Lecture 8 - Feb. 4th, 2019
The Politics of Trade
James E. Alt and Michael Gilligan, “The Political Economy of Trading States” (1994); Helen V.
Milner, “The Political Economy of International Trade” (1999)
Reading Notes
Alt & Gilligan
- “Trading states” = states of trading societies
- What is required to understand the domestic consequences of a society’s “choosing to
trade”?
- “Can a state enhance aggregate welfare by intervening in a trading economy?”
- “What consequences would/should an increase in trade have for the design of state
institutions?
- Pareto: “A protectionist measure provides large benefits to a small number of people, and
causes a very great number of consumers a slight loss”
- Schattschneider (1930): “Benefits are concentrated while costs are distributed”
- ^^these are empirical observations, not general theoretical points
- Two problems of organizing/taking collective political action: “excludability”, and the
cost of organizing a group.
- Stolper-Samuelson or “mobile factors” approach
- Argued that a change (increase) in the price of the product “would more than
proportionally increase the return to the factor that is used intensively in the
production of that good.”
- Thus the real incomes of the owners “of that intensively-used factor will
unambiguously rise, giving them a stake in bringing about that change in prices.”
- If there are only 2 factors of production, the real incomes of owners of the less
used factor will fall.
- “Protection of an industry will raise the price of the good produced by that
industry.”
- The consequence is that “owners of the same factor have the same change to its
returns, regardless of whether it is actually employed in the protected industry or
in the unprotected industry” ← therefore the conflict is between the factors of
production
- Hecksher-Ohlin theorem: states that a country will export the good which
intensively uses whichever factor of production is relatively abundant in that
country.
- ^Combining this prediction with the Stolper-Samuelson theorem yields “the usual
conclusion that, other things being equal, in a relatively capital-abundant country
, labour will favour protection because it cannot be extensively used in exports,
while capital will favour relatively free trade.”
- Assumes that factors are mobile between sectors of the economy
- Ricardo-Viner or “specific factors” model
- Assumes that factors of production are “specific” to a particular industry, and
when that industry declines they “cannot move” to the rising industry.
- The effect on the real income of the mobile factor in the example is ambiguous;
depends on intensities of use and consumption patterns.
Lecture Notes
The Politics of Trade
- From International Relations to International Political Economy
The Logic Behind Trade
Why does trade take place?
- Classical notion of how markets work
Comparative Advantage
Definition: “an actor’s ability to produce a good or service more efficiently than another actor’s
ability to do so”
- At least two actors are required in this concept
- Your ability to create the good depends on your efficiency during each step of the
production process.
- Comparative advantage + the ability to exchange = specialization. This creates more
goods for everyone to consume.
With exchange, the consequence is specialization
A Simple Example of Comparative Advantage
Ricardo: imagine a set of 2 countries, each produces 2 goods.
In isolation, Country A can:
- If country A puts all their resources into the production of either textiles or wine, they
can:
Produce a maximum of either
Output of first good (textiles) 300 units
Output of second good (wine) 150 units
The price of goods in A prior to trade:
300/150 or 2/1 (2 units of textiles = 1 unit of wine)
The Politics of Trade
James E. Alt and Michael Gilligan, “The Political Economy of Trading States” (1994); Helen V.
Milner, “The Political Economy of International Trade” (1999)
Reading Notes
Alt & Gilligan
- “Trading states” = states of trading societies
- What is required to understand the domestic consequences of a society’s “choosing to
trade”?
- “Can a state enhance aggregate welfare by intervening in a trading economy?”
- “What consequences would/should an increase in trade have for the design of state
institutions?
- Pareto: “A protectionist measure provides large benefits to a small number of people, and
causes a very great number of consumers a slight loss”
- Schattschneider (1930): “Benefits are concentrated while costs are distributed”
- ^^these are empirical observations, not general theoretical points
- Two problems of organizing/taking collective political action: “excludability”, and the
cost of organizing a group.
- Stolper-Samuelson or “mobile factors” approach
- Argued that a change (increase) in the price of the product “would more than
proportionally increase the return to the factor that is used intensively in the
production of that good.”
- Thus the real incomes of the owners “of that intensively-used factor will
unambiguously rise, giving them a stake in bringing about that change in prices.”
- If there are only 2 factors of production, the real incomes of owners of the less
used factor will fall.
- “Protection of an industry will raise the price of the good produced by that
industry.”
- The consequence is that “owners of the same factor have the same change to its
returns, regardless of whether it is actually employed in the protected industry or
in the unprotected industry” ← therefore the conflict is between the factors of
production
- Hecksher-Ohlin theorem: states that a country will export the good which
intensively uses whichever factor of production is relatively abundant in that
country.
- ^Combining this prediction with the Stolper-Samuelson theorem yields “the usual
conclusion that, other things being equal, in a relatively capital-abundant country
, labour will favour protection because it cannot be extensively used in exports,
while capital will favour relatively free trade.”
- Assumes that factors are mobile between sectors of the economy
- Ricardo-Viner or “specific factors” model
- Assumes that factors of production are “specific” to a particular industry, and
when that industry declines they “cannot move” to the rising industry.
- The effect on the real income of the mobile factor in the example is ambiguous;
depends on intensities of use and consumption patterns.
Lecture Notes
The Politics of Trade
- From International Relations to International Political Economy
The Logic Behind Trade
Why does trade take place?
- Classical notion of how markets work
Comparative Advantage
Definition: “an actor’s ability to produce a good or service more efficiently than another actor’s
ability to do so”
- At least two actors are required in this concept
- Your ability to create the good depends on your efficiency during each step of the
production process.
- Comparative advantage + the ability to exchange = specialization. This creates more
goods for everyone to consume.
With exchange, the consequence is specialization
A Simple Example of Comparative Advantage
Ricardo: imagine a set of 2 countries, each produces 2 goods.
In isolation, Country A can:
- If country A puts all their resources into the production of either textiles or wine, they
can:
Produce a maximum of either
Output of first good (textiles) 300 units
Output of second good (wine) 150 units
The price of goods in A prior to trade:
300/150 or 2/1 (2 units of textiles = 1 unit of wine)
