Domestic Politics of Trade: Winners and Losers Flashcards
What is trade policy shaped by?
- The distribution of winners and losers
- The government response to winners and losers
- The institutions that constrain the government response
- International interaction
Two frameworks of distributional consequences of trade
The Stolper-Samuelson Theorem
- Emphasizes factors of production (ie. (high/low) labor, capital, and land)
The Ricardo-Viner Model
- Emphasizes industries/sectors
What are the 4 factors of production?
Skilled labor
- University professors, high tech workers, etc.
Unskilled labor
- Factory workers, farmers
Land
- Land for growing crops, natural resources
Capital
- Have money for investment
Heckscher-Ohlin trade theory
- A country will export goods that make intensive use of the resources the country has in abundance
- A country will import goods that make intensive use of the resources in which the country is scarce
- This helps us explain who trades together and what they import and export
- Industrial countries are rich in capital and skilled labor
– They export goods that are capital intensive and require skill - Developing countries are rich in land, raw materials, and unskilled labor
– They export agriculture, minerals, and textiles
Trade benefits owners of factors of production used to produce exported goods (Stopler-Samuelson Theorem)
- Usually the abundant factor
- Artificially restricting trade hurts owners of abundant factors
- Example:
– In Africa, land is abundant relative to capital and skilled labor
– Under free trade many African countries would export agricultural products, and the returns to land in Africa would increase
– Landowners in African countries are economically worse off if developed countries protect their agricultural markets from African imports
Trade hurts owners of factors of production used to produce imported goods
- Usually the scarce factor
- Artificially restricting trade raises the income of owners of scarce factors
- Example:
– Germany has lots of capital but little unskilled labor (compared to the world) so it imports unskilled labor-intensive goods like cloth
– Less skilled Germans’ income decreases when trade is liberalized - import competition and less production of unskilled labor-intensive goods at home means less demand for unskilled workers -> wages for unskilled workers decline - Thus German unskilled workers benefit from tariffs/quotas/NTBs on goods like foreign textiles
Predictions of Stolper-Samuelson
- Owners of the scarce factors always lose from liberalization
- Owners of the abundant factor always win
- Assumes factors (capital, labor, land) are perfectly mobile
- Predicts that trade policy generates class-conflict
Factor mobility (and factor model)
The ease with which factors can move from one industry to another
- The factor model assumes that capital and labor are perfectly mobile
- However factors might be industry specific and therefore immobile (Ricardo-Viner approach)
Ricardo-Viner (Sector) Approach
Ricardo-Viner consider the industry (or sector) of the economy that employs an individual
- There are two types of industries:
– Import-competing
– Export-oriented
- These types are determined by factor endowments and relative factor intensity
– Capital-intensive sectors in capital-abundant countries will be export oriented
– Labor-intensive sectors in labor-scarce countries will be import oriented
- Instead of a class based divide (capital vs labor), owners and workers are on the same side of an issue
Factor mobility (across borders)
- Both Ricardo-Viner and Stolper-Samuelson assume that factors are immobile across borders
- However capital can be mobile through international investment, and labor can be mobile through migration
New Trade Theory
- Paul Krugman got a Nobel prize in economics for this
- Observation: lots of trade between similar countries
- Idea: increasing returns to scale - countries that are identical still have an incentive to trade with each other
- Industries in each country specialize in a niche product and export it to the world
- Political implications: sometimes used to justify infant industry industrialization
New New Trade Theory
- Also called the Melitz Model
- Observation: even within exporting sectors, only a small fraction of firms export
- Idea: within one sector, only the most efficient firms export
- Political implications: only the most efficient firms will lobby in favor of free trade
Predictions of Stolper-Samuelson (factor) model and Ricardo-Viner (sector) model
Stolper-Samuelson:
- People with “abundant” factor should support free trade
- People with “scarce” factor should oppose free trade
Ricardo-Viner;
- People employed in exporting sectors should support free trade
- People employed in importing sectors should oppose free trade
Critiques of both factor and sector models
- Individuals don’t know much about trade or how it affects them
- Preferences are not purely individualistic or economic:
– National Security Concerns: Citizens support trade agreements with “friends” not “rivals”
– Socio-tropic preferences: People don’t think of themselves but think about what’s good for the country - Beyond calculating rationality:
– Psychological approach to trade preferences: Individuals want to reward “friends” with trade and punish enemies
– People care about what is fair
– Ideational leaders and the media shape how people perceive their trade interests
Do people act in line with their trade preferences? The US
Evidence is mixed
- Jensen, Quinn, and Weymouth (2017) find that winners of trade vote more for incumbent, and losers of trade less
- Guisinger (2019) find that trade played little role in 2006 US midterm congressional elections
- Feigenbaum and Hall (2015) find that voters don’t hold their congress people responsible for increased import-competition
– HOWEVER: legislators do vote based on their constituencies’ level of import competition (maybe pre-emptively)
