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

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

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?

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

Factor model

Factors of production Land Labor Skilled Unskilled Capital

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

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

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

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?

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?

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?

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

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.“

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

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” …”

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.”

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

Sector Model

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

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

Organizing Interests: The Collective Action Problem and Trade Policy Demands

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

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

http://www.youtube.com/watch?v=Ro_-isihnqM

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

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?

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

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

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

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

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

http://www.theguardian.com/cartoons/stevebell/0,7371,1100627,00.html

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)

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

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

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

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

Research Exercise 1

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

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

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

Alternative trade openness measure Openness to trade = HF Trade Freedom

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

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

Growth: Look for change in level

Income level: Look for change in slope

Income level: Look for change in slope

Income level: Look for change in slope

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