Policymakers` Horizon and Trade Reforms

Policymakers’ Horizon and Trade Reforms
Paola Conconi
Université Libre de Bruxelles (ECARES) and CEPR
Giovanni Facchini
Erasmus University, Università di Milano, LdA, CEPR and CES-Ifo
Maurizio Zanardi
Université Libre de Bruxelles (ECARES)
Introduction
•  “In no other area of economics displays such a gap between what
policymakers practice and what economists preach as does
international trade.” (Rodrik, 1995)
•  Why do policymakers often fail to support trade liberalization,
favoring instead protectionist policies?
•  This papers shows that electoral incentives deter policymakers
from supporting trade liberalization reforms.
Introduction
•  Common view in the literature on political economy of trade:
-  For most voters, trade is not a salient policy issue.
-  Trade policy is determined outside the voting framework, through the
interaction between incumbent politicians and deep-pocketed lobbies.
•  Our paper:
-  Trade is salient issue to some voters, who strongly oppose liberalization.
-  Electoral incentives lead politicians to pander toward these voters.
•  In last presidential campaign, Obama stated “NAFTA has been devastating on
the community (…) I don’t think NAFTA has been good for America, I never
have”. He later admitted that his rhetoric had been “overheated and amplified
(…) Politicians are always guilty of that, and I don’t exempt myself.”
•  In last presidential campaign, Obama stated “NAFTA has been devastating on the
community (…) I don’t think NAFTA has been good for America, I never have”.
•  He later admitted that his rhetoric had been “overheated and amplified (…)
Politicians are always guilty of that, and I don’t exempt myself.”
•  On September 17, 2012, less than two months before facing re-election, and the
same he was campaigning in the crucial swing state of Ohio, President Obama
lodged a complaint against China at the World Trade Organization, alleging that it
unfairly subsidizes car-part exports.
•  “There was nothing subtle about it – but then subtlety does not win many
elections” (The Economist, “Chasing the anti-China vote: a suspiciously timed
dispute”, September 22, 2012).
Introduction
•  We study the determinants of U.S. congressmen’s votes on all major trade
liberalization reforms since early 1970s and provide systematic evidence
that electoral incentives lead politicians to take a protectionist stance.
•  In particular, we show that the political horizon of U.S. congressmen – their
term length and how close they are to facing elections – crucially affects
their support for trade liberalization reforms.
•  Focus on the United States:
–  Data availability
–  Institutional features of the U.S. Congress:
•  6-year terms for Senate, 2-year terms for House
•  Staggered structure of Senate
Main results
•  House members are less likely to support trade reforms than Senate members.
•  This is not true for senators in the last two years of their mandate, suggesting
that inter-cameral differences are driven by differences in term length.
•  The last generation of senators is more protectionist, both when comparing
different senators on same bill and individual senators on different bills.
•  This effect is pervasive: it applies to members of both parties and
representatives of import-competing and export constituencies.
•  No cycling behavior for senators with safe seats or retiring, suggesting that the
protectionist effect of election proximity is driven by re-election incentives.
Outline of the presentation
•  Related literature
•  Dataset and variables
•  Empirical methodology and results
–  House versus Senate
–  Different generations of Senate members
•  Discussion
•  Conclusions
Related literature
•  Influence of domestic political factors on trade policy outcomes (e.g.,
Grossman and Helpman, 1994; Maggi and Rodriguez-Clare 1998).
•  Political viability of economic reforms (e.g., Fernandez and Rodrik, 1991;
Alesina and Drazen, 1991; Dewatripont and Roland, 1995; Drazen, 2000).
•  Political business cycles (e.g., Rogoff and Siebert, 1988; Rogoff, 1990).
•  Election proximity and legislative behavior (e.g., Amacher and Boyes,
1978; Thomas, 1985; Bernhard and Sala, 2006).
Related literature (cont.)
•  Term length and legislative behavior (e.g., Titiunik, 2008; Dal Bo and
Rossi, 2011).
•  Analysis of U.S. congressmen’s voting behavior on
–  trade policy (e.g., Bloningen and Figlio, 1998; Baldwin and Magee,
2000; Karol, 2007).
–  other economic policies (e.g., Peltzman, 1985; Mian, Sufi and
Trebbi, 2010).
Data: votes on trade liberalization bills (1973-2005)
Data: control variables
•  Legislators’ characteristics
–  Senate
–  Senate1, Senate2, Senate3
–  Party affiliation
–  Gender and age
–  Safe seat
–  Retiring
–  Lobby contributions from labor and corporate groups
–  …
•  Constituencies’ characteristics
–  Export ratio
–  Concentration of exports and import industries
–  Percentage of high skilled
–  Population
–  …
j
X
•  Trade policy interest of constituency j captured by its export ratio: t
Yt j
•  Two difficulties to construct this measure for House members:
€
–  District-specific information must be obtained by aggregating countylevel data; counties may be split in different districts;
–  Redistricting: every ten years 435 congressional districts assigned
across the United States depending on population.
Santa Clara County, California
Santa Clara County, California
House vs Senate
•  To verify the role of term length, we study the run the following probit model:
Pr(Votetj = 1) = φ ( β0 + β1Senate j + β2 Χtj + β3 Z)
House versus different generations of senators
•  To verify whether inter-cameral differences are driven by differences in term
length, we compare House members with different generations of senators:
Pr(Votetj = 1) = φ (γ 0 + γ 1Senate1tj + γ 2 Senate2 tj + γ 3 Senate3tj + γ 4 Χtj + γ 5 Z)
Different generations of senators
•  To study the role of election proximity, we focus on Senate votes and estimate
Pr(Votetj = 1) = φ (δ 0 + δ1Senate2 tj + δ 2 Senate3tj + δ 3 Χtj + δ 4 Z)
Pr(Votetj = 1) = φ ( λ0 + λ1Senate2 tj + λ2 Senate3tj + λ3 Χtj + λ4 Z + λ j )
Predicted probabilities for different Senate generations
The pervasiveness of senators’ cycling behavior
•  Inter-generational differences are observed among senators from both
parties and representing both import-competing and export constituencies.
The role of re-election incentives
•  To verify if re-election motives are behind the protectionist effect of
election proximity, we focus on the voting behavior of senators who
–  hold very “safe seats”
–  have announced their retirement
Additional robustness checks
•  Additional political controls for legislators (incumbency, years in Congress,
membership in Appropriations and Finance committees).
•  Additional economic controls for legislators’ constituencies (real GDP per
capita, unemployment rate, percentage of population above 65).
•  Differences in the margin of passage of votes (close versus lopsided votes).
•  Different subsets of trade votes (e.g., only votes on the ratification of the
most important trade agreements negotiated by the US).
•  Alternative measures of trade exposure for preferential trade agreements.
•  Alternative measures of ideology (ACU indexes, DW-Nominate scores).
Discussion
•  Existing models in the political economy of trade do not consider the role of
term length and election proximity and thus cannot explain our findings:
–  House Representatives are generally more protectionist than senators
(Table 4), but inter-cameral differences disappear for the last
generation of senators, facing re-election at the same time (Table 5).
–  Election proximity reduces support for trade liberalization, a result
that holds when comparing different senators voting on the same bill
(Table 6) and individual senators over time (Table 7).
–  Inter-generational differences in senators’ voting behavior are
pervasive, i.e., apply even to representatives of export constituencies, in
which most voters should benefit from trade liberalization (Table 8).
–  Election proximity has no effect on the voting behavior of senators who
are retiring or hold very safe seats (Table 9).
Discussion (cont.)
•  Our findings suggest that office-motivated politicians pander toward the
interests of protectionist voters when they approach re-election.
•  This explanation requires the existence of two biases:
–  Protectionist bias: when deciding whether to support trade liberalization,
politicians are more responsive to the interests of protectionist voters.
–  Recency bias: when deciding whether to re-elect incumbent politicians,
voters are more responsive to recent policy choices.
Protectionist bias
•  Deviations from free trade almost invariably aim at constraining imports rather
than subsidizing them (Rodrik, 1995).
•  Different mechanisms can give rise to a protectionist bias:
–  Loss aversion in voters’ preferences (Freund and Ozden 2008; Tovar 2009)
–  Information bias: voters are more informed about trade barriers that help
them as producers than those that hurt them as consumers (Ponzetto 2011)
–  Heterogeneity in voters’ preferences: trade policy is only salient to
individuals who strongly oppose liberalization (e.g., Guisinger 2009).
Recency bias
•  Behavioral economics: disproportionate salience of recent stimuli or
observations is one of the cognitive biases affecting belief formation,
decision making, and human behavior in general (e.g., Lee 1971).
•  Political economy:
–  Voters follow the “what have you done for me lately?” principle (e.g.,
Fiorina 1981; Weingast, Shepsle, and Johnsen 1981; Ferejohn 1986;
Lewis-Beck and Stegmaier 2000; Eisenberg and Ketcham 2004).
–  Imperfect information about politicians’ ability and the policy
environment can lead voters to optimally attach more weight to recent
policy choices (e.g., Rogoff and Sibert 1988).
•  Combining a protectionist bias in trade policy with a recency bias in voting
provides a simple explanation for our findings:
–  when deciding whether to support trade reforms, politicians pander toward
the interests of protectionist voters;
–  this bias is more pronounced at the end of their mandate, when their policy
choices are more likely to affect voters’ decisions.
•  This mechanism can also explain why the protectionist effect of election
proximity is so pervasive: representatives of export constituencies pander
toward the interests of a vocal minority that opposes liberalization.
•  Cycles in campaign contributions from lobbies could in principle explain
electoral cycles in trade policy votes.
•  Lobbying models do not examine calendar effects; even if there are cycles in
campaign contributions, it is unclear how they could explain our findings,
unless they systematically differ between pro-trade and anti-trade lobbies.
•  Our empirical analysis shows that
–  Contributions from labor (corporate) groups are associated with votes
against (in favor of) freer trade.
–  The protectionist effect of election proximity is not driven by cycles in
campaign contributions: it is robust to controlling labor and corporate
contributions received by senators throughout their mandates.
Conclusions
•  We have examined the role of term length and election proximity on
policymakers’ willingness to support trade reforms.
•  Our results show that electoral incentives decrease legislators’
support for trade liberalization.
•  Support for trade liberalization could be enhanced by
–  Lengthening terms of elected politicians
–  Delegating trade policy to non-elected officials
Avenues for future research
•  New theoretical models to shed light on the mechanisms through which electoral
incentives affect policymakers’ choices.
•  Analysis of the role of lobbies in explaining pandering to “single issue” voters.
•  Empirical analysis of legislators’ policy choices
–  on other “secondary” policy issues:
-  Gun control (Bouton, Conconi, Pino and Zanardi, 2013)
-  Environmental policy (Conconi, Pino and Zanardi, 2014)
–  on “frontline” policy issues (taxation, health or education reforms)
–  in other countries with similar institutional features (Argentina, Chile)