Smaller Exchanges, Larger Regimes: How Trading in Small, Interdependent Units Affects Treaty Stability

Suppose two parties desire to divide a $300 prize equally, but only have bills at their disposal. As long as the unit of exchange remains too large for equal division, the two parties seem destined for an uneven and uneasy agreement. The solution seems simple: exchange the $100 bills for $50 bills, so that the unit of exchange is small enough to support an equal division. Theories in effective policymaking and diplomacy readily acknowledge this concept.1 Treaties that take an all-or-nothing approach2 are out of style. Breaking up a large issue into smaller entitlements would allow for more proportionate divisions that correspond to proportions the parties feel they deserve/ Countries could benefit from agreeing to have joint jurisdiction over disputed areas, rather than engaging in a cosdy fight for complete control.4 Countries that disagree on the appropriate scope of international criminal law or the jurisdictional limits of the International Criminal Court may still agree that piracy should be treated as an international crime.5 Rather than arguing for complete freedom of the seas or absolute jurisdiction over territorial waters, countries may negotiate intermediary zones with shared rights.6 Perceptions of fairness are important to gaining credibility for one's position and building international consensus, and a state that cannot justify its position with principles of equity must dip into its limited supply of political capital to pay for its choice. Thus, theories of diplomacy and equitable division might lead one to predict that nations prefer to negotiate in smaller units, insofar as they facilitate perceptions of fair, proportionate division. Counterintuitively, however, the current trend in treaty negotiation is not toward working with ever-smaller units of exchange. If smaller units were all that were necessary to facilitate exchange, then a state could always create the proper balance of benefits through side payments. Any divisibility problem could be solved with the introduction of money. However, in practice, states often disfavor side payment schemes as overly "redistributive."7 To the extent that states have formally implemented such payment schemes into agreements, they have often given a conceptual justification for why these payments are directly linked to the goals of the project at hand, rather than admitting that they are simply payments to compensate for uneven exchanges.8 On the contrary, some of the most successful modern treaties appear to be of a scope that would have been unimaginable a century ago, ranging across multiple regulatory regimes and binding multiple countries.9 On the one hand, countries are "unbundling" what were traditionally larger "packages" of sovereign rights and trading in exchanges of smaller commitments, but on the other hand, they are making many of these "small-unit" exchanges to build linkages that make larger regimes possible.10 The conclusion: merely exchanging in smaller units is not enough; there must be some value added in carefully selecting those small pieces of exchange that promote interdependence. To illustrate, consider the earlier problem involving the $300 prize. If exchanging in smaller units was all that mattered, the parties could simply convert the $100 bills into $50 bills and make an even split. Instead, many of these large-scale treaties function as though the parties agreed to split the $200 evenly, then agreed to put the remaining $100 into a joint savings account in order to share the interest. Notice in this example that, strictly from a monetary perspective, the parties do not gain any advantage by choosing this second approach, given the opportunity cost. The parties could have probably earned the same amount of interest investing $50 on their own. However, there is some value added from being able to secure the stability of an interdependent relationship for the future. In the example, the added value of pooling resources might not be enough for the prizewinners to justify entering into a long-term relationship with each other. …