Preferential trading arrangements (PTAs) have spread widely over the past fifty years. During the same era, multilateral openness has grown to unprecedented heights, spurred by the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). If the cornerstone of the manifestly successful multilateral regime is nondiscrimination, why have its members increasingly resorted to preferential liberalization? We argue that developments at the heart of GATT/WTO encourage its members to form PTAs as devices to obtain bargaining leverage within the multilateral regime. Specifically, the growth in GATT/WTO membership, the periodic multilateral trade negotiation rounds, as well as participation and, especially, losses in formal GATT/WTO disputes, have led its members to seek entrance into PTAs. Conducting the first statistical tests on the subject, we find strong evidence in support of this argument.

During the past half-century, states have established a large number of international trade institutions, both multilateral and regional in scope+ The existing literature on this topic emphasizes that these agreements are chiefly designed to liberalize and increase the flow of overseas commerce+ Yet such institutions have another function that has been largely ignored by researchers, namely, reducing volatility in trade policy and trade flows+ Exposure to global markets increases the vulnerability of a country's output to terms of trade shocks+ Governments seek to insulate their economies from such instability through membership in international trade institutions, particularly the World Trade Organization~WTO! and preferential trading arrangements~PTAs!+ We hypothesize that these institutions reduce the volatility of overseas commerce+ We further hypothesize that, because market actors prefer price stability, trade institutions increase the volume of foreign commerce by reducing trade variability+ This article conducts the first large-scale, multivariate statistical tests of these two hypotheses, using annual data on exports for all pairs of countries from 1951 through 2001+ The tests provide strong support for our arguments+ PTAs and the WTO regime significantly reduce export volatility+ In so doing, these institutions also increase export levels+ During the past half-century, states have concluded a large number of international trade agreements+ Some of these agreements have been multilateral in scope, particularly the General Agreement on Tariffs and Trade~GATT! and its successor, the World Trade Organization~WTO!+ Others have been bilateral or regional, most notably the preferential trading arrangements~PTAs! that have proliferated with striking speed in recent years+ What do such trade institutions accom-

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Disputes under the General Agreement on Tariffs and Trade (GATT) exhibit a puzzling selection effect. Defendants concede more prior to GATT judgments than afterward, despite GATT's lack of enforcement power. Yet, why would states plea-bargain if they know they can spurn contrary rulings? To find out, the article develops an incomplete information model of trade bargaining with the option of adjudication. The plaintiff has greater resolve prior to a ruling, believing that the defendant might be compelled to concede to an adverse judgment—even if that belief later proves false. Surprisingly, this resolve induces more generous settlements even from defendants who intend not to comply with any ruling. After a ruling, however, this anticipatory effect is irrelevant: adjudication works best when threatened but not realized. The prospect of adjudication thus conditions the behavior of states even when enforcement is not forthcoming but not through mechanisms identified by previous studies.