《国际政治经济学》文献资料（International Political Economy and National Security）Conflict Expectations and the Paradox of Economic Coercion

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International Studies Quarterly(1998)42,709-731 Conflict Expectations and the Paradox of Economic Coercion DANIEL W.DREZNER University of Colorado at Boulder Despite their increasing importance,there is little theoretical under- standing of why nation-states initiate economic sanctions or what deter- mines their success.These events are often explained away as "symbolic politics"driven completely by domestic-level factors.This article develops a simple game-theoretic model of economic coercion to show that both "senders"and "targets"of economic coercion incorporate expectations of future conflict as well as the short-run opportunity costs of coercion into their behavior.Conflict expectations have a paradoxical effect on'coercion events.First,senders that anticipate frequent conflicts will be more willing to initiate economic coercion,even if such attempts are costly.Senders that anticipate few conflicts will not threaten sanctions unless they incur mini- mal costs and the target would suffer significantly.While a robust antici- pation of future disputes might make the sender prefer a coercive strategy, it also reduces its ability to obtain concessions.Target states that anticipate frequent conflict with the sender will make fewer concessions.Ironically, a sender will obtain the most favorable distribution of payoffs when it cares the least about its reputation or the distribution of gains.These hypotheses are tested statistically,with the results strongly supporting the conflict expectations model. In 1990,the United States convinced the United Nations Security Council to impose stringent economic sanctions against Iraq in response to Saddam Hussein's invasion of Kuwait.These sanctions achieved the greatest degree of international coop- eration in modern history and cost Iraq half of its GNP in lost trade.The Iraqi regime refused to back down,however,and force was needed to restore Kuwaiti independence. In 1991,the United States threatened to withhold loan guarantees from Israel unless that country agreed to halt the construction of new housing in the West Bank and attend a multilateral peace conference in Madrid.Unlike the Iraqi case,in this episode the United States acted alone,without much fanfare,and against the wishes of an active domestic lobby.The costs of the sanctions to Israel were significant but far lower than in the Iraqi case.Yet in the end the Israelis acquiesced. Why were the outcomes so different?More generally,under what conditions will a sanctioning country (called the sender)attempt economic coercion?What determines the magnitude of the concessions made by the sanctioned country(called the target)? Author's nate:I thank Bruce Bueno de Mesquita,John Ferejohn,Kurt Taylor Gaubatz,Judy Goldstein,Stephen D. Krasner,and Paul Krugman for their comments on earlier drafts.Previous versions of this article were presented at Stanford University,the University of Colorado at Boulder,and the University of California at Santa Barbara.I am grateful to the seminar participants at these places for their valuable contributions.All remaining errors are my own. 1998 International Studies Association. Published by Blackwell Publishers,350 Main Street,Malden,MA 02148,USA,and 108 Cowley Road,Oxford OX4 IJF,UK

International Studies QuaTterly (1998) 42, 709-73 1 Conflict Expectations and the Paradox of Economic Coercion Uniuersity of Colorado at Boulder Despite their increasing importance, there is little theoretical understanding of why nation-states initiate economic sanctions or what determines their success. These events are often explained away as "symbolic politics" driven completely by domestic-level factors. This article develops a simple game-theoretic model of economic coercion to show that both "senders" and "targets" of economic coercion incorporate expectations of future conflict as well as the short-run opportunity costs of coercion into their behavior. Conflict expectations have a paradoxical effect oncoercion events. First, senders that anticipate frequent conflicts will be more willing to initiate economic coercion, even if such attempts are costly. Senders that anticipate few conflicts will not threaten sanctions unless they incur minimal costs and the target would suffer significantly. While a robust anticipation of future disputes might make the sender prefer a coercive strategy, it also reduces its ability to obtain concessions. Target states that anticipate frequent conflict with the sender will make fewer concessions. Ironically, a sender will obtain the most favorable distribution of payoffs when it cares the least about its reputation or the distribution of gains. These hypotheses are tested statistically, with the results strongly supporting the conflict expectations model. In 1990, the United States convinced the United Nations Security Coun'cil to impose stringent economic sanctions against Iraq in response to Saddam Hussein's invasion of Kuwait. These sanctions achieved the greatest degree of international cooperation in modern history and cost Iraq half of its GNP in lost trade. The Iraqi regime refused to back down, however, and force was needed to restore Kuwaiti independence. In 199 1, the United States threatened to withhold loan guarantees from Israel unless that country agreed to halt the construction of new housing in the West Bank and attend a multilateral peace conference in Madrid. Unlike the Iraqi case, in this episode the United States acted alone, without much fanfare, and against the wishes of an active domestic lobby. The costs of the sanctions to Israel were significant but far lower than in the Iraqi case. Yet in the end the Israelis acquiesced. Why were the outcomes so ddferent? More generally, under what conditions will a sanctioning country (called the sender) attempt economic coercion? What determines the magnitude of the concessions made by the sanctioned country (called the target)? Author's note: I thank Bruce Bueno de Mesquita, John Ferejohn, Kurt Taylor Gaubatz, Judy Goldstein, Stephen D. Krasner, and Paul Krugman for their comments on earlier drafts. Previous versions of this article were presented at Stanford University, the University of Colorado at Boulder, and the University of California at Santa Barbara. I am grateful to the seminar participants at these places for their valuable contributions. All remaining errors are my own. 01998 International Studies Association. Published by Black~~~ell Publishers, 350 Main Street, Malden, MA 02148, USA, and 108 Cowley Road, Oxford OX4 lJF, UK

710 Conflict Exbectations The answers to these questions are not trivial.The use of economic coercion in international relations has a long pedigree;the Athenian boycott of Megara was one of the triggering events of the Peloponnesian War.The end of the Cold War has brought this tool of statecraft renewed prominence.The United States has threat- ened or implemented economic coercion against more than forty countries since 1990.The Russian Federation has been quite willing to employ economic coercion as a way of gaining political concessions from the newly independent states.As public resistance to military interventions has increased,policymakers are turning more and more to economic statecraft as an alternative policy option.I The increased prominence of economic coercion has led to an increase in the scholarly literature,but not much progress has been made.With some notable exceptions (Martin,1992;Morgan and Schwebach,1997)most of the recent contributions consist of well-crafted theories that lack empirical support(Eaton and Engers,1992;Smith,1996),or well-crafted case studies that produce generalizations of dubious quality (Galtung,1967;Cortright and Lopez,1995;Klotz,1996).One scholar claims that the one constant about economic sanctions is that each event is purposefully random (Tsebelis,1990).Furthermore,most of the literature has focused on the outcomes of coercion attempts;there has been little research explain- ing when senders will initiate threats or acts of economic sanctions. This article uses a simple game-theoretic model to develop a theory of economic coercion that can answer those questions.The short-run opportunity costs of sanctions imposition are important,but they are not the only factor.Just as important to explaining economic coercion are the expectations of future bilateral conflict held by the target and sender countries.Conceding in the face of economic coercion implies a redistribution of assets between the target and sender.Nation- states care about this redistribution if they think it will harm their bargaining position in future conflicts.This expectation of future conflict is translated into a short-run concern for relative gains and reputation that varies with the expectation of future threats or conflicts in the bilateral relationship between the sender and target. Conflict expectations is an abstract concept that can be empirically measured by observing the alignment between the target and the sender.Allies will expect fewer political conflicts than adversaries.Adversaries will expect more zero-sum conflicts in the future,and so will care more about the material and reputational repercus- sions of existing conflicts.Because of heightened conflict expectations,adversaries will care more than allies about relative gains and reputation for bargaining toughness. The expectation of future conflict has a contradictory effect on economic coer- cion.On the one hand,it makes senders more willing to threaten economic sanctions.The greater the concern for relative gains,the more likely the sanctioner will prefer a stalemate outcome of disrupted economic exchange and attempt to coerce.With adversaries,a sender will be willing to incur significant costs,provided the target incurs even greater costs.With an ally,the costs to itself must be less and the costs to the target must be greater before the sender will attempt economic I In this article,I switch between the terms ecomnomic coercion,economic statecraf,and economic sanctions in the interest of style,but I am much more comfortable with the first term because of its inclusiveness.There is an odd demarcation line between what is described as a sanctions event and what is not.For example,the United States imposed trade sanctions on South Africa in 1985.The sanctions were threatened and then implemented as a way of putting pressure on South Africa's government to end apartheid.In 1997,the United States pressured the World Bank to postpone loans to Croatia until that country more closely adhered to the Dayton Accord provisions on refugees and war criminals.The former event is commonly described as a sanctions episode,while the latter is not.They are both efforts at economic coercion,however,and the theory developed here will try to explain both events.See Baldwin,1985,for a further discussion

710 Conjict Expectations The answers to these questions are not trivial. The use of economic coercion in international relations has a long pedigree; the Athenian boycott of Megara was one of the triggering events of the Peloponnesian War. The end of the Cold War has brought this tool of statecraft renewed prominence. The United States has threatened or implemented economic coercion against more than forty countries since 1990. The Russian Federation has been quite willing to employ economic coercion as a way of gaining political concessions from the newly independent states. As public resistance to military interventions has increased, policymakers are turning more and more to economic statecraft as an alternative policy option.1 The increased prominence of economic coercion has led to an increase in the scholarly literature, but not much progress has been made. With some notable exceptions (Martin, 1992; Morgan and Schwebach, 1997) most of the recent contributions consist of well-crafted theories that lack empirical support (Eaton and Engers, 1992; Smith, 1996), or well-crafted case studies that produce generalizations of dubious quality (Galtung, 1967; Cortright and Lopez, 1995; Klotz, 1996). One scholar claims that the one constant about economic sanctions is that each event is purposefully random (Tsebelis, 1990). Furthermore, most of the literature has focused on the outcomes of coercion attempts; there has been litt,le research explaining when senders will initiate threats or acts of economic sanctions. This article uses a simple game-theoretic model to develop a theory of economic coercion that can answer those questions. The short-run opportunity costs of sanctions imposition are important, but they are not the only factor. Just as important to explaining economic coercion are the expectations of future bilateral conflict held by the target and sender countries. Conceding in the face of economic coercion implies a redistribution of assets between the target and sender. Nationstates care about this redistribution if they think it will harm their bargaining position in future conflicts. This expectation of future conflict is translated into a short-run concern for relative gains and reputation that varies with the expectation of future threats or conflicts in the bilateral relationship between the sender and target. Conflict expectations is an abstract concept that can be empirically measured by observing the alignment between the target and the sender. Allies will expect fewer political conflicts than adversaries. Adversaries will expect more zero-sum conflicts in the future, and so will care more about the material and reputational repercussions of existing conflicts. Because of heightened conflict expectations, adversaries will care more than allies about relative gains and reputation for bargaining toughness. The ex~ectation of future conflict has a contradictorv effect on economic coer- i cion. On the one hand, it makes senders more willing to threaten economic sanctions. The greater the concern for relative gains, the more likely the sanctioner will prefer a stalemate outcome of disrupted economic exchange and attempt to coerce. With adversaries, a sender will be willing to incur significant costs, provided the target incurs even greater costs. With an ally, the costs to itself must be less and the costs to the target must be greater before the sender will attempt economic 1 In this article, I switch between the terms economic coercion, economic statecraft, and economic sunctions in the interest of style, but I am much more comfortable with the first term because of its inclusiv~ness. There is an odd demarcation line between what is described as a sanctions event and what is not. For example, the United States imposed trade sanctions on South Africa in 1985.The sanctions were threatened and then implemented as a way of putting pressure on South Africa's government to end apartheid. In 1997,the United States pressured the World Bank to postpone loans to Croatia until that country more closely adhered to the Dayton Accord provisions on refugees and war criminals. The former event is commonly described as a sanctions episode, while the latter is not. They are both efforts at economic coercion, however, and the theory developed here will try to explain both events. See Baldwin, 1985, for a further discussion

DANIEL W.DREZNER 711 pressure.Ceteris paribus,senders will be eager to coerce adversaries,and reluctant to coerce allies. Eagerness does not translate into greater concessions.The second effect of conflict expectations is paradoxical and surprising.While a robust anticipation of future disputes might make the sender prefer a coercive strategy,it also reduces its ability to obtain concessions.The target's conflict expectations determine the magnitude of concessions.Facing an adversarial sender,the target will be worried about the long-run implications ofacquiescing.Because it expects frequent conflicts, the target will be concerned about concessions in the present undercutting its bargaining position in future interactions.The sender might exploit the material or reputational effects from conceding in later conflicts.When relative gains concern is prominent,a concession represents a gain for the coercer and a loss for the coerced.When reputation is important,acquiescence bolsters the sender's credibil- ity as a tough negotiator while weakening the target's reputation.With allies,this concern is not prominent,because the target anticipates fewer zero-sum conflicts. Ceteris paribus,targets will concede more to allies than adversaries.Ironically,a sender will obtain the most favorable distribution of payoffs when it cares the least about relative gains. A conflict expectations model can explain the dynamics of economic coercion with more accuracy and parsimony than other theories.A major problem with the existing literature is that theories are developed from just one or two well-publicized cases of economic sanctions (Galtung,1967;Hoffman,1967;Schreiber,1973; Losman,1979;Renwick,1981;Doxey,1987).The very celebrity of these cases suggests they are atypical,that they stand out in some unusual way.In "classic"cases, the sender and target are usually adversaries.Thus,existing explanations overlook less contentious but more successful coercion attempts between allies.By choosing cases that take on extreme values of both the dependent variable and several independent variables,the literature commits two errors.First,there is a tendency to underestimate the main causal effects on the universe of events.Second,these studies will overestimate effects that are unique to the extreme set of cases (Collier and Mahoney,1996).In focusing on a limited subset of coercion cases,these writings have painted a distorted picture of economic sanctions.These arguments are not necessarily wrong,but the empirical evidence marshaled for their arguments is insufficient.In contrast to a conflict expectations model,they explain fewer cases, and less of the variation in outcomes. The following section further develops the notion of conflict expectations.The next section uses a simple coercion game to formalize the argument;the model generates testable propositions about the relationship between opportunity costs, alignment,and coercion events.The following three sections (a)consider what happens when conflict expectations change during the sanctions episode,(b) describe the data and testing procedures,and(c)examine the statistical results on sanctions events data and show they provide moderately strong support for the model.The final section summarizes and concludes. The Effect of Conflict Expectations For the purposes of this model,the actors are the foreign policy leaders of nation-states.It is assumed that the foreign policy regimes within these states act as a unitary,rational actor.This assumption has been made repeatedly in international relations theory (Krasner,1978;Bueno de Mesquita,1981),and the justification for it will not be delved into here. Conflict expectations influence state preferences about conceding to coercive pressure in a conflict in two ways.First,states are concerned that concessions made in the present can be used later to threaten their security.This possibility leads to

pressure. Ceteris paribus, senders will be eager to coerce adversaries, and reluctant to coerce allies. Eagerness does not translate into greater concessions. The second effect of conflict expectations is paradoxical and surprising. While a robust anticipation of future disputes might make the sender prefer a coercive strategy, it also reduces its ability to obtain concessions. The target's conflict expectations determine the magnitude of concessions. Facing an adversarial sender, the target will be worried about the long-run implications of acquiescing. Because it expects frequent conflicts, the target will be concerned about concessions in the present undercutting its bargaining position in future interactions. The sender might exploit the material or reputational effects from conceding in later conflicts. When relative gains concern is prominent, a concession represents a gain for the coercer and a loss for the coerced. When re~utation is im~ortant. acauiescence bolsters the sender's credibil- I 1 ' I ity as a tough negotiator while weakening the target's reputation. With allies, this concern is not prominent, because the target anticipates fewer zero-sum conflicts. Ceteris paribus, targets will concede more to allies than adversaries. Ironically, a sender will obtain the most favorable distribution of payoffs when it cares the least about relative gains. A conflict ex~ectations model can ex~lain the dvnamics of economic coercion I 1 i with more accuracy and parsimony than other theories. A major problem with the existing literature is that theories are developed from just one or two well-publicized cases of economic sanctions (Galtung, 1967; Hoffman, 1967; Schreiber, 1973; Losman, 1979; Renwick, 1981; Doxey, 1987). The very celebrity of these cases suggests they are atypical, that they stand out in some unusual way. In "classic" cases, the sender and target are usually adversaries. Thus, existing explanations overlook less contentious but more successful coercion attempts between allies. By choosing cases that take on extreme values of both the dependent variable and several indeeendent variables. the literature commits two errors. First, there is a tendencv to underestimate the main causal effects on the universe of events. Second, these studies will overestimate effects that are unique to the extreme set of cases (Collier and Mahoney, 1996). In focusing on a limited subset of coercion cases, these writings have painted a distorted picture of economic sanctions. These arguments are not necessarily wrong, but the empirical evidence marshaled for their zrguments is insufficient. In contrast to a conflict exeectations model, thev explain fewer cases, ' , A and less of the variation in outcomes. The following section further develops the notion of conflict expectations. The next section uses a simple coercion game to formalize the argument; the model generates testable propositions about the relationship between opportunity costs, alignment, and coercion events. The following three sections (a) consider what happens when conflict expectations change during the sanctions episode, (b) describe the data and testing procedures, and (c) examine the statistical results on sanctions events data and show they provide moderately strong support for the model. The final section summarizes and concludes. The Effect of Conflict Expectations For the purposes of this model, the actors are the foreign policy leaders of nation-states. It is assumed that the foreign policy regimes within these states act as a unitary, rational actor. This assumption has been made repeatedly in international relations theory (Krasner, 1978; Bueno de Mesquita, 1981), and the justification for it will not be delved into here. Conflict expectations influence state preferences about conceding to coercive eressure in a conflict in two wavs. First. states are concerned that concessions made in the present can be used later to threaten their security. This possibility leads to

712 Conflict Expectations an explicit concern for relative gains.This concern becomes more important if states expect frequent disputes.Second,states prefer to have a reputation for tough bargaining.The importance of reputation increases as the likelihood of repeated conflict increases. The debate about the role of relative gains concern in international relations is an all too familiar one.For the past decade,it has been couched in terms of the debate between the neoliberal and neorealist paradigms.2 Realists argue that states must be wary of gaps in gains because of the ever present possibility that those gaps will be exploited in a future military attack.Neoliberals,by contrast,argue that these factors are salient only under extreme circumstances.This debate is concerned with variables such as polarity and the offense-defense balance to determine the extent of relative gains.The logic developed here sidesteps this debate.It argues that states will care about relative gains if they anticipate that those gaps will reduce their absolute utility in the long run (Viner,1948;Matthews,1996).This could be due to the possibility of a military conflict,as realists argue.It could also be due to the possibility that a small concession in the present could lead to the long-run disintegration of a state's position on a particular issue.Either way,foreign policy leaders will care about relative gains if they expect that an unequal distribution of gains in the present will lead to reduced benefits in future conflicts. Concessions made in the present can be translated into future leverage.Robert Keohane observes: For relative gains,rather than simply the desire to maximize utility to account for tough negotiations,there must be some plausible way by which one's partner could use advantages gained from the international agreement to hurt oneself in a future period,and a significant motivation to do so.Only if the advocate of a relative gains interpretation can show that these conditions are met,is it plausible to entertain this hypothesis.(1993:281) The subject matter of economic coercion is well suited to Keohane's criteria.In a sanctions dispute,economic leverage is used to extract political concessions.Unlike economic cooperation,a successful sanctions episode results in an explicit transfer of political assets from the target to the sender.States will be concerned about relative gains due to the possibility of today's concessions becoming tomorrow's leverage.A variety of demands could be used in this fashion.A Great Power may use economic coercion to secure basing rights,and those bases are used in a later coercion episode to threaten the targeted country.A demand for greater liberaliza- tion within the target regime might permit the sender country to exploit domestic divisions in a later dispute.The importance of the transfer increases as the likelihood of future conflict increases.When a country makes a political concession to a potential aggressor,the decision to acquiesce has a greater probability of coming back to haunt the country in the future. How important are these transfers?The standard realist argument assumes that between states of unequal power,the concern for relative gains is unimportant, because the distribution of power is already lopsided.Such an argument assumes that all power is fungible,and therefore Great Powers can readily impose their will on smaller states.Any transfer is of little importance in the overall distribution of power.There are two flaws in this logic,however,that suggest that unequal adversaries will care just as much about material transfers as equal adversaries.First, 2For the realist argument see Grieco,1988,1990;Gowa,1994;Powell,1991;Mearsheimer,1995;and Rousso,1996. For the neoliberal responses see Snidal,1991;Keohane,1993;Keohane and Martin,1995;and Liberman,1996

7 12 Conjlict Expectations an explicit concern for relative gains. This concern becomes more important if states expect frequent disputes. Second, states prefer to have a reputation for tough bargaining. The importance of reputation increases as the likelihood of repeated conflict increases. The debate about the role of relative gains concern in international relations is " an all too familiar one. For the past decade, it has been couched in terms of the debate between the neoliberal and neorealist paradigms.2 Realists argue that states must be wary of gaps in gains because of the ever present possibility that those gaps will be exploited in a future military attack. Neoliberals, by contrast, argue that these factors are salient only under extreme circumstances. This debate is concerned with variables such as ~olaritv and the offense-defense balance to determine the extent of relative gains. ?he loiic developed here sidesteps this debate. It argues that states will care about relative gains if they anticipate that those gaps will reduce their absolute utility in the long run (Viner, 1948; Matthews, 1996). This could be due to the possibility of a military conflict, as realists argue. It could also be due to the possibility that a small concession in the present could lead to the long-run disintegration of a state's position on a particular issue. Either way, foreign policy leaders will care about relative gains if they expect that an unequal distribution of gains in the present will lead to reduced benefits in future conflicts. Concessions made in the mesent can be translated into future leverage. Robert U Keohane observes: For relative gains, rather than simply the desire to maximize utility to account for tough negotiations, there must be some plausible way by which one's partner could use advantages gained from the international agreement to hurt oneself in a future period, and a significant motivation to do so. Only if the advocate of a relative gains interpretation can show that these conditions are met, is it plausible to entertain this hypothesis. (1993:281) The subject matter of economic coercion is well suited to'Keohane's criteria. In a sanctions dispute, economic leverage is used to extract political concessions. Unlike economic cooperation, a successful sanctions episode results inin explicit transfer of political assets from the target to the sender. States will be concerned about relative gains due to the possibility of today's concessions becoming tomorrow's leverage. A variety of demands could be used in this fashion. A Great Power may use economic coercion to secure basing rights, and those bases are used in a later coercion episode to threaten the targeted country. A demand for greater liberalization within the target regime might permit the sender country to exploit domestic divisions in a later dispute. The importance of the transfer increases as the likelihood of future conflict increases. When a country makes a political concession to a potential aggressor, the decision to acquiesce has a greater probability of coming back to haunt the country in the future. How important are these transfers? The standard realist argument assumes that between states of unequal power, the concern for relative gains is unimportant, because the distribution of power is already lopsided. Such an argument assumes that all power is fungible, and therefore Great Powers can readily impose their will on smaller states. Any transfer is of little importance in the overall distribution of power. There are two flaws in this logic, however, that suggest that unequal adversaries will care just as much about material transfers as equal adversaries. First, 2 For the realist argument see Grieco, 1988, 1990; Gowa, 1994; Powell, 1991; Mearsheimer, 1995; and Rousso, 1996. For the neoliberal responses see Snidal, 1991; Keohane, 1993; Keohane and Martin, 1995; and Liberman, 1996

DANIEL W.DREZNER 713 some types of concessions have very poor or expensive substitutes.Political assets are more heterogeneous and less substitutable than economic assets.Concessions that transfer information,institutional access,or asset-specific investments alter the local distribution of power in a way that other power resources cannot without serious political externalities.Second,the assumption of fungible power is not necessarily true in the short run.It may be possible to redirect power resources toward a particular target,but it cannot be done immediately,and there are associated opportunity costs with it.While states must keep the aggregate distribu- tion of power in mind,they will be more concerned about the local correlation of forces and policy levers. The importance of relative transfers depends on the expectation of future conflict.If the concession is significant but the number of expected disputes in the bilateral relationship is small,the relative distribution of payoffs will matter less. Previous game-theoretic models have highlighted the importance of conflict expec- tations.Robert Powell(1991)argues that relative gains concern is salient when a military attack is expected.The logic developed here includes instances beyond military force,but is consistent with Powell's argument.Duncan Snidal (1991) concludes that relative gains concern will be salient when the locus ofa foreign policy leader's attention is on the bilateral dispute.A high expected probability of future confrontations and threats from another state will lead to an enhanced concern for relative gains in bilateral dealings with that state. Conflict expectations will also affect states through their concern over their bargaining reputation.In a future conflict,foreign policy leaders will consider the history of prior bilateral negotiations in developing conjectures about the other states'behavior.For example,if a country has a history of acquiescing in the face of deadlock,the other country will have the incentive to act tough in crises,so as to obtain a better outcome.By contrast,if that state has a history of refusing to fold even if that action is costly,the other foreign policy leader will take that history into account in later rounds of negotiations. If a nation-state demonstrates that it prefers to incur a costly outcome,provided it hurts the other side even more,it can affect the outcomes of those future conflicts. Furthermore,reputations are interdependent;one state's boost in reputation can come at the expense of the other.In a crisis,whichever side backs down is perceived to have lost credibility.At the same time,the side that triumphed will find its credibility enhanced.Therefore,leaders must be concerned that backing down in the present will raise the other state's expectation of success in later episodes.States will care about the distribution of payoffs in the present because it will alter their perceived reputations in the other state. Reputation becomes more important as the expectation ofrepeated interactions, and the shadow of the future,increases.If players anticipate that a game will be played often,they will be more willing to sacrifice current gains for a larger payoff in the future.Countries will always have some incentive to be concerned about their reputation.Nevertheless,the incentive will be much stronger when they expect a greater number of potential conflicts.States have both tangible and abstract reasons to factor in conflict expectations when crafting their existing strategies. Casual empiricism suggests that the expectation of future conflict varies with the dyad.For example,during the Cold War,the United States clearly expected more zero-sum disputes with the Soviet Union than with West Germany.At present,India can anticipate a greater number of disagreements with Pakistan than with Bangla- desh.For the foreseeable future,the United States is more concerned with a possible North Korean nuclear program than a probable Israeli nuclear program.In each of the cases where more future conflict is expected,one or both states perceive a significant threat from the other.In relationships where threat perception is high, so is the expectation of future zero-sum conflicts

some types of concessions have very poor or expensive substitutes. Political assets are more heterogeneous and less substitutable than economic assets. Concessions that transfer information, institutional access, or asset-specific investments alter the local distribution of power in a way that other power resources cannot without serious political externalities. Second, the assumption of fungible power is not necessarily true in the short run. It may be possible to redirect power resources toward a particular target, but it cannot be done immediately, and there are associated opportunity costs with it. While states must keep the aggregate distribution of power in mind, they will be more concerned about the local correlation of forces and policy levers. The importance of relative transfers depends on the expectation of future conflict. If the concession is significant but the number of expected disputes in the bilateral relationship is small, the relative distribution of payoffs will matter less. Previous game-theoretic models have highlighted the importance of conflict expectations. Robert Powell (1991) argues that relative gains concern is salient when a military attack is expected. The logic developed here includes instances beyond military force, but is consistent with Powell's argument. Duncan Snidal (1991) concludes that relative gains concern will be salientwhen the locus of a foreign policy leader's attention is on the bilateral dispute. A high expected probability of future confrontations and threats from another state will lead to an enhanced concern for relative gains in bilateral dealings with that state. Conflict expectations will also affect states through their concern over their bargaining reputation. In a future conflict, foreign policy leaders will consider the history of prior bilateral negotiations in developing conjectures about the other states' behavior. For example, if a country has a history of acquiescing in the face of deadlock, the other country will have the incentive to act tough in crises, so as to obtain a better outcome. By contrast, if that state has a history of refusing to fold even if that action is costly, the other foreign policy leader will take that history into account in later rounds of negotiations. If a nation-state demonstrates that it prefers to incur a costly outcome, provided it hurts the other side even more, it can affect the outcomes of those future conflicts. Furthermore, reputations are interdependent; one state's boost in reputation can come at the expense of the other. In a crisis, whichever side backs down is perceived to have lost credibility. At the same time, the side that triumphed will find its credibility enhanced. Therefore, leaders must be concerned that backing down in the present will raise the other state's expectation of success in later episodes. States will care about the distribution of payoffs in the present because it will alter their perceived reputations in the other state. Reputation becomes more important as the expectation of repeated interactions, and the shadow of the future, increases. If players anticipate that a game will be played often, they will be more willing to sacrifice current gains for a larger payoff in the future. Countries will always have some incentive to be concerned about their reputation. Nevertheless, the incentive will be much stronger when they expect a greater number of potential conflicts. States have both tangible and abstract reasons to factor in conflict expectations when crafting their existing strategies. Casual empiricism suggests that the expectation of future conflict varies with the dyad. For example, during the Cold War, the United States clearly expected more zero-sum disputes with the Soviet Union than with West Germany. At present, India can anticipate a greater number of disagreements with Pakistan than with Bangladesh. For the foreseeable future, the United States is more concerned with a possible North Korean nuclear program than a probable Israeli nuclear program. In each of the cases where more future conflict is expected, one or both states perceive a significant threat from the other. In relationships where threat perception is high, so is the expectation of future zero-sum conflicts

714 Conflict Expectations A logical extension of this argument is that the concern for relative gains and reputation is inversely correlated with the degree of alignment.Allies will anticipate few disputes,and care less about relative gains and reputation.Adversaries will anticipate frequent threats of conflict,and therefore care a great deal about relative gains and reputation. It is often unclear what theorists mean when they talk about allies,adversaries, or alignment.My definitions are as follows:states are allies if they share a history of cooperation and mutual trust on security and other issues that is not disrupted by shifts in the international distribution of power.States are adversaries if they share a history of discord and conflict on various issues that is not disrupted by large shifts in the international distribution of power.By allies I do not mean states that temporarily join coalitions to fight a common enemy,such as the United States and the Soviet Union in World War II or the United States and Syria in the Gulf War. By adversaries I do not mean states that have highly public but ephemeral spats over a single issue,such as the dispute between France and the United States over the Uruguay round. In sum:the model will assume that states act as rational,unitary utility-maximiz- ers.National preferences are partially motivated by conflict expectations.There are two effects of this expectation.First,states will have some concern for relative gains, because concessions made in the present can be used against nation-states in the future.Second,countries are concerned that conceding in the present will damage their reputation in future interactions.Both of these concerns vary with the expec- tation of future conflict.Therefore,states will care more about relative gains and reputation effects when their perception of threat is palpable.Because states balance against their threats,conflict expectations will be greatest between adversaries. Disputes will also be anticipated between allies,but to a lesser degree. A Game-Theoretic Model of Economic Coercion There are two ways to formalize the conflict expectations model.The first is to assume states are egotistic utility-maximizers with an expectation of a future dispute where the outcome depends on relative capabilities.The second is to create a reduced-form utility function,incorporating the conflict expectations into the actors'utility functions in the form of a concern for relative gains.As Powell (1994:336)observes,there is no a priori answer as to which approach is better.For this article,the reduced-form model will be used for two reasons.First,this version of the conflict expectations model is easier to present and analyze.3 Second,the focus of this article is the effect of conflict expectations on economic statecraft,not on the causes of those expectations. All games must have players,strategies,and payoffs.The coercion game has two actors:Sender and Target,occasionally labeled S andTfor notational convenience.4 These actors are rational and are assumed to have full information about the possible strategies and payoffs.The game is played only once.5 The structure of the game can be seen in Figure 1.Sender moves first;it can elect to do nothing and end the game at Status Quo Ante(SQA),or it can choose to make 3 Versions of the model that are more explicit about the future implications of present concessions produce results that are substantially similar to the reduced-form game presented here.See Drezner,1998. 4 It could be argued that many high-profile coercion efforts do not have just one sender but many.An examination of these events shows that most sanctions episodes have one dominant sender who persuades and cajoles other states into cooperation.For more on this see Martin,1992. 5A different variant of the game used two stages in an effort to incorporate the shadow of the future.The results are not fundamentally affected

'114 ConJlict Expectations A logical extension of this argument is that the concern for relative gains and reputation is inversely correlated with the degree of alignment. Allies will anticipate few disputes, and care less about relative gains and reputation. Adversaries will anticipate frequent threats of conflict, and therefore care a great deal about relative gains and reputation. It is often unclear what theorists mean when they talk about allies, adversaries, or alignment. My definitions are as follows: states are allies if they share a history of cooperation and mutual trust on security and other issues that is not disrupted by shifts in the international distribution of power. States are adversaries if they share a history of discord and conflict on various issues that is not disrupted by large shifts in the international distribution of power. By allies I do not mean states that temporarily join coalitions to fight a common enemy, such as the United States and the Soviet Union in World War I1 or the United States and Syria in the Gulf War. By adversaries I do not mean states that have highly public but ephemeral spats over a single issue, such as the dispute between France and the United States over the Uruguay round. In sum: the model will assume that states act as rational, unitary utility-maximizers. National preferences are partially motivated by conflict expectations. There are two effects of this expectation. First, states will have some concern for relative gains, because concessions made in the present can be used against nation-states in the future. Second, countries are concerned that conceding in the present will damage their reputation in future interactions. Both of these concerns vary with the expectation of future conflict. Therefore, states will care more about relative gains and reputation effects when their perception of threat is palpable. Because states balance against their threats, conflict expectations will be greatest between adversaries. Disputes will also be anticipated between allies, but to a lesser degree. A Game-Theoretic Model of Economic Coercion There are two ways to formalize the conflict expectations model. The first is $0 assume states are egotistic utility-maximizers with an expectation of a future dispute where the outcome depends on relative capabilities. The second is to create a reduced-form utility function, incorporating the conflict expectations into the actors' utility functions in the form of a concern for relative gains. As Powell (1994:336) observes, there is no a priori answer as to which approach is better. For this article, the reduced-form model will be used for two reasons. First, this version of the conflict expectations model is easier to present and analyze.3 Second, the focus of this article is the effect of conflict expectations on economic statecraft, not on the causes of those expectations. All games must have players, strategies, and payoffs. The coercion game has two actors: Sender and Target, occasionally labeled S and T for notational con~enience.~ These actors are rational and are assumed to have full information about the possible strategies and payoffs. The game is played only onceS5 The structure of the game can be seen in Figure 1.Sender moves first; it can elect to do nothing and end the game at Status Quo Ante (SQA), or it can choose to make 3 Versions of the model that are more explicit about the future implications of present concessions produce results that are substantially similar to the reduced-form game presented here. See Drezner, 1998. 4 It could be argued that many high-profile coercion efforts do not have just one sender but many. An examination of these events shows that most sanctions episodes have one dominant sender who persuades and cajoles other states into cooperation. For more on this see Martin, 1992. 5 A different variant of the game used hvo stages in an effort to incorporate the shadow of the future. The results are not fundamentally affected

DANIEL W.DREZNER 715 a demand(D),attached to a threat of economic coercion.6 It might represent a shift in Target's policy on an international issue,a shift in one of Target's policies toward Sender,or a change in one of its domestic policies that has international ramifica- tions.The demand is an action that hurts the target regime and benefits the sender regime.Note that the sender can calibrate the size of its demand;this decision is endogenous to the game. If Sender chooses to make a demand,then Target must decide between backing down and standing firm.If it chooses to back down,the outcome is Acquiescence (AQ);Target agrees to Sender's demand.Ifit chooses to stand firm,however,Sender has the last move.It could choose to back down and accept the Status Quo(SQ),or carry out the threat of disrupting economic exchange,which produces an outcome of Deadlock(DL).The Deadlock outcome means that Sender disrupts some bilateral economic exchange.This could include suspending aid,imposing trade barriers, freezing financial assets,or reducing investment flows.This action would obviously be painful to Target,and presumably painful to Sender.The opportunity costs of such an action would be the scarce resources needed to compensate for the interrupted exchange.Small opportunity costs imply that the costs of substitution are low (i.e.,low levels of asset-specific investment).The Deadlock outcome is essentially a stalemate;Sender and Target both incur costs,but Target makes no concessions. Figure I also shows the payoffs for each outcome.All of the payoffs are relative to the Status Quo outcome.Sender and Target payoffs in the Status Quo are normalized to zero.Status Quo Ante produces the same outcome,plus a small increase(o)for both actors.The difference between SQ and SQA is that Sender's threat temporarily freezes the bilateral relationship,preventing further increases of trade or investment.Even if the threat is not carried out,the crisis is sufficient to cast a pall on the economic relationship.Acquiescence also delivers the Status Quo payoffs,but there is also a direct transfer;Sender gains and Target loses the demand D.7 Finally,the Deadlock outcome disrupts the bilateral relationship.Both actors suffer costs from the loss ofeconomic exchange.Sender and Target receive penalties of -c(s)and -c(t),respectively. If the sender and target countries cared only about their short-run absolute benefits,backwards induction produces a unique outcome.Sender,choosing be- tween backing down or standing firm,will always back down;it will prefer the benefits of continued economic ties to the costs of economic disruption.That is to say,0>-c(s).Moving backwards,Target,at its decision node,knows that Sender will back down.Therefore,its strategic choice is between acquiescing to Sender's demands,or standing firm and reaching a Status Quo outcome.Since Target must concede in an AQ outcome,it will always prefer the Status Quo payoff and elect to stand firm.Finally,Sender must decide between doing nothing and arriving at Status Quo Ante,or making a threat and reaching the Status Quo.Because Sender always prefers the additional benefit from the SQA payoff,it will do nothing. Therefore,if one assumes that Sender and Target care only about their own payoffs, the unique equilibrium of this game is Status Quo Ante.Because the sender will not prefer to carry out a costly threat,it will opt to do nothing. If one assumes that only immediate absolute gains matter,the game is,frankly, boring.Even if Target suffers much greater costs than Sender,Sender cannot credibly threaten coercion,because it will always prefer to back down and incur fewer 6 Another variant could be that Sender implements sanctions and threatens to keep them in place unless Target meets its demands. 7The results do not change appreciably if Sender and Target place different values on the demand

a demand (D), attached to a threat of economic coercion.6 It might represent a shift in Target's policy on an international issue, a shift in one of Target's policies toward Sender, or a change in one of its domestic policies that has international ramifications. The demand is an action that hurts the target regime and benefits the sender regime. Note that the sender can calibrate the size of its demand; this decision is endogenous to the game. If Sender chooses to make a demand, then Target must decide between backing down and standing firm. If it chooses to back down, the outcome is Acquiescence (AQ); Target agrees to Sender's demand. If it chooses to stand firm, however, Sender has the last move. It could choose to back down and accept the Status Quo (SQ), or carry out the threat of disrupting economic exchange, which produces an outcome of Deadlock (DL). The Deadlock outcome means that Sender disrupts some bilateral economic exchange. This could include suspending aid, imposing trade barriers, freezing financial assets, or reducing investment flows. This action would obviously be painful to Target, and presumably painful to Sender. The opportunity costs of such an action would be the scarce resources needed to compensate for the interrupted exchange. Small opportunity costs imply that the costs of substitution are low (i.e., low levels of asset-specific investment). The Deadlock outcome is essentially a stalemate; Sender and Target both incur costs, but Target makes no concessions. Figure 1 also shows the payoffs for each outcome. All of the payoffs are relative to the Status Quo outcome. Sender and Target payoffs in the Status Quo are normalized to zero. Status Quo Ante produces the same outcome, plus a small increase (a)for both actors. The difference between SQ and SQA is that Sender's threat temporarily freezes the bilateral relationship, preventing further increases of trade or investment. Even if the threat is not carried out, the crisis is sufficient to cast a pall on the economic relationship. Acquiescence also delivers the Status Quo pa offs, but there is also a direct transfer; Sender gains and Target loses the demand D.4' Finally, the Deadlock outcome disrupts the bilateral relationship. Both actors suffer costs from the loss of economic exchange. Sender and Target receive penalties of -c(s) and -c(t), respectively. If the sender and target countries cared only about their short-run absolute benefits, backwards induction produces a unique outcome. Sender, cfioosing between backing down or standing firm, will always back down; it will prefer the benefits of continued economic ties to the costs of economic disruption. That is to say, 0 > -c(s). Moving backwards, Target, at its decision node, knows that Sender will back down. Therefore, its strategic choice is between acquiescing to Sender's demands, or standing firm and reaching a Status Quo outcome. Since Target must concede in an AQ outcome, it will always prefer the Status Quo payoff and elect to stand firm. Finally, Sender must decide between doing nothing and arriving at Status Quo Ante, or making a threat and reaching the Status Quo. Because Sender always prefers the additional benefit from the SQA payoff, it will do nothing. Therefore, if one assumes that Sender and Target care only about their own payoffs, the unique equilibrium of this game is Status Quo Ante. Because the sender will not prefer to carry out a costly threat, it will opt to do nothing. If,one assumes that only immediate absolute gains matter, the game is, frankly, boring. Even if Target suffers much greater costs than Sender, Sender cannot credibly threaten coercion, because it will always prefer to back down and incur fewer 6 Another variant could be that Sender implements sanctions and threatens to keep them in place unless Target meets its demands. 7 The results do not change appreciably if Sender and Target place different values on the demand

DANIEL W.DREZNER 717 where PSENDER Sender's payoff from the outcome PTARGET =Target's payoff from the outcome B Mutual expectation of harmonious relations. B,by definition,lies between zero and one.By extension,(1-B)is the mutual expectation of the likelihood of future conflict.If the two states anticipate few political conflicts,then B-1,Sender and Target care only about absolute gains, and the utility function collapses back into the simple case of the utilities equaling the payoffs.If the two actors anticipate endless political conflicts,then B->0,Sender and Target care only about relative gains,and view the game as a strict zero-sum negotiation.As conflict expectations increase,so does the concern for the material and reputation effects of any concession by either actor.9 Incorporating conflict expectations makes the game slightly more complex.At its final decision node,Sender does not necessarily prefer the Status Quo to Deadlock.To be sure,there are still conditions under which Sender still prefers to back down.When this happens,the outcome of the game is still SQA.If the sender prefers DL to SQ,however,then the game has a different outcome.Moving backwards,Target now faces a choice between Acquiescence and Deadlock,as this choice is less clear-cut than between Acquiescence and the Status Quo.Its decision depends on the size of Sender's demand. Finally,it is unclear whether Sender will prefer Acquiescence to either Deadlock or the Status Quo Ante.If it prefers the Status Quo Ante,then it can simply choose not to make a threat.If Sender prefers Deadlock to all other outcomes,it can make its demand request so large that the target would never acquiesce,guaranteeing an outcome of DL. In order to determine the outcome of the game,the following questions must be answered: 1.When will Sender prefer Deadlock(DL)to Status Quo(SQ)? 2.For what demands will Target prefer Acquiescence(AQ)to Deadlock(DL)? 3.Given those values of D,will Sender prefer Acquiescence (AQ)to Deadlock (DL)or Status Quo Ante? To answer the first question,Sender's utility from the Status Quo outcome must be compared with its utility from the Deadlock outcome.If Us(DL)is greater than Us(SQ),then Sender is willing to stand firm: U,(SQ)=B(0)+(1-B)(0-0) U(DL)=B{-c(s)}+(1-B){-c(s)+c()} There are two ways to incorporate concerns about reputation into this model.The first is to argue that reputation is formed by outcomes;a country's bilateral reputation for negotiation is determined by how well that country's payoff compares to that of the other actor.This means that reputational effects are felt through the concern for relative gains. The second way is to argue that reputations are formed by strategies;a country's reputation is formed by the consistency with which its foreign policy leaders stick to their positions.Actors are penalized when they go back on a strategy;in this case,when Target acquiesces or when Sender backs down after threatening sanctions.I have chosen the first approach for reasons of tractability.Modeling reputation effects using the other approach does not affect the results, it only reinforces the hypotheses

where PsENDER= Sender's payoff from the outcome PTARGET= Target's payoff from the outcome B = Mutual expectation of harmonious relations. B, by definition, lies between zero and one. By extension, (1 - B) is the mutual expectation of the likelihood of future conflict. If the two states anticipate few political conflicts, then PI + 1, Sender and Target care only about absolute gains, and the utility function collapses back into the simple case of the utilities equaling the payoffs. If the two actors anticipate endless political conflicts, then I3 -+0, Sender and Target care only about relative gains, and view the game as a strict zero-sum negotiation. As conflict expectations increase, so does the concern for the material and reputation effects of any concession by either actor.9 Incorporating conflict expectations makes the game slightly more complex. At its final decision node, Sender does not necessarily prefer the Status Quo to Deadlock. To be sure, there are still conditions under which Sender still prefers to back down. When this happens, the outcome of the game is still SQA. If the sender prefers DL to SQ, however, then the game has a different outcome. Moving backwards, Target now faces a choice between Acquiescence and Deadlock, as this choice is less clear-cut than between Acquiescence and the Status Quo. Its decision depends on the size of Sender's demand. Finally, it is unclear whether Sender will prefer Acquiescence to either Deadlock or the Status Quo Ante. If it prefers the Status Quo Ante, then it can simply choose not to make a threat. If Sender prefers Deadlock to all other outcomes, it can make its demand request so large that the target would never acquiesce, guaranteeing an outcome of DL. In order to determine the outcome of the game, the following questions must be answered: 1. When will Sender prefer Deadlock (DL) to Status Quo (SQ)? 2. For what demands will Target prefer Acquiescence (AQ) to Deadlock (DL)? 3. Given those values of D, will Sender prefer Acquiescence (AQ) to Deadlock (DL) or Status Quo Ante? To answer the first question, Sender's utility from the Status Quo outcome must be compared with its utility from the Deadlock outcome. If Us(DL) is greater than Us(SQ), then Sender is willing to stand firm: "There are two ways to incorporate concerns about reputation into this model. The first is to argue that reputation is formed by outcomes; a country's bilateral reputation for negotiation is determined by how well that country's payoff compares to that of the other actor. This means that reputational effects are felt through the concern for relative gains. The second way is to argue that reputations are formed by strategies; a country's reputation is formed by the consistency with which its foreign policy leaders stick to their positions. Actors are penalized when they go back on a strategy; in this case, when Target acquiesces or when Sender backs down after threatening sanctions. I have chosen the first approach for reasons of tractability. Modeling reputation effects using the other approach does not affect the results, it only winforces the hypotheses

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