Society and State Centred Approach to Trade

Meeting Four

Society Centred Approach to Trade Policy 1- Trade Policy Preferences 2- Factor income and class conflict3- Sector income and industry conflict 4- Organizing interests 5- Political institutions and supply of the trade

policy State Centred Approach to Trade Policies States and industrial Policy State Strength Industrial Policy in High Tech Industries

What determines the specific trade objectives that governments peruse when bargaining within the WTO or when making unilateral trade decision making?

There are two main approaches to answer to this question

A society Approach to Trade policy A State centred Approach to trade polices

It argues that a government’s trade policy objectives are shaped by politicians responses to interest group’s demands.

This approach is based on Distributional Consequences of Trade

Distributional Consequences of trade create political competition as winners and losers from trade turn to political arena to advance and defend their economic interests. ( Who prefers protectionism and who prefers liberalization?)

We should find sources, content , and organization of social demands .

There are two standard models : Factor Incomes Sector Incomes

Trade polices are driven by competition between factors of production

Labour and capital

Trade will make scarce resources to have less income and abundant resources to have more income .

As a result , scarce resources ask for tariff while abundant resources ask for liberalization

Factor-Price equalization theory

The main assumptions are it is easy to shift factors from sector to sector and there is not distinctions between factors ( all labour are the same) .

The Sector model argues that trade politics are driven by competition between industries . Whenever tariffs are raised or lowered , wages and the return on capital employed in some industries both raise , whereas wages and return to capital employed in some industries both fall.

The sector model divides the society across industry rather than factors as assumptions on factor mobility are different .

Sector model assumes that factors are not easily moved from one industry to another . Instead , factors are tied , or specific , to the sector in which they are currently employed.

When factor are immobile , trade affects the income of all factors employed in a given industry in the same way .

Why ? Because the capital is immobile and as a result, capital used in apparel industry can not be moved to computer industry.

We can say which industries gain and which ones lose for trade . ( Labour and capital which is abundant in the country both win from trade)

As a group such industries are referred to export-oriented industries.

Factor model says that trade pits the labour and capital against each other while sector model says that as a matter of fact , labour and capital in export-oriented industry will pit against labour and capital in import oriented industry

What is the collective action problem ?

It helps us to understand three main characteristics of trade politics :

1- Why producers rather than consumers determine trade policy

2- Trade policies will exhibit bias towards protectionism .

3- Why governments rarely liberalize trade unilaterally

In society centred approach , trade policies are shaped by competition between organized interest groups .

The main goal is redistribution of national income . Winners will gain more and losers will get poorer .

Policy intuitions will shape the interest among competing groups .

Election and Veto voters

Majoritarian vs. Proportional Representation

Majoritarian : Each constituency one MP ( Strongly linked with interests of business groups)

PR : Each Constituency many MPs ( Linked with interests of more than one group)

Election will affect the level of protection against trade ( Countries with PR system have lower tariffs) .

Now we can see how minorities can have more protected interests in Majoritarian systems .

Veto player is a political activist who vote is necessary for approval of a plan .

In USA Each branch of power is veto player

In USA two veto player In Germany multi veto player In England one veto player According to trade policy increasing the

number of veto players will make liberalization more difficult.

From time to time governments make decision regarding trade policy without considering demands of interest groups .

It might even create the aggregate social welfare

The first assumption concerns the impact of protectionism on aggregate social welfare.

Second concerns whether governments can operate independently of interest groups pressures .

These two assumptions say that under special condition , government will intervene in economy with tariffs , production subsidies and other policy instruments in order to increase the aggregate social welfare.

Economics of scale Economics of experience

It is adopted by many late industrialized countries

Strong states : High degree of centralization and authority High degree of coordination among state

agencies Limited number of channels through which

social actors can influence the policy Japan USA Russia

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