loss aversion and foreign policy resolve

Loss Aversion and Foreign Policy Resolve

Jeffrey D. BerejikianUniversity of Georgia

Bryan R. EarlyUniversity at Albany, SUNY

This article draws upon recent findings from the field of neuroscience to explore how loss aversion affectsforeign policy resolve. We theorize that U.S. policy makers are more resolute in pursuing preventive policies thatseek to avoid losses than they are in pursuing promotive policies that seek to acquire new gains. To test ourtheory, we conduct the first large-n analysis of foreign policy hypotheses derived from the neuroscience of lossaversion using data from 100 cases of U.S.-initiated Section 301 trade disputes. The results provide strongsupport for the loss-aversion-based theory, revealing that American policy makers are willing to fight harderand hold out longer in trade disputes with preventive objectives than they are in cases with promotive ones. Ourstudy demonstrates that hypotheses derived from neuroscientific findings can be tested using large-n techniquesin study of foreign policy, revealing a new avenue of inquiry within the field.

KEY WORDS: loss aversion, foreign policy, neuroscience, trade policy, resolve, Section 301

Introduction

Loss aversion is perhaps the most enduring and intuitive finding in behavioral decision theory(Kahneman et al., 1991; Novemsky & Kahneman, 2005; Thaler, 1980). Experimental results suggestthat the subjective pain of loss is greater than the benefit enjoyed from an equivalent gain, andscholars have extended this finding beyond the laboratory to explain a wide range of otherwisepuzzling human behavior.

Building upon these results, and adding new findings from the field of neuroscience, we seek tocontribute to the theory-building enterprise in the study of foreign policy by constructing a gener-alizable theory of loss aversion and foreign policy behavior. The approach is consistent with the callto continue to develop theories of foreign policy built upon solid micro foundations (Hudson, 2005).Specifically, we hope to explain why policy makers stubbornly stand firm in their prosecution ofsome international disputes while in others they are willing to back down. The question is relevantfor any number of foreign policy issues, such as territorial disputes, trade negotiations, conflicts overwater rights, arms control, and international treaty compliance. Much of the research on loss aversionin the foreign policy literature has relied heavily upon case studies (Mercer, 2005). However, forsome time scholars have suggested that loss aversion should produce broad patterns of behavior thatcould, in principle, be captured by statistical analysis (e.g., Jervis, 1992, Levy, 1996). Large-nanalyses of broader behavior patterns thus remain fertile territory for research and contain thepotential for advancing our understanding of how loss aversion affects foreign policy. As we

Political Psychology, Vol. 34, No. 5, 2013doi: 10.1111/pops.12012

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demonstrate in this article, foreign policy behaviors, like trade disputes, can be analyzed usingcontemporary insights about loss aversion derived from neuroscience.

Our analysis proceeds in the following manner. First, we build upon neuroscience research toargue that policy makers’ aversion to accepting losses can affect their willingness to back down ininternational disputes. Cognitive science has convincingly demonstrated that individuals tend tostrive harder and take more risks to avoid losses than they will to achieve similar gains. More recentneuroscientific findings show that unrealized expectations, like those observed in a broken agree-ment, are processed in the human mind in a way almost identical to actual losses. The result is thatunmet expectations can also trigger loss aversion. Policy makers’ resolve during disputes can thusvary if they perceive themselves to be defending previously established agreements from violationsby their counterparts. Such violations diminish expected and hoped for gains, triggering lossaversion. Generalizing from this phenomenon, we then distinguish between preventive goals inwhich policy makers seek to protect against perceived losses versus promotive goals in which policymakers seek to make new gains. We theorize that policy makers should be less willing to back downin disputes initiated for preventive reasons than for promotive ones. We employ our theory to helpexplain cross-case variation in the level of resolve demonstrated by the U.S. Trade Representative(USTR) in prosecuting Section 301 trade disputes designed to improve the terms of trade for U.S.businesses. Drawing on our preventive versus promotive framework, we hypothesize that the USTRshould be less willing to back down in Section 301 disputes initiated because of breached tradeagreements than those initiated to open up new markets.

We test our theory via two different large-n analyses of a hundred Section 301 trade disputes.This approach is unique because—to the best of our knowledge—this study constitutes the firsttheoretically driven statistical analysis of loss aversion on foreign policy behavior grounded in aspecific set of neuroscientific findings. In our first test, we conduct an analysis using binary logit,and, in the second, we employ a competing risks model. The two approaches allow us to model theeffects of time on U.S. resolve in different ways. Our empirical results provide strong support for ourtheory, revealing that the U.S. Government was significantly less likely to back down in preventivedisputes. Indeed, we find that the preventive/promotive distinction provides the single greatestdeterminant of U.S. resolve in prosecuting its Section 301 cases.

We believe that this project offers a number of novel contributions. First, this study demonstratesthat specific findings from cognitive neuroscience can make tangible contributions to explainingphenomena in international relations. Our study reveals that loss aversion and unrealized expecta-tions profoundly shape the behavior of even the most powerful states in the international system andthat it does so in ways that traditional theoretical approaches are often blind to. This suggests that theloss-aversion-based framework we have developed may be able to yield novel insights into a host ofother issue areas beyond the study of trade policy. Second, we test our arguments utilizing large-nstatistical analysis—a method that has seen little use in evaluating cognitive and/or neurosciencetheories of international relations (e.g., Drury, 2005). Moving forward with a program of quantitativeanalysis broadens the applicability of such theories and places them on equal analytical footing withrationalist models. Our project thus demonstrates that the empirical barriers that have to date“arrested” the development of the cognitive research agenda in international relations can beovercome (Walker, 2007). Lastly, our inquiry provides a number of case-specific insights explainingthe comparative resolve demonstrated by the United States in prosecuting its Section 301 tradedisputes and the policy implications that arise from them.

Loss Aversion and Expectations

Loss aversion is a long-standing and intuitively appealing finding that emerged under theumbrella of behavioral decision theory. Figure 1 depicts a stylized value function. The slope for

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losses is steeper reflecting the empirical finding that “changes that make things worse (losses) loomlarger than improvements or gains” (Kahneman et al., 1991, p. 199). Here, a gain of $1,000 producesfewer units of pleasure than the number of units of pain produced by a $1,000 loss. The conventionalview of loss aversion is that decision-maker reference points serve as cognitive anchors againstwhich changes in endowment are evaluated either as gains or losses.1

The fields of economics, finance, and marketing all study loss aversion as a distinct empiricalphenomenon (Camerer, 2005). Research has further confirmed its influence in consumer-purchasingpatterns (e.g., Carmon & Ariely, 2000), as well as competitive market behavior (e.g., Benartzi &Thaler, 1995). More importantly, loss aversion is also key to understanding otherwise puzzlingforeign policy behavior. Salient losses can result from a state’s own foreign policy choices or fromchanges in the international environment that are beyond the state’s immediate control. It is alsotriggered when losses have already been suffered or when they are looming on the horizon. Forexample, Taliaferro (2004) demonstrates that loss aversion explains why great powers often remaincommitted to conflicts in the periphery even when the benefits of doing so are outweighed by thecosts of continued conflict. Elms (2004) demonstrates that aversion to losses can motivate a spiral ofcostly maneuvers in trade disputes. There is also evidence suggesting that loss aversion may shapethe domestic incentive structure for leaders in a way that reinforces their own desire to avoid lossesin both security (Nincic, 1997) and trade (Freund & Özden, 2004). The desire to avoid losses is alsoa key motivation when sharp shifts in foreign policy strategy are observed (Welch, 2005).

Rather than viewing loss aversion as a distinct phenomenon, prospect theory incorporates lossaversion as package of interrelated observations about how human beings make decisions thatinvolve risks (Kahneman & Tversky, 1979). The key contention of prospect theory is that individualsmaking decisions in the domain of losses tend to be more risk acceptant, while they tend to be morerisk averse in the domain of gains. While the use of prospect theory has gained a lot of traction in thestudy of political behavior and foreign policy (e.g., Berejikian, 2004; Fuhrmann & Early, 2008; Levy,

1 The argument that actors evaluate gains and losses relative to a reference point, and not as net assets, is a key differencebetween behavioral decision theory and classic rationality.

Value +

Losses Gains

– $1,000

+ $1,000

Value –

Figure 1. Example of a value function accounting for loss aversion.

Loss Aversion and Foreign Policy Resolve 651

1997; McDermott, 1998; McDermott et al., 2008),2 it is not necessary to adopt all of the assumptionsand attendant complexities of prospect theory to invoke the insights provided by loss aversion.3

Indeed, the more narrowly focused neuroscientific research agenda on loss aversion provides a moredetailed, nuanced understanding of how loss aversion affects human decision making than prospecttheory does. In developing our theory, we thus opt for the more parsimonious approach of focusingon loss aversion as an independent phenomenon, but we are aware that our insights may be broadlysupportive of those potentially derived from prospect theory.

Like most of cognitive science, loss aversion was initially studied in controlled experimentalsettings. While decision-maker behavior was observed directly, the underlying cognitive processesthat produce a particular choice were not directly observable. Recent advances in neuroscience havedeepened our understanding of how loss aversion works. Cognitive neuroscience examines theneural and biological architecture of the human mind as it relates to judgment and decision andutilizes medical imaging technologies to directly observe brain functions (Senior et al., 2006). fMRI,for example, detects subtle changes in blood flow within the brain in response to activated regionsas they demand resources to do their cognitive work.4 While there are several types of imagingtechnology, the basic experimental methodology is the same. Subjects are confronted with stimuliwhile conscious and nonconscious neural responses are observed. These responses are compared tononstimulus conditions (a baseline) in order to identify which regions of the brain are elicited whendecision makers confront a particular decision task. This technique has facilitated the construction ofa detailed map of our cognitive architecture, and neuroscientists are increasingly able to understandhow that architecture drives and constrains human choices and behavior (Purves et al., 2007).

For example, neuroscientists have demonstrated that gains and losses are registered and pro-cessed in distinct networks. This accounts for the observed differences in preference between gainsand losses that earlier cognitive scientists uncovered (Yacubian et al., 2006). The consensus is thatthe gain- and loss-related systems are neurologically dissociable. That is, there are “neurobiologicalreasons for viewing gains and losses and being encoded and subsequently assessed in a fundamen-tally different manner by the brain, involving distinct neural circuits and activation patters” (Littet al., 2008, p. 254).

Gains are processed through a neural “reward system” that includes regions including themidbrain, orbito-frontal cortex (OFC), and striatum (Breiter et al., 2001; Delgado et al., 2000;Elliott, et al., 2000). This network activates with, for example, the consumption of food, the expe-rience of sexual pleasure, and the receipt of financial rewards. The ventral portion of the striatum, inparticular, is inundated with dopamine receptors that reinforce many appetitive behaviors. Interest-ingly, parts of this system function as an on-off switch, simply detecting the existence of rewardregardless of the magnitude. This is consistent with the finding that individuals are quite sensitive tochanges in condition relative to the status quo. Other regions—particularly the OFC—appear to beresponsible for coding the relative value of positive stimuli (Elliott et al., 2003). Results from initialbehavioral experiments led scholars to believe that the “significant carriers of utility are not states ofwealth or welfare, but changes relative to a neutral reference point” (Kahneman et al., 1991, p. 199).In fact, the human brain appears to have distinct, dedicated circuitry to identify positive changes instate as well as the magnitude of these changes.

2 Also, see the special issues of Political Psychology devoted to prospect theory published in June of 1992 and April and Juneof 2004.

3 Prospect theory’s overlapping insights with loss aversion theory arise from the former’s subsumption of the latter. This isbecause risk acceptance, status quo bias, and endowment effects all originate from loss aversion (Kahneman et al., 1990).Loss aversion can provide stand-alone insights independently of prospect theory, whereas prospect theory cannot do sowithout loss aversion.

4 To the extent that neural activation (process) and decisions (outcomes) are examined simultaneously, most decision-makingexperiments in neuroscience combine process tracing and outcome-oriented research into a single research design.


By contrast, losses are processed through an aversion system associated with strong negativeemotions like pain and disgust. Aversion to losses likely emerged as an evolutionary response toenvironmental pressures in the early human environment (McDermott et al., 2008). Regions hereinclude the anterior insula (Paulus et al., 2003) and the amygdala (Livet, 2009). The anticipation ofregret, in particular, has emerged as an important part of the aversion system and as a key toexplaining heightened sensitivity to loss (Moretti et al., 2011). This association of undesirableoutcomes with strong negative affective consequences is believed to be part of the reason why lossesare so compelling (Camerer, 2005). This conclusion is supported by studies of individuals withamygdala abnormalities who are unable to process fear and, unlike their healthy-brain counterparts,exhibit no loss aversion (De Martino et al., 2010).

Recently, neuroscientists have begun to explain how the reward and aversion systems interact.5

When individuals consider monetary gambles with negative outcomes, the dopamine receptorcenters of the brain, which are very active during the consideration gains, actually quiet down tobelow baseline levels (Tom et al., 2007). Interestingly, the slope for decreasing activity in theseregions (during the consideration of losses) was greater than the increasing activity slope (duringrewards), suggesting that in part the location for the asymmetric treatment of gains and losses islocated in the interaction between the reward and aversion systems.

As cognitive resources are limited, neural systems must perform multiple functions. Mellerset al. (1997) initially argued that dashed expectations produce disappointment that is subjectivelyequivalent to actual loss. The notion that individuals have positive or negative reactions to unmetexpectations is of course not new: pleasant surprise and disappointment are both intuitively under-stood as part of the human condition. However, research suggests that much of the neural circuitrydeployed for gains and loss processing described above is also triggered when evaluating priorexpectations against actual outcomes. When decision makers generate an expectation of a gain orloss, they anchor the value of the actual outcome to their expectation rather than to the impact of thatoutcome on their objective endowment. The result is that unrealized expectations of gain are oftenregistered in the brain as a loss, while unrealized expected losses are registered as gains.

For example, Breiter et al. (2001) confronted subjects with a pinwheel lottery containing mixedpayoffs, including zero.6 The payoff matrix was kept simple, so that individuals could easily identifyboth the expected value of a random wheel spin as positive or negative, as well as the differences themagnitude of expected value between wheels. Neuroimaging revealed that when a pinwheel spinproduced a payoff that was substantially less than the expected value for that wheel, individualsprocessed this outcome as a loss even if, objectively, they did not experience loss. The reverse wasalso true. When subjects expected to lose money but did not, they processed this outcome as a gaineven when they did not receive real benefit. Indeed, experiments using conditional cooperationgames reveal that decision makers can begin to set expectations about reciprocity quite quickly, thatthis processing is done by the reward system, and that this reinforces the evolution of sustainedcooperation (King-Casas et al., 2005; Krueger et al., 2007). However, the impact of unmet expec-tations about cooperative behavior is extremely corrosive because actors process this through theaversion system, as they do for actual losses. For example, subjects who violate partners’ expecta-tions of fair cooperative behavior elicit a very strong reaction in the aversion system of the aggrieved(Sanfey et al., 2003). The aversion is so strong that individuals will reject offers that are objectivelybeneficial. In addition, unreciprocated cooperation also depresses the dopamine sensitive rewardcenters, much like actual losses do (Rilling et al., 2002).

5 This interaction is also, likely, part of the neurological explanation for the broader set of findings under prospect theory(Trepel et al., 2005).

6 Experiments were incentivized by informing subjects that they would receive real monetary rewards depending upon theoutcome of each spin.


In sum, neuroscience experiments confirm that loss aversion emerges from the structure of thebrain and that real losses and unmet expectations are processed similarly. As we argue below,expectations matter a great deal when governments craft international trade agreements. Signatoriesexpect and anticipate benefits. If these expectations are not met, loss aversion is a prime motivationin the aggrieved government’s subsequent foreign policy response. That is, because losses loomlarger than equivalent gains, decision makers will expend greater objective effort (e.g., time, money,and resources) in order to avoid the loss of anticipated gains than they are willing to expend to createnew gains.

Gains, Losses, and Foreign Policy

Most foreign policy objectives, and in particular those involving foreign trade, can be classifiedas either gains seeking or loss avoiding. Because loss aversion shapes the resources and risks thatdecision makers are willing to undertake to achieve their objectives, we argue here that this will alsoaffect the resolve that political leaders demonstrate when they confront foreign policy conflicts. Wedefine resolve as the level of determination that a government exhibits in pursuit of its foreign policyobjectives.7 We define promotive foreign policies as those that are gains seeking. Such policies arepredominantly designed to secure new benefits above and beyond the status quo. This could includeterritorial expansion, undermining the position of rivals, and opening new markets for export. Wedefine preventive policies as loss avoiding. Preventive policies are primarily driven by the desire tomitigate an erosion of current assets. Examples here include protecting existing territorial holdings,preventing the loss of alliance partners, and supporting existing legal agreements—to the extent theyare beneficial. Not all policies in the real world will necessarily be purely promotive or preventive innature. For the purposes of our theory, though, we assume that policy makers will associate policieswith dominant objectives identifiable as either promotive or preventive. As a result of loss aversion,we expect that policy makers will demonstrate greater resolve in pursuing policies they view aspreventive than ones viewed as promotive. Consistent with the findings in neuroscience, we includein the class of preventive policies those in which states attempt to alter the terms of an interactionwhen expectations of gains are not met.

In addition, given a heightened sensitivity to losses, it is possible that the “return on investment”for preventive policies will be suboptimal. That is, the greater effort generated by loss aversion,because it is not a function of strategic calculations about the potential benefits of greater resolve,may not produce better results. This gives rise to the expectation that, ceteris paribus, policy makerspursuing preventive policies are less likely to back down in disputes than policy makers pursuingpromotive objectives.

While we expect that the distinction we propose between preventive and promotive policiesshould apply to a broad range of foreign policy situations, we focus on testing our theory via a singleissue area: international trade disputes. In the next section, we develop an operational hypothesis ofour loss-aversion-inspired theory to explain variance in the United States’ prosecution of Section 301trade disputes.

Section 301 Background

For the United States, managing its foreign trade interests often involves both defending existingtrade agreements against cheating and opening new markets for exports. A key mechanism used by

7 Our conceptualization of resolve is borrowed from the long-standing tradition in the conflict literature that treats resolve asa latent variable affecting foreign policy behavior in ways that are directly observable (e.g., Ang & Peksen, 2007; Fearon,1997).


the United States during the period from 1974 to 1999 was Section 301 of the Trade Act of 1974(hereafter, Section 301). The legislation is broadly directed at restrictive practices against U.S.products and services. Congress charged the executive branch, through the office of the United StatesTrade Representative (USTR), with implementing the directives of the act. Once the USTR identifiedan unfair practice, Section 301 obligated it to initiate an investigation and attempt to resolve the issue.Following the legislation’s initial authorization, the USTR has launched over a hundred separateSection 301 cases.

After initiating a Section 301 case, the USTR had a brief period to negotiate with the targetgovernment before the legislation mandated the use of retaliatory economic sanctions.8 The costsimposed by the Section 301 proceedings were designed to continuously mount the longer the disputelasts, progressing along an explicit timetable. After a period of consultation and negotiation, thestatute mandated the following steps to be taken in succession: publication of the retaliatorysanctions, the imposition of sanctions, and, finally, revaluation with more sanctions should the initialround fail. Given the structured nature by which Section 301 proceedings progressed, each caselaunched can be considered an episode of economic coercion—even those that do not advance to thelevel of sanctions (e.g., Drezner, 2003).

The politics surrounding the use of Section 301 were quite contentious. Critics of Section 301viewed the measure as an aggressively unilateral use of U.S. economic power that ran counter to thegeneral movement toward multilateral management of the international trading system. Forexample, Bhagwati (1990) asserts that the policy was “. . . characterized by the (wholly distinct) factthat it enables the United States to unilaterally make demands for trade concessions by otherswithout offering any matching, reciprocal concession of its own that others might demand in turn”(p. 5). This position portrayed U.S. Section 301 policies as essentially promotive in nature, theintent of which was to force trading partners into making unilateral concessions that would improvethe status quo position of the United States. In contrast, the U.S. Government claimed that Section301 served as the mechanism through which it enforced the collection of formal agreements thatconstitute the contemporary trading system—preventing the erosion of the status quo. As we discussbelow, the contours of this political debate fit nicely onto the preventive-promotive framework wehave developed.

For policy makers, significant uncertainty existed about the eventual outcome of Section 301cases, how long they would last, and what costs they would entail. While some Section 301 disputeslasted just weeks, others lingered for over a decade. As well, Section 301 proceedings couldsometimes generate significant sets of political and economic costs. Targeting allies and significanttrading partners can strain important diplomatic and security relationships. Economically, embargosdamage domestic producers by reducing the overseas demand for their products and services, andimport barriers damage domestic consumers by forcing them to substitute more expensive alterna-tives (Farmer, 2000). The targets of Section 301 cases could even respond by issuing countersanc-tions. As such, affected domestic constituencies and other government agencies could placesignificant pressure on the USTR to limit their escalation. Given the USTR’s limited resources(Ryan, 1995, p. 336), there were clear opportunity costs entailed in each case the USTR initiated—limiting the total number of cases it could take on.

At the same time, there were also costs inherent in backing down from a Section 301 case beforeachieving a satisfactory resolution. Backing down could be politically costly, as presidential admin-istrations sometimes had significant domestic-audience costs at stake vis-à-vis affected U.S. interestgroups (Fearon, 1994). For example, the Section 301 proceedings against Japan in the semiconductorand supercomputer industries became significant U.S. political issues in the latter half of the 1980s

8 The legislation has been amended revised several times since its initial passage. However, the components relevant to thisstudy remained consistent throughout (see Bayard & Elliott, 1994; Bello & Holmer, 1990).


(Zeng, 2004, pp. 127–152). Both U.S. Presidents and members of Congress can face intense publiccriticism for failing to be seen as being “tough on trade” and potentially lose the support of theindustries they failed to protect. Conceding Section 301 cases could also damage the United States’reputation and signal weak resolve to other trading partners, increasing the costs of prosecutingfuture cases. Therefore, we assume that policy makers and the USTR had a vested interest inresolving the Section 301 episodes it initiated as quickly and satisfactorily as possible.

Preventive vs. Promotive Objectives in Section 301 Disputes

As part of the formal Section 301 process, the USTR was required to document its claims aboutthe nature of trade barriers in the U.S. Federal Register. This documentation includes a briefsummary of the target-country practice, the relevant treaty if there is a violation, and the affectedindustry sector. From these data, it is possible to identify in each Section 301 investigation whetherU.S. policy makers claimed that there was a violation of an existing agreement or if the targetmaintained an “unfairly” closed market but was not in violation of a specific agreement.

A review of Section 301 cases reveals that the USTR initiated proceedings both on the groundsthat partners had broken existing agreements and in order to promote new market access outside theexisting set of trade pacts (see Ryan, 1995, also). For example, in 1990 the United States charged thatCanada’s restrictions on the importation of U.S. beer were in violation of the GATT and theU.S.-Canada Free Trade Agreement. After negotiations failed to resolve the dispute, the UnitedStates imposed ad valorem duties on all Canadian beer imports and threatened further sanctions ifCanada did not alter its import distribution and pricing practices. U.S. sanctions were eventuallylifted after Canada modified its behavior. In this case, the U.S. government sought to prevent itstrading partner from eating into the benefits of an existing agreement. By contrast, in 1975 the UnitedStates charged that Canada’s quota on imported eggs was “unfair” to U.S. producers but could notclaim that this was in violation of any existing agreement. Instead, the U.S. simply demanded, andeventually received, a doubling of the quota for American produced eggs (in this case, withoutresorting to sanctions). Therefore, U.S. policy makers have sometimes employed Section 301 tocompel states into opening up their markets and sometimes to prevent trade partners from renegingon existing trade agreements.

In terms of our theory, the distinction between Section 301 investigations launched in responseto a breached trade agreement versus those intended to open up new markets provides a means ofdistinguishing between cases with preventive and promotive objectives. Investigations initiatedagainst trading partners that U.S. policy makers thought to be in violation of existing trade pacts wereintended, at least in part, to prevent erosion in the status quo. Because the purpose of tradeagreements is to codify a set of expectations about future behavior, the benefits from that behaviorare the reference against which partners measure gains and losses.9 Noncompliance (perceived orreal) therefore represents a threat to expected future benefits. We therefore classify this set of 301cases as preventive. By contrast, initiating Section 301 investigations against governments where noprior arrangement exists represents a strategy designed to secure gains above those possible in thecurrent status quo. In general, U.S. policy makers would have no reason to expect that the targetwould grant unilateral market concessions without the imposition of the Section 301 proceedings.We classify this set of disputes as promotive.

Our argument is consistent with long-standing research on international institutions that affirm-ing governments expect agreements to coordinate behavior and improve upon the status quo. That is,

9 It is also possible that for any given dispute there are additional objectives. The United States could be sending a credibilitysignal to other potential violators. But this only reinforced the above point that threatening actual violators is a policydesigned to defend the status quo.


a consummated agreement leads participant governments to “alter their behavior, their relationships,and their expectations of one another over time in accordance with its terms” (Chayes & Chayes,1993, p. 176). Formal theorists have added to this the notion that expectations about postagreementbehavior are a key component in the initial bargaining process (Fearon, 1998). The notion thatagreements reset expectations is easy to make when institutions are robust, containing clear rules andbinding enforcement mechanisms. However, our argument holds even when participant governmentsbelieve that the enforcement mechanisms are partially inadequate. For example, the General Agree-ment of Tariffs and Trade (GATT) contained well-documented enforcement gaps that frustratedpolicy makers. Indeed, this was an important motivation behind the Section 301 statute (see Sykes,1992). Despite this, global compliance rates were quite high, and the agreement delivered significantbenefits to member states (Goldstein et al., 2007). As Downs et al. (1996) have convincingly argued,in instances where enforcement mechanisms are weak (e.g., GATT), high compliance rates are bestexplained by the fact that governments only make the commitments that they know they can keep.Compliance rates are high and treaties deliver benefits because weak treaties “require states to makeonly modest departures from what they would have done in the absence of an agreement” (Downset al., 1996, p. 380). This supports our argument about the formation of expectations that attach toconsummated agreements. Even in regimes with spotty enforcement, governments are likely toanticipate cooperation because partners are not asked to endure deep sacrifices in order to comply,making noncompliance and the reduction in expected benefits all the more unsettling.

Indeed, in the political discourse surrounding Section 301 investigations, policy makers clearlyanchored their expectation to partner states’ compliance with existing agreements and assessed statusquo outcomes against those expectations. For example, concerning Japan’s breach of an existingsemiconductor agreement, one frustrated Congressman remarked that:

The projection currently of the U.S. market share for semiconductors in Japan through 1991translates into a loss of about $4 billion in cumulative sales and about 8,000 to 12,000 fewerU.S. jobs compared to what would result from Japan’s compliance with the 1986 semi-conductor agreement. (Unfair foreign trade practices, 1989b)

The language used by the executive branch in this case is strikingly similar. Administration officialsdefined the damage done to U.S. producers in terms of the expectation for gains that accompaniedthe earlier agreement. As then Secretary of Commerce Robert Mosbacher explained, the majorconcern was that the “share the United States gets of the semiconductor business in Japan has notincreased as it should . . . Far from being on the road to 20 percent, we see it [growth in exports] asbeing close to level” (Unfair foreign trade practices, 1989a). Here status quo evaluations areanchored to expectations generated by the prior agreement. Even when partner behavior does notchange—status quo ante remains the same—policy actors repeatedly utilize the language of lossesto describe the consequences of the Japanese violation. Preventing an “erosion” of U.S. market share,not in a real sense, but rather against expectations (which in this case included clear benchmarks)thus provided the justification for U.S. action under Section 301.

Promotive disputes are framed differently. The discourse often emphasizes the potential benefitsof access to new, previously closed markets. This is straightforward gains seeking. For example, inthe 1980s the U.S. government described the consequences of Japanese agricultural barriers (thatwere not part of an existing agreement) by emphasizing the potential benefits to U.S. produces if thebarriers could be removed. As one Congressman noted, “Should the U.S. Trade Representative besuccessful in opening Japanese markets to U.S. rice producers, this could mean an expansion of U.S.markets by approximately $1.7 billion” (Review of Japan’s policy, 1986a). Interest groups echoedthis emphasis on potential gains in their attempt to persuade the USTR to take a tough stance on theissue. Producers framed their argument to Congress by emphasizing the potential benefits of revising


the status quo and noted that “California, like other major rice producing states, is poised to gainsignificantly from the liberalized Japanese market” (Review of Japan’s policy, 1986b).

For U.S. policy makers, then, the evaluation of the actual payoff from a breached trade pact isanchored to the expectations created by the terms of the initial agreement, and unrealized expecta-tions were evaluated in terms of loss. Even if the USTR’s determinations on this point wereself-serving (e.g., made from a broad interpretation of an existing agreement), policy makers’aversion to losses would still be invoked by the perception of a violation. Backing down in thesecases meant accepting the losses imposed by their trading partners’ actions and accepting a dimin-ished market position. In contrast, Section 301 proceedings initiated to open up previously closedmarkets were often viewed as a way to improve the United States’ position relative to the status quo.If U.S. policy makers gave up in such cases, they would be left at the status quo position theyoccupied before launching the case. Our perspective thus assumes that the USTR’s views on whetherlosses occurred were based primarily on whether partner states’ trade barriers broke existingagreements or not, rather than reflecting arguments made by interest groups about whether “unfairly”closed markets could hurt their future competiveness (Elms, 2004, pp. 249–250). The USTR initiatedboth breach and nonbreach cases in response to domestic group petitions and, insofar as we areaware, its determinations of whether a case involved a breached trade agreement were independentof direct domestic group input.

As noted earlier, some Section 301 disputes lasted weeks and others lasted years. Once a disputewas initiated, both policy makers in the United States and in target states had to continually decidewhether it was in their interests to persist or acquiesce. Undoubtedly, the resolve of the disputants andtheir perceptions of each others’ resolve played a key role in this determination. Based upon theirassessment of the United States’ commitment to its Section 301 demands, the cost of continuing theSection 301 dispute, and the potential costs of backing down, policy makers in target states had todecide whether it was in their interest to hold out or concede. In general, we assume that target states’negotiators were averse to conceding, as their reference points would have been anchored to thestatus quo position they occupied.10 Thus, while U.S. policy makers’ resolve may vary on the basisof whether they pursued preventive or promotive objectives, the targets of Section 301 would almostalways view their response in preventive terms. For both parties, the proposed effects of loss aversiondo not mean that policy makers were completely unwilling to accept losses in their dispute—just thatit was more difficult than we would otherwise expect given general rationalist assumptions.

Time potentially played a major role in both affecting disputants’ resolve and in providinginformation about the extent of each party’s commitment to win the dispute in question. One reasonwhy Section 301 proceedings often took time to work is that their targets may have needed “sometime to arrive at ‘better’ (more realistic) estimates of the probability that” U.S. policy makers wouldhold out if they refused to capitulate (Van Bergeijk & Marrewijk, 1995, 85). Thus, a target’sperception of the United States’ resolve played a crucial role in its decision to acquiesce or not.Indeed, Drezner (2003, p. 653) finds evidence that the targets of Section 301 proceedings are morelikely to acquiesce during the preliminary stages of the dispute before the sanctions are imposed.This suggests that targets considered the prospective costs of continuing to holdout in Section 301disputes in deciding whether to concede. More broadly, Bolks and Al-Sowayel (2000) have foundthat “shorter [sanctions] episodes are associated with more success while longer ones typify failure”(pp. 241–242). This suggests that, in general, U.S. policy makers’ perceived commitment to theirSection 301 proceedings should have been of greatest importance in initially convincing targets toacquiesce and then of declining marginal value over time. Section 301’s mandatory escalation clearly

10 Research has shown that actors tend to normalize gains very quickly (Jervis, 1992), which suggests that target policy makerswill rapidly adjust their perception of the status quo to the gains obtained by breaching a trade agreement. In the face ofpressure to change a policy that benefits them, we can safely assume that targets will always be influenced by loss aversion.


represented an attempt to bring disputes to a quick and effective close. The willingness of both theUnited States and target states’ policy makers to accept the escalating costs entailed in Section 301provided additional information about each party’s resolve to hold fast in the dispute. In cases inwhich a target state could not be easily compelled and the costs entailed in prosecuting the case weresignificant, it could often be in the USTR’s best interest to back-down rather than to hold out in aprotracted dispute.11

This happened in some cases, but not in others. In two notable cases, U.S. policy makers heldout in their Section 301 disputes involving U.S. citrus exports to the European Community (1976–86) and U.S. leather exports to Japan (1977–85) for roughly a decade. In both instances, the disputeswere initiated because the USTR determined their targets had breached existing trade agreementswith the United States. Our explanation for why U.S. policy makers persisted in these disputes—despite their mounting costs and uncertain chances of success—was their unwillingness to allow theerosion of the United States’ trade position that backing down would have entailed. Consistent withour theory, we would expect that U.S. policy makers should be more resolved in prosecuting Section301 cases when the motivation is preventive. Thus, we hypothesize that U.S. policy makers shouldbe less likely to back-down in Section 301 disputes with preventive goals than in disputes withpromotive goals. The empirical implication of this hypothesis is that the USTR should obtain theconcessions it seeks more often in cases with preventive objectives than promotive ones. This is notbecause such cases are inherently easier to win, but rather because U.S. policy makers’ staunchrefusal to back down could wear down their targets’ resolve—leading to their eventual capitulation.

Empirical Analysis

This section evaluates our theory using two different models of analysis. For both, we use adataset comprised of 100 cases of U.S. Section 301 proceedings that were ongoing from 1975 to1999.12 The first model uses each Section 301 dispute as the unit of analysis. The dispute outcomesare coded dichotomously in terms of whether the United States backed down or achieved importantconcessions. For this test, we employ binary logistic regression. Our second analysis uses thedispute-year as our unit of analysis, which allows us to model the effects of time on the factorsaffecting disputants’ resolve in the Section 301 cases. This analysis uses a competing risks model andemploys a categorical coding of our dependent variable that captures whether the dispute persistedin a given year or terminated with either the United States backing down or achieving a satisfactorysettlement.

We start this section by discussing how we code the dependent variable and operationalize ourdistinction between Section 301 cases imposed because of breached agreements versus thoseimposed to open up new markets. Next, we discuss some other factors that could also exercisesubstantively important effects on dispute outcomes. We then present the results from our twoanalyses, discussing the implications of each in turn.

Section 301 Dispute Outcomes

In our examination of Section 301 cases, the nature of the dispute’s resolution is the dependentvariable within our analysis. The termination of a dispute can be categorized in terms of whether the

11 Even if we assume that policy makers discount the negative value of future losses incurred through a prolonged dispute inlight of the opportunity to realize immediate benefits, taking this mechanism into account does not negate decision makers’aversion to accepting immediate losses (see Streich & Levy, 2007).

12 With the creation of the World Trade Organization (WTO) in 1995, a number of governments challenged the legality of theSection 301 statutes. A WTO (1999) dispute resolution panel found that the law did not violate WTO rules. However, theWTO decision led the U.S. Government to require that the USTR first seek redress via the WTO’s Dispute SettlementMechanisms before initiating retaliatory actions via Section 301.


United States has rescinded its demands at the time of termination or has achieved a satisfactorysettlement. Our conceptualization of Section 301 outcomes relies on Crawford’s (1982) disagree-ment theory to classify U.S. behavior in each case and builds upon the scheme adopted by Kherallahand Beghin (1998). According to these criteria, the United States is considered to have backed downif there was little or no change in target policy when the investigation was closed and/or if the UnitedStates modified its own policies to accommodate the target. The United States is considered to haveachieved a satisfactory settlement if the target adopted policy changes largely consistent with U.S.demands.13 For our binary logit model, we operationalize case outcomes as a binary variable calledBACKDOWN, with a 1 constituting cases that terminated with the U.S. backing down and a 0constituting the case’s termination with a satisfactory settlement for the United States.14

Operationalizing Promotion and Prevention in Section 301 Disputes

We distinguish between preventive and promotive Section 301 proceedings by using the USTR’sdeclaration of whether the target had breached an existing trade agreement. We collected data fromthe U.S. Federal Registrar to code a dichotomous variable that we call BREACH, with a 1 denotingthat the United States claimed that an existing agreement had been violated and 0 denoting that thedispute did not involve such a violation.15 As per above, if a breach is claimed, we consider theSection 301 proceedings to be a preventive policy. If no breach occurred, the case is considered tobe promotive in nature.16 We focus on the USTR’s own conclusions concerning the dispute, as theeffects of loss aversion are a consequence of how U.S. policy makers view the issues at stake in thedispute—not of the target’s views. As coded, our theory predicts that BREACH will have a negativeeffect on the likelihood of the U.S. backing down.

Other Potential Explanations for Section 301 Outcomes

Within our analyses, we attempt to control for the potentially confounding effects of otherfactors on the impact that BREACH has on Section 301 outcomes by including a number ofadditional political and economic variables suggested by the literature (e.g., Drezner, 2003; Drury,2005; Zeng, 2002, 2004). For all the additional variables we employ in episode-level study, we usethe values of the variables for the year in which the dispute was initiated. In our competing risksmodel, the yearly values of the variables are used for each observation year. For cases in which theEU was targeted, the variables are aggregated to encompass all EU countries.

The party affiliation of the U.S. President in office could have a significant effect on Americanresolve in prosecuting Section 301 cases, as the USTR would be influenced by the president’spolitical prerogatives (e.g., Drury, 2005). For example, Zeng (2002, p. 110) found that PresidentRonald Reagan’s 1985 Trade Policy Action Plan (TPAP) had a positive effect on the success of theUnited States’ Section 301 disputes. In launching the TPAP initiative, Schoch (2001, p. 104) asserts

13 In most cases of settlement the targeted country committed to specific policy changes consistent with U.S. governmentdemands. However, also included in this category are instances in which targeted governments commit to future changesin policy (e.g., regulatory reform, new standards implementation, addressing the issue into a future trade negotiation, etc.)that could not be implemented immediately. In such instances, the USTR usually agrees to terminate the current investi-gation and monitor the targeted government’s subsequent behavior. If USTR did not revisit its complaint during the periodof this study, the case is considered satisfactorily settled.

14 The disposing of cases is coded at the end of the dispute. A case is coded as 1 if the target offered policy changes that theU.S. did not initially accept, continued the dispute, and subsequently accepted.

15 A case was also coded with a BREACH if the USTR explicitly claimed a target violation in Congressional testimony or inan official press release.

16 The determination of whether a Section 301 case involved breached trade agreement is made by the USTR at the onset ofa dispute and is not affected by the dispute’s outcome. In total, 61% of the Section 301 cases in our dataset involvedbreached trade agreements.


that President Reagan sought both to “shield” Congressional Republicans from partisan attacks onthe trade issue and put the issue firmly under Republican control. To control for the effects ofpresidential parties, we code the variable REPUBLICAN dichotomously to measure whether or nota Republican President was in office the year Section 301 dispute was initiated (1 = Republican, 0= Democrat). We control for the effects of the TPAP initiative with a dummy variable (1 = post-TPAP,0 = pre-TPAP).

Another domestic determinant of U.S.-resolve could be whether the Section 301 proceedingswere instigated directly by the USTR or on behalf of a constituent plaintiff. As the Trade Act of1974 is written, the USTR is allowed to initiate proceedings unilaterally or in response to domesticgroup(s) asking for relief from target trade practices. It could be expected that the USTR wouldface stronger domestic pressure not to back down in Section 301 cases initiated on behalf ofconstituent group. We code USTR INIT as a dummy variable for whether the Section 301 pro-ceedings were initiated by the USTR or a domestic interest group (1 = USTR-initiated, 0 = Initiatedby a domestic group). We also control for whether particular domestic economic sectors could bemore effective in influencing the resolve of policy makers in prosecuting their cases. In particular,the manufacturing and agricultural sectors are known for having particularly strong domesticlobbying groups (e.g., the automotive industry and corn growers) that could make it more costlyfor the USTR to back down in cases involving their interests. Dummy variables are thus usedto distinguish whether particular disputes involved the manufacturing (MANUFACTURING) oragriculture (AGRICULTURE) sectors.

Our analysis controls for an array of economic factors that could affect the outcome of Section301 disputes. First, we code a variable to control for the balance of trade that existed between theUnited States and target states (TRADEBAL). Potentially, the U.S. Government could strive harder towin Section 301 disputes against target states with which it has significant trade deficits. We codeTRADEBAL by subtracting U.S.-Target exports from U.S.-Target imports using current-year bilateraltrade data from Barbieri et al. (2008). Previous work has also shown that target states’ exportdependence upon the United States (TARGXDEP) is positively related to the United States’ successin Section 301 disputes (Zeng, 2002, p. 110). We code TARGXDEP as the proportion that Target-U.S.exports comprise of a target state’s GDP using data from Barbieri et al. (2008) and Gleditsch (2002).Lastly, we include individual dummy variables for Japan and the EU. Both were major tradecompetitors of the United States and frequent targets of U.S. Section 301 proceedings. The controlfor the EU is particularly important due to the unique nature of the organization and additional cloutits member states are able to wield by negotiating under its aegis (Mansfield & Reinhardt, 2003).

In terms of political variables, we control for whether the United States had an alliancerelationship with the target and the effects of shared democratic institutions. Drezner (1999) hasfound that allies are actually more likely to capitulate to economic sanctions than nonallied statesbecause they are less concerned about relative gains. We code ALLIES using a dummy variable forwhether or not the United States had a defense pact with the target using alliance data from Giblerand Sarkees (2004). As pairs of democracies have been shown to manage their trade differently thanmixed-regime dyads (Mansfield, Milner, & Rosendorff, 2000), we code a variable for whether theUnited States and target were democracies (DEMOCRACIES). To do this, we employ data on states’regime type using the polity2 variable from the Polity IV data set (Marshall & Jaggers, 2004). Weconsider a target to be an established democracy if it has a polity2 score of greater than 6 (1 =Democracy, 0 = Nondemocracy).17 Since the United States met this criterion in all our observations,this variable denotes whether both countries involved in the dispute were democratic. Lastly, weinclude a variable for the number of days a Section 301 episode lasted from its start date to the dayof its termination (DURATION). We log this variable in the analysis.

17 For the episodes involving EU, we counted the EU as being a U.S. ally and a democracy.


The Binary Logit Analysis

This section uses logistic regression to evaluate our theory using a binary coding of ourBACKDOWN variable. We evaluate the robustness of the effects exercised by BREACH by firstanalyzing its effects on U.S. resolve in isolation and then introducing the suite of control variablesdiscussed above. Model 2 controls for the effects of domestic political variables, while Model 3controls for relational factors between the United States and targets. Model 4 contains all thecontrols, and Model 5 is run containing only the variables that attained statistical significance in anyof the preceding models. In all five models, we employ Huber-White robust standard errors.

The results from the logistic regressions suggest that the distinction between Section 301 casesinitiated in response to a violated agreement versus those imposed to open up new markets had aprofound effect upon whether the USTR backed down. BREACH exercises a negative, statisticallysignificant effect on the United States’ likelihood of backing down across all five models. On averageand holding all other factors constant, the results from Model 5 indicate that the United States is 4.29

Table 1. Logit Estimates for the Likelihood of the U.S. Backing Down in Section 301 Disputes

Variables / Models 1 2 3 4 5

BREACH -1.17** -1.52** -1.88** -1.68* -1.45**(.44) (.60) (.60) (.66) .54

REPUBLICAN .32 .17(.47) (.50)

USTR INIT -.41 -.62(.76) (.77)

TPAP .54 .76(.69) (.76)

MANUFACTURING -1.45* -1.42 -1.41**(.63) (.73) (.55)

AGRICULTURE .48 -.06(.67) (.81)

TRADEBAL -.00 -.00(.00) (.00)

TARGXDEP -3.63 -5.39(5.12) (5.53)

EU 1.51* 1.05 1.24(.68) (.89) (.66)

JAPAN -1.08 -.32(1.00) (1.22)

ALLIES -.27 .07(.63) (.70)

DEMOCRACIES .32 .05(.66) (.67)

lnDURATION .31 .18 .17(.28) (.26) (.28)

CONSTANT .81** -1.10 -.12 -.04 1.04*(.35) (1.81) (1.60) (1.94) (.41)

N 100 99 99 99 100Prob > c2 0.01 .01 .05 .04 0.00Pseudo-R2 .06 .17 .14 .20 0.18

Note. Coefficients are reported first, followed by robust standard errors in parentheses below. *, **, † denote significanceat the 95%, 99%, and 99.9% confidence intervals respectively using two-tailed tests. Figures reported as .00 denote valuesthat were less than .00.


times less likely to back down in cases in which the Section 301 proceedings involving a breachedagreement versus those that did not. These findings strongly support the predictions made by ourtheory.

The results further indicate that the effects of BREACH are robust, even in the presence of a slewof alternative explanatory factors. Indeed, only two other variables attained statistical significance inany of the other models. In Models 2 and 5, the variable signifying that the Section 301 disputeinvolved the manufacturing sector (MANUFACTURING) is negative and statistically significant. Onaverage and holding all other factors constant, the results from Model 5 indicate that the UnitedStates is just over four times less likely to back down in disputes involving the manufacturing sectorcompared to those from other sectors. This is notable in that the U.S. manufacturing sector wassubject to increasingly stringent international competition during this period. As such, this sector’sincentives to lobby the U.S. Government to protect it from unfair foreign trade practices couldaccount for the stronger resolve the USTR demonstrated in prosecuting such cases. The results fromModel 3 indicate that the United States is significantly more likely to back down in Section 301disputes involving the EU. This effect is weaker in the full model, but still just misses attainingstatistical significance at the 95% confidence level (CL). These results indicate limited support forthe notion that the additional negotiating clout wielded by the EU offers it an advantage overindividual countries in facing off with the United States in trade disputes.18

This preliminary sketch indicates that, just as we hypothesized, the United States is less likelyto back down in cases involving breached agreements. To test our theory more thoroughly, however,we conduct an analysis capable of more clearly modeling the effects of time on the disputants’resolve.

The Competing Risks Analysis

Rather than analyzing Section 301 disputes as singular events, this analysis disaggregates eachdispute into discrete time periods so that the processes by which the disputants arrived at theirdecisions can be studied. This approach is consistent with the perspective that states’ decisions arebased upon incomplete information and uncertainty about the future (Bergeijk & Marrewijk, 1995).In any given year, both the sender and target states must make a calculated choice based upon thecosts and benefits of continuing the dispute or acquiescing. The approach allows us to analyze ifthere are any systematic differences between Section 301 disputes involving a breach versus thosethat did not in when disputants chose to back-down. Competing risks models are well-suited toexamine data involving dependent variables with both static and time-varying covariates involvingoutcomes that can terminate in more than one way (Box-Steffensmeier & Jones, 2004, 173–175). Aclose sibling of the events history model, the competing risks model uses categorical outcomesinstead of dichotomous ones. This allows us to assess the likelihoods of disputes persisting orterminating with the acquiescence of either the United States or the target, which offers insight intothe processes by which Section 301 disputes play out.

Running the competing risks models requires recoding our dependent and independent variablesusing the dispute-year as the unit of analysis. Towards that end, we restructure our data set on Section301 disputes to conform to the typical events history format. Separate observational records arecreated for each year that the individual Section 301 disputes were ongoing. For each year of thedisputes, we code a new categorical dependent variable to denote one of three outcomes in terms ofthe United States’ perspective: the United States and target states remain locked in their dispute

18 As additional robustness checks, we also analyzed whether the “Super 301” legislation passed by Congress in 1988, thecreation of the WTO in 1995, and the GDP ratio between the United States and target states affected the dispute outcomes.None of these variables had significant effects.


(STALEMATE), the dispute terminates with the United States backing down (U.S. LOSES), or thedispute terminates with the United States achieving a satisfactory settlement (U.S. WINS).

We code the data for the independent variables in this data set to pertain to the specificobservation year in which the dispute was ongoing—allowing them to change over time. To controlfor the effects of whether the U.S. economy is expanding or contracting during the period, we alsoinclude the measure GDP GROWTH. This variable denotes the growth rate of the United States’GDP in the previous year using data from the Penn World Table (Heston et al., 2011). In addition, wealso include a set of variables to account for temporal effects on the disputants’ decision making. Wemeasure the effects of time using a count variable for the number of years that the dispute has beenongoing (TIME). We adopt Carter and Signorino’s (2010) approach of including time-squared(TIME_SQ) and time-cubed (TIME_CB) variables as a Taylor series approximation to the hazardinstead of cubic splines. Finally, we include an additional variable that measures the number ofongoing Section 301 disputes to which the target is subject to in each observation year (ONGOING).This variable is meant to control for whether bringing multiple suits against a target country dividesthe USTR’s attention or gives it additional leverage in compelling the target to acquiesce.

To evaluate our theory, three competing risks models are run using multinomial logistic regres-sion with Huber-White robust standard errors. Model 1 contains only BREACH and the variablescontrolling for temporal effects, while Model 2 also includes the variables found to be significant inthe previous analysis. Model 3 is run using all the controls. The output of the multinomial logitmodels depicts the effects of the variables in a series of binomial comparisons of the alternativeoutcomes. These results are displayed in Table 2. While the significance of a variable’s effects inparticular specifications can be interpreted by looking at individual coefficients, its overall signifi-cance must be assessed by jointly assessing its entire set of coefficients. This was done using Waldtests for all the variables discussed below.

The results provide strong support for our hypotheses concerning the effects of dispute moti-vation on the United States’ behavior during the Section 301 disputes. Across all three models, Waldtests indicate that BREACH has a statistically significant effect at the 99.9% CL on Section 301dispute outcomes. This effect is most pronounced concerning the likelihood of the dispute persisting(STALEMATE) versus the United States backing down (U.S. LOSES). The results indicate that theUnited States is significantly (at the 99% CL) more likely to endure a stalemate than back down incases involving breached trade agreements versus those geared towards opening up new markets. Onaverage and holding all other variables constant, the odds of the United States enduring a stalemateversus backing down are higher by a factor of 6.6 for cases with a breached trade agreementcompared to those without one.19 The results also show that disputes involving a breached tradeagreement are less likely to terminate in a concession by the target (U.S. WINS) versus persisting ina stalemate in a given year. While statistically significant in Model 1 at 99% CL, BREACH’s effectis significant only at the 90% CL in Models 2 and 3. Substantively, its effects are also much weakeron target states’ willingness to concede compared to the United States’ willingness to back down.Together, these findings indicate that Section 301 disputes initiated for preventive reasons will tendto be more protracted than promotive cases.20

In disputes initiated in response to breached agreements, the United States appears only mar-ginally more effective at compelling targets’ acquiescence than in disputes launched to open up newmarkets. Directly comparing the likelihood of U.S. WINS versus U.S. LOSES, BREACH’s effects arepositive but fall just short of attaining statistical significance at the 90% CL in all three models.Indeed, Figure 2a shows that a target’s average overall likelihood of acquiescing (U.S. WINS) during

19 The odds ratios discussed are reported using coefficients from Model 2.20 This assertion holds up in directly comparing the length of time that both types of disputes persist. The mean duration of

Section 301 disputes involving breached agreements was 779 days, while it was 389 days for nonbreach cases.


a Section 301 dispute is actually greater for promotive cases during the first two years after theirinitiation than preventive cases. Only after a dispute has persisted two-and-a-half years does a targetbecomes more likely to concede in preventive cases than in promotive ones. This indicates that thereason why the United States tends to win disputes involving breached trade agreements morefrequently is not because targets are more willing to capitulate immediately in such cases.

Table 2. Multinomial Logit Competing Risks Model of the Section 301 Outcomes

Variables / Models Comparison Comparison Comparison

STALEMATE | U.S. LOSES U.S. WINS | U.S. LOSES U.S. WINS | STALEMATE

1 2 3 1 2 3 1 2 3

BREACH 2.17† 1.88† 2.26† .89 1.04 1.20 -1.29** -.84 -1.06(.49) (.57) (.57) (.54) (.67) (.74) (.44) (.49) (.57)

REPUBLICAN .21 -.43 -.65(.44) (.53) (.44)

USTR_INIT -.16 .73 .89(.52) (.64) (.51)

TPAP -.70 -.79 -.09(.72) (.87) (.64)

MANUFACT. .80 -.05 .90 .84 .10 .89(.59) (.65) (.69) (.77) (.46) (.61)

AGRICULT. -.75 .50 1.25(.56) (.85) (.77)

TRADEBAL -.00 -.00 -.00(.00) (.00) (.00)

TARGXDEP -4.67 1.45 6.12(4.50) (5.37) (4.55)

EU .51 -.04 -1.17 -2.27 -1.68* -2.23(.57) (1.05) (.82) (1.64) (.66) (1.36)

GDP GROWTH .26* .32* .06(.11) (.15) (.13)

JAPAN -.32 -1.04 -.72(1.14) (1.48) (1.12)

ALLIES .98 .68 -.30(.60) (.74) (.64)

DEMOC. -.05 -.22 -.17(.64) (.85) (.72)

ONGOING .11 .11 -.00(.17) (.22) (.17)

TIME -2.78† -2.74** -3.24† .32 .40 .03 3.10† 3.13† 3.27†(.86) (.86) (.90) (.95) (.96) (.93) (.44) (.77) (.80)

TIME_SQ .51** .49* .58** -.16 -.16 -.06 -.67† -.66† -.63**(.20) (.20) (.20) (.21) (.21) (.20) (.17) (.18) (.18)

TIME_CB -.03* -.03* -.03* .01 .01 .01 .04† .04† .04**(.01) (.01) (.01) (.01) (.01) (.01) (.01) (.01) (.01)

CONSTANT 3.72† 3.57† 3.50** -.65 -.93 -1.81 -4.37† -4.49† -5.30†(.91) (.92) (1.14) (1.11) (1.14) (1.26) (.86) (.91) (1.00)

N 283 283 283 283 283 283 283 283 283Prob > c2 .00 .00 .00 .00 .00 .00 .00 .00 .00Pseudo-R2 .12 .15 .21 .12 .15 .21 .12 .15 .21

Note. Coefficients are reported first, followed by robust standard errors in parentheses below. *, **, † denote significanceat the 95%, 99%, and 99.9% confidence intervals respectively using two-tailed tests. Figures reported as .00 denote valuesthat were less than .00.


2a: The Likelihood of U.S. WINS in Section 301 Disputes.

2b: The Likelihood of U.S. LOSES in Section 301 Disputes.

2c: The Likelihood of STALEMATE in Section 301 Disputes.

Figure 2. The likelihood of Section 301 outcomes over time.


Consistent with our loss-aversion-based account, we find strong evidence that U.S. policymakers are more resolute in holding out in preventive cases than they are in promotive ones. AsFigure 2b shows, time has a curvilinear effect on U.S. policy makers’ willingness to back down (U.S.LOSES) in Section 301 disputes. The graph indicates that the likelihood of the USTR backing downin a dispute grew increasingly large from years 1 through 5, but then diminished significantly if thedispute persisted. While this curvilinear relationship exists for both preventive and promotive cases,the difference between U.S. policy makers’ willingness to back down in preventive versus promotivecases is substantial. Whereas the USTR became significantly more apt to give up its case after failingto win a quick victory in promotive cases, it was much more likely to dig in its heels and endurecostly, long-term disputes when it had preventive motives.

The above suggests that loss aversion explains why U.S. policy makers demonstrate moreresolve in trying to win preventive cases than promotive ones. The evidence shows that the UnitedStates was much more willing to back down in promotive cases, illustrating that it cared less aboutopening up new markets than it did for preventing the erosion of its existing agreements. Figure 2cprovides a clear illustration of this point. U.S. policy makers appeared more willing to gamble incommitting the time and resources to prevail in preventive cases than they were in promotive ones.These findings echo those of Elms (2004), who found that loss-averse negotiators were willing tomake substantial commitments of resources to avoid accepting losses in their trade negotiations. Thefact that the United States generally had to work harder to win preventive cases than it did to winpromotive ones but was still more willing to stand firm in these cases is wholly consistent withbehavior influenced by the effects of loss aversion.

Though Section 301 critics may have labeled the measure “aggressively unilateral,” our findingsreveal that the United States had the most success when it used Section 301 defensively. This suggeststhat Section 301 disputes can best be described in terms of the two strategies it employed in their use:(1) an “aggressive” defense of American trade interests in confronting cheating trade partners; (2) aprudent offense in pursuing new opportunities to improve U.S. market access. In hindsight, such acharacterization seems entirely consistent with a foreign trade policy shaped by loss aversion.

Within our analysis, we also found further evidence that the EU is a tougher target for the UnitedStates to confront in Section 301 disputes than other parties. The results from Model 2 indicate thatif the target is the EU, it will be significantly more likely to endure Section 301 disputes in astalemate than to acquiesce as compared to non-EU targets. As in the previous analysis, however, thesignificance of the EU’s effects washed out with the addition of the economic and political controlsin the full model. It is also notable that the United States targeted the EU far more with Section 301proceedings than any other parties. The only other control variable to exert consistently consistenteffects was our control for whether the U.S. economy was growing or contracting. The variable GDPGROWTH had a positive and statistically significant effect on the likelihood of disputes persisting ina stalemate as opposed to ending in a U.S. loss down at the 95% CL. It had the same effects on thelikelihood of disputes ending in a U.S. victory as opposed to a loss. These findings indicate that thesuccess of the USTR in prosecuting Section 301 trade disputes is tied to the overall performance ofthe U.S. economy. It makes sense that targets of Section 301 proceedings would be more likely toacquiesce to U.S. coercion when its economy is booming, while they would be more resistant to U.S.pressure when its economy is lagging.

Consistent with the findings from the first logit analysis, the temporal controls did not exertstatistically significant effects on the likelihood of the United States winning or losing a dispute ina given year. Wherein the temporal controls were significant across all three models, though, relatesto the likelihood of disputes persisting in a stalemate versus terminating in either a U.S. victory orloss in a given year.21 As Figure 2 illustrates, the length of time that disputes last heavily influenced

21 Since the initial binary logit analysis only examined dispute outcomes, it could not capture these effects.


the policy makers’ decisions. These results suggest that time’s effects on economic coercion aremore complicated than previous analyses have recognized.22

Conclusion

Broadly, we hope our findings illustrate that research securely anchored to empirically estab-lished cognitive mechanisms yield important insights into foreign policy. The wealth of findingsgenerated by neuroscientists can motivate the kind of theory building that is amenable to large-nanalyses of foreign policy behavior: a methodological domain that has been primarily dominated byrationalist frameworks. Further application of our loss-aversion-based framework to topics amenableto large-n analysis in the realms of security policy and other aspects of IPE should be fruitful avenuesfor future research. Indeed, the linkage between domestic politics, the promotion-prevention dis-tinction, and foreign policy remain largely unexplored. As noted above, there is some evidence thatpreventive policies elicit greater domestic support. This opens the possibility of strategic framing(preventive vs. promotive) on the part of governments, the purpose of which would be to opendomestic win-sets and create desired foreign policy latitude. The potential effects of domestic framesthat contradict the one held by foreign policy decision makers are also unknown. For example, if astate’s constituents view a policy as promotive while its leaders view it as preventive, the leaders maymisjudge the degree of domestic support the policy actually has—potentially to their peril. Thissuggests that political scientists have their own unique contributions to make to the interdisciplinarystudy of loss aversion.

More specifically, the results from our study indicate that policy makers in the USTR exercisedgreater commitment to Section 301 disputes launched in response to breached trade agreements thanthose intended to open up new markets. Our analysis suggests that U.S. policy makers’ unwillingnessto back-down in cases launched to prevent partners from violating existing agreements constitutesclear evidence of loss aversion at work. That disputes involving breached trade agreements tooklonger to resolve and were less likely to yield immediate concessions from target states indicate thatsuch cases were not inherently easier for the USTR to win. Instead, the USTR’s greater success inachieving favorable settlements in preventive cases stemmed from its policy makers’ determinationto outlast targets in such cases. By holding out longer in preventive cases—despite the costs anduncertain prospects for success—U.S. policy makers were able to wear down their targets’ resolveand convince them to make concessions. In contrast, policy makers in the USTR were much morelikely to back down from Section 301 disputes with promotive objectives if their cases did not makeheadway after several years. Our empirical results show that this motivational distinction played thelargest role in affecting cross-case variation in the resolve demonstrated by U.S. policy makers intheir prosecution of Section 301 disputes.

Our findings also have salient implications for of U.S. trade policy. Our results show that theUnited States’ “aggressive unilateralism” has been most effective when used defensively. WhileSection 301 proceedings have been criticized for being an aggressive policy tool, U.S. policy makersappear to have been more committed to using them to prevent the erosion of existing trade agree-ments than in seeking out new gains. Loss aversion provides a compelling explanation for thisotherwise puzzling disparity in the degree of resolve. This suggests that U.S. policy makers, ingeneral, devote more effort to defending the beneficial terms-of-trade that it has already establishedcompared to seeking out new gains.

22 We also tried running our model with interaction terms for BREACH and the three temporal variables. BREACH retainedits statistically significance in these models and its behavior was still very much consistent with our argument. Itssubstantive and statistical impact, though, did vary across the range of the temporal variables.


ACKNOWLEDGMENTS

Previous versions of this article were presented at the 2008 annual meeting of the InternationalStudies Association and the 2008 annual meeting of the American Political Science Association. Wewould like to thank Christopher Butler, Damon Cann, Raymond Dacey, A. Cooper Drury, MatthewFuhrmann, Gary Schaub, Jr., and Douglas Stinnett for their suggestions and comments. Correspon-dence concerning this article should be sent to Jeffrey D. Berejikian, Department of InternationalAffairs, School of Public and International Affairs, University of Georgia, Athens, GA 30602.E-mail: [email protected]

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