1. Theoretical framework____________________________________________ 35
1.3 Interactions: Inter-state relations towards policy formulation
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To sum up, the relevance of domestic institutions must be considered towards policy formulation, in two major causal aspects which are their historical development, and their policy preferences from a rational choice point of view. Neither can be left out from the analysis when it comes to understanding the meat market policies adopted by the different Taiwanese bureaucracies, but power and path dependence do rival each other in terms of causal explanation for selective liberalization.
1.3 Interactions: Inter-state relations towards policy formulation
This research does not only aim for the inside-out approach theorized by Katzenstein and the following scholarship in the field. It also aims to understand the influence of the international system (states and IOs) in the development of Taiwan’s protectionist policy, also from the perspectives of historical institutionalism and rational choice theories. For that, it is important to understand what Gourevitch called the “second image-reversed”
(Gourevitch, 1978), which was complemented by the research of Keohane and Milner in Internationalization and Domestic Politics (1996), and Goldstein in Ideas, Interests and American Trade Policy (1993). Through this process, we reverse the abovementioned analysis in order to complement it, and look for the international sources of foreign trade policy, rather than looking for the domestic sources of such a policy. The goal of such an analysis is to understand the political constraints of the international level on domestic foreign trade policies, and show –as Richard Friman (1990) did- that low levels of international political constraints suggest the opportunity for introducing overt types of protectionist policy at low international costs and vice-versa.
Keohane and Milner do provide a theoretical explanation from an IPE perspective, drinking from the theory of rational choice. “Internationalization [defined as the process generated by underlying shifts in transaction costs that produce observable flows of goods, services and capital] affects the opportunities and constraints facing social and economic actors, and therefore their policy preferences. (…) As incentives change through internationalization, we expect to observe changes in economic policies and in political institutions” (Keohane & Milner, 1996, p. 4). Therefore, when taking internationalization as an independent variable, they theorize that domestic institutions are affected in their behaviour in light of exposure. The basis for their analysis is the rationality of the actors involved. However, they point out that political leaders have a degree of latitude in how they respond to internationalization, with a broad range of policy choices available to them. The authors distinguish three different responses which states can take to avoid the interference of domestic institutions on the process of linking internationalization to domestic politics:
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1. The may block relative price signals from the international economy from entering the domestic one, thus obscuring actors’ interests. Here, there are large opportunity costs, but leaders can respond to the pressures presented by internationalization.
2. They may freeze coalitions and policies into place by making the cost of changing these coalitions and policies very high. Groups with access to political power may retain their advantage despite internationalization.
3. They may channel leaders’ strategies in response to international economic change (Keohane & Milner, 1996, p. 21). Prior policy choices and institutions will condition which particular strategies and policies are selected to respond to the pressures.
The theory starts from the basis that an easing of international trade, by decreased transaction costs, will impact domestic political economies through raising the share of tradeable goods in each country’s economy. Even when economies are relatively closed, there is an impact through the opportunity costs, and the relative price differences away from convergence. As prices do converge, the distortionary impacts affecting trade barriers will increase, affecting aggregate welfare within the closed economy. The reflection of this in the foreign economic policy will be through the institutions, beginning with the figure of political entrepreneurs; “the greater the exogenous easing of trade, the likelier it becomes in every country –including particularly, we reiterate, those previously most closed to the world economy – that liberalization, and where necessary liberalization-favoring institutional reform, will occur” (Frieden & Rogowski, 1996, p. 43). While they consider these political entrepreneurs to be domestic actors, we consider for this research the existence of states as political entrepreneurs who either play a same role in order to protect the market shares that they have already obtained, pressuring selective protection for the players already in the market, or push for further opening given that they do not have access to a market where prices stand above international averages.
“Economic actors best able to take advantage of newly available opportunities for international trade and payments are expected to support policies that allow them to realize the fullest possible benefits associated with broadened economic horizons” (Frieden &
Rogowski, 1996, p. 45). These broadened economic horizons are quantified by countries which do not have market access to a closed economy in terms of the losses that they suffer through the opportunity costs. Countries, as economic actors, are thus expected to support policies of liberalization in third countries where they can be competitive. The institutional expression of these pressures is left blank from the theoretical framework of Frieden and Rogowsky, but it is a part of which the inductive methods of the current research aim to
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discern. Decisions are expected to be the result of bargaining, reflecting the relative power, skills and will of the actors. “They may be influenced by external inputs from other governments and international oganizations” (Moyer & Josling, 2002).
It is important to keep in mind that institutions, when considered from an aggregate-interests perspective, will have policy preferences which will vary if the international situation varies. Milner and Keohane make sure that the theory stays within the field of IPE when they bring power back into the equation. They establish two ways8 in which internationalization affects domestic policy-making, of which the first is the alteration of policy preferences. First, Institutions will reflect the preferences of powerful actors; when the environment changes, the preferences of these actors may vary, and with them new policies are to be expected; therefore institutional change is likely to follow. Garret and Lange explain the process in three stages, where preferences move from the international economy to socio-economic institutions (in the private sectors), and from these through pressure groups to formal public institutions which react with a change in government responsiveness to the economic constraints imposed by the new conditions (Garret & Lange, 1996). This process derives in policy changes. Two main points should be taken from the abovementioned analysis: The first one is that the theory infers the aggregation of preferences in formal public institutions and their effect on policy. Second, powerful actors may be domestic, as well as international, exerting similar pressure through their own institutions (embassies, trade offices, chambers of commerce or comparable organizations) in the pursuit of policy preferences towards policy change that favours their interests. In this sense, the pressure that a country can apply towards another one in order to realize its interests will be determined by its relative power. Important is to keep in mind that, given the fact that Taiwan’s meat market is partially closed, it can be considered a market where few actors have preferential access9. This preferential access is said to inhibit the process of internal policy reform, distort trade relations, and constitute an impediment to multilateral or unilateral trade liberalization, since preference-receiving countries have a vested interest in defending the status quo preserving their market shares (Panagariya, 2002) (Hoekman, 2006)
The second pathway through which internationalization influences domestic policy is the effect it has in undermining the efficacy of government’s macroeconomic policy.
Relative price changes will alter the behaviour of economic agents (domestic or international) in the face of current policies, which will at the same time alter the value that this policies
8The third pathway developed by Milner and Keohane is the triggering of domestic political and economic crisis. This pathway will not be developed as part of this theoretical framework, as it is irrelevant to the current research, and does not add causal explanatory power to the arguments presented.
9 Preferences are evident in access, as well as in the instruments applied to this access, as there are countries that have benefits of market certification and zoning easing their meat trade with Taiwan.
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have for the government. Therefore, through a cost-benefits analysis, the government is expected to take action in order to change or eliminate a policy which carries larger costs than benefits. But the declining policy autonomy of states as they cede control to markets may only be a temporary phase, until new forms of intervention are demanded and discovered; thus establishing loops that take theory back to the importance of powerful actors. While internationalization does have an important impact on domestic policy, there are new measures which have been developed in order to keep the state present in the markets. Therefore, rational choice presents an account of how international factors affect the creation of trade policy by altering preferences and undermining the efficacy of local governments.
The level of internationalization plus the role of policy entrepreneurs will alter the policy preferences of policymakers if the deadweight losses of a policy are large enough, altering also the cost-benefits analysis that had imposed a previous policy. Power must be considered as a key element in this discussion, as new policy preferences will reflect the preferences of powerful international actors. In this regard, and given that the state responds to the preferences of powerful actors, we could use Kent Calder’s concept of a “reactive state”, meaning that “the impetus to policy change is typically supplied by outside pressure, and that reaction prevails over strategy in the relatively narrow range of cases where the two come into conflict” (Calder, 1988).
Rational choice needs to be contrasted in this second image reversed analysis with historical institutionalism in order to have a more comprehensive theoretical framework.
Katzenstein’s theoretical perspective from the second image was complemented with Milner’s rational choice research. “To explain a particular outcome, even game theorists must move beyond a simple model of interests to conventions, learned behaviours, focal points, bounded rationality and the like” (Goldstein, 1993, p. 6). She argues that a purely interest-based explanation is not enough to understand why a country (in her case the United States) that adheres to a liberal trade policy has high level of protectionist measures, as is also the case with Taiwan. Historical institutionalism regards the analysis of policy processes as being influenced by the way in which institutions have worked for years, and these processes will have long-term ramifications.
Historical institutionalism argues that how regulatory capacities are built up over time helps to explain the bargaining outcomes between states. Thus the argument does not necessarily rule out the pre-eminence of powerful actors. It does argue, however, that the reason why powerful actors are present in policy decisions is not because they are powerful, but because they have made their way into policy-making processes.
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“Recent studies suggest that while large internal markets are a necessary condition for bargaining leverage under most political constellations, they are certainly not a sufficient condition” (Farrell & Newman, 2010). Moreover, rational choice tends to focus nearly exclusively on inter-state negotiations; while these negotiations continue to matter, their role in the international economy is decreasing as bargaining and adjustments between states take more complex forms and involve more actors. Hay and Wincott (1998) argue that historical institutionalism adopts a context bound rationality that stresses the degree to which actors strategically relate to the institutions in which they are embedded, reflecting their interests in political choices which they can effectively constrain.
As research has progressed along the theory, the third generation of historical institutionalism has strived to “identify the particular mechanisms underlying institutional stability and change” (Farrell & Newman, 2010). Particular mechanisms pushing stability or change in Taiwan’s agricultural trade policy can thus be studied under this prism, as theoretically historical institutionalism has developed tools to do so. The one tool to be followed amongst the existing theoretical toolkit is that of policy feedbacks, through which actors which have positioned themselves in policy feedback loops will have a say in policy decisions, while those not positioned are left out of the discussions. But even prior to considering policy feedback loops, the bilateral relationship between both countries must be institutionalized in order for this country to become part of the client groups.
The institutionalization of a bilateral relationship is given by the formation of organizational structures which operate systematically and regularly over time, granting an avenue of dialogue for the bilateral relationship which increases transparency in the interactions, and enhances the strength of the governmental contacts. The degree of institutionalization can be seen in three aspects: First the number of mechanisms of consultation and cooperation, second, is the competence and efficiency of these mechanisms, and third, ability and will of the governments of construct upon this bilateral relation (Zhao, 2008). Given the fact that Taiwan is not diplomatically recognized by most countries in the world, the institutionalization of the bilateral relations has proceeded in a strategic setting where a larger number of constraints operate than in a regular bilateral setting. National policies are not formed in vacuum; rather they are highly contingent on regular (that is, institutionalized) interactions with other states, and where the institutionalization of the bilateral relationship is lacking or weak, states will resort to self-interest more regularly potentially affecting the self-interests of the other party (Smith M. , 2004).
Prior research has shown that the institutionalization of bilateral structures grant the bilateral relationship health and stability, allowing both parties to further their interests in an accommodative manner (Zhao, 2008). Thus it is expected that countries which have
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institutionalized their bilateral relationship with Taiwan will be able to, in the first place, resolve issues of market access in a swifter manner, and secondly, become client groups of policy and participate in feedback loops.
Policy feedbacks refer to the “propensity of state institutional reforms to create client groups that then have a strong incentive to push for their maintenance” (Farrell & Newman, 2010). Policies themselves create incentives for concentrated interests to organize and become clients of the bureaucracies involved in policy stability and change. While these clients could be varied (interests groups, states, NGOs, or others), this research is based on a low level of differentiation between state and society for Taiwan. Therefore, the preferences of domestic interests groups are already aggregated into policy, since these groups are recipients as well as part-takers in policy processes. For the bilateral interactions, however, we argue that countries that have market access have found their way into policy.
As Pierson (1996) and Mettler (2002) have argued, institutions may create groups of beneficiaries informed about the consequences of regulatory changes, who are likely to oppose these changes when it undercuts their own interests. Whether these institutions are domestic or foreign will depend on how relevant domestic players are in the market vis-à-vis foreign players, and on the relationship established between the host countries and the rest;
preferences are not the result of exogenous economic conditions, but rather of previous trajectories.
The analysis of feedback loops is based on the premise that groups who have successfully embedded themselves in policy processes will “unsurprisingly use their advantageous positions to pursue regulatory policies that favour them (and potentially disfavour other groups)” (Farrell & Newman, 2010). Thus interests groups and policy preferences end up co-constituting each other, since as Mettler has shown (2002) the policymakers also have a say in the preferences of these groups.
The way in which feedback processes act is by linking action (policy) to its environment (the market), and environmental effects of policy to subsequent action. Feedback processes unfold over time, therefore they are highly useful for addressing policy dynamics in a historical context. Thus in order to be able to shed light on the reasons that have established a particular agricultural trade policy, it becomes fundamental to first trace back the players involved in this loop, and their preferences towards policy alternatives, in order to evaluate the relevance that their interactions with the state have on policy decisions.
Following Katzenstein, we know that the institutional tradition will influence a particular institution’s preference formation, and a process of path dependence kicks in based on two main reasons: First, policies tend to be self-reinforcing because there are significant start-up
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costs, and second, policies establish mental images which serve to filter incoming information and feedback. Given a low level of differentiation between state and society, the government can pursue its preferences coherently; but in order to determine its preferences, each unit of the government is involved in feedback processes that inform its decisions towards policy creation or change. When different states become involved in these feedback mechanisms (through institutions that have direct contact with foreign governments, as the Bureau of Foreign Trade or the Ministry of Foreign Affairs), they are expected to at least consider the feedback received from these third parties, particularly relative to markets where there is a strong foreign presence.
The way in which this policy loop functions is one of mutual reinforcement. Policy enables practice, while practice informs policy. Policymakers study and act based on a preferred structure for the market; thus they devise a procedure. This procedure is put into action through policy enactment. Before or after its implementation, interested groups will send feedback to policymakers; if this is done ex-ante, the feedback will be mediated into policy; if it is done ex-post, it will be considered towards policy change. This mechanism of reinforcement, for the meat markets in Taiwan, has to consider that the players in the market are not only domestic; as this research will show in Chapter 1, for bovine and ovine meat the domestic players are limited basically to importers. On the other hand, for porcine and poultry meat, foreign participation is limited, thus feedback processes is expected to be largely dominated by domestic groups.
The formation of a historical structure through feedbacks can shed light not only on how policy is determined, but also on how foreign players have embedded themselves in a market with limited competition, as the meat markets in Taiwan. The participation of foreign states in policy feedback processes is highly unexplored within the theory, thus particular mechanisms of analysis are not available. Thus this research aims to contribute to theory building in this regard by applying a tool that was devised to analyse domestic interaction, and use to analyse inter-state interaction towards preference and policy formation.