were foreign-sourced (Id. at 174). The figure for European members was dramatically higher, at 80%.
As this cursory look at die semi-conductor industry shows, it is often die case diat even if a
state decides diat it wants to become self-sufficient in the manufacture of a particular weapons
component, it cannot. Either die state may not have manufacturers capable of producing the component
or if it does, die manufacturers may not be able to produce it at competitive pricesmy final point as to
why interdependence in components-sourcing is growing. Consider some of die foreign-sourced
components on die Ml-Al Abram Tank: optic quality glass, MAG-58 machine guns, 120-millimeter
smooth-bore canons, trimer, and semiconductors. Optical glass for it can be produced in die US, but
at a cost two to three times that of foreign sources. Similarly, trimer, an ingredient in the plenum seal
connecting die engine and the air intake system of the M1 Abram tank, is a product which the US has
die technology to deliver. But a new domestic production facility would need to be built at a cost of
$1.5 million. DOD considered building the facility, but determined diat because it could not guarantee
more than $1 million in purchases, it probably could not be sustained over the long-term (GAO 1991,
18).
DOD has also found, on occasion, that even when it could purchase the manufacturing
capability to produce a weapon component, diat was not enough. For example, under Congressional
pressure to find a domestic alternative to the British-built F/A-18 fighter ejection seat, DOD negotiated
a co-production agreement between Martin Baker Aircraft Co. of die U.K. and East West Industries in
New York. Despite the deal, East West still purchases elements of the seat from Britain. As DOD
officials put it, having a complete technical data package for die seats does not guarantee diat diey can
be entirely produced here. The odier essential component is capability (GAO 1991, 22).
Thus, despite the overall failure of NATO to standardize its weapons procurement at the
systems level in die 1980s, in keeping widi Hypodiesis One the internationalization of defense-related
components procurement is standardizing them, anyway. This is happening die most dramatically in


70
tlie electronics industry and advanced aviation, but it is also occurring in less sophisticated fields like
the production of ejection seats. Standardization of parts is convergence not designed purposefully into
weapons, but as a result of market incentives. Hence, even when NATO fails to respond to die
inefficiency obviously leading to die structural disarmament of die Alliance, convergence in weapons
procurement policies continues at the components level.
Furthermore, diis convergence is essentially irreversible for diree primary reasons: (1)
essential components are simply not available domestically or, at least, not at a competitive price, (2)
the increasing cost of weapons R&D and production makes international consortia of defense producers
necessary, and (3) die increasing availability of dual-use technologies makes the purchase of specialty
defense components inefficient. In addition, die sheer number of parts involved in a weapons system
and the multinationalization of defense contractors diat has already occurred makes state regulation and
tracking of interdependence at diis level virtually impossible.
Collective Goods Problem
In fact, it is (1) die very inability of die state to avoid interdependence at the components level
of weapons systems and (2) the choice die state faces between structural disarmament and coordinated
weapons procurement which allows me to verify Hypodiesis Two. It states that goods which countries
formerly provided on dieir own are being substantially transformed into collective goods problems. In
diis case, it is national security which is being transformed into a collective goods problem for even the
most powerful industrialized countries. Since World War II, industrialized countries have tried to be
self-sufficient in weapons production and, thus, in some measure to guarantee their own national
security.
Until the 1970s, the US in particular could have severed all contact with die rest of the world
and still met its weapons procurement needs. European countries, especially non-aligned ones, would
not have been quite so successful at achieving autarky, but they could have come close widi second-
class weapons. Beginning in die 1970s, however, dependence on offshore components and die need to
counter structural disarmament undermined even the superpowers most concerted efforts to remain


71
self-sufficient in armaments production. Now, even the US has had to give-up the goal of autarky and
depend on multilateral cooperation to meet its procurement objectives.
Structural-realists have argued that interdependence in defense-related equipment is not unique
to the late-Twentieth Century. Although this is true, a brief review of die interdependence in weapons
procurement in die past shows diat the extent and nature of interdependence in weapons procurement
today is unprecedented. To begin with, during die 1800s, industrialized countries were, for die most
part, able to attain die goal espoused by mercantilists like Alexander Hamilton and Friedrich List: self-
sufficiency in armaments production. The largest exceptions had to do widi imports of essential raw
materials. This situation changed only in die late-1800s and early-1900s, as interdependence increased
and trade in weapons expanded again. Germanys Krupp, for example, sold to both sides of die
Franco-Prussian War; and on die eve of World War I, filled Russian, French, and British weapons
orders. However, prior to World War I, there was no ideological split between die major powers.
The shift toward ideological warfare, together widi an era of unprecedented government intervention in
weapons research and procurement during die Cold War, forever changed the character of
interdependence.
The fixed costs of new weapons, particularly aircraft and advanced naval vessels, increased
after World War II. However, exponential increases in their cost did not occur until the 1970s. Only
huge markets for diese weapons could offset die tremendous investment they required. In the 1970s,
"fixed costs placed autarky far beyond the means of any single country in Europe" (Moravcsik 1992,
40), while the US remained self-sufficient for a decade. Never before had interdependence affected the
great powers so asymmetrically. Moreover, die New Interdependence of the late-1970s was not
primarily in raw materials, but electronics and advanced composites which require advanced technical
knowledge to manufacture. Knowledge and economies-of-scale, in odier words, not natural resource
endowments, is die key to military interdependence in die 1990s.
Now, not even die superpower can provide for its own weapons procurement needs. Not only
that, but it too is undergoing structural disarmament, as a result of inefficient procurement practices


72
that could ultimately endanger its own national security. The problem is not acute, because of the end
of die Cold War. However, the trend in the late-1970s and 1980s, was for the Warsaw Pact to outstrip
NATO in almost every category of major weapons systems production. Most startling, this was despite
die fact that the Alliance had a collective wealdi worth 2.5 times the GNP of die Warsaw Pact, a
population 1.5 times larger, and a defense budget roughly equivalent to die Warsaw Pacts.
To reverse diis trend would have required die collective effort of the Alliance to standardize
weapons. The technical knowledge and economies-of-scale necessary to produce and procure weapons
efficiently now depends on multilateral cooperation, since no individual state in the Alliance can deliver
eidier. As we saw in die last section, though, it was difficult even during the Cold War to convince
Alliance members not to "buy national" for political reasons. Most NATO projects involved few
Alliance members. The ones diat failed usually were canceled because states withdrew from diem.
Even NATO projects diat were completed inevitably finished with fewer participants than they began
widi. This is the free rider problem at work. The two conditions of a collective goods problem are
also present: (1) participants in NATO projects could not prevent other Alliance members from
enjoying die standardization and strategic advantage diey provided (nonexclusion) and (2) NATO
project participants obviously could benefit from standardization without diminishing the level of
standardization from which other Alliance members could benefit (nonrivalness). It is no surprise,
therefore, diat Rationalization, Standardization, and Interoperability failed and die gap between East and
West widened.
Between 1987 and 1988, the size of die Soviet military machine grew almost 50%, whereas
NATOs forces grew just 10% (Committee on Foreign Relations 1988, 122). The Warsaw Pact also
dramatically reduced its qualitative inferiority throughout the 1970s and 1980s, in part because it could
deploy new technology faster than NATO (Moodie 1986, 24). Table 3-2 shows diat in some weapons
technologies die Warsaw Pact may have been even superior to NATO. The consequence of this shift
was diat in 1987, Secretary of Defense Weinberger reported diat die Pacts advantage in-place ground
force combat power had increased from around 1.5 to 1 in 1965 to 2.2 to 1 (Committee on Armed


73
Services 1988, 67). The index he referred to combines a measure of the quantity and quality of
opposing forces. It suggested that the cushion NATO members would have in the event of Soviet
aggression was reduced from a projected two weeks to maybe just two days before NATO would have
to resort to nuclear weapons.
Readiness reports also indicate that in a crisis, NATO forces probably could not have
effectively reinforced one another, because diey fired different projectiles, serviced different equipment,
and even communicated on different frequencies. All of this was the resort of divergent weapons
procurement at the systems level in NATO. The gathering convergence at the components level had
not yet caught up with the weapons system as a whole. In die late-1980s, NATO had six main battle
tanks, each of which fired different ammunition. Even NATOs multinational F-16 had unique weapon
carrying systems diat were not compatible between national forces. Hence, if an F-16 landed at an
Allied base, most likely it could not have been fitted widi bombs; the plane would have been grounded.
Odier NATO jets could not even be serviced at Allied bases; hence, even in good conditions, diey
might be grounded on die basis of technicalities. Most astonishing, NATO forces often could not even
communicate with one another.
Warsaw Pact forces were substantially more standardized in the 1980s, because they had a
dominant supplier: die Soviet Union. Ironically, socialist countries, which tried to disconnect
themselves from the global economy, took better advantage of capitalist economies-of-scale in defense
procurement than did NATO. Of die approximately $23 billion NATO spent in 1981 on R&D, as
much as 28% of die total (Europes combined R&D expenditures) was redundant (Callaghan in
Committee on Armed Services 1988). More recently, DODs Office of the Inspector General estimated
diat the Defense Department could save $10 billion between FY1992 and FY1997 if it would take full
advantage of die R&D programs of American allies and dieir contractors (Defense & Aerospace
Electronics 1992, 2). Likewise, the Grace Commission estimated diat by ignoring the markets signals
to standardize NATO R&D, the US wasted $2.3 billion annually through die early-1990s.


74
NATO wasted far more money by ignoring the markets incentives to coordinate actual
weapons acquisition, too. A rule of thumb in the aerospace industry is that the unit price declines by
15 to 20% for each doubling of production, simply because firms learn (Moravcsik 1990, 67).
Likewise, Callaghan estimates that the US could save 10% of its procurement expenditure and Europe,
25%, if economies-of-scale were realized (Taylor 1982, 51). In May, 1987, a Senate sub-committee
reported:
During the last five years, weapons have been produced at just 50% of efficient
production capacity. A fourth of the major acquisition programs during die past five
years were manufactured at a rate below the minimum economic rate for those
systems. Half of the largest 20 weapons systems were stretched-out, compared to last
years plans.17 (Committee on Armed Services 1988, 90)
Stretch-outs increase the proportion of overhead to military product. A longer stretch-out
means less cost effective production, since each dollar buys more overhead and fewer weapons. In
contrast, an optimum funding level is the minimum amount of money required to produce the maximum
number of units on one eight-hour shift, five days a week. To make this concept more tangible,
consider the now famous Patriot missile system. The Army estimates that stretching-out this missile
system in die 1980s, cost $1 billion, a sum that could have purchased 1,760 additional Patriot missiles.
Likewise, the Air Force claims that stretching-out the F-15 for three years in the 1970s cost $2 billion,
a sum equal to die purchase price of 83 F-15s. Instead, die money purchased overhead.
All of diis inefficiency, die result of divergence in NATOs weapon procurement policies, is
die root of structural disarmament: states are spending more and more dollars to get fewer and fewer
weapons. In the words of the former Supreme Allied Commander of Europe (SACEUR) Gen. Bernard
Rogers, "Every time we replace a system, the cost of die newer one has increased by a factor of from
diree to five. Consequently, we procure fewer and fewer systems as replacements each time. .
17So-called stretch-outs increase die proportion of overhead to military product. Every funding
level below an optimum level buys more overhead and fewer weapons. An optimum production level is
the minimum amount of money required to produce the maximum number of units on one eight-hour shift,
five days a week" (Committee on Armed Services 1988, 94).


75
(Committee on Armed Services 1988, 125). Rogerss successor, SACEUR Gen. John Galvin echoed
this complaint:
In 1988 prices, the cost of building a new F4 Phantom would be US$9 million; the
F14 Tomcat that replaced it is priced at US$32 million. Similarly, an M60 tank could
be fielded for US$1.4 million (again at 1988 prices); but its successorthe Mlcost
US$2.7 million. A type 23 frigate is 3.5 times as expensive as the Leander which it
replaces. (Galvin 1988, 18)
Once again, die same budget bought die US 3,000 aircraft per year in the 1950s, 1,000 per
year in die 1960s, 500 per year in the 1970s, and roughly 300 per year in the 1980s (Committee on
Armed Services 1988, 124). This was not primarily because we got a "bigger bang" for die dollar,
either. Declining quantities of weapons are not being equivalently offset by increases in quality.
Andrew Moravcsik reports that die cost of a given unit of increased performance (die cost/perfomiance
ratio) of new fighter aircraft has been steadily increasing for three decades at a real annual rate of
between 0.5 and 1.2%.18
Structural disarmament has most severely affected small NATO members and non-allied
industrialized countries. This is as we might expect, based upon Corollary One, which states diat
convergence more substantially influences countries widi relatively small national incomes. Middle-
range military powers are forced to seek large export markets for weapons to maintain a semblance of
defense autonomy. Hence, they tend to be less favorable toward restrictions on the proliferation of
defense technology, too.
For example, France, a middle-range military power has always strongly resisted limitations
on die export of defense technology. Exports to developing countries are a natural strategy for France
to pursue because of its many former colonies. French firms like Avions Marcel Dassault, a military
aircraft manufacturer, exported roughly 70% of its production in die 1970s and 1980s (Moravcsik
1990, 68). In 1984 this prompted the French Defense Minister to acknowledge, "If France didnt
18This deflation was more severe in defense than the civilian sector, too. Between 1947 and 1987,
whereas the cost of commercial manufactured items increased only tenfold in die US, the cost of military
manufactured items increased 100-fold (Committee on Armed Services 1988, 90).


76
export, it couldnt buy its own weapons from its own producers. . The cost would be too high . .
and we would have to buy more weapons abroad" (Committee on Armed Services 1988, 125). The
same is true for non-aligned Sweden. Swedens so-called "national champion" in defense, the Celsius
Industries Corporation, has 50% of its weapon sales overseas. Celsius does most of its naval business
outside of the country, yet Celsius is still tremendously subsidizedto the point that Sweden is
considering privatizing the corporation (Hitchens 1992, 22).
Thus, in review, the divergent defense procurement patterns of NATO members in the decades
prior to the 1970s, could not be sustained without structural disarmament occurring and a decline taking
place in Alliance readiness. Formerly, states could achieve self-sufficiency or nearly so in weapons
production and, therefore, provide for national security. They might still be beat on the battlefield, but
it need not have been for lack of economies-of-scale in weapons production. However, in keeping with
Hypotiiesis Two, which states that goods states formerly provided on their own are being substantially
transformed into collective goods problems, adequate weapons production now depends on technical
knowledge and economies-of-scale that can be obtained only multinationally. Provision of adequate
weapons for defense has become a collective goods problem. Not even the superpower can prevent its
own structural disarmament. Smaller allies are even less capable of meeting these criteria, as Corollary
One would have predicted. In fact, the asymmetry apparent in a countrys ability to provide for
national security is more dramatic now than at any time previous.
Lowest Common Denominator Agreements
To reverse the trend toward structural disarmament, the state must liberalize policies for
procuring weapon systems. Alternatively, if the state intends to try to control the multinationalization
of weapons components, it will have to take some strong steps to pull back from die international
economy in ways likely to be violative of the GATT. Either way, it will have to act decisively. So
far, industrialized countries have taken primarily symbolic steps, in keeping widi Hypodiesis Three,
which states that public policy coordination designed to regulate the market is increasingly likely to
center around agreement on a LCD. For example, radier than coordinate standardization effectively


77
and provide mechanisms whereby the Allies could share the political costs of not "buying national," the
NATO Rationalization, Standardization, and Interoperability Program is itself a LCD. The RSI
Program suggests that NATO is serious about procuring weapons efficiently, but it actually protects the
right of the Allies to be self-sufficient. As a result of weak enforcement regulations and co-production
and co-licensing agreements, RSI has not altered the overall inefficiency in weapons procurement.
Weapons produced collaboratively under the RSI framework, are separately manufactured, thus
eliminating important economies-of-scale.
NATO projects have failed not only to stem the tide of structural disarmament in net terms,
but also to satisfy the performance needs of most participants in the Projects. In the worst instance, a
weapon that reflects a compromise between multiple national missions may be unsuited to perform any
of them effectively. For example, disagreement over performance expectations and cost ultimately
undermined the NFR-90 Frigate project and Advanced Short-Range Air-to-Air Missile
(ASRAAM)/Advanced Medium-Range Air-to-Air Missile (AMRAAM) program. Alternatively,
differences have led members in NATO projects to modify the base NATO project model with
customized options and to demand coproduction rights that eliminated many of the economies-of-scale
RSI was supposed to guarantee. For example, the European Fighter Aircraft (EFA) planned for the
1990s, will have four models, each manufactured separately in Britain, Spain, Italy, and Germany.
None of these states could decide which of them should benefit from the revenue and jobs creation the
European Fighter Aircraft program would bring if completed as a single aircraft.
In general, die problem of dividing die costs and benefits of standardization equally is a root
cause of LCD NATO projects. Real economies-of-scale in the production of a NATO weapon depend
upon the ability to depreciate overhead in a single location. Efficiency requires optimal production runs
in one country. But diat means diat many odier Project members cannot benefit from technology
transfer and revenue that particular weapons systems generate, except insofar as diey source
components for die main weapon system. The problem is quite similar to that analysts encounter in
asymmetric economic communities like diose die developing world has tried.


78
For example, investment in the Andean Pact flowed to the strongest economies and virtually
overlooked the weakest. But the weakest needed investment the most; and die fact that investment
bypassed them meant diat they fell fardier behind die strongest economies. Likewise, a NATO project
which maximized the gains from RSI would locate primary production in the most technologically
advanced country relative to that product; dierefore, contributing to that countrys leadership in the area
in question and widening the technology gap between it and odier Alliance members. Rather dian be
part of the "out" group and obtain a weapon not quite suited to a particular national need, states choose
to co-produce NATO projects or to back out of NATO projects. From a strictly utility-maximizing
perspective diis makes sense, too. Free riding on the standardization efforts of odiers in an Alliance
guarantees the free riders basically the same level of national security available to diose committed to
Rationalization, Standardization, and Interoperability.
Recall that free riding, in general, is intimately wrapped-up in the trend toward LCD
agreements. Since every state prefers to be a free rider on the regulations of others, no individual state
has an interest in providing the regulation. So, the regulation oftentimes is not provided and statements
of resolve or agreements that have at best short-term efficacyin other words, LCD agreements
replace them. This is true especially as convergence tightens around a multilateral equilibrium (the
airline regulation example from Chapter Two). CoCom, the Coordinating Committee on Multilateral
Export Controls, represents such an equilibrium for controlling die multinationalization of weapons
components and technology.19 It has confronted one primary question since its inception in 1949;
How does a state prevent the transfer of sensitive military technology capable of undermining its
national security, while not impeding legitimate scientific, technical, or commercial exchange?
The Allies have not answered this question die same way. CoCom has always been composed
of two groups: the strict export controls bloc and die loose export controls bloc. The US has always
been in the former bloc, in part because its large defense market made exports of technologically
19COCOM is composed of NATO Member states minus Iceland, but including Japan.


79
sensitive weapons less crucial to obtaining economies-of-scale. Most other Allies have favored looser
export controls, since they need to trade to protect their defense industry and because their ideological
opposition to communism is less pronounced. This disagreement in CoCom only became critical in the
late-1970s. Until then, CoCom fairly effectively regulated the diffusion of technology with obvious
military use.
But the shift toward knowledge-intensive weapons in the late-1970s, made economies-of-scale
more critical and "dual use" technology more of a problem. Dual use items confused what should be
regulated. In addition, the number of states vying for sensitive technology increased. Until the 1970s,
CoCom concentrated primarily on denying military technology to the Soviet bloc, but afterwards it had
to worry about developing countries, as well. Trends which concerned the Alliance most were nuclear
weapons proliferation, as a result of advances in "civilian" reactor technology, and the diffusion of
ballistic missile-related technology to countries like China, North Korea, India, Brazil, Israel, Iraq, and
Libya, as a result of advances in space and defense programs (McCall 1992).
Changes like these, together with the Warsaw Pacts numerical advantage in military
equipment in the late-1970s, spurred the US to pass even tougher domestic laws against sensitive
exports (the 1979 Export Administration Act) and to press for stricter guidelines in CoCom. But
CoCom members preferred a LCD approach. CoCom adopted three categories of restricted weapons:
the Direct Military Use List, International Atomic Energy List, and Dual Use List). It limited
technology on the Dual Use List the least. Furthermore, since agreements reached in CoCom depend
upon implementation by members states, widely varying enforcement of CoComs restricted lists has
been the rule (Parks. 1990). Not even the invasion of Afghanistan and martial law in Poland created a
consensus in favor of a more restrictive multilateral trade policy and effective law enforcement. As a
result, American manufacturers lost business in the East to Allied manufacturers. The National
Academy of Sciences (NAS) estimated those losses at $9.3 billion in 1985 (Parks 1990, 99). Individual
industries like the computer and telecommunications industry and the oil and natural gas industry claim
much higher losses.


80
Moreover, despite these losses, the US did not stem the proliferation of sensitive military
technologies. This is in keeping with Hypothesis Two on die transformation of goods that states could
formerly provide on dieir own into collective goods problems. It also verifies diat CoCom has been no
more than a LCD, since the period of the New Interdependence began. Analysts disagree about die
extent of proliferation under die not so watchful eye of CoCom, but a DOD Assistant Secretary for
International Security Policy characterized it as a "hemorrhage of technology" to hostile nations
(Feldman 1985, Nexis Service). Likewise, Sam Nunn testified,
Inhibitions within diis Alliance on technology transfer are supposed to slow the Soviet
military flywheel; but I submit that the Soviets are stealing almost everydiing they
want and that die machinery weve set- up to restrict our own technical dialogues are
self-defeating, because they are slowing us down, and thats why we deploy front-line
weapons so much more slowly dian die Soviets. (Nunn 1986, Nexis Service)
Although the US tried to extend its regulatory powers extraterritorially and to foreign
companies with operations in die US to stem this flow by itself, Canada, France, and the U.K.
introduced blocking legislation. Many members of CoCom did not even enforce adequately die few
export limitations to which diey had agreed.
The 1987 Toshiba-Krongsberg Affair illuminated quite dramatically die consequences unequal
and lax enforcement of CoCom export controls could have for NATO. Some contend that the propeller
refining technology diese companies transferred to die USSR advanced its propeller development
program seven to ten years, and would have made $30 billion in countermeasures necessary had the
Cold War not ended. This amount may be small, however, compared to die costs of technology
transfers that took place through channels diat COCOM did not monitor during the Cold War. The
FBI estimates that as much as 90% of the defense technology which the Soviets obtained through
espionage was supplied in this maimer (Feldman 1985, 65).
The Toshiba-Krongsberg scare did have one positive outcome. It led to a rare display of unity
on strategic export controls in CoCom (Parks 1990, 89), which might have propelled CoCom out of die
ranks of LCDs toward an effective regulatory system. In response to die Toshiba-Krongsberg affair,
CoCom members agreed to shorten die list of controlled technologies, but also to toughen enforcement


81
procedures and, thus, level die regulatory playing field. This unity did not last long after the Iron Wall
fell. CoCom fell back into its LCD rut. The US stood alone in 1989, insisting on controls on sensitive
weapons sales to Eastern Europe and even stricter controls on sales to the ailing Soviet Union. In June
1990, the US finally gave in to a more liberal standard, as die sales American companies lost to Allied
countries mounted. In die first of many reductions to come, CoCom agreed in 1990, to end controls
on 30 of 116 "protected" technology categories (Auerbach, Washington Post. 8 June 1990, F:l).
Debate continues on how far this process should go, with Germany and the US the most conservative,
and Japan and France, the least (Belir, Washington Post. 27 August 1993, B:l). But for all intents and
purposes, die shift of CoCom toward an almost completely symbolic function is nearly complete.
In review, Hypodiesis Three states diat public policy coordination designed to regulate the
market is increasingly likely to center around agreement on a LCD. This section verified this shift in
diree separate ways: (1) NATO projects designed to bring about standardization and reverse die trend
toward structural disarmament, yet not totally abandon self-sufficiency objectives through co-production
and co-licensing arrangements, have failed substantially to stem die proliferation of weapons systems in
the Alliance; (2) NATO projects, themselves, represent a compromise on performance, cost, and
delivery time expectations for weapons diat fully satisfy none of dieir participants; and (3) CoCom has
evolved from being a fairly effective and noil-controversial organization that controlled the diffusion of
technology to the Soviet bloc to an organization fulfilling the largely symbolic function of listing a
decreasing number of knowledge-intensive and dual-use technology that China, Nordi Korea, and a few
odier radical developing countries ought not to have access to. For the most part, these states can still
obtain access to die technology, because diere is always at least one free rider in CoCom eager to make
a dollar profit or generate political influence. LCD agreements can never effectively achieve the
Rationalization, Standardization, and Interoperability, performance, or non-proliferation objectives of
NATO. The trend toward them may not be so pronounced in a regional integration community,
diough. We shall examine this question next.


82
Weapons Cooperation in Western Europe
In Western Europe the temptation for states to free ride on the regulations of one another is
less than among industrialized countries as a whole, because of the institutional supports which exist.
A primary purpose of these supports is to level the playing field in Europe and ensure that the
regulations enacted by one Western European country will not be undercut by another. Hence, we
might expect that in specifically Western European forums efforts to address structural disarmament
and die proliferation of sensitive technologies would proceed further than in NATOespecially as
American domination of NATO has waned. This is not the case, though.
The same tradeoffs which affected NATO between self-sufficiency and efficiency in weapons
procurement, and between stemming proliferation and promoting trade, influence Europe. Hence, in
keeping with Corollary Two, which states that capital mobility, not declining hegemony, accounts for
the failure of multilateral regulatory systems to control the market, I find in this section that declining
American hegemony is not an adequate explanation for structural disarmament, failed standardization
programs, and weak export controls on military technology. It is innovation which is making defensive
autonomy unaffordable and market competition which has made CoCom largely ineffective. In other
words, the Interdependence Approach better explains structural disarmament, failed RSI, and weak
export controls on military technology than the neo-realistic preoccupation with declining hegemony.
To prove this I will show in diis section that every hypothesis which I verified in the previous sections
on NATO using the Interdependence Approach, can also be verified in the context of pan-European
weapons cooperation. Yet, in Europe American domination of NATO is, if anything, as secure as it
ever has been.
As in NATO, pan-European defense cooperation emerged when the European Union did. The
most powerful symbol of that cooperation, die European Defence Community (EDC), was designed to
procure weapons for the entire Community. This would have been a strong standardizing influence.
But die French Assembly narrowly defeated the EDC in 1954. In response. Great Britain convinced
Europe to replace the EDC widi a less powerful organization, formally independent of die EC. Great


83
Britain hoped thereby to justify Germanys rearming and admittance to the Alliance. So, in 1955
Europeans established die Western European Union (WEU). In addition, two other institutions
emerged independently in the 1970s, also to support pan-European weapons procurement: the
Independent European Programme Group (IEPG) and Eurogroup. Table 3-3 provides a summary look
at which military powers belong to which organizations involved in weapons procurement collaboration.
Like CNAD, all three pan-European procurement organizations were moribund until late in their life.
In fact, in Europe diey hit full stride after NATOs CNAD did-not until die late-1980s.
The Western European Union awakened from its slumber first, but like the other pan-European
procurement organizations has had limited effect, overall. In 1984 Senator Samuel Nunns effort to
ann-twist Europe into increasing its defense outlays for NATO under direat of an American troop
withdrawal had the unintended effect of giving the Western European Union a new lease on life. The
reason for their new endiusiasm, Europeans (except France) insisted publicly, was "to make the WEU
into die European pillar of die Atlantic Alliance" (Financial Times 1984, 1:14). However, in Europe
die most widely cited reason was Americas continued domination of the European weapons market
(OTA 1990, 56) and structural disarmament. Regarding die former point, not declining American
hegemony, but its continued strengdi, prompted a backlash in Europe. Although die ratio of European
weapons imports to US imports dropped from 8:1 in the late-1970s, it remained at approximately 2:1 in
1990 (Moravcsik 1990, 78).
Structural disarmament was also a growing problem in Western Europe in the 1970s, that
created severe pressure for liberalization in national weapons procurement programs. This is in
keeping with Hypodiesis One, which states that every country and every issue-area, whedier in high or
low politics, is subject to a pressure to converge toward a global equilibrium which die market prefers:
commercial liberalization. States resisted the markets demand for economies-of-scale in the form of
free access to multiple amis markets at the cost of national insecurity. The same stretch-outs and
diminishing "bang for die buck" evident in die US struck European countries, but widi more force.
European countries responded initially widi two strategies: (1) mergers and subsidization and (2)


84
exports (Moravcsik 1992, 34). Mergers aggregated the number of independent contractors into one or
two commercial units; thus, increasing potential economies-of-scale. Subsidization guaranteed a
minimum income for die contractors. Finally, exports expanded the potential market of a weapons
system.
For example, France consolidated its aircraft contractors and sub-contractors into two "national
champions," Aerospatiale and Dassault. Similarly, in Britain five main aircraft contractors in the
1960s, were reduced to one in 1990, British Aerospace. All of these national champions had to export
to survive. This is the fundamental reason for opposition in CoCom to effective export restraints on
sensitive military technologies. France has been the most liberal, as well as the most determined in its
pursuit of export markets. For example, beginning in die 1970s, France concentrated on designing and
exporting aircraft to the Third World. Exports constituted roughly 70% of production in die 1970s and
1980s (Moravcsik 1990, 68). The trouble is die aircraft that resulted were not adequate for Europes
central theater, as even die French Navy complained (Moravcsik 1992, 34). Furthermore, the end of
the Cold War created a buyers market for weapons systems. In net terms, die market diminished;
and, worst of all, the French failed to capture die loyalty of their Third World clients. Consequently,
"the French arms industry, it is widely agreed, is in crisis" (Moravcsik 1992, 34).
Based on diese facts, it is no surprise dial Europeans finally embraced collaboration and, thus,
standardization in the late-1980s. No longer able to guarantee their own weapons procurement needs
through strategies like building national champions and exporting weapons, European countries had to
face the fact that national security was being transformed into a collective goods problem, as
Hypothesis Two predicted. While export markets held-up, die shift toward collaboration was slow.
However, when die export market collapsed, collaboration became more important
Thus, until die mid-1980s, die WEU, Eurogroup, and Independent European Programme
Group were like NATOs CNADno more than LCDs that symbolically demonstrated resolve to
standardize weapons, but realistically accomplished little else. For its part, the WEU concentrated with
unknown effect on strategic airlift and intelligence and surveillance satellites (Coeme 1991, 19)


85
expensive projects not easily exportable. Likewise, the Eurogroup specialized in coordinating primarily
software-oriented military needs, i.e. training, logistics, communications, military medicine, and
operational concepts (Eurogroup 1988, 5). As for die Independent European Programme Group, it did
nothing noteworthy until the issuance of the Vredeling Report in 1986. This led to the endorsement of
an "Action Plan" in 1988, which designated die Independent European Programme Group as die major
organization for coordinating European defense industrial cooperation and proposed a program for
establishing a "common European amis market."
Not coincidentally, die collapse of die Iron Curtain occurred shortly thereafter, destroying
Europes export objecrives and other means of softening the impact of structural disarmament. The
Vredeling Report called for a standardized reporting system for cross-border contracts; aid for the
defense industries of Greece, Turkey, and Portugal; and open competition within Europe for contracts,
subject to the principle of juste retour. Perhaps most importantly, die Plan created a European military
research program named EUCLID (endowed widi only $140 million to begin with), modeled after the
European Research Coordinating Agency (EUREKA), to advance the objective of pan-European
weapons coordination. Finally, in 1991, the demand of some EC members (primarily France,
Luxembourg, Belgium, and Spain) for a coordinated defense policy became at least a topic of serious
discussion.20
20Building on the precedent of die Single European Act of 1987, the Treaty on European Union
finalized in Maastricht on 9-10 December 1991, declares as one of its five objectives "die implementation
of a common foreign and security policy including die eventual framing of a common defense policy, which
might in time lead to a common defense." Furdiermore, in a declaration attached to die Treaty, WEU
members state that they aim "to develop WEU as die defense component of die European Union." Three
provisions of the Single European Act of 1987 related to weapons cooperation: (1) The preamble pledges
signatories to act widi consistency and solidarity for the purpose of protecting dieir common interests more
effectively and to make dieir own contribution to die preservation of peace and security, (2) Article II
broadens the basis for Community-wide weapons procurement programs within the aegis of a common
industrial policy, and (3) Article III promises that signatories will more closely coordinate their political
and economic policies which affect security and maintain adequate technological and industrial conditions
to defend the security of Western Europe (Rummel 1989, Lexis Service).


86
All of this suggests that Western Europe made a significant commitment to cooperation in the
early-1990s. The list of collaborative weapons systems that Europe is developing is growing. The
most celebrated of these weapons, the European Fighter Aircraft (EFA), was the choice of Britain,
Spain, Italy, and Germany over the US Advanced Tactical Fighter (ATF) Program. In the early-1990s,
WEU members even set up a "Euro-corps," an extension of the Franco-German brigade of the late-
1980s. Thus, late in life, European arms cooperation looks even more substantial than that taking place
in NATO, as a whole.
The impression outside observers gained in the summer of 1992 was of a shift of
attitude in all major European capitals, away from the rhetoric that had characterized
so many previous West European defense initiatives, towards a concern to build an
effective structure for defense policy coordination, with at least some elements of
military integration. (Menon, Forster, and Wallace 1992, 117)
So far, though, the fruits of collaboration have been minimal. Great Britain and France still
produce, respectively, 75% and 80% of their major weapons systems domestically (Moravcsik 1990,
66). Excessive defense industrial capacity in Europe remains high, tooroughly 27% of total European
defense spending in 1987 (Moravcsik 1992, 36). Furthermore, individual collaborative programs have
received mixed reviews. The European Fighter Aircraft, for example, is rumored to have the same
shortcomings that the Tomado Fighter Bomber did: it performs many roles adequately, but none
deftly. Compromise has eliminated many of the economies-of-scale that the European Fighter Aircraft
promised, too. This is because the European Fighter Aircraft is now not one aircraft, but four.
Britain, Spain, Italy, and Germany plan to test and manufacture their version of the EFA separately.
Thus, the EFA is another good example of LCD weapons procurement cooperation.
More substantial coordination is likely to result in the 1990s, if the Independent European
Programme Groups projects of the late-1980s are carried through. The future of cooperation through
the WEU looks more clouded, though. If the weakness of the EMS (next chapter), and, more
importantly, the divisions in the European Community which war in fomier-Yugoslavia made obvious
are a harbinger of tilings to come, a pan-European common defense may be a long time off. In any


Full Text
226
Preserving biodiversity. Unfortunately, the international community has not been quite as
successful at providing the collective good of biodiversity conservation. Until basically the 1970s, the
primary tools which states counted on to preserve biodiversity were parks and reserves. These were
first established in the late-1800s, although forest reserves date as far back as the fourth century B.C.
in India (World Resources Institute 1994, 152). By 1990 roughly 5% of the worlds land area was
protected, widi North and Central America harboring the most protected land (11.7%) and Oceania
(9.9%) and Europe (9.3%) close behind. In addition, the US and Europe have benefited from
instruments like the Endangered Species Preservation Act and even zoos.
Nevertheless, biodiversity is vanishing at an alarming rate even in the most protected areas, as
the result of population growth, urbanization, and industrialization. In keeping with Hypothesis Two,
which states that goods that countries formerly provided on their own are being substantially
transformed into collective goods problems, preserving biological diversity is increasingly dependent
upon international cooperation. Since most of die worlds biodiversity is located in the tropics (40-
90%), biodiversity preservation depends heavily upon North-Soudi financial and functional cooperation.
The current rate of species extinction is about 1,000 species per year, widi the rate expected to increase
dramatically in die 1990s. In die single most dramatic instance of extinctions in world history in over
65 million years, the world is on the verge of losing as much as 11 % of its species by 2015 (World
Resources Institute 1994, 149).
These species represent a collective loss not just in and of diemselves, but also because of the
genetic diversity and unexplored applications (i.e. medical, food, and construction uses) which they
represent. People all over the world will lose by not being able to learn about diese flora and fauna,
and by not being able to benefit from the unimaginable variety of uses to which they could be put.
One-quarter to one-half of US pharmaceutical contain active ingredients derived from plant products
(World Resources Institute 1994; and Weissgold 1991, 4). Likewise, world agriculture depends heavily


260
Convergence toward commercial liberalization in international trade policy is evident in two
respects: (1) most states have liberalized their trade policies since the late-1970s, as part of their
efforts to restructure national macro-economic policies; and (2) factor-price equalization has occurred
among industrialized countries in keeping with neo-classical trade Uieory. First, as a result of pressure
to capture the gains from trade, membership in GATT has grown dramatically. In keeping with
Corollary One, countries with relatively small national incomes may be the freest traders now in the
international trade system. However, even the most industrialized countries continue to cut trade
barriers in (1) areas historically associated with trade and (2) within regional trade groupings like the
EC and NAFTA.
Second, factor-price convergence has occurred the most substantially among the EC-6 and
between the US and Canada, and less so among EFTA members. This is because trade between diese
countries most closely approximates die assumptions of die Factor Price Equalization (FPE) Theory.
The FPE predicts diat, where there is perfect competition, no transportation costs, free trade,
homothetic demand, constant returns to scale (CRS), similar factor endowments, and at least one sector
unambiguously more capital-intensive than another, then die factor prices between two trading partners
should be completely equalized over time. This type of convergence is likely to increase as
industrialized countries achieve closer economic integration and developing countries begin to meet die
preconditions of factor-price equalization.
Last, convergence toward commercial liberalization in environmental policy looks somewhat
mixed on first inspection because there is bodi a tendency in environmental policy toward (1) more
regulation of a broader variety of environmental problems and (2) abandonment of inflexibly enforced
command-and-control environmental regulations in favor of consensual or neo-corporatist, market-
oriented ones. However, die first of diese trends can be explained in terms not really at odds with
Hypothesis One.
The states regulation of a broader variety of environmental problems merely reflects the
artificially low level of environmental regulation which states enforced until the 1970s, either because


Table 3-3: Members of Systemic Weapons Standardization Groups
101
NATO
United States X"
Belgium X
Denmark X
France X
Germany X
Greece X
Iceland X
Italy X
Luxembourg X
Netherlands X
Norway X
Portugal X
Spain X
Turkey X
United Kingdom X
Canada X
Note: "X" means member.
Source: Eurogroup 1988; OTA 1
CNAD WEU IEPG
X
XXX
X X
X X
XXX
X X
XXX
XXX
XXX
X X
XXX
X X
X X
XXX
X
I; Menon 1992.
Eurogroup
xxxxxxxx XX XX


47
economy; (6) contributing labor-saving, materials-saving, and energy-saving manufacturing techniques;
and (7) accelerating the international transfer of technology and capital (Freeman in OECD 1987, 132-
37).
There is a seemingly constant flow of innovations in information technology. Figure 2-2
shows some of diese innovations in IT and how they have increased with time. The opportunity which
IT has given modem TNCs to design "world" products and to manufacture diem simultaneously in
multiple locations around the globe means diat the stages of Raymond Vernons product life-cycle
(1966) are no longer clearly demarcated. They are fused and sped-up.
Recall diat according to life-cycle theory, products are (1) initially designed and manufactured
in developed countries for the home market, (2) exported to foreign markets, then manufactured in
foreign, developed countries, and, (3) manufactured in developing countries and exported back to the
home and other developed markets. In contrast, die current manufacturing process best implemented
by die Japanese circumvents diis entire cycle by bringing goods to market and allowing diem to mature
in the same location with the cost-saving advantage of automation. This process happens more rapidly
than the former product life-cycle, too. Hence, states must work harder now at presenting attractive
investment opportunities that will keep die competitive advantage within their borders.
Computers are perhaps die best case in point of rapid innovation. Every two years new
models render computers with less memory, slower central processing units (CPUs), and, oftentimes,
inferior data storage systems. In this environment, it is much more important for a firm to be the
product innovator. Competitors may not have time to develop clones before die cloned products are
outdated by a second generation of new products. Companies that fail to innovate lose-out on the
initial windfall profits that product innovation can bring and often fall behind the front-runners widiout
any hope of catching-up.
A Contradiction. Not Compromise
In diis environment of intense technological innovation leading to increased capital mobility, a
contradiction is emerging in nearly every functional area of die state between, on die one hand, the


39
Also, in environmental policy the vast majority of environmental agreements are LCDs. But,
consistent with the exceptional character of environmental policymaking, there are a few, notable
exceptions to this trend, involving highly publicized, potential or actual environmental disasters (e.g.
die Bhopal tragedy) diat stimulate public concern and even moral outrage.
Framework for die Interdependence Approach
In sum, die three processes which make up the Interdependence Approach are diagrammed in
Figure 2-1. They each represent different aspects of the same revolution in world politics. To the
extent that convergence increases, collective goods problems and LCD regulations generally proliferate,
as well. This is because convergence around a multilateral equilibrium (e.g. a standard regulation for
airline companiessee supra) ironically contributes to a free rider problem and makes certain defections
from the equilibrium more likely. Second, convergence toward a universal market standard
collectivizes problems that states could formerly address on their own.
But there are some environmental treaties that violate my expectation about the trend toward
LCDs even when the prevalent convergence appears to be toward more liberalization; for example, the
Montreal Protocol. Whereas die dominant tendency in environmental policy is now for the state to
liberalize die regulation of a greater variety of environmental problems, some effective multilateral
regulations are being negotiated. These agreements are not LCDs; and they help to resolve
international collective goods problems.
Examining in reverse the linkage of collective goods problems and LCDs with convergence
shows that causality is not bi-directional within die Interdependence Approach; in odier words, more
collective goods problems and LCD regulations do not necessarily lead to more convergence. For
example, die fact diat more collective goods problems exist has no necessary bearing on whether or not
states will decide to solve them by agreeing to similar policies (convergence). These problems can
simply persist. On the odier hand, convergence necessarily makes formerly national problems,
international ones diat require collective action to resolve. Thus, where a state could formerly restrict
the proliferation of defense technologies by regulating its armed forces and defense contractors, now


90
Consortium Loose agreement among several partners to pursue a technology area
from shared resources with shared revenues.
Acquisition Out-right acquisition of a firm, either abroad or domestically.
Stock Options Investments by one firm in another to ensure the joint production
and development of weapons.
The type of NDFI defense contractors choose is related very strongly to their country of
origin. American industry favors the simplest type of NDFI, industry-industry teaming. In this case,
one company serves as the prime contractor, whereas other team members function as subcontractors
that participate in the overall program in a predetermined fashion. Consortiums and joint ventures, on
the other hand, are the favorite vehicle of Europeans interested in collaborating on weapons projects.
Consortiums usually have their own organizational form, unlike teams. On the other hand, joint
ventures are separate corporate entities that operate independent of their sponsors. Examples include
Eurocopter, the creation of Germanys Mersserschmidt-Bolkow-Blohm and Frances Aerospatiale, and
Siemens-GEC-Plessey.
The ultimate joint venture is a foreign acquisition or merger. These are, again, more common
in the US than overseas.21 European and Pacific Rim countries are historically very protective of
their defense industry. Hence, most of the mergers and acquisitions that occur overseas are between
firms in the same country. In fact, the trend in Europe has been to create so-called "national
champions" in the arms industry: British Areospace/Westland/GEC in the United Kingdom; Daimler-
Benz/MBB/Siemens in Germany; and Aerospatiale/Dassault/Thomson CSF in France (OTA 1990, 56).
Even more often, pan-European weapons cooperation takes the form of stock swaps. In contrast,
according to one study of Europes (primarily Britain and Frances) penetration of the American
21The full extent of European penetration of the U.S. defense market is unclear, but one study
shows that it is increasing: whereas foreign concerns purchased 37 American defense firms in the first half
of 1988, alone, they acquired 11 American defense firms in all of 1983 (OTA 1990, 54).


138
Once more, although most in the world community have agreed not to be bound formally to
one another through a monetary system anymore, financial innovation and capital mobility continue to
make it so. States have no choice in the matter. In fact, although states thought that by destroying
Bretton Woods and the EMS they could reassert their monetary control, die market lias decided for
diem that liberalization is die preferred strategy.
Conclusion
In this chapter, we have evaluated and verified each of die hypotheses raised in Chapter Two.
First, in keeping with Hypodiesis One, I demonstrated diat die convergence taking place in monetary
policy is toward "instrumental ineffectiveness." This is the consequence of two trends: (1) states are
being forced to liberalize dieir markets to a similar extent and (2) die standard for liberalization is
being liberalized itself. Each state tries to out-liberalize the odier to gain a competitive advantage in
the pursuit of capital, a defining characteristic of die New Interdependence, according to Corollary
Three. Competitiveness among financial centers is die most obvious, since London, New York, and
Tokyo do not want to lose business. The competition is more cut-diroat than in other issue-areas that I
evaluate, because the spread on returns necessary to prompt capital flight is minimal. Convergence is
also more substantial in monetary policy, because capital is die most liquid in this issue-area.
Convergence in monetary policies is also occurring the most rapidly in countries widi relatively small
national incomes, as Corollary One predicted.
Hypothesis Two concerning die transformation of domestic problems into collective goods
problems accurately describes die shift affecting domestic financial stability. Formerly, central banks
could count on currency controls, reserve requirements, and other monetary instruments to maintain
domestic financial stability and to pursue whatever fiscal strategy they chose. However, in the 1990s,
monetary controls are obsolescing. Markets are becoming de-segmented, meaning that capital can look
internationally for the best rates of return and for currencies that accurately reflect underlying fiscal
policiesin other words, fiscal policies diat stress low inflation, minimal deficits, and healthy current
accounts. States that want to resist this trend and not depend upon die international market for


269
e.g. the maauilladora corridor on die US-Mexico border. Alternatively, technological innovation gives
industry the choice to restructure and remain in die intensively-regulated setting. Industries at the end
of the product life cycle and manufacturing highly toxic substances (e.g. the unwrought lead industry)
are the most likely to migrate overseas and, dierefore, to contribute to collective goods problems. On
the odier hand, industries enjoying strong growdi prospects at home and, hence, which can afford to
innovate (e.g. the copper industry), often stay. Both of diese trends are in keeping with Hypothesis
Four.
The mobility of capital leads to collective goods problems in die area of, for example, solid
waste disposal, because it creates opportunities for industry to dispose of waste in an environmentally
unsound manner. Likewise, the new mobility of capital leads to LCDs because of the inherent,
competitive interest of each state in putting as much of the burden of environmental regulation on other
states as possible. Similarly, die spread of "green technologies" worldwide by TNCs urges harmonized
product standards that are LCDs from die perspective of industrialized countries, but significant
regulations from the perspective of developing countries.
f. Hypodiesis Five: A contradiction will be evident in every issue-area between die states
preference to preserve its policy autonomy and its desire to preserve international stability in
the given area.
g. Corollary Two: Capital mobility and technological innovation, not declining hegemony,
accounts for the failure of multilateral regulatory systems (i.e. Bretton Woods) to control the
market.
The increasing mobility of capital and technological innovation have given rise to an essential
contradiction in nearly every functional area of the state between, on the one hand, autonomy and, on
the other hand, international stability. The state cannot achieve both at the same time in the 1990s.
The most well recognized example of this contradiction is "embedded liberalism." Actually, John
Ruggie referred to the Bretton Woods system and GATT as evidence of the "compromise of embedded
liberalism."
In essence, Ruggie argued diat Bretton Woods and the GATT were designed, so that states
could remain autonomous over their domestic economy, even as they promoted international financial
stability and guaranteed liberalization and non-discrimination in the world trade system. Ruggie


I certify that I have read this study and that in my opinion it conforms to
acceptable standards of scholarly presentation and is fully adequate, in scope and quality,
as a dissertation for the degree of Doctor of Philosophy.
Alforjo J. IJamico, Chairman
Associate Professor of Political
Science
I certify that I have read this study and that in my opinion it conforms to
acceptable standards of scholarly presentation and is fully adequate, in scope and quality,
as a dissertation for the degree of Doctor of Philosophy.
Gary D. Goertz, Cochairman
Assistant Professor of Political
Science
I certify that I have read this study and that in my opinion it conforms to
acceptable standards of scholarly presentation and is fully adequate, in scope and quality,
as a dissertation for the degree of Doctor of Philosophy.
Leaq^Brown
Assistant Professor of Political
Science
I certify that I have read this study and that in my opinion it conforms to
acceptable standards of scholarly presentation and is fully adequate, in scope and quality,
as a dissertation for the degree of Doctor of Philosophy.


227
upon the wild flora genes and plasmas scientists have discovered in the tropics.64 These have led to
the manufacture of new pesticides, and contributed to pest and disease-resistant strains of crops that
accounted for die green revolution.
The 1973 Convention on International Trade in Endangered Species of Wild Fauna and Flora
(CITES) established worldwide trade controls based on mandatory permits and certificates covering the
export, import, and re-export of particular plant and animal species or products listed in its appendices.
Theoretically, CITES permitted only trade in plants and animals that were not "over-exploited." But
states have not enforced its voluntary compliance provisions.65 Illegal trade in species continues.
Reported trade comprises annually 40,000 primates, 4.5 million live birds, 50 million manufactured
reptile skin products and 12 million raw skins, 15 million fur pelts from captured wild animals, 10
million rare cacti, as much as 2,000 tons of raw coral, 3.3 million rare orchids, and 350 million
freshwater and marine species of ornamental fish (Weissgold 1991, 1). The pet market especially in
the US is implicated in the decline of more than 40 species of parrots (World Resources Institute 1994,
150-51). The retail value of the global trade in species may exceed $50 billion (Weissgold 1991).
Thus, CITES does not appear to be adequately providing the collective good of preserving
species, despite die fact that it has one of the largest operational budgets of any environmental treaty.
64For example, a wild tomato taken from Peru in 1962 contributes $8 million per year to die
American tomato processing industry (Business Times 5 January 1994, 13). In all, wild varieties of plants
added at least $340 million annually to US agriculture between 1976 and 1980 (Id.). In addition, wild
germplasm contributed as much as $66 billion to the US economy (Id.). This looks very much like the
asymmetric exchange evident in die hazardous waste trade and predicted in Chapter 2. In the words of
one analyst, "germplasm flows out of die South as die common heritage of mankind" and "returns as a
commodity" (Id-)- The US biotechnology industry has been growing as much as 35% per year in the
1990s, in part due to this asymmetric exchange.
65The US enforces CITES die most strictly, following passage of amendments to die Endangered
Species Preservation Act in die early-1980s, diat led to the first criminal prosecutions in 1984. But even
die US lacks sufficient wildlife monitors and US courts have imposed only moderate fines and sentences
for violations of the act (Weissgold 1991, 25-7). The EC, another major importer of species, never
enacted an effective penal or deterrent system for CITES violators, so the compliance of member states
with the treaty has been variable (Weissgold 1991, 24). Other countries like China and Taiwan have been
free-riders on the CITES requirements. They oversee a brisk trade in rhinoceros and tiger parts as part
of traditional Asian medicine rituals.


CHAPTER 5
INTERNATIONAL TRADE
A textbook for the modern prince should indeed contain, in addition to Machiavellis
classic chapters, extensive new sections on the most efficient use of quotas, exchange
controls, capital investment, and other instruments of economic warfare. In this
respect, practice has preceded theory.
Albert Hirschman 1945, p. ix
International trade is the third case-study that I examine in relation to the New
Interdependence. It represents an issue-area somewhere between high and low politics, albeit leaning
hard toward high politics following the end of the Cold War. Historically, trade has been important to
the state for two primary reasons: (1) states can manipulate trade to create dependency and strategic
vulnerability (Hirschman 1945) and (2) the source of the gains from trade also contributes to defense.
But in the 1990s, trade is even more integral to industrialized countries, because it represents a greater
share of national income, and because competitiveness and defensive readiness have come to depend
upon it in unprecedented ways. Not only the extent, but also the type of trade has changed, putting a
premium on rapid, technological innovation and emphasizing forms of imperfect competition.
However, at the same time as international trade is becoming more important to the state, the
shortcomings of the international trade system are increasingly evident. Two dichotomies which exist
in the General Agreement on Tariffs and Trade (GATT) framework are no longer sustainable: (1)
between the drive to lower trade barriers cross-nationally and to autonomously regulate all other
economic policies that impact upon trade and (2) between the principle of unconditional most-favored-
nation (MFN) treatment and reciprocity. Since these dichotomies do not apply to the EC, its internal
trade system is strong. In contrast, because the world trade system has not resolved them, it continues
to make significant strides toward liberalized trade policies that, however, exclude a number of extra-
149


35
example, the maintenance of international financial stability is now a collective goods problem. Such
stability would "simultaneously benefit all states" in a way diat "consumption could not degrade,"
whether or not die states paid part of the cost of enforcing die regulation. This is the case, so long as
some minimum number of states cooperated to enforce die regulation (i.e. a universal reserve
requirement) and make it meaningful.
Hypodiesis Two: Goods diat states formerly provided on their own are being substantially
transformed into collective goods problems.
1 will demonstrate diat, in fact, domestic security is becoming a collective goods problem,
because die weapons procurement needs of NATO and EC members can be met only as a result of
multilateral cooperation in high-technology areas. In addition, international financial stability now
depends on multilateral collaboration in monetary and fiscal policymaking. For that matter, a liberal
trade order depends increasingly on restraint in the competitive industrialization policies to which
industrialized countries have resorted. Last, many problems to which environmental regulations have
been addressed have always been collective goods problems, but there are a number of problems like
solid waste management and biodiversity conservation diat the state once tried to regulate on its own.
Now, these problems have also become collective goods problems.
Lowest Common Denominator Agreements
Related, but independent of die tendency of domestic goods to be transformed into collective
goods problems, is the new tendency of public policy coordination to center on a lowest common
denominator (LCD). The opposite of a LCD regulation is an effective regulation. Effective
multilateral regulations would plug the flow of capital to the most liberal states (in a regulatory sense),
because they would provide for a level playing field; that is, they would ensure diat every state was
equally liberal (or illiberal); dius, capital would have no incentive to migrate.
The trouble is, each state acting on its own has an incentive to defect from the multilateral
equilibrium, so diat capital will flow its way. "The consequence is diat die multilateral arrangement
tends to be cast in terms of least common denominators [LCDs] so far as concessions are concerned,
and most elevated standards so far as demands are concerned" (Rubin in Rubin and Hufbauer 1983,


142
Table 4-1: Financial Liberalization
Quantitative
Regulations/
Ceilings
Powers
Deregulation
Foreign
Exchange
Deregulation
US
Mainly in the late-
70s/early 80s, i.e.
regQ.
From the mid-70s impor
tant. MMMF authorized
in 74. NOWS appeared
in late-70s.
Always de
regulated in
70s and 80s.
Japan
Carried out
gradually thru
the 80s.
Gradual introduction of
new instruments mainly
in 80s.
For all the 80s
(not 70s).
UK
Controls widely
used until 80.
Bank cartel broken in
71, but most deregulation
from mid-80s.
Removed
controls in 79.
Canada
Always deregulated
in 70s and 80s.
Always deregulated in 70s
and 80s.
Always
deregulated in
70s and 80s.
Germany
Always deregulated
in 70s and 80s.
Strongly controlled & little
deregulation in 70s and 80s.
Cartel-like behavior evident.
Always
deregulated in
70s and 80s.
Italy
Credit ceilings used
until 83.
Ready availability of short
T-Bills since 75, but strong
regulation of intermediaries.
Cartel-like behavior evident.
Highly regulated
in 70s and most
of 80s. Some
recent easing.
France
Controls widely
used in 70s and
80s.
Being gradually carried out
mainly from mid-80s.
Cartel-like behavior evident.
Controls widely
used and only in
late-80s phasing
out began.
Source: Blundell-Wignall 1990, 7-8, 29.


75
(Committee on Armed Services 1988, 125). Rogerss successor, SACEUR Gen. John Galvin echoed
this complaint:
In 1988 prices, the cost of building a new F4 Phantom would be US$9 million; the
F14 Tomcat that replaced it is priced at US$32 million. Similarly, an M60 tank could
be fielded for US$1.4 million (again at 1988 prices); but its successorthe Mlcost
US$2.7 million. A type 23 frigate is 3.5 times as expensive as the Leander which it
replaces. (Galvin 1988, 18)
Once again, die same budget bought die US 3,000 aircraft per year in the 1950s, 1,000 per
year in die 1960s, 500 per year in the 1970s, and roughly 300 per year in the 1980s (Committee on
Armed Services 1988, 124). This was not primarily because we got a "bigger bang" for die dollar,
either. Declining quantities of weapons are not being equivalently offset by increases in quality.
Andrew Moravcsik reports that die cost of a given unit of increased performance (die cost/perfomiance
ratio) of new fighter aircraft has been steadily increasing for three decades at a real annual rate of
between 0.5 and 1.2%.18
Structural disarmament has most severely affected small NATO members and non-allied
industrialized countries. This is as we might expect, based upon Corollary One, which states diat
convergence more substantially influences countries widi relatively small national incomes. Middle-
range military powers are forced to seek large export markets for weapons to maintain a semblance of
defense autonomy. Hence, they tend to be less favorable toward restrictions on the proliferation of
defense technology, too.
For example, France, a middle-range military power has always strongly resisted limitations
on die export of defense technology. Exports to developing countries are a natural strategy for France
to pursue because of its many former colonies. French firms like Avions Marcel Dassault, a military
aircraft manufacturer, exported roughly 70% of its production in die 1970s and 1980s (Moravcsik
1990, 68). In 1984 this prompted the French Defense Minister to acknowledge, "If France didnt
18This deflation was more severe in defense than the civilian sector, too. Between 1947 and 1987,
whereas the cost of commercial manufactured items increased only tenfold in die US, the cost of military
manufactured items increased 100-fold (Committee on Armed Services 1988, 90).


221
not even come on to the international political agenda until the 1970s. Since they have, Hypothesis
One has been confirmed, insofar as states have adopted more market-friendly and consensual regulatory
techniques to try and resolve environmental problems.
Collective Good
One problem with states succeeding in regulating the environment is that nearly all
environmental problems have a collective goods aspect: (1) every state can consume the benefits of
pollution abatement or conservation without diminishing the quantity available to another (nonrivalness);
and (2) whether or not a state helps to pay for multilateral pollution abatement or conservation, it can
generally benefit from it. Thus, it is clear that each country would prefer to free-ride on the
environmental regulations of others, despite the fact that the world would be better-off if each country
cooperated in reducing pollution. This is Garret Hardins classic "tragedy of the commons."
Many recently popularized international environmental problems have always been collective
good problems, e.g. ozone depletion and climate change. But to evaluate Hypothesis Two we are
interested in investigating environmental problems Uiat states once addressed on their own, but which
were transformed into collective goods problems. This is a feature of the New Interdependence
Approach. However, since environmental policymaking is so new and the transformation of regulation
has occurred so rapidly, it is not simple to identify serious environmental problems that were once
solved by the state.
Nevertheless, a few critical areas of environmental policymaking, which have roughly followed
the pattern of Hypothesis Two are solid and hazardous waste management, air quality control,
conservation of biodiversity, and water and forestry management. These areas of environmental
regulation, togedier with those environmental problems that have been collective goods problems from
the start, represent basically the whole of environmental governance. Some are more obviously
collective goods problems now than others. For example, air and water quality management are often
considered local or domestic problems. But consider the transnational implications of acid rain, Arab-
Israeli cooperation in the allocation and control of the water rights of the Jordan River (Gleick 1994),


220
corporatist model of politics, "[llawsuits were perceived as an impermissible breakdown of that
countrys highly consensual approach to policy implementation" (Jasanoff 1991, 107).
Internationally, a convergence between the viewpoints of developing and industrialized
countries is largely a function of the formers new willingness to embrace western concepts of market
economics and democracy, die influence of donors (e.g. through mechanisms like die Global
Environment Facility), and even die comparative experience of developing countries widi command-
and-control and market-based environmental regulations. For example, whereas in die late-1970s,
Kenya banned elephant hunting, only to watch its herd decline from 65,000 to 19,000, Zimbabwe
rewarded the conservation of its elephants with environmental charges, and has seen its herd increase
from 30,000 to 43,000. Zimbabwe permits villages to charge safari operators for die right to conduct
tours in their area; hence, villagers have a powerful incentive to protect their herds. Likewise, in
Chile, Santiago-area companies now have substantial incentive to innovate in die area of air pollution
abatement, as the result of a new trading pollution permit system which the government has set up
(World Resources Institute 1994, 245-46). Notably, rather than charter a full-fledged environmental
ministry, Chile settled upon a "coordinating body" that includes citizens, academics, business, labor,
and NGOs (Id.).
Thus, in environmental policy, although one trend is toward the regulation of a broader variety
of environmental problems, another one is toward die liberalization of environmental regulatory tools.
Industrialized countries are converging upon environmental policies about equally market-friendly and
consensual in nature. This is in keeping widi Hypodiesis One, which states that every country and
every issue-area, whedier in high or low politics, is subject to a pressure to converge toward a global
equilibrium which die market prefers: commercial liberalization. The regulation of a broader variety
of environmental problems which seems out of step with this hypothesis is due primarily to die
artificially low level of environmental regulation which states enforced until the 1970s, not unlike die
artificially low level of trade and monetary flows which Europe and Japan accounted for immediately
following World War II. Most serious environmental problems, never mind regulatory answers, did


96
cooperation might be expanding, too. Instead, many states are simply permitting structural
disarmament to draw down dieir militaries.
This brings me to Hypothesis Two concerning the transformation of domestic problems into
collective goods problems. Since World War II, industrialized countries have tried very hard to be
self-sufficient in weapons production and, thus, in some measure to guarantee their own national
security. Real politik is the reason. After all, (1) a foreign supplier may refuse to supply critical
components during a conflict and (2) components may simply be unavailable because of enemy attacks
on sea-lanes or production facilities. Nevertheless, in the late-1970s, when "smart" weapons began to
emerge, economies-of-scale became critical to their affordable acquisition. First, middle-range military
powers and, then, even die US had to give-up die goal of autarky and depend on foreign-sourcing and
collaborative R&D projects to meet their procurement objectives. At the components level diis shift is
proceeding quickly. But at die systems level defectors from weapons collaboration are spoiling die
Alliances ability to counteract structural disarmament. National security is increasingly becoming a
collective goods problem, but one which is receiving little attention now that die Cold War is over.
NATO has preferred to respond to structural disarmament with LCD agreements. This is in
keeping widi Hypothesis Three, which states diat public policy coordination designed to regulate the
market is increasingly likely to center around agreement on a LCD. In this chapter, the
Rationalization, Standardization, and Interoperability effort itself was characterized as a LCD, because
it has had little effect on decreasing the variety of weapons systems in NATOs arsenal. Furthermore,
the few NATO projects diat have been fully developed look like LCDs. NATO projects represent a
compromise among participating countries, each of which has its own performance and cost criteria.
Consequently, NATO projects are designed to perform multiple roles, but no specific role particularly
well. Also, NATO projects have usually not realized dieir potential economies-of-scale and have
generally involved substantial acquisition delays.
Last, public policy coordination leading to agreement on a LCD in defense policy is apparent
in the export controls industrialized countries tried to put on the proliferation of sensitive military


5
(2) The "New Interdependence" refers to an empirical phenomenon-a new, advanced stage of
interdependence that is binding even the most economically influential industrialized countries,
in the areas traditionally regarded as sacrosanct to the state, i.e. high politics. Always
advancing, the three processes of the Interdependence Approach caused the level of
interdependence to increase and traverse the continuum in Figure 1-1 from left to right, until at
last we reached a level of interdependence-tlie New Interdependence-which suggests the
outlines of a radically new inter-state system.
Taking up the second of these themes, first, Figure 1-1 shows where the old interdependence
would fit in relation to the New Interdependence. If a y-axis were added to this continuum
(representing autonomy). Figure 1-3 would be the result. Here, as interdependence increases it is
likely to limit the autonomy of, first, small states in die area of low politics and, last, large developed
states in the area of high politics. Thus, whereas in die 1970s, interdependence forced northern
European states to remain attached to die German Mark in foreign currency markets, France, Britain,
and Italy detached themselves from it. In the 1980s, in contrast, interdependence forced even the most
economically powerful European states to follow die lead of die Bundesbank.
Overall, what is most important about the empirical condition of interdependence today is that
even die most influential industrial countries cannot pursue policies penalizing capital for long, no
matter die issue-area concerned. In this sense, the New Interdependence stands for an unprecedented
situation where die autonomy of even influential industrialized countries is limited by the market. For
example, in the 1970s, whereas die US could simply "close die gold window" and not worry about the
implications for its own economy, today it cannot significantly influence die value of its currency over
the long-term. Regulating investment is also a problem. When Germany decided in October 1987 to
authorize a 10% withholding tax on interest income (effective January 1989), German capital poured
into deutsch mark Eurobonds and other offshore assets. In the end, Germany had to retract die tax,
three months after it went into effect. Indeed, in an environment characterized by the New
Interdependence monetary policy has to be liberalized.
To demonstrate more generally how "new" interdependence is today, I will concentrate for a
moment on my primary variable (convergence) and steal a page from die literature on international
finance. According to diat literature, as long as developed countries are fairly independent of one


274
These new characteristics of trade not only place new demands on states to act strategically,
but also shift the basis of trade to competitive advantage, rather than Ricardian comparative advantage.
The competitive advantage literature suggests that trade reflects arbitrary and sometimes temporary
advantages resulting from economies-of-scale and shifting leads in close technological races. These
factors create an essentially random division of labor among countries, insofar as TNCs are their
principle agent.
Indicative of the importance of strategic trade policies and industrial targeting in the 1990s is
the macro-economic success of those countries employing these policies the most thoroughly (e.g.
Japan), and the only mediocre macro-economic performance of countries doing otherwise (e.g. the
US). Some relatively corporatist countries like Japan and Germany seem structurally better suited to
remain competitive in the new economy, because their state-societal relationships make them receptive
to rapid innovation.
In monetary policy, the new competitiveness of the state is obvious from the speed with which
industrialized countries are dismantling controls on capital flows. Nearly every financial liberalization
move by one industrialized country has been duplicated by the others for fear of falling behind.
London, New York, and Toyko are all vying for currency inflows; thus, they are loosening the very
apparatus of monetary controls that allows them to autonomously govern their markets.
For example, the "Big Bang" on the London Stock Exchange in 1986, itself a consequence of
deregulation on the New York Stock Exchange in 1975, spawned "Mini-Bangs" throughout the EC and
in Scandinavia in the late-1980s. European countries risked losing considerable domestic and
international financial business unless they competitively pursued more liberal regulations on capital.
Large German banks, for example, threatened to migrate to London unless Germany relaxed its
restrictions on capital. Overall, competition like this is making even the financial stragglers in the
industrialized world surprisingly liberal.
In weapons procurement policy, too, competitiveness is evident in the inability of industrialized
countries to stem the proliferation of dangerous technology related to biological, chemical, and nuclear


176
Of course, the US became involved in industrial targeting much later and less substantially
than the EC.46 Few of the ECs programs have been a commercial success, but Airbus, for example,
is now credited with entering the world passenger aircraft market by pushing, first, Lockheed and,
now, McDonnel Douglas out (Emmerij, 1992; Pomfret 1991). The first model (A300/310) was a white
elephant like die Concord; however, the newer A320 is approaching its break-even sales level (Id.)-
As for the future of EC-industry cooperation, ESPRIT and EURKEKA are die models and Europes
answer to Sematech. Bodi are designed to invest large sums in "pre-commercial research in
information technologies and microelectronics to aid specifically European firms (although IBM Europe
participates in both).
The last proof that the failure of die GATT to move beyond a LCD trade system has resulted
in widespread resort to industrial targeting is diat individual EC members are taking independent
measures to join the industrial targeting bandwagon, too. For example, France has increased the
flexibility of Coface, the French export credit agency; and even the UKs Department of Trade and
Industry has looked more interventionist recently, after inaugurating a ten-year strategic research effort
in cooperation with its aerospace industry.
Health, labor, die environment, and human rights. Turning to the final area in which diere is
pressure affecting die GATT for policy coordination to center around a LCD (like Hypodiesis Three
predicted), health, labor, die environment, and human rights is a controversial topic in international
trade circles, now. Health, labor, and environmental standards were the subject of a last-minute
attempt on the part of the US and France to attach a side-agreement to the Uruguay Agreement,
recognizing or regulating (not clear) these policy concerns. For the US diis move came as
environmental groups stepped up dieir assault on die Uruguay Agreement, because it threatens basic US
environmental legislation. The GATT tribunal has already declared the US dolphin protection law, the
46The exception to this observation is diat some consider die US R&D budget for defense
industries a form of industrial targeting. With some exceptions, e.g. the civilian aircraft industry, this
R&D had little commercial application, though.


284
APPENDIX A: POPULATION OF NON-REGIONAL, MULTILATERAL ENVIRONMENTAL TREATIES
Flora & Fauna Protection
Int'l. Conv. for the Protection of Birds (1950)
Antarctic Treaty (1959)
Conv. on Wetlands of Int'l. Importance Esp. as Waterfowl Habitat (1971)
Conv. Concerning the Protection of the World Cultural & Natural Heritage (1972)
Conv. on Int'l. Trade in Endangered Species of Wild Fauna & Flora (1973)
Agreement on Conservation of Polar Bears (1973)
Conv. on the Conservation of Migratory Species of Wild Animals (1979)
Int'l. Tropical Timber Agreement (1983)
Intl. Undertaking on Plant Genetic Resources (1983)
Conv. for the Regulation of Whaling (1 946)
Atmosphere & Outer Space
Outer Space Treaty (1967)
Conv. on Int'l. Civil Aviation (1944)
Provisions for Cooperation Between States on Weather Modification (1980)
Conv. for the Protection of the Ozone Layer (1 985)/Montreal Protocol (1987)
Marine Environment & Marine Pollution
Conv. Relating to Intervention on the High Seas in Case of Oil Pollution Casualties (69/73)
Conv. on the Prevention of Marine Pollution by Dumping from Ships/Aircraft (1972)
Conv. for the Prevention of Pollution from Ships (1973/78)
Guidelines on Offshore Mining and Drilling w/n Limits of National Jurisdiction (1982) (p)
United Nations Conv. on the Law of Sea (1 982)
Guidelines for Protection of Marine Env. against Pollution from Land Sources (1985) (p)
Int'l. Conv. on Salvage (1989)
Int'l. on Oil Pollution Preparedness, Response, and Cooperation (1990)
Conv. for the Int'l. Council for the Exploration of the Sea (1964)
Conv. on Civil Liability for Oil Pollution Damage (1969)
Conv. on the Establishment of an Intl. Fund for Comp, of Oil Pollution Damage (1971)
Conv. on Civil Liability for Oil Pollution Damage Resulting from Explor. of Sea (1977) (p)
Conv. on the Conservation of Atlantic Tunas
Hazardous Substances
Recommendations on the Transport of Dangerous Goods (1947)
Recomm. on Mutual Acceptance of Data in Assessment of Chemicals (81-89) (p)
Conv. on Prohibition of Devel., Mfg., Stockpiling Biological & Toxic Weapons (1972) (p)
Code of Conduct on the Distrib. & Use of Pesticides (1985)
Guidelines for the Exchange of Info, on Chemicals in Int'l. Trade (1987)
Conv. on the Control of Transboundary Movements of Hazardous Wastes (Basel) (1989)
Conv. on Civil Liability for Damage Caused by Carriage of Dangerous Goods (1989) (p)
Nuclear Safety
Scientific Committee on the Effects of Atomic Radiation (1955)
Treaty Banning Nuclear Weapons Tests in the Atmosphere (1963)
Conv. on Early Notification of a Nuclear Accident & Assist, in Emergency (1986) (p)
Conv. on 3d Party Liability in the Field of Nuclear Energy (1960)
Conv. on Civil Liability for Nuclear Damage (1963)
Conv. Relating to Civil Liability in the Field of Maritime Carriage of Nuclear Mat. (1971)
Conv. on the Liability of Operators of Nuclear Ships (1962)
Conv. on Biological Diversity (1993)
Convention on Climate Change (1994)
Effect- Developing
iveness Countries? Budget Year
w
Yes
s
Yes
M-
Yes
M-
Yes
M-
Yes
M-
No
W
Yes
W
Yes
M-
Yes
S
Yes
W
Yes
W
Yes
W
No Members
S
Yes
M-
Yes
M
Yes
S-
Yes
w
No Members
X
Yes
w
No Members
w
Yes
X
No
w
No
S-
Yes
M
Yes
W
No
W
Yes
W
No Members
w
No
M-
Yes
W
No Members
W
Yes
S-
Yes
n.a.
Yes
W
Yes
s
Yes
n.a.
Yes
M-
No
W
Yes
W
Yes
W
Yes
W
Yes
S-
Yes
2,300,000.00
2,460,000.00
1992
1992
300,000.00
3,100,000.00
1990
1991
1,300,000.00
1990
2,400,000.00
1993
700,000.00
3,030,000.00
1991
1990
4,500,000.00
1990
860,000.00
1990
500,000.00
400,000.00
690,000.00
1990
1990
1990
1,000,000.00
1992
Over 1 Million
Over 1 Million
n.a.
n.a.
Source: Peter Sand (1992) provided the base indicators from which I have interpreted the effectiveness of the treaties and taken aggregate data on, for example,
the annual funding of the environmental treaties. See supra, note 14, and surrounding text for more details.


219
environmentalists and industrialists is by no means over, "there are signs of convergence" (San Diego
Union-Tribune 21 November 1993, Nexis).
In 1988, a bipartisan group released the Project 88 report, advocating a shift in EPA rule-
making "toward imiovative measures designed to enlist the forces of the marketplace and the ingenuity
of entrepreneurs to help deter pollution" (Stavins 1989, 5). This impetus, together with the early
advocacy of the Environmental Defense Fund (EDF) of market-based policies, led to the 1990
Amendment of the acid rain provisions in the Clean Air Act, which set up a tradable-permit system.
The first permits were auctioned primarily by Northeast electrical utilities to Midwest power companies
on the Chicago trading floor for between $120-$450 per ton (Munson, Sacramento Bee. 21 April 1993,
B:7; Dumanoski, The Boston Globe. 17 March 1993, 25).
A permit system was also used in EPAs emissions trading program for local air quality and in
the elimination of lead in automobile fuel (Stavins and Whitehead 1992, 29; Hahn 1989). Robert Hahn
estimates that trading air emissions permits may have saved as much as $12 billion over command-and-
control models (1989, 100-01); and trading lead permits has saved refiners probably over $228 million
(Id. at 102) without adversely affecting air quality. Moreover, the Clinton Administration entered
office, promising more of the same market-incentives that the Bush Administration advocated, plus a
greater emphasis on pollution prevention and source reduction (Bukro, Chicago Tribune. 13 February
1993, N: 1; Lambrecht, St. Louis Post-Dispatch. 14 January 1993, 1:C). For example, Clintons plan
to reduce heat-trapping gases minimizes command-and-control regulations and emphasizes voluntary
efforts, subsidized by the government to achieve energy efficiency.
This voluntary approach to environmental regulation backed up by a stick, is much more in
line with the model diat the rest of die world is now pursuing. For example, environmental regulation
in Britain tends to rely upon secret, informal, and voluntary compliance (Vogel 1986; Jasanoff 1991).
British regulators openly tolerate plant-by-plant differences in pollution emissions. Germany, like the
US, relies upon formal regulations, but rarely goes to trial to enforce them. In keeping with the neo-


57
The New Interdependence
Figure 2-3: General Framework for the Interdependence Approach
Note: The thickness of lines indicates the importance of the causal relationship. Dashed
lines indicate a causal relationship that is not constant.


10
So, is the Interdependence Approach just transactionalism writ largel It is not, because 1(1)
define the Interdependence Approach in terms of three processesthe most important leading to policy
convergencewhich Deutsch never emphasized; and (2) limit my focus on transactions ostensibly to
capital (liquid and fixed) and technological innovation in information technologies. In contrast, Deutsch
never explicitly referred to technological innovation. Once more, he liked to consider all kinds of
transactions, which I do not take into account; for example, mail service, exchanges through media,
phone calls, exchange students, and tourism. Clearly, the Interdependence Approach contributes
theoretically and empirically to the field of international political economy.
Methodology
One of the shortcomings of the old interdependence literature was its methodology. Over-
determination in regime theory, for example, is one of the reasons that the approach is in crisis. When
we agree with Keohane and Nye (1977) that since 1920 an oceans regime (x) has ensured the free
navigation of the seas (y), we are begging the question of what the absence of this regime (-x) would
have implied (-y) and whether the latter implication is even plausible. It would not be plausible to
insist, for example, that the absence of an oceans regime would have meant a complete inability to
navigate the seas. It might be reasonable, on the other hand, to argue that an absence of a regime
would have made navigation harder. But how do we know at what point the number of restrictions is
so great as to verify the absence of a regime?
No answer is necessarily better than another, a problem which has justifiably led many to
doubt the utility of interdependence theory. The methodology with which I have chosen to illuminate
the New Interdependence does not suffer from diese same methodological problems. To be sure, I use
a case-study methodology, based upon historical analysis like Keohane and Nye do,4 and I employ
statistical techniques like correlations and cross-tabulations only in limited ways to support my case-
4Tliis is because, first, die case-studies in which I am interested are simply too limited to permit
large-/? analysis; and, second, trend data related even to diese case-studies is often tenuous or unavailable.


242
1993, 9). For comparisons sake, whereas US copper smelters must recover over 90% of the sulfer
that they emit, Chilean smelters may recover well under 50% (Id. at 13). Radier than migrate South,
though, in 1975-87, seven US copper smelters, representing 36% of US production capacity, simply
shut down. According to the industry, this was because of the high cost of complying with emissions
regulations (Id.). We would expect diat, overall, imports of unwrought copper would increase, as a
result, and that remaining US unwrought copper smelters would invest overseas, e.g. in Chile which
mines die other 20% of die worlds unwrought copper.
But aggregate trade statistics show no clear tendency for imports of unwrought copper to rise,
since US copper smelters which survived the 1982-86 period underwent a dramatic restructuring. Not
surprisingly, between 1982 and 1986, imports rose considerably. Chiles exports to the US more than
doubled in quantity (USITC November 1985, 6), so that Chiles share of the US market expanded from
about 7% in 1980, to 16% in 1983. However, between 1986 and 1991, the restructured US copper
industry took back market share from Chile, leaving it with 12% in 1990.
The US copper industry never really relocated overseas during the early-1980s, either. There
are at least two reasons: (1) Chile ruled-out privatization of die state-owned copper company, and even
joint ventures with it until the 1990s; and (2) copper consumption in the US was expected to continue
to increase. Importantly, some would add that after experience widi expropriation in the natural
resource mining sector during the 1960s and 1970s, die copper industry tries to diversify its holdings.
Analysts of even aggregate copper trade statistics, never mind "processed minerals," would miss these
important dynamics. Likewise, aggregate estimates of die costs of environmental regulation of die
unwrought copper industry would count die outlays that industry made to meet emissions requirements,
but miss die far more costly restructuring which environmental regulation compelled the industry to
undergo.
Unwrought lead. Likewise, the outlays which the unwrought lead industry has made as a
result of environmental regulation are large, but die indirect costs to the industry of, for example,
baiming leaded gasoline and paints, and compelling them to invest in recycling programs has been even


223
300 and 500 million tons was hazardous (Vivier 1988, cited in Hilz 1992, 20-21). Whereas municipal
solid waste generation in the US has grown steadily from 87.8 million tons in 1960, to almost 180
million tons in 1988, recovery and recycling has increased only nominally from 7% in die 1960s and
1970s, to 13% in 1988 (EPA 1990, 54). Consequently, the US, like odier industrialized countries,
faces serious problems effectively managing its own garbage. One EPA report concludes:
As the generation of municipal solid waste continues to increase, the capacity to
handle it is decreasing. Many landfills and combustors have closed, and new disposal
facilities are often difficult to site. As a result, many communities face hard choices
when weighing trash management options. Some communities end up paying
premium prices to transport their garbage long distances to available facilities. Others
try to site facilities nearby and encounter intense public conflict. (EPA 1990, ES-1)
Old landfill sites are themselves sources of serious environmental concent, as the Love Canal
story in the US and Lekkerkerk story in the Nedierlands underscore.60 The estimated cost of cleaning
up hazardous, closed landfills in die US is over $100 billion; in Western Germany, $30 billion; and in
the Netherlands, $6 billion (OECD, The State of die Environment. 1991, 152). Between diese
countries, France, Denmark, and Belgium, die number of "problem sites" requiring remedial attention
is over 32,000 and the number requiring "immediate" attention is at least 8,000 (]d). One alternative to
landfillsincineration-is also proving problematic, because of its hazardous emissions. Japan, Sweden,
and Switzerland incinerate over 50% of their wastes, and other OECD countries about 20% (Id. at
150).
With industrialized countries unable to dispose of their wastes themselves, it is not surprising
that, beginning in the late-1970s, transfrontier movements of waste heated-up. Most agree diat an
estimated 10 to 20% of total hazardous waste production is now traded internationally, or about 30
million tons of toxic waste (Hilz 1992, 21). The OECD contends diat about 80% of this tonnage is
traded between advanced industrialized countries (Greenhouse 1989; Vivier 1988, cited in Hilz 1992,
60Love Canal refers to a small US locality near Niagara Falls, where homes were built on top of
an abandoned chemical dump containing over 20,000 tons of waste. For its part, Lekkerkerk is a small
village in the Nedierlands built on a site polluted by aromatic hydrocarbons (OECD, The State of the
Environment. 1991, 152).


83
Britain hoped thereby to justify Germanys rearming and admittance to the Alliance. So, in 1955
Europeans established die Western European Union (WEU). In addition, two other institutions
emerged independently in the 1970s, also to support pan-European weapons procurement: the
Independent European Programme Group (IEPG) and Eurogroup. Table 3-3 provides a summary look
at which military powers belong to which organizations involved in weapons procurement collaboration.
Like CNAD, all three pan-European procurement organizations were moribund until late in their life.
In fact, in Europe diey hit full stride after NATOs CNAD did-not until die late-1980s.
The Western European Union awakened from its slumber first, but like the other pan-European
procurement organizations has had limited effect, overall. In 1984 Senator Samuel Nunns effort to
ann-twist Europe into increasing its defense outlays for NATO under direat of an American troop
withdrawal had the unintended effect of giving the Western European Union a new lease on life. The
reason for their new endiusiasm, Europeans (except France) insisted publicly, was "to make the WEU
into die European pillar of die Atlantic Alliance" (Financial Times 1984, 1:14). However, in Europe
die most widely cited reason was Americas continued domination of the European weapons market
(OTA 1990, 56) and structural disarmament. Regarding die former point, not declining American
hegemony, but its continued strengdi, prompted a backlash in Europe. Although die ratio of European
weapons imports to US imports dropped from 8:1 in the late-1970s, it remained at approximately 2:1 in
1990 (Moravcsik 1990, 78).
Structural disarmament was also a growing problem in Western Europe in the 1970s, that
created severe pressure for liberalization in national weapons procurement programs. This is in
keeping with Hypodiesis One, which states that every country and every issue-area, whedier in high or
low politics, is subject to a pressure to converge toward a global equilibrium which die market prefers:
commercial liberalization. States resisted the markets demand for economies-of-scale in the form of
free access to multiple amis markets at the cost of national insecurity. The same stretch-outs and
diminishing "bang for die buck" evident in die US struck European countries, but widi more force.
European countries responded initially widi two strategies: (1) mergers and subsidization and (2)


THE NEW INTERDEPENDENCE:
MARKET COMPETITION RECONFIGURING THE INTER-STATE SYSTEM
By
NATHAN A. ADAMS, IV
A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
1994


106
of rolling back financial liberalization where it has occurred (Blundell-Wignall, Browne, and Manasse
1990, 15), indicating that central banks may never be able to return to the precise countercyclical
policies toward which they once aspired. In Paul Volckers words, central banks will soon "have to
accommodate their operations to the new market environment, rather than the reverse" (Volcker 1990,
11). This is just another way of stating the theme that I have sounded before: states are becoming
market-takers, rather dian regulators.
States have loosened the whole apparatus of administrative controls that make countercyclical
policies possible, but in response to financial innovations that have made them obsolete. The US
abandoned Regulation Q (an interest rate ceiling), for example, after money market mutual funds
(MMFs) and Euro-capital provided ways to circumvent die intent of Regulation Q and make it too
expensive (in terms of lost revenue and competitiveness) to sustain. In general, capital deserts states or
makes their industries non-competitive where die states have maintained unusual limitations on the
market. The latter explains why, in many instances, non-regulated (Euro- ) financial institutions are
rapidly taking away market-share from regulated ones.
Admittedly, it is still the case that die G-7 countries have essentially diree levels of financial
liberalization: (1) very liberal (the US, Canada, and U.K.), (2) liberal (France), and (3) least liberal
(Japan, Germany, and Italy). But, this absolute difference among G-7 countries is not as important for
my purposes as their consensual movement toward more liberalization. Table 4-1 clearly establishes
this trend. Even die most centralized states, ie. France and Japan, deregulated foreign exchange,
loosened quantitative restrictions and ceilings on money, and introduced deregulated financial
instruments in die 1980s. Germany and France are still stragglers in the area of monetary deregulation,
but, in general, die new convergence toward "instrumental ineffectiveness" in monetary policy is being
recognized at die statutory level.
In keeping with my sixdi hypothesis diat a fundamental characteristic of die New
Interdependence is competitive pursuit of commercial advantage, nearly every financial liberalization
move by one industrialized country has been duplicated by the odiers for fear of falling behind.


236
industrial competitiveness which overly strict environmental regulations pose compels states to abandon
command-and-control regulations in favor of market-friendly and consensual ones. Likewise, because
it is creating many opportunities for industry to exploit divergent environmental regulatory systems, the
mobility of capital leads to pollution havens, which, in turn, cause collective goods problems. The new
mobility of capital also leads to LCD environmental agreements, because in the search for competitive
advantage every state has an incentive to put most of the regulatory burden on other states. In die
words of the World Resources Institute:
International economic competition compels nations to manage pollution in the most
cost-effective way, while strained budgets force government managers to re-examine
pollution control costs. (1994, 235)
Reassessment of environmental policies is happening the most dramatically in those countries
with the strictest environmental regulations. Tlius, the new mobility of capital is also encouraging the
harmonization of international environmental standards. However, in this case, most of the rest of the
world has had virtually no environmental regulation, so die harmonization is upward from the
perspective of developing countries and downward from the perspective of industrialized countries.
Surprisingly, it is no small task to use die empirical literature to explain why states are
liberalizing the greater variety of environmental regulations which diey are pursuing, now. The
empirical literature relating differences in environmental standards to competitiveness in terms of
productivity, investment, and trade has generally concluded that industry does not migrate toward
pollution havens to any significant extent.73 There are diree basic explanations for this, which when
73To summarize die productivity studies, diey suggest that environmental regulations, defined only
in terms of compliance outlays, accounted for about a .20-.28% decline in annual productivity during the
past two decades (Stewart 1993, 2072-74, citing multiple studies). In contrast, the Congressional Budget
Office found that environmental compliance outlays decreased Japans annual productivity growdi .06%
and Canadas .14% (CBO 1985, 69). Likewise, investment studies find that, overall, differences in
environmental standards are not important in decisions regarding die siting of new facilities (Leonard 1988,
Stewart 1993, 2077, citing multiple studies). Industries invest in particular locations for a variety of
reasons, including labor costs and quality, the attractiveness of a market, and the political stability of the
region. Environmental regulation is only one concern. Last, trade studies suggest that, in general, US
export/import performance is not related to die intensity of environmental regulations (Id-); that is, diere
is no agreement on whether or not die US exports relatively less pollution intensive products and imports
relatively more pollution intensive products.


230
established only through agreement among all significant parties involved, and where such a regulation
is considered only on its own merits, collective action will be limited to those measures acceptable to
the least enthusiastic party" (Underdal quoted in Sand 1991, 220).
Concern with "social dumping" is also based on this fear that the market is compelling
industrialized countries to lower their environmental and labor standards. One Canadian minister
advocating offsetting tariffs to maintain industrial competitiveness said that "dumping refers to goods
and services imported into Canada whose prices do not reflect the environmental costs of production, or
labor costs that are associated widi good practices and strong human rights laws" (Crane, The Toronto
Star. 31 July 1993, Nexis).
Although this section reveals that, overall, environmental agreements are LCD agreements, it
also admits of some notable exceptions. Thus, proof of HypoUiesis Three is more nuanced in this case-
study than in the former ones, in keeping widi die unique propensity of environmental regulations to
govern an increasing variety of environmental problems at die same time as they become more market-
friendly. Appendices 6-1 and 6-2 present a survey of the population of environmental treaties in force
as of 1992, including the Convention on Biological Diversity and Convention on Climate Change, but
excluding agreements which die International Labor Organization (ILO) oversees.67 The appendices
present the first comprehensive, comparative analysis of die effectiveness of international environmental
treaties, based on a consistent set of indicators.68
Table 6-3, a summary of these appendices, estimates diat fully 68% of environmental treaties
are weak or less than mediocre in effectiveness, as most would expect. Moreover, the weakest
67ILO agreements are quite different than most environmental regulations because they are usually
codifications of national worker safety measures in industrialized countries; dius, dieir independent
effectiveness is difficult to assess.
68These indicators include die objectives of die treaties, countries participating in diem, evidence
of implementation procedures, die terms of codification, and data on the operation, review, and adjustment
of the agreements. Peter Sand compiled (1992) this information, and I have interpreted it in keeping with
information about the treaties from other sources. Inevitably, diis process is subjective, but at least it is
controlled within the parameters of die indicators listed above.


302
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Resolution 26: 621-644.
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11
study analysis; however, in contrast to Keohane and Nyes work, I preserve variance on the x and y-
axes of my analysis by distributing the case-studies that I consider along die curve of Figure 1-4. All
of the case-studies represent issue-areas, or primary functional areas in which die state is involved.
Whether I put convergence or eidier of my two odier dependent processes on die y-axis makes no
difference, since all diree processes basically move together. The processes are just diree aspects of
die same Interdependence Approach. Monetary policy and environmental policy are at opposite ends of
die curve because capital is the most liquid and innovative in die former instance and die least, in the
latter. I will explore diese differences and die odier case-studies in more detail below. For now, die
point that I want to emphasize is diat die Interdependence Approach succeeds where the old
interdependence literature failed by maintaining case-study variability.
The approach I use to analyze my case-studies comes from comparative politics: comparative
historical analysis (Skocpol 1979). Alternatively, Lijphart (1971; 1975) calls die same basic approach
die "controlled comparison" mediod; Harry Eckstein (1975), the "disciplined-configurative" mode of
analysis; and Alexander George (1974, 1979), the "mediod of structured, focused comparison." The
advantage of diis mediod is that it allows die researcher to structure his inquiry selectively around die
variables of interest to him or her and then to examine them cross-sectionally, cross-temporally, or
both. Theda Skocpol (1979, 36) explains diat there are two primary ways of proceeding with this
method: (1) try to establish diat a number of cases have variable y in common, as well as a set of x
variables or (2) contrast cases in which variable y and a set of x variables are present widi cases in
which both are absent. In practice, she continues, it is best to combine these two comparative logics.
This is precisely what Rudi and David Collier (1991) do. They combine Adam Przeworski
and Henry Teunes (1970) "most similar" and "most different" systems approach into one research
design. I will do die same. The Colliers consider a set of eight Latin American countries diat are
roughly matched on a number of variables and then proceed to analyze pairs of countries diat are as
different as possible in specific issue-areas. The countries diat I will consider are primarily
industrialized countries. Thus, in respect to dieir commercial and political development, they are fairly


79
sensitive weapons less crucial to obtaining economies-of-scale. Most other Allies have favored looser
export controls, since they need to trade to protect their defense industry and because their ideological
opposition to communism is less pronounced. This disagreement in CoCom only became critical in the
late-1970s. Until then, CoCom fairly effectively regulated the diffusion of technology with obvious
military use.
But the shift toward knowledge-intensive weapons in the late-1970s, made economies-of-scale
more critical and "dual use" technology more of a problem. Dual use items confused what should be
regulated. In addition, the number of states vying for sensitive technology increased. Until the 1970s,
CoCom concentrated primarily on denying military technology to the Soviet bloc, but afterwards it had
to worry about developing countries, as well. Trends which concerned the Alliance most were nuclear
weapons proliferation, as a result of advances in "civilian" reactor technology, and the diffusion of
ballistic missile-related technology to countries like China, North Korea, India, Brazil, Israel, Iraq, and
Libya, as a result of advances in space and defense programs (McCall 1992).
Changes like these, together with the Warsaw Pacts numerical advantage in military
equipment in the late-1970s, spurred the US to pass even tougher domestic laws against sensitive
exports (the 1979 Export Administration Act) and to press for stricter guidelines in CoCom. But
CoCom members preferred a LCD approach. CoCom adopted three categories of restricted weapons:
the Direct Military Use List, International Atomic Energy List, and Dual Use List). It limited
technology on the Dual Use List the least. Furthermore, since agreements reached in CoCom depend
upon implementation by members states, widely varying enforcement of CoComs restricted lists has
been the rule (Parks. 1990). Not even the invasion of Afghanistan and martial law in Poland created a
consensus in favor of a more restrictive multilateral trade policy and effective law enforcement. As a
result, American manufacturers lost business in the East to Allied manufacturers. The National
Academy of Sciences (NAS) estimated those losses at $9.3 billion in 1985 (Parks 1990, 99). Individual
industries like the computer and telecommunications industry and the oil and natural gas industry claim
much higher losses.


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245
technology worldwide, as TNCs disseminate their manufacturing techniques and push for die
harmonization of global product performance standards. From die perspective of industrialized
countries these standards are likely to be LCDs, since developing and industrialized countries prefer to
be solicitous of die competitiveness of dieir industries. On the other hand, from die perspective of
developing countries, any increased environmental regulation is significant. On the whole, the new
mobility of capital encourages convergence toward liberalized environmental policies, but this
liberalization is from a higher level of environmental regulation that states began to implement in the
1970s, to make up for die dangerously naive non-policies of die past.
Contradiction
Ultimately, states must coordinate dieir new environmental and development strategies with
one another if they intend to maintain international environmental stability. Hypothesis Five states that
a contradiction will be evident in every issue area between the states preference for autonomy and its
desire to ensure international stability. This is evident in environmental policy between die states
interest in regulating its own environment and industry as it sees fit and its interest in maintaining
environmental stability. In many instances, it cannot pursue both strategies at die same time, just as the
state cannot pursue monetary autonomy and international financial stability concurrently. In die words
of the World Commission on Environment and Development:
Policies formerly considered to be exclusively matters of national concern now have
an impact on the ecological bases of other nations development and survival. . .
This fast-changing context for national action has introduced new imperatives and
opportunities for international cooperation, (quoted in Hampson 1989-90, 44-45)
Protecting die ozone layer and counteracting climate change, for example, depend upon most
states, and not just industrialized states, cooperating in die effort. But diat means diat many
industrializing countries must give up die same development techniques which industrialized countries
used to reach their current state of prosperity. The tradeoff is by no means easy. Nevertheless, the
EPA expects diat projected warming without the cooperation of developing countries will be 40%
higher than with it by 2050 (quoted in World Resources Institute January 1991, at 79). Moreover,
developing countries are likely to be "die greatest victims of rapid climate change," in contrast to ozone


262
surprisingly, transboundary movements of solid waste redoubled in the late-1970s, leading to the
environmentally unsound management of hazardous waste overseas. Moral outrage at this untoward
dumping led to The Basel Convention on the Control of Transboundary Movements of Hazardous
Waste in 1989, which in 1992 was amended to ban all shipments of hazardous waste overseas. Thus,
the Basel Convention is a rare example of the international community agreeing to provide for a
collective good that not too long ago was merely a problem for domestic politics.
In contrast, the international community has not been as successful at providing die collective
good of biodiversity conservation. Biodiversity has been vanishing at an alarming rate and, with it,
possible pharmaceutical, agricultural and odier products. The 1973 Convention on International Trade
in Endangered Species of Wild Fauna and Flora (CITES) was designed to slow this loss, but illegal
trade in endangered species continues at an alarming rate. Consequently, countries concluded die
Convention on Biological Diversity in 1992, but its provisions appear weaker than CITES. Thus,
neither CITES nor die Convention on Biological Diversity is likely to solve die collective goods
problem of preserving biological diversity, even though at one time states preserved biodiversity on
their own by opening parks and reserves, and simply because population was small.
In weapons procurement policy there are not as many collective goods problems as in
environmental policy, but largely because the category itself is narrow. Support for Hypothesis Two in
weapons procurement policy is apparent from the growing inability of states to provide for national
security on their own. The weapons procurement needs of NATO and EC members can be met only as
a result of multilateral collaboration in high technology fields. In fact, (1) the very inability of the state
to avoid interdependence at the components level of weapons systems and (2) the choice which the state
faces between structural disarmament and coordinated weapons procurement means that security is
becoming a collective goods problem.
The technical knowledge and economies-of-scale necessary to produce and procure weapons
efficiently now depends on multilateral cooperation. In contrast, until die 1970s, the US, in particular,
could have essentially severed all contact with the rest of the world and still met all of its weapons


70
tlie electronics industry and advanced aviation, but it is also occurring in less sophisticated fields like
the production of ejection seats. Standardization of parts is convergence not designed purposefully into
weapons, but as a result of market incentives. Hence, even when NATO fails to respond to die
inefficiency obviously leading to die structural disarmament of die Alliance, convergence in weapons
procurement policies continues at the components level.
Furthermore, diis convergence is essentially irreversible for diree primary reasons: (1)
essential components are simply not available domestically or, at least, not at a competitive price, (2)
the increasing cost of weapons R&D and production makes international consortia of defense producers
necessary, and (3) die increasing availability of dual-use technologies makes the purchase of specialty
defense components inefficient. In addition, die sheer number of parts involved in a weapons system
and the multinationalization of defense contractors diat has already occurred makes state regulation and
tracking of interdependence at diis level virtually impossible.
Collective Goods Problem
In fact, it is (1) die very inability of die state to avoid interdependence at the components level
of weapons systems and (2) the choice die state faces between structural disarmament and coordinated
weapons procurement which allows me to verify Hypodiesis Two. It states that goods which countries
formerly provided on dieir own are being substantially transformed into collective goods problems. In
diis case, it is national security which is being transformed into a collective goods problem for even the
most powerful industrialized countries. Since World War II, industrialized countries have tried to be
self-sufficient in weapons production and, thus, in some measure to guarantee their own national
security.
Until the 1970s, the US in particular could have severed all contact with die rest of the world
and still met its weapons procurement needs. European countries, especially non-aligned ones, would
not have been quite so successful at achieving autarky, but they could have come close widi second-
class weapons. Beginning in die 1970s, however, dependence on offshore components and die need to
counter structural disarmament undermined even the superpowers most concerted efforts to remain


LD
1780
1994
UNIVERSITY OF FLORIDA
3 1262 08554 7718


4
products. Obviously, this increases interdependence and the tendency toward convergence in product
types.
Thus, capital mobility and technological innovation can co-vary, but not necessarily. Clearly,
some innovations have no effect on the mobility of capital. Likewise, the availability of capital does
not always advance technological innovation. Scarcity of ideas plays an independent role in the
innovation process. Yet, as R&D costs rise, scarcity of capital is becoming a more critical restraint on
innovation.
Why is this so important? Capital became mobile enough and technological innovation rapid
enough in the 1980s, that die three dependent processes of die Interdependence Approach began
seriously limiting die autonomy of even die largest industrialized states. To be sure, prior to the
1980s, these processes prompted a number of crises in die international political economy (like die
collapse of Bretton Woods), but diey seriously bound only die autonomy of industrialized and
developing countries widi relatively small national incomes in issue-areas where capital was highly
liquid (usually, areas related to low politics). The revolutionary change which began in die 1980s was
that the dependent processes began to bind even economically influential industrialized countries in die
area of high politics. This new, advanced stage of convergence, far to the right on Figure 1-1, I call
die New Interdependence. Since it is completely different from past periods of interdependence, I
believe that it deserves special exploration.
Understanding Old and New Interdependence
There are two primary dieoretical contributions diis research makes to die study of
interdependence diat are important to distinguish between, as well as to distinguish from classical
interdependence theory:
(1) The "Interdependence Approach" is die name I have given to the new approach to
interdependence which I take. It is concerned primarily widi three processes:
a. convergence in public policy toward a liberal, global equilibrium
b. the transformation of domestic regulatory problems into international collective goods
problems
c. the tendency of the market to restrain states acting multi laterally from enforcing
regulations that exceed a lowest common denominator (LCD).


help and knowledgeable guidance from the Graduate School. Hence, I also gratefully
acknowledge the many people in the Graduate School who helped me administratively.
Last, but most importantly, my wife. Heather L. Adams, and parents, Nathan A. Adams.
Ill and Eleanor Adams, have helped me though the most challenging days of this project. They
have been long-suffering encouragers and my wife, an absolutely essential helpmate. Many was
the night after a long day of work that she gave up her own pursuits to type a Figure or Table to
add to the many in this dissertation. Thus, by rights, I consider this achievement, ours. To be
fair, it is also partly my dad and mom's. They have been wonderfully supportive of everything
that I have done. Thus, with love in my heart, I acknowledge my family, wife, and God, and
dedicate this work to them.
v


109
barriers to banking. The dissolution of inter-state barriers to banking really began with the Federal
Reserve Act of 1913. It paved the way for American banks to establish branches abroad for the first
time (Stallings 1987, 65-66). Since foreign countries (especially developing countries) did not always
receive the banks warmly after 1929,23 banks set-up "representative offices" overseas that gathered
information and solicited contacts for banking services. In 1970, there were 30 such representative
offices of American banks in Latin America; and by 1980, 127 (Stallings 1987, 98). Furthermore,
Chase Manhattan pioneered another way to obtain access to a "closed" market: it acquired partial
ownership in overseas banks. Chase moved into six Latin American countries in this maimer.
Now, there are many other ways the market has to overcome inter-state barriers to banking;
for example, through such mediums as TNCs (ie. international securities firms), stock markets, DFI,
and international capital markets. As a consequence of these avenues, the banking industry is rapidly
standardizing. International banks are reaching into die farthest comers of the world, adapting to local
regulations but also bringing widi them die same transnational market incentives that have prompted
liberalization elsewhere. As I stated before, die results are two-fold: (1) states are being forced to
liberalize their markets to a similar extent and (2) the standard for liberalization is being liberalized
itself. Convergence, in other words, toward instrumental ineffectiveness in national monetary
policymaking is becoming die international norm.
Intra-state barriers to banking can be more difficult for capital to overcome than inter-state
barriers, as in the US. But over die long-term, die market is jeopardizing the effectiveness of these
barriers, too, again leading to standardization in die banking industry. In some areas of the US, limited
regional banking is beginning, and in others, a network of "nonbank banks" is expanding across state
lines (Lawrence and Shay 1986, 45-46).24 The "Nations Bank," for example, is located across the US.
23Mexico, Venezuela, and Brazil were the largest borrowers that had restrictions on bank
branching.
24"Nonbank banks" are banks diat do not take deposits or banks diat do not make commercial
loans. So long as they do not perfomi both functions at the same time, interstate banking laws have been
said not to apply to die institutions. However, courts may overturn this reasoning (see Lawrence and Shay


61
efforts to achieve the closest practicable substitutability and interchangability of weapons equipment and
components, die most efficient use of R&D and production resources, and the most compatible
technical and operational procedures possible.15
"Rationalization" is the overarching term which describes any action diat makes more rational
use of defense resources. I will not refer to this term on its own, because of its over-inclusiveness. I
prefer "standardization," which refers to a process whereby military equipment, doctrine, and
procedures in NATO are made identical. NATO uses the term exactly as I do "convergence." Hence,
in this chapter "standardization" is the same as "convergence." Finally, "interoperability" refers to
steps taken to make different equipment more compatible. Interoperability permits interface with other
weapons systems (i.e. use die same radio frequency), but stops short of furdier standardization.
Usually, it is retrofitted on to equipment. Thus, interoperability reflects convergence, but only to a
limited degree.
Structural disarmament is the primary reason NATO inaugurated die Rationalization,
Standardization, and Interoperability program. Although I will discuss it in more detail later, structural
disarmament, in brief, describes die decreasing quantity of arms widiout an equivalent and offsetting
increase in dieir quality, which a stable and even increasing defense budget can purchase over time.
As weapons have become "smarter," obtaining economies-of-scale in production has required a larger
market dian even die US offers. This provides powerful incentive for NATO members to standardize
weapons systems, so that they can be procured in optimal lots and the cost of national defense can be
lowered. However, we shall see that RSI has not been as effective a program as it potentially could
be. This is because states jealously protect die well-being and self-sufficiency of their defense
contractors. This prevents die market from liberalizing die production of weapons systems to die extent
15This definition of RSI is a variant of die Pentagons, albeit die Pentagons is even broader. The
Pentagon argues that RSI includes efforts to procure common or compatible operational, administrative,
and logistics procedures, as well as common or compatible tactical doctrine (Taylor 1982, 8). Although
diese are clearly important elements of standardization, they are not related directly to weapons acquisition.
Thus, diey are outside die purview of diis chapter.


36
15). In general, rather than agree to and enforce effective multilateral regulations, this approach saves
face and costs little. The permissive multilateral agreements which result, I call LCDs. They represent
hardly more than symbolic steps to address problems, centered on the response least costly for the most
powerful actors involved to take. At the same time, LCDs have the advantage of underscoring the
signatories normative conviction that they should cooperate to resolve a given problem.
This is a strategy consistent widi the new competitiveness of the state. The imperfect
competition diat technological innovation prompts by stimulating investment and trade in R&D-intensive
products encourages die state to offensively pursue fleeting commercial advantages. The powerful
temptation states now have not to effectively regulate capital is no better illustrated than by the $4,493
billion (in 1988 gross terms) Euromarket. In the words of some finance scholars:
. . imposing reserve requirements presents major practical difficulties. In order for
them to be effective, diey would have to be universally adopted. If just one country
refused, the Euromarket would relocate to that country and carry on business as usual.
Many countries do not have domestic reserve requirements and would be reluctant to
impose a control on die international part of dieir banking system diat diey have not
tried in dieir domestic sector. (George and Giddy 1983, 31)
In short, every state would prefer to be a "free rider"8 on die regulations of every other. The
regulation of capital or, for that matter, the conservation of biodiversity has become a prime instance of
what Garret Hardin (1968) calls die "tragedy of the commons": aldiough it may be in die collective
interest of the world community to conserve biodiversity, it may not be in the individual states interest
to do so. Brazil, for example, may prefer to cut down die Amazon Jungle, rather than to preserve
species. In general, the tragedy of die commons becomes more insoluble as convergence tightens
around a multilateral equilibriumundermining the argument of some functionalists diat successful
multilateral coordination in die past necessarily leads to more in die future.
To explain, consider a world in which every one of 180 states has a different regulation on
airline companies. In this setting, die gain to a state diat reduces its regulations to a point less
8A free rider will be understood diroughout this dissertation in its classic sense: a free rider is
any state which benefits from the initiative of another state, but does not help pay for it. In essence, it
tree-loads on the other state.


41
technology, biotechnology, materials technology, energy technology, and space technology) that a
special report of the OECD says are inspiring an on-going technological revolution. The report states
that information technologies are having "such pervasive effects on the economy as a whole that they"
are changing "the style of production and management throughout the system" (Freeman in OECD
1987, 130).
The diffusion of information technologies was evident in the 1970s, "but they have become
more accentuated in the 1980s" (UNCTC 1988, 18). Diffusion, not incidentally, is a necessary element
of innovation. Many inventions are never widely adopted; hence, they have little affect on die
international political economy and, thus, do not rise to die level of an innovation (see Van Duijn 1983,
175). It is important to keep in mind this distinction between inventions and innovations, as we begin
die case-studies.
As for die "mobility of capital," it is a phrase which refers in the following chapters to the
ability of both liquid and fixed assets to change location. For obvious reasons, liquid capital is likely to
be more mobile than fixed capital. In general, capital can become more mobile under two conditions;
(1) if it has a more conductive medium through which to move and (2) if it can take advantage of a
substantial cost-saving or profit-increasing opportunity. Technological innovation especially in
information technologies (IT) creates the medium for capital mobility. Entrepreneurs do the rest.
Therefore, under many (but not all) circumstances the mobility of capital and my secondary
independent variable, technological innovation, co-vary. In fact, die primary way in which
technological innovation affects die process of convergence is by facilitating die mobility of capital and
diffsing services and R&D. The important independent effect on interdependence diat technological
innovation can have is by making R&D more important to firms and states that want to maintain a
competitive edge in the global market. This R&D has become more expensive with time, encouraging
firms to join in multinational consortia to develop and market new products. Hence, in die automobile
industry, for example, competition is no longer centered around cross-national competitors; for
example, GM-Ford-Chrysler, Toyota-Nissan-Honda-Mazda, and Volkswagen-Mercedes-BMW. It is


124
policies and competitiveness vis-a-vis the United States. Hence, all agreed that something needed to be
done.
Nevertheless, ultimately, the accords they reached only succeeded in forestalling for a short
period a free-fall of die dollar and, dius, the increasing interest rates which America needed to finance
its current accounts imbalance. In diis sense, the market made the US pay twice for a cheaper dollar:
first, in foreign exchange and, second, in lost foreign investment. Private inflows of capital all but
stopped in 1987. Over two-thirds of the capital that financed the US deficit diat year came from
central banks. Private capital inflows did not resume until 1988, when the dollar stabilized and interest
rates rose, relative to diose overseas (Id.).
Plaza Agreement. The first of the agreements that the Group of Five (G-5)29 signed in
September 1985, is called the Plaza Agreement. It called for coordinated action to weaken die dollar.
In addition, trade surplus countries promised to strengdien domestic demand and reduce their external
surpluses, whereas deficit countries promised "to encourage steady, low inflation growdi while
reducing their domestic imbalances and external deficits" (Silk, New York Times, 25 Feb. 1987, D:2).
G-5 countries backed diese promises with targets like a 2.3% debt to GDP ratio for die US by 1988.
The G-5 did not meet diese targets, though. Hence, aldiough the dollar dropped in value
(from approximately 258:1 to 156:1 in yen) by about one-third (Lohr, New York Times. 26 April
1992, 4:1) between September 1985 and March 1986, its decline was temporary, so long as the market
valued die dollar more highly than central banks. The market did so, because G-5 countries did not
meet dieir fiscal targets. This omission emptied the Plaza Agreement of real utility as a regulatory
instrument. The Plaza Agreement became a LCDonly a symbol of concern about "inequitable"
currency valuations.
The renewed rise of the dollar in 1986, led the US to ask the G-5 to implement new
"automatic rules" to bring down die value of die dollar. These would have put in place some of die
29The G-5 countries include the U.S., Japan, Germany, Britain, and France.


48
states desire to pursue autonomy and, on the other hand, its need to ensure international stability. I
argue that the state cannot achieve both at die same time in die 1990s. This is a quite different thesis
from John Ruggies (1982), which states diat the inter-state system was designed around a "compromise
of embedded liberalism." I believe diat this so-called compromise was more of a latent defect.
Embedded liberalism could persist only so long as the economic liberalism that the inter-state
system was organized to facilitate remained adolescent. That is, embedded liberalism could be
sustained so long as economies remained segmented. When diis condition changed because of
technological innovation and increasing transnational flows of capital, embedded liberalism failed.
Thus, embedded liberalism was not so much a compromise between, on the one hand, economic
autonomy, and, on die other hand, international financial stability, as it was a basic contradiction.
This contradiction between autonomy, on the one hand, and international stability, on the other
hand, is not restricted to economic affairs, either. The contradiction is an inherent part of almost every
functional area in which the state is involved, whether national defense, trade, or the environment. It
seems that the architects of the post-World War II inter-state system wanted to "have their cake and eat
it, too." At the same time as they agreed that states should work together cooperatively to ensure
international stability in a host of areas, they likewise insisted that the state should be autonomous
enough to set its own agenda. This is as evident in the Charter of the United Nations as it is in GATT
and Bretton Woods. For, the UN Charter enshrined autonomy in the form of national sovereignty and
the right to self-defense with national means, as well as international stability in the form of a ius
cogens against unilateral aggression and the collective peace-keeping function of the Security Council.
Furthermore, to demonstrate that the contradiction between autonomy and international stability
is caused by capital mobility and technological innovation, not waning hegemony, I will illuminate the
contradiction in a context where the hegemon is excluded: die EC.12 Whereas neo-realists contend
diat eroding American hegemony accounts for die collapse of Bretton Woods and die GATT- die two
12By "hegemon" I mean what Kindleberger (1973) did: a global superpower like Pax Britannica
and Pax Americana.


131
Finally, on September 17, the British could withstand currency speculation no further. The
country was running-out of foreign currency reserves (Stevenson, New York Times, 17 Sept. 1992b),
so it exited. The Italians followed suit. Finally, the Spanish and Portuguese devalued their currencies
(Cohen, New York Times. 21 Dec. 1992). Sweden and Finland, which had linked their currencies to
the EMS in preparation for accession, also devalued. Meanwhile, other currencies like the Irish pound,
Danish krone, and French franc teetered on the brink of devaluation (Stevenson, New York Times, 25
Nov. 1992a).
To be sure, as of Uiis writing, the EMS still stumbles on, but its role has been dramatically
reduced. Now, it is basically a LCD agreement-more a symbol of pan-European determination to
integrate further than an effective tool of monetary regulation. There are no indications diat European
countries are willing to realign their fiscal policies, and thus enhance the status of the EMS, eidier.
Rather, fiscal misalignment is worsening and speculators continue to take stabs at European currencies.
They are betting "that a number of European governments do not have the political will or the financial
wherewithal to sustain the value of dieir currencies if investors begin selling en masse" (Stevenson,
New York Times. 19 July 1993, C:l). The lesson which the failure of Bretton Woods and the
monetary agreements of the 1980s teaches is that they are right.
In fact, a review of this section shows diat a common cause underlies die failure of both
Bretton Woods and the EMS. In keeping with Corollary Two, hegemony is not it. The ability of
capital to exploit die highest rates of return and to force exchange rates to reflect real differences in
fiscal policies is die key. Capital mobility and technological innovation are the two independent
variables which drive convergence toward instrumental ineffectiveness, transform domestic financial
stability into a collective good, and change effective regulatory structures like the EMS into LCDs. So
long as a level playing field exists, capital mobility camiot defeat multilateral regulation of die market,
but as soon as differences emerge, capital will exploit them. We focus on the mobility of capital and
technological innovation next.


Table 1-2: Growth in Unregulated Capital Markets, 1970-88
Year
Gross
Size
$ bill.
Annual
Rate of
Growth
Gross
Absolute
Size
$ bill.
% of World
Bond Issues
1970
110
n.a.
3.0
65
1974
395
.20
2.1
31
1978
950
.22
14.1
41
1982
2146
.10
51.6
66
1984
2359
.04
79.5
74
1986
3632
.22
188.7
83
1988
4493
.01
119.8
80
Source: Morgan Guaranty Trust Company of New York, 1970-90.


74
NATO wasted far more money by ignoring the markets incentives to coordinate actual
weapons acquisition, too. A rule of thumb in the aerospace industry is that the unit price declines by
15 to 20% for each doubling of production, simply because firms learn (Moravcsik 1990, 67).
Likewise, Callaghan estimates that the US could save 10% of its procurement expenditure and Europe,
25%, if economies-of-scale were realized (Taylor 1982, 51). In May, 1987, a Senate sub-committee
reported:
During the last five years, weapons have been produced at just 50% of efficient
production capacity. A fourth of the major acquisition programs during die past five
years were manufactured at a rate below the minimum economic rate for those
systems. Half of the largest 20 weapons systems were stretched-out, compared to last
years plans.17 (Committee on Armed Services 1988, 90)
Stretch-outs increase the proportion of overhead to military product. A longer stretch-out
means less cost effective production, since each dollar buys more overhead and fewer weapons. In
contrast, an optimum funding level is the minimum amount of money required to produce the maximum
number of units on one eight-hour shift, five days a week. To make this concept more tangible,
consider the now famous Patriot missile system. The Army estimates that stretching-out this missile
system in die 1980s, cost $1 billion, a sum that could have purchased 1,760 additional Patriot missiles.
Likewise, the Air Force claims that stretching-out the F-15 for three years in the 1970s cost $2 billion,
a sum equal to die purchase price of 83 F-15s. Instead, die money purchased overhead.
All of diis inefficiency, die result of divergence in NATOs weapon procurement policies, is
die root of structural disarmament: states are spending more and more dollars to get fewer and fewer
weapons. In the words of the former Supreme Allied Commander of Europe (SACEUR) Gen. Bernard
Rogers, "Every time we replace a system, the cost of die newer one has increased by a factor of from
diree to five. Consequently, we procure fewer and fewer systems as replacements each time. .
17So-called stretch-outs increase die proportion of overhead to military product. Every funding
level below an optimum level buys more overhead and fewer weapons. An optimum production level is
the minimum amount of money required to produce the maximum number of units on one eight-hour shift,
five days a week" (Committee on Armed Services 1988, 94).


272
However, as weapons became smarter in the 1970s, and economies-of-scale important, self-
sufficient procurement strategies created a situation in which the same amiual defense budget purchased
fewer and fewer weaponsthe root of structural disarmament. In the 1980s, this trend compelled
NATO members to collaborate in R&D on weapons and in procurement. More importantly, die
increasing cost of technological innovation forced defense contractors to become transnational in
orientation and to foreign-source parts. Thus, even while die decreased external direat of aggression to
NATO has cooled concerns about structural disarmament in the 1990s, technological innovation is
eliminating die self-sufficiency of industrialized countries in weapons procurement from the components
level up.
The explanation cannot be waning American hegemony, eidier, because at least in military
matters, die US remains the uncontested hegemon in die 1990s. Indeed, it was not because of
declining hegemony, but in spite of continued US dominance of Europes procurement programs that
Europe invigorated its pan-European weapons cooperation programs and weakened CoCom. More
importantly, die expense of continued subsidies to domestic contractors and of innovation in weapons
design, as well as die closing of die weapons export market, made self-sufficiency in weapons
procurement unaffordable.
Finally, in environmental policy support for Hypothesis Five lies in the contradiction between
the states preference for autonomy and its desire to ensure international stability. Nearly every major
environmental problem is die result of states independently maximizing their own welfare by
encouraging rapid industrial development and regulating environmental problems, if at all, in the most
advantageous way feasible for die market. In the aggregate, these measures cause serious damage to
the global commons and, thus, destabilize the international environment. However, die lag between the
immediate benefits of such behavior and their long-term costs can be long.
That declining hegemony cannot explain the failure of die international community adequately
to provide international environmental stability is obvious from the fact that (1) most international
environmental problems came on to die international political agenda a decade after US hegemony


162
comunes, BOP imbalances are now quite politicized. In particular, Japans surplus, which exceeded
$100 billion for the first time in the 1980s ($150 billion in 1987), has been a constant source of
irritation.
In sum, change in the nature of trade has made it less amenable to GATT regulation, even as
national welfare has become more intimately linked with international trade movements. The state, too,
finds it increasingly difficult to oppose the direction of the market. For example, a state which refuses
to permit countertrade loses substantial gains from trade. Likewise, states that try to resist transfer
pricing practices or which limit mergers and monopolies as part of their competition strategy probably
will find TNCs moving their business offshore. They will also discover that their competitiveness
diminishes, as innovation finds more receptive homes elsewhere.
Collectivizing full employment policies. What all of this means in terms of Hypothesis Two is
that the state is less capable of ensuring full employment in its economy without coordinating its
competition policies with those of other countries. But this type of coordination presents a collective
goods problem: (1) each state can "consume" the advantages of coordinated full employment policies
without diminishing the advantages available to other states (nonrivalness) and (2) except perhaps for
the major trilateral powers, this is true whether or not they helped sacrifice to ensure full employment
or macro-economic optimization (nonexclusion). Hence, within the framework of GATT coordinated
macro-economic optimization policies have been under-provided.
The most important assumption of the GATT trading system has been that economies
liberalizing their trade can ensure full employment and growth at the same time (Panic 1988, 123).
Also, two more essential principles now in doubt are: (1) that the international financial system would
efficiently and sufficiently allocate credit and (2) that the gains from trade would be distributed fairly
evenly among the industrialized countries (Id. at 123-29). In keeping with these critical assumptions,
die GATT has pursued "shallow integration," or die reduction of trade discrimination among products
and producers by limiting tariffs and NTBs (Hoekman 1993, 1529). This contrasts widi "deep


84
exports (Moravcsik 1992, 34). Mergers aggregated the number of independent contractors into one or
two commercial units; thus, increasing potential economies-of-scale. Subsidization guaranteed a
minimum income for die contractors. Finally, exports expanded the potential market of a weapons
system.
For example, France consolidated its aircraft contractors and sub-contractors into two "national
champions," Aerospatiale and Dassault. Similarly, in Britain five main aircraft contractors in the
1960s, were reduced to one in 1990, British Aerospace. All of these national champions had to export
to survive. This is the fundamental reason for opposition in CoCom to effective export restraints on
sensitive military technologies. France has been the most liberal, as well as the most determined in its
pursuit of export markets. For example, beginning in die 1970s, France concentrated on designing and
exporting aircraft to the Third World. Exports constituted roughly 70% of production in die 1970s and
1980s (Moravcsik 1990, 68). The trouble is die aircraft that resulted were not adequate for Europes
central theater, as even die French Navy complained (Moravcsik 1992, 34). Furthermore, the end of
the Cold War created a buyers market for weapons systems. In net terms, die market diminished;
and, worst of all, the French failed to capture die loyalty of their Third World clients. Consequently,
"the French arms industry, it is widely agreed, is in crisis" (Moravcsik 1992, 34).
Based on diese facts, it is no surprise dial Europeans finally embraced collaboration and, thus,
standardization in the late-1980s. No longer able to guarantee their own weapons procurement needs
through strategies like building national champions and exporting weapons, European countries had to
face the fact that national security was being transformed into a collective goods problem, as
Hypothesis Two predicted. While export markets held-up, die shift toward collaboration was slow.
However, when die export market collapsed, collaboration became more important
Thus, until die mid-1980s, die WEU, Eurogroup, and Independent European Programme
Group were like NATOs CNADno more than LCDs that symbolically demonstrated resolve to
standardize weapons, but realistically accomplished little else. For its part, the WEU concentrated with
unknown effect on strategic airlift and intelligence and surveillance satellites (Coeme 1991, 19)


CHAPTER 7
CONCLUSION
We live in an era of interdependence. This vague phrase expresses a poorly
understood but widespread feeling that the very nature of world politics is changing.
Keohane and Nye 1977, 3
It is easy to state diat a global system of political economy has come into being. It is
quite another problem to dieorize and understand it.
Gill and Law 1988, xxiii
We began this dissertation puzzling over why, if it is true that international politics has
changed since the 1970s, scholars have not been able to model this transformation persuasively. This
dissertation reveals that part of the reason may be that they have focused on institutions to the exclusion
of transactions, and missed die three processes which constitute what I call the New Interdependence
Approach: (1) convergence in public policy toward a liberal, global equilibrium, (2) the transformation
of domestic regulatory problems into international collective goods problems, and (3) the tendency of
the market to restrain states acting multilaterally from enforcing regulations that exceed a lowest
common denominator (LCD).
The foregoing case-studies provide strong evidence of each of diese trends and demonstrate
diat two independent variables primarily account for them: (1) die increasing mobility of capital and
(2) technological innovation. Togedier, these variables illuminate the contradiction which an
interdependent political economy poses in die 1990s, for a state which is naturally inclined to govern
autonomously, but which must coordinate its regulatory apparatus widi odier states to solve problems
effectively, if at all. This globalization of problems and solutions to them is what helps to set the
present period apart from prior eras of interdependence.
In general, die trend since the 1970s has been for the state to regulate the market less and, in
fact, to facilitate market competition, radier than to dampen the markets impact. In Philip Cernys
257


Figure 3-1: The Co-produced F-16
Source: Office of Technology Assessment 1990, 42-43.


151
NAFTA. In other extra-GATT ways, industrialized countries have begun pursuing beggar-thy-neighbor
industrial policies that attempt to capture for the domestic market die gains that a more comprehensive,
liberal trading system would realize.
Multilateral liberalization. First, in Latin America the combination of indebted
industrialization and high interest rates in die early-1980s, led to a serious financial crisis for bodi the
US and its hemispheric trade partners. As debt mounted and Latin American countries exhausted their
credit, die US Government intervened in die crisis widi successive debt restructuring plans that,
essentially, offered refinancing in exchange for IMF-approved, macro-economic reforms: die much
maligned "structural adjustment" policies. A key element of structural adjustment was promoting
exports and dampening imports in an effort to earn foreign currency to pay off debt. Consequently, the
US trade balance with Latin America went from a growing trade surplus to a deficit in 1981.
In Latin America when trade reform began in die early-1980s, high tariffs, foreign exchange
restrictions, multiple exchange rates, quantitative restrictions on imports and exports, and export taxes
were die hallmark of trade policy. These were vestiges of die import substitution model of growdi, and
the balance of payments (BOP) crisis diat confronted Latin America in the late-1970s. The extent and
timing of reform in Latin America varied. Argentina, Chile, Columbia, Peru, and Uruguay began
them as early as the 1970s, only to stall and reverse them later in that decade. However, by 1992, the
results of trade liberalization were quite dramatic.
Table 5-1 presents World Bank estimates of the level of trade protection in Latin America
before and after structural adjustment. Table 5-1 shows diat (1) average tariff rates and die dispersion
of the tariff rates are much reduced, (2) quantitative import restrictions are negligible, except for some
sector-specific regulations like limits on imports of automobile parts in Argentina, Chile, and
Columbia; and (3) die degree of openness, estimated by die sum of real exports and imports as a
percentage of GDP, has increased substantially from an average pre-reform level of 49% to 58% (Alam
and Rajapatirana 1993, 45). Not surprisingly, reforms have led to substantial increases in exports and
A


86
All of this suggests that Western Europe made a significant commitment to cooperation in the
early-1990s. The list of collaborative weapons systems that Europe is developing is growing. The
most celebrated of these weapons, the European Fighter Aircraft (EFA), was the choice of Britain,
Spain, Italy, and Germany over the US Advanced Tactical Fighter (ATF) Program. In the early-1990s,
WEU members even set up a "Euro-corps," an extension of the Franco-German brigade of the late-
1980s. Thus, late in life, European arms cooperation looks even more substantial than that taking place
in NATO, as a whole.
The impression outside observers gained in the summer of 1992 was of a shift of
attitude in all major European capitals, away from the rhetoric that had characterized
so many previous West European defense initiatives, towards a concern to build an
effective structure for defense policy coordination, with at least some elements of
military integration. (Menon, Forster, and Wallace 1992, 117)
So far, though, the fruits of collaboration have been minimal. Great Britain and France still
produce, respectively, 75% and 80% of their major weapons systems domestically (Moravcsik 1990,
66). Excessive defense industrial capacity in Europe remains high, tooroughly 27% of total European
defense spending in 1987 (Moravcsik 1992, 36). Furthermore, individual collaborative programs have
received mixed reviews. The European Fighter Aircraft, for example, is rumored to have the same
shortcomings that the Tomado Fighter Bomber did: it performs many roles adequately, but none
deftly. Compromise has eliminated many of the economies-of-scale that the European Fighter Aircraft
promised, too. This is because the European Fighter Aircraft is now not one aircraft, but four.
Britain, Spain, Italy, and Germany plan to test and manufacture their version of the EFA separately.
Thus, the EFA is another good example of LCD weapons procurement cooperation.
More substantial coordination is likely to result in the 1990s, if the Independent European
Programme Groups projects of the late-1980s are carried through. The future of cooperation through
the WEU looks more clouded, though. If the weakness of the EMS (next chapter), and, more
importantly, the divisions in the European Community which war in fomier-Yugoslavia made obvious
are a harbinger of tilings to come, a pan-European common defense may be a long time off. In any


95
Conclusion
Not long ago preparing for war meant simply checking ones sword, horse, and armor to be
sure all were ready for battle. Today, warships, warplanes, missiles, and tanks depend upon the
availability of thousands of components, including semiconductors, software, alloys, and chemicals-
many of which are not available domestically or, if diey are, not at a competitive price. This is why
interdependence in weapons procurement is a fact of life in the 1990s. It is also why, with some
nuances, we have been able to confirm each of the hypotheses that Chapter Two outlines.
The primary difference between this case study and diose that follow is that, although
standardization is not occurring at the systems level of weapons procurement yet, it is occurring quite
rapidly at die components level. Hypothesis One states diat every country and every issue-area,
whether in high or low politics, is subject to a pressure to converge toward a global equilibrium which
the market prefers: commercial liberalization. The primary impetus to convergencealso called
standardization-in defense procurement policy is technological innovation which led to structural
disarmament in the Alliance in the late-1970s. In keeping with Corollary One, which states that
convergence most substantially influences countries widi relatively small national incomes and issue
areas where capital is liquid, middle-range military powers experienced structural first, followed by the
US. Thus, just as the Cold War heated-up again in die early-1980s, NATO members realized that dieir
defense budgets were buying fewer weapons. Meanwhile, to the disadvantage of NATO, the Warsaw
Pact widened the gap in numbers of weapons systems and closed the gap in weapons technology. By
agreeing to cooperate in weapons procurement, NATO members believed that they could produce
weapons more efficiently and, dius, reverse this trend.
However, whereas diese efforts have not proven notably successful widiin NATO, because
members insist upon retaining a considerable degree of control over their procurement of weapon
systems, NATO members have not been able to resist die trend at the components level for weapons
systems to become standardized as a result of common offshore sourcing. In effect, standardization is
occurring from die ground-up. Moreover, were it not for the end of the Cold War, systems level


217
Tradable permit systems. Government sets an overall level of allowable air pollution and then
allocates "permits to pollute" to businesses in the relevant area, so that each can emit some
fraction of die overall total. Companies which emit less than die allocated level can sell or
lease their surplus permits or use diem to offset emissions from other of their facilities.
Eliminating government subsidies. Government subsidizes many inefficient and
environmentally unsound development practices, e.g. the US Forest Service subsidizes below-
cost timber sales. Removing these subsidies can encourage more environmentally sound
management of natural resources.
These market-based incentive systems can ease die burden on diose least able to pay for
pollution abatement. Some mix of them widi command-and-control regulations that are consensually
enforced is increasingly the choice of industrialized countries,57 because, in addition to die costliness
of command-and-control regulations, their weak performance in many areas have left regulators
searching for alternatives. The World Resources Institute reports that command-and-control policies
have achieved dieir greatest successes at improving water and air quality, but at great cost and without
decreasing nor managing the volume of solid and hazardous waste (World Resources Institute 1994,
235).58
57 All of die major EC countries have implemented environmental charges of some kind (see Hahn
1989), after relying primarily upon command-and-control regulations and "end-of-pipe" technologies
(World Resources Institute 1994, 235). Moreover, die EC, as a whole, is preparing to introduce a
Community "carbon tax" or charge to limit C02 and other greenhouse gas emissions.
58First, the Clean Air Act Amendments of 1977 divided die US into three regions: (1)
nonattaiimient regions, where federal ambient standards were not met; (2) Class I "prevention of significant
deterioration" regions (i.e. national parks and scenic areas), where federal standards were also not met and
no deterioration was to be allowed; and (3) Class II "prevention of significant deterioration" regions, where
federal standards were met and some deterioration was permissible. The EPA has not protected Class I
and Class II regions effectively, because the Clean Air Act does not protect against air pollution carried
across state boundaries, neglects chemical transformations of permissible emissions of particulates into
visibility-inhibiting and acid depositing substances, and has created a political morass in which Class II
regions bargain endlessly over how much deterioration is acceptable (Howe 1991, 13-14).
Second, studies of US water quality management reveal that the total costs of abatement programs
exceed their total benefits. Water quality management brought an estimated $14 billion in annual benefits,
but cost $23.2 billion (Howe 1991, 15). The greatest failure of water quality management is its complete
disregard of non-point sources of pollution like agriculture and its inadequate monitoring and enforcement
of water quality regulations. In addition, die goal Congress set for water pollution abatement making
all lakes and streams swimmable and fishable is unreasonable. Vogel estimated diat it would cost the
entire GNP of die US for one year (1986, 166).


9
Equalization Theorem) that explicitly model convergence. The regime literature never considered these
more exacting explanations of convergence. Still, I owe an intellectual debt to regime scholars, who
first pointed out the importance of interdependence to the world community.
In addition, regime scholars were among the first to relate the provision of collective goods
also called public goodsto interdependence, usually conceptualized as regimes. Regime scholars,
usually neo-realists, also interested me in the notion of international "hegemons" and hegemonic
decline. The grandfather of this literature, Charles Kindleberger (1973), argued that only a hegemon
could be counted on to pay the price of providing collective goods. Expanding on this work, Robert
Gilpin (1987) contends that regimes are likely to be underprovided when the power of hegemons
erodes. I argue that the more compelling explanation for the transformation of domestic regulatory
problems into international collective goods problems is the new mobility of capital and technological
innovation.
Transactionalism
However, more critical to the Interdependence Approach than regimes is transactionalism.3 In
fact, the primary reason that I can develop the idea of convergence to a greater extent than other
interdependence scholars have is due to transactionalisms emphasis upon exchange as a measure of
integration. Like Deutsch, I do not deny the independent causal importance of institutions, principles,
and norms on interdependence. I just believe diat it is most useful to concentrate upon transactions.
Gabriel Almond (1990) pointed out that the disadvantage of focusing upon institutions is that they vary
cross-nationally; that is, whereas the functions which the state performs are everywhere the same, the
institutions that they develop to perform diose functions vary. In contrast, transactions occur in
discrete units that can be measured and compared meaningfully, wherever their location. For example,
$1 has the same value to a banker in Europe as it does to one in the US.
3Tlie integration which Deutsch studied is simply the end-point toward which die process of
interdependence naturally leads. Hence, Deutschs (1957) ideas should apply to my framework, not just
to European integration studies.


286
APPENDIX B: POPULATION OF REGIONAL, MULTILATERAL ENVIRONMENTAL TREATIES
Effect
Developing
iveness
Countries?
Budget
Year
Flora & Fauna Protection
African Conv. on the Conservation of Nature and Natural Resources (1968)
M
Yes
Conv. on Nature Protection and Wildlife Preservation in the Western Hemisphere (1949)
W
Yes
Conv. on Conservation of Nature in the South Pacific (1976)
W
Yes
Treaty for Amazonian Cooperation (1978)
W
Yes
Berne Conv. on the Conservation of European Wildlife & Natural Habitats (1979)
M-
Yes
78,000.00
1991
Conv. for the Conservation & Management of the Vicuna (1979)
W
Yes
ASEAN Agreement on the Conservation of Nature and Natural Resources (1985)
Atmosphere & Outer Space
X
Yes
Agree, on Uniform Conditions of Approval of Motor Vehicle Equip. & Parts (1958) (p)
M
Yes
Conv. on Long-Range Transboundary Air Pollution (1979)
Marine Environment & Marine Pollution
S
Yes
1,000,000.00
1990
Agreement Concerning Coop, in Measures to Deal w/Pollution of Sea by Oil (1971) (p)
S-
No
Conv. for the Prevention of Marine Pollution by Dumping from Ships & Aircraft (1972)
M
No
Conv. on the Protection of the Marine Env. of the Baltic Sea Area (1 974)
M
No
4,400,000.00
1991
Conv. on the Prevention of Marine Pollution from Land-based Sources (1974)
W
No
Conv. for the Protection of the Med. Sea Against Pollution (1976)
M
Yes
1 3,000,000.00
1992
Kuwait Conv. for the Coop, on the Protection of the Marine Env. from Pollution (1978)
W
Yes
3,500,000.00
n.a.
Conv. for the Prot. & Develop, of Marine/Coastal Env. of West/Central Africa (1981) (p)
W
Yes
1,000,000.00
1990
Conv. for the Prot. of the Marine Env. & Coastal Areas of the Southeast Pacific (1981)
W
Yes
Memorandum of Understanding on Port State Control (1982)
W
No
Conv. & Protocol for the Conservation of the Red Sea & Gulf of Aden Env. (1982)
W
Yes
500,000.00
1990
Conv. for the Prot. & Devel. of the Marine Env. of the Wider Caribbean Region (1983)
W
Yes
1,600,000.00
1990
Agreement for Cooperation in Dealing with Pollution of the North Sea by Oil (1983) (p)
W
No
Conv. for Prot., Mngm't,, & Devel. of the Marine/Coastal Env. of East African Region (1985)
X
Yes
250,000.00
1990
Conv. for the Protection of the Natural Resources & Env. of the South Pacific Region (86)
w
Yes
Agreement on Cooperation for Combatting Pollution in the Northeast Atlantic (1990)
w
Yes
Agreement for the Establishment of the Indo-Pacific Fishery Commission (1948)
w
Yes
200,000.00
1990
Convention for the Establishment of an Inter-American Tropical Tuna Commission (1949)
w
Yes
Agreement on the Network of Aquaculture Centres in Asia & Pacific (1988)
w
Yes
Agreement on the Establishment of the General Fisheries Council for the Med. (1949)
M-
Yes
300,000.00
1990
Conv. for the High Seas Fisheries of the North Pacific Ocean (1952)
W
No
340,000.00
1989
Conv. Perm, Commission on Exploit./Conserv. of Marine Res. of the South Pacific (52) (p)
M
Yes
Conv. on Fishing and Conservation of Living Resources in the Baltic Sea & Belts (1973)
W
Yes
1 20,000.00
1991
Conv. on Future Multilateral Cooperation in the Northwest Atlantic Fisheries
W
Yes
630,000.00
1990
South Pacific Fisheries Conv./Conv. on Prohibition of Driftnet Fishing in South Pacific (79)
S
Yes
Conv. on Future Multilateral Cooperation in the Northeast Atlantic Fisheries (1980)
W
Yes
Conv. for the Conserv. of Salmon in the North Atlantic Ocean (1982)
Hazardous Substances
M
No
440,000.00
1990
European Agreement Concerning Intl. Carriage of Dangerous Goods by Rd. (1957)
S
Yes
European Agreement on the Use of Certain Detergents in Washing/Cleaning Prod. (1968)
S
No
Bamako Conv. on Ban of Import into Africa of Hazardous Wastes (1991) (p)
s-
Yes
Conv. for the Mutual Recog. of Inspections in Mfg. Parmaceutical Products (1970) (p)
w
Yes
Nuclear Safety
Tlatelolco Treaty for the Prohibition of Nuclear Weapons in Latin America (1967)
M
Yes
South Pacific Nuclear Free Zone Treaty (1985)
S
Yes
Source: Peter Sand (1992) provided the base indicators from which I have interpreted the effectiveness of the treaties and taken aggregate data on, for example,
the annual funding of the environmental treaties. See supra, note 14, and surrounding text for more details.


229
Convention, whereas the treaty itself states that the signatories (including developing countries) shall
vote on contributions.66
Thus, neither the Convention on International Trade in Endangered Species of Wild Fauna and
Flora (CITES) nor the Convention on Biological Diversity is likely to solve the collective goods
problem of preserving biological diversity. In one analysts words, the Biodiversity Convention
"merely memorializes rather than resolves die deadlocks diat characterized the negotiating process"
(Downes 1993, 9). Neither treaty is as strong as die Basel Convention on the Control of
Transboundary Movements of Hazardous Waste, which itself has many weaknesses diat could prevent it
from providing die collective good of environmentally sound management of hazardous waste.
Regardless, the important point of this section is diat CITES, the Biodiversity Convention, and Basel
Convention all support Hypothesis Two, which predicts that environmental goods which countries
formerly provided on their own are being substantially transformed into collective goods problems. A
broader survey of environmental problems suggests diat, currently, diere are no examples of
environmental problems which do not have some international collective goods aspect. Hence, although
diis section makes clear diat political boundaries are no barrier to pollution and other environmental
problems, it also emphasizes that they do pose substantial barriers to resolving them.
Lowest Common Denominator
In fact, in environmental policy, sentiment runs strong that the majority of international
environmental agreements are LCDs like Hypothesis Three would expect. Hypothesis Three states that
public policy coordination designed to regulate the market is increasingly likely to center around
agreement on a LCD. In die words of one political scientist, "Where international management can be
66The Biodiversity Convention is likely to be comparatively well capitalized anyway, since
developing countries have accepted the General Environmental Facility (GEF) as at least the interim
funding mechanism for die convention. In its initial phase, GEF allocated 48% of its $812 million Global
Environmental Trust Fund to 55 biodiversity projects (Jordan 1994, 14-15). In 1994 industrialized
countries pledged to expand die GEF to over $2 billion. Were die GEF to spend half of this amount on
sustaining biological diversity, this would be a large amount in terms of international environmental
governance, even if it is not a large amount in terms of the actual problem that it is meant to control.


275
weapons. Export markets are so important now to cost-effective production runs, especially for
middle-range military powers like France and Sweden, that few states are willing to agree to effective
restraints on weapons proliferation. The 1987 Toshiba-Krongsberg scandal illuminated quite
dramatically the consequences that unequal and lax enforcement of CoCom export controls could have
for NATO during the Cold War. The cost of taking countermeasures to the propeller refining
technology which the Soviet Union received from Toshiba-Krongsberg would have been over $30
billion if the Cold War had not ended.
The competitiveness of states in weapons procurement policy is also responsible for the overall
lack of success of collaboration at the weapons systems level in programs like NATOs Rationalization,
Standardization, and Interoperability (RSI) Program. Divergence in the procurement of weapons
systems continues to be the rule in NATO, despite NATOs commitment to the opposite. Like they
always have, states prefer to maintain some semblance of national control over their systems level
procurement programs, even though, oddly enough, they tend to overlook the foreign-sourcing of
components and, thus, standardization of weapons that is occurring from the ground up. Whereas
NATO members want to ensure their access to the manufacturing technology for the smartest weapons
system, they are willing to sacrifice complete autarky in weapons procurement because either they
cannot afford it or lack the technology to achieve it.
Finally, in environmental policy support for Corollary Three is evident even in the concern of
legislatures that their environmental policies will put industry at a global competitive disadvantage. In
the search for competitive advantages, every state has an incentive to put most of the regulatory burden
on other states and to shift environmental externalities to other states, to the extent possible. Thus, for
example. Great Britain adopted a "high chimney policy" in the 1970s, which reduced urban pollution in
Britain by sending it across the Channel to Scandinavian countries.
Overall, the pressure on the state to encourage trade and investment and to ensure that its
industries remain competitive explains why states are abandoning rigidly enforced command-and-control
environmental regulations in favor of consensually enforced, market-friendly ones. It also explains the


188
to which we could add the juxtaposition of die liberalization norm with die reciprocity norm and a
diplomacy of means with ends underscore well how this case-study validates Hypothesis Five.
Hypothesis Five states that a contradiction will be evident in every issue-area between the states
preference to preserve its policy autonomy and its desire to preserve international stability in the given
area. Ruggie pointed to the same explanation for diis inconsistency in trade policy as he did in
monetary policy: "die compromise of embedded liberalism" (1983).
However, as Chapter Four explained, "contradiction" better describes the phenomenon of
embedded liberalism than "compromise." According to Ruggie, the genesis of embedded liberalism was
the desire among the architects of the post-war international economy to ensure both multilateralism
(radier than the economic nationalism of the 1930s) and domestic interventionism (rather than die
liberalism characteristic of die 1920s) (1983, 209). Thus, Ruggie argued that the failure of the ITO
(Id. at 212), the institutionalization of the MFN rule along with its blanket exceptions (Id. at 213), die
liberalization of intra-industry trade radier than inter-sectoral trade (Id. at 215-16), and the expansion of
restraints to trade in step with its liberalization (Id. at 226-27) were all predictable. Ruggie anticipated
that "so long as it remains understood that it is a dilemma, bodi parts of which have to be
accommodated, the normative framework of embedded liberalism will endure as a central institutional
feature of the international economic order" (Id. at 231).
There are good reasons not to be so optimistic, diough. First, the very success of GATT at
doing what its designers intended has undermined embedded liberalism. In fact, with the conclusion of
the Uruguay Round, GATT has nearly exhausted its possibilities for further shallow integration.
Second, Ruggies thesis is in trouble because GATTs membership has expanded, mostly out of
necessity to guarantee economic growdi and die longevity of die trade system. Thus, GATTs
expansion closes what Ruggie believed to be a necessary vent for the preservation of embedded
liberalism: foisting die burdens of trade adjustment on non-GATT members (]d. at 229-30). In
Ruggies words, there are more "regime-makers" and fewer "regime-takers," now.


77
and provide mechanisms whereby the Allies could share the political costs of not "buying national," the
NATO Rationalization, Standardization, and Interoperability Program is itself a LCD. The RSI
Program suggests that NATO is serious about procuring weapons efficiently, but it actually protects the
right of the Allies to be self-sufficient. As a result of weak enforcement regulations and co-production
and co-licensing agreements, RSI has not altered the overall inefficiency in weapons procurement.
Weapons produced collaboratively under the RSI framework, are separately manufactured, thus
eliminating important economies-of-scale.
NATO projects have failed not only to stem the tide of structural disarmament in net terms,
but also to satisfy the performance needs of most participants in the Projects. In the worst instance, a
weapon that reflects a compromise between multiple national missions may be unsuited to perform any
of them effectively. For example, disagreement over performance expectations and cost ultimately
undermined the NFR-90 Frigate project and Advanced Short-Range Air-to-Air Missile
(ASRAAM)/Advanced Medium-Range Air-to-Air Missile (AMRAAM) program. Alternatively,
differences have led members in NATO projects to modify the base NATO project model with
customized options and to demand coproduction rights that eliminated many of the economies-of-scale
RSI was supposed to guarantee. For example, the European Fighter Aircraft (EFA) planned for the
1990s, will have four models, each manufactured separately in Britain, Spain, Italy, and Germany.
None of these states could decide which of them should benefit from the revenue and jobs creation the
European Fighter Aircraft program would bring if completed as a single aircraft.
In general, die problem of dividing die costs and benefits of standardization equally is a root
cause of LCD NATO projects. Real economies-of-scale in the production of a NATO weapon depend
upon the ability to depreciate overhead in a single location. Efficiency requires optimal production runs
in one country. But diat means diat many odier Project members cannot benefit from technology
transfer and revenue that particular weapons systems generate, except insofar as diey source
components for die main weapon system. The problem is quite similar to that analysts encounter in
asymmetric economic communities like diose die developing world has tried.


Table 5-4: Long-Term Income Convergence Coefficients, by Group'
201
t-stat.
N R2 Hg: K=0
EEC
Prewar,b 1900-1933
135
0.988
0.98
Postwar, 1951-1985
204
0.991
4.39**
Transition period,
1959-1968
60
0.993
4.90**
United States. 1931-1984
2554
0.961
11.64**
World tool, EEC 6). 1960-198?
All 107 Countries
2675
0.996
-6.42**
Top 25 Countries
625
0.981
-0.47
14 Countries0
(excluding Venezuela)
325
0.973
-1.42
Source: Ben-David, 1993, p. 667.
a. Standard deviations are in parentheses.
b. Does not include Luxembourg due to lack of data and excludes the WWI years, 1914-1919.
c. These are the fourteen countries within the same per capita income range as the EEC six
countries in 1960.
Significant at the 1 percent level.


18
which dominates. This is because the tendency of many goods that states previously provided on their
own to become collective goods problems means that more and more problems can only be effectively
addressed with a multilateral approach. The trouble is, each state acting on its own has an incentive to
defect from multilateral cooperation, so diat capital will flow its way.
This is not a trend limited to low politics, either. For example, states now have no choice but
to purchase weapons dependent upon parts sourced from around the world. They must set monetary
policies widiout resorting to exchange rate intervention, interest rate controls, and even money
targeting. Thus, their monetary policies and even fiscal policies compete with that of other states vying
for die same increasingly unregulated flow of capital.
Likewise, in international trade industrialized countries are now competitively pursuing the
initial monopoly rents diat technological innovation leading to imperfect competition causes. Not even
the US can afford any longer to ignore diis race. Last, diere is increasing pressure for convergence in
conservation efforts to deal with multilateral environmental problems. The trouble is, die market
creates strong incentives for some states to be less dian environmentally conscious.
For reasons like diese, it appears diat no less dian a revolution is occurring in world politics.
I have called this empirical reality, wherein even die most influential industrialized countries are bound
to universal market imperatives, die New Interdependence. The theoretical approach I have taken to
understand interdependence I call simply the Interdependence Approach. Its heuristic contribution to
die field of international political economy is to take diree variables never before concentrated upon to
measure nothing less dian an awesome leap in the level of interdependence.
How different is the organization of die international political economy under the New
Interdependence from prior periods in world politics? If we accept diat one of die primary functions of
die modern welfare state has been to prevent and counteract market failure and to remove some
activities from the marketplace, die importance of die shift away from these functions should not be
underestimated. Increasingly, the state looks more like a market-taker dian regulator. In diis kind of
"Brave New World" the choices diat we are left-widi are challenging, if not unsettling.


172
entertainment, book, and CD-ROM industry is also particularly displeased with their protection under
TRIPs (Publishers Weekly 1993, 9; Chemical & Engineering News 1994, 11-13; Commonweal 1994,
6-7).
In principle, what the WTO adds up to is "substantial progress on a number of old GATT
issues," (Hoekman 1993, 1537) with the TRIPs agreement something of an outlier. As such, it remains
a LCD agreement. What the Uruguay Round needed to do to ensure continued trade liberalization
among industrialized countries was to deepen integration, because the "shallow integration approach
underlying the GATT is inherently based upon-and fosters-regulatory competition, as contracting
parties remain sovereign with respect to regulatory regimes and social policies" (Hoekman 1993, 1538).
This makes sense, too, if we assume diat countries are capital-scarce and competitive, they will try to
out-attract one another with whatever tools remain unregulated. In this case, competition policy is fair
game.
Strategic trade and industrial targeting. In keeping widi Corollary Three, which states that a
defining feature of the New Interdependence is that countries will behave more competitively in pursuit
of commercial advantage, die failure of industrialized countries to agree on more than a LCD trade
system has encouraged beggar-diy-neighbor strategic trade policies and industrial targeting. "Strategic
trade" refers to government-backed promotion policies for exports;41 and "industrial targeting," to
41 In general, strategic trade policy is an attempt on the part of the state to make sure that TNCs
innovate within their borders, not the borders of other states. Three primary rationales explain why
strategic trade can be to the advantage of the state: (1) the infant industry argument, (2) economies of
scale, and (3) tax on foreign profits. The infant industry argument states that it is best to protect an
industry until it is capable of competing with foreign rivals, assuming that die industry to be protected
generates positive externalities or cannot efficiently make long-term investments through capital markets
on its own. The economies of scale argument states that by restricting a market to a particular firm, diat
firm is advantaged in other markets (Krugman 1984; Venables 1984). The reason is that economies of
scale allow the firm to move down its average cost and learning curves. Finally, the last argument is that
tariffs imposed on foreign firms earning substantial profits in a market can act like a tax on the firm
(Brander and Spencer 1981). Up to some point, die firm will simply absorb the tariff to dissuade potential
domestic entrants from budging into the firms monopolized market. After that, the firm will allow prices
to rise, and domestic entry will occur.


213
remarkable. It has changed attitudes in developing countries more than in the OECD" (Maddox,
Financial Times 23 June 1993, 21). Thus, "by almost all accounts, since Stockholm [in 1972] there
has been a convergence of opinion within the global community that nations must act to slow
destruction of planetary resources" (Shabecoff, New York Times 23 May 1982, 4:11).
Of course, as Leonard and Morell point out (1981), this convergence has not always led to
increased action. Of die over 110 developing countries that now have environmental management
offices, most are weak, sometimes just one-person, intergovernmental (rather than ministerial) agencies
that can be dominated by patron-client relationships and factionalism (Id. at 308, 312). The World
Environment Center has found diat, although almost all countries now have environmental guidelines,
legislation, or regulation in place, most developing countries "do not have the resources-technical,
human, and financialto monitor and enforce diem" (1985, ix).
Indications are that die enforcement of environmental regulations in developing
countries is a relatively haphazard process, depending heavily on the political power
of those who violate die regulations and on the extent to which the government is
under pressure to take action to stop pollution and environmental degradation.
(Leonard and Morrell 1981, 302-03)
Until recently, developing countries have had little data about even the environmental problems
that their countries confront. But because international donors have put increasing emphasis on urging
developing countries to gadier basic information about environmental conditions and trends, between
1987 and 1990, virtually every country in die world prepared a national report on its environment
(World Resources Institute 1994, 236). Still, with some notable exceptions such as in Chile,
environmental regulations are more apparent on paper dian in practice.
For example, whereas the US spent $24.40 per capita on environmental protection in 1991,
Mexico spent $0.48 (Satchell 1991, 36). In other words, Mexico spent just 2% of die American per
capita environmental budget in 1991. Once more, diis level was significantly higher dian before the
US and Mexico began negotiating NAFTA. In 1990, Mexico spent diree one-diousanddi ($0.08) of the
1991 American per capita environmental budget. Convergence among environmental expenditures is
much clearer among die major industrialized countries around roughly 1 % of GDP. A 1991 OECD


44
Second, in the case-study on monetary policy, innovations in computers and
telecommunications make fixed exchange rate systems less sustainable. Innovations in information
technologies even make fiscal undiscipline very costly, because they allow the market instantaneously to
draw money away from economies pursuing macro-economic policies not to their liking. This explains
why speculators were able to splinter the EMS in 1992. "Ultimately the whole structure of banking,
financial services and distribution is likely to be transformed as a result of the introduction of
electronic funds transfer" (Freeman in OECD 1987, 134).
Mobility of Capital
The mobility of capital is the primary factor which I contend accounts for the new level of
interdependence that we reached in the 1980s. It is not a variable upon which the old interdependence
literature reflects in any great detail. Even so, my use of it is consistent with a theory important to the
integration literature: transactionalism. In general, the father of transactionalism, Deutsch, argued
(1957, 58) that the best way to measure the integration of a community is to examine die volume of its
transactions or, in odier words, exchanges between countries. The transactions diat he counted
important were mail service, trade, exchanges through media like television and movies, phone calls,
exchange students, tourists, and international publications.
Although the only transactions I focus upon are financial and technological ones, I find
Deutschs general emphasis upon exchange as a measure of interdependence more persuasive and
theoretically useful than the functionalist (Mitrany 1966, 1975) and neo-functionalists (Haas 1958;
Haas and Schmitter 1966; Nye 1971) emphasis on the proliferation of international organizations (IOs).
Even functionalists (Mitrany 1966, 1975) admit that IOs are likely to vary cross-nationally, even when
die functions that they perform do not. That is, as Almond put it (1990), different institutions are
likely to develop to serve die same functional ends around die world. Transactions, in contrast, occur
in discrete units diat can be measured and compared meaningfully, whatever dieir location.
Furthermore, we know in retrospect diat it is not necessarily the case that institutions naturally
grow stronger and drive a community of states automatically toward integration like functionalists


158
This was the consequence of (1) the tremendous absolute increase in international trade and its
associated increase in trade as a percentage of national income and (2) the advent of new types of trade,
i.e. trade in services, countertrade, and intra-firm trade. The growth of world trade meant that it was
more important to national prosperity to be a successful international trader; and the evolution of world
trade meant that innovation was more important and, thus, that the state had to help the market to
achieve the economies-of-scale that it needed to promote national welfare. In the modem political
economy full employment depends on the state succeeding, but the problem is that every other state is
trying to snatch (in largely GATT-consistent, though extra-GATT ways) the same advantages deriving
from imperfect competition for its industrial complex that the others want. The result is that the
collective good is being under-provided.
Growth in trade. For the first time in 1989, the value of world merchandise trade topped $3
trillion. As recently as 1985, world trade was valued at less than $2 trillion. Now, even small
increases in trade have an important influence on the world economy. This is the case even for large,
industrialized countries, as it has been for small, developing countries all along. For example, l.M.
Destler points to a substantial increase in the importance of trade as a percentage of total US GNP in
the 1980s. She argues that trade accounted for 21.3% of national GNP in 1980, and 23.2% in 1990
(Destler 1992, 45-6, citing the Economic Report of the President. 1991. and Economic Indicators. June
1991). This is a dramatic increase over the only modest gains in trade as a percentage of GNP during
the previous three decades. Destler estimates that the US imported only 5.6% of its total production of
goods in 1950; 5.8%, in 1960; and 8.7%, in 1970.
Overall, the increased "internationalization of the US economy has multiplied the number of
business interests that depend on trade and suffer from its restriction-even as it multiplies the number
of trade disputes US officials must address" (Destler 1992, 210). Thus, increased trade dependence has
not been an unmixed blessing for multilateralists. Empirically, it is clear that in the US the more an
industry is export dependent, the more likely its representative associations are to support a targeting
provision in Section 301 (Martin 1991, 86, 200, 204; Destler and Odell, 1987). In contrast, the higher


53
substantial realization of the liberalizing objectives of Bretton Woods, the GATT, and other post-World
War II multilateral institutions explains this shift. De-segmentation and liberalization are the
consequences of innovation and capital mobility, not waning hegemony.
This will be obvious in each of die case-studies which follow. Chapter Three deals widi
weapons procurement policy, my "crucial case" study. It is innovation which is making defensive
autonomy unaffordable and market competition which has made COCOM, an organization designed to
stem the flow of sensitive technology, largely ineffective. Chapter Four evaluates monetary policy and
finds that convergence is die most substantial in this issue-area. Capital mobility and technological
innovation in die context of monetary policy has undermined both Bretton Woods and the EMS. In
Chapter Five, I deal with trade policy and find diat liberalization of tariff and non-tariff barriers is
proceeding, even while extra-GATT or WTO competition policies and industrial targeting are becoming
attractive to industrialized countries. In Chapter Six, I examine environmental policy and find that the
tendency is for die state to liberalize regulations on a broader variety of environmental problems.
Finally, in chapter seven, I close with some over-arching observations and expectations for the future.
It should become obvious diat my foremost impression is diat the market is radically
reconfiguring die inter-state system, leading to die development of competition states in die short-term
and probably to supra-national governance in the long-term. In the words of E.H. Carr,
The conclusion now seems to impose itself on any unbiased observer diat the small
independent nation-state is obsolete or obsolescent and diat no workable international
organization can be built on a membership of a multiplicity of nation-states.
(1964, viii)


259
policymaking. However, since each state has reason to avoid such punishing behavior in order to
receive financial flows which a less restrictive regulatory environment invites, the odds are that
convergence upon further financial liberalization will continue.
My critical case-study, weapons procurement policy, reveals more nuanced convergence-also
called standardizationthan is evident in monetary policymaking, but convergence, nonetheless. The
unique convergence evident in weapons procurement policy is, in effect, occurring from the
components level up. Whereas standardization at the components level is occurring rapidly, NATO
efforts to standardize procurement at the systems level under the Rationalization, Standardization, and
Interoperability (RSI) program have not been notably successful. The end of the Cold War has
decreased the sense of urgency with which NATO members have greeted technological innovation
leading to structural disarmament. NATO members have chosen simply to allow their forces to be
drawn down in the 1990s, as the result of costly and inefficient national weapons procurement
programs.
However, at the components level standardization will eventually overtake de-standardization at
the systems level of weapons procurement because of three trends: (1) essential components are often
not available domestically or, at least, not at a competitive price, (2) the increasing cost of weapons
R&D and production makes international consortia of defense producers necessary, and (3) the increase
in dual-use technologies makes the purchase of specialty defense components too costly. Consistent
with Corollary One, which states that convergence most substantially influences countries with
relatively small national incomes and issue areas where capital is liquid, all of these trends are the most
pronounced in middle-range military powers. Furthermore, the sheer number of parts involved in the
weapons system of all countries and the multinationalization of defense contractors makes state
regulation and tracking of interdependence at the components level of weapon systems virtually
impossible. Thus, standardization from the ground up should eventually make weapons systems fairly
similar among industrialized countries.


298
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Moravcsik, A. 1992. "Anns and Autarky in Modem European History." In Defense and Dependence in
a Global Economy. R. Vernon and E. Kapstein, eds. Washington, D.C.: Congressional Quarterly,
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Morgan Guaranty Trust Company of New York. Various Issues. World Financial Markets. New York:
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Morse, E. 1970. "The Transformation of Foreign Policies." World Politics 22:3 (April): 371-392.
Mourik, A. 1987. "Testing the Factor Price Equalization Theory in the EC: An Alternative Approach: A
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Muller-Rommel, F., ed. 1989. New Politics in Western Europe: The Rise and Success of Green Parties
and Alternative Lists. Boulder, Colorado: Westview Press.
Munson, F. 1993. "Pollution for Sale, Only $120 Per Ton." Sacramento Bee (April 21): B:7.
Murray, A. and Lehner, U. 1990. "What U.S Scientists Discover, the Japanese Convert-Into Profit." The
Wall Street Journal (June 25): A: 1.
Myerson, A. 1992. "Turmoil in the Currency Markets." The New York Times (September 17): C:l.
Niebuhr, R. 1946. Christianity and Power Politics. New York: Charles Scribners Sons.
Nunn, S. 1986. "Improving NATOs Armaments Cooperation." Congressional Record Service 132:3699
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Nye, J.S. 1971. Peace in Parts: Integration and Conflict in Regional Organization. Boston: Little, Brown
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"Olof Lund; Chairman, Celsius Industries Corp." 1992. Defense News (July 27): 22.
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Tomorrows World. Paris: OECD.


67
number at 20% of the parts in US weapons systemsand growing (Vernon and Kapstein 1991). This is
compared to basically no foreign components sourcing just two decades ago. In general, European
members of NATO have had a higher level of components dependence upon die US, especially in
aviation and micro-circuits. Roughly 30% of the Tornado's components, for example, are American-
sourced (Moravcsik 1990, 78).
Of course, in some instances dependence on offshore component sourcing is much more severe
than 20 or 30%. In the US, for example, the single domestic supplier of ceramic package
manufacturing, one of four elements essential for micro-circuits used in defense applications, is
Kyocera America, Inc., a subsidiary of a Japanese firm. Its sales represent about 13% of sales in the
US ceramic packaging market. The rest of the market is controlled by overseas firms.
Three primary factors explain why this kind of interdependence is growing at the components
level: (1) defense contractors are becoming multinational, (2) "dual-use" technology, or technology
that has both a commercial and military application, is more common, and (3) capital can now search
internationally for optimal cost, quality, performance, and delivery time criteria. I will save the first
point for later. Evidence for die second became apparent in 1981, when the Reagan Administration
attempted to tighten export controls on technology potentially useful in military applications. The
Administration discovered diat so-called "dual-use" technologies had grown so much that "it direatened
the entire control process and dierefore the national security of the US (today, 90% of defense needs
are dependent upon dual-use technology)" (Parks 1990, 78). Dual-use technology permits access to
parts for which states could not otherwise achieve economies-of-scale. Indeed, during the 1970s and
1980s, die most rapid increase in international trade took place in products closely linked to battlefield
capabilities like data processing equipment, transistors, telecommunication equipment, engines,
measuring instruments, and artificial resins (Vernon and Kapstein 1991, 9).
Dual-use technology is die most pronounced in micro-electronics, a field critical to "smart"
weapons. It was also a field at one time dominated by DOD, but now far more commercial dian
defense-related. The military contributed handsomely to AT&Ts initial research on semiconductor


100
Table 3-2: Relative US/USSR Technology Level in Deployed Military Systems (late-1980s)
US
USSR
Superior
Equal
Superior
ICMB's
X
SSBM's
X
SLBM's
X-->
Bombers
x->
SAM's
X
Ballistic Missile Defense
X
Antisatellite
X
Cruise Missiles
<~x
SAM's (including naval)
X->
Tanks
x->
Artillery
X
Infantry Combat Vehicles
X
Anti-tank Guided Missiles
x->
Attack Helicopters
x~>
Chemical Warfare
X
Biological Warfare
X
Attack & Interceptor Aircraft
x~>
Air-to-Air Munitions
x->
Air-to-Surface Munitions
x~>
Airlift Aircraft
x->
SSN's
x->
Torpedoes
X
Sea-based Aircraft
X
Surface Combatants
x->
Naval Cruise Missiles
x~>
Mines
X
Communications
X
Electronic Countermeasure/ECCM
x~>
Early Warning
X
Surveillance and Reconnaissance
x->
Training Simulators
X
Source: Defense Science Board 1988, p. 39.


194
percentage of GNP has increased in all industrialized countries, and the nature of trade has changed, as
well, toward types of trade which tend to be associated with high technology, e.g. countertrade, intra
industry, intra-firm trade, and trade in services. So far, the collective good of full employment policy
coordination has not been provided, though. The exception is in the EC and, to a much more limited
extent, ANZCERTA and NAFTA. The EC has consciously chosen to integrate national competition
policies, the results being dramatically increased intra-EC trade and investment.
This step which the EC has taken, other industrialized countries will probably need to make to
continue their liberalizing trade agenda. In keeping widi Hypothesis Three, the General Agreement and
even die WTO are manifestations of public policy coordination centered around a LCD. They
encourage shallow integration, not the kind of integration around which trade disputes now center:
competition policy. Consequently, industrialized countries have turned increasingly to industrial
targeting and strategic trade policies to obtain competitive advantages in some industrial sectors. Most
of diese policies have been GATT-consistent, if only because they are extra-GATT. Others like Super
301 are only consistent widi GATT under a very strained interpretation of both. The challenge for the
future will be to harmonize these competition policies and health, labor, environmental, and human
rights standards.
Critics of the Uruguay Round Agreement are afraid diat the WTO will be a tool for
implementing LCD agreements in die areas of health, labor, die environment, and human rights.
Already, die GATT has ruled diat certain US environmental legislation is an illegal barrier to trade.
So, environmentalists and labor have good reason to be concerned. But competitive pressure would
have the same effect in this area as die WTO will on industrialized countries: eidier they must impose
elements of dieir social and environmental regulations on developing countries or resign themselves to
die economic sanctions comparatively tougher environmental and social laws entail. It is ironic that in
die future, developing countries may be die greatest advocates of liberalized trade that excludes
competition policy.


I certify that I have read this study and that in my opinion it conforms to
acceptable standards of scholarly presentation and is fully adequate, in scope and quality,
as a dissertation for the degree of Doctor of Philosophy.
David Conradt
Professor of Political Science
This dissertation was submitted to the Graduate Faculty of the Department of
Political Science in the College of Liberal Arts and Sciences and to the Graduate School
and was accepted as partial fulfillment of the requirements for the degree of Doctor of
Philosophy.
December 1994
Dean, Graduate School


125
elements of an effective regulatory device, in contrast to the LCD the Paris Agreement represented.
The G-5 refused die offer, though:
They preferred a more discretionary approach to international cooperation, one that
would enable them to exercise domestic economic autonomy. ... A commitment on
their part to defend established currency values could subject them to inflationary
dollar inflows, as had happened before, or the US might force them to adopt high
exchange rates that would harm their export industries. . They regarded the
initiative of die Reagan Administration for automatic and binding rules as an attempt
to reimpose American hegemony on the global economic system. (Gilpin 1987, 158)
Louvre Accord. The value of the dollar refused to remain stable. But radier dian continue to
inflate, after die Tokyo Round the dollar went into a free-fall because of die changing fiscal
environment. In February 1987, the US finally galvanized enough support among industrialized
countries to take on die international monetary market again, this time to raise the value of the dollar.
The G-730 minus Italy (because of a diplomatic embarrassment) met in France and signed the so-called
Louvre Accord. The Accord was a pledge on die part of die G-7 to intervene actively in exchange
markets to maintain the value of die dollar within an unofficial and undisclosed trading range. That
range is widely rumored to have been between 1.80 and 1.90 marks to die dollar. In addition, die G-7
promised to make good on certain fiscal policy objectives this time (like declining interest rates)
(Greenhouse, New York Times. 26 Sept. 1988, D:l).31 These pledges were reaffirmed as late as
September 1988.
Again, however, die industrialized countries reneged on dieir commitments. This is as we
would expect, too. Hypothesis Three states that public policy coordination designed to regulate the
market is increasingly likely to center around agreement on a LCD. In this instance, the market was
already beginning to speculate on fiscal policy divergence when Janies Baker suggested on October 17,
30The G-7 equals die G-5 plus Italy and Canada.
31The G-7 also reaffirmed the accord in December 1987, the purpose of which, according to Alan
Greenspan, Chairman of the Federal Reserve, was to "give the U.S. and foreign economies time to adjust
to die depreciation of the dollar that had already occurred, while recognizing the uncertainties of where the
dollars long-run equilibrium value may lie" (Kilbom, New York Times 5 May 1988, D:l).


132
Capital Mobility and Technological Innovation
Hypothesis Four states that as the mobility of capital increases, the three dependent variables
of die Interdependence Approach necessarily increase. And as technological innovation continues,
convergence is likely to increase. In die foregoing sections, die now dramatic and still increasing
mobility of capital is what allows investors and currency speculators to take advantage of financial
playing fields that are not equal. As late as the 1970s, private cross-border investment flows were
fairly small, exchange rates were fixed, capital controls were rigid, regulated banks were the primary
source of investment capital, and laws limited die types of bank and investment accounts available.
Capital which managed to look for transnational investment opportunities primarily did so through the
relatively slow mechanism of direct foreign investment (DFI)-not through instant computer transfers
from one stock or currency portfolio to anodier. Transnational investment also had to deal with
cumbersome national regulations dial made risk-taking difficult to judge.
By no means have all of these obstacles to capital mobility dissolved among industrialized
countries in die 1990s, but financial innovation has removed or jeopardized most of them, as I pointed
out in die first section of this chapter. The basis of financial innovation is financial invention. Table
4-4 presents what is to my knowledge a complete list of die new financial instruments and techniques
that emerged throughout die period 1950-80. Since financial inventions are easy to imitate, given their
limited number of attributes and ill-defined property rights, we might expect few, overall. But Table 4-
4 presents an impressive array of financial inventions, which financial houses developed for primarily
two reasons: (1) to circumvent government regulations on die price or quantity of financial services
and (2) to reduce variable exchange rate and interest rate risk and other types of politically-induced
financial risk (Dufey and Giddy 1981).
Advances in computers and telecommunications enabled die market to find ways around
national financial regulations by providing a mechanism through which it could look offshore for states
willing to attract capital into less hostile environments. The decision of industrialized countries in die
late-1950s and 1960s to defend Bretton Woods with still tougher regulations on capital (especially the


45
insisted (Mitrany 1966; Soroos 1986). Rather, many supra-national institutions persist without states
transferring significant, new powers to them. Nor is it obviously the case that institutions are necessary
to bring about integration. The lack of any significant institutional framework for the North American
Free Trade Agreement (NAFTA) demonstrates this point. Finally, we know that significant integration
efforts have begun in developing areas that failed completely, never mind multiplied in functional
terms.
This is not to devalue the importance of institutions. Many criticized Deutsch (Mitrany 1975,
xiv) for this very thing, despite this statement:
. . integration requires, at the international level, some kind of organization, even
though it may be very loose. We put no credence in the old aphorism that among
friends a constitution is not necessary and among enemies it is of no avail. The area
of practicability lies in between. (1957, 6)
I agree and will make reference throughout this manuscript to IOs that are of fundamental
importance to the reconfiguration of world politics. Still, like Deutsch, I find it more useful to
emphasize the influence that transactions are having on the direction of the international political
economy than institutions.
Transactionalism even appears to have been a more important influence on the old
interdependence literature than functionalism. Consider Keohane and Nyes definition of "complex
interdependence" (1977). It has diree main characteristics: (1) multiple channels connect societies
(including informal ties between governmental and nongovernmental elites and transnational
organizations); (2) there is no hierarchy among issue-areas (hence, military security does not
consistently dominate the agenda); and (3) governments do not use military force against other
governments widiin the area covered by the term. "Multiple channels connecting societies" is just
another way of describing transactions.10 And Keohane and Nyes focus on pacific relations between
10This is the more evident when we dissect anodier term diat Keohane and Nye added to die old
interdependence lexicon, "transnational relations." According to Keohane and Nye, transnational relations
has to do with interactions with non-governmental actors (NGOs) and governmental subunits in other
words, "all of world politics diat is not taken into account by die state-centric paradigm" (383). The
"global interactions" (1971) diat interested diem are revealing for their transactional character, diough:


228
One critic argues that "there is no measurable evidence that CITES has benefitted any species at all"
(Trexler 1989, quoted in Weissgold 1991, 29). At least elephants seem to be an exception to this rule,
though. In truth, because the argument is counterfactual, we cannot be sure just what effect CITES has
had. Moreover, it must be remembered diat its goal was never to eradicate trade in species, only to
control it. Moreover, CITES camiot retard the threat to biodiversity that pollution and population
growth causes.
CITES shortcomings are one reason why states are entering into parallel, and generally
regional, species conservation treaties, as well as passing unilateral conservation measures like die US
Wild Bird Conservation Act of 1992. It is also one impetus behind die Convention on Biological
Diversity (1992), die central diemes of which include promoting only trade in biota that conserves
biological diversity and enhances sustainable development, sharing the gains from this exchange
between die North and South, and sovereignty over national biological resources (see Convention;
Downes 1993; Maher 1993). The US ratified the convention on June 30, 1994, almost one year after it
entered into force, after initially opposing it and watering down its tone. Even upon signing the
convention, the US like Britain and Switzerland, attached an "interpretative statement" concerning its
view of the conventions provisions on intellectual property rights. Interpretative statements have
insisted that die convention does not compel private companies to transfer technology, nor to share
profits on odier than mutually agreeable terms (Downes 1993, 100-03; Prentice Hall Law and Business,
January 1994, Westlaw).
But mandatory technology transfer and the sharing of benefits derived from trade in
biodiversity was the major emphasis of the Convention. Genetic resources taken from the Third World
and already stored in gene banks in industrialized countries are excluded from the profit-sharing
provisions in die treaty. And the last controversial provision in the Biodiversity Convention related to
funding, has also been "solved" through interpretative statements. Italy, Switzerland, the US, France,
and Britain all insist diat they retain discretion over how much they will fund implementation of the


197
Most likely, the "second best" solution to economic inefficiencies will not persist for long.
Either the inefficiencies or political friction caused by beggar-thy-neighbor trade policies will finally
compel states to permit the WTO to internalize competition policies (like ANZCERTA and, much more
dramatically, the EC has), or the trade system may be torn asunder by political forces, just as it was in
the 1930s. If the market is allowed to prevail finally, rather than divisive politics, the troubling
implication is that at that point, the division in the international trading system between die North and
South will widen widi little realistic prospect of reversal.


92
labor under the new arrangement is decided at the sub-contractor level in advance through an industry
teaming arrangement. These differences should be clearer after we compare the way the multiple
launch rocket system (MLRS) and F-16 are manufactured. The MLRS is based on the co-development
approach (Table 3-4); and the F-16, on the co-production and co-licensing approach (Figure 3-1).
Comparing co-development and co-production. LTV Aerospace and Defense Company is the
prime contractor for the multiple launch rocket system project; however, co-development arrangements
for die MLRS in 1984 included an impressive array of companies from different NATO countries, each
with a specific task to perform in building the overall vehicle. The F-16 diagram also includes a
diverse group of companies, but in all cases diey are duplicating one anothers work. Thus, the F-16 is
less international in conception than international in construction; hence, it cannot realize most potential
economies-of-scale. In contrast, die MLRS is international in conception and national in construction.
If carried out as planned, the MLRS would be a very efficient weapons procurement program.
Unfortunately, the multiple launch rocket system also illuminates die limits of even quasi-government
inspired weapons harmonization. Whereas the US deployed MLRS to its forces in Europe in 1985, and
significantly subsidized the distribution of die MLRS technical data package, European countries were
just signing acquisition orders diat would not be implemented by European firms until 1991 (Nunn
1986, Nexis Service).
The lesson is that, although quasi-government approaches to weapons standardization take
better advantage of the new mobility of capital in die defense industry, it is not as efficient as New
Direct Forms of Investment. Overall, die mobility of capital in die defense industry is increasing,
diough, and driving convergence forward as Hypodiesis Four predicted. Moreover, technological
innovation is encouraging standardization by making weapons more expensive and economies-of-scale,
more important. The trend toward "smarter" weapons can be seen in defense budget outlays for R&D,
but also in die shift among defense contractors toward NDFI made necessary by die increasing cost of
weapons research. Eventually, if NDFI is allowed to continue to integrate the defense industry in


183
and large-scale agricultural exporters. For transnational investors in goods and services,
multilateralism remains the best forum for reducing the leverage that host governments have over dieir
foreign assets (Id. at 217). The same is true among multinationals, which Susan Strange argues have
become "still more multinational" in response to floating and volatile exchange rates (1986, 13).
They have done this to minimize their exposure to de minimis currencies. Ironically, in the long-run
this strategy "will tend, in turn, to increase their short-term needs for hedging against exchange rate
risks, thus adding still further to the volume of transactions in the financial casino" (Id )-
US-based exporters could not weather a more expensive dollar as easily. Increased global
competition, high interest rates, an overvalued dollar, and the debt crisis confronted US-based exporters
all at once in the 1980s (Martin 1991, 88). The combination of their increased dependence on trade
and GATTs inability to deepen integration left them dissatisfied with the liberal trade regime. So, they
became supporters of fair trade and passage of Super 301, the linchpin of US strategic trade policy (Id.
at 145-48).
Of course, had the GATT deepened integration and, therefore, industrialized countries
managed to optimize dieir macro-economic policies, US-based exporters might have remained
multilateralists. But as capital and technology have washed over traditional trade barriers, they have
created a situation in which die gains from imperfect competition through industrial targeting and
strategic trade policies are substantial for the industrialized countries. "In an imperfectly competitive
environment, the main actors are oligopolies rather than price takes, intra-industry trade dominates, and
comparative advantage depends upon technological leads and scale economies" (Martin 1991, 45).
Therefore, widiout more dian a LCD trade agreement and in die absence of coordination to provide the
collective good of macro-economic optimization, industrial targeting and strategic trade policy is the
result.
Innovation, industrial targeting, and strategic trade. The most commonly cited characteristics
of technology-intensive industries and intra-industry and intra-firm trade in the 1990s, conform well to
the preconditions for profitable industrial targeting and strategic trade: (1) steep learning curves, which


291
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APPENDIX A: POPULATION OF NON-REGIONAL, MULTILATERAL ENVI
RONMENTAL TREATIES 283
APPENDIX B: POPULATION OF REGIONAL, MULTILATERAL ENVIRON
MENTAL TREATIES 285
REFERENCES 287
BIOGRAPHICAL SKETCH 305
viii


271
Neo-realists assert that eroding American hegemony precipitated die collapse of Bretton Woods
in 1971, too. However, as in trade policy, die increasing mobility of capital and technological
innovation provide a better explanation. On die basis of these variables, we can divide the functioning
of Bretton Woods into two phases: 1945-58 and 1958-71. During the former period die international
political economy could sustain die contradiction of embedded liberalism because (1) die international
monetary system was chronically short of dollars, (2) die common fiscal policy objective of most
industrialized countries was to stimulate dieir economies so diat diey could recover from World War II,
(3) die international financial market was relatively small, and (4) financial markets were independent
and carefully regulated. Notably, it was not until 1958, that all European countries agreed to make
their currencies freely convertible.
In contrast, a glut of dollars replaced die chronic shortage of dollars in the 1960s, as the
Triffin Dilemma became influential. Information technologies began to link financial markets and new
financial instruments allowed unregulated dollar reserves to dramatically increase. Thus, shortly after
Bretton Woods began to operate as intended, it began to unravel because die US could not adjust die
value of the dollar. Markets priced currency at values different from what die fixed exchange rate
system demanded; dius, despite increasingly desperate attempts to place controls on capital outflows,
die US closed die gold window in 1971. More evidence diat waning hegemony does not account for
this shift is that die final days of die EMS looked very much like those of the Bretton Woods system.
The ability of capital to exploit the highest rates of return and to force exchange rates to reflect real
differences in underlying fiscal policies ultimately split the EMS in 1992.
In weapons procurement policy die contradiction between die states preference to preserve its
policy autonomy and its desire to preserve international stability is evident in the tradeoff that states
face between self-sufficiency and efficient weapons procurement. While weapons were basically
mechanical, NATO could sustain diis tradeoff widiout unilaterally disarming. Thus, Alliance members
wastefully duplicated one anothers R&D, and procured weapons in inefficient lots.


248
include problems such as Upton Sinclair (1905) identified in the US at the turn of the century, and
which die maquilladora corridor evidences now. But states more focused on economic growth dian
chemical burns, polluted rivers, and smog-filled skies, are likely to ignore diese problems, to discount
the future heavily, and, thus, to minimize environmental regulations. The result in the long-run is diat
die international environment is degraded even for those who do not have such a high discount rate.
Moreover, contrary to what neo-realists might contend, whether or not a hegemon dominates
international politics has little to do widi the speed of environmental degradation. If anything, countries
have responded to environmental problems more effectively in die two decades following the alleged
decline of US power than ever before. With any luck, they will do even better in the future.
Conclusion
Consistent with the novel character of environmental problems and regulation, this chapter has
verified each of the hypodieses which Chapter Two raises, but widi some important nuances. First,
although the new tendency is for states to adopt environmental regulations that are market-friendly and
consensual in nature, rather than rigid and inefficient, another tendency affecting environmental
policymaking since die 1970s, is for the state to regulate a broader variety of environmental problems.
Whereas the first of diese trends appears consistent widi die convergence that Hypothesis One
anticipated, on the surface die second does not. However, in reality, the regulation of a broader
variety of environmental problems reflects the artificially low level of environmental regulation which
states enforced until the 1970s. Until even die 1980s, we were not aware of some of die most serious
environmental problems fundamentally at odds with basic human needs. Eidier that, or we could not
imagine alternatives to die problems.
As environmental problems and solutions to diem have come on to the international political
agenda, diough, states have responded quite predictably by liberalizing regulations after introducing
diem. This "newness" of the environmental policy area, rather than any exception to the tendency of
capital to urge policy liberalization, explains why the variety of regulated environmental problems is
increasing. In fact, the very pressure on die state to ensure diat its industries remain competitive, to


31
The worst penalty that a state faces for not being competitive is capital flight. Excessive
regulations encourage capital to look elsewhere for higher rates of return. Because of modern
technological advances, all else being equal, capital can evaluate and take advantage of differential rates
of return, worldwide. Therefore, these rates of return equalize across states over time. Again, Table
1-1 made this point with regard to national stock markets.
Likewise, literature in finance (Grubel 1968; Levy and Sarnat 1970; Agmon 1972; Solnik
1974; Grubel and Fadner 1971) underscores the attractiveness of international portfolio diversification
to investors. Benefits include, not only higher rates of return, but also risk-reduction. In comparative
terms, Donald Lessard (1974) judges the risk-reduction possible from cross-national diversification even
greater than from cross-industrial diversification within the same country.
Theoretically, die same benefits should exist for those interested in direct foreign investment
(DFI). The literature suggests (see Adler and Dumas 1983; Collins 1990) that DFI results from
imperfections or segmentation in eidier the goods or money market. In reality, findings suggest
(Collins 1990, 284) diat, in net terms, stockholders benefit from a companys decision to diversify only
into select countries. Diversification away from purely domestic operations to developed-country
operations, results in higher rates of return (279). But diversification into investments in developing-
countries reduces overall returns. This is why most DFI flows between industrialized countries.
This finding of bias in capital mobility is not surprising, since not "all else is equal" in capital
markets. In fact, die finding of bias relates to many others in finance (Allan 1982; Adler and Dumas
1983; Errunza 1983; Van Agtmael and Errunza 1982) which show that the correlations between the
equity markets of the US and those of developing states are much lower than those between the US and
developed states. For example, Van Agtmael and Errunza (1982) report correlations of .64 between
die US and Canada in 1976 and 1980 and -.033 between the US and Brazil during the same time
period. The conclusion we should draw is diat die New Interdependence is a concept which applies
primarily to industrialized countries. Labor, land, infrastructure, and markets are different in every
country, but the comparisons are most dramatic between developed and developing countries.


170
What this meant in practice, as the last section of this case-study will explain in more detail, is
that for six successive rounds the GATT had very little practical effect on international trade. The
Kennedy Round which GATT members concluded in 1967, was the first to achieve serious tariff
liberalization beyond that achieved reciprocally in and prior to 1947. All total, from the time when
GATT began functioning properly to the conclusion of the Uruguay Round, tariff rates had dropped
from an average of 45% to 5% (Business Week 1993, 38). GATT members also succeeded at binding
a very few NTBs to GATT discipline, as well as signing some side-agreements or GATT codes like the
Agreement on Trade in Civil Aircraft that involved only a few industrialized countries. However,
practically speaking, subsidies, VERs, standards, most government procurement, and a host of other
tools of competition policy39 remained outside of the GATT system, as did sensitive sectors like
agriculture and steel. With the conclusion of the Uruguay Round, the natural question is: Have GATT
signatories finally agreed on a liberalizing agenda that will move the world trade system beyond its
status as a LCD?
World Trade Organization. A more powerful world trade organization would be counter to
Hypothesis Three. But "the approach taken during the [Uruguay] Round has continued to revolve
around shallow integration" (Hoekman 1993, 1537). The WTO reflects this, suggesting that the
Uruguay Round has not violated the hypothesis. Admittedly, the WTO incorporates a number of
substantial advances over the GATT. The most important are that the WTO: (1) improves on existing
trade dispute resolution mechanisms; (2) requires that all members of the GATT comply with the
Uruguay Round; and (3) provides a permanent Secretariat to address evolving trade issues (see Business
39Admittedly, the Tokyo Round produced a subsidies, procurement, standards, import licensing,
and customs valuation code. But only a handful of states have signed on to these codes. Moreover, their
disciplines are fairly minimal. For example, the specified list of prohibited export subsidies leaves major
gaps. Likewise, die exceptions to the procurement code, tied-aid and the GATT national defense waiver,
leave major gaps in the agreement (GATT 1979, 137-39). The procurement code is also limited to
purchases in excess of US $195,000 (in 1979 dollars) (Id- 137). In contrast, the Agreement on Technical
Barriers to Trade (standards) and customs valuation codes are. in practice, mainly a device to harmonize
international definitions of technical barriers to trade (Id. at 139-40, 139-40). Last, the import licensing
code is only designed to encourage GATT members to adopt automatic licensing procedures (]d. at 142).


211
problem facing the nation" (Id. at 9). But, whereas majorities in 7 out of 12 industrialized countries
said that they were personally concerned about the environment a "great deal" or a "fair amount,"
majorities in 10 out of 12 developing countries said the same (Id. at 11). Perhaps most important for
our purposes is die finding that respondents in developing countries are only slightly less supportive of
environmental regulation at die expense of economic growth than respondents in industrialized countries
(Id- at 33-35). Thus, the survey scientists concluded:
In part, die findings of strong environmental concern diroughout the 24 nations may
reflect the fact diat environmental quality is no longer seen as a postmaterialist value
and diat environmental degradation is increasingly recognized as a direct threat to
human health and welfare. Indeed, protecting ones family from environmental
hazards seems to be joining die provision of food, clothing, and shelter as a basic
human goal. But in part, the results of the survey may also reflect the fact that social
science analyses of environmentalism . have downplayed the role of direct human
experience with environmental degradation, which is especially noticeable at die local
levels in die poorer nations. (Id. at 37-38)
Although this conclusion is probably overstated, if for no other reasons dian diose related to
the limitations of survey research in developing countries (see supra, notes 2 and 3), the trend toward
increasing environmental concern, especially following die 1972 UN Conference on die Human
Environment in Stockholm, is clear-cut. We were not even aware of some of die most serious
environmental problems until the 1970s, or that there were alternatives to enduring diem. In Bachrach
and Baratzs words (1962), environmental regulation had not "come on to die political agenda" yet.
For the most part, environmental externalities were not even counted as significant costs until
the 1970s; dius, the prior level of environmental non-regulation was artificial. Resources were
misallocated. In contrast, by pricing environmental externalities appropriately we force consumers and
producers to face die true economic costs of dieir allocative decisions and; dierefore, improve the
overall efficiency of die economy. In the words of one analyst, "The inclusion of diese costs
[economic externalities] will alter production, trade, and investment patterns, but the move will be
toward a more efficient pattern" (Pearson 1987, 119). When confronted with the real costs of their
actions, individuals, business, and die government will undertake environmentally harmful activities
only if they have a compelling reason and at the least cost possible.


107
Germanys first major deregulatory moves in the 1980sthe abolition of its withholding tax on foreign
holdings of German securities in 1984was a response to a similar move on the part of the US diat
year. For fear of losing bond business, Britain and France copied the US move later in 1984.
Likewise, the United States removal of capital controls in 1974 was the prelude to Britains dramatic
1979 decision to eliminate its forty-year-old capital controls overnight.
The City of London was not the only European capital that wished to retain its international
financial centrality. The "Big Bang" on the London Stock Exchange in 1986, itself a consequence of
deregulation on the New York Stock Exchange in 1975, spawned "Mini-Bangs" throughout the EC and
in Scandinavia in the late-1980s. Without duplicating London, European countries risked losing
considerable domestic and international financial business. German big banks, for example, threatened
to migrate to London unless Germany relaxed restrictions on capital (Helleiner 1993, citing Pringle
1989, 27). As a result of this kind of competition throughout the industrialized world, even its
financial stragglers have become surprisingly liberal. A racheting-up toward further "instrumental
ineffectiveness" is the seemingly unflagging trend. In the words of Edward Kane,
Inherited regulatory structures are effectively crumbling away. By making minor
adaptations in its organizational form and in the labels it attaches to its products, an
institution may legally engage in most prohibited activities. ... In an evolutionary
manner, market forces have made preexisting regulations cumulatively less effective. .
. For policymakers, economic events have created a need to define a workable
strategy for re-regulating the financial services industry. (Lawrence and Shay 1986,
125-127)
Admittedly, some (Tobin, in Committee on Banking, Housing, and Urban Affairs 1992) are
more sanguine than I am about this prospect. Others like Phillip Cagan are persuasive, however, when
they insist that re-regulation is less and less feasible, particularly if information technologies continue to
advance. He writes that in die not too distant future even the Fed will "essentially be out of the
money-creating business" (Lawrence and Shay 1986, 197). In smaller countries, economists have
already written-off monetary policy. This is as I expected, based on Corollary One of Hypothesis One,
which states that convergence more substantially influences countries widi relatively small national


108
incomes and issue-areas in which capital is highly liquid. In Great Britain, for example, Maximilian
Hall writes:
... it would seem appropriate to downgrade monetary policys contribution to
economic management, just as Friedman had previously done for fiscal policy, and
instead allow monetary policy to play a more humble role, such as the maximization
of sales of public-sector debt to non-bank investors, to which it has proved to be
better suited. (Hall 1983, 131-132)
To be an influential player in the economy in the future, central banks will have to overcome
at least six primary obstacles to returning to an effective interventionist strategy in national monetary
policy. The likelihood that the central banks can do so, and move against the tide of liberalization
which the market is encouraging states to embrace (convergence), is slim. The six obstacles to
effective regulation are: (1) managed or fixed exchange rates do not work; (2) interest rate ceilings are
no longer effective; (3) geographic barriers to banking can be overcome; (4) legal regulations that
compartmentalize financial services are nearly obsolete; (5) monetary targeting is less precise, if not
futile; and (6) national reserve constraints are no longer as limiting. In effect, the convergence toward
instrumental ineffectiveness in monetary policy means that central banks are no longer so much setting
the policy in these critical areas (e.g. exchange rates, geographic and financial services restrictions on
banking, money reserve requirements, and exchange rate intervention) as reacting to the markets lead
and with limited effect.
Below, I will explore in more detail the last four of the six obstacles to financial regulation
that I have just listed, with particular regard to the US. This is in keeping with my research design,
which emphasizes singling-out the hegemon to show that (1) even the largest states are entangled in the
New Interdependence and (2) the real explanation for the breakdown of multilateral coordination efforts
is capital mobility, rather than declining hegemony. I will concentrate on the first of these justifications
for singling-out the hegemon in this section, and show that, aldiough the US is the country dieoretically
most capable of controlling its own finances, it is having serious problems doing so.
Geographic barriers. One of the most important reasons for the convergence toward
instrumental ineffectiveness in monetary policymaking is the breach of both intra-state and inter-state



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