Lecture 4: Domestic politics of international trade
Domestic interests
Domestic institutions
When and where do societal preferences matter?
How do institutions play?
What to do about the losers of trade liberalization?
The Collective Action Problem and Trade
Collective action problem
The larger the group, the harder to organize (and lobby the government)
Consumers are generally hurt by protectionism and higher prices but
they have little incentive to lobby the government because your
individual participation won’t change much
The larger the group, the greater incentive to defect (or free ride)
The smaller the group, the benefits are concentrated and there is less of an
incentive to free rise
Winners of trade (consumers) are often much larger than the losers
Losers, because of their size and the larger benefits they receive, have a greater
ability to organize and change policy
Protectionist interest groups often get their way (against the interests of
consumers)
Helps explain why free trade is the exception and not the rule
Another barrier on top of cooperation problems
Example: Smoot-Hawley Tariff Act of 1930
1930s: Beginning of the Great Depression; prices were down because of deflation
A bill that enacted tariffs on many goods as a response to low agricultural prices ->
pressure on politicians to help farmers -> they decided to limit foreign competition
to increase prices
A product of “logrolling"
An exchange of favors between lawmakers
A success for protectionist special interests
Reflects failure of US farms to compete abroad
They needed industrial interests to get relief, they traded votes for
protection
Made possible by the institutional structure of the US Congress
Each member sought to bring concentrated gains to their district
Less concerned with the “national welfare”
Seen as adding to (causing) the “Great Depression”
Who loses if the goldfish industry wins?
Consumers (collective action problem): Prices are higher
Export interests: Less profit because f oreign countries imposed their own
, tariffs in retaliation
Reciprocal Trade Agreements Act (RTAA): Attempt to undo Smoot-Hawley
The bill (key institutional changes in the way trade policy is set)
Gave the president greater authority to set trade policy, not Congress
President could negotiate bilateral, reciprocal trade agreements
abroad
Congress had power to remove the President’s authority
Credited with ushering in an era of trade liberalization globally
What allowed the passage of the RTAA 4 years after Smoot-Hawley?
The new rules (institution) that dictate trade policy
Changing distribution of societal support
Institutional explanation
Delegating authority to the President allowed Congress to escape
protectionist incentives of localized interests
Congress, realizing their problems, gave up their power over trade
policy and kept extending authority to the President
President is more concerned with national welfare than small interest
groups, because of US political institutions
By making trade agreements reciprocal, exporters had a greater
interest in lobbying for the elimination in protection in non-related
industries (unilateral liberalization)
Societal explanation
The world economy changed
US was positioned to benefit from trade as it wasn’t in the 1920s
Societal distribution of pro- and anti-trade groups changed (more
export-oriented interests in the US)
Democrats, pro-trade, came into office and changed policy
Institutions didn’t matter as much as we might think
What do Smoot-Hawley and the RTAA tell us?
Institutional rules change how societal interests are turned into policy
Broader institutional effects
To determine which countries will engage in trade liberalization more than others:
democracy vs autocracy, majoritarian vs proportional representation, military vs
party dictatorships, veto players
Electoral systems
Majoritarian systems
Sector based organization; geographic representation (industry tends to
cluster geographically)
Small districts dominated by fewer industries
More protectionism on average (both tariffs and NTBs) because strong
incentive to bring protection to your own district
Proportional Representation
Organization around factors, e.g. labor parties, etc
, Represent national constituency (or close); appeal to broad rather than
narrow interests
Less protectionism on average (because of the incentive to build a wide
coalition)
Malapportionment (degree to which representation is equal or unequal)
Countries in which representation is unequally distributed often gives power
to subsets that can push for protection; country size, single member districts
and federalism play a strong role
Often leads to disproportionate rural representation (51% of US Senate
represents 18% of US population)
Often in majoritarian systems but not strictly
Veto players
Some political systems might make change (or a new trade deal) more difficult to
achieve
More veto players -> Less change/more difficult to engage in a trade
agreement (passing legislation becomes harder with a larger number of
players; less likely a country will engage in trade)
Veto player, any domestic actor that can “veto” a policy (opposition party in
Congress, courts, multiple parties in parliament, cabinet ministers,
bureaucrats)
Veto players also make it more difficult to defect from a trade agreement; more
credible partnership
Democracy/Autocracy
Democracies tend to engage in trade more with each other relative to mixed pairs
Easier to overcome barriers to bargaining
Enforcement and information problems: Easier to see if a democracy is
upholding its trade agreement, autocracies can hide non-tariff barriers
In developing countries, democracy leads to more trade liberalization (on average)
Very strong correlation
Tariffs are often a private good
Democratic leaders rely more on public goods (free trade) to remain in
power (while autocracies thrive on providing specific goods to key
supporters)
Since the poor mainly benefit from free trade, democracy will lead to more
liberalization (where there is an abundance of unskilled labor, there will be an
incentive for democratic leaders to engage in liberalization)
What about autocracies?
Autocratic trade policy is conditional on…
The factors of production owned by the ruling class
The leader’s time horizon
International bargaining
The domestic politics of trade suggest diplomats will have a hard time bargaining
Domestic interests
Domestic institutions
When and where do societal preferences matter?
How do institutions play?
What to do about the losers of trade liberalization?
The Collective Action Problem and Trade
Collective action problem
The larger the group, the harder to organize (and lobby the government)
Consumers are generally hurt by protectionism and higher prices but
they have little incentive to lobby the government because your
individual participation won’t change much
The larger the group, the greater incentive to defect (or free ride)
The smaller the group, the benefits are concentrated and there is less of an
incentive to free rise
Winners of trade (consumers) are often much larger than the losers
Losers, because of their size and the larger benefits they receive, have a greater
ability to organize and change policy
Protectionist interest groups often get their way (against the interests of
consumers)
Helps explain why free trade is the exception and not the rule
Another barrier on top of cooperation problems
Example: Smoot-Hawley Tariff Act of 1930
1930s: Beginning of the Great Depression; prices were down because of deflation
A bill that enacted tariffs on many goods as a response to low agricultural prices ->
pressure on politicians to help farmers -> they decided to limit foreign competition
to increase prices
A product of “logrolling"
An exchange of favors between lawmakers
A success for protectionist special interests
Reflects failure of US farms to compete abroad
They needed industrial interests to get relief, they traded votes for
protection
Made possible by the institutional structure of the US Congress
Each member sought to bring concentrated gains to their district
Less concerned with the “national welfare”
Seen as adding to (causing) the “Great Depression”
Who loses if the goldfish industry wins?
Consumers (collective action problem): Prices are higher
Export interests: Less profit because f oreign countries imposed their own
, tariffs in retaliation
Reciprocal Trade Agreements Act (RTAA): Attempt to undo Smoot-Hawley
The bill (key institutional changes in the way trade policy is set)
Gave the president greater authority to set trade policy, not Congress
President could negotiate bilateral, reciprocal trade agreements
abroad
Congress had power to remove the President’s authority
Credited with ushering in an era of trade liberalization globally
What allowed the passage of the RTAA 4 years after Smoot-Hawley?
The new rules (institution) that dictate trade policy
Changing distribution of societal support
Institutional explanation
Delegating authority to the President allowed Congress to escape
protectionist incentives of localized interests
Congress, realizing their problems, gave up their power over trade
policy and kept extending authority to the President
President is more concerned with national welfare than small interest
groups, because of US political institutions
By making trade agreements reciprocal, exporters had a greater
interest in lobbying for the elimination in protection in non-related
industries (unilateral liberalization)
Societal explanation
The world economy changed
US was positioned to benefit from trade as it wasn’t in the 1920s
Societal distribution of pro- and anti-trade groups changed (more
export-oriented interests in the US)
Democrats, pro-trade, came into office and changed policy
Institutions didn’t matter as much as we might think
What do Smoot-Hawley and the RTAA tell us?
Institutional rules change how societal interests are turned into policy
Broader institutional effects
To determine which countries will engage in trade liberalization more than others:
democracy vs autocracy, majoritarian vs proportional representation, military vs
party dictatorships, veto players
Electoral systems
Majoritarian systems
Sector based organization; geographic representation (industry tends to
cluster geographically)
Small districts dominated by fewer industries
More protectionism on average (both tariffs and NTBs) because strong
incentive to bring protection to your own district
Proportional Representation
Organization around factors, e.g. labor parties, etc
, Represent national constituency (or close); appeal to broad rather than
narrow interests
Less protectionism on average (because of the incentive to build a wide
coalition)
Malapportionment (degree to which representation is equal or unequal)
Countries in which representation is unequally distributed often gives power
to subsets that can push for protection; country size, single member districts
and federalism play a strong role
Often leads to disproportionate rural representation (51% of US Senate
represents 18% of US population)
Often in majoritarian systems but not strictly
Veto players
Some political systems might make change (or a new trade deal) more difficult to
achieve
More veto players -> Less change/more difficult to engage in a trade
agreement (passing legislation becomes harder with a larger number of
players; less likely a country will engage in trade)
Veto player, any domestic actor that can “veto” a policy (opposition party in
Congress, courts, multiple parties in parliament, cabinet ministers,
bureaucrats)
Veto players also make it more difficult to defect from a trade agreement; more
credible partnership
Democracy/Autocracy
Democracies tend to engage in trade more with each other relative to mixed pairs
Easier to overcome barriers to bargaining
Enforcement and information problems: Easier to see if a democracy is
upholding its trade agreement, autocracies can hide non-tariff barriers
In developing countries, democracy leads to more trade liberalization (on average)
Very strong correlation
Tariffs are often a private good
Democratic leaders rely more on public goods (free trade) to remain in
power (while autocracies thrive on providing specific goods to key
supporters)
Since the poor mainly benefit from free trade, democracy will lead to more
liberalization (where there is an abundance of unskilled labor, there will be an
incentive for democratic leaders to engage in liberalization)
What about autocracies?
Autocratic trade policy is conditional on…
The factors of production owned by the ruling class
The leader’s time horizon
International bargaining
The domestic politics of trade suggest diplomats will have a hard time bargaining
