Domestic Politics of Trade II: Institutions 2024 PDF

Domestic Politics of Trade II: Institutions Block II 2024 Dr. Toenshoff 1  Recap Questions According to the Stolper-Samuelson Theorem, who benefits from free trade in a country that is abundant in unskilled labor and scarce in capital? - Owners of capital - Unskilled workers...

Domestic Politics of Trade II: Institutions Block II 2024 Dr. Toenshoff 1  Recap Questions According to the Stolper-Samuelson Theorem, who benefits from free trade in a country that is abundant in unskilled labor and scarce in capital? - Owners of capital - Unskilled workers - Owners of capital and unskilled workers in sectors that use unskilled labor intensively - Owners of capital and unskilled workers in sectors that use capital intensively What economic group faces the worst collective action problem? - Capital owners - Consumers - Land owners - Workers What does the sector model assume about factor mobility? - Capital can easily switch between sectors - Labor cannot easily switch between sector - Capital is free to move between countries - Labor is free to move between countries Scheve and Slaughter's research on US voter attitudes finds that: - Higher skilled individuals are more supportive of trade restrictions - Higher skilled individuals are less supportive of trade restrictions - There are no consistent patterns of higher skilled individuals’ support for trade restrictions - The sector model is more consistently supported by the data than the factor model 2 Recap of last class Societal interests: two models  Factor (Stopler-Samuelson)  Sector (Ricardo-Viner)  Factor mobility assumption is key distinction Help us understand who is likely to support or oppose liberalization in a country. Issues: 1. individuals might not be aware of what is good for them 2. individuals might be influenced by elite discourse 3. supply chain complexity makes it difficult to identify costs/benefits (Next week) Evidence for both theories at the individual level is mixed. 3 Interests, Ideas & Institutions Societal/Elite Elite Interests Interests Interpretation of interests (ideas/ideology) International Domestic Institutions Institutions Interpretation of interests (ideas/ideology) Policy Outcomes Political Interests 4  Domestic Institutions Who can organize and influence policymakers? Whose preferences matter? How do different institutions shape preferences? 5 US Coca-Cola vs. European Coca-Cola Which Tastes Better? 6 US Coca-Cola vs. European Coca-Cola The difference:  Outside the US, Coca-Cola uses cane sugar  US Coca-Cola uses corn syrup Sugar prices are very high in the US  Almost double the price paid by the rest of the world. 7 US Coca-Cola vs. EU Coca-Cola 8 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) 9  US Coca-Cola vs. EU Coca-Cola Everyone loses out… Exceptfor US sugar producers: 10  A similar story from Indonesia Price of sugar is 3x higher in Indonesia than globally Why? The government highly controls who can produce sugar domestically! To keep prices high. Source: https://www.krisna.or.id/en/post/gula/ 11 GAME PLAN Collective Action Problems  How do institutions help/exacerbate the problem? Institutions more broadly:  Level of Democracy  Electoral Systems  Veto Players The EU’s Trade Institutions – 3-Level Games The Welfare State and Compensation for the Losers of Trade 12 Farmers often very vocal 13 The Collective Action Problem and Trade Collective action problem: the gift that keeps on taking #MancurOlson  The larger the group, the harder it is to organize (lobby the government)  The 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 14 The Collective Action Problem and Trade What does this mean for trade 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 problems we discussed last week. Can institutions heighten this problem or ameliorate it?  Depends on the institution(s)… 15 Smoot-Hawley Tariff Act of 1930 16  Smoot-Hawley Tariff Act of 1930 A bill that enacted tariffs on many goods  Response to low agricultural prices Even a tariff on imported goldfish 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 17  Smoot-Hawley Tariff Act of 1930 Made possible by the institutional structure of the U.S. Congress  Single member districts  Each member sought to bring concentrated gains to Even a tariff on imported goldfish their district  Less concerned with the “national welfare” Seen as adding to (or causing) the “Great Depression” Who loses if the goldfish industry wins?  Consumers (collective action problem)  ALSO! Export interests – via retaliation abroad. 18  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  President could negotiate bilateral, reciprocal trade agreements abroad  Congress had the power to remove the President’s authority  But didn’t US President Franklin D. Roosevelt Signing the RTAA 19  The RTAA of 1934 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 Congresspeople Congress just votes for or against, no amendments = no more logrolling US President Franklin D. Roosevelt Signing the RTAA 20 The RTAA Aftermath: 21 The RTAA Aftermath: 22 What happened? RTAA Institutional Explanation: Alternative Societal Explanation: Delegating authority to the President allowed The World Economy Changed. Congress to escape protectionist incentives The US was positioned to benefit from trade as it Congress, realizing their problems, gave up their wasn’t in the 1920s power over trade policy. And kept extending the authority. Thus, the societal distribution of pro and anti- trade groups changed President is more concerned with national welfare than small interest groups because of US political institutions Democrats, pro-trade, came into office and changed policy. By making trade agreements reciprocal, exporters had a greater interest in lobbying for the elimination of protection in non-related Institutions didn’t matter as much as we might industries think. 23  Smooth-Hawley/RTAA Conclusion Institutional rules change how societal interests are turned into policy.  If you believe the story. We don’t quite know which matters more (institutions or preferences) here, but both are probably important.  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… 24 Broader Institutional Effects 25 Electoral Systems Majoritarian systems  Sector-based organization – geographic representation  Small districts dominated by fewer 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 See Stephanie Rickard (2012) – Non-tariff barrier bias in majoritarian politics 26 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 See (Samuels and Snyder 2001); MAL score: percent of seats allocated to districts that would not receive those seats if there was no malapportionment 27 US Coca-Cola vs. EU Coca-Cola 28 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 governing coalition, Cabinet ministers, Bureaucrats, Regional Parliaments... Veto players also make it more difficult to defect from a trade agreement!  Meaning that they last longer. 29 Veto Players 30 10 Minute Break 31 Democracy/Autocracy: Democracies 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. In developing countries, 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 free trade, democracy -> liberalization. 32 Democracy/Autocracy: Autocracies 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 Sum up: easier to agree, less interest in agreement, harder to find partners willing to agree. 33 Global Evidence on Democracy and Tariffs: From Helen Milner & Keiko Kubota 2005 Why the Move to Free Trade? Polity scores: Measure of democracy, the higher the more democratic 34 But there are exceptions, e.g. the world’s biggest democracy: 35 Evidence on Trade Agreement Formation Mansfield, Milner & Rosendorff (2003): Democracies are much more likely to form PTAs than autocracies: 36 Back to Indonesia: The Role of Patronage Networks 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 Read more here (Indonesia Sugar Scandals) Source: https://www.krisna.or.id/en/post/gula/ 37 International Bargaining & The EU’s Trade Institutions 38  From Domestic to International Bargaining The domestic politics of trade suggest that diplomats will have a hard time bargaining with other countries Putnam’s two-level games (1988) 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 39  The EU = Three-Level Games 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 When negotiations finish, agreements get an up or down vote from the EU Parliament and the Council  Similar to RTAA (now fast-track authority) in the US. EU trade policy explained (through propaganda)  EU Trade Policy explained – YouTube (Commission) Exception: Trade agreements with non-trade provisions, e.g. investment clauses have to be ratified by national (and some regional) parliaments 40 CETA, Provisionally Applied, but Waiting for Ratification… (over Halloumi Cheese) (over Protected Geographical Indications, e.g. Aceto Balsamico di Modena; Basilico Genovese…) But also remaining concerns over issues discussed in week 1: Investment arbitration, consumer protection, environmental standards… 41 Embedded Liberalism: Compensating Those Harmed by Trade 42  Embedded Liberalism Would we expect those with the most liberalized internal markets to also have the most liberalized external markets? No, those countries that engage in a bunch of trade tend to have larger welfare states… The welfare state is used to protect or “buy off” the “losers” of globalization so they don’t strongly oppose liberalization (Ruggie, 1982) It is no surprise that the U.S. and U.K. are seeing stronger backlashes to globalization 43 Trade Drives the Welfare State in Democracies Source: Iverson 2001 44 Societal Interests Takeaway You can’t explain international politics well without a fundamental understanding of domestic politics.  Societal interests matter, domestic institutions matter. Trade causes winners and losers domestically  Despite overall welfare gains of trade  Salient short-term costs for some domestic actors. Two prominent approaches to identify the winners and losers  Factor model  Sector model Domestic institutions shape societal interests into policy 45 Next: Supply Chains, Multinational Enterprises and International Investment 46 Suggest Quiz Questions 47