Lecture 7: Domestic Politics of Trade · Lecture 7: Domestic Politics of Trade Benjamin Graham. The...

Lecture 7: Domestic Politics of Trade

Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham

Today’s Plan

• Finish last week’s lecture• Domestic Politics of Trade


Housekeeping

• Homework 2 due next Tuesday (Feb 18).

• Midterm is February 25– Midterm review guide will go out later this week

– Note: The optional reading/viewing is truly optional – not on the exam• It does help with your papers


Reading Quiz (1)

• Strategic Trade Policy is generally promoted as a response to what?

– A. trade sanctions

– B. economic sanctions

– C. perfect competition

– D. imperfect competition

Lecture 6: Barriers to Trade Benjamin Graham

Quiz (2)

• In the Planet Money segment, the two main competing interest groups were:

– A. Labor unions and candy factory owners

– B. Candy producers and sugar beet farmers

– C. Lollipop makers and chocolate manufacturers

– D. US-based Lollipop producers like dum-dum vs. retailers like Walmart who import most of their candy


Quiz (3)

• What lead to the protests by French farmers in the article we read?

– A. Russian Ban on EU food imports

– B. Reduced Chinese demand

– C. Low Prices

– D. All of the above


How Tariffs Work


How Subsidies Work


Examples of US Tariffs


Examples of US Quotas


Industrial Products vs. Agricultural Products


Why doesn’t the law of one price hold?

• Lets assume French and US sales tax are the same and tariffs on French wine are 0. How much would a bottle of French wine cost in the US?A. The same as in FranceB. The French price + shipping costs C. The French price + shipping costs – a small amount because

demand in the U.S. is lower


Who benefits from tariffs?

• In the country that implements the tariffs, who benefits from tariffs on agricultural goods and textiles?A. Unskilled workers and people who own farmland B. Skilled workers and people who own farmland C. People without farmland land and skilled workersD. People who eat food and people who buy clothes


Tariffs are also an easy tax handle


• Tariffs as a share of government revenues

Trade and income distribution

• Free trade makes a country richer in total– But it hurts some people and helps others

• Government redistribution can help even this out and get everyone to support free trade– Tax beneficiaries of free trade, give it to those who lose out– Unemployment benefits, job training, etc.


Source: Rodrik 1998 “Why Do More Open Economies Have Bigger Governments?

Trade and income distribution

• What is the effect of trade on inequality?– Depends on who owns the scarce factors– Should (generally) reduce inequality in poor countries and

increase inequality in rich countries• This is empirically muddy


The effect of tariffs on consumers

• What do tariffs on textiles and agriculture do to prices in the US?– Whom does that hurt?

• What do tariffs on textiles and agriculture do to prices in developing countries?– Whom does that hurt?


Tariffs vs. subsidies

• Tariffs and subsidies are different in which of the following ways:– A. Tariffs are a much more effective way to protect domestic

importers.– B. Tariffs increase government revenue while subsidies cost the

government money– C. Tariffs raise the prices paid by domestic consumers,

subsidies do not– D. Tariffs hurt domestic consumers, subsidies hurt domestic

taxpayers– E. B, C, and D are all correct


Concentrated vs. Diffuse Interests

• Concentrated Interest: A small group of people, each of whom care a lot

• Diffuse Interest: A large group of people, each of whom care a little

• In a democracy, concentrated interests often prevail over diffuse interests.


Social Media Seems to Be Making it Easier to Coordinate Consumer Protests

• In the past year, rising prices have sparked mass protests in:– In Sudan, Omar al-Bashir was ousted via protests that began

over the price of bread– Haiti and Bolivia, mass protests over food and fuel prices– Iran, France, and Zimbabwe protests over fuel prices– Chile, protests sparked by an increase in subway fares– Lebanon, tax on WhatsApp– Algeria, youth unemployment


Interest Groups: Factors of Production vs. Industries

• Labor unions represent owners of labor, i.e. workers• Chambers of Commerce represents owners of capital• Various agricultural lobby groups represent owners of land

• We also see lobbying at the industry-level– For example, when the auto industry lobbies for protection, it is

often both unions and company owners doing the lobbying (i.e. both labor and capital.

– Same with the coal industry -- both miners and mine-owners

• Either way, trade protection happens at the product level


The Producer Viewpoint

• How does the sugar industry justify US sugar policy?• Doesn’t cost taxpayers anything (tariffs & Quotas instead of

subsidies)• Provides stable prices (no shortages) • Creates jobs• Unfair competition (subsidies) in Mexico & China• Lower prices wouldn’t reach consumers anyway


Factors of Production and Interest Groups

•Owners of locally-scarce factors of production often seek protection for products that use that factor intensely

• Import-competing industries also seek protection as industry groups

•Anti-trade interests seek subsidies for domestic production, tariffs on foreign imports, or quotas on foreign imports


Factors of Production and Interest Groups (continued)

• These policies benefit owners of the locally scarce factor of production and import-competing industries

• The policies harm consumers and/or taxpayers across the country

•Bonus points if beneficiaries are concentrated in a swing state –Michigan and Ohio (cars)–Pennsylvania (Steel)–Florida (Sugar)

Who benefits from tariffs on the import of foreign t-shirts into the US?

– A. Unskilled U.S. workers generally– B. Owners of U.S.-based T-shirt manufacturing facillities – C. U.S. Consumers who buy t-shirts– D. Hipster entrepreneurs who buy bulk t-shirts, print snarky

things on them, and resell them– E. A&B– F. A, B, & D– G. All of the Above


But people aren’t “pocketbook voters”

• People generally vote based on their perception of the public good.– How is trade affecting their zip code?

• How do voters feel about foreigners in general? About global integration?


Logic of Trade Protection

• Jobs will be protected– In the protected industry, and in its suppliers and ancillary

industries• Example: Auto parts producers would go under if GM goes

under

• Foreign competition is in some way “unfair,” – Foreign subsidies, or lax labor and environmental laws

• Trade displacement has cultural costs as well economic ones– Protecting “traditional” industries


Industrial Policy

• Industries are hard to start – May only become globally competitive later

• Government’s pick an industry, subsidize it, and protect it– Subsidies and protection are supposed to be temporary– “infant industries”

• The goal: create a globally competitive industry that no longer needs subsidies


Industrial Policy (The Risks)

• Governments are bad at “picking winners”• Temporary protections become permanent

– The National Wool Act of 1954• Repealed in 1995, brought back a few years later

– What incentive do firms have to wean themselves from government help?• Innovation vs. Rent-Seeking


Japan did it pretty well

• 1950s, Japan exported textiles, low-tech products; by 1970s and 1980s, Japan was exporting cars, ships, etc

• Ministry of Economy, Trade, and Industry (METI): Selects industries to receive trade protection, R&D subsidies, low interest loans, tax breaks, etc.

• Debates remain, but generally viewed as quite successful

• Many other countries have been much less successful– Lots of corruption


The Story of Airbus

• In the early 1970s Germany, France, Britain, and Spain all chipped in to create a (heavily subsidized) European airplane manufacturing industry– $13.5 billion of direct subsidies in first 20 years

• By the early 1990s, airbus had an operating profit and was starting to pay back government loans

• Worth it? Probably.

• Huge WTO dispute between Airbus and Boeing– But that’s for a later class


The Making of the US Farm Bill

• Subsidies across a variety of crops

• Also includes foodstamps, school lunch subsidies, etc.

• The Coalition:– Rural states/congressional districts (crop subsidies)– Urban states/congressional district (food stamps, school lunch

subsidies)

• Domestically, who bears the costs of these subsidies?


Free Trade Agreements: One Way Trade Policy Liberalizes

• Concentrated interests oppose opening US markets to imports defeat the diffuse interests who would benefit– i.e. producers in import-competing industries defeat consumers

• There are also concentrated interests that want access to foreign markets.– Producers in xporting industries

• Free trade agreements harness these concentrated interests in favor of reciprocal free trade agreements– I’ll let your goods in if you let mine in.


The Union Argument Against FTAs


But... this is how they might come around


Free Trade Agreements: Korea

• The Korean FTA was signed in 2007, but was not ratified by the Democrat-controlled Senate’– Main opposition: Labor Unions

• Obama administration renegotiated the deal, got a better deal regarding the Auto industry– Got the United Auto Workers on board– Ratified easily in 2011


Free Trade Agreements: Colombia

• Signed in 2006, but not ratified until 2011– Again, major opposition was US labor unions

• Negotiations focused on improving labor rights in Colombia


Free Trade Agreements: Terms of Trade?

• In both the Colombia and South Korea cases, the smaller country wanted it more.– The U.S. is Colombia’s largest trading parter, but Colombia

accounts for less than 1% of US trade

• The party that wants a deal more ends up giving up more– For example, South Korea had to let US autos into South Korea 5

years before tariffs will be lifted on Korean autos into the US


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Lecture 7: Domestic Politics of Trade · Lecture 7: Domestic Politics of Trade Benjamin Graham. The...

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