1. Society and State-Centered Approaches to Trade Politics
Oatley, Chapters 4 and 5
Society and State-Centered Approaches to Trade Politics

2. Ch. 4: A Society-Centered Approach to Trade Politics
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- the next examines a state-centered approach.

3. 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

4. Protectionist coalitions versus pro-liberalization coalitions
Role of political institutions in aggregating interests that are later reflected in trade policy
This chapter focuses on:
Interest group preferences- which group prefers protectionism, which group prefers liberalization and why?
Collective Action Theory- how certain groups make use of this theory to pursue their interests.
Political institutions- how different institutional frameworks create different kinds of interest representation.
Chapter concludes with some of the weaknesses of this approach

5. Trade policy preferences
Interest group demands analyzed
Trade policy preferences from trade’s impact on individual incomes (trade raises some incomes and lowers others)
What are the factors that determine whether groups of people with similar trade preferences will organize or not to lobby government to adopt their preferred policy?

6. 2 standard models of trade policy preferences:
Factor model
Sector model

7. Factor incomes and class conflict
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 experience rising income whereas the other will see their income fall whenever tariffs are changed
Eternal competition

8. 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

9. 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

10. 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 (wages and return to capital will equalize).
This tendency of trade to cause factor prices to converge is known as factor-price equalization (Stolper-Samuelson Theorem)

11. 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

12. The factor model highlights the economic interests driving the political debate over globalization
In the US, this pits the AFL-CIO (a federation of 64 labor unions) 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

13. Sector incomes and industry conflict
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

14. 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

15. 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

16. 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)

17. Organizing Interests: the collective action problem and trade policy demands
Collective action problem (Olson 1965) results from free riding (individuals rely on others to bear the cost of a program from which they derive benefits.
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

18. The logic of collective action helps us understand 3 important characteristics of trade politics:
Producers (not consumers) dominate trade politic
Trade politics exhibits 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. Reciprocal trade agreements transform the large and heterogeneous pro-liberalization interests into smaller groups of export-oriented industries that can more easily organize to pursue common goals.

19. Political institutions and interests in American trade politics
A coalition of export-oriented interests lobbied for post-war trade liberalization
Had to overturn the Smoot-Hawley Act (1930, raised the average tariff to almost 60 percent).
Problem of institutional foundations of American politics
Single member district electoral system (an electoral district that returns one officeholder to a legislature) creates incentives for groups to organize around narrow industry lines.
Legislative dynamics, in turn, allow for logrolling- proposal of increasing tariff for one sector turns into tariff for multiple sectors
This is precisely what happened with the Smoot-Hawley Act- the Bill raised tariffs on almost 20,000 items.
The solution?: shifting trade-setting authority from Congress to the executive
Executive –Presidency represents a national constituency rather than a single district.
Executive can reduce tariffs through negotiating reciprocal agreements with foreign governments-

20. President Roosevelt proposed such institutional change in 1933 and Congress responded by passing the Reciprocal Trade Agreement of 1934.
Under this legislation Congress delegated to the president the authority to reduce tariffs by as much as 50 percent in exchange for equivalent concessions from foreign governments.
Since RTAA US tariffs have been changed through the GATT/WTO negotiations and through administrative procedures (not through a comprehensive act of congress since 1930).
In short, postwar trade liberalization was made possible through the interaction between the interests of export-oriented producers and institutional change that reduced congressional influence over tariffs.
But, there are some constraints on executive authority(authority delegated for short periods of time). The 1934 RTAA authorized the president to reduce American tariffs only by 50 % and even this authority expired in 3 years.

21. Since the 1974 Trade Act, Congress began to require all agreements negotiated under this delegated authority to be ratified by Congress under the fast-track procedure.
Congress initiated fast track because the GATT’s Tokyo Round focused on a number of issues that required changes to American trade law.
The Congress was unwilling to give prior consent to any changes in American laws resulting from the Tokyo Round (so it allowed the President to negotiate but to require Senato approval of the resulting agreement).

22. Conclusion 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

23. Ch. 5: A State-Centered Approach to Trade Politics
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

24. States and Industrial Policy
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

25. The infant-industry case for protection
Economies of scale: unit cost of producing falls as the number of units produced rises
Economies of experience: cost of production fall as experience is gained.

26. The infant-industry case for protection
Late-industrializing country: one that is trying to develop manufacturing industries in competition with established manufacturing industries in other countries.
Industrial policy: the use of broad assortment of instruments, including tax policy, subsidies, traditional protectionism and government procurement policies

27. State strength: the political foundation of industrial policy
State strength: degree to which national policymakers, a category that includes elected and appointed officials are insulated from domestic interest group pressures.
Strong states: are states in which policymakers are highly insulated from such pressure (high degree of centralization of authority, a high degree of coordination among state agencies, and a limited number of channels through which societal actors can attempt to influence policy).
Weak states: policymakers are fully exposed to such pressures (weak states are characterized by decentralized authority, a lack of coordination among agencies, and a large number of channels through which domestic interest groups can influence economic policy.

28. State strength: the political foundation of industrial policy
MITI – Ministry of Economy, Trade, and Industry in Japan
Ministry o Finance (Japan)
Through these institutions, the Japanese state pursued an active role where it channeled resources to those industries it determined critical to Japanese success (first heavy industries like steel, shipbuilding, automobiles, then high-tech industries).

29. State strength: the political foundation of industrial policy
US characterized as weak state (decentralized)
This decentralization of power provides multiple channels through which domestic interests can attempt to influence policy.
But despite this, the US has supported critical industries. The US government has financed the basic research that underlies many high-tech products including computers, telecommunications, lasers, advanced materials and even the Internet.

30. Strategic-trade theory
Strategic-trade theory: like the infant-industry case, strategic trade theory asserts that government intervention can help domestic firms achieve economies of scale and experience in order to become efficient and competitive in global markets.
Firms operating in oligopolistic markets earn excess returns- profits greater than could be earned in equally risky investments in other sectors of the economy (e.g auto industry, commercial aircraft industry).
First-mover advantage

31. Strategic-trade theory
First mover advantage arises from economies of scale and experience.
Government intervention may have a powerful effect on the willingness of a late comer to enter the industry.
Targeted government intervention may enable late entrants to succesfully challenge first movers.

32. Strategic rivalry in semiconductors and commercial aircraft
According to strategic-trade theory, the firm that is first to enter a particular high-technology industry will hold a competitive advantage and the country that is home to this firm will capture the rents available in this industry.
Governments may provide financial assistance to help their new firms pay for the costs of research and development.
Governments may also guarantee a market for the early and expensive versions of the firm’s products.

33. Conclusion 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