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    Political Economy of Trade Policy

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    D Attitude Kid
    This document discusses the political economy approach to analyzing trade policy decisions. It argues that policymakers act in their own self-interest rather than the public interest when making trade policy. Existing theories like pressure groups and status quo hypotheses provide some explanations but lack coherence. The Grossman-Helpman model formalized how interest groups lobby governments to influence trade barriers. Empirical tests find this model explains some patterns but governments also consider citizen welfare. The document examines applying these theories to Russia and ways to promote less distorting trade policies.

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    Political Economy of Trade Policy

    Uploaded by

    D Attitude Kid
    83 views17 pages
    This document discusses the political economy approach to analyzing trade policy decisions. It argues that policymakers act in their own self-interest rather than the public interest when making trade policy. Existing theories like pressure groups and status quo hypotheses provide some explanations but lack coherence. The Grossman-Helpman model formalized how interest groups lobby governments to influence trade barriers. Empirical tests find this model explains some patterns but governments also consider citizen welfare. The document examines applying these theories to Russia and ways to promote less distorting trade policies.

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    PoliticalEconomyOfTradePolicy-Afontsev

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    This document discusses the political economy approach to analyzing trade policy decisions. It argues that policymakers act in their own self-interest rather than the public interest when making trade policy. Existing theories like pressure groups and status quo hypotheses provide some explanations but lack coherence. The Grossman-Helpman model formalized how interest groups lobby governments to influence trade barriers. Empirical tests find this model explains some patterns but governments also consider citizen welfare. The document examines applying these theories to Russia and ways to promote less distorting trade policies.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    83 views17 pages

    Political Economy of Trade Policy

    Uploaded by

    D Attitude Kid
    This document discusses the political economy approach to analyzing trade policy decisions. It argues that policymakers act in their own self-interest rather than the public interest when making trade policy. Existing theories like pressure groups and status quo hypotheses provide some explanations but lack coherence. The Grossman-Helpman model formalized how interest groups lobby governments to influence trade barriers. Empirical tests find this model explains some patterns but governments also consider citizen welfare. The document examines applying these theories to Russia and ways to promote less distorting trade policies.

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    Political Economy of

    Trade Policy
    Sergey A. Afontsev
    Institute for World Economy and
    International Relations,
    Moscow, Russia
    Welfare Paradoxes
    of Trade Policy
     In the real world, all countries practice
    trade barriers in one form or another
     Choice of trade policy instruments is
    often ineffective
     Traditional models usually produce
    unexpectedly low estimates of
    protection-generated losses
    WHY ?
    Principles of Political Economy
    Approach
    Decisions of policy makers reflect their own
    preferences and interests, rather than interest
    of the general public. People engaged in
    policy making, just like people engaged in
    ordinary economic activities, are driven by
    self-interest.
    Principles of Political Economy
    Approach
    Politics can be viewed as a sort of market where
    policy decisions are sold for political support and
    resource transfers.

    Trade policy is determined endogenously:


    Economic agents enter political markets to
    influence trade policy, which in turn affects their
    position on economic markets and incentives for
    influencing future trade policy.
    Traditional (Ad Hoc) Political
    Economy Hypotheses
     The pressure group hypothesis attaches the key role to the demand
    for trade policies by lobbies representing sectoral interests
     The adding machine hypothesis stresses politicians’ desire to attract
    voters by implementing trade policies
     The status quo hypothesis presents trade policy as an ‘insurance’
    against shocks injuring national industries
     The revenue maximization hypothesis addresses the fact that trade
    policies can generate additional budget revenues
     The foreign repercussions – trade negotiation hypothesis interprets
    national trade policy decisions in the context of multidimensional
    system of economic and political interactions with other countries
     The ideological preference hypothesis states that ideology of the
    ruling party can exercise strong influence on trade policy decisions
    Traditional (Ad Hoc) Political
    Economy Hypotheses
    The major problem with these hypotheses
    is that they are formulated on a rather ad
    hoc basis and do not rest on any coherent
    theoretical model.
    Moreover, they often produce equivocal
    predictions about the impact of different
    political economy factors on trade policies.
    Grossman-Helpman Model
    The first coherent theoretical model of
    endogenous trade policy formation was put
    forward by G.Grossman and E.Helpman (1994).
    It focuses on the interaction between pressure
    groups representing owners of factors specific to
    particular industries and the government
    interested in resource transfers from these
    groups and welfare of the general public,
    attaching different weights to each of them.
    Grossman-Helpman Model
    Predictions of Grossman-Helpman model
     In industries represented by lobbies, protection
    decreases with higher import penetration.
     In unorganized industries, on the contrary,
    relationship between import penetration and trade
    protection is positive.
     Deviations from free trade are more likely in
    industries with low import demand and/or export
    supply elasticities, as low elasticities are associated
    with lower welfare losses for any given level of
    protection.
    Empirical Tests of Political
    Economy Models
    Ad Hoc Models
    Trade protection tends to be higher in
     labor-intensive, low-skill, low-wage, stagnant industries;
     industries with high and/or raising import penetration;
     industries producing consumer rather than producer goods,
    and more generally in industries producing goods for
    unorganized buyers;
     industries with intensive intra-industry trade.
     Ideological preferences were also found to influence trade
    policies.
    Empirical Tests of Political
    Economy Models
    Grossman-Helpman Model

    A number of empirical tests of Grossman-Helpman model


    found support for its general logic, but at the same time
    produced a quite unexpected result that the weight attached
    by the government to the welfare of citizens is often higher
    than the weight attached to resource transfers from pressure
    groups or even exceeds it.
    Empirical Tests of Political
    Economy Models - Russia
    Ad hoc models

    Empirical tests of ad hoc political economy models provide


    partial support for
     the pressure group hypothesis
     the status quo hypothesis
     the adding machine hypothesis
     the revenue maximization hypothesis
    Empirical Tests of Political
    Economy Models - Russia
    The extended Grossman-Helpman model
    In the extended Grossman-Helpman model where the
    government is assumed to take special care of
    budget income, tariff revenues have the highest rank
    in government’s preference schedule, then follows
    welfare of citizens, with lobbying contributions having
    the lowest rank.
    Empirical results strongly favor the extended
    Grossman-Helpman model against alternative ad hoc
    specifications.
    Empirical Tests of Political
    Economy Models - Russia
    Empirical analysis in the framework of the
    extended Grossman-Helpman model
    shows that government’s desire to
    increase budget revenues by suppressing
    misclassification of higher-taxed goods for
    lower-taxed ones induced import tariff
    structure to be more uniform in 2002 than
    it would have been otherwise.
    Towards More Effective
    Trade Policy
    In addressing the question of welfare-
    improving policy reform, political economy
    literature concentrates on forces behind
    distortive trade policies and opportunities to
    limit their influence.
    Towards More Effective
    Trade Policy
    Major factors favoring less distortive policies
     emergence of new political market actors with a
    policy demand for free trade;
     internal policy commitments (tariff unification,
    simplification of tariff structure) and institutional
    mechanisms;
     external obligations of a country concerning trade
    policy (made in the context of the WTO
    negotiations, regional agreements, etc.).
    General Assessment of the
    Political Economy Approach
    Though political economy models have still
    not reached the degree of theoretical and
    empirical sophistication characteristic of
    traditional trade theory models, they
    provide useful insights into real-world trade
    policy decisions and mechanisms to
    improve their efficiency.

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