International eco: Trade policy in practice Lect 10 part 1
Median voter theorem
Intro
Why do we still observe countries actively implementing trade policy?
gains from trade: countries as a whole benefit from free trade
Why do we still see so many protests against free trade / globalization?
several reasons for this:
Politics
There may be gains/disadvantages from trade not taken into account by our (simple) models
Some groups do lose from trade, and actively lobby for trade policy to protect their interests
Countries retaliate against other countries’ trade policy
Infant industry arguments
Environment
Labor standards
Politics of trade politics- 2 simple models
democratic societies, trade policies are set by politicians
These politicians are voted into office
They have an incentive to set policies that make people vote for them. But, they also need money to campaign for votes
Understanding this process, can help us understand why some trade policies (e.g. export subsidies) are put into place that lower a country’s overall welfare
Political economy models provide insights into why and how certain policies are chosen
They are based on the idea that politicians care about maximizing their own political success, rather than national welfare
Two important notions in these models:
Median voter theorem
Collective action
Predicts that democratic political parties pick their policies to court the voter in the middle of the ideological spectrum (i.e., the median voter)
Example: Suppose the level of a tariff rate is the only policy issue.
Line up all the voters according to the tariff rate they prefer, starting with those who favor the lowest rate
Graph slide 9/60+ 11/60
Assumptions of the model [other electoral systems can also be modeled, but typically more elaborate (more difficult math)]
Only one policy
The objective of each party is to get elected by majority vote
There are two competing political parties
Parties live up to their promises (if they don’t, no one would ever vote for them again)
What policy will they pursue?
Both parties will offer the same tariff policy to court the median voter (the voter in the middle of the spectrum) in order to capture the most votes.
Thus, the median voter theorem implies that a two-party democracy should enact trade policy based on how many voters it pleases.
A policy that inflicts large losses on many people (consumers) but benefits a small number of people (import-competing producers) should NOT be chosen
So, no quota, no export subsidies, no import tariffs!
Trade policies in practice
Agriculture: farmers make up a small fraction of the electorate but receive generous subsidies and trade protection.
Example
European Union’s Common Agricultural Policy
Japan’s 1000% tariff on imported rice
America’s sugar quota
Recently: protection of domestic high-tech industries
Also, we see tariffs in many middle income / developing countries:
US tariffs on Chinese solar panels, wind turbines, etc.
EU threatens to follow
Brazil raised import tariffs on many products in 2012
Ghana imposes tariffs on used cars
China’s tariffs on American cars