Society and State Centred Approach to Trade
Meeting Four
Society Centred Approach to Trade Policy
1- Trade Policy Preferences
2- Factor income and class conflict
3- 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
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What determines the specific trade objectives
that governments peruse when bargaining
within the WTO or when making unilateral
trade decision making?
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There are two main approaches to answer to
this question
A society Approach to Trade policy
A State centred Approach to trade polices
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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?)
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We should find sources, content , and
organization of social demands .
There are two standard models :
Factor Incomes
Sector Incomes
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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
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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) .
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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 .
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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.
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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.
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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
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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
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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 .
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Policy intuitions will shape the interest among
competing groups .
Election and Veto voters
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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)
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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 .
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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.
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From time to time governments make
decision regarding trade policy without
considering demands of interest groups .
It might even create the aggregate social
welfare
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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.
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Economics of scale
Economics of experience
It is adopted by many late industrialized
countries
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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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Thank you