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Journal of International Business Policy

, Volume 2, Issue 1, pp 86–109 | Cite as

Bridging the enforcement gap in international trade: Participation in the New York Convention on arbitration

  • Michael OlabisiEmail author
Article

Abstract

International trade transactions come with a peculiar hazard: unlike commerce inside national borders, there are no common courts or legal jurisdictions to enforce contracts should disputes arise. Distance, language, and cultural disparities further complicate contract enforcement for international trade. A 1958 United Nations treaty, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC), addresses this enforcement gap. NYC signatory countries commit to enforce the outcomes of private arbitration between importers and exporters. This commitment makes private international arbitration a viable legal alternative for dispute resolution, supported by state enforcement through national courts. This paper explores why many countries waited decades to join the NYC despite the obvious benefits. The puzzle is framed with a model of policy adoption – how the net benefits of membership, driven by trade interactions, social contagion or peer effects and internal barriers, influence the timing of membership decisions. In the data, countries are more likely to join when their regional trade partners do. The nature of traded goods is also a strong predictor of NYC membership, as countries that specialize in contract-intensive goods join sooner on average, relative to producers of undifferentiated commodities.

Keywords

New York Convention international commercial arbitration policy diffusion 

INTRODUCTION

Doing business with firms in other countries comes with risk (Schwenzer & Whitebread, 2014; Van Assche & Schwartz, 2013; Goldberg, 2005). Forming enforceable contracts is difficult because the businesses are from different legal jurisdictions. Overcoming this difficulty by using foreign courts to get rulings may lead to biased judgments, particularly in countries with weak legal institutions. Using domestic courts, then again, may be meaningless if the foreign partner has no seizable assets in the court's jurisdiction. In sum, resolving international trade disputes presents a judicial dilemma for contract enforcement: using domestic courts to get judgments that a foreign trade partner may not recognize, versus using the partner’s courts, and risking biased judgments, along with the high costs associated with legal proceedings in foreign jurisdictions.

To bridge this enforcement gap, a 1958 United Nations conference produced the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention (NYC). The convention enabled a new approach to enforcing trade contracts: [1] When buyers and sellers draw up a contract of trade, they include an arbitration clause, [2] disputes, if they arise, are referred to international arbitration panels, as agreed in the contract, [3] the arbitration panels follow due process to resolve the dispute, and to award costs or damages impartially. Countries that sign the NYC treaty agree to enforce the judgments issued by arbitrators to resolve private commercial disputes arising from international trade. The NYC offers several benefits: businesses obtain relatively fast and high-quality adjudication from arbitrators of their choice when doing business abroad. Nevertheless, it comes at the cost that governments need to give up part of their own judicial sovereignty in the process.1

The NYC is a resource for dispute resolution between firms, created with the support of governments. It reflects the reality that: governments do not trade, firms do. It differs from the World Trade Organization (WTO), regional trade agreements (RTAs) and other mechanisms for dispute resolution between countries. When firms undertaking international trade have contract disputes, they need both [1] adjudication or arbitration of the dispute, as well as [2] enforcement of the arbitral or judicial decision. The NYC guarantees the latter part for firms that choose international arbitration as the option for the first part. Furthermore, the NYC is not an investment dispute treaty. In that sense, it also differs from the International Centre for the Settlement of Investment Disputes (ICSID), which administers disputes between corporations and the governments of countries where the companies have assets, even though both the ICSID and the NYC share the attribute of referring parties to international commercial arbitration.

Many legal experts consider the New York Convention to be the single most important treaty in the field of international commercial arbitration (Kronke, 2010; Schwebel, 1996), with more than 60% of international business contracts including arbitration clauses (Schwenzer & Whitebread, 2014). Recent studies show that NYC membership leads to increased foreign direct investment (Myburgh & Paniagua, 2016). Surprisingly, and this is less well known, many countries took decades to join the NYC. This begs the question of why it took some countries longer to join than others. This paper studies the timing of entry decisions by NYC treaty members. Large trading economies like the U.S. and the U.K. joined in 1970 and 1975, more than a decade after the first members. In 1978, two decades after the initial signatures, treaty membership was only 51 out 155 possible countries. By comparison, in the first two decades of GATT, the World Trade Organization’s predecessor founded in 1948, 75 countries became members, despite GATT’s more stringent entry requirements. There are no real barriers to entry into the NYC, unlike the WTO, which allows current members to hold up would-be joiners in negotiations (Bagwell & Staiger, 2011). Any eligible state may ratify or accede to the NYC, usually through an act of Senate or Parliament. Countries become eligible at formation, independence or when the geographic unit otherwise obtains treaty-signing powers. The responsible UN secretariat notifies current members when new members join. The NYC ultimately became one of the most successful international treaties, with 140 members by December 2010, one of the top seven in the Multilateral Treaties Database. Appendix Section “Entry: Signature, Ratification, Accession and In-Force Dates” provides data and explanations for membership and eligibility as defined by the NYC charter.

This paper develops a policy adoption model that builds on Bass (1969) to study why certain countries joined the NYC faster than others. In the framework, countries have both economic and political reasons for joining the NYC. Economically, the NYC provides trade benefits to companies in their jurisdiction, and those benefits increase as more trade partners join the NYC. Countries that specialize in contract-intensive differentiated goods are more likely to join early, given their firms greater needs for dispute resolution services (for example, a dispute is more likely over the specifications in a contract for the sale of a commercial airline jet than for shipments of No. 3 Durum Wheat) (Nunn, 2007). Politically, countries have an incentive to join, because regardless of their firms international business relations, there is pressure to keep up with peers in multilateral trade agreements. The incentive to join also depends country-specific attributes, which may increase or decrease the costs or benefits of participation. One cost, which has been mentioned in the context of referring disputes to arbitration in investor-state disputes, is the loss of judicial sovereignty. Countries with stronger incentives will join earlier, just as countries with weak incentives join later, or never join.

We use a hazard model to estimate the relative contributions of country-specific attributes, trade and peer effects to the timing of countries’ decision to join the NYC. (The hazard model is called a ‘duration model’ in some fields, so the term, ‘hazard’ when used to describe joining the NYC in this paper, has a positive meaning). The empirical model is flexible enough to consider a robust set of alternative explanations for the timing of membership. The main findings are:
  • Country-specific traits influence treaty participation. Specifically, countries that specialize in contract-intensive, differentiated goods join sooner. There is weak evidence that democracies join sooner on average, and countries of socialist legal origin join the treaty sooner, on average.

  • Countries are more likely to join the treaty if regional trade agreement (RTA) partners are members. The findings are consistent with the predictions of a model of peer influence.

  • Surprisingly, trade with NYC members by itself, as a driver of membership loses significance after controlling for the NYC membership of RTA partners.

The paper is organized as follows: The next section presents some background on the treaty and related literature. The following sections present a model of treaty participation, and empirics that test the model’s predictions. The last section concludes the paper and discusses the policy implications.

BACKGROUND AND RELATED LITERATURE

Background: The New York Convention

Quoting the United Nations body that oversees the convention:

The Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against and it obliges Parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards. An ancillary aim of the convention is to require courts of parties to give full effect to arbitration agreements by requiring courts to deny the parties access to court in contravention of their agreement to refer the matter to an arbitral tribunal.

Understanding the NYC calls for defining the term binding international commercial arbitration (BICA): resolving international trade disputes between firms by submitting the conflict to an impartial person or group for a final and binding decision, instead of taking the issue to a court. It is also necessary to recognize that arbitration is an important element of international trade. More than 60% of international trade contracts are estimated to have arbitration clauses (Schwenzer & Whitebread, 2014). This compares well with the claim in Leeson (2008) that more than 70% of contracts have an arbitration clause, citing a survey by Casella (1996). Arbitration panels are accessible to most firms. The panels are located in more than forty-seven countries, with the most popular being the International Chamber of Commerce (Paris) and the London Court of International Arbitration (Chartered Institute of Arbitrators, 2011). For the arbitrators’ decisions to be binding, the jurisdiction of the affected parties must be willing to enforce it. This is the gap that the NYC addresses. It puts some teeth behind the ‘binding’ in BICA.

Countries that join the NYC, agree to enforce awards made by arbitrators. (They also agree to not re-litigate in their domestic courts, issues that have been resolved in international commercial arbitration.) For businesses in NYC countries considering trade contracts with parties in other jurisdictions, simply writing an arbitration clause into their contract can make dispute resolution through commercial arbitration a viable option. In the hypothetical example of Furnit Inc. vs. Wood Corp., let us imagine that a panel of impartial arbitrators decided that Furnit Inc. should pay $1 million to Wood Corp. (The case was taken to arbitration because, before the dispute, when the original trade contract was being drawn, an arbitration clause was included). Furnit Inc. cannot be compelled to pay by the arbitrators, only the law enforcement bodies in country F. However, if country F is an NYC member, the government of country F is obliged to enforcing the $1m award against Furnit in favor of Wood Corp. Furnit Inc. has no place to hide from its responsibility to pay.2

The threat of state enforcement for arbitral awards represents an implicit guarantee that is usually sufficient for effective contracting between international trade partners based in signatory countries, when the trade agreement includes an international commercial arbitration clause. The treaty allows specific limited exceptions for not enforcing arbitral awards: invalid contracts, improper arbitration processes, arbitration awards that fall outside the scope of the original contract, and awards that contravene public policy in the jurisdiction of enforcement. Even with these exceptions, participation in the NYC generally signals to foreign private parties that a government will not shield citizens that violated an international contract, just as it does not expect other countries to shield violators.

Binding international commercial arbitration as a dispute-resolution process, substitutes for domestic courts (Pinkham & Peng, 2017). Independent arbitration panels offer the formality of a court, faster average case resolution times, and uniform legal procedures that do not necessarily depend on the contracting party’s country. In fact, with arbitration, firms have the option of shopping for their preferred legal basis for contracting. The NYC makes this possible, as the contracting parties are free to choose the terms of their arbitration clause, knowing that there is state support for the enforcement of arbitral decisions. Table 1 in Pinkham & Peng (2017) outlines the other advantages of arbitration and its differences from the courts, including confidentiality, impartiality, and predictable costs. At the same time, international commercial arbitration is a complement to domestic courts. The courts review the final awards made by arbitration. Therefore, the expectation of hassle-free enforcement still rests on the support of the national courts.

In the absence of formal arbitration or courts, firms need to rely on self-enforcement based on reputation. The history of international trade expansion on the basis of reputation or self-enforcement extends to the Law Merchant or Lex Mercatoria in Western Europe’s Middle Ages (Masten & Prüfer, 2014), and to Maghrebi traders in North Africa and the Middle East (Goldberg, 2005). That is, trade happens, as outlined in Dixit (2003), mostly within close relationships that have built up trust over time. The presence of a few bad actors means that most firms will rationally forgo profitable trade opportunities because they have no way to compel honest behavior by the other party.

The NYC enjoys broad private-sector support. The subsequent section “The U.S. Case” shows that at least in the U.S., the private sector lobbied for the treaty. This is arguably because the treaty effectively offers contract-enforcement insurance for all firms that agree to use arbitration in international trade disputes. The cost of arbitration is the analog of the deductible expense, while countries act as insurers for their resident firms’ trade partners. This analogy illustrates how the NYC favors trading firms. National governments should also favor the treaty, given the prospects of higher tax revenue from increased private sector trade.

Nevertheless, by signing the NYC treaty, a country agrees to enforce agreements and awards made outside its jurisdiction, using its own legal resources. This costs signatory countries a modicum of sovereignty. The willingness of countries to do this may vary, given the different systems of laws that exist, the frictions that exist within different systems of government and the attitudes of governments to international cooperation.

Twenty governments signed the treaty in June 1958 the NYC came into force for those first signatories in June 1959. These founding members were a diverse array of countries that included Germany, France, India and the Philippines. Appendix Table 6 shows membership dates by country, as well as the dates when countries first became eligible. (The analysis in Sect. Empirics focuses on the delay or duration between eligibility and entry.) By 2010, membership in the treaty had increased to 140 (144 in 2014). Figure 1 illustrates the trend, (and for comparison, includes the number of countries in regional trade agreements or RTAs, as well as the number of WTO members).
Figure 1

Number of NYC members over time vs. RTA members. The plot shows the number of NYC members in each year t as circles. The triangles show the number of corresponding number of countries belonging to at least one regional trade agreement (RTA). The squares represent the number of countries that belonged to the WTO in year t.

Data source: UNCITRAL (2014), WTO, Head et al. (2010).

The increase in NYC membership shown in Figure 1 coincided with the proliferation of trade agreements, and the countries that joined those regional trade agreements (RTAs). Given the stricter requirements for GATT/WTO membership, it is striking that NYC membership roughly keeps pace with WTO membership, but does not surpass it, even if GATT/WTO had a head-start of more than a decade. The relatively slow uptake of the NYC compared with other international trade mechanisms drives the question at the heart of this paper.

The U.S. Case

As the value of state relative to private enforcement increases, one expects domestic business interests to increase pressure on the government for the extension of state enforcement to international agreements. Less clear is why states might resist that pressure or delay action. One explanation may be a general reluctance to subject domestic legal systems to outside influences; as Trakman (1983: 42) observed, ‘National systems of law remain jealous of their jurisdiction over world trade and hesitate to lose such business to foreign systems.’ Delays may simply be due to the limited decision-making capacities of governments. Ratifying the treaty requires reconciling the NYC with the domestic legal system on matters like time limits for filing complaints, thresholds on the amount at stake, and grounds for refusal or deferral of award enforcement.

The U.S. experience is illustrative. The U.S. participated in the 1958 conference that established the New York Convention, but did not sign ‘because the American delegation felt that certain provisions were in conflict with some of our domestic laws’ (Congressional Report, 1970). Despite the urging of lawyers and businessmen for early and favorable action, support from the American Bar Association, the American Arbitration Association, the International Chamber of Commerce, the Departments of State and Justice, and the Bureau of the Budget; and assurances that ‘so far as is known, there is no opposition to the bill,’ the bill authorizing accession to the Convention did not arrive in the Senate until April 1968. By a vote of 57–0, the Senate approved the NYC in October 1969, but the decision was made to defer ‘depositing the instrument of accession’ until legislation modifying the chapter of the United States Code containing the United States Arbitration Act could be enacted. Asked why it took another 4 months (to February 1970) for the implementing legislation to be submitted, the State Department explained that an advisory committee on private international law in the State Department suggested changes to the approach for incorporating the convention into the U.S. legal code. The treaty eventually went into effect in September 1970.

Related Literature

To develop our theoretical framework, we build on the policy adoption literature. The literature on the adoption of policies and products goes back more than seven decades. These include studies of how Iowa farmers adopted hybrid corn seeds (Ryan & Gross, 1943), to more recent papers in economics that consider herd behavior in financial decision-making (Banerjee, 1992) or households’ decision to use personal computers (Goolsbee & Klenow, 2002). Earlier in the business literature, Bass (1969) described the purchase of durable goods with an empirically successful imitation-based model.3

Much has been published on policy adoption in the political science literature. The studies extend from cities’ adoption of smoking bans (Shipan & Volden, 2008), through states’ decisions to run lotteries (Berry & Berry, 1990), to the international adoption of financial liberalization policies (Simmons & Elkins, 2004).

The literature on contagion in the context of policy or production adoption draws on research describing biological diffusion or the spread of diseases (Aral et al., 2013; Young, 2009; Jackson & Yariv, 2007). Young (2009) describes this linkage in building a formal model of contagion from the basic elements of epidemiology’s susceptible-infected-recovered (SIR) framework. Carroll (2001) provides another notable usage of the SIR model in economics, using it to represent the diffusion of macroeconomic expectations. Problems of this form lend themselves to estimation using logit models for the simplest cases, or hazard models more generally.

On policies related to international trade, a few papers have studied factors like past colonial relationships that facilitate or obstruct WTO membership (Copelovitch & Ohls, 2012; Cattaneo & Braga, 2008). Wagner (2010) provides a robust model of accession to the Montreal Protocol, which emphasizes the spillover effects of early joiners on other countries. Others like Baldwin & Jaimovich (2012), suggest the possibility of contagion in countries’ participation in regional trade agreements.

Several papers in the international business literature are related to this paper (e.g., Pinkham & Peng, 2017; Khanna & Palepu, 2010; Leeson, 2008). Pinkham & Peng (2017) shows that for international joint ventures, the partners can resolve the institutional gap in contract enforcement using BICA. That paper notes that BICA relies on the NYC. The challenge of institutional gaps and contract enforcement in international trade transactions is emphasized in Khanna & Palepu (2010). These papers all underscore the importance of the NYC and the need to understand its adoption by countries.

The next section presents a formal model of countries adopting a trade treaty like the NYC. The model is a hybrid, in how it accommodates peer effects, as well as the individual responses to incentives in making choices.

MODEL

Explaining NYC membership decisions is challenging, not least because it involves organizations and governance at multiple levels: businesses undertaking international trade, private arbitration tribunals, state courts, international organizations (the UN), and for ratifying treaties, national governments. This section focuses on two of those levels: businesses and governments.

First, businesses looking for the benefits of international trade dispute resolution will lobby governments to join the NYC. Consider a set of N countries, each populated by \(F_i\) firms, (\(i \in 1,...,N\)). At time t, \(n_t\) countries belong to a treaty that benefits only firms in member-countries. For each non-member-country, the potential benefit of joining is proportional to the sum of each of its resident firms’ private benefits from joining the treaty. For the firms, treaty benefits represent the net cost of an insurance policy that guarantees the execution of contracts with trade partners in NYC member countries. (If one calls NYC membership free contract enforcement insurance for firms, the expected cost of appearing before arbitration is the deductible expense). National governments that are responsive to the private sector’s interests will want to join, as long as there are gains from trade, and trade with NYC members is significant. The propensity to join will be proportional to the value of NYC’s benefits to each country’s importers and exporters.

National governments may also want to join the treaty in response to peer effects or contagion, even without direct lobbying from companies in their jurisdiction. Like individuals, governments may be susceptible to peer influence, so that treaty adoption behaves like contagion. (The mechanism mimics the workings of a susceptible-infected (SI) model of infectious disease transmission). The rationale behind conforming to a norm could be the intangible cost of being a ‘pariah’ state, or the desire to be one of the crowd, in order to gain the social influence that comes with being part of a trend (Aral et al., 2013; Golub & Jackson, 2010; Young, 2009).

Within the trade literature and other papers that study contract formation, it is recognized that the risk of reneging of a contract depends on the nature of the traded good (Johnson et al., 2002; McMillan & Woodruff, 1999). Some goods are more contract-intensive than others – the level of contracting effort required to buy an airplane is not the same as that for swapping a commodity on the trading floor (Nunn, 2007). It is therefore reasonable to expect that a country’s propensity to adopt dispute resolution treaties will reflect the complexity of goods in its trade portfolio. However, no country trades in a vacuum, and countries form regional trade agreements as formal structures to support trade. These structures also represent linkages or relationships between countries from a trade policy perspective.

This paper proposes a hybrid model of treaty participation, because the timing of entry depends on the combination of the two incentives – firm benefits and contagion – outlined in the previous paragraph. That said, national governments may vary in their responsiveness to the incentives. Governments have competing priorities, such that one expects high priority items to take less time and low priority items to encounter long delays. In the language of disease transmission, if the barrier to transmission is low, i.e., all countries are highly responsive, then most countries will join quickly. Entry decisions may be delayed on the other hand, despite the benefits, if most countries are not responsive to the net benefits of joining the NYC.

The next subsections explain these mechanisms further.

Contagion Contagion can be explained as the outcome of a polling process for countries that are either members or non-members of a treaty. (Say there are \(n_t\) members out of N countries at time t). Hypothetically, each country polls every other country on their membership status in each period. It decides to join with a non-negative probability proportional to the fraction of members in the population \(P(t) = n_t/N\) . The fraction of countries joining in each period or the hazard rate is initially low because few non-members meet members in the early rounds of polling, as only a few members exist. Eventually, the rate of participation by new members diminishes as non-members become fewer. Formally:
$$\begin{aligned} \frac{\text {d} P}{\text {d}t}&= \gamma P (1-P) \end{aligned}$$
(1)
All countries are equally influential in the diffusion process, and mixing between countries is perfect. Each interaction between a member and a non-member increases the probability of the non-member switching status. \(\gamma\) represents that marginal contribution to the probability of joining the treaty.4
The differential equation in Eq. (1) yields:
$$ln[{P}/{(1-P)}] = \gamma t + A \nonumber$$
(2)
where A is the odds ratio at time t = 0
$$\begin{aligned} A&= ln[P_0/(1-P_0)]. \nonumber \\ P&= \frac{ A e^{\gamma t}}{1 + A e^{\gamma t}} \end{aligned}$$
(3)
The \(\gamma\) parameter measures the responsiveness of a country to interactions with NYC members. This parameter is country-specific, such that some countries have high \(\gamma _i\) and are more responsive to interactions with NYC members. National attributes that may determine the responsiveness of a government to join the treaty may include the system of government and trade as a share of the national economy. For example, interactions with NYC members will generally not sway a country in constant political gridlock or dictators wary of commitments to the international community. In general, those countries will take longer to join the treaty. With heterogeneous \(\gamma _i\)s, one may define country-specific participation propensities \(\text {d} P_{it}/{\text {d} t}\):
$$\begin{aligned} \frac{\text {d} P_{it}}{\text {d} t}&=\gamma _i P_t \end{aligned}$$
(4)
In the aggregate:
$$\begin{aligned} \frac{\text {d} P_t}{\text {d} t}&= \frac{1}{N}\sum _{i=1}^{N-n} \gamma _i P_{t} \end{aligned}$$
(5)
With N countries and n members, so that \((1-P) = (N-n)/N\), Eq. (5) reverts to (1) if \(\gamma _i\) was constant.

Furthermore, interactions between countries, measured by the level of trade, are not uniform. Countries belong to different regional agreements, commonwealths and other fora for negotiation, where membership in the treaty is relevant. Regional trade agreements represent a notable forum for negotiating and observing trade policy between countries. That countries in these agreements belong to the same geographic region also means that members often share boundaries, languages and other traits that could facilitate contagion. For example, Argentina is more likely to emulate Brazil, its MERCOSUR partner, than a distant country like China, even if the latter were a large trade partner.

In sum, the responsiveness of governments is captured by the \(\gamma\) term with responsiveness to economic interests as a special case. The value of the term should be influenced by national attributes like legal origins or system of government. If, for example, all democracies equally favor the treaty but parliamentary democracies are more efficient, then their average \(\gamma\)s should be higher. Similarly, if democracies are on average more pro-trade than monarchies, then monarchies will have lower \(\gamma\)s. (The political costs of treaty membership are also couched in this term, so that if monarchies and democracies are equally pro-trade, but the political costs are less in monarchies, then democracies will have lower \(\gamma\)s).

Firm Benefits One cannot claim that Eq. (5) only represents contagion through imitation. The interactions in the equation could also represent trade, which drives contagion. Trade by definition, represents interactions between private parties – importers and exporters, not necessarily governments. Yet, the level of trade should affect government choices on policy, either directly because governments want the benefits of trade, or indirectly, because trade prompts governments to come together at fora like regional trade agreements to discuss policy. The next paragraphs shift the focus to trade as the primary mechanism that promotes membership in the NYC treaty.

Consider the N countries mentioned at the start of this section, each with \(F_i\) firms, \(i \in [1,N]\). If \(w_{ij}\) is country j’s known share of country i’s trade, \(\sum _{j \ne i} NYC_j*w_{ij}\tau\) is country i’s propensity to join. \(NYC_j=1\) indicates that country j is a member and \(\tau\) captures the value of NYC membership benefit per dollar of trade.

The propensity to join in the previous paragraph is not distinguishable from the polling analogy in Eq. (5). In the polling analogy, the trade share \(w_{ij}\) could be used as weights for each bilateral interaction. The weights will range from zero to one, so every country is polled, but the opinion of non-trade partners are completely discounted. In this scenario, the country-specific propensity will be \(\sum _{j \ne i} NYC_j*w_{ij}\gamma\), and the right hand side of Eq. (5) will be \({\hat{\gamma }}*\sum _{i=1}^{N} w_j \sum _{j\ne i}NYC_j* w_{ij}\). The modified marginal probability of joining is \({\hat{\gamma }}\) and \(w_{j}\) is country j’s share of global trade. Replacing \(\tau\) with \(\gamma\) in the previous paragraph shows that the two approaches are equivalent.

In sum, the \(\tau\) term represents the enforcement gap: the benefits of treaty membership, conditional on trade, or more precisely, the net benefits of formal adjudication over informal, reputation-based enforcement. One expects this term to be influenced by the nature of trade, most prominently by the nature of traded goods. Where trade is predominantly in contract-intensive differentiated goods, \(\tau\) is expected to be higher, leading to more timely adoptions of the treaty. Trade in undifferentiated goods like wheat on global exchanges is expected to require less contract adjudication than trade in differentiated goods like clothing and airplanes. This follows the arguments in Nunn (2007) and Berkowitz et al. (2006) that some goods are more contract-intensive. Similarly, trade with proximate longstanding partners needs courts or arbitration less than trade with new distant partners. The main hypothesis that emerges from the model is that peer effects should be important for a treaty that facilitates trade, as the NYC does. The peer effects will be moderated by the responsiveness of individual countries, as well as the intensity of interactions between specific country-pairs.

The model can be extended to include contagion effects due to trade directly, as well as other interactions. If only one of these two sets of incentives is at work, then the estimation step should yield a zero parameter for the other.

Formally, where \(\kappa\) is the relative contribution of factors not directly proportional to the level of trade, with the understanding that \(\tau\) need not be uniform – contract intensive goods and standardized commodities can have different values for the parameter:
$$\begin{aligned} \frac{\text {d} P_{it}}{\text {d} t}&= \gamma _i \left[ \sum _{j \ne i} NYC_j(w_{ij}\tau + \kappa )\right] \end{aligned}$$
(6)
Setting non-trade weights \(\kappa = 0\) and the enforcement gap parameter \(\tau = 1\) yields Eq. (5).

The rest of the paper will focus on estimating \(\gamma\), \(\kappa\) and \(\tau\). It is important to check whether \(\kappa\) is greater than zero, addressing the question of whether state actors are subject to peer influence as suggested by prior work (Shipan & Volden, 2008; Simmons & Elkins, 2004). The hazard model is ideal in this setting, where the outcome of interest is the growth rate of NYC membership \(\frac{\text {d} P_{it}}{\text {d} t}\).

The next section takes Eq. (6) to the data, first in the aggregate, then later with country-specific variables.

EMPIRICS

There are three parts to this section: (1) Estimating Eq. (2) on the assumption that trade with NYC members does not contribute to countries’ NYC decision [i.e., setting \(\kappa = 1\) and \(\tau =0\) in Eq. (6)]. This provides baseline estimates for the responsiveness of governments. (2) Allowing non-zero values for \(\tau\), while forcing all countries to have the same value of \(\gamma\) and \(\tau\). This allows claims about whether non-trade drivers of membership are statistically significant, and (3) Allowing some country-level heterogeneity in the \(\tau\) parameter.

The section begins with a description of the data.

Data Sources and Descriptives

The main variable of interest is the delay to membership, i.e., the number of years between when a country became eligible to join the treaty and when it actually joined. The United Nations Commission on International Trade Law (UNCITRAL) website provides membership dates for NYC members. Eligibility dates come from different sources, as explained in Appendix Section “Entry Delay: Lag from Eligible Date to Signature Date”. NYC eligibility requires membership of the United Nations (UN), UN specialized agencies, or the International Court of Justice. The earliest date for each country on the member-lists for these organizations marks its eligibility date, (or 1958 for countries with eligibility dates that precede the NYC’s founding).

The availability of data constrains our analysis to the years 1958–2008. Countries started to join the NYC in 1958, and data on countries’ systems of government is only available up to 2008. The trade data also comes in two parts – as no single source for trade data covers 1958–2008. The first bilateral aggregate trade data used by this paper is the CEPII gravity dataset (Head et al., 2010). The trade data was compiled from the IFS Direction of Trade Statistics (DOTS) Database and covers more than 200 countries and territories from 1948 to 2006. The second data source is the CEPII BACI dataset (Gaulier & Zignago, 2010). This second dataset includes trade flows from 1995 to 2016, which were added on to the end of the CEPII data to create a continuous 1948–2016 series of trade flows between country-pairs. For more detailed trade flows that show whether the items traded are differentiated goods or primary commodities, (by the Rauch categories), we use another trade dataset. The Feenstra et al. (2005) dataset shows trade flows between all country-pairs by SIC product categories between 1962 and 2000. The dataset is combined with BACI, which also shows product categories – but using the HS system, to cover trade flows between 1962 and 2016. Given the differences in product categorization, the two datasets were concorded separately to the same product and country name conventions.

Country-specific variables and bilateral variables were extracted from the extended version of the gravity data provided by Head et al. (2010). The country-specific variables include the legal system origin for each country and its WTO membership status. The bilateral variables are richer in detail, ranging from the distance between each country-pair, to whether the country-pairs have contiguous borders, a common official language, a common colonizer, or a previous colonial relationship. The data also includes variables that show whether a country-pair are in a regional trade agreement, using data from the World Trade Organization (WTO). The paper’s online appendix provides further details and references, including updates made to the original dataset to cover more recent years.

Table 1 summarizes the trend for the key variables used in the hazard model (also known as a duration model).
Table 1

NYC members over time

 

Eligible

NYC

Total trade

NYC

Rauch

Colonial

Year

Countries

Members

(bln USD)

Trade share

Diff’d share

Trade share

1958

87

24

105.00

0.13

 

0.18

1968

130

43

252.02

0.22

0.48

0.12

1978

157

62

1401.19

0.57

0.50

0.08

1988

167

86

3078.28

0.77

0.61

0.08

1998

191

129

6177.10

0.91

0.67

0.08

2008

196

154

15,799.60

0.93

0.57

0.06

2016

198

166

15,253.72

0.94

0.64

0.05

The Eligible Countries column represents the number of member and non-members states that qualify to join the treaty. (Appendix Sect. A.2 defines eligibility in detail). NYC Share represents the fraction of global imports and exports that originated and terminated in NYC member countries. Diff’d Share represents the Rauch differentiated goods’ share of trade. The Rauch share data was derived from Feenstra et al. (2005), which starts in 1962. This table stops at 2016, the last year of trade for the revised Head et al. (2010) data.

Data Sources: UNCITRAL, Head et al. (2010), Feenstra et al. (2005).

NYC members increased from roughly a quarter of eligible countries and a sixth of global trade in 1958 to more than three quarters of all countries in 2008. Trade between NYC members represented 93% of the global total, (and trade between NYC members and non-members was 6%). These numbers indicate that NYC members since the 1970s traded more than the average country, an early sign that membership is endogenous. The argument that joining the NYC leads to more trade should be tempered by the fact that countries that tend to trade more, are also more likely to join the NYC. (Figure 1 shows the progress of NYC adoption over time, (in comparison with the WTO, for illustration.) Furthermore, the nature of trade changed in this period, as the last two columns of Table 1 show. Differentiated goods, which tend to be more contract-intensive, increased from less than half in 1968, to 64% of world trade in 2016, using the product categories defined by Rauch (1999) to identify contract-intensive items. The share of trade between countries with colonial ties also decreased significantly, so that the business relationships behind trade transactions now more frequently cross the barriers of language, legal origin, and cultural affiliation.

The founding members of the treaty provide the initial conditions. This means that we start with just over 11,200 country-year observations, of which 1432 do not enter the survival model because they are for countries that never became eligible for NYC entry, 2613 country-years correspond to countries that never joined, and 4647 observations for countries that join in the same year they became eligible, so that there is no duration to observe. These leave us with 4296 observations that can enter our survival model, with 127 NYC entry incidents for 169 possible countries.

Table 2 summarizes the variables used in the duration model. At the country-year level, NYC members represented more than half of the average country’s trade partners between 1958 and 2016. As Table 1 suggests, this value was higher in 2016 than 1958. The broadly consistent upward trend was stronger for some countries than others. Similarly, although RTAs grew in the same period, RTA members represented only 5% of the average country’s trade partners in the same period. This is understandable, given that regional trade partners tend to be few, close, and more intensive trade partners. The pattern consistent with the next lines in the table – 16% of trade in the average country-year was with RTA partners, while it was 39% for NYC members. We also see that for average country-year, trade with NYC members that belonged to the same RTA was 32%.

Interactions with NYC members in the context of regional trade agreements also changed in this period. The average share of each country’s partnerships through RTAs that belonged to NYC members was less than four in ten, but the average depended on the country and time. For some countries, all their RTA partners were NYC members, while others had none. In addition, the ColonialShare and \(Diff'd Goods Share\) variables capture the nature of interactions between countries: the first is the fraction of a country’s trade that involved partners with colonial ties, and the second represents contract-intensive goods as a share of each country’s trade. As show in Table 2, ColonialShare was generally in decline while differentiated goods were gaining global trade share.
Table 2

Summary statistics for model variables

Variables

N

Mean

SD

Minimum

Maximum

Year

11,252

  

1958

2016

NYC share of partners

11,252

0.55

0.19

0.28

0.84

RTA share of partners

11,252

0.05

0.09

0.00

1.00

RTAs share of trade

10,923

0.16

0.27

0.00

1.00

NYC share of RTAs

9349

0.32

0.45

0.00

1.00

NYC share of Trade

10,923

0.39

0.45

0.00

1.00

Diff’d goods share

8590

0.33

0.26

0.00

1.00

Colonial share

10,923

0.15

0.20

0.00

1.00

The Rauch differentiated goods variable only becomes available from 1962. The table reports values for 1968–2006. NYC membership increases from 20 in 1958 to 139 in 2006. It is 140 in 2010.

RTA membership deserves focus as a means of interaction between countries for several reasons: it is a reasonable measure of peer linkage between countries that is not a direct measure of trade. Countries with strong trade ties tend to have regional trade agreements, but this correlation is not perfect. By definition, RTAs are tied to regional geography. Therefore RTA membership is a good proxy for interactions between countries on the basis of geographic proximity and the commonalities that usually come with such proximity. The difference between NYC members’ share of a country’s trade and NYC members’ share of a country’s RTA partnerships provides a useful means to identify whether countries join primarily because of trade, or because they want to be NYC members like their peers.

Other variables not shown in the table include legal origins and systems of government. They are categorical in nature. The legal origins of the 197 countries in the analysis are: French Common Law (76), German/Scandinavian (10), Socialist (33), and U.K. Common Law (63). The system of government changes over time for several countries. Countries like Saudi Arabia and the United Kingdom remained a monarchy or parliamentary democracy for all the years in the data, while others changed systems of government. This category breaks down into country-years as: Parliamentary Democracy (2013), Semi-Presidential Democracy(670), Presidential Democracy (1056), Military Dictatorship (2327), Civilian Dictatorship (1573), Monarchies (686). Cheibub et al. (2010) provided the data on systems of government.

Results

The \(\gamma\) term in Eq. (2) should be zero if interactions between governments play no role in their treaty membership decisions. This motivates the first stage of analysis, which ignores all country-level attributes and trade. That is, fitting data on the number of NYC members for each year between 1958 and 2014 to the equation \(ln[P/(1-P)] = \gamma t + A\).

The estimates yield a \(\gamma\) of 0.033 (using GMM). (The parameter’s z-statistic of 34.3 strongly suggests that it is statistically different zero). With OLS, one gets a similar estimate of 0.035, and a remarkably high \(R^2\) of 0.90 with an A term constructed to match the number of treaty members in 1958. The fit between this naive model and countries’ accession to the NYC strongly implies that interactions or peer influence between countries plays a part in driving membership, even if the model is uninformative about the effectiveness of specific interaction mechanisms.

Having established that interactions between countries play a role in the NYC membership decision, the next steps are to disentangle the direct effects of trade from other interactions, as those other interactions will represent contagion.

The illustrative exercise in the previous paragraph is extended, to allow interactions between countries to be weighted by trade, while keeping all countries homogeneous as shown in Eq. (5). The data for this illustrative exercise is limited to n, the number of eligible countries, N, the number of NYC members and NYCtradeshare, members’ share of trade in each year between 1958 and 2010.5

Formally:
$$\begin{aligned} ln[{P}/{(1-P)}]&= (\tau NYCtradeshare) t + A \end{aligned}$$
(7)
Estimating Eq. (7) yields a \(\tau\) of 0.037 (using GMM). (The parameter’s z-statistic of 45.0 indicates that it differs from zero at a statistically significant level). With OLS, one gets similar estimates of 0.038, and a remarkably high \(R^2\) of 0.98. This specification fits the aggregate trend better, which is not surprising, as the relevant form of interaction between countries in a trade treaty should be trade. It is encouraging that more than 95% of the variation in membership over time is explained by time and the share of trade by NYC members, as shown by the fit of the model to the data in the graph.

These simple estimation exercises provide preliminary evidence that NYC membership is more likely for countries that already want to interact with other countries through trade. They suggest what to expect in the more elaborate survival model that considers the specific countries that adopted the treaty, and their trade profiles. The more detailed estimates make up the rest of this section.

Survival Model Results: Table 3 presents the contributions of trade with NYC members to countries’ decision to join. The specification uses an exponential form for the hazard model, given the distinctive structure of Eq. (6). This form implies that countries join only because of interactions between members and non-members over time. This also requires the explicit assumption of a constant baseline participation hazard, or propensity to join. This appears reasonable, given the nature of international trade and the NYC.

Column 1 of Table 3 is consistent with the preliminary evidence; NYC members’ share of a non-member country’s trade is a reasonable predictor of its propensity to join, but it is not statistically significant. In the same column, the baseline participation propensity over time remains statistically significant. The estimates, naive as they are, given how they ignore country-specific attributes, suggest that non-member participation increases by 4% [i.e., \({\text{exp}}(0.1*.41)-1\)] if the fraction of trade with NYC members increases by 0.1. That said, South Africa joining the treaty would not likely have the same effect on China as South Korea joining the treaty. The regional and cultural links make South Korea a more proximate source of contagion for China. Column 2 explores this idea.
Table 3

NYC participation estimates: contagion

Variables

(1)

(2)

(3)

(4)

NYC share of trade

0.41

  

– 0.11

(0.27)

  

(0.78)

NYC share of RTAs

 

1.03***

 

0.65**

 

(0.00)

 

(0.03)

RTAs share of trade

  

2.09***

1.28***

  

(0.00)

(0.01)

Constant

– 3.89***

– 3.84***

– 3.74***

– 3.76***

(0.00)

(0.00)

(0.00)

(0.00)

Observations

4272

4296

4272

4272

The table reports estimates from a duration model, where the duration of interest is the lag between when a country is eligible to when it joins the NYC or the data is censored. The time-varying covariates represent country-year observations, except for NYCShare, the fraction of all countries in a particular year that belong to the NYC. NYCTradeShare is the fraction of imports and exports for a country-year traded with NYC members. NYCRTAs is the fraction of a country’s RTA partners that belong to the NYC in each year. The specification assumed an exponential form, i.e., constant baseline propensity to join.

Robust standard errors in parentheses, clustered by country. ***, **, and * denote statistical significance at the 1, 5, and 10% levels.

Column 2 estimates the effects of having strong trade ties to RTA members with NYC membership on participation: the propensity to join is estimated to be two times higher if all of a country’s RTA partners were NYC members, compared with belonging to no RTAs or RTAs with no NYC members. The results are not surprising. By 2010 most countries belonged to a regional trade agreement. These regional fora for negotiating trade policy are one of the defining features of international trade in the last half-century (Crawford & Fiorentino, 2005). It is also reasonable to expect that information about the benefits of NYC membership, or negotiations to influence non-members to join may happen in the course of RTA meetings.6

Column 3 of Table 3 further supports the finding in column 2, (and dispels arguments that RTAs can effectively substitute for the dispute resolution that NYC member provides). The column suggests that stronger regional trade ties With estimates that suggest a 75% increased likelihood of participation for a non-member whose share of trade with RTA members increases by 0.27 (one standard deviation).

Combining all three measures of interactions between NYC members and non-members in column 4 confirms the intuition that interactions through trade and RTAs can explain away the purported effects of contagion through observing the global trend in participation. The share of trade within regional trade treaties remains statistically significant, providing preliminary, if inconclusive evidence in support of Masten & Prüfer (2014), that even with proximate relationships the availability of formal arbitration can substitute for self- or reputation-based enforcement, as countries opt to join the NYC.

Table 4 builds on the argument in Nunn (2007) that contract enforcement may be more vital for some goods. Higher shares of contract-intensive goods in a country’s trade portfolio should motivate participation in the NYC, which facilitates formal dispute resolutions through arbitration. Imports and exports in the Rauch (1999) differentiated goods category are taken as contract-intensive. For an effective contract, differentiated goods which are neither sold on a global exchange nor reference-priced, require at the minimum, that trading parties agree on the quality of the traded item. The category covers a broad range of products that range from tee-shirts to airplanes. That these items are contract intensive is understandable, disputes are less likely over whether a shipment of coal, lumber or crude is of a specific grade, than whether an airplane meets agreed specifications.

The estimates suggest that increasing differentiated goods as a share of a country’s trade portfolio also increases the likelihood of NYC participation. The hazard of participation according to column 1 increases by 50% if one increased this index by 0.26 (one standard deviation). [Estimates computed as \({\text{exp}}(1.57*0.26)-1\)]. The estimated effect increases slightly in column 2 when one accounts for the contributions of NYC membership in RTAs and trade with NYC members.
Table 4

NYC participation estimates: the nature of trade and goods

Variables

(1)

(2)

(3)

(4)

Diff’d goods share

1.57***

1.60***

 

1.52***

(0.00)

(0.00)

 

(0.00)

RTAs share of trade

1.65***

 

1.28***

0.77

(0.00)

 

(0.01)

(0.18)

Colonial share

0.09

 

– 0.42

0.27

(0.87)

 

(0.41)

(0.64)

NYC share of RTAs

 

0.85***

0.64**

0.59*

 

(0.00)

(0.04)

(0.09)

NYC share of trade

 

0.61

– 0.13

0.72

 

(0.17)

(0.74)

(0.12)

Constant

– 4.10***

– 4.68***

– 3.68***

– 4.78***

(0.00)

(0.00)

(0.00)

(0.00)

Observations

3368

3368

4272

3368

The table reports estimates from a survival model, where the duration of interest is the lag between when a country is eligible to when it joins the NYC or the data is censored. The time-varying covariates represent country-year observations. RauchShare is the fraction of a country’s trade in a particular year that belong to the Rauch differentiated goods category, (i.e., the liberal definition). ColonialShare is the fraction of imports and exports for a country-year traded with former colonies or colonizers. NYCTradeShare is the fraction of imports and exports for a country-year traded with NYC members. NYCRTAs is the fraction of a country’s RTA partners that belong to the NYC in each year. The specification assumed an exponential form, i.e., constant baseline propensity to join.

Robust standard errors in parentheses, clustered by country. ***, **, and * denote statistical significance at the 1, 5, and 10% levels.

Table 4 also tests a hypothesis from Masten & Prüfer (2014) – that traders will favor formal adjudication as trade expands beyond the scope of established relationships. In this case, colonial history is the proxy for established relationships. Head et al. (2010) shows that the erosion of colonial linkages is one of the most significant changes to trade patterns over the last half-century. By this paper’s estimates, trade between countries with historical colonial ties fell from above 20% in the 1950s to about 5% in 2016. Historical colonial linkages as a proxy also capture some of the effects of having similar languages, legal institutions, and trade treaties.

Column 3 of the table implies that NYC participation rates decrease slightly for countries with high shares of trade with past colonial partners. This agrees with the hypotheses in Masten & Prüfer (2014) that established relationships with self-enforcement are a substitute for formal arbitration. However, the estimates are not statistically significant. NYC participation does not appear to be related to colonial partners’ share of a country’s trade.

Combining all the foregoing in column 4 of Table 4 introduced notable changes to the previous predictions. Having more differentiated goods is still associated with a statistically significant propensity to join the NYC, as is having NYC trade and RTA partners. However, the share of trade with RTA members as a driver of participation becomes statistically insignificant, suggesting that NYC participation is more meaning for trade with proximate partners, when the items traded are differentiated goods. The share of trade with colonial partners remains not statistically significant, as does the share of trade with NYC members. Consistent with the previous findings, having a NYC members in a country’s RTA increases the propensity to join.

One must consider country-specific variables that may affect treaty participation. The systems of government or legal origins fit this end, given earlier discussions of country-specific factors. Table 5 examines how these two factors contribute to NYC participation rates. For example, one may consider democracies more likely to agree to an international covenant. Among democracies, it may also be more likely that parliamentary democracies approve treaties faster – the executive and legislature are unlikely to be politically opposed, by definition. There is room for within- and between-variation in the system of government variable. Ninety of the 188 countries with data, do not change systems of government. Forty of the remaining 98 change more than once, with transitions to democracy becoming more common over time.

Columns 1 and 2 of Table 5 do not support the view that the system of government matters. However, these results lose statistical significant once other variables are included in the empirical model. The estimates suggest that compared to monarchies, democracies are more likely to join, although this is not statistically significant when one considers the nature of traded goods and the prevalence of NYC members in trade relationships. In column 4, the estimates controlling for countries’ legal origins indicate that dictatorships are less likely to join the treaty, but this is also not statistically significant.

Legal origins provide another measure of countries’ propensity to sign a treaty about using legal resources to support trade. Some legal systems may be more disposed to cooperative agreements of this nature, which should reduce the national government’s perceived political costs of signing the treaty. Civil Law (76 countries) and Common Law (63 countries) are the most common categories. These categories are time-invariant.
Table 5

NYC participation estimates: country features

Variables

(1)

(2)

(3)

(4)

NYC share of RTAs

 

0.94**

0.65*

1.00**

 

(0.02)

(0.07)

(0.01)

NYC share of trade

 

0.81*

0.80*

0.90*

 

(0.09)

(0.10)

(0.07)

Diff’d goods share

 

1.50***

1.34***

1.27***

 

(0.00)

(0.00)

(0.01)

RTAs share of trade

 

0.09

0.52

– 0.04

 

(0.91)

(0.38)

(0.97)

Colonial share

 

0.25

0.40

0.31

 

(0.68)

(0.49)

(0.61)

Government system

    Parliamentary

0.59*

0.08

 

0.09

(0.08)

(0.87)

 

(0.85)

    Semi-presidential

0.40

0.30

 

– 0.01

(0.38)

(0.59)

 

(0.99)

    Presidential

0.21

0.06

 

– 0.10

(0.57)

(0.90)

 

(0.81)

    Military dictator

0.09

0.20

 

– 0.02

(0.79)

(0.64)

 

(0.96)

    Civilian dictator

– 0.26

– 0.35

 

– 0.62

(0.51)

(0.45)

 

(0.17)

Legal origin

   Germ./Scandinavian

0.73

 

0.18

0.06

(0.13)

 

(0.73)

(0.92)

   Socialist

0.65**

 

0.44

0.38

(0.01)

 

(0.12)

(0.19)

   Common law

– 0.34

 

– 0.18

– 0.35

(0.13)

 

(0.46)

(0.17)

Constant

– 3.72***

– 4.88***

– 4.82***

– 4.68***

(0.00)

(0.00)

(0.00)

(0.00)

Observations

3885

3150

3358

3148

The table reports estimates from a survival model, where the duration of interest is the lag between when a country is eligible to when it joins the NYC or the data is censored. The time-varying covariates represent country-year observations. Monarchy is the comparison category for government type that is not shown. The reported categories are democracies – semi-Presidential and Presidential democracies, and dictatorships – military and civilian. Similarly, Civil Law as a legal origin category is the comparison category. RauchShare, is the fraction of a country’s trade in a particular year that belong to the Rauch differentiated goods category, (i.e., the liberal definition). ColonialShare is the fraction of imports and exports for a country-year traded with former colonies or colonizers. NYCTradeShare is the fraction of imports and exports for a country-year traded with NYC members. NYCRTAs is the fraction of a country’s RTA partners that belong to the NYC in each year. The specification assumed an exponential form, i.e., constant baseline propensity to join.

Robust standard errors in parentheses, clustered by country. ***, **, and * denote statistical significance at the 1, 5, and 10% levels.

Column 1 of the Table suggests that countries with socialist legal origins are more likely to join the NYC convention. However, after controlling for interactions with NYC members in columns 3 and 4, legal origins appear not statistically significant, (even if the propensity for socialist legal origin countries appears to be higher than that of Civil Law countries). The socialist legal system was built on Civil Law and shares many features. For example, in deciding cases, judges must follow the Legal Code and not judicial precedent (as Common Law countries do). However, the socialist legal system puts more emphasis on power of the state over property. Countries with this legal origin may have been inclined to join the NYC in order to signal a willingness to trade with other countries, given the notable differences in legal principles and procedures.

Combining all the factors in column 4 gives a picture that is largely consistent with previous columns and tables. Having either more differentiated goods, more trade with NYC members, or RTA relationships dominated by NYC members all predict a higher propensity to join the NYC. The country-specific variables change the statistical significance of the trade-interaction variables, but are not themselves statistically significant.

Overall, the results reported in Table 5 suggest that while country-level attributes like legal origins matter, the membership of regional trade partners and other incentives to trade influence country’s decisions to join a treaty like the NYC. This lends support to other papers that find evidence of peer effects in policy adoption, e.g., Shipan & Volden (2008) and Simmons & Elkins (2004). The findings also support claims that some goods are more contract-intensive (Nunn, 2007; Berkowitz et al., 2006), as well as the hypothesis in Masten & Prüfer (2014) that the preference for formal adjudication will increase as the nature and scope of trade expands.7

CONCLUSION

This paper evaluates factors that influence participation in the New York Convention (NYC) – a treaty that supports trade across legal jurisdictions through the commitment of its signatories to the outcomes of international commercial arbitration. The significance of countries’ commitment to support private dispute settlement with the power of the state has led some to call the NYC a modern day Lex Mercatoria. The study is motivated by a puzzling fact: despite benefits of joining the treaty, several large trading economies like the United States, Canada and the United Kingdom waited more than a decade to join.

The paper shows that the nature of traded goods is one of the strongest predictors of NYC participation. Countries that specialize in contract-intensive goods like cars and airplanes are more likely to join the treaty, and to join sooner, compared with those that trade commodities like cotton and coffee. The latter products are sold on regular exchanges and presumably require little legal intervention for a successful trade transaction. This finding supports the hypothesis in Masten & Prüfer (2014) that the preference for formal adjudication will increase as trade expands beyond the scope of reputational enforcement. The findings come from estimating duration models that reflects the nature of the problem, and are flexible enough to accommodate country-level categories, as well as time-varying covariates like trade that are driven by interactions between countries. The foregoing suggest that understanding policy adoption at the national level also calls for understanding the strategies and behaviors of large firms.

The paper shows that peer effects matter in the context of international policy. The results suggest that contagion through forum for trade policy interactions like regional trade agreements (RTAs) are influential in driving adoption of the treaty by non-members. Trade with NYC members increases the propensity to join, but this appears to be more notable when the trade is with NYC members that also belong to a country’s RTAs. This is consistent with some of the work on policy diffusion and suggests further inquiry into the factors that make such peer effects more or less effective. Early works in this area include (Golub & Jackson, 2010; Young, 2009; Shipan & Volden, 2008; Simmons & Elkins, 2004). Table 9 in the Appendix suggests that the peer effects are robust to excluding newly-formed countries, given the counter-argument that countries formed after 1958 may simply adopt the treaty because their former colonial metropoles or parent-country is a member.8

Regional trade agreements play an interesting role in driving peer effects in this study. Trade within regional trade areas may not strongly predict NYC participation after controlling for country-specific variables, but trade with RTA members that are also NYC members increases the propensity to join the NYC. Consistent with this finding, countries like Canada and the United States, with no regional trade agreements in the 1960s, or countries whose trade agreement partners did not belong to the NYC were less likely to join in the first decade, compared with members of the European Free Trade Area, which was established in 1960 and whose members include the first NYC signatories. Country-level factors like legal origins also affected treaty participation, with the estimated participation propensity being higher for socialist legal origin countries than Common Law or Civil Law countries. Other country-level factors like the system of government do not yield statistically significant predictions. It is not clear that democracies are more likely to join the treaty than dictatorships or monarchies. (see the section “The U.S. Case” for a discussion of the U.S. case, where even as the private sector lobbied for adoption, the political process created delays).

These findings are policy-relevant. First, the paper makes a case for joining regional trade agreements (RTAs), given how the RTAs are positively correlated with joining other trade governance initiatives like the NYC. Second, peer-influences matter for policy adoption. Therefore, this paper suggests that a careful selection of ’influencer-nations’ as initial members could enable international businesses to achieve goals that call for consensus among a large number of countries. In the literature on policy adoption, the presence of peer effects suggests that rational choice by national governments may not be completely divorced from social influence or contagion. The findings also suggest that regional trade agreements and other inter-governmental organizations may be influential drivers for policy adoption by their members. Whether this is due to learning, or homophily as suggested by Jackson (2008), is left for later work. The practical implication of the paper’s findings is that multinational corporations can influence the adoption of a policy by lobbying another country within its trade bloc to participate.

The findings encourage further research into the role of social influence and relationship networks on dispute resolution processes include the adoption of dispute resolution tools. If countries that have more to gain from international trade, are also more likely to be the first members of a treaty like the NYC, the paper provides a first step towards identifying the true effects of NYC participation on trade, not just the trade levels of the countries most willing to join. This line of research is useful for policy makers, in valuing the benefits from existing multilateral and bilateral relationships – like the RTA relationships in this paper. The line of research would also be useful for understanding countries’ propensity to join other dispute-resolution mechanisms, e.g., Investor-State Dispute Settlement (ISDS).

Notes

  1. 1

    To emphasize the importance of the NYC, it creates a legal basis in principle, for bridging the gap in enforcement jurisdictions for the 99% of global imports and exports that occurred between firms based in member countries in 2006. Judging how often firms use international arbitration is difficult. Arbitral institutions do not usually publish statistics on the volume of disputes that they resolve. However, we know that between 2007 and 2012, one institution handled more than 4000 disputes that relied on the NYC for enforcement (Cuniberti, 2013).

     
  2. 2

    In reality, the option to arbitrate does not require ex-ante agreement or stand-alone clause in the contract, and the parties to the contract and arbitration have the freedom to choose any country as the venue for enforcement, as long as it is an NYC member, and has jurisdiction over sufficient assets of the relevant contracting party. Furthermore, any of the parties to a dispute may resist the process of arbitration: They may challenge the selection of arbitrators, challenge the selection of the operative law for dispute resolution, appeal to domestic courts – even if those courts are obliged to decline, and when the arbitral award is made, attempt to slow down the process of enforcement. However, these exceptions to the normal process of International Commercial Arbitration with the backing of the New York Convention do nothing to redefine the rule: that the NYC enables international trade by providing a higher level of confidence to contracting parties about contract enforcement.

     
  3. 3

    Exploring the difference between rational learning and ’unsophisticated imitation’ holds great research potential, but that is not the goal of this paper. The paper stays close to the script in Masten & Prüfer (2014), in addressing the factors that motivate countries’ adoption of trade policies like this treaty. Whether the potential drivers of peer influence are rational or not, is not explored.

     
  4. 4

    This model is equivalent to the basic epidemiological model of contagion. As countries never revoke the treaty, the susceptible-infected-recovered (SIR) model simplifies to an SI model. The trivial baseline for the model is one where membership is not driven by interactions, but occurs stochastically at some rate γ. Young (2009) motivates his paper with this baseline, which helps in defining γ later in this paper. It also sets up a notable feature of this model i.e., membership decisions are not guaranteed, but occur with a non-negative probability. In the baseline, all countries join eventually. If γ is heterogeneous, the more responsive countries with high γ should have shorter average entry delays. Equation (1) also mirrors the form presented by the Bass (1969) model of product adoption, \(\frac{\text {d} P}{\text {d}t} = \gamma [P(1-P)] + {\hat{p}}(1-P)\), i.e., if one sets the innovation rate \({\hat{p}}\) to zero. That is, the Bass Model is an SI model with an additional term that depends strictly on the uninfected fraction of the population.

     
  5. 5

    To justify the form in Eq. (7), one must emphasize that the NYCtradeshare term is interacted with the t term, in (1). The share of trade with NYC members is one more factor that drives the ‘infection’ of non-members. It cannot be separated from time.

     
  6. 6

    The number of observations in Table 3 and subsequent tables will change between columns because not all variables are available for all countries in all years, as evidenced in the N column of Table 2.

     
  7. 7

    Masten & Prüfer (2014) argue that trade becomes more contract-intensive with geographic distance, though the same principle applies to changes in the composition of trade. Distance provides little usable variation for the tests: the global average for trade distance has remained unchanged near 5000 km since 1985 (Berthelon & Freund, 2008).

     
  8. 8

    In cases like Serbia and Slovenia, the speed with which Slovenia joined after seceding from Yugoslavia may reflect the fact that Yugoslavia was a member of the NYC, just as Serbia succeeded to Yugoslavia’s NYC status after the split. The main body of the paper interprets Slovenia’s entry as subject to peer effects from Serbia, for simplicity. Table 9 remains consistent with the main findings, even if they suggests further research into how the choices of ’parent-countries’ influence those of the countries they spawned.

     
  9. 9

    For UN membership, http://www.un.org/en/members/; for ICJ membership, http://www.icj-cij.org/jurisdiction/?p1=5&p2=1&p3=1&sp3=a; for International Labor Organization (ILO) membership, http://www.ilo.org/dyn/normlex/en/f?p=1000:11003:0; for the International Telephone Union membership (ITU) http://www.itu.int/online/mm/scripts/mm.list?_search=ITUstates&_languageid=1; and Food and Agriculture Organization (FAO) membership http://www.fao.org/legal/home/fao-members/en/.

     

Notes

Acknowledgements

I am very thankful for helpful guidance by Scott Masten, who helped to start this research paper. I should also thank participants at the European University Institute Workshop on Global Governance, (Multi-mode Governance, Shaping and being Shaped by Globalization). The paper has improved with comments from participants at the Midwest Political Science Association (MPSA) and Association for Public Policy Analysis and Management (APPAM) conferences. All errors are mine.

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Copyright information

© Academy of International Business 2019

Authors and Affiliations

  1. 1.Michigan State UniversityEast LansingUSA

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