1 - CESifo

Political Economy of Trade Policy
Paola Conconi
Université Libre de Bruxelles (ECARES) and CEPR
•  “No other area of economics displays such a gap between what
policymakers practice and what economists preach as does
international trade. The superiority of free trade is one of the
profession’s most cherished beliefs, yet international trade is rarely
free.” (Rodrik, 1995)
•  The past decades have witnessed a remarkable decrease in the level of
import tariffs. At the same time, there has been a surge in non-tariff
barriers (NTBs), e.g. antidumping and countervailing duties, sanitary
and phytosanitary (SPS) measures, technical barriers to trade (TBT).
ynamic perspective, seems substitutional:
Why do policymakers support protectionist policies?
•  Economic explanations: welfare maximizing policymakers depart
from free trade due to the existence of distortions (e.g. imperfect
competition, dynamic economies of scale, revenue constraints).
•  Political economy explanations: politically motivated
policymakers respond to the interests of certain groups in society
(e.g. industry lobbies, voters).
Plan of the lecture
•  Review of political economy of trade literature, studying the role of
–  Lobby groups
–  Electoral incentives
–  Institutional rules
Individual preferences
Interest groups
(A)
(B)
trade policy outcomes
Policymakers’ preferences
(C)
Institutional structure of the
government
(D)
Standard trade model
•  Small open economy
•  All goods (but no factors) are tradable
•  Consumer preferences are identical and homothetic
•  Perfect competition in product and factor markets
•  Alternative assumptions about the supply side:
- Specific-factors (S-F) model
- Hecksher-Ohlin (H-O) model
International trade generates winners and losers
•  H-O model: an import tariff raises the real return to the
economy’s scarce factor and reduces the real return to the
abundant factor (Stolper-Samuelson theorem)
↓
the distributional effects work along factor lines
•  S-F model: an import tariff in sector i increases the return to
the specific factor in that sector, lowering the returns to other
specific factors through the induced increase in wages
↓
the distributional effects work along industry lines
Typology of political economy models (Rodrik, 1995)
A) Median voter model (Mayer, 1984)
B) Interest groups models:
•  Tariff formation function (Findlay and Wellisz, 1982)
•  Campaign contributions approach (Magee, Brock and Young, 1989)
•  Political support function (Hillman, 1989)
•  Political contributions approach (Grossman and Helpman, 1994, 1995)
Median voter model (Mayer, 1984)
•  Tariffs determined by majority voting among the population
•  Provided that preferences are single picked (i.e., each person has a
unique maximum), the trade policy chosen maximizes the utility of
the median voter.
•  In a H-O model, if voters differ in their relative factor endowments
and the median voter owns a lower capital-labor ratio than the one
for the overall economy, we should observe
–  Import tariffs, if imports are labor intensive
–  Import subsidies, if imports are capital intensive
•  Lack of realism of the median voter model:
- Trade policy not determined by majority voting
-  Import subsidies not observed
-  Tariffs observed even in small industries that do not have
support from majority of voters
The role of lobby groups
Workhorse model of Grossman-Helpman (1994)
•  Small open economy
•  Specific factor model:
–  numeraire good produced via CRS, using labor alone
–  n goods produced via CRS, using labor and a specific factor
•  N citizens with identical preferences:
n
u = x0 + ∑ ui (xi )
i=1
•  In a subset L of sectors, specific-factor owners overcome freeriding problems (Olson, 1965) and form a lobby.
•  Each lobby offers political contributions to the incumbent
government to influence its trade policy choices.
•  Trade policy consists of ad valorem tariffs/subsidies, driving a
*
*
wedge between domestic and world prices ti = ( pi − pi ) / pi
•  Gross-of-contributions aggregate utility of lobby i:
Wi (p) = li + π i ( pi ) + α i N[r(p) + s(p)]
•  Semi-benevolent politician sets trade policy to maximize a
weighted sum of lobby contributions and aggregate welfare:
G = ∑ Ci (p) + aW (p)
i=L
n
W (p) = l + ∑ π i ( pi ) + N[r(p) + s(p)]
i=1
•  The interaction between lobbies an policymakers takes the form of a
common-agency game (Bernheim and Whinston, 1986):
1) 
Each lobby simultaneously and non-cooperatively presents the
incumbent with a contribution function, giving a binding
promise of payment conditional on the chosen policy.
2) 
Given lobbies’ contributions functions, the government sets
trade policy and collects the corresponding contributions.
•  In a political equilibrium, neither the government nor any lobby
has an incentive to alter its behavior.
•  Characteristics of lobbies’ contributions
–  Feasible, i.e. no greater than total income of lobby’s members
-  Differentiable at least around the equilibrium
-  Truthful, i.e. the slope of the contribution function is equal to
the marginal benefit of the policy for the lobby:
∇Ci0 ( p 0 )= ∇Wi 0 ( p 0 )
•  The government chooses vector of tariffs/subsidies t that maximizes
∑ ∇ W (t) + a∇ W (t) = 0
t
i∈L
i
t
•  Equilibrium tariff/subsidy in each industry i:
ti
I i − α L " zi %
=
$ '
1+ ti a + α L # ei &
for i = 1, 2,..., n
Ii: indicator variable equal to 1 if sector i is organized into a lobby
αL ≤ 1: fraction of the population organized into lobbies
zi = Xi/Mi: equilibrium ratio of domestic output to imports
ei: elasticity of import demand (positive) or export supply (negative)
Testable predictions of Grossman-Helpman (1994)
•  An organized import-competing industry can “buy” an import tariff
•  The extent of protection should fall with
–  import elasticity (ei)
–  import penetration (Mi/Xi) in organized industries
Goldberg and Maggi (1999)
•  Predictions of G-H (1994) in empirically testable form:
ti
α L " Xi / M i %
1 " Xi / M i %
=−
$
'+
$I ×
' i = 1, 2,..., n
1+ ti
a + α L # ei & a + α L #
ei &
•  Empirical model estimated by Goldberg and Maggi:
! Xi $ !
ti ei
Xi $
= γ # &+ δ # I ×
& + εi i = 1, 2,..., n
1+ ti
" Mi % " Mi %
•  Predictions: γ <0, δ >0, γ + δ >0
(17)
Main variables
•  Protection measure (ti): US NTB coverage ratio (1983)
•  Import demand elasticities (ei): estimates by Shiells et al. (1986)
•  Political organization dummy (Ii): various thresholds of corporate
contributions to determine whether and industry is organized.
•  Import penetration ratio (Xi/Mi)
Variable
Xi/Mi
Ii × Xi/Mi
N
Estimation results
-0.009**
0.01**
107
•  Coefficients γ and δ have predicted signs and are statistically significant
•  Estimates of γ and δ used to compute the implied structural parameters
- government’s weight on social welfare (β) as opposed to contributions (1-β)
- proportion of the population organized in a lobby (αL)
Limitations of Goldberg and Maggi (1999)
•  NTB coverage ratio
–  inaccurate measure of the level of protection (e.g. non-binding quotas)
•  Overall corporate contributions
–  inaccurate measure of contributions (e.g. not trade related)
–  exclusion of important sources of contributions (e.g. labor unions)
•  Government’s weight on welfare (β =0.98): do lobbies really matter?
•  The G-H (1995) model might be the appropriate model to test since the US
is not a small country and tariffs are often determined cooperatively
(but need for data on different sets of countries).
•  Strengths of Grossman-Helpman (1994):
–  Strong micro-foundations for government-lobby interactions
–  Applicability to other economic problems (e.g. environmental taxation)
–  Directly testable (e.g. Goldberg and Maggi, 1999)
•  Limits of Grossman-Helpman (1994):
–  No role for international negotiations (Grossman and Helpman, 1995)
–  No analysis of lobby formation (Mitra, 1999; Bombardini, 2008)
–  Other roles of lobbies: transmission of issue-specific information,
access to politicians (Blanes-i-Vidal et al, 2012; Bertrand et al, 2014)
–  No role for voters and electoral incentives (Conconi et al, 2014)
“Trade Wars and Trade Talks” (Grossman-Helpman, 1995)
•  Two large open economies, home (no *) and foreign (*)
•  Production and demand side of each economy as in G-H (1994)
πi: international price
pi = πi ti: domestic price
•  Product markets clear when
Mi (πi , ti) + Mi* (πi , ti*) = 0,
i =1, 2, …, n.
Mi (pi) = Di (pi) - Xi (pi): net domestic imports
(7)
Two forms of interaction
•  Non-cooperative (trade wars)
•  Cooperative (trade talks)
Trade wars
•  Stage 1: in each country, lobbies simultaneously and noncooperatively offer contribution functions relating their
binding promise of political support to the selected policies
•  Stage 2: given lobbies’ contribution functions and the other
country’s policy, each government sets its trade policy and
collects the corresponding contributions
•  Equilibrium condition:
*
*
∇
W
(
t,
t
)
+
a
∇
W
(
t,
t
) =0
∑ t i
t
(8)
i=L
•  Equilibrium trade policies:
ti − 1 = −
I iL − α L X i
1
+
a + α L π i M i* ei*
for i = 1,2,..., n
(9)
•  The first component of (9) represents the political support motives
for trade intervention (as in G-H, 1994).
•  The second component captures the terms-of-trade motives for
trade intervention and represents the optimal tariff (or export tax)
adopted by a large country (Johnson, 1954).
•  In the case of an import competing lobby, terms-of-trade
considerations reinforce the industry’s lobbying efforts
•  An organized import-competing industry emerges from a trade
war with an higher tariff than in the Johnson equilibrium
Trade talks
• 
Stage 1: in each country, lobbies present policymakers with
contributions schedules tying their promised political support to
the policies that emerge from international talks.
• 
Stage 2: given lobbies’ contribution schedules, governments set
cooperative trade taxes and collect corresponding contributions.
•  Objective functions of the two governments:
G = ∑i∈L Ci (t, t*) + a [W (t, t*)]
(10)
G* = ∑i∈L* Ci* (t*, t) + a* [W (t*, t)]
(11)
•  Efficient cooperative policies must be such that G cannot be
raised without lowering G*. The objective of a “mediator” or
supra-national government is
a* G + a G*
(12)
Equilibrium conditions
a* ∑ ∇tWi (t, t * ) + a ∑ ∇ t Wi* (t * , t ) + a a*[ ∇ t W (t, t * ) + ∇ t W * (t * , t )] = 0
(13)
a* ∑ ∇t*Wi (t, t * ) + a ∑ ∇t*Wi* (t * , t ) + a a*[ ∇t*W (t, t * ) + ∇t*W * (t * , t)] = 0
(14)
i∈L
i∈L
i∈L*
i∈L*
•  From (12) and (13), we can determine the equilibrium trade
policy ratios:
% I * − α *L X * (
%
(
I
−
α
X
L
i
i
iL
'
*
t i − t i* = ' iL
−
*
'
*
*
*'
& a + αL π i Mi ) & a + αL π i Mi )
for i = 1,2,...,n
(15)
•  Foreign elasticities do not enter into (15) because there are no
terms-of trade motives for trade intervention.
•  Protection rates reflect domestic and foreign lobbying.
•  Higher domestic tariffs if home lobby is stronger than the foreign
•  The domestic lobby has more political power if
–  foreign industry not organized (IiL=1, IiL*=0)
–  greater stake in the negotiations (Xi >Xi*)
–  smaller government’s weight on welfare (ai< ai*)
–  smaller proportion of population organized (αL< αL*)
•  If lobbies are equally strong, their political influences cancel out
and international prices are the same as in free trade.
The role of electoral incentives
•  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).
Policymakers’ Horizon and Trade Reforms:
the Protectionist Effect of Elections
Paola Conconi
Université Libre de Bruxelles (ECARES) and CEPR
Giovanni Facchini
Nottingham University, Università di Milano, LdA, CEPR and CES-Ifo
Maurizio Zanardi
Lancaster University Management School
•  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 )
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).
Main results
•  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,
but inter-cameral differences disappear for the last generation of
senators, facing re-election at the same time.
–  Election proximity reduces support for trade liberalization, a result
that holds when comparing different senators voting on the same bill and
individual senators over time.
–  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.
–  Election proximity has no effect on the voting behavior of senators who
are retiring or hold very safe seats.
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
Ongoing research on the role of electoral incentives
•  New theoretical models to shed light on the mechanisms through which
electoral incentives affect policymakers’ choices.
•  Empirical analysis of the role of electoral incentives on legislators’ votes
on other secondary policy issues:
-  Gun control (Bouton, Conconi, Pino and Zanardi, 2014)
-  Environmental policy (Conconi, Pino and Zanardi, 2016)
Avenues of future research in political economy of trade
•  Emergence of global value chains
•  Does it fundamentally change the nature of political economy?
Fast Track Authority and
International Trade Negotiations
Paola Conconi
Université Libre de Bruxelles (ECARES) and CEPR
Giovanni Facchini
Nottingham University, Università di Milano, LdA, CEPR and CES-Ifo
Maurizio Zanardi
Lancaster University Management School
Introduction
•  The conclusion of international agreements between the U.S. and partner
countries involves both Congress and the President.
•  In the case of trade agreements, all deals negotiated by the President
must be approved by Congress, which can amend their content.
•  Art. I: Congress has the power to “regulate commerce with foreign
nations ...” and to “...lay and collect taxes, duties, imposts, and excises.”
Introduction
•  Since 1974 U.S. legislators can decide to give up their power to amend
trade agreements, by granting fast track authority (FTA) to the executive.
•  Main features of FTA:
•  Congress can only accept or reject deals negotiated by the President
•  Deals must be ratified by Congress within 90 legislative days
•  We examine the determinants of congressmen’s FTA voting decisions.
Motivation
In the absence of fast track, the inability to “submit pacts to Congress
without having them picked apart line-by-line diminishes trading
partners’ enthusiasm for negotiations.”
Financial Times, September 25, 2007
In the absence of fast track, “the prospects for completion of the Doha
Round of global trade talks, as well as several proposed bilateral U.S.
trade deals, remain bleak.”
Wall Street Journal, June 29, 2007
“Without it (fast track authority), lawmakers can wreck carefully
negotiated deals with toxic amendments.”
The Economist, February 22, 2014
Conferrals of FTA
Outline of the presentation
•  Related literature
•  Theoretical model
–  A simple model of trade negotiations
–  FTA and trade negotiations
•  Empirical analysis
–  Empirical methodology
–  Data
–  Results
•  Conclusions
Related literature
•  Interaction between domestic politics and trade negotiations
–  Mayer (1981)
–  Grossman and Helpman (1995)
–  Maggi and Rodríguez-Clare (2007)
•  Evolution of U.S. trade policy
–  Lohmann and O’Halloran (1994)
–  Hiscox (1999)
•  Determinants of congressional trade policy decisions
–  Kahane (1996)
–  Box-Steffenmeyer et al. (1997)
–  Baldwin and Magee (2000)
Related literature (cont.)
•  Strategic delegation in bargaining: principals may gain by delegating
decision making power to status quo-biased agents, to increase their
bargaining power in negotiations with third parties:
“The power of a negotiator often rests on a manifest inability to make
concessions and to meet demands.” (Shelling, 1956)
A simple model of trade negotiations
•  Specific-factor trade model between Home and Foreign
•  Three goods, i = 0, 1, 2, three factors of production.
•  Good 0 is the numeraire, produced using only labor and freely traded Goods
1, 2 are produced using labor and a sector-specific factor
•  Individuals share quasi-linear, separable preferences
•  Home is abundant in the specific factor used to produce good 2 Foreign is
abundant in the specific factor used to produce good 1
A simple model of trade negotiations
•  Home imports good 1, exports good 2 (vice-versa for Foreign)
•  Trade policies consist of ad valorem import tariffs/subsidies, τ and τ*
•  Home and Foreign aggregate welfare:
W (τ ,τ * ) = 1 + R1 (τ ) + R2 (τ * ) + T (τ ) + Ω(τ ,τ * )
*
W (τ ,τ * ) = 1 + R1 (τ ) + R2 (τ * ) + T (τ * ) + Ω(τ ,τ * )
•  Totally differentiating W, we obtain the slope of Home’s indifference curves:
∂R1
∂T
∂Ω
+
+
dτ
∂τ
∂τ
= − ∂τ
∂R2
∂Ω
dτ
+
∂τ *
∂τ *
*
•  Substitution yields
*
dτ
=−
dτ
M1
dπ 1
(1 − τε * )
dτ
dπ 2
M2
dτ *
•  It follows that
dτ *
1
≥ ( <) 0 ⇔ τ ≤ *
dτ
ε
*
where
*
dM 1 p1
ε =
dp1* M 1*
*
Home’s indifference map
τ*
W1
W2
τ
W3
Negotiations between Home and Foreign executives
WZ *
τ*
Z
WZ
0
τ
Assumptions on international agreements
•  Assumption 1: Executives can only agree to trade deals that make each of
them at least as well off as they are in the status quo.
•  Assumption 2: Executives can only agree to tariff combinations such that
no additional welfare gains can be achieved by one of them without the
other one losing.
•  Assumptions 1 and 2 imply that the executives agree to combinations of
import tariffs (subsidies) on the AB arc of the contract curve CC.
Negotiations between Home and Foreign executives
WZ *
τ*
Z
C
WZ
A
0
τ
B
C
Bargaining between the two executives
•  To derive the equilibrium outcome of the trade negotiations, we
employ the generalized Nash bargaining solution.
•  Domestic and foreign tariffs are chosen as the solution to the following
maximization problem:
γ
max* (W − W Z ) (W − W
W ,W
*
* 1−γ
Z
)
where γ captures Home’s relative bargaining strength.
Bargaining between the two executives
1−γ
γ
max* (W − W Z ) (W * − W Z* )
W ,W
W*
€
A
0
E
Z
B
W
Congressional preferences
•  D electoral districts characterized by identical population shares but
different production shares of the two goods.
•  Congressmen represent the interests of their constituencies, which
differ due to the uneven geographical distribution of industries:
•  Import districts (M): a fraction βM of the districts is relatively
specialized in the production of the import-competing good;
•  Export districts (X): a fraction βX of the districts is relatively
specialized in the production of the export good;
•  Non-specialized districts (N): the remaining fraction βN of
districts has equal stakes in the production of the two goods.
€
€
Congressional preferences
W M (τ,τ * ) = h + α1M R1 (τ ) + α 2M R2 (τ * ) + h (T(τ ) + Ω(τ,τ * ))
with α1M > h > α2M
W X (τ,τ * ) = h + α1X R1 (τ ) + α 2X R2 (τ * ) + h (T(τ ) + Ω(τ,τ * ))
with α2X > h > α1X
W N (τ,τ * ) = h + hR1 (τ ) + hR2 (τ * ) + h (T(τ ) + Ω(τ,τ * ))
Preferences of Home congressmen
τ*
WZ M
Z
WZ X
WZ N
τ
The model: stages of the game
FTA voting
t=1
International negotiations
t=2
Congressional approval
t=3
Game Tree
FTA and trade negotiations
•  Each legislator in Home votes for or against FTA so as to maximize his
expected utility, anticipating the impact that FTA (or lack thereof) will
have on the outcome of the negotiations with Foreign.
•  Absent FTA, the game’s outcome is the same as if the foreign President
negotiated directly with Home’s Congress majority.
•  FTA voting decisions thus imply a choice between two country
representatives: the President and Congress majority.
•  Assumption 3: In the absence of FTA, the foreign executive and a
majority of Home legislators agree to tariff combinations such that no
further welfare gains can be achieved by one without the other one losing.
•  Assumption 4 (ratification constraint): trade agreements must make a
majority of Home legislators at least as well off as in the status quo.
No majority
•  When βi < 1/2 for all i ∈ {M, X, N}, trade deals can only be amended in the
third stage of the game by a coalition of representatives.
•  The only possible amending coalition is between N and M (under mild
condition of Lemma 1):
W M ,N = β M W M + β N W N
•  An increase in βN makes the indifference curves of the coalition flatter,
making N representatives less likely to vote in favor FTA.
Trade negotiations between foreign executive and
coalition of M and N legislators
Main results
•  Proposition 1: When βi < 1/2 for all i ∈ {M, N, X}, representatives of M
districts will never vote in favor of FTA; representatives of X districts will
vote in favor of FTA whenever N representatives do.
!
Preferences of X and N legislators
under no majority
Main results
•  Proposition 1: When βi < 1/2 for all i ∈ {M, N, X}, representatives of
import districts will never vote in favor of FTA; representatives of export
districts will vote in favor of FTA whenever non-specialized district
representatives do.
•  Proposition 2: When βi < 1/2 for all i ∈ {M, N, X}, N representatives will
vote against (in favor of ) FTA if their share of seats in Congress is above
(below) a threshold .
^
N
β
€
Empirical predictions
•  When no district type has a majority, the likelihood that a U.S.
congressman votes in favor of FTA increases with the degree to which his
own constituency is relatively export-oriented compared to the U.S. as a
whole.
•  When no district type has a majority, the likelihood that representatives
from non-specialized constituencies vote in favor of FTA decreases with
their relative share in Congress.
Empirical methodology
•  Probit model to explain FTA voting decisions by congressmen:
P(voteti ) = Φ (α + β1Xit + β 2 Z)
Xti: district-specific and time variant variables
Z: other control variables
•  Main explanatory variable of interest: ratio of employees in export industries to
import-competing industries, relative to the U.S:
λit =
i
L
∑ x ,t
x
i
m ,t
∑L
m
,
λUS
=
t
US
L
∑ x ,t
x
US
m ,t
∑L
m
,
i
λ
Λit = USt
λt
Data
•  13 votes over the period 1973-2002 granting or extending FTA.
Bill
Vote in House
Vote in Senate
First approval of FTA
Other provisions: escape clause, antidumping, countervailing
duties, trade adjustment assistance, GSP
Dec. 11, 1973
(272-140)
Dec. 20, 1974
(72-4)
Extension of FTA
Other provisions: implementation of Tokyo Round
July 11, 1979
(395-7)
July 23, 1979
(90-4)
Approval of FTA
Other provisions: strengthening of unilateral trade retaliation
instruments, authority of USTR
July 13, 1988
(376-45)
Aug. 3, 1988
(85-11)
H.Res. 101
Disapproval of extension of FTA
May 23, 1991
(192-231)
S.Res. 78
Disapproval of extension of FTA
H.R. 1876
Extension of FTA
June 22, 1993
(295-126)
H.R. 2621
Extension of FTA
Sept. 25, 1998
(180-243
Approval of FTA
Other provisions: Andean Trade Preference Act, trade
adjustment assistance, GSP
July 27, 2002
(215-212)
H.R. 10710
Trade Act of 1974
H.R. 4537
Trade Agreements Act of 1979
H.R. 4848
Omnibus trade and
Competitiveness Act
H.R. 3009
Trade Act of 2002
Description
May 24, 1991
(36-59)
June 30, 1993
(76-16)
Aug. 1, 2002
(64-34)
Data
•  From roll call voting records, we collect votes in favor or against
FTA, identity of congressmen, Congress branch, party affiliation.
•  Two difficulties to construct Λti for House members:
1)  District-specific information must be obtained by aggregating
county-level data; counties may be split in different districts;
Santa Clara County, California
Santa Clara County, California
Data
•  From roll call voting records, we collect votes in favor or against
FTA, identity of congressmen, Congress branch, party affiliation.
•  Two difficulties to construct Λti for House members:
1)  District-specific information must be obtained by aggregating
county-level data; counties may be split in different districts;
2)  “Redistricting”: every ten years 435 congressional districts
assigned across the United States depending on population.
Congress composition by district type
Empirical results – trade exposure
Empirical results – trade exposure
Empirical results – trade exposure
Empirical results – N constituencies
Robustness checks
•  Alternative definitions of legislators’ identity (i.e., g values)
•  Falsification exercise on non-FTA votes
•  Including Agriculture; services; other economic controls
•  Within-county heterogeneity
•  Clustering of standard errors
•  Regressions by decades
Conclusions
•  The current U.S. institutional setting involves the recurrent choice
between partial delegation (FTA) and no delegation (no FTA).
•  Our model shows that “no delegation” tends to skew trade agreements
in favor of the U.S., and can thus explain why other countries are
reluctant to negotiate with the U.S. in the absence of FTA.
•  Our results are in line with the literature on strategic delegation,
which shows how principals may gain by delegating to status-quo
biased agents to increase their “bargaining power” in negotiations with
other parties (e.g. Schelling, 1956).
Conclusions
•  The foreign country might be tempted to adopt similar institutional
procedures, leaving trade negotiations in the hands of protectionist
legislators, to try to skew trade agreements in its favor.
•  In this case, both countries would end up being worse off than if they
could commit to delegate trade negotiating authority to their
executives (e.g. Jones, 1986).
•  In a multi-country setting, lack of FTA would be more costly for the
U.S., leading its trading partners to negotiate with other countries.