Oatley, Chapters 4 and 5

 What determines the specific trade objectives that governments pursue when bargaining within the WTO, when negotiating regional trade arrangements, or when making unilateral trade policy decisions?  2 approaches rooted in domestic politics  This chapter examines a society-centered approach to trade politics

 A society-centered approach argues that a government’s trade policy objectives are shared by politicians’ responses to interest groups’ demands  To understand the political dynamics of competition, the society-centered approach emphasizes the interplay between organized societal interests and political institutions  Trade has distributional consequences  Distributional consequences generate political competition as the winners and losers from trade turn to the political arena to advance and defend their economic interests

 Protectionist coalitions versus pro-liberalization coalitions  Role of political institutions in aggregating interests that are later reflected in trade policy  Interest group preferences  Collective Action Theory  Political institutions  Example of American trade politics in the postwar era  Chapter concludes with some of the weaknesses of this approach

 Interest group demands analyzed  Trade policy preferences from trade’s impact on individual incomes  Income consequences of trade  Factors that determine whether groups of people with similar trade preferences will organize or not to lobby government to adopt their preferred policy

 2 standard models of trade policy preferences:  Factor model  Sector model

 The factor model argues that trade politics are driven by competition between factors of production – that is, by competition between labor and capital, between workers and capitalists  One factor will experiences rising income whereas the other will see their income fall whenever tariffs are changed  Eternal competition

 Assumptions: 2 countries, 2 commodities, 2 factors of production (model we saw in general equilibrium in previous chapter)  Shirts rely on labor; computers on capital  Assume US has capital; China has labor  So, capital is cheap (abundant) in US, but expensive (scarce) in China  Labor is expensive in US, but cheap in China

 What happens to factor incomes if there is trade?  Labor-intensive shirt industry shrinks in US and releases a lot of labor but less capital  Capital-intensive computer industry employs lots of capital but less labor.  There is an imbalance between the amount of labor and capital being released by the shirt industry and the amount being absorbed into the computer industry  Consequently, the price of capital and labor will change  More capital is being demanded than is being released, causing the price of capital to rise in the US.  Generally, in the US, trade causes the return to capital to rise and wages to fall  The reverse is true for China

 Trade has thus caused changes in the incomes earned by workers and capitalists in both countries  The income of the scarce factor fell whereas the income of the abundant factor rose  More generally, trade raises the income of society’s abundant factor and reduces the income of society’s scarce factor  Over time, if trade is uninterrupted, factor incomes in both countries will equalize  This tendency of trade to cause factor prices to converge is knows as factor-price equalization (Stolper-Samuelson Theorem)

 Abundant factors want to maximize trade, thus favoring liberal trade policies, whereas the scarce factor will prefer protectionist trade policies  Competition pits workers against capitalists  Class-based model of trade politics

 The factor model highlights the economic interests driving the political debate over globalization  In the US, this pits the AFL-CIO against groups such as the Business Roundtable  But, a caveat is in order: this model assumes that labor is homogeneous (that all workers are identical), failing to differentiate between low-skill and high-skill workers, etc.  But, since high-skill workers from the US would be an ‘abundant’ factor, it would benefit from trade

 The Sector Model argues that trade politics are driven by competition between industries  Trade pits the workers and capitalists employed in one industry against the workers and capitalists employed in another industry in the conflict over the distribution of national income  Trade divides society across industry rather than factor lines because the assumptions about factor mobility are quite different  Factor mobility refers to the ease with which labor and capital can move from one industry to another  The factor model assumes that factors are highly mobile  The sector model assumes that factors are not easily moved from one industry to another  Instead, factors are tied, or specific to, the sector in which they are currently employed

 When factors are immobile, trade affects the incomes of all factors employed in a given industry in the same way  Workers and business owners in the US apparel sector, for instance, both suffer from trade  When factors are immobile it makes little sense to speak of a unified labor interest or of a unified capitalist interest

 Labor and capital employed in industries that rely on society’s abundant factor (that is, the country’s comparatively advantaged industries) both gain from trade  As a group, these industries are referred to as the export-oriented sector  The group opposed to is referred to as the import- competing sector  Trade politics is driven by competition between the import-competing and export-oriented sectors

 In the US we would anticipate that UNITE (apparel industry union) and The American Textile Manufacturers Institute (a business association representing American textile firms) both oppose free trade (confirming the expectations of the sector model)  See p. 80 for more examples  See Table 4.1 comparing the factor and sector models on principal actors, mobility of factors, winners and losers from international trade, and the central dimension of competition over trade policy (see p. 81)

 Collective action problem (Olson 1965)  Free riding  All large group members benefit once the common objective has been achieved, yet the contribution of each individual is too small to affect the final outcome  Consumers are a good example of this phenomenon  In large groups there is greater incentive to free ride

 The logic of collective action helps us understand 3 important characteristics of trade politics:  Producers (not consumers) dominate trade politic  Trade politics exihibits a bias toward protected industry (tariffs provide large benefits to a small number of producers and workers whereas the cost is distributed throughout society  Governments rarely unilaterally liberalize trade (reciprocal trade agreements are the norm – lobbying of export-oriented industries, balancing protectionist lobbying)

 A coalition of export-oriented interests lobbied for post-war trade liberalization  Had to overturn the Smoot-Hawley Act  Problem of institutional foundations of American politics  Single member district electoral system creates incentives for groups to organize around narrow industry lines  Legislative dynamics, in turn, allow for logrolling  This is precisely what happened with the Smoot-Hawley Act  The solution?: shifting trade-setting authority from Congress to the executive  Executive can reduce tariffs through negotiating reciprocal agreements with foreign governments

 1933 Reciprocal Trade Agreements Act (RTAA)  Since RTAA US tariffs have beem changed through the GATT/WTO negotiations and through administrative procedures (not through a comprehensive act of congress since 1930).  But, there are some constraints on executive authority (specifically time constraints and the need to extend authority)  Ratification by Congress (as of the 1974 Trade Act)  Fast-track procedure  Congress was unwilling to give prior consent to any changes in American laws resulting from the Tokyo Round (so it established broad parameters)

 Congress established an agency called the Special Trade Representative (STR) as part of the 1962 Trade Expansion Act  In 1970s Congress transformed STR into the United States Trade Representative (USTR)  Congress also has established a rule-based system of administered protection to consider the demands of individual industries  Escape clause (Article XIX of GATT - serious injury to domestic producers): leads to US International Trade Commission recommendation  ‘Unfair trade’ – cases of dumping or foreign subsidies: Commerce Department followed by ITC findings lead to tariffs

 In recent years demands for protection has been increasing in US, and Congress has been responsive  ITC granted greater independence  Dumping investigations was transferred from Treasury Department to Commerce Department (the latter was presumed to be more receptive to demands for protectionism)

 Weaknesses in the society-centered approach  Does not explain trade policy outcomes: which group will win?  We need to know the relative power of these groups  Also, the society-centered approach assumes that politicians have no independent trade policy objectives and play no autonomous role in trade politics (misleading)  Finally, the society-based approach does not address the motivation of noneconomic actors in trade politics (e.g. environmental groups, human rights groups)  But, despite these weaknesses, the society-centered approach does provide us with an understanding of the enduring features of trade politics

 Example of US versus EU at the WTO over Airbus SAS  Trade conflict  A state-centered approach argues that national policymakers intervene in the economy in pursuit of objectives that are determined independent from domestic interest groups’ narrow self-interested concerns  Intervention to develop specific national industries  In this chapter the initial focus is on the broader economic justification for protectionism aimed at creating internationally competitive industries  Then, the focus shifts toward the use of such measures by the advanced industrialized countries in high-technology industries and then apply the logic of this approach to the current US-EU conflict in the commercial aircraft industry

 State-centered approach assumptions:  Impact of protectionism on aggregate welfare under certain circumstances might be positive!  Under specific circumstances governments are unconstrained by interest-group demands Thus, under specific circumstances, governments will intervene in the domestic economy with tariffs, production subsidies, and other policy instruments in ways that raise aggregate social welfare

 The infant-industry case for protection  Economies of scale  Economies of experience  Late-industrializing country  Industrial policy

 State strength  Strong states  Weak states  MITI – Ministry of Economy, Trade, and Industry in Japan  MoF (Japan)  France  US characterized as weak state (decentralized)

 Rents: industries earn a higher than normal return on investment

 Strategic-trade theory  Oligopoly  Excess returns  First-mover advantage  See figure 5.1 on page 105  Strategic-trade theory suggests that the location of high- technology has little to do with cross-national differences in factor endowments and a lot to do with market structure and the assumptions we make about how production costs vary with the quantity of output  Thus, specialization in high-technology industries is attributed as much to the timing of market entry as to underlying factor endowments

 See Table 5.1 on page 109

 Do states really concern themselves with aggregate welfare?  Why aren’t we more cynical regarding the interests of leaders or state actors?  Elections, after all, push us back toward the society-centered model  And interest-groups will tend to establish the parameters in which policy is to be made  And the theory is prescriptive