The political economy of international trade

TitleThe political economy of international trade
Publication TypeJournal Article
AuthorsAlt, JE, Frieden, JA, Gilligan, MJ, Rodrik, D, Rogowski, R

In this survey, we summarize the main findings of two literatures -- politics of trade policy (endogenous tariff theory) and new economics of institutions. We argue that collective action problems and political institutions interact with economic characteristics, mainly the degree of factor specificity, to affect trade policy coalitions. 

I. Factor Specificity, Interest Groups, and the Politics of International Trade

Factor specificity: The ease with which factors can move among sectors of the economy, or the costliness with which factors move from their current use to an alternative one.

Traditionally, two models have been used to ground the study of trade policy, and we introduce a third:

Heckscher-Ohlin model: factor specificity is low, assumed that all factors can move costlessly among industries. Owners of abundant factors will favor free trade, owners of scarce factors will be protectionist, and empirically we would expect trade policy coalitions to form along factor or class lines.

Ricardo-Viner model: factor specificity is very high, some factors cannot move at all among industries. Trace policy coalitions form along the lines of exporting versus import-competing industries or sectors. This model is often implicit in endogenous tariff literature. 

Increasing Returns to Scale: Neither model above predicts the increasing importance--indeed now the vast majority of world trade--of intruindustry trade between regions of similar factor endowments, that is north-north rather than north-south trade. It does not necessary have stark distribution implications. Because the adjustments called for by intraindustry trade take place within (rather than across) sectors, there is at least the theoretical possibility that everyong can gain from such trade. But they also show how both workers and owners can be threatened by a 'tipping' of regional advantage that moves a whole sector from one location to another. 

Interaction of Political and Economic Factors

Alt and Gilligan (1994) argue that we cannot get from the specification of pregerences offered in these three mdoels directly to coalition formation. Simply having a particular set of preferences will not motivate people to take political action. They go on to argue that two variables - collective action costs and political institutions -- are interactive with factor specificity. The kinds of politics described most often in the endogenous tariff literature: (a) factors must be specific, (b) collective action costs must be high and (c) institutions must be less majoritatrian). If one of these is missing, a different set of coalitions will form. 

In short, to get the two 'ideal' types of trade policy coalitions associated with the HO and RV models, researchers must really make assumptions not only about factor specificity but also about collection action costs and policy-making institutions. Further, because these 3 variables are interactive, altering assumptions about each of them, one by one, yields different outcomes for trade policy coalitions, including no coalitions at all, and some unstable coalitions.  Also, well-established coalitions of groups are likely to survive simply because new ties are costly. 

Treating Specificity as a Matter of Degree

Once the extreme assumptions of both endowments-based mdoels are eased, their predictions about coalitions are no longer clear cut. 

Many remaining Challenges

Each of the models has significant weak spots and many puzzles remain unsolved. 

III. Factor Specificity and 'Gains From Trade' Within Industrial Organization

This section develops the measurements and use of factor specificity as an explanatory variable. A crucial determinant of the incentives for an economic agent to seek trade protection of subsidies for her economic activity is the degree to which the agent's assets as specific to this activity. More cross-fertilization is possible between factor specificity in the trade-theoretical sense and asset-specificity in the new institutional economics sense, in the following areas:

The Organization of Political Activity

Long-lasing or institutionalized political aggregations are more likely where the actors hold political or economic assets specific to their current use. Unskilled laborers will be less likely to join together politically than will skilled workers. This shoud be true for primordial interest groups, parties, or movements.

Public Policy as Contract

Policies that address broad groups vs more limited groups, voting vs. lobbying.

Interdependence of Political Constitutions and Economic Structure

An economy characterized by a high level of asset specificity is likely to be th eproduct of a politicial system that allows firms to protect specific assets by forming durable relationships with political representatives, depending on political institutions.

Preference Intensity and Asset Specificity

One major goal of IPE should be to come up a theoretical and empirical analysis incorporating variation in asset specificity. 


Measurement of asset specificity has to take into account a variety of levels of agreggation and sources of specificity. We can think of 4 types of specificity: site, physical, human, dedicated. There are also 4 approaches to measurement: rate-of-return, lobbying, expert survey, and indirect.

IV: Future Research: The Dependent Variable

Major questions include:

Why do we observe trade restrictions in the first place? The typical strategy in answering this question and building a model of political economy of trade policy is: (a) to lay out the implications of different trade policies on the incomes of sectoral groups or of broad factor owners, and (b) to deduce the policy outcomes from the organizational strength of these actors and the nature of prevailing political institutions.

Where this model falls short is that they demonstrate only how trade policy can play a redistributive role, not why it should do so. We are left with the question: If the beneficiaries of trade restrictions are indeed powerful enough to redistribute income to themselves, then why do they not do it more directly? Given these desires ends (inefficient or not) why do politicians and interest groups choose such inefficient means of achieving them? The question out to be not only why certain groups can obtain privileges from the state but also why these privileges are granted in the form of trade restrictions.

Why do import-competing groups on average seem to win out in net against exporting groups?  Why do we not see more countries in which export (or import) subsidies dominate?