Domestic Politics of Trade: Institutions Flashcards
The collective action problem and trade
Collective action problem = the gift that keeps on taking
- The larger the group the harder it is to organize (lobby the government)
- Larger the group, the greater the incentive to defect (or free ride)
- The smaller the group, the benefits are concentrated and there is less of an incentive to free ride
- The winners 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
– Another barrier on top of the cooperation problem
Smoot-Hawley Tariff Act of 1930
A bill that enacted tariffs on many goods
- Response to low agricultural prices
What was Smoot-Hawley the product of?
A product of “logrolling”
- An exchange of favors between lawmakers
– “I’ll scratch your back, you scratch mine”
- A success for protectionist special interests
– Reflects failure of US farms to compete abroad
– But they needed industrial interests to get relief, they traded votes on protection
How come Smoot-Hawley was possible and what did it make worse?
Made possible by the institutional structure of the US Congress
- Single Member Districts
- Each member sought to bring concentrated gains to their district
- Less concerned with the “national welfare”
Seen as adding to (or causing) the “Great Depression”
The RTAA of 1934
Reciprocal Trade Agreements Act (RTAA)
- An attempt to undo Smoot-Hawley
The bill:
- Gave the US President greater authority to set trade policy, not congress
- Presidents could negotiate bilateral, reciprocal trade agreement abroad
- Congress had power to remove the President’s authority (but didn’t)
- Credited with ushering in an era of trade liberalization globally
- Reciprocity = mobilizes exporters to lobby for free trade
- Presidential mandate to negotiate = president represents ALL voters, not just small, specialized districts, presumed to be more pro-free trade than congressmen
- Congress just votes for or against, no amendments = no more logrolling
Explanation of changes in trade: RTAA Institutional Explanation
- Delegating authority to the president allowed Congress to escape protectionist incentives
- Congress realizing their problems, 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
Explanation of changes in trade: Alternative Societal Explanation
- The World Economy Changed
- The US was positioned to benefit from trade as it wasn’t in the 1920s
- Thus, the societal distribution of pro and anti-trade groups changed
- Democrats, pro-trade, came into office and changed policy
- Institutions don’t matter as much as we might think
Effect of electoral system on trade
Majoritarian systems:
- Sector-based organization, geographic representation
- Small districts dominated by few industries
- More protectionism on average (both 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 and trade
- Countries in which representation is unequally distributed often give 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 the US population
- Similar in other countries
How veto players affect trade
Some political systems might make change (or a new trade deal) more difficult to achieve
- More veto players -> less changed
- Veto player, any domestic actor that can “veto” a policy
– Opposition party in Congress, Courts, Multiple parties in parliament, Cabinet ministers, Bureaucrats, Regional Parliaments
Veto players also make it more difficult to defect from trade agreements
- Therefore they last longer
How being a democracy affects trade
Democracies tend to engage in trade more with each other
- Relative to mixed pairs
- Can more easily overcome barriers to bargaining
– Enforcement (can legally commit to policies) and information problems (transparency)
– Often less reliance on state revenue from tariffs and state-owned industries
In developing countries: democracy -> trade liberalization (on average)
- Very strong correlation
- Tariffs are often a private good
- Stolper-Samuelson: workers in developing countries should favor free trade
- Democratic leaders rely more on public goods (free trade) to remain in power
- Since the poor mainly benefit from free trade, democracy -> liberalization
How being an autocracy affects trade
- Autocratic trade policy is conditional on:
– The factors of production owned by the ruling class
– The leader’s time horizon - They can more easily overcome domestic opposition from interest groups to pass a trade agreement
– Easier to come to an agreement - However, they also face opposition from elite interests seeking private goods
– State-owned industries
– Fear of urban protests from closed factories
– Fear of removing subsidies to key supporters - And they have a harder time committing to play by the rules
– No domestic forces to punish them if they deviate from the agreement (audience cost)
– They have a harder time alleviating commitment/enforcement problems - Overall: easier to agree, less interest in agreement, harder to find partners willing to agree
Role of patronage networks in Indonesia on sugar trade
- 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 employee cooperatives have licenses for sugar importation that are not available to others
Putnam’s two-level games of trade (1988)
The domestic politics of trade suggest that diplomats will have a hard time bargaining with other countries
- Playing two political games simultaneously:
– International level: relative size and strength can be important
– Domestic level: preferences of domestic groups and legislative process are important
– Bargaining failure can result from problems at either level (information, commitment)
The EU three-level games of trade
- The EU is like a 3-level game but institutions help solve problems
– Domestic politics -> EU-level -> EU - other state
– However, the process has been delegated to the EU level - European Commission gets permission to negotiate from the Council of the EU (member states’ governments)
- When negotiations finish, agreements get an up or down vote from the EU Parliament and the Council
– Similar to RTAA (now fast-tracked authority) in the US
– Civil society gets “consulted” - Exception: trade agreements with non-trade provisions eg. investment clauses have to be ratified by national (and some regional) parliaments
