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International eco: Trade policy in practice Lect 10 part 2 (Collective…
International eco: Trade policy in practice Lect 10 part 2
Median voter + collective action
Median voter theorem per se, can not explain these policies
Consumers would prefer no tariffs, and cheaper products
“only” producers facing import-competition benefit from them (often a small group)
To be able to explain this, add an additional element to political economy model:
Collective action
Collective action
Political activity is often described as a collective action problem:
While consumers
as a group
have an incentive to advocate free trade, each
individual
consumer has
no incentive
because his benefit is not large enough compared to the cost required to advocate free trade
Policies that impose large losses for society as a whole, but small losses on each individual may therefore not face strong opposition
Instead, for groups where each
individual
suffers large losses from free trade (unemployment, bankruptcy), each individual in that group has a
strong
incentive to advocate the policy he desires: tariffs / subsidies!
For them: the cost required to advocate restricted trade is small compared to the cost of unemployment/bankruptcy
(they do not face a collective action problem)
Collective action problems, can explain why the median voter
theorem does not give us accurate predictions about trade
policy in practice:
Trade policy in practice
These funds may especially come from groups who do not have a collective action problem and have a keen interest in a special interest policy:
Trade restrictions remain in place if
Consumers do not care too much about them (there are many other issues they typically find more important)
The special interest groups pay contributions to the party’s campaign that are big enough for the party to be willing to run the risk of not setting a “median-voter” policy
Politicians win elections partly because they advocate popular policies as implied by the median voter theorem, they also
require funds to run campaigns
Politics: trade policy in practice
Besides domestic policy, some restrictions remain in place because countries often respond to other countries’ trade policies
Extreme case:
trade wars
Multilateral trade policy
Only the threat of other countries imposing trade restrictions, can already result in them being applied:
To avoid this, countries need an agreement that prevents a trade war or eliminates the existing protection
How does this work?
Potential trade wars --> without coordination both countries choose protection
although if countries can establish a binding agreement to maintain free trade, both would be better off
Or, if the damage has already been done --> agree to return to free trade
All countries could enact trade restrictions,
even if it is in the interest of all countries to have free trade
Multilateral trade policy
: this explains why
international negotiation
in trade policy is important
Bilateral trade agreements
Regional trade agreements
W
orld
t
rade
o
rganization