Lecture 4 Flashcards
Ricardo-Viner
Emphasizes industries/sectors
Stolper-Samuelson
Emphasizes factors of production (i.e. (high/low skilled) labor, capital and land)
Coca cola example
US Coca-Cola vs. EU Coca-Cola
* Why the difference in price:
The US government limits imports of foreign sugar with
import quotas
Supply is limited to more costly US produced sugar.
* Consumers (Coca-Cola) must pay a higher price or
find substitutes (Corn Syrup – subsidized)
Everyone loses out…
* Except for US sugar
producers
Collective action problem and trade
The larger the group, the harder it is to organize (lobby the government)
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 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
Smooth-Hawley tariff act of 1930
A bill that enacted tariffs on many goods
Response to low agricultural prices
* 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.
Made possible by the institutional structure of the
U.S. Congress
1934 RTAA
- 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
President could negotiate bilateral, reciprocal trade
agreements abroad
Congress had power to remove the President’s authority
But didn’t
Credited with ushering in an era of trade liberalization
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
RTAA alternative 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 antitrade groups changed
- Democrats, pro-trade, came into office and
changed policy. - Institutions didn’t matter as much as we might
think.
Majoritarian systems
Sector-based organization – geographic representation
Small districts dominated by fewer industries
More protectionism on average (both Tariffs and NTBs)
Proportional representation
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
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 * The Netherlands doesn’t suffer this problem
Veto players
- Some political systems might make change (or a new trade deal) more
difficult to achieve.
More veto players Less change
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 a trade agreement!
Meaning that they last longer.
Democracies in 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 & state-owned industries.
Developing countries and democracy and trade
- In developing countries, democracy -> trade liberalization (on average)
Very strong correlation
Tariffs are often a private good
Remember 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.
Autocracy
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 (If you want one!)
* 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 costs)
* They have a harder time alleviating commitment/enforcement problems
