society-centered approach to trade politics international political economy prof. tyson roberts 1

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Society-Centered Approach to Trade Politics

International Political EconomyProf. Tyson Roberts

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Lecture goals

• Factor model• Sector model• Collective action problem • Economic & political predictions

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Puzzle

• Comparative advantage: free trade good for all nations, in aggregate– More nuanced view: depends on size of economy,

state capacity, positive & negative externalities, etc.

• Then why do governments pursue protectionist policies?

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Some possible answers

• Trade isn’t always good• “Wrong ideas”

– Mercantilism, Dependency Theory, Structuralism, etc.• Infant industry protection (Next Week)• Collective action problems (Lecture 6 & 7)

– Producers of tradeables have more political power than consumers, favor protection of own markets

• Relative factor endowment politics (Today – Lecture 6)– Scarce factors oppose free trade to protect income

• Sector orientation politics (Today – Lecture 6)– Import-competing sectors oppose free trade

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Factor model

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Factors of production

• Land • Labor– Skilled– Unskilled

• Capital

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Factor-price equalization(Stolper-Samuelson)

• Economic assumptions:– Autarky:

• Scarce factors in each economy demand high payment

– Trade: • Each economy has comparative advantage in, and

exports, goods that intensively use abundant factors• Payment to scarce factors in each economy falls (import

competition) • Payment to abundant factors rises (used for exports)• Factors move from import-substituting to export sectors

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Commerce & Coalitions (Rogowski 1990)

• Political assumptions:– Beneficiaries of change will try to accelerate it;

victims of change will try to halt it (desire)– An increase in wealth enables increased political

influence (means)– As desire & means for a particular policy

increases, likelihood increases that a political entrepreneur will overcome collective action problems

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Commerce and Coalitions(Rogowski 1990, based on 3-factor model: Land, capital, labor)

Labor scarce relative to Land

Labor abundant relative to Land

Capital rich (Developed countries)

Capitalists & Landowners for trade

Labor against

Class conflict

Capital & Labor for tradeLandowners against

Urban-rural conflict

Capital scarce (LDCs)

Landowners for tradeLabor & Capitalists against

Urban-rural conflict

Labor for tradeLandowners & Capitalists

against

Class conflict

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Britain, 1840s

• Rich relative to trade partners• High population density (i.e., low land-labor

ratio) relative to U.S.

• What should we predict regarding policy preferences of each group, and the resulting political coalitions?

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Prussia (Germany), 1840s

• Economically backward relative to Britain• High population density relative to U.S.


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United States, 1840s

• Economically backward relative to Britain• Low population density relative to Britain and

Germany


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Commerce and Coalitions1st Age of Globalization (increasing free trade)





Labor againstCapital & Labor for trade

Landowners against


Landowners for trade Labor & Capitalists against


against

Germany

Britain

United States

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1st Age of Globalization (from Rodrik, pp. 27-30)

• Britain: “Landlords wanted high tariffs that kept food prices high and raised their incomes. Urban manufacturers … wanted to abolish the tariffs to reduce the cost of living.“

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Start of 1st Age of Globalization: End of Corn Laws (1846)

• Actor: Landlords

• Interest: High food prices to increase income

• Policy preference: Tariffs on food imports

• Actor: Urban manufacturers

• Interest: Lower food costs so can reduce wages, increase profits

• Policy preference: Abolish tariffs

Institution: Parliamentary Vote

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• “Everywhere on the Continent agricultural interests clamored for protection, often making common cause with industrialists who were reeling under competition from the more advanced British producers… In Bismarck’s Germany, this led to the famous “marriage of iron and rye” …”

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• US: “The South depended on international trade for its prosperity. The North wanted protection from imports, at least until it could catch up.”

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Commerce and CoalitionsDepression of the 1930s (increasing protectionism)





Labor againstCapital & Labor for trade

Landowners against


Landowners for tradeLabor & Capitalists against


against

Asian & East European Fascism

W. European FasicismUnited States: New Deal

South American Populism

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Sector Model

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Specific factors model(Ricardo-Viner)

• Economic assumptions:– Not all factors are mobile; some trapped in specific sector– All factors from a sector that intensively uses the

economy’s abundant factor gain from trade; factors from sector intensively using economy’s scarce sector lose

– For example, capital invested in a labor intensive sector (e.g., textiles & apparel) in a labor abundant country is HELPED by trade

– Labor w/special training in capital-intensive sector (computers, autos, etc.) in a labor-abundant country is HURT by trade

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Specific factors model (Frieden)

• Political predictions:– Coalitions cut across factors, along industry lines if factors

have low mobility – For example, capital & labor in labor-intensive sector forms

coalition if capital and labor cannot easily change sectors

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Organizing Interests:The Collective Action Problem and Trade Policy

Demands

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Collective action and trade protection:Producers lobby governments more than consumers

• Consumers – Benefit from trade (lower prices)– Are diffused – Marginal benefit of lower price for each good is small

• Producers of tradeables – Benefit from

• Protection in own country (higher prices)• No protection in foreign country (access to markets)

– Are concentrated– Marginal benefit of protection/access is large

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Political Institutions & Trade Policy

• Majoritarian vs. PR electoral system– Majoritarian increases voice of minority interests,

e.g. sector-based interests (based on geography)– PR increases voice of larger groups, e.g., class or

factor interests, or consumers

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http://www.youtube.com/watch?v=Ro_-isihnqM

http://www.youtube.com/watch?v=Ro_-isihnqM

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Example of tariffs, WTO, & distribution of benefits

• “We had a tire case in which they were flooding us with cheap … Chinese tires. And we put a stop to it and as a consequence saved jobs throughout America. I have to say that Governor Romney criticized me for being too tough in that tire case; said this wouldn’t be good for American workers and that it would be protectionist. But I tell you, those workers don’t feel that way. They feel as if they had finally an administration who was going to take this issue seriously.” – Barack Obama, October 22, 2012

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Coalition for tire protection(from podcast)

• Tire company union

• Tire company owners

• Does this comply with the factor or sector model?

• Does this imply factors are mobile or immobile?

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• “It’s not like you were going to take a 52-year-old guy and send him to internet school.” (Podcast)

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China responds to US anti-dumping tire tariff with anti-dumping chicken part tariff

(US wins on tires, chicken parts still in dispute)

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Tire tariffs saved/created ~1200 jobs in Ohio, etc. (swing states)

(Hufbauer & Lowry 2012)

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Estimated cost to consumers in higher tire prices estimated at $1.1 billion, or $900,000 per job

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Another tariff case(LaFaive 2002, Tran 2003)

• President Bush raised tariffs on steel in 2002• Winners: Estimated 4,400 – 8,900 steel-sector

jobs in MI & PA (swing states)• Losers: Estimated decrease in national income

$0.5-1.5 billion; lost jobs in steel-using industries• WTO ruled against US, authorized EU to retaliate

with tariffs against FL oranges & Harley-Davidsons (WI, PA, etc.)

• Bush reduced steel tariffs in 2003

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Take-aways

• While trade has many obvious benefits, protectionism is a common strategy for many reasons– Collective action challenges (more voice for

producers than consumers)– Winners vs. losers among producers (factors or

sectors)– Some countries may benefit in the long run from

targeted protection policies (Lecture 8)

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The role of veto players

• Veto player must • More veto players => more policy stability• Institutional veto points– President, lower house (HR), upper house (Senate)

• Partisan veto players– Parties in institutional veto points– Parties in coalition governments

If there is one veto player, he can get his ideal policy choice

Taxes on the rich

Republicans

Democrats

Community Collegespending

SQ

If there are two veto players, the possible policy outcomes are narrowed – both must agree

Republicans

Democrats

SQJoint gainsTaxes on

the rich


If there are three veto players, the possible policy outcomes are narrowed further still – all must agree

Republicans

President

SQ

Joint gains

Democrats in

Senate

Taxes on the rich


Research Exercise 1

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Empirics (Research Exercise 1)

Openness to trade = Trade (% of GDP) (pwt_openk)

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Comments• GDP vs. GDP per capita• Real GDP vs. GDP• (PPP adjustments)• GDP per capita growth vs. GDP per capita• Trade (% of GDP) vs. Policy measures• Measurement error• Causality issues

– Correlation– Snap shot– Direction of causality/endogeneity– Omitted variables (e.g., oceans)– Growth vs. Level

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Varying measures of economic prosperity, for 1990, from WDI

Measure China USA USA/China

GDP, current dollars 357 Billion 5.8 Trillion 16.2

GDP, PPP 2005 dollars

1.2 Trillion 8 Trillion 6.7

GNI per capita, current dollars

310 22,080 71.2

GDP per capita, PPP 2005 dollars

1,099 31,951 29.1

GDP growth, constant 2000 dollars

3.8 1.9 0.5

GDP per capita growth, current LCU

2.3 0.7 0.3

Which measure to use depends on the question being asked

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Alternative trade openness measure

Openness to trade = HF Trade Freedom

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Time lag for explanatory variable

Openness to trade = HF Trade Freedom, 5 year lag (i.e., 1995)

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Growth: Look for change in level

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Growth: Look for change in level

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Income level: Look for change in slope

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Comments

• Volatility of growth vs. rate of growth• Alternative explanations – look at history– Vietnam War ended in 1973– Ghana launched Economic Recovery Program in

1983– International financial crises ~1980 and ~1997

society-centered approach to trade politics international political economy prof. tyson roberts 1

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