Society-Centered Approach to Trade Politics - PowerPoint Presentation

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Society-Centered Approach to Trade Politics

International Political EconomyProf. Tyson Roberts

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Lecture goals

Factor modelSector modelCollective action problem Economic & political predictions

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Puzzle

Comparative advantage: free trade good for all nations, in aggregateMore 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 LaborSkilledUnskilledCapital

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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

P

ayment 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

trade

Landowners

against

Urban-rural conflict

Capital scarce

(

LDCs

)

Landowners for trade

Labor

& Capitalists againstUrban-rural conflictLabor for tradeLandowners & Capitalists against Class conflict

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Britain, 1840s

Rich relative to trade partnersHigh 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 BritainHigh population density relative to U.S.What should we predict regarding policy preferences of each group, and the resulting political coalitions?

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United States, 1840s

Economically backward relative to BritainLow population density relative to Britain and GermanyWhat should we predict regarding policy preferences of each group, and the resulting political coalitions?

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Commerce and Coalitions1

st Age of Globalization (increasing free trade)

Labor scarce

relative to Land

Labor

abundant

relative to Land

Capital rich

(Developed

countries)

Capitalists

& Landowners for trade

Labor against

Capital & Labor for

trade

Landowners

against

Capital scarce

(

LDCs

)

Landowners for trade

Labor

& Capitalists against

Labor for trade

Landowners & Capitalists against GermanyBritainUnited 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

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Institution: Parliamentary VoteSlide16

1st Age of Globalization

(from Rodrik, pp. 27-30)

“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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1st Age of Globalization

(from Rodrik, pp. 27-30)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 scarce

relative to Land

Labor

abundant

relative to Land

Capital rich

(Developed

countries)

Capitalists

& Landowners for trade

Labor against

Capital & Labor for

trade

Landowners

against

Capital scarce

(

LDCs

)

Landowners for trade

Labor

& Capitalists against

Labor for trade

Landowners & Capitalists

against Asian & East European FascismW. 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

B

enefit 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 concentratedMarginal benefit of protection/access is large

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Political Institutions & Trade Policy

Majoritarian vs. PR electoral systemMajoritarian 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

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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)29Slide30

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 reasonsCollective 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 stabilityInstitutional veto pointsPresident, lower house (HR), upper house (Senate)

Partisan veto players

Parties in institutional veto points

Parties in coalition governments

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

Taxes on the rich



Republicans

Democrats

Community College

spending



SQSlide37

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





Republicans

Democrats



SQ

Joint gains

Taxes on the rich

Community College

spendingSlide38

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

Community College

spendingSlide39

Research Exercise 1Slide40

Empirics (Research Exercise 1)

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Openness to trade = Trade (% of GDP) (

pwt_openk

)Slide41

Comments

GDP vs. GDP per capitaReal 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

3

57 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

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GDP growth, constant 2000 dollars3.81.90.5GDP per capita growth, current LCU2.30.70.3

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Which measure to use depends on the question being askedSlide43

Alternative trade openness measure

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Openness to trade = HF Trade FreedomSlide44

Time lag for explanatory variable

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Openness to trade = HF Trade Freedom, 5 year lag (i.e., 1995)Slide45

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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Income level: Look for change in slope

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Income level: Look for change in slope

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Comments

Volatility of growth vs. rate of growthAlternative explanations – look at historyVietnam War ended in 1973Ghana launched Economic Recovery Program in 1983

International financial crises ~1980 and ~1997

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