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Why do countries keep their promises to foreigners? Few questions are as central to the theory
and practice of international relations. It is widely believed that in the absence of a world
government, countries enforce their agreements linking issues, that is, by threatening to retaliate
in one area of world affairs if foreigners behave selfishly on another.
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Provided the link is
credible, leaders will think twice before crossing foreigners, since the gains from cheating on one
issue may not outweigh the loss of cooperation on another. There are other ways to sustain
international agreements, but issue linkage is seen as one of the most important mechanisms.
This paper studies the strategic link between two domains of international relations:
finance and trade. When a government borrows money from foreigners, it may feel tempted to
violate its obligations by refusing to repay the principal plus interest. In leading models of
sovereign debt, lenders deter this kind of behavior by tying debt to commerce. In particular, they
use trade embargoes and other commercial sanctions to coerce countries into paying their debts.
As Lane (2004, 2) points out, “the imposition of trade sanctions on the offending country” is “the
classic punishment … in the sovereign debt literature.”
Many theories rely on this linkage hypothesis, but surprisingly little research has tested it
directly. In this paper I assess the importance of linkage in debtor-creditor relations during the
nineteenth and twentieth centuries. Contrary to existing theory, I find almost no evidence of an
explicit or an implicit enforcement strategy that connects debt and trade. The paper concludes by
noting the implications of this finding for theories of foreign debt.
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The concept of issue linkage has a long intellectual history. See, for example, Keohane and Nye (1977), Tollison
and Willett (1979), Haas (1980), Stein (1980), Keohane (1984), Axelrod and Keohane (1985), Oye (1985), Snidal
(1985: 939), McGinnis (1986), Martin (1992), Keohane and Martin (1995), Lohmann (1997), Aggarwal (1998), and
Davis (2004).
Convention