Geoffrey Hale Political Science 3170 September 21, 2010

Outline Trade politics as the domestic politics of distribution The Heckscher-Ohlin Model The Stolper-Samuelson Theorem Real-world applications / refinements Embedded liberalism (Ruggie) The post-war response to trade liberalization. Managing distributive issues in an era of “liberalized trade”

Trade Policies and Distributive Politics Trade policies may increase overall economic welfare within and between nations, BUT Increased competition may shift related economic benefits among different groups of producers, or between one social / income group and another. Building political consensus in support of trade liberalization requires attention to distributive issues and adjustment costs

Political Economy of International Trade Theoretical Models Heckscher-Ohlin Model (1933) Refinement of Ricardo’s theory of comparative advantage Predicts patterns of trade, production based on relative “factor endowments” of trading region Comparative advantages seen to result from relative abundance, costs of key factors of production (e.g. labour, capital – focus on two key factors) “Countries with access to plenty of capital will tend to export more capital-intensive goods; countries with relative surplus of labour will tend to export more labour-intensive goods. Assumes easy movement of capital, labour from one industry or economic use to another. Ignores effects of technology. Does not predict international distribution of gains from trade.

Political Economy of International Trade Theoretical Models II Stolper-Samuelson Theorem (1941) Predicts that returns for various factors of production (e.g. labour, capital) will decline for factors that are scarce relative to the other. If capital is relatively plentiful (thus cheap) in country A vs. country B, trade will result in greater returns to capital and lower returns to labour in country A. Subsequent changes contend that unskilled workers producing traded goods in a high skill country will be worse off as trade increases because unskilled workers are relatively scarce compared to capital. Assumes prices in similar factors of production will tend to equalize across countries with similar technologies.

Responses to H/O and S/S Theories Gains from trade may accrue to businesses, consumers or both. However, they accrue more selectively to industrial workers – usually based on relative abundance of skills. S/S errs in assuming relative ease of mobility of both capital and workers across economic sectors. Existing investments in production equipment, skills are frequently not (easily) transferable to other uses. Holders of relatively scarce factors of production tend to oppose trade liberalization. Business associations and workers facing growing import competition are likely to oppose trade liberalization unless compensated in other areas.

Responses to H/O and S/S Theories II Result – trade coalitions (pro or anti-liberalization) are often sector (or sub-sector) specific Availability, transferability of technology may also be significant factor in shaping competitiveness. Government policies can also influence availability / cost of various factors of production Subsidies / supports for skills acquisition / retraining Support for new infrastructure, creation of new technologies BUT – potential for policy imitation by other countries, thus reducing relative benefits of subsidies or policy supports.

Embedded Liberalism Set of policy compromises “embedded” in post Second World War policies of economic stabilization, liberalization to “cushion” processes of economic adjustment to growing international competition Encouraged development of strong domestic state capacity through: Expansion of welfare state programs Expansion of universal or broadly available state services (e.g. education, training) Also involved selective protection, investments in key industries as part of broader industrial policy. Facilitate unionization to promote sharing of gains from economic growth.

Challenges of trade liberalization, liberalization to “embedded liberalism” Power of national governments declining Degree of decline contested – but more power shared across national boundaries, between governments, or with markets Capital much more mobile than labour Greater ability to take advantage of “globalization” Growing economic inequality  larger in U.S. than in some other countries, including Canada

Challenges of trade liberalization, liberalization to “embedded liberalism” Growing economic insecurity – especially for less skilled workers Significantly higher levels of job creation for skilled (PSE + skilled trades) than unskilled workers since 1990s Higher levels of long-term unemployment (Europe) Relatively stagnant (or declining) wage levels (U.S.) over medium- to-long term.

Challenges of trade liberalization, liberalization to “embedded liberalism” Gains from trade shifted to capital, especially finance capital, away from organized labour. Challenges of regulating global capital markets Requires international cooperation – but national positions reflect national conditions Increasingly difficult to distinguish between domestic, foreign producers What is an “American” or “Canadian” company? product? Reinforced by requirements for “national treatment” in international trade rules.

Economic liberalization and embedded liberalism  different patterns of adaptation Canada United States Greater fiscal discipline (both spending, taxes) since mid-1990s. Greater targeting of social benefits, econ. adjustment to support workforce entry, overcome poverty trap Substantial investment in education, skills Immigration policies targeted to people with higher-skill sets Modest after-tax income gains in economic cycle. Rapid spending increases (incl. two wars) while reducing taxes. Targeting, reduction of social benefits in ‘90s replaced by expansion after 2000 without taxes to fund in long-term Selective investments in education, skills Breakdown in immigration policies  rapid growth in low-skilled labour Income stagnation, decline in economic cycle.

Political effects Canada United States “Permissive consensus” (Mendelsohn) on trade policy Export driven economy holds support across governments of all parties Subject to preservation of federal transfers to provs. Vulnerability to U.S. protectionism resulting from economic insecurity Growing political polariza- tion over economic policies Intense union opposition to trade liberalization reflected in Democratic Congress, esp. since Cdn. interests need to secure domestic interest group partners in U.S. to secure past gains from trade.