Bridging the enforcement gap in international trade: Participation in the New York Convention on arbitration

Abstract

International trade transactions come with a peculiar hazard: unlike commerce inside national borders, there are no common courts or legal jurisdictions to enforce contracts should disputes arise. Distance, language, and cultural disparities further complicate contract enforcement for international trade. A 1958 United Nations treaty, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC), addresses this enforcement gap. NYC signatory countries commit to enforce the outcomes of private arbitration between importers and exporters. This commitment makes private international arbitration a viable legal alternative for dispute resolution, supported by state enforcement through national courts. This paper explores why many countries waited decades to join the NYC despite the obvious benefits. The puzzle is framed with a model of policy adoption – how the net benefits of membership, driven by trade interactions, social contagion or peer effects and internal barriers, influence the timing of membership decisions. In the data, countries are more likely to join when their regional trade partners do. The nature of traded goods is also a strong predictor of NYC membership, as countries that specialize in contract-intensive goods join sooner on average, relative to producers of undifferentiated commodities.