Trade Policy

Trade Policy Jean-Baptiste Velut Draft  for International  Encyclopedia  of  Social  and  Behavioral  Sciences,  2nd   edition,  Elsevier,  2015.  

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Key words Exports Foreign economic policy Free Trade Agreements Globalization Imports International negotiations International Political Economy International Trade Protectionism Regionalism Tariff duties Trade theory Two-level games World Trade Organization

Abstract The notion of trade policy is a transdisciplinary object that has received considerable attention among economists, political scientists, international relation scholars and sociologists seeking to understand its origins, nature and outcomes. Its conceptualization has changed according to theoretical developments in each of its nurturing disciplines – the rise of neo-institutionalism and International Political Economy being only two of the main subfields contributing to enrich theories of trade policy. At the empirical level, the very definition of trade policy has always been contingent upon the history of the world economy. Thus, the changing nature and ever-greater significance of international trade over the past fifty years has renewed controversies surrounding the economic, social and environmental ramifications of trade policy, and more broadly surrounding the evolving relationship between markets and states under the new constraints of globalization.

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What Is Trade Policy? At its core, trade policy consists of managing the international exchanges of goods and services between national or regional economies. In the Westphalian era, this realm of public policy has traditionally been the prerogative of national governments, although the behavior of private actors has shaped international trade flows from the monopoly of the East India Company to Apple’s global supply chains. The conduct of trade policy falls into two main categories: 1) the regulation of imports; 2) the management of exports, itself divided between export promotion and export controls. The growing significance of international trade – from 22% of world GDP in the early 1970s to more than 50% in 2012 – and the intensification of economic competition in the second half of the twentieth century prompted decision-makers to develop an ever-wider array of policy tools to manage the circulation of goods and services. Long confined to tariff duties and import quotas, trade policy has mutated into more sophisticated forms of import restrictions designed to protect domestic interests threatened by foreign competition, among which rules of origins, sanitary and phytosanitary standards and other technical barriers to trade. Conversely, national governments have resorted to a growing range of measures aimed at supporting both small and large exporting companies, whether through preferential loans, insurance programs, technical assistance or trade missions. Finally, export controls remain an integral part of trade policy, although they have been generally subordinate to security interests (economic sanctions, arms controls). Trade policy reflects a country’s openness to, or isolation from, the rest of the world and is, therefore, implemented through regional or multilateral trade agreements. Multilateral agreements have been negotiated under the aegis of the General Agreement on Trade and Tariffs (GATT) since 1947, before it was replaced by the World Trade Organization (WTO) in 1995. Today, the WTO continues to promote trade liberalization (under the non-discriminatory principle of the “Most-Favored-Nation”) and has played an important role in settling trade conflicts among its 150 members thanks to its dispute settlement body. Unlike multilateral agreements, regional accords – whether bilateral or plurilateral – are by definition preferential trade agreements (PTAs) insofar as they grant concessions 3 / 17

to specific trading partners. PTAs have proliferated over the past twenty years as countries compete for foreign markets and/or favor regional integration over the more competitive route of multilateralism. In 2014, the WTO recorded no fewer than 583 notifications of regional trade agreements throughout the world. Trade policymakers can resort to three types of PTAs according to the degree of economic integration that they seek. Partial scope agreements such as the European Steel and Coal Community (1951) or the US-Canada Auto Pact (1965) are conducted on a sectoral basis and are often preliminary to greater economic cooperation. Free trade areas like the North American Free Trade Agreement aim to dismantle trade barriers among a set of economic partners while leaving them free to pursue independent policies with non-members. By contrast, customs unions like the European Union imply not only trade liberalization within a certain geographic zone but also imposes common external tariffs to its members. The growing complexity of both regional and multilateral agreements reflect the above-mentioned diversification of trade policy tools. At the multilateral level, trade negotiators began to focus on “non-tariff barriers” during the Tokyo Round (1973-1979). Since then, the GATT/WTO’s agenda has embraced issues that go far beyond trade, such as intellectual property rights, investment, procurement or regulatory standards (Maskus (2000); Muzaka (2009); Weiss (2006)). The so-called “behind the border” rules have raised sensitive questions about national sovereignty and, as a result, involved an evergreater number of trade policy stakeholders. This has made the design of trade policy increasingly complex.

Trade Policy Formation The study of trade policy formation can be classified in four categories, each of which has its own subdivisions and variations: system-centered, society-centered and statecentered approaches, as well as “two-level” or “multi-level” games. These interpretations should not be conceived as mutually exclusive but as the different pieces of the trade policy puzzle, a complex process at the intersection of the domestic and international sphere. “Two-level games” are particularly well equipped to depict the complexity of trade policy models insofar as they incorporate multiple variables at each level of

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analysis: the role of societal forces, decision-makers and institutional structures in the domestic sphere; and state actors, intergovernmental organizations and transnational advocacy networks in the international sphere.

Structural theories of trade policy Hegemonic stability theory System-centered theories of trade policy are primarily concerned with the international level of analysis. They focus on the relation between the world’s distribution of power and the structure of international trade. This type of literature can be subdivided into two principal schools of thoughts: hegemonic stability theory and (neo)Marxian models. Kindleberger’s World in Depression (1973) is commonly viewed as the earliest formulation of hegemonic stability theory. In his study of the interwar period, Kindleberger identified Britain’s inability and America’s reluctance to stabilize the international economic system as the main cause of the Great Depression. Two years later, amidst fears about declining US power, Gilpin (1975) drew the lessons from Kindleberger’s seminal contribution to predict that America’s increasingly contested hegemony would lead to a renewal of mercantilist policies. Krasner (2000) reformulated these empirical studies in a coherent framework that would later be called hegemonic stability theory. Krasner’s systemic theory of trade policy can be summarized as follows: “a hegemonic distribution of power is likely to result in an open trading structure” (Krasner (2000)). His rationale rests upon the idea that trade openness, while raising national economic income, tends to generate social dislocations as labor shifts from one sector to another. Consequently, only a large and dynamic economy, like Britain in the nineteenth century or the United States after World War II, can bear the brunt of promoting trade liberalization. In contrast with Gilpin and Krasner’s realist perspectives, Keohane renewed with Kindleberger’s “benevolent” version of hegemonic stability theory to stress the correlation between the “leadership lag” of the 1970s and changes in international economic regimes, namely in the oil, monetary and trade areas (Keohane (1980); Keohane & Nye (1977)). In a reformulation of his argument, Keohane (1984) argued that

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cooperation can in fact persist in a non-hegemonic international system under the tutelage of international regimes. His emphasis on the “independent life” of regimes distinguishes Keohane from Gilpin, who has continued to argue that the absence of a hegemon renders co-operation exceptionally difficult (Gilpin (2001)). (Neo)Marxian approaches to trade policy The first prominent authors to apply Marxian theories to the international trade system were Lenin and his contemporaries. Along with fellow Marxists Bukharin, Hilderling and Luxemburg, Lenin interpreted imperialism as a new era dominated by financial capital. In this new phase of capitalism, developed countries occupied a monopolistic position and struggled for the control of foreign markets and industries. Their foreign economic policies served the interests of financial capital and were by definition the result of “the struggle of the Great Powers for the economic and political division of the world” – (Lenin (1939)). What was idiosyncratic of this period was the fact that Marxists like Lenin and Kautsky associated imperialism with mercantilist trade policies (Etherington (1982)), even though Rosa Luxemburg stressed the inherent contradictions between the expansionist proclivities of financial capital and the nationalist scope of protective tariffs (1968). Conversely, the next wave of Marxian interpretations of trade policy emerged during an era dominated by trade-liberalizing policies. In the late 1960s-early 1970s, dependencia theorists interpreted foreign penetration in the political economies of Latin America as a source of underdevelopment. For dependentistas, as well as world system theorist Wallerstein, the development of capitalism divided the world economy into metropolitan centers and peripheral satellites, the former expropriating the latter’s economic surplus (Chilcote (1974); Frank (1967 & 1969); Wallerstein (1979)). Like Leninism, this form of neo-Marxism interpreted trade policy as the result of structural economic forces. As Frank wrote, “trade relations are based on monopolistic control of the market” (1970, 231). Within this framework, capital interests drove trade policy.

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Society-centered theories of trade policy While system-centered theories focus on the international level of analysis, societycentered or “market” perspectives on trade policy are concerned with domestic politics. Within this framework, the policy process is the result of a struggle for influence among various interest groups, a political competition arbitrated by decision-makers (Ikenberry, Lake & Mastanduno (1988)). In political science, this theoretical model borrows from the American pluralist tradition and has dominated analyses on U.S. trade politics since Schattschneider’s seminal study of the Smoot-Hawley Act of 1930 (Schattschneider (1935); Gourevitch (1977); Baldwin (1985)). In the sphere of economics, theories of trade policy have developed along two standard economic paradigms: the factor model and the sector model. Based on the Stolper-Samuelson theorem, the first claims that trade will reward abundant factors (e.g. capital in the United States or labor in China), but punish or reduce the income of scarce factors (American workers or Chinese capital-owners), leading eventually to “factor-price equalization” i.e. the convergence of factor costs (Oatley, 2006, 70-4). Under this assumption (also referred to as the Hecksher-Ohlin model), trade policy is driven by the competition between mobile factors of production. From these principles of neo-classical economic theory, Rogowski (1989) derived political implications: scarce factors will likely lobby for protectionism, while abundant factors will pressure the state for increased openness. “Losers” from trade liberalization will experience declining political leverage, while economic winners will become increasingly powerful. The second and dominant society-centered paradigm rejects the mobility of production factors and the monolithic vision of class interests upon which the factor model is based, pointing not only to the problematic conversion of low-skilled workers into high-skilled technicians, but also to the lack of fungibility of capital from one sector (e.g. mining industry) to another (e.g. biotechnology). Instead, the Ricardo-Viner model holds factors as “specific” to industries and focuses on the conflict of interests between sectors, and more precisely on the competition between import-competing industries and export-oriented companies (Schattschneider (1935); Bauer, de Sola Pool, & Dexter (1972); Baldwin (1985); Magee & Young (1987); Alt & Gilligan (1994)). While these two economic theories are generally considered to be mutually exclusive, Hiscox (2001,

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2002) has sought to bridge the gap between factor and sector models. He argues that coalition patterns depend on inter-industry factor mobility. Thus, broad class-based coalitions are more likely where factor mobility is high, while narrow industry-based coalitions are more common where mobility is low. While conventional society-centered interpretations of trade policy provide useful insights into the domestic dynamics of trade policy, they tend to neglect or downplay the importance of two major developments in the international political economy. First, what is often missing from societal trade models is the transformative effects that the geographic mobility of capital has had on trade politics over the past three decades. Indeed, since the 1970s, multinational corporations have developed complex global supply chains leading to a dramatic expansion of intrafirm trade. The rapid liberalization of international trade and investment flows contrasts with the enduring immobility of labor. This asymmetry has generated intra-sectoral class conflicts that conventional sector-specific models can hardly explain. On the one hand, multinational corporations can benefit from the cost reductions resulting from outsourcing and are, therefore, prone to support laws that liberalize trade and investment flows. On the other hand, domestic workers are the first victims of offshoring and will logically oppose the very same trade agreements – as witnessed by the protectionist retrenchment of American labor since the 1970s (Helleiner (1977); Moody (1997); Dreiling & Darves (2002)). The growing class cleavages of American trade politics have been particularly visible during recent debates on NAFTA, which, for instance, pitted autoworkers against their employers (Chase, 2003; Cox, 1995). A second lacuna of both factor- and sector-based models is related to another feature of contemporary trade politics that cannot be captured by class-based analyses: the expanding scope of trade policy beyond tariff barriers. The growing social and environmental ramifications of trade agreements logically triggered the political mobilization of new trade policy stakeholders among which environmentalists, consumer advocates or human rights groups. From the NAFTA debates to the Seattle protests of 1999, non-governmental organizations in the United States and elsewhere have invited themselves to the negotiating table (Hinojosa-Ojeda, 2002; Mayer, 1998; Vogel, 1997; Destler & Balint, 1999; Esty, 1998). They have struggled to broaden the terms of trade

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debates in a policy sphere long reserved to trade associations. Some scholars have focused on the challenges and opportunities inherent to integrating trade policy and environmental regulation (Gallagher (2004); Fickling & Schott (2011)). Others have examined the rising prominence of labor standards in the trade policy sphere and pondered whether globalization deters or encourages the enforcement of labor and/or human rights (Elliott & Freeman (2003); Flanagan (2006)). Globalization scholars are often better equipped to study the dynamics of these new trade-related debates than conventional trade economists. The latter tend to reduce trade policy outcomes to either free trade or protectionism, thereby leaving aside important moral questions on the social terms under which international trade takes place. Finally, and despite their dominance in the field, society-centered studies of trade policy have been criticized for their disregard for the role of decision-makers and institutions. In particular, the market-based approaches described above often reduce the policymaker to “an auctioneer in a product market” (Magee & Young (1987)), a lacuna that has been challenged by neo-institutionalist scholars.

State-centered approaches Over the past two decades, political science has departed from pluralistic, economics-based models of policy-making to “bring the state back in” and (re)emphasize the conditional autonomy of government on the hand, and the “policy legacies” of institutions on the other (Evans, Rueschemeyer, and Skocpol (1985); March & Olsen (1984); Immergut (1998)). This renewed interest in institutional forces gave rise to statecentered approaches to trade policy, which fall into two categories: “state-as-an-actor” theories, which highlight the independence of decision-makers; and institutionalist models, which stress the impact of domestic structures. Within the former literature, the emphasis is on how governments shape trade policy to defend their national interest, of which international competitiveness is a crucial component. Under this category of argument falls the perennial “infant-industry” argument according to which government must shield its emerging domestic industries from foreign competition until they become fully competitive. This argument can be traced back as far as 1645 (Irwin (1996)) but was most famously enunciated by

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Alexander Hamilton (1791), who called for the adoption of tariff duties to protect its America’s nascent manufactures. This challenge to the free trade orthodoxy of classical economists like Adam Smith and David Ricardo reemerged in the 1980s under the banner of strategic trade theory. Often associated with the work of Brander and Spencer (1983) and Krugman (1986), strategic trade theory took stock of the imperfection of markets, the logic of economies of scale, scope and experience, as well as the role of technology spillovers to explain how government could protect and invest in national firms in order to maintain a competitive advantage in strategic sectors of the economy (Gilpin (2001)). This theoretical conception of trade policy has broad empirical implications to the extent that it tends to legitimize interventionist policies in the name of economic competitiveness. The rise of China has renewed interest in so-called “developmental states” and their ability to shape growth through industrial and trade policies (Rodrik (2007); Haley & Haley (2013)). Today as in the 1980s, when Japan’s economic surge threatened American competitiveness, sector-specific policies ranging from government subsidies, non-tariff barriers and export-promotion are once again a source of both envy and anxiety toward so-called “unfair trade”. Amidst these political debates, political economists have, however, shattered conventional dichotomies between strong and weak states, revealing, for instance, that the United States has long played an active role in supporting the private sector, not least with protectionist or interventionist trade policies (Block (2008); Chang (2003); Weiss (1998)). While this approach confers great responsibility to decision-makers, a second school of thought has devoted greater attention to the institutional constraints under which they must operate. For institutionalist scholars of foreign economic policy, the formation of domestic structures has a durable impact on politics as it restricts future policy choices and potentially shapes ideas and coalitions (Katzenstein (1977); Gourevitch (1978); Goldstein (1994)). As Goldstein writes, “policy is path-dependent: the world does not start anew at each decision point. Rather, history builds an ever-morecomplex web of interests, ideas and policies” (1994, 22). In short, institutions shape the orientation of trade policy, while institutional changes occur primarily in exceptional circumstances such as periods of crises (major wars, deep recessions etc.) (Ikenberry, Lake & Mastanduno (1988)).

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For instance, in the United States, the Reciprocal Trade Agreements Act (RTAA) of 1934 has been largely held as a catalyst for the adoption of liberal trade policies. Indeed, by transferring the tariff-making authority from the legislative to the executive, it redefined the relationship between business and government. This power shift was renewed with the creation of fast track authority in 1974 which delegates tradenegotiating authority to the executive branch, and has arguably helped to shield the decision-making process from pressure groups (Destler (1986); Haggard (1988); Goldstein (1994)). On the other hand, free trade institutions have co-existed not only with older protectionist institutions such as the U.S. escape clause, but also with the resurgence of protectionist remedies in the last quarter of the twentieth century, giving rise to a “hybrid” trade policy that promotes both trade liberalization and protective tariffs in certain sectors (Goldstein (1986)). A common grievance addressed to institutionalism is that it is a poor predictor of change. Indeed, by themselves, institutional factors are nothing more than intervening variables. They are only relevant because they can affect the mobilization of political actors on behalf of policy innovation. On the other hand, and as some statist theorists acknowledge, institutions are also “malleable” and can be instrumentalized by decisionmakers (Haggard (1988); Ikenberry (1988)). As Ikenberry notes, “in terms of explaining foreign economic policy, the institutional approach can provide only some of the answers” (ibid.). To be useful, institutional and societal forces must, therefore, be combined. Finally, the study of trade policy formation must also account for the interplay between the domestic and international levels of analysis, an intellectual undertaking best encapsulated in two-level games.

Two-level and multiple-level games While economists and institutionalists provided crucial insights into the internal dynamics of policymaking, International Relations scholars have encouraged students of trade policy formation to consider both domestic and international factors. The seminal contributions of Bruck, Sapin and Snyder (1962) and Gourevitch’s “Second Image Reversed” (1978) represented two early attempts to analyze the interaction between

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domestic politics and the international environment. Gourevitch posited that international events were not only the reflection of domestic structures – “a second image” – but also a source of political change at the state-level: a “second image reversed”. Both Snyder and Gourevitch’s analyses included a wealth of variables: structural and societal, and even ideational factors at the domestic level; institutional and power-related determinants at the international level. In 1988, Putnam built upon the work of his predecessors to formulate a more parsimonious theory. His analysis of international economic negotiations at the Bonn Summit of 1978 has since become a classic in International Relations. For Putnam, international politics can be conceived as a two-level game: at the national level (Level II), domestic actors pursue their interests by pressuring the government while politicians seek political support by building coalitions; at the international level (Level I), national governments strive to satisfy their domestic constituencies, while minimizing the adverse effects of foreign developments. Within his framework, the decision-making process hinges on a “win-set,” defined as the set of all possible international agreements that would obtain the necessary majority among domestic constituencies. For Putnam, the size of this “win-set” is crucial to the outcome of negotiations. Larger win-sets are more likely to be successful, i.e. to lead to international cooperation. Conversely, smaller win-sets, whether real or simulated by negotiators, are more difficult to overcome and, thus, likely to confer more bargaining power to state actors. What forces shape win-sets? Here, Putnam points to three factors: domestic politics, state institutions and the strategy of international negotiators. Despite his emphasis on the significance of domestic politics, Putnam does not exclude the possibility

of

a

“second

image

reversed.”

In

fact,

his

concept

of

“reverberation” posits that international pressures can impact the domestic sphere. Putnam provides a robust theoretical toolbox to understand the complex dynamics of trade politics, insofar as it synthesizes many elements of the society-centered and statist approaches. As a result, it has become a popular framework for the study of trade policy formation, particularly congenial with intergovernmental negotiations. For instance, two separate studies of the negotiations on NAFTA show that two-level games are

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particularly well-equipped to analyze North American trade politics (Cameron & Tomlin (2002); Mayer (1998)). However, Putnam’s analytical framework shows less explanatory power when applied to intergovernmental negotiations within well-established international organizations like the European Union. Indeed, not only do “two-level games” ignore the autonomous role of surpranational institutions in agenda-setting, but they also disregard the hypothesis that national governments might instrumentalize international negotiations to pursue unpopular domestic reforms that fall outside their win-sets. This is all the more important in the trade policy sphere, where national governments have delegated their negotiating authority to the European Union. To remedy this problem, scholars have expanded Putnam’s framework into a “three-level game” that incorporates the logic and dynamics of supranational institutions (Moyer (1990); Patterson (1997)). In doing so, they renewed with the neofunctionalist tradition of Ernst Haas (1958), who studied the role of transnational actors and supranational officials to understand the self-reinforcing process of European integration. Others have developed multi-level analyses to account for multiple factors including subnational groups, supranational actors or transnational advocacy networks (Smith & Ray (1992); Hinojosa Ojeda (2002)).

The future of trade policy These sophisticated models illustrate the growing complexity of the trade policy process in the globalized economy, a policy sphere that is no longer confined to tariff duties. The challenge of negotiating far-reaching agreements under the unanimity rule of the WTO – illustrated by the failure of the Doha Round – has led some countries to pursue trade initiatives at the bilateral and regional levels that may be more attuned to their economic interests and worldviews (Krist (2013); Lynch (2010)). Amidst the proliferation of regional trade agreements, two competing varieties of regionalism have emerged. One model, defended aggressively by the United States and Europe, aims to promote comprehensive agreements that go far beyond conventional tariffs to tackle complex issues such as regulatory coherence, digital trade and state-owned enterprises. This deeper form of integration contrasts with China’s policy of non-interference and the more circumscribed nature of its multiple trade initiatives. Without a revival of

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multilateral trade negotiations, the future of trade policies is likely to be shaped by these competing models. More than a complex bureaucratic apparatus, the debates surrounding trade policy are in essence a battle over the norms and rules of economic globalization that will be shaped by the dynamics of the world economy, the geopolitical tactics of competing nation-states and the social and economic interests of producers, workers and consumers.

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Cross references 71039. International Trade: Economic Integration 71040. International Trade: Commercial Policy and Trade Negotiations 72023. Globalization: Geographical Aspects 72079. International Business: Geographic Aspects 73003. International Business 73004. Multinational Corporations 75023. Industrial Policy

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