domestic politics of trade 2: institutions Flashcards
issues societal interest models (last week recap)
- individuals might not be aware of what is good for them
- individuals might be influenced by elite discourse
- supply chain complexity makes it difficult to identify costs/benefits
evidence of both theories at the individual level is mixed
US Coca-Cola vs European Coca-Cola
US = uses corn syrup
outside US = uses cane sugar
sugar prices are very high in the US (almost 2x as rest of the world), bc
- US limits imports of foreign sugar with import quotas = protectionist
possible bc agriculture - supply is limited to more costly US produced sugar
consumers (Coca-Cola) must pay a higher price or find substitutes (subsidized corn syrup)
-> everyone loses out except for US sugar producers
sugar e.g. also really expensive in Indonesia (almost 3x higher than globally)
gov highly controls who can produce sugar domestically to keep prices high
collective action problem and trade
+ farmers
(farmers are good at mobilizing and therefore getting what they want)
collective action = gift hat keeps on taking (Olson)
- larger group -> harder to organize (lobby the gov)
- larger group -> greater incentive to defect
- smaller group and concentrated benefits -> less incentive to free ride
winner of trade (consumers) are often much larger than the losers
the 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
helps explain why free trade is the exception not the rule
Smoot-Hawley Tariff Act of 1930
= worst tariffs ever
= on many goods (incl. goldfish), was response to low agricultural prices (agriculture not very competitive on world market -> wanted protection)
product of “logrolling”
- an exchange of favors between lawmakers (in exchange for protection agriculture, other states got protection in other industries)
- a success for protectionsit special interests
was made possible by the institutional structure of the US Congress: SMD -> each member sought to bring concentrated gains to their district (to gain re-election) + less concerned with national welfare
tariff seen as adding/causing the Great Depression
who loses if every industry wins protection?
- consumers: all prices increase (collective action problem)
- ALSO: export interests via retaliation abroad
RTAA of 1934
reciprocal trade agreements act to undo Smoot-Hawley and prevent something similar to happen in the future
the bill =
- gave the US President greater authority to set trade policy, not Congress (usually the president wants less protectionism bc he needs nationwide votes)
- President could negotiate bilateral, reciprocal trade agreements abroad (can only lower tariffs in the US if another country can also lowers tariffs on something)
- congress had the power to remove the President’s authority, but didn’t
-> ushered in an era of trade liberalization
- reciprocity is key = mobilizes exporters to lobby for free trade (exporters gain access to another market)
- presidential mandate to negotiate = presidents represents all voters, not jsut small, specialized districts -> presumed to be more pro-free trade than congresspeople
- congress just votes for or against, no amendments = no more logrolling
RTAA aftermath = it seemingly worked: average US tariff rate lowered + global export shoots up (but also there were other factors that caused this)
what happened to tariffs and trade values -> two alternative explanations
RTAA institutional explanation
- delegating authority ot the president allowed congress to escape protectionist incentives
- congress realizing their problems (logrolling) gave up their power over trade policy, and kept extending the authority
- 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 of protection in non-related industries
alternative societal explanations:
- world eco changed
- US was positioned to benefit from trade as it wasn’t in the 1920s (it industrialized while other industrialized nations were in ruins -> US became succesful exporter)
- thus, the societal distribution of pro and anti-trade groups changed
- democrats (pro-trade) came into office and changed policy
- maybe institutions didn’t matter as much as we might think
take away Smoot-Hawley/RTAA conclusions
institutional rules cahnge how societal interests are turned into polcy, if you believe the story
we don’t quite know which matters more (institutions or preferences) here, but both are probably imtant:
- a single case can’t establish causality but can help us learn about possible mechanisms
- possible feedback loops: more liberal trade increases the coalition of exporters who support free trade institutions
broader institutional effects
- electoral systems in democracy
influence whose interests are taken into account
majoritarian systems
- SMD -> sector-based organizations, representatives listen to interests of their district
- small districts dominated by fewer industries
- more protectionism on average (tariffs and NTBs)
proportional representation
- organization around factors - labor parties etc.
- represent national constituency (or close to it) appeal to broad rather than narrow interests
- less protectionism on average
malapportionment
= when representation is unequally distributed often give power to subsets that can push for protection
- country size, SMD, federalism play strong role
often leads to disproportionate rural representation
- e.g. 51% US Senate represents 18% US population (US states vary in size, but all get 2 senators)
malapportionment table = proportion of seats wouldn’t have been received without malapportionment
e.g. US sugar beets producers in large unpopulated states -> overrepresented in Senate
nr of veto players
= players that can stop a policy from being enacted
(e.g. large enough opposition parties, courts, coalition parties, cabinet ministers, bureaucrats, regional parliaments)
some political systems might make change (or a new trade deal) more difficult to achieve
- more veto players -> less likely to enact change
more people can block it
lot of veto players -> can make it more difficult to enter an agreement and to defect from a trade agreement (more checks and balances if someone wants to pull out)
e.g. Ceta (Canada + EU) had to be renegotiated because Wallonia vetoed the bill
democracy/autocracy: democracies
democracies tend to engage in trade more with each other
- relative to mixed pairs (autocracy-democracy) and autocracy-autocracy
- can more easily overcome barriers to bargaining (more rule of law + veto players): enforcement (can legally commit to policies) + information problems (transparency) + often less reliance on state revenue from tariffs and state owned industries
in developing countries (abundant in labor, scarce in capital), democracy -> 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
- remember Stolper-Samuelson: unskilled workers in developing countries should favor free trade
- since the poor mainly benefit from trade, democracy -> liberalization
democracy/autocracy: autocracies
autocratic trade policy is conditional on:
- the factors of production owned by the ruling class
- the leader’s time horizon (opening is losing in the short term, long term it is beneficial)
they can more easily overcome domestic opposition from interest groups to pass a trade agreement (easier to come to an agreement (if you want one))
HOWEVER: face opposition from elite interests seeking private goods
- state-owned industries (bc opening it up would be bad for state-owned industries: more competition)
- fear of urban protests from closed factories (no comparative advantage in industrial protection -> fear closing of factories when liberalizing)
- fear of removing subsidies to key supporters (often required for liberalization)
and they have a harder time committing to play by the rules:
- no domestic forces to punish them if they deviate from an agreement (audience costs not relevant in autocracy)
- they have a harder time alleviating commitment/enforcement problems
- fewer veto players
sum up = easier to agree on trade agreements, less interest in agreement (rely on protectionism to get elite support), harder to find partners willing to agree
empirical evidence on democracy and tariffs
Milner and Kubota
policy score = measure of democracy (higher = more democratic)
as a country democraticizes (higher polity score), tariffs decrease
there are exceptions:
- India = famously protectionist + big veto player in WTO negotiations
evidence on trade agreement formation
Milner and Rosendorff: probability that a dyad of countries gets a trade agreement
higher predicted annual number of democratic dyads forming a trade agreement than mixed or only autocratic dyads
Indonesia: the role of patronage
sugar producer associations lobbied for quotas in 2002 following price drops after state monopolies collapsed after Suharto
sugar producing licenses are a source of patronage given the profitability due to low competition
further sugar is a source of revenue for security forces
police and military employee cooperatives have licenses for sugar importation that are not available to others
you can produce it for cheap and then sell it really expensive
