International Trade and Domestic Politics
A vast literature on international political economy has acknowledged various mechanisms through which domestic political institutions affect international trade flows. In fact, domestic political institutions are important determinants of the choice of trading partners, thus democracies are more likely to trade with one another and countries with stable domestic property rights and contractual institutions are more likely to trade certain products to begin with. Furthermore, democratized countries also shifts the distribution of political power to the owners of abundant factors, which encourages more trade in line with countries’ comparative advantages. Correspondingly, trade policies are determined by the interaction of domestic economic interests, domestic political institutions, and the information that is available to all involved players. These preferences vary across groups, as industries, factor-owners or an agent’s as producer or consumer. The groups themselves may or may not be organized politically, and may or may not have political influence or authority. Lastly, the ability of any group to influence a policy outcome or the trade policy agenda will depend on the structure and nature of the domestic political process.
In order to clarify what determines a governments specific trade objectives when negotiating regional trade arrangements, making unilateral trade policies or enhance national welfare, requires an analysis how state actors are rewarded for promoting policies that enhance national welfare and are punished for failing to do so. Thomas Oatley identifies in his international political analysis different theories and approaches that describe and predict the decisions governments make in international trade. Oatley in chapter four, first presents the society-centered approach that is mainly emphasized on the cooperation between organized interests and political institutions, based on the assumption that trade implements political competition due to distributional consequences, therefore the winners and losers form trade turn to the political arena to secure their economic interests. In fact, the society-centered approach is separated into two concepts; the factor model and the sector model. Both models agree on by rising and lowering tariffs redistribute income, and that these income consequences are the source of trade policy preferences. In fact, the factor model suggests that the debate over globalization pits labor against capital, and the sector model suggests that this political debate often pits capital and labor in import-competing industries against capital and labor in export-oriented industries. Also, the sector model predicts that capital and labor employed in export-oriented industries will both support globalization. In addition, both the factor and sector model argue that trade policy preferences are determined by the income consequences of trade, trade raises the incomes of some groups and lowers the incomes of others. Those who gain from trade prefer trade liberalization, whereas those who lose prefer protectionism. Each model offers a distinct pattern of trade policy preferences, (page 92) based on distinct conceptions of how the income effects of trade divide society. Therefore, the factor model states that trade divides society across factor lines and that trade politics is driven by conflict between labor and capital, and the sector model states that trade divides society along sector lines and that trade politics is driven by conflict between import-competing and export oriented industries. Also, the tendency for trade to cause factor prices to converge is know as factor-price equalization or the Solper-Samuelson Theorem. This approach to explain and analyze trade is also emphasized in Ronald Rogowski’s "Political Cleavages and Changing Exposure to Trade", that trade liberalization benefits holders of abundant resources but hurts holders of scarce resources. Rogowski extends this to its logical conclusion, which is that changes in a state's exposure to trade should have profound effects on its domestic political cleavages. Thus, structurally induced international factors as war, another country's tariff rates, and changes in shipping prices will change a country's exposure to trade can affect domestic political cleavages.
Conversely, due to new research findings on what can influence trade policies, Oatley expands that people base their trade policy preferences on perceptions or beliefs about what is good for the country as a whole. Moreover, individuals’ preferences are not transformed automatically into political pressure for specific trade policies due to the incentive to free ride amongst the consumers makes collective action in pursuit of a common goal, very difficult. In contrast, most industries are made up of a relatively small number of firms; therefore can producers easier organize to lobby the government. This states why producers’ interests dominate trade politics, and consumer’s interests are often neglected. Hence, political institutions shape how competition between organized interests unfolds by establishing rule that influences the strategies people adopt in pursuit of their policy objectives. This influence how people organize and determine whether interests organize around factor or sectorial interest. Because political institutions shape the way people behave, they have an important impact on who ultimately wins the batter over national income. Lastly, political institutions somewhat shape how private-sector policy demands are transformed into trade policy outcomes. The rules governing elections can influence whether private sector group organize around factors or sectors. These same rules can also shape the level of protectionism, the number of veto players in the political system shapes the governments ability to raise or lower tariffs in response to changes in the relative power of protectionism and liberalizing demands emanating from organized groups. More importantly, Rogowski further discuss certain factors that characterize society; land, labor, and capital. Thus as trade becomes more or less difficult due to transportation innovations, the presence or absence of an international hegemon, domestic political cleavages will emerge between the winners and losers, and can predict which group will win. These assumptions lead Rogowski to characterize four types of economies and how changes in exposure to trade affect political cleavages in each type, where capital rich, land rich, labor poor states influenced with class conflicts that encounters an increase in trade benefits capitalists and land-owners, and harms rural and urban workers. On the other hand, capital rich, land poor, labor rich states with urban-rural conflict with an increase of trade benefits workers and capitalists, and harms farmers and land owners. Also, capital poor, land rich, labor poor with urban-rural conflict with an increase of trade benefits farmers and landowners, and harms workers and capitalists. Lastly, capital poor, land poor, labor rich with class conflict with an increase in trade benefits workers and harms capitalists and land-owners.
On the subject of political cleavages and trade influence on political institutions, Kono in his “Optimal Obfuscation: Democracy and the Trade Policy Transparency”, further describes that democracies have more liberal trade policies than do autocracies. In contrast, that democracy has contradictory effects on different types of trade policies because electoral competition generates more information about some than about others. It generates considerable information about policies whose effects on consumer welfare are easy to explain to voters, but less information about policies whose effects are more complex. Furthermore, politicians in democracy liberalize to please voters, but some areas of trade policies are more transparent and thus more susceptible to voters’ pressure than others. Also, the government maximizes a weighted sum of interest groups’ contribution and voter support. On the contrary from Rogowski, Kono states that the only difference between autocracies and democracies is the weight attached to voter support. By increasing the transparency of some policies relative to others, democracy induces politicians to reduce transparent trade barriers but also to replace them with less transparent ones. In fact, democracy leads to lower tariffs, higher core non-tariff barriers, and even higher quality non-tariff barriers.
With this in mind, Kono’s argument combined with Rogowski’s concept adds on to chapter five in Oatley’s book, where the question and discussion about how state actors are rewarded for promoting policies that enhance national welfare. Conversely, as previously mentioned from chapter four, the society-centered approach suggest that we should look at the political influence of the industries concerned, and is based on the standard model of trade, which rules out welfare-improving intervention. In contrast, Oatley evolves the discussion of trades influence on state incentives by presenting a state-centered approach argues that national policymakers intervene in the economy in pursuit of objectives that are determined independent from domestic interest groups narrow self-interested concerns. Furthermore, suggests that such intervention designed to promote the development of specific national industries. In contrast to Rogowski’s analysis, a government’s trade and economic policies embody the goals of national policymakers rather than the demands of domestic interest groups. By combining these two assumptions, the state-centered approach states that under a specific set of circumstances, governments will intervene in the domestic economy with tariffs, production subsidies, and other policy instruments in ways that raise aggregate social welfare. In contrast, the standard model rules out welfare increasing government intervention by removing all forms of trade protection and by specializing in its comparatively advantaged industry. Maintaining protection merely deprives society of the welfare gains from trade, and therefore factors of production will move into comparatively advantaged industries because it is profitable to do so, meaning the returns in these industries are higher than the returns in the comparatively disadvantaged industries. Additionally, governments can use industrial policies to create international competition through domestic high-technology theories. As an contribution, strategic-trade theory expands on the basic insight of the infant-industry case for protection, asserting that government intervention can help domestic firms chive economies of scale and experience in order to become competitive in global markets and that these high-tech industries are competing only between a few firms, called oligopolistic competition. Also, due to the low number of competitors the firm that first enters the industry will win. Therefore, by enable governmental support through policies and financial support, the late arrival to these small industries have a chance to grow and establish themselves in the new profitable industry, and thereafter generate profit to the national economy. To refer this concept back to Kono’s analysis, where voters are also consumers who do not like paying extra for imported goods. Democratic governments can tolerate some consumer dissatisfaction, especially if it is too thinly spread to effect many votes. But autocracies do not need to pay it any attention whatsoever. Particularly, voters are also workers. The poor countries, where many of the new democracies have flowered, are typically crowded with abundant labor but scarce capital. If they cut themselves off from trade, manpower will be cheap relative to capital. The plutocrats who profit from this economic isolation are the natural allies of autocratic government. By contrast, democracy enfranchises a wider circle of people who stand to gain from selling their labor at something closer to the current world prices. For these reasons, freer trade often follows freer elections.
In all to conclude the readings and the common findings, political institutions matter more for the extensive than the intensive margin, and that democratic political institutions are not always trade promoting, although trade appears to be cultivated by political stability, and other features of democracies advocated inhibit trade. International cooperation via international organizations, and treaties generates information which affects the domestic politics conflict in fundamental ways. Lastly, domestic politics matters for trade policy are now a well-established trope in both economics and political approaches. In fact, international trade and international relations are not determined by a exclusive national executive, acting freely and isolated from the pressures of domestic political interests when choosing tariff levels or other elements of trade policy. Instead, trade policy is determined by the interplay of domestic economic interests, domestic political institutions, and the information that is available to all involved inhabitants and players.