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Lecture goals
• Factor model• Sector model• Collective action problem • Economic & political predictions
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Puzzle
• Comparative advantage: free trade good for all nations, in aggregate– More nuanced view: depends on size of economy,
state capacity, positive & negative externalities, etc.
• Then why do governments pursue protectionist policies?
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Some possible answers
• Trade isn’t always good• “Wrong ideas”
– Mercantilism, Dependency Theory, Structuralism, etc.• Infant industry protection (Next Week)• Collective action problems (Lecture 6 & 7)
– Producers of tradeables have more political power than consumers, favor protection of own markets
• Relative factor endowment politics (Today – Lecture 6)– Scarce factors oppose free trade to protect income
• Sector orientation politics (Today – Lecture 6)– Import-competing sectors oppose free trade
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Factor-price equalization(Stolper-Samuelson)
• Economic assumptions:– Autarky:
• Scarce factors in each economy demand high payment
– Trade: • Each economy has comparative advantage in, and
exports, goods that intensively use abundant factors• Payment to scarce factors in each economy falls (import
competition) • Payment to abundant factors rises (used for exports)• Factors move from import-substituting to export sectors
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Commerce & Coalitions (Rogowski 1990)
• Political assumptions:– Beneficiaries of change will try to accelerate it;
victims of change will try to halt it (desire)– An increase in wealth enables increased political
influence (means)– As desire & means for a particular policy
increases, likelihood increases that a political entrepreneur will overcome collective action problems
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Commerce and Coalitions(Rogowski 1990, based on 3-factor model: Land, capital, labor)
Labor scarce relative to Land
Labor abundant relative to Land
Capital rich (Developed countries)
Capitalists & Landowners for trade
Labor against
Class conflict
Capital & Labor for tradeLandowners against
Urban-rural conflict
Capital scarce (LDCs)
Landowners for tradeLabor & Capitalists against
Urban-rural conflict
Labor for tradeLandowners & Capitalists
against
Class conflict
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Britain, 1840s
• Rich relative to trade partners• High population density (i.e., low land-labor
ratio) relative to U.S.
• What should we predict regarding policy preferences of each group, and the resulting political coalitions?
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Prussia (Germany), 1840s
• Economically backward relative to Britain• High population density relative to U.S.
• What should we predict regarding policy preferences of each group, and the resulting political coalitions?
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United States, 1840s
• Economically backward relative to Britain• Low population density relative to Britain and
Germany
• What should we predict regarding policy preferences of each group, and the resulting political coalitions?
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Commerce and Coalitions1st Age of Globalization (increasing free trade)
Labor scarce relative to Land
Labor abundant relative to Land
Capital rich (Developed countries)
Capitalists & Landowners for trade
Labor againstCapital & Labor for trade
Landowners against
Capital scarce (LDCs)
Landowners for trade Labor & Capitalists against
Labor for tradeLandowners & Capitalists
against
Germany
Britain
United States
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1st Age of Globalization (from Rodrik, pp. 27-30)
• Britain: “Landlords wanted high tariffs that kept food prices high and raised their incomes. Urban manufacturers … wanted to abolish the tariffs to reduce the cost of living.“
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Start of 1st Age of Globalization: End of Corn Laws (1846)
• Actor: Landlords
• Interest: High food prices to increase income
• Policy preference: Tariffs on food imports
• Actor: Urban manufacturers
• Interest: Lower food costs so can reduce wages, increase profits
• Policy preference: Abolish tariffs
Institution: Parliamentary Vote
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1st Age of Globalization (from Rodrik, pp. 27-30)
• “Everywhere on the Continent agricultural interests clamored for protection, often making common cause with industrialists who were reeling under competition from the more advanced British producers… In Bismarck’s Germany, this led to the famous “marriage of iron and rye” …”
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1st Age of Globalization (from Rodrik, pp. 27-30)
• US: “The South depended on international trade for its prosperity. The North wanted protection from imports, at least until it could catch up.”
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Commerce and CoalitionsDepression of the 1930s (increasing protectionism)
Labor scarce relative to Land
Labor abundant relative to Land
Capital rich (Developed countries)
Capitalists & Landowners for trade
Labor againstCapital & Labor for trade
Landowners against
Capital scarce (LDCs)
Landowners for tradeLabor & Capitalists against
Labor for tradeLandowners & Capitalists
against
Asian & East European Fascism
W. European FasicismUnited States: New Deal
South American Populism
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Specific factors model(Ricardo-Viner)
• Economic assumptions:– Not all factors are mobile; some trapped in specific sector– All factors from a sector that intensively uses the
economy’s abundant factor gain from trade; factors from sector intensively using economy’s scarce sector lose
– For example, capital invested in a labor intensive sector (e.g., textiles & apparel) in a labor abundant country is HELPED by trade
– Labor w/special training in capital-intensive sector (computers, autos, etc.) in a labor-abundant country is HURT by trade
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Specific factors model (Frieden)
• Political predictions:– Coalitions cut across factors, along industry lines if factors
have low mobility – For example, capital & labor in labor-intensive sector forms
coalition if capital and labor cannot easily change sectors
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Collective action and trade protection:Producers lobby governments more than consumers
• Consumers – Benefit from trade (lower prices)– Are diffused – Marginal benefit of lower price for each good is small
• Producers of tradeables – Benefit from
• Protection in own country (higher prices)• No protection in foreign country (access to markets)
– Are concentrated– Marginal benefit of protection/access is large
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Political Institutions & Trade Policy
• Majoritarian vs. PR electoral system– Majoritarian increases voice of minority interests,
e.g. sector-based interests (based on geography)– PR increases voice of larger groups, e.g., class or
factor interests, or consumers
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Example of tariffs, WTO, & distribution of benefits
• “We had a tire case in which they were flooding us with cheap … Chinese tires. And we put a stop to it and as a consequence saved jobs throughout America. I have to say that Governor Romney criticized me for being too tough in that tire case; said this wouldn’t be good for American workers and that it would be protectionist. But I tell you, those workers don’t feel that way. They feel as if they had finally an administration who was going to take this issue seriously.” – Barack Obama, October 22, 2012
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Coalition for tire protection(from podcast)
• Tire company union
• Tire company owners
• Does this comply with the factor or sector model?
• Does this imply factors are mobile or immobile?
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• “It’s not like you were going to take a 52-year-old guy and send him to internet school.” (Podcast)
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China responds to US anti-dumping tire tariff with anti-dumping chicken part tariff
(US wins on tires, chicken parts still in dispute)
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Another tariff case(LaFaive 2002, Tran 2003)
• President Bush raised tariffs on steel in 2002• Winners: Estimated 4,400 – 8,900 steel-sector
jobs in MI & PA (swing states)• Losers: Estimated decrease in national income
$0.5-1.5 billion; lost jobs in steel-using industries• WTO ruled against US, authorized EU to retaliate
with tariffs against FL oranges & Harley-Davidsons (WI, PA, etc.)
• Bush reduced steel tariffs in 2003
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Take-aways
• While trade has many obvious benefits, protectionism is a common strategy for many reasons– Collective action challenges (more voice for
producers than consumers)– Winners vs. losers among producers (factors or
sectors)– Some countries may benefit in the long run from
targeted protection policies (Lecture 8)
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The role of veto players
• Veto player must • More veto players => more policy stability• Institutional veto points– President, lower house (HR), upper house (Senate)
• Partisan veto players– Parties in institutional veto points– Parties in coalition governments
If there is one veto player, he can get his ideal policy choice
Taxes on the rich
Republicans
Democrats
Community Collegespending
SQ
If there are two veto players, the possible policy outcomes are narrowed – both must agree
Republicans
Democrats
SQJoint gainsTaxes on
the rich
Community Collegespending
If there are three veto players, the possible policy outcomes are narrowed further still – all must agree
Republicans
President
SQ
Joint gains
Democrats in
Senate
Taxes on the rich
Community Collegespending
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Comments• GDP vs. GDP per capita• Real GDP vs. GDP• (PPP adjustments)• GDP per capita growth vs. GDP per capita• Trade (% of GDP) vs. Policy measures• Measurement error• Causality issues
– Correlation– Snap shot– Direction of causality/endogeneity– Omitted variables (e.g., oceans)– Growth vs. Level
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Varying measures of economic prosperity, for 1990, from WDI
Measure China USA USA/China
GDP, current dollars 357 Billion 5.8 Trillion 16.2
GDP, PPP 2005 dollars
1.2 Trillion 8 Trillion 6.7
GNI per capita, current dollars
310 22,080 71.2
GDP per capita, PPP 2005 dollars
1,099 31,951 29.1
GDP growth, constant 2000 dollars
3.8 1.9 0.5
GDP per capita growth, current LCU
2.3 0.7 0.3
Which measure to use depends on the question being asked