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Testing theories of regime change: hegemonic decline or surplus capacity?

Published online by Cambridge University Press:  22 May 2009

Peter F. Cowhey  and
Edward Long
Peter F. Cowhey
Affiliation:
Assistant Professor of Political Science at the University of California, San Diego.
Edward Long
Affiliation:
Congressional Fellow of the American Historical Association on the staff of Congressman Tom Harkin (D-Iowa).
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Abstract

Two theories explain changes in the international regimes for major economic sectors. A theory of hegemonic stability explains sectoral change as a consequence of ebbing hegemony; a theory of surplus capacity attributes regime shifts to a serious global problem with excess production capacity in the sector. The history of the world automobile industry shows that surplus capacity offers the better prediction and explanation for the timing of regime changes. However, a synthesis of the two theories is even more satisfactory. Hegemonic decline is a necessary but not sufficient condition for change. Surplus capacity, in the absence of a hegemon, creates the conditions necessary for change.

Type
Articles
Information
International Organization , Volume 37 , Issue 2 , Spring 1983 , pp. 157 - 188
Copyright
Copyright © The IO Foundation 1983

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References

We thank Jonathan Aronson, Peter Gourevitch, Peter Katzenstein, David Laitin, Susan Strange, and the reviewers of this journal for their comments. The Faculty Senate of the University of California, San Diego, supported this research.

1. Krasner, Stephen, “The Tokyo Round: Particularistic Interests and Prospects for Stability in the Global Trading System,” International Studies Quarterly 23 (12 1979): 491–530CrossRefGoogle Scholar; Lipson, Charles, “The Transformation of Trade: The Sources and Effects of Regime Change,” International Organization 36 (Spring 1982)CrossRefGoogle Scholar. In 1981 world exports showed no net growth because of the collapse of mineral prices. But exports of manufactured goods still grew at a faster pace than did global manufacturing production, albeit at low levels by postwar standards: Financial Times, 23 August 1982, p. 2.

2. Both Robert Keohane (“The Demand for International Regimes”) and Susan Strange (“Cave! hic dragones: A Critique of Regime Analysis”) have expressed strong reservations about the conventional uses of the concept of regime in a special issue of International Organization 36 (Spring 1982)Google Scholar. Nonetheless, the theories we are testing rely on a concept of regime as a dependent variable, even if they do not necessarily rely on all of the independent variables normally associated with this literature.

3. The stipulation concerning “the demand of others” is important. Major players often made little more than perfunctory protests about many deviations from the regime. For example, Europe was largely silent concerning Japanese trade barriers for autos until the mid 1970s.

4. Keohane, Robert, “Hegemonic Leadership and U.S. Foreign Economic Policy,” in Avery, William P. and Rapkin, David P., eds., America in a Changing World Political Economy (New York: Longman, 1982), pp. 49–76Google Scholar, and “The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967–1977,” in Holsti, Ole R., Siverson, Randolph M., and George, Alexander L., eds., Change in the International System (Boulder: Westview, 1980), pp. 131–62Google Scholar. Also see his “U.S. Foreign Economic Policy toward Other Advanced Capitalist States,” in Oye, Kenneth A., Rothchild, Donald, and Lieber, Robert J., eds., Eagle Entangled (New York: Longman, 1979), pp. 91–122Google Scholar.

5. Keohane predicts that “as the distribution of tangible resources, especially economic resources, becomes more equal, international regimes should weaken” (“Theory of Hegemonic Stability,” p. 136). Unlike Charles Kindleberger or Robert Gilpin, Keohane does not claim that hegemony and a commitment to a liberal order are necessarily linked. His primary concern is not with specific rules or substantive biases; it is with strong regimes, which he identifies with stability. He emphasizes “patterns of regularized cooperative behavior in world politics” where “predictable orderly behavior takes place according to a set of standards understood by participants …” (ibid., p. 133). Great powers institute regimes to their liking that will not prove totally unacceptable to key partners. However, he accepts the fact that the United States did prefer liberal, albeit imperfectly liberal, regimes (“Hegemonic Leadership,” p. 66).

6. Keohane notes that the world's confidence in U.S. integrity in carrying out its obligations as the “world's banker” was an important source of symbolic power for the United States (“Theory of Hegemonic Stability,” pp. 150, 155). His measures do not capture this dimension of power but this is not a fatal theoretical flaw.

7. The theory was not very helpful in dealing with particular forms of erosion that did occur.

8. It is interesting to compare Keohane's approach on this score with the latest work by Robert Gilpin. Gilpin argues that the dynamics of exercising hegemonic power predictably lead to a decline in the nation's power: Gilpin, , War and Change in International Politics (New York: Cambridge University Press, 1981)CrossRefGoogle Scholar.

9. Strange explicitly denies having created a “theory” of surplus capacity because she was primarily engaged in offering selected observations on the subject (private communication). We gladly acknowledge that what follows is our formalization of Strange, “The Management of Surplus Capacity: or How Does Theory Stand Up to Protectionism 1970s Style?” International Organization 33 (Summer 1979)Google Scholar; Strange, and Tooze, Roger, eds., The International Politics of Surplus Capacity, (London: Butterworth, 1980)Google Scholar; and Tsoukalis, Loukas and Ferreira, António da Silva, “Management of Industrial Surplus Capacity in the European Community,” International Organization 34 (Summer 1980): 355–76CrossRefGoogle Scholar.

10. Surplus capacity exists when, for a sustained period of time and a large percentage of all producers, demand is not sufficient to absorb enough output for prices to sustain substantial employment and adequate returns on investment in a sector (based on Strange, “Management,” p. 304, and Tsoukalis, and Ferreira, , “Management,” pp. 355–56Google Scholar). Tsoukalis and Ferreira note that surplus capacity may not exist in the automobile industry, which may rather suffer simply from a cyclical problem. But few experts now believe that fundamental readjustment of world capacity can be avoided in the auto industry.

11. The arrangement for such cartels is often very loose and virtually indistinguishable from what oligopoly produces. Tsoukalis and Ferreira emphasize international corporatist arrangements more than Strange because they want to explain why the Common Market's ability to manage surplus capacity varies from sector to sector. They define effectiveness in terms of possessing an industrial policy that can eliminate distortions to competition or impose state preferences on the market at the sectoral level (“Management,” p. 356).

12. Strange, , “Management,” p. 308Google Scholar.

13. More generally, Strange suspects that the structure of production of multinational firms makes them less concerned than domestic companies about the specific contents of an international regime (private communication).

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17. Concentration is a double-edged sword. Conceivably, it could allow quicker, more painless agreements to avoid continuing trade wars. But it also may maximize the chances of a shift from a liberal to an international corporatist order. (Nonetheless, both by the standards of stability of the postwar regimes and of adherence to liberal doctrines, the shift would be a significant event.) Tsoukalis and Ferreira originally developed market concentration as a supplement to a broader intervening factor suggested by Strange: the competence and powers of international institutions. The two most important for their studies are the GATT and the European Community (EC). Particularly in the case of the EC, its mandate to regulate trade negotiations with nonmembers is important to making progress on a common industrial policy. However, the explanatory power of this variable is limited even in the EC, which is by far the strongest institution for the task. Thus, for our purposes of comparison this intervening variable does not seem crucial for explaining the decline of stable global regimes.

18. Splits may also arise among developing countries because the first entrants into the world market from their ranks may oppose new entries.

19. Financial Times, 23 August 1982, p. 2.

20. Kurth, James R., “The Political Consequences of the Product Cycle: Industrial History and Political Outcomes,” International Organization 33 (Winter 1979)CrossRefGoogle Scholar.

21. A secondary divergence in the dependent variable is that Keohane is more concerned with regimes as a set of principles, norms, and procedures than are those working on surplus capacity. Strange is much more interested in particular policies than in the broad normative principles of a regime.

22. Krasner, Stephen D., “State Power and the Structure of International Trade,” World Politics 28 (04 1976): 317–47CrossRefGoogle Scholar.

23. Gilpin, Robert, “Three Models of the Future,” in Bergsten, C. Fred and Krause, Lawrence B., eds., World Politics and International Economics (Washington, D.C.: Brookings, 1975), p. 51Google Scholar.

24. Duncan, William C., US-Japan Automobile Diplomacy: A Study in Economic Confrontation (Cambridge, Mass.: Ballinger, 1973), pp. 21–24 and 40–41Google Scholar.

25. Bennett, Douglas C. and Sharpe, Kenneth E., “Agenda Setting and Bargaining Power: The Mexican State versus Transnational Automobile Corporations,” World Politics 32 (10 1979), p. 80CrossRefGoogle Scholar.

26. Washington folklore claims that the U.S.-Canadian agreement was a “thank you” gift from President Johnson to Prime Minister Pearson. During the Cyprus crisis Pearson had immensely assisted U.S. diplomats by dispatching Canadian troops to Italy to be available for a UN peacekeeping force. This tipped the balance in UN deliberations. Johnson knew that Pearson keenly wanted the automobile package and decided to “rig” the U.S. negotiating team by circumventing normal bureaucratic assignments, thus assuring a favorable outcome for Canada (based on interviews).

27. Another way to think about national power in a world market is to examine the share of consumption represented by a country's market. Presumably the larger the share of the leading power, the bigger is the “secure” market base of its firms and the more other countries will compromise to win entry into that market. By this standard North America lost its overwhelming hegemony around 1970 when Europe and Japan combined to match the North American share of consumption (each being at about 44%). By 1980 Japan and Europe had a larger share of world consumption (together totalling about 45%) than North America (at about 35%). However, it is important to remember that U.S. firms held a substantial share of the European market. See McMullen, Neil and Megna, Laura L., “Automobiles,” in Turner, Louis and McMullen, , eds., The Newly Industrializing Countries: Trade and Adjustment (London: Allen & Unwin, 1982)Google Scholar.

28. Commission of the European Communities, The European Automobile Industry: Commission Statement (Brussels, 06 1981), p. 21Google Scholar.

29. Automotive News (Detroit), 1981 Market Data Book Issue, 29 April 1981, p. 2.

30. Jenkins, Rhys Owen, Dependent Industrialization in Latin America: The Automotive Industry in Argentina, Chile, and Mexico (New York: Praeger, 1977), p. 25Google Scholar.

31. Commission of the EC, European Automobile Industry, p. 30Google Scholar.

32. Ibid.

33. United States, Congress, House, “Summary Statement of Douglas A. Fraser on H.R. 5133, Fair Practices in Automotive Products Act,” Hearings before the Subcommittee on Commerce, Transportation and Tourism of the Committee on Energy and Commerce, 97th Congress, 2d sess., 2 March 1982, p. 2.

34. Wall Street Journal, 24 November 1982, p. 27.

35. As noted earlier, some restrictions had existed previously in Europe, Latin America, and Japan.

36. Commission of the EC, European Automobile Industry, p. 10Google Scholar.

37. European Report no. 843, 13 February 1982; no. 846, 24 February 1982. By 1982 Japanese manufacturers were reportedly trying to circumvent the voluntary restrictions with Britain by exporting cars from their Australian plants (which are exempt from these limits): Financial Times, 23 July 1982, p. 10.

38. Winham, Gilbert R., The Automobile Trade Crisis of 1980 (Halifax, Canada: Dalhousie University Centre for Foreign Policy Studies, 1981), pp. 28–30Google Scholar.

39. In 1980 Ford endorsed a plan proposed by the UAW urging the government to impose import quotas on Japan and in general, since its recent abysmal sales and profit figures, has advocated a policy more protectionist than GM's: United States, Congress, House, World Auto Trade: Current Trends and Structural Problems, Hearings before the Subcommittee on Trade of the Committee on Ways and Means, 96th Congress, 2d sess., 7 03 1980Google Scholar; United States, Congress, House, Auto Situation: 1980, a report of the Subcommittee on Trade of the Committee on Ways and Means, 96th Congress, 2d sess. (Washington, D.C.: GPO, 1980)Google Scholar; United States, Congress, House, Auto Situation, Autumn 1980, Report of the Subcommittee on Trade of the Committee on Ways and Means, 96th Congress, 2d sess., 18 11 1980Google Scholar; United States, Congress, Senate, The Automobile Industry and the World Economy, Hearings before the Subcommittees of International Finance and Subcommittee on Economic Stabilization of the Committee on Banking, Housing and Urban Affairs, 96th Congress, 2d sess., 18 06 1980Google Scholar.

40. United States, Congress, House, “Statement of Congressman Richard L. Ottingin [on H.R. 5133, the Fair Practices in Automotive Products Act],” Hearing before the Subcommittee on Commerce, Transportation and Tourism of the Committee on Energy and Commerce, 97th Congress, 2d sess., 2 03 1982, pp. 2–3Google Scholar.

41. European Parliament, Report on the European Automobile Industry, 12 1980, pp. 48–49Google Scholar.

42. Financial Times, 20 August 1982, p. 12.

43. The following are only a sampling of the many joint ventures arranged by 1980. Renault acquired 22.5% of AMC, giving Renault access to a wider dealer network in the United States and paving the way for assembly of Renault models in America. In 1980 Renault signed an agreement with Volvo, which could lead to its taking a 20% share in the Swedish manufacturer and to further cooperation in the design and production of components. In 1974, the French government arranged Peugeot's takeover of Citroen. Saab and Lancia have entered into an agreement to develop and pool common components for future models. In early 1980, Peugeot-Citroen agreed to lend Chrysler $100 million, marking the start of a cooperative program that could lead to joint car and commercial vehicle production in the United States. In 1980, British Leyland, Fiat, Peugeot-Citroen, Talbot, Renault, VW, and Volvo entered into a joint research agreement. Volvo, Peugeot, and Renault have agreed to produce a V6 engine. British Leyland has supplied Triumph engines to Saab. Renault supplies engines to DAF.

Moreover, both European and American auto manufacturers have formed joint ventures with Japanese companies, as the following examples demonstrate. In 1979 Ford acquired a 25% equity interest in Toyo Kogyo. Nissan has bought 37% of Spain's Motor Iberia. Alfa Romeo has agreed to assemble 60,000 Datsuns a year. As of 1980, British Leyland plans to build 85,000 cars a year with Honda. In September 1981, VW entered into a joint venture with Nissan. Honda and Volvo are considering a joint venture in Thailand. GM and Nissan agreed to let GM market Nissan trucks in the United States; and Toyota will build small cars with GM in the United States.

44. European Parliament, Report, pp. 30–31Google Scholar; Becker, Jasper, “Europe's Auto Troubles, the United States Is Not Alone,” Europe, 11–12 1980, pp. 26–27Google Scholar.

45. Prior to the late 1970s when the United States did protect its auto makers, it operated within the rules of the existing regime. In 1971, for example, the United States implemented measures to restrain imports while avoiding overtly protectionist measures. Early that year, President Nixon devalued the dollar, raising the cost of foreign-manufactured cars, and then increased the surcharge on imported goods from 3.5% to 10%. Nixon finally repealed the surcharge increase but the upward evaluation of the yen, completed in 1972 under the Smithsonian Agreement, caused a 5% increase in prices of Japanese imports as well as lower priced European models: United States, Congress, House, Multinational Corporations, Hearings before the Subcommittee on International Trade of the Committee on Finance, 93d Congress, 1st sess., 1973, pp. 137–47 and 177–78Google Scholar. When the Burke-Hartke bill became an issue the UAW and the AFLCIO supported the bill in order to preserve high levels of domestic employment. On the other hand, Thomas Murphy, vice-chairman of GM, opposed the measure, contending that import quotas would provoke foreign countries to erect their own trade barriers, which would rebound against the overseas expansion of American multinationals. Nonetheless, the Big Three had a somewhat easier time in winning their way because the UAW had some reservations about Burke-Hartke. The UAW supported the portion of the bill that used tax incentives to discourage foreign investment by American firms but it opposed the provisions that would have restricted imports by U.S. auto firms from their overseas subsidiaries. The union accepted the logic of a global division of labor as long as the primary plant investment was at home. In contrast, the UAW and AFL-CIO have made the local content bill of 1982 their top priority. There is a persistent rumor that the UAW made this campaign the price for its rejoining the AFL-CIO.

46. That shift began when Congress adopted the Chrysler Loan Agreement of 1979, in which the government not only provided the ailing auto maker with $1.5 billion in federally backed loans but also pledged to oversee Chrysler's management. That collaborative relationship proceeded at a more rapid pace once President Reagan took office, as evidenced in early 1981 when the government curtailed or modified some 34 environmental and safety regulations on cars and trucks manufactured in the United States: Winham, , Auto Trade Crisis, pp. 23–24Google Scholar; Automotive News, 13 April 1981, pp. 2, 49–50.

47. Automotive News, 13 April 1981, p. 2.

48. Automotive News, Market Data Book Issue (1981), p. 2Google Scholar.

49. Commission of the EC, European Auto Industry, pp. 20, 22Google Scholar.

50. In fact, U.S. Trade Representative Block had previously warned the EC Commission that it should not treat such arrangements bilaterally. The United States has continued to follow a unilateral approach to the Japanese question. In mid 1981, the EC had called at the Ottawa Summit for a joint U.S.-EC squeeze on Japan, a proposal that the United States rejected. Thus the Common Market countries have been forced to handle Japan alone. The U.S. approach to the Japanese may prove similar to the 1971 dollar devaluation case; in 1971, as well as in 1980, U.S. actions shifted the balance in the worldwide auto regime and forced all involved parties to reconsider their policies; after some period of time, the auto regime may arrive at some state of equilibrium: see “The Mood in Brussels,” World Trade Outlook 3 (06 1981), pp. 4–5Google Scholar.

51. We believe that the issue of variation in the timing of individual national responses to the Japanese challenge in Europe may be a function of more complex factors. Why, for example, did Italy impose restraints earlier than did West Germany? Was it a matter of strength of national auto industry, relative strength of the national currency in exchange markets, or political ideology? (We thank Susan Strange for the observation about currency exchange rates.) We leave the answer to other researchers.

52. The EC Commission faces another problem with trying to negotiate a European-wide response to Japan: existing voluntary import restraint agreements by several of its member states (Italy, Britain, France, and Germany). Several of those countries, the most notable of which is Italy, have resisted efforts by the Commission to negotiate such an agreement: European Parliament, Report, p. 36Google Scholar.

53. Koopman, “The Challenges of the Future and Adjustment Strategies of European Carmakers,” as quoted in Commission of the EC, European Automobile Industry, pp. 23–24Google Scholar.

54. See especially the work of Moe, Terrance, The Organization of Interests (Chicago: University of Chicago Press, 1980)Google Scholar. Also, Stein, Arthur, “Coordination and Collaboration: Regimes in an Anarchic World,” International Organization 36 (Spring 1982)CrossRefGoogle Scholar.

55. Keohane, argues that a country is not hegemonic unless it is willing to pay a cost for leadership (“Hegemonic Leadership,” p. 50)Google Scholar. Accordingly, he doubts that Japan can become a hegemonic sectoral power.