IPE Chap 4 Summary

International Political Economy CH 4: A Society-Centered Approach To Trade Politics.

Chapter Focus: •Interest-group preferences & reasons for them. •Weaknesses of society-centered approach. •Trade theory is used to develop systematic expectations about trade policy preferences. •Collective action theory to understand which groups will organize to pursue their interests. •How different institutional frameworks create different kinds of interest representation.

What determines the trade objectives pursued by governments when bargaining with the WTO, when negotiating regional trade agreements or when making unilateral trade decisions? -Society-Centered Approach:   

States that a government's trade policy objectives are shaped by politicians' responses to (domestic) interest groups demands. Emphasizes the interplay between organized interests & political institutions. Based on the recognition that trade has distributional consequences which generate political competition as the winners & losers from trade turn to the political arena to advance & defend their economic interests.

Trade Policy Preferences Models of trade policy preferences: I. The Factor Model: This Model suggests, the debate over trade policy is a conflict over the distribution of national income between labor & capital since trade places them into direct competition. -Factor Incomes & Class Conflict: 

Argues that trade politics are driven by competition between factors of production (L & C)

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L & C have distinct trade policy preferences because trade's income effects divide society along factor lines Assumptions: (~Standard Trade Model Ch3) Only 2x countries in the World ex US & China Both countries produce two goods ex shirts & PCs Each country uses two production factors (L & C) Shirt production relies more on labor, PC production relies on more capital US endowed with lots of C & little L, China endowed with lots of L & little C all factors are homogenous between industries (factors highly mobile) based on the assumption, US will export PCs since capital is cheap & China will export shirts since labour is cheaper. factor incomes after the countries trade with each other:

1.US: imports shirts which reduces the demand for US produced shirts, therefore firms produce less shirts & apparel firms liquidate the capital they had invested in shirt factories & lay off employees which in turn frees up factors for the American PC production firms to expand. => imbalance between amount of L & C released dude to the different proportions used in the production process which affects the prices of these factors. => demand for C is higher than the released amount which increases its price. => demand for L is lower than the released causing its price to fall. 2.China: same dynamic but in the opposite direction; demand for Chinese PCs falls, firms manufacture less & therefore computer manufacturers liquidate the C they invested in the factories & lay off their employees, while shirt firms are expanding in response to the growing demand in the US which increases their demand for L & C! => due to the imbalance of the released factors & the demanded prices are affected. => PC industry uses lots of C, shirt industry uses lots of L so as it expands it is demanding more L than C which makes L more expensive due to its high demand & capital cheaper since less is demanded than what is available. 

Trade raises the income of society's scarce factor & after time if trade is uninterrupted,

factor incomes will equalize (Stolper Samuelson Theorem/Factor-Price Equalization)  

Trade policies are in turn affected by the income effects. Model Predictions:

Owners of the abundant factor will prefer liberal trade policies. Owners of the scarce factor will prefer protectionist trade policies.

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Trade politics are driven by conflict between labour & business/capital.

II. The Sector Model: -Sector Incomes & Industry Conflict: •argues that trade politics are driven by competition between industries since they have distinct preferences because trade's income effects divide society along industry lines •Assumptions: factor mobility is low, factors are instead tied (~specific) to the sector •when factors are immobile, trade affects the incomes of all factors implied in an industry the same way : shirt imports lead to lower production in US which causes shirt factories to close & workers laid off as well as a decrease in income for the owners of employed capital since capital is immobile. PC production expands, increasing demand for capital which raises the return to capital employed in the computer industry, & incomes of workers employed rise because labour is immobile & relapsed workers of the apparel industry cannot move to the PC industry which means greater demand for L in PC production •trade interest are defined in terms of the industry •Export-Oriented Sector: industries that rely on society's abundant capital intensive & hightechnology industries gain from trade •Import-Competing Sector: industries that rely on society's scarce factor lose from trade

both models agree that raising & lowering tariffs redistributed income & that these income consequences are the source of trade policy preferences; -they offer conceptions of how trade's income consequences divide society -Factor Mobility: the ease with which L & C can move from one industry to another => both argue that trade policy preferences are determined by the income consequences of trade -trade raises incomes of some groups & lowers incomes of others -those who gain from trade prefer liberalization -those who lose from trade prefer protectionism

Trade Adjustment Policy Options to respond to economic dislocation: -Protectionism:

•governments raise tarriffs or use other means to protect industries threatened by import competition therefore protecting the most vulnerable from the forces of economic dislocation. -Adjustment Assistance: •governments establish programs to retain workers which would help workers move from declining to expanding industries with less difficulty.

Organizing Interest: The Collective Action Problem & Trade Policy Demands -transformation of preferences into political demands requires the actors who share a common preference to organize in order to influence the policy making process ! -Reasons why organizing does not always work: •Public Goods Problem •Collective Action Problem -> Incentive to Free Ride -Characteristics of trade politics based on the collective action problem: •producers in an industry can organize easier & quicker than consumers -> no free riding problem. •trade politics will exhibit bias toward protectionism -> dominated by import-competing industries •reciprocal trade agreements make it easier for export-oriented industries to overcome the collective action problem. - Reciprocal Trade Agreement Act (RTAA) of 1934: president has the authority to reduce tariffs in exchange for equivalent concessions from foreign governments which transformed the large heterogeneous group favoring liberalization into small groups of export-oriented industries which can organize easily to pursue common goals => Result: more balanced political pressure -Society-Centered Approach => trade politics are shaped by competition between organized interest groups with the core conflict being the distribution of national income Political Institutions & The Supply Of Trade Policy -Supply-Side Models -> say sth about who wins the competition over trade policy -Political institutions shape how the competition between organized interests unfolds:

•by establishing rules that influence strategies adopted in pursuit of policy objectives •rules influence how people organize, how pressure is exerted on the political process & which interests politicians must respond to

-Electoral systems •Categories: are distinguished based on the number of legislative seats: I. Majoritarian Electoral Systems: combine single member districts & first-past-the-post elections, but they disadvantage smaller third parties II. Proportional Representation: employ multi-member districts to distribute legislative representation in proportion to the share of the popular vote each party attracts

•Electoral systems affect trade politics in the following ways: a. Shaping how groups organize to pursue their trade policy objectives b. Level of protection adopted by governments in the two electoral systems -The number of veto players can affect trade policy  

Veto Player: political actor whose agreement is necessary in order to enact a policy Veto Player Theory: difficulty of moving policy from the status quo increases in line with the number of veto players in the political system which implies that political systems with many veto players will find it difficult to alter tariffs in response to societal pressure for change.

International Factor Mobility & Trade Politics -Standard Trade Theory Models: assume that production factors are immobile internationally which is not accurate => Does international factor mobility force us to alter our approach to the distributional consequences of trade & thus to the underlying structure of trade politics? -No: Economists believe cross border flow of actors is the same as cross border flow of goods. -> cross border flow of factors reinforces distributional consequences of trade in goods. -International factor mobility adds the following new domains to trade politics: •pushed off-shoring to the center of trade politics. •pushes class based conflict to the center of trade politics & pushes sector based conflict to the side.

•labor's bargaining power relative to capital weakens with international factor mobility .

Conclusion -Society-centered approach helps in understanding how the interaction between societal interests & political institutions shapes trade politics. -Significant weaknesses of this approach: 

It does not explain trade policy outcomes

->it only states that trade politics will be characterized by conflict between the winners & losers from international trade but it does not state who the winners & losers are, it does not explain which group will win the political battle, it provides little guidance about how to measure this balance of power. => approach can explain why trade politics are characterized by competition between organized interests but not tell why one group outperforms another in the competition for influence.  

it assumes that politician s have no independent trade policy objectives 7 play no autonomous role in trade politics which is misleading. It does not address the motivations of noneconomic actors in trade politics & why they attempt to influence trade policy.

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