2. Preferential Trade Agreements, Depth, and Regime-Type READING ASSIGNMENT: Mansfield, Edward D., Helen V. Milner, and B. Peter Rosendorff. 2002. Why Democracies Cooperate More: Electoral Control and International Trade Agreements. International Organization 56 (3):477-513. 1

3. The Plan Regional Trade Agreements Domestic politics Democracy v. dictatorship 2

4. Regional Trade Agreements Free Trade Area (e.g., NAFTA) –Eliminate tariffs amongst members –Members maintain independent trade policies with non-members Customs union (e.g., EU) –Eliminate tariffs amongst members –Common tariff policy with non-members Discriminatory? –Allowed under GATT Article XXIV – as long as tariffs are no higher than the level applied by (ALL***) countries prior to the arrangement –(MERCOSUR led Argentina to raise tariffs on non-members – but not above the level of the highest MERCOSUR member) Currently 190-250 RTAs in operation (up to 400 on the horizon for 2010) More than half are bilateral (e.g., KORUS) Most are free trade agreements 3

5. Customs Unions Central American Common Market (CACM) Andean Community (CAN) Caribbean Community (CARICOM) Economic and Monetary Community of Central Africa (CEMAC) East African Community (EAC) Eurasian Economic Community (EAEC) European Economic Area (EEA) (plus EC – Andorra, EC – Turkey) Gulf Cooperation Council (GCC) Southern Common Market (MERCOSUR) Southern African Customs Union (SACU) West African Economic and Monetary Union (WAEMU) 4

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7. Narrow and deep Most of the trade agreements in today’s class… BILATERAL As narrow as possible Still a form of international cooperation 6

8. Preferential Trade Agreements (PTAs) PTAs are a form of Regional Trade Agreement (RTA) What are the two types of RTAs? Free trade area Customs union Which is more common? FTA Why? Customs unions require more sacrifice (common external tariff) Do RTAs violate the WTO principle of MFN? Yes & no They clearly go against the spirit of MFN But they are allowed by the WTO/GATT charter (GATT Article XXIV) FTAs are becoming increasingly important 1 st wave in the 1950s 2 nd wave started in the 1990s and is continuing (100s are currently in force) 7

9. Will bilateral cooperation hurt global cooperation? Recall Richardson Hypothesis 8

10. Why would you go to NAFTA? 9

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12. Without NAFTA Perhaps you don’t go to the WTO at all Status quo prevails 11

13. With NAFTA? This round: the “losers” from trade are weakened Next round: government cares less about their preferences The “ideal point” of the government shifts 12

14. Why do some groups organize more effectively than others? Consider a can of soda: Why “fructose” instead of sugar? Ever been to Europe? Is “fructose” used there? American consumers (large group) American sugar farmers (small group), corn farmers (relatively small group) Small groups organize more effectively than large groups 13

15. Abundant factors win from globalization (intuition: supply & demand) In a closed economy (autarky), Papa Smurf is in high demand. And he has a lot of cheap labor. But imagine there’s another country out there with lots of “Papas” and only one regular smurf. If these countries trade, the supply of Papa-goods (for the 1 st country) goes way up (and the price way down) Meantime, the demand for regular smurf-goods (worldwide) goes way up – and so does their price. WINNERS FROM TRADE! LOSERS FROM TRADE!

16. Collective action problem faced by consumers and producers Collectively rational for consumers to fight barriers to free trade But it is individually irrational –Too costly to become informed about trade policy –Too costly to mobilize to act Protectionism may only cost individual consumers a small amount, so it is not worth it to become informed and fight it Even though collectively it is worth it For producers, the benefits of protectionism are huge and easily outweigh the costs Fewer producers = fewer “free riders” Hence, easier for producers to lobby government 15

17. What can a democratically elected government do? If it can improve economic performance, it can increase the probability of reelection So, it has an incentive to fight protectionism –Increase the income of consumers/voters But consumers/voters do not have the incentive to become informed –Rational ignorance And producers pressure the government to protect them If they pursue free trade: –Face punishment from producers –Receive no reward from uninformed voters 16

18. Why a trade agreement? Send a signal to consumers of “good” policy? –“Import-competers” lobby against free trade Small, organized group – benefits of protectionism concentrated –Consumers win from free trade Large, disorganized group – benefits of trade disbursed In democracies, governments want to win reelection –The small group lobbies for protection… the large group is (rationally) ignorant –The trade agreement “signal” solves the rational ignorance/collective action problem of consumers –Governments signal their trade… –RESOLVE! –Credible signal because of outside enforcement –Recall Hollyer & Rosendorff 17

19. How can the government send a CREDIBLE signal that it fights protectionism? Mansfield, Milner, and Rosendorff (MMR): –Enter into a trade agreement with another government It’s a fire alarm story – democracies seek a credible outsider –Fire alarm story That outsider = a foreign government it signs a PTA with –sends a signal to voters, as the outsider can lodge a complaint if they believe the other side reneged on their commitment in the PTA towards liberalization 18

20. The story requires several features of the international trade agreement Requires the outsider government to have better information than voters Requires the outsider government to announce violations Requires more scrutiny to exist with participation in the international agreement than without it Requires uninformed voters to pay attention to signals from outside governments 19

21. A key prediction: Democratic governments have an incentive to resist protectionist lobbies They use PTAs as a signal to “the median voter” Dictatorships do not have the same incentives They succumb to protectionist lobbies Democracies are more likely to enter into PTAs than dictatorships! 20

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24. What do the statistical tests demonstrate? MMR story is PLAUSIBLE: –Democracies more likely to sign PTAs than non-democracies. –Other findings: Small countries (economies) enter PTAs Former colonial ties encourage PTAs Allies enter into PTAs Neighbors enter PTAs GATT members enter PTAs! Waning hegemony  more PTAs –Surprising? Trade flows and military disputes do not seem to matter However… –Is the mechanism right? –Plausible story, but not the only possible story 23

25. Take-aways Free trade area, Customs union, Common External Tariff Collective action: easier for small groups. –Voters benefit from free trade, but it's a large group and the benefits are small –Classic collective action problem: –Collectively rational for consumers to fight barriers to free trade, but it is individually irrational –Import-competing industries benefit from protectionism and the benefits are huge Using international agreements to send credible signals (again) –This time: trade agreements –Why credible? Independent 3rd party enforcement (the other country in the agreement) Democracies seeking efficient trade policies can use the international agreement as a credible signal Democracies more likely than dictatorships to enter into PTAs 24

26. Thank you WE ARE GLOBAL GEORGETOWN! 25

27. Simplification of the argument (Mancur Olson, 1965, The Logic of Collective Action) Expected value of taking action: –E(action) = Pr (my action makes the difference)*X – C –As the group gets larger, the probability that one individual will make a difference gets smaller. How does Olson resolve this? Selective incentives: –E(action) = Pr (my action makes the difference)*X – C + S –“S”: “Selective incentive” – applies only to the individual taking the action 26

28. What are barriers to trade & what are their effects? Tariffs, Quotas, Subsidies, and other restrictions They affect a national economy by lowering competitiveness, which may hurt in the long run –Shelter new industries? The infant industry view They help domestic (import-competing) producers by allowing them to charge less But they hurt foreign producers And they hurt domestic consumers (voters) by raising prices 27