Lecture 3: Society-Centered Approach to Trade Politics
Today
The value of looking at societal interests
Two models of individual level preferences for trade policy
How they help us simplify large populations with diverse preferences
Evidence for the approach and common critiques
Case study: US Coca-Cola vs. European Coca-Cola
Outside the US, Coke uses cane sugar; inside the US, Coke uses corn syrup
(suboptimal substitute)
Sugar prices are very high in the US; almost double the price paid by the rest of
the world
Why the difference in price?
US government limits imports of foreign sugar with import quotas
Supply is limited to more costly US produced sugar
Consumers (Coca-Cola) must pay higher price or find substitutes (corns syrup
(subsidized))
Everyone loses out except for US sugar producers (Minnesota, Michigan) and the
locations that benefit from their income
Why do politicians maintain this sub-optimal policy?
Political institutions in the US have a heavy rural bias
Malapportionment of representation often gives rural voters greater
power (relative to their numbers)
Common feature in democratic countries as institutions took time to
keep up with urbanization
Collective action problem: Few actors are heavily invested and have a strong
preference in maintaining this quota; for your average family, this quota
means a couple hundred dollars in extra costs, but for farmers producing
sugar beets it represents hundreds of thousands of dollars in revenue
Smaller groups benefit from the collective action problem of their
larger opposition; often helped by institutions
Trade’s distributional consequences
Not everyone benefits from trade (at least in the short-run); free trade produces
winners and losers
Trade policy is shaped by…
The distribution of winners and losers
The government response to winners and losers
The institutions that constrain the government response
International interaction
,Domestic politics of trade
Winners and losers of trade protection
Winners: Producers of domestically consumed goods; because they limit
competition, they achieve above normal rates of profit by artificially restricting
competition and supply
Losers
Consumers: Pay a higher price for good; lack of choice
Exporters: Can’t exploit free trade and have below normal profits; because if
a country closes its borders to trade, it’s likely to face a reciprocation of that
protectionism abroad, which means its exporters will be shut out of those
markets (reciprocal nature of trade policy at the international level)
Theories on who wins and who loses or “trade policy preferences"
1. Heckshcher-Ohlin trade theory
Helps us explain who trades together and what they import and export
A country will export goods that make intensive use of the resources the country
has in abundance
A country will import goods that make intensive use of the resources in which the
country is scarce
Industrial countries are rich in capital and skilled labor
They export goods that are capital intensive and require skill
Developing countries are rich in land, raw materials or unskilled labor
They export agricultural, minerals and textiles
2. The Strolper-Samuelson approach: Factors of production approach
Trade benefits owners of factors of production used to produce exported goods
Usually abundant factors (Heckshcher-Ohlin)
Artificially restricting trade hurts owners of abundant factors
Example: Where land is abundant, exporters of agricultural goods lose from
protection
Scarce factor of production always loses to liberalization; abundant factor always
wins
Owners of scarce factors of production favor protectionism
Artificially restricting trade raises the income of owners of scarce factors
Example:
Germany has lots of capital, but little unskilled labor so it imports
labor intensive goods like clothes and textiles
Germans who make fabric may lose their job under free trade or at
least face competition and lower prices from imports from China
Thus, they benefit from tariffs/quotas/NTBs on foreign textiles
Abundance and scarcity are relative to global supply, not national supply;
because that will define how competitive or in demand a good is in the rest
of the world
Example: China
, Abundant in unskilled labor, but scarce in capital
Supply and demand for each factor grows under autarky (no trade)
and under liberalization
Who benefits from trade liberalization in China? Laborers!
Laborers get to sell their goods globally; earn higher incomes
Capital has to compete with investment from abroad; lower
returns on investment
Example: The Netherlands
Abundant in capital, but few unskilled labor
Who benefits from trade liberalization in the Netherlands?
Laborers get to/have to sell their goods globally; lower income
because they have to compete with China
Capital has to/gets to compete with investment from abroad;
higher returns on investments
Assumes factors (capital, labor, land) are perfectly mobile
Factor mobility: The ease at which factors can move from one industry to
another
The factor model assumes that capital and labor are perfectly mobile
If we assume we can move back and forth between industries (from
being a textile worker to a construction worker), trade is going to
affect the wages everybody who works in that factor of production
Capital: Investment in Volkswagen is the same as investment in
Apple? No, machines used to build cars can’t be repurposed to build
computers.
An automaker can easily transition to work on a farm? No, it takes
expertise to work in a farm.
Factors might be industry specific, or immobile
Predicts trade policy generates class-conflict
3. The Ricardo-Viner approach: Industry or sector approach
Instead of “owners of factors of production,” it considers the industry or sector of
the economy an individual is employed in
Two types of industries:
Import-competing: Any industry that competes with imports from abroad
Export-oriented: An industry generally focused on exporting goods to
foreign countries (pharmaceuticals)
Example: Restrictions of automobile imports help both the capital holders
(executives and shareholders) and also unskilled workers (employees of company)
Instead of class based (class vs labor), owners and workers (industry) are on the
same side of an issue
Still relies on factor model as a foundation, but both labor and capital can gain
from trade if industry relies on a society’s abundant factor
Examples:
US automakers: Laborers and capital owners shouldn’t favor liberalization;
they should seek protection from abroad
Wall Street: Laborers and owners should favor liberalization because their
capital exports will be in demand in the rest of the world
Today
The value of looking at societal interests
Two models of individual level preferences for trade policy
How they help us simplify large populations with diverse preferences
Evidence for the approach and common critiques
Case study: US Coca-Cola vs. European Coca-Cola
Outside the US, Coke uses cane sugar; inside the US, Coke uses corn syrup
(suboptimal substitute)
Sugar prices are very high in the US; almost double the price paid by the rest of
the world
Why the difference in price?
US government limits imports of foreign sugar with import quotas
Supply is limited to more costly US produced sugar
Consumers (Coca-Cola) must pay higher price or find substitutes (corns syrup
(subsidized))
Everyone loses out except for US sugar producers (Minnesota, Michigan) and the
locations that benefit from their income
Why do politicians maintain this sub-optimal policy?
Political institutions in the US have a heavy rural bias
Malapportionment of representation often gives rural voters greater
power (relative to their numbers)
Common feature in democratic countries as institutions took time to
keep up with urbanization
Collective action problem: Few actors are heavily invested and have a strong
preference in maintaining this quota; for your average family, this quota
means a couple hundred dollars in extra costs, but for farmers producing
sugar beets it represents hundreds of thousands of dollars in revenue
Smaller groups benefit from the collective action problem of their
larger opposition; often helped by institutions
Trade’s distributional consequences
Not everyone benefits from trade (at least in the short-run); free trade produces
winners and losers
Trade policy is shaped by…
The distribution of winners and losers
The government response to winners and losers
The institutions that constrain the government response
International interaction
,Domestic politics of trade
Winners and losers of trade protection
Winners: Producers of domestically consumed goods; because they limit
competition, they achieve above normal rates of profit by artificially restricting
competition and supply
Losers
Consumers: Pay a higher price for good; lack of choice
Exporters: Can’t exploit free trade and have below normal profits; because if
a country closes its borders to trade, it’s likely to face a reciprocation of that
protectionism abroad, which means its exporters will be shut out of those
markets (reciprocal nature of trade policy at the international level)
Theories on who wins and who loses or “trade policy preferences"
1. Heckshcher-Ohlin trade theory
Helps us explain who trades together and what they import and export
A country will export goods that make intensive use of the resources the country
has in abundance
A country will import goods that make intensive use of the resources in which the
country is scarce
Industrial countries are rich in capital and skilled labor
They export goods that are capital intensive and require skill
Developing countries are rich in land, raw materials or unskilled labor
They export agricultural, minerals and textiles
2. The Strolper-Samuelson approach: Factors of production approach
Trade benefits owners of factors of production used to produce exported goods
Usually abundant factors (Heckshcher-Ohlin)
Artificially restricting trade hurts owners of abundant factors
Example: Where land is abundant, exporters of agricultural goods lose from
protection
Scarce factor of production always loses to liberalization; abundant factor always
wins
Owners of scarce factors of production favor protectionism
Artificially restricting trade raises the income of owners of scarce factors
Example:
Germany has lots of capital, but little unskilled labor so it imports
labor intensive goods like clothes and textiles
Germans who make fabric may lose their job under free trade or at
least face competition and lower prices from imports from China
Thus, they benefit from tariffs/quotas/NTBs on foreign textiles
Abundance and scarcity are relative to global supply, not national supply;
because that will define how competitive or in demand a good is in the rest
of the world
Example: China
, Abundant in unskilled labor, but scarce in capital
Supply and demand for each factor grows under autarky (no trade)
and under liberalization
Who benefits from trade liberalization in China? Laborers!
Laborers get to sell their goods globally; earn higher incomes
Capital has to compete with investment from abroad; lower
returns on investment
Example: The Netherlands
Abundant in capital, but few unskilled labor
Who benefits from trade liberalization in the Netherlands?
Laborers get to/have to sell their goods globally; lower income
because they have to compete with China
Capital has to/gets to compete with investment from abroad;
higher returns on investments
Assumes factors (capital, labor, land) are perfectly mobile
Factor mobility: The ease at which factors can move from one industry to
another
The factor model assumes that capital and labor are perfectly mobile
If we assume we can move back and forth between industries (from
being a textile worker to a construction worker), trade is going to
affect the wages everybody who works in that factor of production
Capital: Investment in Volkswagen is the same as investment in
Apple? No, machines used to build cars can’t be repurposed to build
computers.
An automaker can easily transition to work on a farm? No, it takes
expertise to work in a farm.
Factors might be industry specific, or immobile
Predicts trade policy generates class-conflict
3. The Ricardo-Viner approach: Industry or sector approach
Instead of “owners of factors of production,” it considers the industry or sector of
the economy an individual is employed in
Two types of industries:
Import-competing: Any industry that competes with imports from abroad
Export-oriented: An industry generally focused on exporting goods to
foreign countries (pharmaceuticals)
Example: Restrictions of automobile imports help both the capital holders
(executives and shareholders) and also unskilled workers (employees of company)
Instead of class based (class vs labor), owners and workers (industry) are on the
same side of an issue
Still relies on factor model as a foundation, but both labor and capital can gain
from trade if industry relies on a society’s abundant factor
Examples:
US automakers: Laborers and capital owners shouldn’t favor liberalization;
they should seek protection from abroad
Wall Street: Laborers and owners should favor liberalization because their
capital exports will be in demand in the rest of the world
