Managing tied aid competition: Domestic politics, credible threats, and the Helsinki disciplines

During the eighties, industrialized countries increasingly used tied aid to circumvent international agreements restricting export subsidies for capital goods. The 1991 Helsinki Disciplines restricted the use of tied aid as a tool of export promotion. In export subsidy competition, donor states have a collective interest in avoiding spiraling escalation of spending; but, reaching international agreements is difficult when preferences over levels of expenditure vary between them. States that favor greater restraint on export subsidies can make subsidy competition prohibitively expensive by increasing their expenditures. However, this requires them to threaten substantial increases in spending when they have a demonstrated preference against doing so. Successful cooperation can only occur when governments with sufficient budgetary resources prefer subsidy reduction, but can mobilize domestic constituencies to make subsidy retaliation credible. Despite an apparent decline in international influence, the U.S. was able to compel accession to the Helsinki agreement by threatening substantial increases in its spending. This article uses a process-tracing approach to demonstrate the role of domestic politics in making that threat credible.