1. Society-Centered Approach to Trade Politics
International Political Economy
Prof. Tyson Roberts

2. Lecture goals Factor model Sector model Collective action problem
Economic & political predictions

3. 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?

4. 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

5. Factor model

6. Factors of production
Land
Labor
Skilled
Unskilled
Capital

7. 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

8. 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

9. Commerce and Coalitions (Rogowski 1990, based on 3-factor model: Land, capital, labor)
Labor scarce
relative to Land
Labor abundant
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 against
Labor for trade
Landowners & Capitalists against

10. 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?

11. Prussia (Germany), 1840s Economically backward relative to Britain
High population density relative to U.S.
What should we predict regarding policy preferences of each group, and the resulting political coalitions?

12. United States, 1840s Economically backward relative to Britain
Low population density relative to Britain and Germany
What should we predict regarding policy preferences of each group, and the resulting political coalitions?

13. Commerce and Coalitions 1st Age of Globalization (increasing free trade)
Britain
Labor scarce
relative to Land
Labor abundant
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
United States
Germany

14. 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.“

15. 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

16. 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” …”

17. 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.”

18. Commerce and Coalitions Depression of the 1930s (increasing protectionism)
United States: New Deal
W. European Fasicism
Labor scarce
relative to Land
Labor abundant
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
South American Populism
Asian & East
European Fascism

19. Sector Model

20. 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

21. 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

22. Organizing Interests: The Collective Action Problem and Trade Policy Demands

23. Producers of tradeables
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

24. 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

26. 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

27. 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?

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

29. China responds to US anti-dumping tire tariff with anti-dumping chicken part tariff (US wins on tires, chicken parts still in dispute)

30. Tire tariffs saved/created ~1200 jobs in Ohio, etc
Tire tariffs saved/created ~1200 jobs in Ohio, etc. (swing states) (Hufbauer & Lowry 2012)

31. Estimated cost to consumers in higher tire prices estimated at $1
Estimated cost to consumers in higher tire prices estimated at $1.1 billion, or $900,000 per job

32. 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 $ 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

34. 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)

35. 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

36. If there is one veto player, he can get his ideal policy choice
Democrats   SQ
Taxes on the rich
Republicans
Community College
spending

37. If there are two veto players, the possible policy outcomes are narrowed – both must agree
Democrats   SQ
Taxes on the rich
Joint gains
Republicans 
Community College
spending

38. If there are three veto players, the possible policy outcomes are narrowed further still – all must agree
Democrats in Senate
President    SQ
Taxes on the rich
Republicans 
Joint gains
Community College
spending

39. Research Exercise 1

40. Empirics (Research Exercise 1)
Openness to trade = Trade (% of GDP) (pwt_openk)

41. 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

42. Varying measures of economic prosperity, for 1990, from WDI
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
PPP: controls for cost of living
Constant (year) dollars: controls for inflation
Per capita: controls for population
Growth: captures change instead of level
GNI is Gross National Income, instead of Production. For example, profits from American factories in China go to US instead of China.
Note – China has lower population growth, so per capita GDP growth is better relative to US than GDP growth. GDP growth includes both population growth and GDP per capita growth.
Which measure to use depends on the question being asked

43. Alternative trade openness measure
Openness to trade = HF Trade Freedom

44. Time lag for explanatory variable
Openness to trade = HF Trade Freedom, 5 year lag (i.e., 1995)

45. Growth: Look for change in level
Average pre 1990=.5
Average post 1990 = 1.7

46. Growth: Look for change in level

47. Income level: Look for change in slope

48. Income level: Look for change in slope

49. Income level: Look for change in slope

50. 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