Geoffrey HalePolitical Science 3170

September 21, 2010

OutlineTrade politics as the domestic politics of

distributionThe Heckscher-Ohlin ModelThe Stolper-Samuelson Theorem

Real-world applications / refinementsEmbedded liberalism (Ruggie)

The post-war response to trade liberalization. Managing distributive issues in an era of

“liberalized trade”

Trade Policies and Distributive PoliticsTrade policies may increase overall economic

welfare within and between nations, BUTIncreased competition may shift related economic

benefits among different groups of producers, or between one social / income group and another.

Building political consensus in support of trade liberalization requires attention to distributive issues and adjustment costs

Political Economy of International TradeTheoretical ModelsHeckscher-Ohlin Model (1933)

Refinement of Ricardo’s theory of comparative advantage

Predicts patterns of trade, production based on relative “factor endowments” of trading region Comparative advantages seen to result from relative abundance,

costs of key factors of production (e.g. labour, capital – focus on two key factors)

“Countries with access to plenty of capital will tend to export more capital-intensive goods; countries with relative surplus of labour will tend to export more labour-intensive goods.

Assumes easy movement of capital, labour from one industry or economic use to another. Ignores effects of technology.

Does not predict international distribution of gains from trade.

Political Economy of International TradeTheoretical Models IIStolper-Samuelson Theorem (1941)

Predicts that returns for various factors of production (e.g. labour, capital) will decline for factors that are scarce relative to the other.

If capital is relatively plentiful (thus cheap) in country A vs. country B, trade will result in greater returns to capital and lower returns to labour in country A.

Subsequent changes contend that unskilled workers producing traded goods in a high skill country will be worse off as trade increases because unskilled workers are relatively scarce compared to capital .

Assumes prices in similar factors of production will tend to equalize across countries with similar technologies.

Responses to H/O and S/S TheoriesGains from trade may accrue to businesses, consumers

or both. However, they accrue more selectively to industrial workers – usually based on relative abundance of skills.S/S errs in assuming relative ease of mobility of both

capital and workers across economic sectors. Existing investments in production equipment, skills are frequently not (easily) transferable to other uses.

Holders of relatively scarce factors of production tend to oppose trade liberalization. Business associations and workers facing growing

import competition are likely to oppose trade liberalization unless compensated in other areas.

Responses to H/O and S/S Theories IIResult – trade coalitions (pro or anti-liberalization)

are often sector (or sub-sector) specificAvailability, transferability of technology may also

be significant factor in shaping competitiveness.Government policies can also influence availability /

cost of various factors of productionSubsidies / supports for skills acquisition / retrainingSupport for new infrastructure, creation of new

technologiesBUT – potential for policy imitation by other countries,

thus reducing relative benefits of subsidies or policy supports.

Embedded LiberalismSet of policy compromises “embedded” in post Second

World War policies of economic stabilization, liberalization to “cushion” processes of economic adjustment to growing international competition

Encouraged development of strong domestic state capacity through:Expansion of welfare state programsExpansion of universal or broadly available state

services (e.g. education, training)Also involved selective protection, investments in key

industries as part of broader industrial policy.Facilitate unionization to promote sharing of gains from

economic growth.

Challenges of trade liberalization, liberalization to “embedded liberalism”Power of national governments declining

Degree of decline contested – but more power shared across national boundaries, between governments, or with markets

Capital much more mobile than labourGreater ability to take advantage of “globalization”Growing economic inequality larger in U.S. than

in some other countries, including Canada

Challenges of trade liberalization, liberalization to “embedded liberalism”Growing economic insecurity – especially for less

skilled workersSignificantly higher levels of job creation for skilled (PSE

+ skilled trades) than unskilled workers since 1990sHigher levels of long-term unemployment (Europe)Relatively stagnant (or declining) wage levels (U.S.) over

medium-to-long term.

Challenges of trade liberalization, liberalization to “embedded liberalism”Gains from trade shifted to capital, especially

finance capital, away from organized labour.Challenges of regulating global capital marketsRequires international cooperation – but national

positions reflect national conditions

Increasingly difficult to distinguish between domestic, foreign producers

What is an “American” or “Canadian” company? product?

Reinforced by requirements for “national treatment” in international trade rules.

Economic liberalization and embedded liberalism different patterns of adaptationCanada United States Greater fiscal discipline (both

spending, taxes) since mid-1990s.

Greater targeting of social benefits, econ. adjustment to support workforce entry, overcome poverty trap

Substantial investment in education, skills

Immigration policies targeted to people with higher-skill sets

Modest after-tax income gains in 2000-08 economic cycle.

Rapid spending increases (incl. two wars) while reducing taxes.

Targeting, reduction of social benefits in ‘90s replaced by expansion after 2000 without taxes to fund in long-term

Selective investments in education, skills

Breakdown in immigration policies rapid growth in low-skilled labour

Income stagnation, decline in 1999-2008 economic cycle.

Political effectsCanada United States“Permissive consensus”

(Mendelsohn) on trade policy

Export driven economy holds support across governments of all partiesSubject to preservation of

federal transfers to provs.Vulnerability to U.S.

protectionism resulting from economic insecurity

Growing political polariza-tion over economic policies

Intense union opposition to trade liberalization reflected in Democratic Congress, esp. since 2006.

Cdn. interests need to secure domestic interest group partners in U.S. to secure past gains from trade.