lecture 3 - domestic politics (winners and losers)

Question 1

recap last class

Answer 1

Global organizations (WTO) are being replaced by a network of regional and preferential trade agreements.

Question 2

Trade’s distributional consequences + two frameworks of the consequences

Answer 2

in the short run not everyone benefits from trade, free trade produces winners and losers
- GDP increases, but not everyone better-off, there are some losers

frameworks of distributional consequences: who wins, who loses?

models that predict who are the losers and winners = gonna be on exam

1. Stolper-Samuelson Theorem = factor based model/approach
   = emphasizes factors of production (i.e. labor (high/low), capital and land)
2. Ricardo-Viner Model = sector based model/approach
   = emphasizes industries/sectors

!there are more theories, explaining diff elements of trade (e.g. factor approach hard to explain why Japan and EU trade (similar factors))

Question 3

trade policy is shaped by:

Answer 3

1. distribution of winners and losers
2. government’s response to winners and losers
3. institutions that constrain the gov’s response
4. international interaction

Question 4

factors of production
(factor based approach distributional consequences)

Answer 4

stuff needed to produce anything

1. skilled labor (uni prof, high tech workers)
2. unskilled labor (factory workers, farmers)
3. land (natural resources, growing crops etc.)
4. capital (necessary for investment)

(diff skilled and unskilled = years of education = NOT value-based)

Question 5

pareto optimum

Answer 5

no potential agreement that can make someone better off without making someone else worse off

Question 6

Heckscher-Ohlin trade theory

Answer 6

makes prediction on what a country exports

country:

• export goods that make intensive use of resources the country has in abundance
• imports goods that make intensive use of the resources in which the country is scarce

industrial countries = rich in capital and skilled labor
-> export goods that are capital-intensive and require skills

developing countries = rich in land, raw materials or unskilled labor
-> export goods that are land-intensive, resource intensive or require unskilled labor

!abundance RELATIVE to other factors in other countries, focus on global supply not national supply

Question 7

Stolper-Samuelson Theorem

Answer 7

= factor based approach

trade benefits owners of factors of production used to produce exported goods

• get higher wages bc demand increases while aanbod does not change bc export
• usually the abundant factor (Heckscher-Ohlin)
• artificially restricting trade hurts owners of abundant factors
• natural comparative advantage if you have abundance and others don’t (not on slide, she said smth like this)

e.g. Africa land is abundant relative to capital and skilled labor -> free trade: export agriculture + returns to land would increase -> landowners in African countries are econ worse off if dev. countries protect their agricultural markets

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
• less demand bc imports are cheaper -> lower wages

e.g. Germany: abundance of capital, little unskilled labor -> imports unskilled labor-intensive goods -> less-skilled Germans income decreases when trade is liberalized (import competition + les sproduction) -> German unskilled workers benefit from tariffs/quotas/NTBs

Question 8

example Stolper-Samuelson

Answer 8

focus on: capital and unskilled labor

China = labor abundant (unskilled labor abundant, capital scarce)

-> labor/workers wins from trade liberalization

Netherlands = capital abundant (scarce in unskilled labor)

-> trade liberalization capital owners win

ABUNDANCE -> wins, so e.g. capital wins, labor wins

Question 9

summary Stopler-Samuelson + assumption + prediction

Answer 9

• owners of the scarce factors always lose from liberalization
• owners of the abundant factor always win
• assumes factors (capital, labor and land) are perfectly mobile within the country
  factor-wide wage, return to capital effects can only occur when people switch between sectors
  (rewatch lecture?)
• predicts that trade policy generates class conflict

core assumption = factor mobility

• factor mobility = the ease with which factors can move from one industry to another (within the country)
• assumes tht capital and labor are perfectly mobile: investment in A is the same as investment in B, unskilled labor can easily switched to skilled labor or vice versa
• if factors are immobile, i.e. cannot move between industries
• usually presume they are mobile on the medium run (not short run)

!is heroic assumption (at least on the short term: switch to make diff product, switch career)

Question 10

Ricardo-Viner Approach

Answer 10

= sector approach/framework of distributional consequences

no focus on owners of factors of production, but on industry or sector of the economy that employs an indiviual

two types of industries:

• import-competing = sectors that produce stuff that is also imported
• export-oriented = sectors that export

!types are still determined by factor endowments and relative factor intensity

• capital-intensive sectors in capital abundant countries will be export oriented (e.g. German cars)
• labor-intensive sectors in labor-scarce countries will be import oriented (e.g. German apparel sector)

example:
restriction automobile imports helps both capital holders (executives/shareholders) + workers (employees) in the automative sector

what matters = does your sector grow or contract? not focus on your own factor, but the sector as a whole

-> sector based conflict rather than class-based (owners and workers are on the same side of an issue)

Question 11

factor mobility

Answer 11

Ricardo-Viner and Stolper-Samuelson assume that factors are immobile across border

• labor, capital and land dont move between countries

BUT: capital can be mobile through international investment + labor can be mobile through migration

-> factor endowments can change across borders (which is not what these models assume)

Question 12

do public preferences align with our frameworks?
predictions

Answer 12

Stolper-Samuelson would predict:

• people with abundant factor should support free trade
• people with scarce factor should oppose free trade

Ricardo-Viner would predict:

• people employed in exporting sectors should support free trade
• people employed in importing sectors should oppose free trade

empirical evidence

2021 US:
- factor endowments: prediction = higher skill -> less support for trade restrictions
- occupational sector: prediction = working in more competitive sector -> less support for trade restrictions

Question 13

do public preferences align with our frameworks?

US 2021

Answer 13

Scheve and Slaughter

factor endowments: high-skill level, measured by:

1. occupation wage: higher skill -> higher wage
2. education years

prediction = higher skill -> less support for trade restriction

occupational sector:

1. industry’s tariff rate (more comparative disadvantage more protection)
2. sector net export share of respondents’ industry (more export than import = export oriented)

prediction (rewatch) =

higher wage = less in favor of trade restrictions = pro-trade = in line with factor model prediction

education years = more education = less favorable of trade restrictions = pro-trade = in line with factor model prediction

sector tariff -> higher tariff, more likely to be import-competing -> support more trade restrictions
!with control variables this changes

sector net-export share = negative effects in line with the sector model
!this is also not very statistically significant and changes with control variables

-> clear support factor model, not so clear support for the sector model

Question 14

do public preferences align with our frameworks?
Tunisia 2019

Answer 14

Jamal and Milner

Tunisia = abundant in low-skilled labor

occupational sector:

• exporting sector vs import-competing/non-traders/public
• prediction: working in an export sector => more support for free trade

include an experiment where they tell people about Ricardo-Viner Model predictions

model 1 = no information -> coefficients not that diff from each others = no support for sector model

model 2 = give info on what sector people are in -> exporters less positive about free trade than import-competing

model 3 = effects info -> proof

people don’t know their interests

!also look at factor endowments, measured through skill level education, don’t find anything (may be bc measurement error)

Question 15

do public preferences align with our frameworks?
a critique of this whole enterprise

Answer 15

1. individuals don’t know much about trade or how it affects them (don’t know what their interests are)
2. preferences are not purely individualistic or economic:
   - national security concerns: citizens may support trade agreements with friends, not rivals
   - socio-tropic preferences: people don’t think of themselves but think out what’s good for the country
3. beyond calculating rationality:
   - psychological approach to trade preferences: idnividuals 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

Mansfield and Mutz: people are not only self-interested + people are sensitive to party cues + preferences as isolationalism and ethnocentrism

party cues: e.g. Trump saying trade is terrible for the US -> from 2016 Republicans against trade (they were positive before)

Question 16

do people act in line with their trade preferences?

Answer 16

politically, public opinion only matters if it leads to political action: voting, lobbying, political donations, VOTING

do people change their political actions based on trade?

US: evidence is mixed (we also wouldn’t expect it bc it is a strongly polarized country with many elements people may vote for)

• Jensen, Quinn, Weymouth 2017: winners of trade vote more for incumbent, losers of trade less
• Guisinger (2009): trade policy played little rol in 2006 US midterm congressional elections
• Feigenbaum and Hall (2015): voters don’t hold their congress people responsible for increased import-competition
  HOWEVER: legislators do vote based on their constituencies level of import competition

Europe: people react to trade shocks

• Germany 1987-2009: only the vote share of far-right parties is responsive to trade shocks
• Milner 2021: across 15 western european countries: more trade competition -> growing vote share of extreme right parties

What does this mean?

• Just because public opinion doesn’t always align with either Stolper-Samuelson or Ricardo-Viner doesn’t mean they are not useful models.
• If individuals do not recognize their interests, they may still vote based on their economic well-being, and their political representatives might legislate based on fear of economic changes

Question 17

interest groups’ lobbying on trade
- theory’s predictions about firm interests

Answer 17

Firms = Capital (owners)

Hecksher-Ohlin / Stopler-Samuelson :

• in capital-abundant countries, all capital owners should favor free trade
• in capital-scarce countries, all capital-ownerships shuold be against free trade

Ricardo-Viner model = more nuanced:

• exporting sectors favour free trade
  capital-abundant countries = capital-intense sectors (e.g. autos)
  capital-scarce countries = less capital-intense sectors (e.g. textiles)
• import-competing sectors oppose free trade
  capital-abundant countries = less capital=intense sectors
  capital-scarce countries = capital-intense sectors

Question 18

do firms lobby in line with the models?

Answer 18

factor lines:

• in capital-abundant countries (e.g. Germany) the overall business representatives favor free trade
• also examples of business representatives in developing countries (capital scarce) also favoring free trade (e.g. industrialists Brazil 1980s)

sector lines:

• sectors often lobby in line with what Ricardo-Viner would predict
• e.g. US textile manufacturers tend to lobby against free trade agreements
• e.g. US automakers tend to support free trade

Question 19

core takeaway

Answer 19

firms and business groups are really important in trade politics, but their preferences are harder to study

each trade model and its predictions likely capture some part of complex firm preferences

which model is most accurate probs depends on e.g.:

• factor mobility
• the specific trading partner and trade policy in question

Question 20

what happened to consumers in this story?

Answer 20

trade theory: consumers always benefit from trade: lower prices + more variety

yet: we almost never talk about consumers in our models of trade policy, consumers often don’t get their way + politicians don’t care that much

• e.g. Chicken Tax harms consumers but still persists: 1950s,60s free trade US, Germany began importing US frozen chicken -> gov puts tax on imported chicken (to support local producers) -> US starts to tariff foreign trucks -> US trucks comparative advantage
  !German consumer does not get cheap chicken + US trucks would be cheaper without the tariff (bc there would be more tariff)

why do they lose out?

collective action: consumers are the largest and most diffuse group + find it hardest to organize politically

Question 21

Ricardo-Viner about factor mobility

Answer 21

= it is hard to switch
they are not mobile

!is the main diff from the factor model

Question 22

are these two models the same? can they be used as synonyms? Hecksher-Ohlin and Stopler-Samuelson

Answer 22

??