lecture 5 domestic politics trade

7/29/2019 Lecture 5 Domestic Politics Trade

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International Political Economy #5

The Domestic Politics of Trade

William Kindred Winecoff

Indiana University Bloomington

September 12, 2013

W. K. Winecoff | IPE #5: Domestic Politics of Trade 1/20
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From Economics to Politics

In the economists story, everything is great.

Trade benefits both countries.

But this relies on some assumptions:

Internally mobile factors of production (i.e. capital, land, andlabor).

No agglomeration effects (i.e. constant returns to scale).

No money or financial sectors.

Only two countries.

No prices.

What if these arent true?

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Complicating Heckscher-Ohlin

Stolper-Samuelson:With trade, the returns to the abundant factor of production

increases, but decreases for the scarce factor.

I.e., American producers of Jay-Zs benefit from trade, but

American producers of Beatles suffer.

Why? For one thing, because factors are not perfectly mobile.Society overall is still better off, but now there is inequality.

S-S is a simple extension of H-O; most of the core assumptions are still

present.

Even still, we can see why some people would oppose trade.

Sets up a basic capital vs. labor competition.

In comparative development, often land vs labor and/or land

vs capital.

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Some Politics from Stolper-Samuelson

S-S has significant implications for politics.

Namely, the scarce factor should oppose trade while the abundant factor

supports it.

Trade might be good for society overall, but it is not good for everyonewithin it.

The Drezner article is (partially) about this.

How important this is depends somewhat on how mobile sectors are.

Not such within countries, but across them (via immigration).Are factors of production are the relevant unit of analysis?

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Another Approach: Ricardo-Viner

Also known as the specific sectors model.

Still 2x2x2.Still constant returns to scale and perfect competition.

Difference: capital is specific to sectors; labor is mobile.

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Some Politics from Ricardo-Viner

Preferences over trade will form across sectoral lines.

Within sectors, capital and labor will have the same preferences.

Comparatively-advantaged sectors will want open trade.

Across sectors preferences may differ.

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Domestic Politics of Trade

In both S-S and R-V there are incentives to restrict trade in

comparatively-disadvantaged sectors.

Also incentives to open trade in comparatively-advantage sectors.

Open trade = diffuse benefits but concentrated costs.The logic of collective action = tyranny of the minority?

More likely to lobby if costs are heavy than if benefits are

light.

Government preferences: open to some types of trade, closed to others.(Well come back to this.)

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S-S vs. R-V

Which is right?

Both: elements of these are clearly visible in many times and

places.

Neither: other factors matter too.

The Leontief Paradox: states as actors?

A lot of trade is North-North.

Increasingly, trade is intra-industry or even intra-firm.

Scale economies: linear vs. exponential.

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Trade As Development Strategy

Suppose you are a state wanting to improve your economy. What are

some things you might do?

Build roads.

Build ports.

Build communications infrastructure.

If you build it, they will come.

These are not just about capacity; also about triggering network

agglomeration effects.



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Networks and Agglomeration

Consider IU: put a lot of intelligent people together and we can

accomplish more than we could individually:

We create a university.

We create things to facilitate the university (support staff,leisure activities, etc.)

Putting us all together in one place leads to more efficiency.

We create networks of collaboration that generate positive externalities.

Networks can lead to increasing returns to scale.

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Networks and Agglomeration, con.

Think about Silicon Valley: Hewlett and Packard started there.

Tech workers went there to work for H&P.

New tech companies went there because the workers were there, which

meant even more tech workers went there. Etc.

This labor mixes with capital investment to produce more efficiently

than they would if they were dispersed.

Efficient sectors, comprised of networks, want open trade.

Sometimes only a few production centers will be supported.



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The Power of Positive Feedback

New York City exists because of the Erie Canal:

Get from the Atlantic to Hudson River, from Hudson River to Lake Erie,

and from Lake Erie to the rest of the country.

Because of this access, manufacturers want to move there.

Because manufacturing and trade is there, financiers want to move

there.

Etc.

Before Erie Canal was built, NYC was well behind Philadelpha.

Now NYC dwarfs Philadelphia.

What is true domestically is true internationally.

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Fixed vs. Variable Costs

Industries with high fixed costs e.g. commercial jet production and

lower variable costs e.g. labor, parts.

Huge economies of scale + huge economies of scope.

If you can develop this industry first, it will make sense for everyone to

buy from you.



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Networks and Agglomeration, con.

Governments might try to generate these scale economies:

Infant industry subsidies.

Inefficient in short term; efficient in the longer term if

successful.

Patterns of global trade strongly reflect these networks.

Local networks combine to form global networks.

Geography of trade.

Being at the core of these networks gives you lots of benefits. Including

power.

Governments and business often work together: industrial policy.



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Path Dependence

Once these agglomeration effects kick in, they reinforce themselves over

time.

It takes a lot to displace a central node in the network, but it can

happen. E.g.:

Japan with durables manufacturing in 1970s-1980s.

China with low-skill manufacturing in 1990s-2000s.

But it involves a lot of effort, investment.

Represents a redistribution to the new sectors from old sectors.

Often this means a redistribution to urban centers from suburban or

rural areas.

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The Core and Periphery

Path dependence plus agglomeration also implies increasing inequalityover time.

Rich get richer, i.e. capture more of the trade market.

This leads to interesting international trade politics (more later).

Also interesting domestic trade politics.

If disadvantaged, encourage immigration.

If disadvantaged, try to subsidize locals.

If disadvantaged, try to protect locals.

Note that in many respects, this trade is anti-economic.

At least in terms of classical economics.

Develop a comparative advantage; dont just rely on endowments.

The importance of technology and catch-up growth.

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Geography

Transaction costs also matter.

Much world trade is with countries close to each other.

U.S. export more to Canada and Mexico than any othercountries. Imports are same, except for China.

Intra-Europe trade is very high as well.

Regional integration efforts have grown, in part for these reasons:

improve efficiency, improve growth.

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Is Independence a Good Thing?

Domestic politics also emerges in response to dependence.

Do we trust others enough to rely on them?

Esp in critical sectors (e.g. food, energy)?

Many citizens seem to want independence (i.e. local control) even if its

less efficient.

Drill baby drill.

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The Trade Network, Visualized

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The Trade Network, Visualized Again

Source: PC-TAS (1996-2000)

ESPON and Project 3.4.1,UMR Gographie-Cits, UMS RIATE, 2006

World trade, 1996-2000

16 %4 %1 % 5.0 %2.0%1.0%0.5%0.2%0.1%

Bilateral international trade flows 1996-2000

(with EU25 aggregated)

Share of world bi lateral trade of each state International flows measured in % of world

bilateral trade


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