Week 2 notes
Week 2 notes Polisci110G
Popular in Governing the Global Economy
Popular in Political Science
This 10 page Class Notes was uploaded by Erica Evans on Thursday January 14, 2016. The Class Notes belongs to Polisci110G at Stanford University taught by Kenneth Scheve in Fall 2016. Since its upload, it has received 14 views. For similar materials see Governing the Global Economy in Political Science at Stanford University.
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Date Created: 01/14/16
Polisci110G Class 3 1/12/2015 Voting history: US • Voting Unity Score: Dems and Reps in House of Representatives. In 1980’s, parties become more unified among themselves. • Late 1990’s, more unity in Trade votes than there was in the 60’s and 70’s • Why might this be the case? Terminology: • Factor of production: labor, capital, land, anything that goes into producing a good • Sector of Production: basically means industry, like the automobile sector • Factor Mobility: How easy it is for factors of production to move from one sector of the economy to the other. • High mobility example: A high skilled computer programmer can move across industries relatively easily. Someone skilled works however may have a hard time changing industries. • Low mobility example: Over a short time, a factory that is set up to make computers will require high costs to be changed to a car factory • Factor-‐intensiveness of production: Are skilled or unskilled workers used more? For shoes, unskilled workers are used more than for computers. • (Relative) Factor abundance: some countries have more factors than others. Some countries have more land. The U.S. has more land than Belgium. A Model • Heckscher-‐Ohlin Model: with two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good • Comparative advantage depends on relative abundance of factors of production. • Assumptions: Two countries: home and foreign. Two goods: computers and shoes. High inter-‐sectoral factor mobility, so both factors can move freely between industries. • Shoe production is more labor intensive • Foreign is labor abundant, meaning its aggregate low skill labor-‐human capital ratio is larger than Home. Home has more high human capital. • Shoes and Computers can be traded, but there is no immigration. Technology is used to produce goods identical across countries. • Note: countries are different in real life, and produce different goods. In this model, the only thing different is their factor endowments. Their consumer tastes are also exactly the same in this model. • Because the US has more high-‐skilled workers, when it puts all its efforts into making computers, it can make a lot, a lot more than Brazil can! If Brazil puts all its efforts into making shoes, it can make more shoes than the US can. • Trade moves us to higher indifference curve… but how does production move? The world equilibrium is set at a new price. • How much is exported: determined by the price and demand in the home country. Example: • Japan and Vietnam: Vietnam has more low-‐skilled workers. Vietnam will export textiles and import cotton wheels. This is not a mystery! Who is exporting what is driven by the relative abundance of factors of production across countries. What are the implications of this model for identifying winners and losers across trade? • Stolpher-‐Samuelson Model! In the long run, this kind of trade results in real earning increases for skilled workers. This results in a real earnings decrease for unskilled workers. (in the Home example). The opposite is true for the foreign country. • See the Alt and Giligan article • The price of computers goes up, production moves to computers and leaves shoes. This increases the relative demand for skilled workers. This shift in relative demand will raise the earnings relative to unskilled workers. The skilled workers will have more money than the unskilled. This is a multiplier effect. The increase in their earnings is going to compensate for the fact that the price of computers is going up too. • Note: The price of computers is going up because we are opening up to trade – and the world price ends up between the foreign price, which was very high and the home price, which was very low. • We would expect unskilled workers not to like international trade and support trade protection. People who are educated will be unlikely to support trade protection at Home. The opposite will be true in Foreign. • Possible problem: A country like Brazil has more unskilled workers, but is still a middle-‐income country. They do have a lot of skilled workers too. So they may vote differently. H-‐O Model and Public Opinion: • The US is well endowed in high human capital. We expect a negative correlation: As we increase education, less likely to support trade regulation. Countries like Norway, Sweden are similar. • But countries like Bangladesh: There is NOT a strong correlation between education and being likely to support trade regulation. • HO model predicts winners and losers – assumes high inter-‐sectoral factor mobility. But let’s revisit that assumption. This is not realistic. Sometimes factors are really specific. Specific-‐Factors Model: • When the price of computers goes up, the winners are everyone in the computer industry, when the price of shoes goes down, the losers are everyone in the shoe industry. (Not separation between skilled and unskilled) • About industries, not factors When is one model better than the other? • Think about intersectoral mobility and technologies of production etc. • KNOW THIS SLIDE! Comparison between Hecksher-‐Ohlin and Specific-‐ Factors models. • HO: intersectoral mobility is high SF: intersectoral factor mobility is low. • HO: Technologies of production are the same SF: technologies are different • …. (review the rest of this slide) Back to the original question: Why was there more unity between democrats and republicans (respectively) in the 80’s and 90’s in terms of trade law? • Trade politics: republicans vote against trade and some vote for it. Democrats: Some vote for trade and some vote against it. Members of Congress are from different regions and the people who elect them want different things. They also have special interests: campaign contributions from the specific industries. • In the 60’s and 70’s, people were voting differently because trade politics was all about special interest groups. It was a world where there was low intersectoral mobility. A lot of people were stuck in the same industry because the cost of moving industries was very high. Special industry groups lobbying had a huge effect on trade votes. • Later, there was more party unity because there was more factor mobility. It doesn’t matter what industry, now free trade is good for skilled workers, protection is good for unskilled workers. th What explains US trade liberalization in the mid-‐20 century? • In the mid-‐1930’s trade liberalization • Very dramatic liberalization after WWII • What did trade politics look like before the 1930’s? It was a constant back and forth between democrats (party of capital-‐owners, supported free-‐trade) and republican (party of farmers, were protectionist) raising and lowering tariffs. • After 1932, democrats won the election, policy gets more and more liberal, even when republicans return to power. Why? • In 1934 -‐-‐ RTAA Reciprocal Trade agreements Act of 1934. Mandated that the president negotiate reciprocal trade agreements with their countries that reduce tariffs up to 50% in exchange for access to foreign markets. • Congress just has to approve by a majority. • Leads to more liberal U.S. policy because the president decides. There are concentrated rather than confused benefits. • President ends congressional logrolling. President has incentive to weigh the benefits for the entire country, rather than disparate regions. This puts more weight on the benefits for consumers. • Problems: there wasn’t a universal model in the first place. • There is little evidence of learning on the part of legislators. Among 225 members of Congress who voted on the Smoot-‐Hawley and RTAA, only 9 changed their position. • Also, the president is not necessarily more liberal than Congress. Republican presidents are routinely more protectionist. Another idea: • RTAA is a new institution for policymaking in which Congress delegates authority for trade policymaking and this leads to more liberal US policy. • A RECIPROCAL trade agreement means that these agreements are more permanent. Reciprocity: • Ordinarily export interests are not well organized for tariff politics. • Exporters share an interest for lower tariffs to avoid closure in foreign markets and to lower input costs but these benefits are uncertain and dispersed widely among all exporters. • RTAA made tariff setting explicitly reciprocal • We are going to get lower tariffs out of other countries! • Assume that everyone in the US wants low tariffs in other countries, but we had other preferences about our own tariff policy. • There is a section of overlapping policy, which makes both the democrats and republicans happier. • After 1930’s opened up a range of outcomes • It lasts because it is a bigger shift in policy, shifting back becomes harder. Increasing trade made exporters more organized over trade policy. • The RTAA is just a regular piece of legislation, so they could have killed it, but they didn’t! This suggests that the institution created by the RTAA was possibly less important than changes in political constituencies. • Republicans started liking free trade – their constituencies shifted their interests in a free trade direction. People in the South and the West started voting for Republicans more, and they support free trade. But people in the Northeast also changed their preferences. • Over time, you get a shifting of U.S. comparative advantage in capital-‐ intensive products – a shifting of free trade preferences among democrats. • Overall, there is more consensus on free trade. • Institutions matter! But remember that these institutions are selected by politicians and people. So always think about how peoples’ preferences affect the implementation of these policies! Polisci110G Class 4 1/14/2016 Announcements: Case Study – 1) talk to your friends, don’t do this by yourself. 2) Write a recommendation on your own. 3-‐4 pages. Analyze both the economic and political consequences. Use some empirical evidence as well to make your recommendation more persuasive. Trade in International Institutions • Western leaders plan post-‐war economic international order • Economic depression and World War II were catastrophic • Disagreement within the Roosevelt administration and among others about world economy • Eventually they decide: we need freer trade and the recovery of international investment • This was led by Cordell Hull (Secretary of State), a southern democrat (export-‐oriented) • Hull believed that trade has security benefits – protectionism leads to war • Countries that have trade agreements treat each other peacefully as allies • “American Internationalism” since Wilson, but we still had protectionist trade policies for a long time. The height of protectionism was the Smoot-‐ Hawley Tariff in 1930. th • Late 19 century, Britain was leading in liberalization. • Reaction to the Great Depression: people blamed protectionism for exasperating the depression. (Economic historians don’t think protectionism was the cause, but agree that it could have made it a bit worse) • The U.S. and Britain decide we should have freer trade How do we get freer trade? • Set up International Institution: • 3 pillars of reform: • Monetary cooperation à IMF • Increase investment à world bank • Freer trade à which institution? They were not able to come to an agreement, negotiations continued. • 1948: established a charter for an “International Trade Organization” • But this never came into being. They created a substitute: “general agreement on tariffs and trade” for the interim time before the ITO could come into being. This was an agreement to get freer trade going. These agreements were negotiated under the principal of reciprocal mutual advantage. • Most Favored Nation also applied to all GATT/WTO (essentially the same organization) • A set of principles and rules • An intergovernmental bargaining process and a dispute settlement process (kind of a court for when people cheat). • 1) Free trade is good • Winners could compensate losers • 2) Nondiscrimination • Most favored nation – treat all countries as well as your favorite trading partner • National treatment – prohibits favoring domestic firms Other functions: • Regional trade arrangements (Article 24) • Free trade area (NAFTA or customs union (EU) • Generalized System of Preferences (from 1960’s) Other articles: • Article 6: dumping is bad. Process to undo this unfair advantage. Ex: “China is dumping a product on the US market. They are selling a good below the cost, or below the price it sells in its own market.” • Article 11: prohibits quotas (quantitative restrictions) • Article 12: an exception to article 11 (when countries have balance of payment problems) • Article 18: if a country has an infant industry case, they can protect this. Intergovernmental Bargaining Process: • After establishment of GATT, there are negotiating rounds – adding new members, reducing tariffs, moving into new areas related to trade protection (like addressing safety regulations or health regulations that might favor domestic producers over foreign producers.) Address intellectual property rights. These rounds happen periodically 1947-‐2001. • In 1960’s 35% tariff reduction. Also 1970’s more reduction. • 1986-‐1994: most important round. Created the WTO, which changed the rules of dispute settlement. It includes agriculture, clothing and textiles which had not been included before (a previous reason for criticism, because these are things undeveloped countries produce) • At the end of this round, tariffs were extremely low: basically free trade in developed countries. WTO reality: • Relatively weak organization. Basically just a means for countries to get together and decide things. The power lies with member governments. Operates on consensus. • WTO has a super small budget. • If a country decides to violate a rule, nothing happens. There is no enforcing power. Countries can remove privileges or punish a country though. Dispute Settlement: • How the GATT was and how it is now: • A funny court – someone accuses you and you can veto proceeding with the trial … so not super effective. • 1) Request for consultation • 2) Request a panel (judges to rule on the case) • 3) Panel publishes ruling, allows for retaliation • BUT – the country could veto at any point in the process. • (So this is how it used to be. They fixed this under the WTO) • Now countries don’t have to comply at the end, but they can’t veto the process • Still, countries only tend to complain if their case is really strong • WTO provides deterrent effect though – because it is a means for pointing out cheating • This allows governments to legally punish each other. You can legally raise tariffs etc. What is the point of the WTO? • Does it increase trade? -‐ Well, one argument is that countries decide they want to liberalize and then they join these organizations. The institution has no direct effect on their behavior. • Why don’t we let everyone’s domestic governments decide on their own? • What are the benefits of joining? -‐ Establish a community with a common purpose -‐ Information – the dispute settlement mechanism can determine whether countries met their obligations. -‐ International externalities – Governments can weigh the costs and benefits of their domestic situation and decide a trade policy. But there could be externalities that suggest problems with trade protection aren’t just about what happens within one economy, but the way countries interact effects the outcome. -‐ Political externality – international institutions help countries cooperate in the presence of political pressures. Example: if each country can liberalize and protect: this is like a cooperation problem (prisoner’s dilemma). It’s best if both liberalize, but if one liberalizes and the other protects, this puts the liberalized country at a disadvantage … so both countries may choose to protect to avoid this worst outcome. -‐ ^WTO can help with this cooperation problem. But the institution is not necessarily required. You don’t really NEED the WTO for cooperation. -‐ However it helps by ensuring indefinite repeated interaction. They may engage in tit-‐for-‐tat strategy, but the GATT/WTO is based on idea for reciprocal tariff reductions, so they are bargaining over reciprocal concessions on tariffs and not getting stuck in a cycle of raising tariffs to punish each other. Terms of trade externalities: • Beggar-‐thy-‐neighbor policy: only applies to large countries. Distinguish between small and large countries. When large countries can influence the world price – the wedge b/w world price and domestic price – the tariff is that wedge in a small country. The big country pushes that wedge down, so the small countries bears the cost of that tariff. • Political leaders have to weigh efficiency costs of tariffs with political consequences of the tariff (not much an international institution can do to change this). • But the effect on world price is an international effect. This is a terms of trade story à this leads to another prisoner’s dilemma. Which the WTO can facilitate because it helps cooperation. • There is empirical evidence that country’s tariffs can affect their terms of trade even for medium-‐sized countries like Mexico. They are more likely to set tariffs higher in markets in which they are more likely to be able to influence the world price. Incentives to shift costs. Domestic Commitment: • Countries would like to liberalize trade because it is good for the country, but it is hard not to listen to lobbyists in their country. • Being part of the WTO lets them commit to free trade. • Why would governments want to do this if listening to lobbyists helps politicians get elected? (a key puzzle!) • Maggi and Rodriguez-‐Clare – lobbies pay governments of small countries for inefficiencies that protection causes in the short run, but they don’t get rewarded for over investment in uncompetitive industries. Government can be made better off by ending the lobbying process. Political Hold-‐up: • Example: US and Hawaii, before Hawaii was a state. The US wanted to promise Hawaii they would give them special deal on sugar tariffs, so Hawaii could sell sugar to the US. Bilateral agreement. Hawaii was worried – if we invest in sugar industry and US raises tariffs, we are screwed. The agreement was a 3-‐5 year agreement. When the 3-‐5 years is up, US says they want to build a base in Pearl Harbor. They used raising tariffs as leverage to impose their political will on Hawaii – like a threat. This is a political hold-‐up problem. • The WTO helps avoid this commitment problem. • China-‐ US trade relations before China joined WTO. We would hold-‐up China and demand that they improve human rights or we would remove trade privileges. Then China joined WTO which creates norms that you can’t use trade policies to get what you want politically – even if it’s a good thing like human rights. • US-‐China MFN debate – there were super frequent threats. Debate over whether China should become a permanent MFN member. There were benefits of having China in the WTO, but some people didn’t want to give up the option of having this political leverage. • Countries know that if they violate this, others may violate it too, in a negative way. WTO makes violations by larger countries more costly. Hawaii could not protect itself from being pushed around by the US, but the WTO can help with things like this. Prevents big countries from exploiting small countries. Possibility that WTO doesn’t do anything: • The empirical literature as I see it: • At the end of WWII, Western allies wanted to support free trade. We see now that there is a lot more free trade since this time. Trade has grown at a rate must fast than the growth of the world economy – suggests that GATT is a success. • Trade protection among members falling at about 40% on average – another indication of success. • But this may have just been caused by unilateral policy choices. It is really difficult to establish a causal effect on GATT/WTO and free trade. There are all kinds of things changing in these countries and these can account for changes in patterns we observe. • Other empirical evidence: -‐ Countries getting richer, transportation costs, etc. Even when you control for these factors, there is still evidence that free trade increases with WTO membership. -‐ Effects have declined as more countries joined however -‐ Developed countries trade more with each other when they join, but developing countries do not. (Remember that agriculture and textiles were left out) -‐ Could be all selection – institution is just a reflection of countries preferences
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