The Politics of International Trade
Summary and Keywords
International trade and state efforts to liberalize or restrict trade generate very contentious politics. Trade creates winners and losers at the individual level, firm level, industry level, national level, and even regional level. It also generates conflict among transnational social groups, such as environmental advocacy organizations, human rights organizations, and transnational business alliances. Because of this complexity of the politics of international trade, scholars of international political economy (IPE) can focus on different levels of analysis and a variety of stages of the political decision-making process. Scholars agree that not only societal preferences but collective action problems, domestic institutions, and international factors all affect trade politics and policy outcomes. These aspects of trade politics together form the key influences on trade policy and whether it is liberal or protectionist in nature.
Societal preferences constitute the initial inputs into the trade policy-making process. Understanding how different groups of economic actors within society win or lose from trade liberalization or protection is the first step toward understanding trade politics and trade policy outcomes. Once societal trade preferences are formed, they must be aggregated into cohesive pressure groups or grass-roots movements whose purpose is to influence trade policy. This is easier for some groups of actors to achieve than others. In lobbying government actors on policy, interest groups find that domestic institutions play an important role translating societal inputs into policy outputs. Policy-making institutions vary in the degree to which they are susceptible to special-interest lobbying versus the preferences of broader societal coalitions, and electoral rules and party structures also affect policy outcomes, with certain configurations creating a bias toward more protectionism or liberalization.
In addition to these domestic-level influences on trade policy, IPE scholars have extensively studied the ways that international factors also affect trade policy outcomes such as the extent of liberalization and the content of what is liberalized (e.g., manufactures versus agricultural goods versus services). International factors such as the distribution of power, the character of international institutions and trade agreements (e.g., multilateral versus bilateral), transnational civil society and diffusion processes may be thought of as inputs into the policy-making process as well. Systemic conditions may constrain the types of policies that governments can adopt, or they may open the door to a range of possible policy outcomes that are nevertheless limited by the preferences of domestic societal actors.
Keywords: international political economy, international trade, trade politics, preferential trade agreements, firm heterogeneity, interest group politics, international institutions, protectionism, lobbying
As the nature of international trade has changed, so have the political battles that are fought over trade policy. Developed economies now trade heavily with each other, global value chains link firms and workers around the world, nontariff measures have risen while tariffs have fallen, multilateral trade agreements have faltered as bilateral agreements have gained steam, and developing countries have begun exporting the high value-added manufactured goods that the rich countries once monopolized. With these changes, the winners and losers of trade have also changed, and the beneficiaries of liberalization versus protection are not always what classic trade theories expect. New models of trade politics incorporate the new global trade patterns and the importance of intra-firm and intraindustry trade. Additionally, while trade itself has changed enormously in recent decades, there are also new tools available to researchers studying trade politics. The availability of firm-level lobbying and trade data has allowed economists as well as political scientists to develop and test firm-level theories of trade preferences and political behavior.
This article examines the key questions and themes animating the literature on the political economy of international trade, focusing on recent research on the ways that societal preferences, collective action problems, domestic institutions and international factors affect trade politics and trade policy outcomes. Societal preferences constitute the inputs into the trade policy-making process. Understanding how different groups of economic actors within society win or lose from trade liberalization or protection is the first step toward understanding trade politics and trade policy outcomes. Once societal trade preferences are formed, they must be aggregated into cohesive pressure groups or grass-roots movements whose purpose is to influence trade policy. This is easier for some groups of actors to achieve than others. In lobbying government actors on policy, interest groups find that domestic institutions play an important role translating societal inputs into policy outputs. Policy-making institutions vary in the degree to which they are susceptible to special-interest lobbying versus the preferences of broader societal coalitions, and electoral rules and party structures also affect policy outcomes, with certain configurations creating a bias toward more protectionism or liberalization.
In addition to these domestic-level influences on trade policy, international factors such as the distribution of power among countries, the character of international institutions and trade agreements (e.g., multilateral versus bilateral), transnational civil society and diffusion processes also affect trade policy outcomes such as the extent of liberalization and the content of what is liberalized (e.g., manufactures versus agricultural goods versus services). International factors may be thought of as inputs into the policy-making process as well. Systemic conditions may constrain the types of policies that governments can adopt, or they may open the door to a range of possible policy outcomes that are nevertheless limited by the preferences of domestic societal actors.
The sections that follow discuss some of the key political-economic implications of societal preferences, collective action problems, domestic institutions, and international factors on the politics of international trade.
Societal Trade Preferences
Classic Trade Theory
Despite virtual consensus among economists on the benefits of liberal trade rules, protection has remained the historical norm and efforts to liberalize are typically met with fierce opposition from one segment of society or another. Political scientists expect policy makers in democracies to respond to pressure from societal actors, though societal actors present competing demands. Scholars disagree on the extent to which politicians are responsive to voters versus broad societal coalitions, narrow special-interest groups, industry, labor unions, or consumers. Understanding societal trade preferences is the first step in understanding the politics of trade, and classic trade theory as well as recent contributions to the trade politics literature shed light on the reasons why certain societal actors support free trade while others favor protection.
The canonical contributions to this literature are grounded in classic trade theory and expect countries will trade primarily along inter-industry lines according to their comparative advantage in certain sectors and industries. The Heckscher-Ohlin theorem builds on the Ricardian model and introduces factor endowments as the basis of comparative advantage. Countries export goods that use factors of production in which they are abundantly endowed, and they import goods that use factors of production that they hold in scarce supply. Two theoretical extensions of Heckscher-Ohlin, the Stolper-Samuelson theorem and the Ricardo-Viner theorem, predict that benefits from trade will accrue either to entire classes or specific industries, respectively, depending on how easily factors of production can move across industries.
Scholars such as Rogowski (1989) and Frieden (1992) work within these frameworks, and numerous studies have built on their theoretical and empirical contributions. In his seminal contribution, Rogowski, assuming high factor mobility, draws on the Stolper-Samuelson theorem to argue that owners of the abundant factors in an economy will form a free-trade coalition against owners of scarce factors, who will ally in favor of protection. For example, labor unions will hold different trade preferences than industrialists in countries where labor is scarce and capital is abundant. Conversely, Frieden draws on the Ricardo-Viner theorem to argue that when factors are specific to a particular sector or industry—in other words, when factor mobility is low—sectors that use abundant factors intensively will support free trade, while sectors that use scarce factors will favor protection. In this situation, labor employed in a particular industry is likely to ally with the owners of that industry, because the fate of the workers is tied to the industry’s fate. Alt et al. (1999) support this theory with evidence that firms with greater asset specificity are more likely to lobby for protective subsidies than other firms.
Several subsequent studies sought to develop better measures of factor mobility to better test the predictions of the factor-based and sector-based approaches. The results of these studies largely confirm that Stolper-Samuelson effects tend to prevail when factor mobility is high and Ricardo-Viner effects hold when factors are specific to certain industries (Brawley, 1997; Beaulieu, 2002; Hiscox, 2002; Ladewig, 2006). Still other studies have refined these approaches empirically by developing more sophisticated measures of factor endowments, including additional productive factors (e.g., skilled labor versus unskilled labor in Midford, 1993), using updated data (Jeong, 2009) and/or survey data of individual attitudes (Scheve & Slaughter, 2001; O’Rourke, 2003), while others include additional political variables to better explain puzzling outcomes (Garst, 1998, 1999).
Firm Heterogeneity, New Trade Theory, and New-New Trade Theory
One of the biggest innovations in the study of trade politics in recent years has been the increasing availability of firm-level data. These new microlevel data have allowed researchers to test newer theories that have been developed to explain important shifts in the nature of international trade in the post-war period. While the approaches discussed above certainly explain some of the variation in trade politics and policy across time and across countries, they are ill-equipped to explain the politics of intraindustry trade, which now comprises a significant portion of the trading profiles of today’s advanced economies. The post-war move away from a Heckscher-Ohlin world of endowments-based, interindustry trade toward a world where countries produce highly differentiated versions of similar products, trading these products with each other as consumers demand variety, necessitates firm-level trade data that allow us to examine which firms benefit and lose out from intraindustry trade in similar products. Firm-level data are also necessary for understanding the way that participation in global value chains influences trade preferences.
Even before firm-level data were widely available, many analysts puzzled by the rise of intraindustry trade among the developed economies had begun to question the applicability of classic trade theory to intraindustry trade. These new trade patterns were based in consumer demand for variety as well as the gains to producers from increasing returns to scale (Dixit & Norman, 1980; Helpman, 1981; Krugman, 1981, 1990; Gilligan, 1997a; Ruffin, 1999). These scholars, developing what is known as “new trade theory,” initially theorized that intraindustry trade is more harmonious in nature than endowments-based trade, arguing that intraindustry trade has “neutral consequences for income distribution and the possibility that everyone gains from increased trade through the expanded number of products available” (Alt et al., 1996, p. 694). Similarly, in his pioneering work, Krugman argued that as long as the trading countries are sufficiently similar in endowments, any income distribution effects of intraindustry trade are offset by the gains to firms, workers and consumers as a whole (Krugman, 1981). Both scarce and abundant factors will be better off due to the gains from a wider variety of goods.
Yet the availability of firm-level data makes it clear that there are indeed losers from intraindustry trade and that those losers are individual firms. Scholars working in the firm heterogeneity and “new new trade theory” literatures argue that while trade liberalization does not reallocate resources away from an entire industry, it does reallocate resources away from less productive firms to more productive firms within a given industry (Melitz, 2003; Trefler, 2004; Bernard et al., 2007). The political implications of this are clear. Firms and workers in industries where there is intraindustry trade, or where some firms have integrated into global value chains will be affected by trade in different ways: large, productive, exporting and importing firms prefer trade liberalization, while smaller domestic-oriented firms prefer protection. This firm heterogeneity in exporting status means that firms within the same industry are unlikely to gain from trade in the same way; thus, industries are unlikely to hold unified positions on trade policy. Supporting this thesis empirically, Madeira (2016) shows that in industries with higher levels of intraindustry trade, firms become more active in lobbying over trade policy while industry associations become relatively less active.
Recent studies in the firm heterogeneity literature demonstrate the ways that firm-level characteristics add to an understanding of trade politics. In terms of preferences, Osgood et al. (2017) and Plouffe (2017) show that exporting firms are more likely to prefer trade liberalization than nonexporting firms, while Osgood (2016) argues that the most productive firms may actually oppose increased liberalization of a partially open economy, as they are likely to be already trading and further liberalization will allow their slightly less competitive competitors to reap the gains of trade. In terms of lobbying, Bombardini (2008) finds that large firms are more likely to lobby than small firms (and they tend to lobby for protection). Kim (2017) and Plouffe (2014) observe that only highly productive firms are likely to lobby for trade liberalization, and Jensen et al. (2015) state that U.S. firms engaged in foreign direct investment are less likely to file antidumping complaints against the countries where they have invested.
Individual Trade Preferences
Analyses of individual trade preferences draw on the economic models discussed above, assuming that individuals will adopt trade preferences based on the welfare consequences of trade. These preferences are assumed to be related to employment, aligning with the interests of a person’s class or industry (Scheve & Slaughter, 2001; O’Rourke, 2003; Mayda & Rodrik, 2005). Owen and Johnston (2017) observe that individual trade preferences depend on the offshore-ability of a person’s occupation. Yet other scholars offer evidence that individual trade preferences may be shaped by nonmaterial factors such as socialization or sociotropic sentiment. Hainmueller and Hiscox (2006) state that individuals with a college-level education are far more likely to support trade liberalization than individuals with less education (or other types of education). They suggest that support for trade is linked to exposure to economic ideas rather than material concerns based on a person’s employment. Mansfield and Mutz (2009) find that individual trade preferences in the United States reflect concerns about the effect of trade on the country as a whole, as well as ethnocentric attitudes. Others find that trade preferences are conditioned by an individual’s level of social trust (Kaltenthaler & Miller, 2013), cosmopolitanism (Kaltenthaler, Gelleny, & Ceccoli, 2004), isolationist and nationalistic attitudes (Mansfield & Mutz, 2013), and gender (Mansfield, Mutz, & Silver, 2015).
In sum, the firm heterogeneity literature’s focus on exporter lobbying for openness and intraindustry disagreement on trade preferences has transformed standard trade theories. The traditional class-based or industry-based coalitions in American trade politics may be replaced by cleavages and coalitions based on firm size. Large firms support openness and possess the political and financial resources to engage in protrade lobbying, while smaller firms support trade protection but are far less likely to mobilize politically. Regarding labor, if the largest, most productive firms are also the most capital-intensive, employing fewer workers relative to smaller firms that are driven out of business as import competition increases, labor is likely to find itself on the losing end of trade liberalization. Indeed, the widespread automation in the United States that has displaced thousands of workers has only made the leading firms more competitive in global markets. Future work on trade preferences should explicitly model the new cleavages in trade politics in developed economies that pit free-trading large firms on one side of the policy debate against protectionist organized labor and small firms. Researchers should explore whether large firms are forming cross-sectoral coalitions with each other or whether they prefer to lobby alone. Similarly, does labor ally with small firms or do small firms drop out of trade lobbying entirely, their voices drowned out by their more powerful, resourced competitors?
Collective Action Problems
Firms and Industries
Demand-side models of trade politics must also consider the fact that lobbying is costly, and societal groups such as industries and consumers may face collective action problems in their attempts to organize politically. While the demand-side approaches discussed above are useful to analysts seeking to deduce societal trade preferences, collective action problems must be considered when analyzing the next step of the political process: the aggregation of societal interests into pressure groups or grass-roots movements to influence policy.
Pareto phrased a central collective action problem in trade politics quite succinctly: “A protectionist measure provides large benefits to a small number of people, and causes a very great number of consumers a slight loss. This circumstance makes it easier to put a protectionist measure in place” (Pareto, 1927, p. 379). This insight about group size was developed further by Olson (1965), who argued that political action is essentially a public good in that it benefits society as a whole and, as such, is plagued by free riding. Smaller groups are more successful at incentivizing their members to contribute to political action (though this does not mean they will necessarily win political battles) through monitoring member involvement and providing selective incentives. The implication of this for trade policy is that narrow, industry-based groups with fewer member firms are more likely to form and mobilize than broad class coalitions, ceteris paribus. Lobbying over trade will be less costly for narrow industry groups than for national coalitions of consumers or class-based actors.
Insights about group size can help make sense of variation in the extent to which industries engage in collective political action. An important recent development in trade politics in developed economies is the rise of lobbying by individual firms who act alone rather than (or in addition to) lobbying as part of an association or other industry group. In general, larger firms are more likely to lobby individually than smaller firms because lobbying is costly and larger firms are more likely to have resources available for political activity (Hansen & Mitchell, 2000; Drope & Hansen, 2006; Bombardini, 2008; Bernhagen & Mitchell, 2009). Smaller firms are more likely to channel their political activity through associations, pooling their resources with other firms in their industry and delegating responsibility to the association (Kerr et al., 2013). Yet collective action theory suggests that industry size may play a role in whether industry associations are politically active or not: less concentrated industries characterized by a large number of firms should find it more difficult to engage in collective action. Many studies have investigated this relationship. As collective action theory would expect, some studies find that firms in concentrated industries often lobby through coalitions, because industries with fewer firms face lower collective action costs and are most effective at mobilizing member firms to take joint and sustained political action (Drope & Hansen, 2009; De Bièvre & Eckhardt, 2011). Other studies find the opposite, however, (Bernhagen & Mitchell, 2009; Bombardini & Trebbi, 2012), and in general, results of studies attempting to link industry concentration with mode of lobbying (firm-based or industry-based) are quite mixed. This is likely because though concentrated industries with fewer firms face fewer collective action problems and may be more likely to engage in political action than large industries, these industries may also be dominated by large firms that are able to shoulder the costs of lobbying alone. The firm heterogeneity literature expects that the largest, industry-leading firms have different trade preferences than smaller firms that stand to lose from trade liberalization, undermining collective action. A promising line of future research is to investigate the influence of sectoral organizations, who have traditionally wielded great influence among trade policy makers, as globalization reallocates resources towards large, multinationalized firms at the expense of smaller, domestic-oriented firms within the same industry.
A second key insight from collective action theory concerns the uneven distribution of costs and benefits of public policies. Schattschneider’s famous analysis of the passage of the Smoot-Hawley tariff was based on the insight that with trade protection, the “benefits are concentrated while costs are distributed” (Schattschneider, 1935, p. 128). As Olson argued, members of groups that expect to enjoy concentrated benefits from a policy have more incentives to invest in political action than members of groups that expect to suffer only diffuse costs from the policy. The endogenous tariff literature draws heavily on this insight as it argues that trade policy tends to be suboptimal and biased toward protection because small producer groups seeking protection can mobilize more easily than other groups to influence policy (Mayer, 1984; Magee, Brock, & Young, 1989). Rent-seeking politicians respond to these groups, making “protection for sale” (Grossman & Helpman, 1994). The central assumption made by these studies, however, that lobbying actors tend to be protectionist, has been challenged by the recent research showing that large firms today lobby increasingly for liberalization rather than protection, even in comparative disadvantage industries (Osgood, 2017). When trade liberalization only benefits the leading exporting firms in an industry while harming less productive firms in the same industry, trade openness becomes a concentrated, rather than a diffuse benefit, making exporter lobbying for openness more likely. This insight highlights the need for the development of new theories that consider how collective action by industry groups is not only complicated by industry size or concentration but by the existence of competing trade preferences within the industry.
The collective action problems facing diffuse groups is one reason that individuals (voters) are not central players in many studies of trade policy. Voters are not expected to exert significant pressure on policy makers over trade, nor hold them accountable for policy choices. A notable exception is Verdier (1994), who argues that the key to understanding trade policy outcomes, as well as the nature of trade politics, is the level of trade salience among voters. When trade is salient, Verdier argues that office-seeking politicians are constrained by voter preferences and will enact policies that are broadly in line with what major groups of voters (workers, farmers) demand. Only when voter salience is low will individual sectors, industries or firms wield the kind of power expected by much of the trade politics literature. Other voter-driven studies link legislator positions on trade policy with constituent interests such as district unemployment rates, import-competing industries in the district, union contributions and campaign contributions, although all these studies also find that party affiliation has an independent effect on legislator votes as well (Coughlin, 1985; Baldwin, 1985; Tosini & Tower, 1987). Guisinger (2009) critiques voter-driven models based on survey responses of more than 36,000 voters in 2006, who neither knew trade issues at stake, knew their policy-makers’ positions on recent trade votes, nor planned to change their propensity to vote for the incumbent in the next election based on trade stances. This analysis is more in line with the general claim that because trade’s benefits or damages are diffuse, voters are unlikely to strongly pressure policy makers one way or another. Trade policies do become salient, however, when voters expect the trade policy to have significant welfare effects (Taylor, 2015).
To sum up the importance of collective action insights to the political economy of trade, the greater ability of small producer groups to overcome free rider problems and the concentrated benefits they expect to receive make them more likely to undertake costly political action than broad coalitions of consumers. Importantly, these collective action costs exist independently of political institutions, although they can be exacerbated or minimized by certain institutional or structural configurations.
The so-called supply side of trade policy also has an important effect on policy outcomes. Trade policy may vary cross-nationally, partially because of different domestic political, electoral and policy-making institutional configurations, which affect the costs of political action and the likelihood of success. Political institutions also vary over time within a given country, allowing analysts to further isolate the ways that institutions affect policy-making outcomes. Institutional analyses problematize the supply side and theorize that institutions incentivize as well as discourage political action by different types of interest groups. Similarly, institutions create incentives and disincentives for certain types of policy responses by elected and nonelected officials. Institutions also reflect deeply entrenched ideas about appropriate policies and policy-making procedures. The institutionalist approaches discussed in this section evaluate the ways that different institutional settings intermediate between societal demands and policy outcomes. These approaches also assume political and ideational rationales for adopting certain trade policies, alongside (or instead of) an economic rationale.
First, and perhaps most broadly, regime type is likely to play a role in trade policy outcomes. Many scholars have explored the effect of regime type on economic openness, but the precise nature of the relationship remains unclear. Rodrik (1994) argues that any dramatic change in regime type is likely to lead to major changes in trade policy, others contend that differences within regime type account for more of the variation in trade policy than regime type does (Haggard & Kaufmann, 1995), and Verdier (1998) argues that the spread of democracy globally is only conducive to trade liberalization when trade is intraindustry in nature. According to Geddes, the conventional wisdom from early research on economic liberalization held that it was more difficult for democracies to liberalize trade than autocracies, especially fragile, young democracies (Geddes, 1994). More recently, however, there is a strong consensus that democracies have more open trade rules than nondemocracies (Milner & Mukherjee, 2009; Aidt & Gassebner, 2010) and are more likely to enter preferential trade agreements (Mansfield & Milner, 2010). In democracies, policy makers are more accountable to voters and may enter liberalizing trade agreements to signal to voters that they are not engaging in rent-seeking behavior (Mansfield et al., 2002). Democratization also increases the size of the selectorate, which means that policy makers must now seek support from poorer, working-class citizens who benefit from trade liberalization (Milner & Kubota, 2005). Wintrobe (1998) argues that protection is a form of rent-seeking and autocrats are more motivated by rent-seeking than policy makers in democracies. Even if policy makers in democracies must signal support for liberal trade policies by lowering tariffs, they may increase nontariff barriers at the same time, a less visible form of rent-seeking (Kono, 2006).
Kono (2015) explores the literature on trade policies in autocracies, focusing especially on the question of why some autocracies are more economically open than others. The literature suggests that autocracies typically adopt more restrictive trade policies than democracies, but Kono asserts that trade policy variation among autocracies is poorly understood. Some studies in the early 21st century have emphasized the role of constituency size in subtypes of autocracies to explain variation in trade openness. More institutionalized autocracies like multiparty and single-party regimes have greater selectorates and, thus, adopt more open trade policies than more “personalistic” dictatorships such as monarchies and military juntas (Milner & Kubota, 2005; Hankla & Kuthy, 2013). Hankla and Kuthy also find that more stable autocracies have longer time horizons and tend to adopt more open trade policies conducive to long-term economic growth. Wu (2015) draws on economic structure and the Heckscher-Ohlin model to argue that dictators in labor-abundant countries are more likely to adopt open trade rules, as trade liberalization in labor-abundant countries benefits low-skilled workers. Dictators calculate that trade liberalization will reduce inequality and neutralize demands for democratization.
While there is a rich literature exploring the way that regime type affects compliance with international agreements in general (see Simmons, 1998, for a review), little work has been done assessing how regime type affects compliance with international trade agreements. As preferential trade agreements proliferate around the globe at a rapid pace, this is a research area with great potential. Davis (2012) makes a notable contribution, finding that democracies are more likely to use WTO adjudication procedures to enforce trade rules and they are also more likely than nondemocracies to be defendants in WTO cases.
Access to Policy Makers
A second way that institutions affect trade policy outcomes is through incentivizing political action by certain groups and discouraging political action by other groups. One way this happens is through ease of access to policy makers. When a greater number of policy makers are involved in trade policy, there are more access points to the policy-making process. This makes lobbying less costly and more groups can participate, especially groups seeking protection. Thus, as the number of access points in the policy-making process increases, trade policy tends to be more protectionist (Ehrlich, 2007). Yet others argue that when there are more “veto points” in the policy-making process, meaning more policy makers who can veto a proposed policy, trade policy changes less in response to societal pressure (O’Reilly, 2005) and tends to be more liberal (Henisz & Mansfield, 2006). At the same time, Mansfield et al. (2007) have found that states with a higher number of veto players involved in the policy-making process are less likely to sign preferential trading agreements as it is difficult to settle on an agreement that satisfies each veto player. Another way that institutions selectively incentivize participation lies in the privilege that they give to broad coalitions versus narrow interest groups (Alt & Gilligan, 1994). In the European Union, for example, the EU’s mandate to represent pan-European interests means that interest groups with broad Europe-wide representation have more influence in Brussels (Bouwen, 2002), and these groups tend to adopt more free-trade policy positions (Woll, 2006). Electoral institutions tend to privilege either narrow or broad interest groups, an issue discussed in depth below.
Third, the location of policy-making authority also affects policy outcomes because different policy makers have different incentive structures for responding to societal demands and providing protection or openness. The presidential liberalism thesis holds that U.S. presidents are more free trading than members of the U.S. Congress because presidents have a larger constituency size (i.e., the entire nation), so they are more likely to support free-trade policies that are good for the nation as a whole. As constituency size decreases, policy makers are more susceptible to protectionist demands from constituents. Thus, delegation of trade policy authority to presidents will result in freer trade policy (Schattschneider, 1935; Katzenstein, 1977; Baldwin, 1985; Lohmann & O’Halloran, 1994; Bailey et al., 1997), and similar arguments have been made about executive authority in developing countries (Haggard & Kaufmann, 1995). A related logic may operate in the European Union, where EU-level officials represent the Union as a whole and are thus more likely to support free-trade policies (Meunier, 2005; Woll, 2009). Others critique the presidential liberalism thesis, providing evidence that it is ahistorical (Hiscox, 1999), confined only to the Democratic Party (Sherman, 2002), or unsupported empirically once other variables are controlled (Ehrlich, 2009). Still other scholars argue that when elected officials have a role in trade policy making, they are likely to grant protection in exchange for campaign contributions, while unelected officials are more insulated from protectionist demands (Grossman & Helpman, 1994).
Fourth, a large literature investigates the ways that electoral institutions affect trade policy outcomes. Electoral systems supportive of narrow interests are frequently associated with higher levels of trade protection, often because of smaller district sizes (Nielson, 2003; Hankla, 2006; Park & Jensen, 2007; Kono, 2009). Majoritarian electoral systems in particular tend to be more protectionist than proportional representation systems (Rogowski, 1987; Grossman & Helpman, 2005; Evans, 2009; Kono, 2009; Ardelean & Evans, 2013; Hatfield & Hauk, 2014), though some studies find the opposite relationship (Mansfield & Busch, 1995; Rogowski & Kayser, 2002), and others find that the effect is conditional upon other factors (McGillivray, 2004; Rickard, 2012). Rickard (2015) contends that part of the lack of consensus on this important question may result from scholars’ use of different types of trade barriers in their analyses, and it is likely that electoral systems have different effects on tariff versus nontariff barriers. Evidence also suggests that governments elected by majoritarian systems are more likely to violate GATT/WTO rules than those elected by proportional representation (Rickard, 2010) and states with PR systems are less likely to be challenged as a defendant, though Davis (2012) notes that this does not necessarily mean they violate trade agreements less frequently.
Finally, party institutions can affect the direction of trade policy. Party discipline influences trade protection because it affects legislator decisions about where and when it is rational to provide protection (McGillivray, 2004). Countries with strong political parties and high party discipline tend to have freer trade policies as party members are better insulated from protectionist demands (Hankla, 2006). Partisanship also matters (Epstein & O’Halloran, 1996; Weller, 2009), and in developed economies leftist parties typically support protection more than rightist parties (Milner & Judkins, 2004). Leftist parties may also be more likely to enforce trade rules through WTO adjudication (Davis, 2012). Finally, party competition has been shown to affect trade policy outcomes. Trade policy becomes more open or restrictive depending on how the mainstream parties respond strategically to niche parties (Camyar, 2012).
Ideas and Institutions
Judith Goldstein’s work has been seminal in advancing the argument that ideas can be independent factors affecting trade policy outcomes. She argues that U.S. trade policy remained liberal throughout the 20th century, despite resistance from industry groups, because of policy-makers’ commitments to deeply entrenched ideas about the value of open trade (Goldstein, 1986). These ideas were codified in the form of trade policy-making institutions, including certain protectionist policy tools. Changes in rules and regulations governing protectionist assistance to firms and industries reflect changing ideas about what types of claims for protection are legitimate (Goldstein, 1988). Goldstein argues that U.S. policy-makers’ commitments to liberal ideas throughout the 20th century meant that Congress preferred to grant substantial decision-making authority over trade policy to the president. Members of Congress, susceptible to interest group pressure, delegated the president wide latitude in trade policy-making to defend the long-held U.S. commitment to liberal ideas about trade. Haggard (1988) also argues that Congress’s decision to pass the Reciprocal Trade Agreements Act in 1934, which removed much of Congress’s control over trade policy, was an effort to reform the policy-making process in a way that would strengthen executive authority over trade policy in order to insulate it from protectionist pressures.
A significant issue for institutionalist approaches to trade policy is the fact that so much of this work relies on the assumption that interest group demands about trade policy are primarily protectionist. Greater attention to the role of protrade exporter lobbying may resolve some of the open questions where consensus is lacking, such as the relationship between electoral systems and trade policy outcomes. The most promising new work finds that electoral institutions have an indeterminate effect on average tariff levels, as institutions favoring narrow interest groups privilege free trading as well as protectionist interest groups. Rather, electoral institutions may influence tariffs at the product level, with greater access for interest groups in plurality countries resulting in more dispersed tariff rates across products (Betz, 2017). The role of reciprocity in incentivizing exporter lobbying for openness brings us to the importance of international factors in the political economy of trade.
A complete account of the political economy of international trade cannot ignore the role of international factors. Several forces at the international level have an influence on politics and policy, from power-based factors to institutions to the role of transnational actors and ideas. When making policy, states must not only account for domestic politics and economic efficiency. When negotiating trade agreements or enforcing trade rules, policy makers confront the limitations of their power and the constraints imposed by power realities, institutional structures and rules, and the effect of nonmaterial factors such as transnational social movements and socialization processes. These same factors may also provide states with opportunities that help them put their preferred policies in place over the objections of domestic pressure groups.
Grounded in realist theories of international politics, a prominent strand of the IPE literature examines the role of the distribution of power in the international system on trade policy outcomes. A classic contribution is hegemonic stability theory, first developed in the 1970s, which posits that hegemony is a necessary condition for an open global economy (Kindleberger, 1974; Gilpin, 1975; Krasner, 1976). Hegemons benefit from openness because of the strength and size of their economies, and they have the material capabilities to construct and enforce an open trade regime. During periods of hegemonic decline, countries will return to trade-restrictive policies in the absence of hegemonic leadership. In his influential critique and modification of hegemonic stability theory, Keohane (1984) argued that the institutions that hegemons construct to facilitate open trade will outlast the hegemons themselves, allowing liberal trade rules to persist and explaining why the global free-trade regime has not collapsed during the current period of declining U.S. hegemony. Gowa (1995) argues that bipolarity is also conducive of international trade, as states form rival military alliances and trade flourishes within, though not across, these political alliances. More recently, Gowa and Hicks (2013) show that trade within each rival trade bloc tends to benefit the great-power hub within that bloc, while trade among smaller states in the bloc does not increase.
The power imbalance between developed and developing countries also affects the nature of trade liberalization and the structure of the global free trade regime. The WTO has been much more successful liberalizing trade in manufactured goods than it has been in agricultural products. While increased market access for manufactured goods benefits the developed economies who wield power in WTO negotiations, increased market access for agricultural products would benefit less developed countries while harming key farming interests in developed ones (Gallagher, 2007). Power imbalances across the North and South likely account for the relative ease with which industrial tariffs have fallen relative to barriers to trade in agricultural goods. Research also shows that developing countries are less likely to initiate trade disputes through the WTO (Davis & Bermeo, 2009).
The proliferation of bilateral and interregional preferential trade agreements (PTAs) may also be a response to geopolitical considerations and power asymmetries. Manger and Shadlen (2014) argue that developing countries have recently been eager to sign PTAs with the United States, European Union and other developed economies because the market access they gain through these PTAs is nonremovable, even though it comes with deep concessions on the part of less developed countries (LDCs). This is preferable, according to Manger and Shadlen, to the Generalized System of Preferences, which gives LDCs preferential access to developed country markets but can be removed at any time, creating a “political trade dependence.” Rather than reducing power asymmetries, however, PTAs tend to reproduce or exacerbate imbalanced power relations, as the partner with more leverage can exact greater concessions than is often possible in multilateral negotiations (Phillips, 2005). New directions in EU trade policy also seem motivated by power considerations. The EU’s recent focus on interregional trade agreements with Asian countries is likely a response to Asia’s growing power as well as an effort to balance U.S. power (Aggarwal & Fogarty, 2004). Others argue that the EU policy positions on China’s and Russia’s accessions to the WTO as well as EU trade agreements with African, Caribbean, and Pacific countries were motivated by neomercantilism and power politics (Hurt, 2003; Farrell, 2005; Zimmermann, 2007).
Institutionalists posit that trade liberalization and the maintenance of open trade rules are a result not of permissive power structures or power politics but of the transformative role of international institutions. The work of Keohane and others following him emphasizes the important functions that international institutions perform on behalf of states, therefore reducing the transaction costs of cooperation. International institutions such as the General Agreement on Tariffs and Trade (GATT) and the WTO provide information to states about other states’ trade policies, provide fora and frameworks in which states can negotiate agreements, enforce, and monitor compliance with trade rules, and resolve disputes. The argument that institutionalists make is that delegating these costly tasks allows states to achieve greater liberalization than they otherwise could. Recent work using a large dataset comparing trade volumes of GATT participants and nonparticipants in the post-war period finds that GATT substantially increased the trade volume of its participants, compared to nonparticipants (Goldstein et al., 2007).
International institutions can help states achieve progress in liberalization that states could not achieve alone. One way they do this is by enhancing the “shadow of the future,” providing a forum in which states are likely to meet repeatedly over time, decreasing the possibility that they will defect from agreements and cheat each other (Axelrod & Keohane, 1985). Second, institutions can serve as “focal points” around which actors’ expectations converge, simplifying negotiations that can at first seem overwhelmingly complex. Garrett and Weingast (1993) argue that the institutions of the European Community provided the focal points necessary to guide European countries through the creation of the single market. Institutions also create issue linkages across a range of issues that states care about (Davis, 2003; Martin, 1992). By linking seemingly unrelated issues into package deals, institutions can make liberalization of one issue contingent on liberalization of another issue, ultimately achieving liberalization of multiple issues. Additionally, institutions can induce states to maintain trade openness even during times of widespread economic crisis when demands for protection are strong. By disseminating information, providing policy advice and monitoring member compliance, institutions assist states in maintaining trade openness even in hard economic times (Davis & Pelc, 2017). Trade agreements also help to increase domestic support for trade liberalization and reduce the strength of protectionist interest groups. These benefits accrue because trade agreements are made according to principles of reciprocity, requiring concessions from both partners. When trade policy is made in the context of bilateral or multilateral free trade agreements, exporting firms will support tariff reductions as a means of increasing their access to foreign markets (Bailey et al., 1997; Gilligan, 1997b; Osgood, 2016, 2017). Evidence also suggests that individuals care about their own country being branded a violator of trade rules, and this may motivate states to comply with agreements (Pelc, 2013).
International institutions also help states liberalize by providing political cover for politicians facing protectionist pressures at home. Vreeland (2003) argues that governments sometimes use the International Monetary Fund (IMF) as a scapegoat to push through unpopular economic reforms. Reform-minded governments in Uruguay and Tanzania, for example, pushed significant reform measures through the legislature using IMF agreements as leverage. These measures had proven politically impossible before concluding the agreement with the IMF. National politicians in EU member states also frequently blame the EU when adopting unpopular political and economic reforms. By allowing elected officials to claim to voting publics and special interest groups that their hands are tied when it comes to contentious liberalization policies, international institutions can facilitate more liberalization than would otherwise have been politically possible. Davis (2012) argues that policy makers may prefer to file a WTO complaint than negotiate a compromise in a dispute, because domestic interest groups understand that WTO rulings are legally binding while they may be more likely to punish elected officials for striking compromises that they feel are unacceptable.
While realist approaches emphasize the way that institutions reproduce and even exacerbate power asymmetries, some institutionalists argue that the rules-based trade regime blunts the force of power politics, constraining powerful states and empowering weaker ones. The international trade regime is more legalized than other areas of international cooperation, and this legalization confers legitimacy on multilateral dispute resolution mechanisms, making unilateral trade threats less successful and less frequent, even from the most powerful states (Pelc, 2010). Though developing countries are less likely to file complaints at the WTO than developed countries, when they do file complaints they achieve better outcomes than peer countries that chose to negotiate disputes outside WTO channels (Davis, 2012). This raises a potentially problematic aspect of bilateral PTAs, because Davis also finds that states that sign bilateral PTAs are much less likely to resolve disputes through WTO adjudication. An implication of these findings that future researchers should explore is that PTAs may reproduce the power imbalances that multilateral agreements can sometimes ameliorate.
Finally, many other scholars focus on the ways that nonmaterial international factors shape international trade politics and policy. First, states and international institutions are not the only actors at the international level. Nontraditional stakeholders are also playing a greater role in trade policy negotiations, and this has led to the increasing complexity of trade agreements. Omnibus trade and investment agreements, such as the ill-fated Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership, as well as successful recent agreements such as the EU-Canada Comprehensive Economic and Trade Agreement, face substantial lobbying by environmental protection organizations, consumer advocacy groups, firms concerned with intellectual property rights, human rights groups, and labor rights groups. These and many other PTAs now include nontrade issue clauses establishing standards in labor and political rights as well as environmental protection. Transnational interest groups have emerged as a vocal force in trade policy making, yet the long-held scholarly consensus has been that these groups have had little to no influence on the multilateral trade regime (De Bièvre, 2014). Nontrade issue clauses included in PTAs are a result of strategic or institutional factors rather than moral considerations or successful lobbying by nongovernmental organizations (Hafner-Burton, 2009; Postnikov, 2014). Lechner (2016) finds that nontrade-related clauses are a result of strong lobbying primarily by labor unions and import-competing firms that are concerned with import pressure and lower wage levels in trade partner countries.
Young (2016) discusses the importance of transnational alliances in the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the European Union and the United States. He argues that the deep links between EU and U.S. firms in the form of foreign direct investment in each other’s markets, the high salience of TTIP and the public health and environmental regulations at stake in the negotiations mobilized transnational alliances among both business actors and public interest groups. Civil society opposition to regulatory changes proposed in the TTIP did constrain the European Commission’s negotiating position in the ill-fated talks. Young’s emphasis on the transnational nature of interest group lobbying over TTIP has potential for future research. Today’s PTAs among developed economies are concerned largely with investment protections that benefit firms from both trading partners. Thus, as Young notes, the cleavages that emerge in “deep PTAs” concerned with investment issues may be more transnational than national, pitting transnational business alliances against transnational public interest groups.
A second international factor that affects the speed and shape of trade liberalization is policy diffusion. Focusing on policy diffusion is an attempt to answer how global economic integration has unfolded, rather than an attempt to answer why, which has been the domain of the power-based and institutionalist approaches discussed above. Diffusion explains the temporal and spatial clustering of the adoption of liberal economic policies. Scholars find that governments tend to liberalize when their economic competitors do, as openness in competitor markets changes the costs and benefits of continued protection (Simmons & Elkins, 2004; Elkins et al., 2006). While this reveals state concerns with material payoffs, Simmons and Elkins also find that states seek out information about liberalization from sociocultural peers, and liberalization tends to diffuse among culturally similar countries. Thus, cultural identity may play a role in how states learn about new policies and interpret their economic interests.
Finally, ideas shape trade politics and policy at the international level. Scholars such as Goldstein and Keohane take a nuanced and sophisticated view of the relationship between ideas and interests as these pertain to IPE. The goal of the best analyses incorporating the role of ideas is not to determine whether ideas or interests matter more, but to understand how ideas held by key stakeholders in foreign policy debates can shape the policy agenda and limit the range of policy options that are considered viable, ethical or beneficial (Goldstein & Keohane, 1993). For example, ideas about the ethics of child labor have changed such that legal prohibitions on child labor are now standard in trade agreements. Constructivist IPE scholars see the dramatic moves toward liberalization in the 1980s as the result of changing ideas about economic policy and appropriate management of the global economy. Ford (2002) argues that the rapid liberalization of the 1980s was a result of a dramatic change in identity among developing states, from protectionists to free traders, after they were influenced by new research in the 1970s about the role of trade in economic development. Abdelal (2007) argues that capital mobility became established within Europe as part of the EU’s liberal commitment to creating the single market. Once capital mobility had taken root as an EU norm, Europeans pushed for the global spread of what they believed was an appropriate and legitimate policy for all liberal states. Learning from their experience establishing a rules-based EU single market, the EU was also instrumental in the creation of rules-based global economic governance. In sum, ideational approaches posit that changes in the global political economy can be linked to changes in ideas held by policy makers about the types of policies that are beneficial, realistic, or appropriate.
This article has discussed some of the central debates and questions motivating scholars of the political economy of international trade. Focusing on key stages in the policy-making process from preference formation to interest aggregation to the role of political institutions, and discussing both domestic and international-level factors, the complexity and multidimensionality of trade policy becomes abundantly clear.
Despite this complexity, some threads emerge linking IPE scholarship on the international political economy regarding different policy-making stages and different levels of analysis, with the potential to integrate these different subgroups of the literature and give rise to more empirically powerful analyses of the political economy of trade. First, the rise in firm-based protrade lobbying, in the context of reciprocity, has the potential to transform the general wisdom regarding trade politics, including trade preferences, interest group politics, or international institutions. The literature on the demand-side of trade politics has made more progress incorporating heterogeneous firms into their models of trade preferences and interest groups politics. The literature on domestic and international institutions can resolve some of their open questions about the types of institutions that are more conducive to liberalization, for example, by more rigorously addressing the fact that policy makers can be captured by free-traders as well as protectionists. Second, the redrawing of cleavages and coalitions along lines of firm size has the potential to mobilize powerful new transnational business alliances consisting of industry-leading firms that benefit from greater access to each other’s markets. This trend has important implications for the shape of future preferential trade agreements among developed as well as developing countries, and for the contours of the political battles that are fought over trade policy.
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