Preferential Trade Agreements, Depth, and Regime-Type

1. Preferential Trade Agreements, Depth, and Regime-Type READING ASSIGNMENT: Mansfield, Edward D., Helen V. Milner, and B. Peter Rosendorff. 2002. Why Democracies Cooperate More: Electoral Control and International Trade Agreements. International Organization 56 (3):477-513.

2. The Plan • Review • Domestic politics • Democracy v. dictatorship

3. Narrow and deep • Most of the trade agreements in today’s class… • BILATERAL • As narrow as possible • Still a form of international cooperation

4. Preferential Trade Agreements (PTAs) • PTAs are a form of Regional Trade Agreement (RTA) • What are the two types of RTAs? • Free trade area • Customs union • Which is more common? • FTA • Why? • Customs unions require more sacrifice (common external tariff) • Do RTAs violate the WTO principle of MFN? • Yes & no • They clearly go against the spirit of MFN • But they are allowed by the WTO/GATT charter (GATT Article XXIV) • FTAs are becoming increasingly important • 1st wave in the 1950s • 2nd wave started in the 1990s and is continuing (100s are currently in force)

5. Will bilateral cooperation hurt global cooperation? • Recall Richardson Hypothesis

6. Why do some groups organize more effectively than others? • Consider a can of soda: • Why “fructose” instead of sugar? • Ever been to Europe? Is “fructose” used there? • American consumers (large group) • American sugar farmers (small group), corn farmers (relatively small group) • Small groups organize more effectively than large groups

7. Collective action problem faced by consumers and producers • Collectively rational for consumers to fight barriers to free trade • But it is individually irrational • Too costly to become informed about trade policy • Too costly to mobilize to act • Protectionism may only cost individual consumers a small amount, so it is not worth it to become informed and fight it • Even though collectively it is worth it • For producers, the benefits of protectionism are huge and easily outweigh the costs • Fewer producers = fewer “free riders” • Hence, easier for producers to lobby government

8. What can a democratically elected government do? • If it can improve economic performance, it can increase the probability of reelection • So, it has an incentive to fight protectionism • Increase the income of consumers/voters • But consumers/voters do not have the incentive to become informed • Rational ignorance • And producers pressure the government to protect them • If they pursue free trade: • Face punishment from producers • Receive no reward from uninformed voters

9. Why a trade agreement? • Send a signal to consumers of “good” policy? • “Import-competers” lobby against free trade • Small, organized group – benefits of protectionism concentrated • Consumers win from free trade • Large, disorganized group – benefits of trade disbursed • In democracies, governments want to win reelection • The small group lobbies for protection… the large group is (rationally) ignorant • The trade agreement “signal” solves the rational ignorance/collective action problem of consumers • Governments signal their trade… • RESOLVE! • Credible signal because of outside enforcement • Recall Hollyer & Rosendorff

10. How can the government send a CREDIBLE signal that it fights protectionism? • Mansfield, Milner, and Rosendorff (MMR): • Enter into a trade agreement with another government • It’s a fire alarm story – democracies seek a credible outsider • Fire alarm story • That outsider = a foreign government it signs a PTA with • sends a signal to voters, as the outsider can lodge a complaint if they believe the other side reneged on their commitment in the PTA towards liberalization

11. The story requires several features of the international trade agreement • Requires the outsider government to have better information than voters • Requires the outsider government to announce violations • Requires more scrutiny to exist with participation in the international agreement than without it • Requires uninformed voters to pay attention to signals from outside governments

12. A key prediction: • Democratic governments have an incentive to resist protectionist lobbies • They use PTAs as a signal to “the median voter” • Dictatorships do not have the same incentives • They succumb to protectionist lobbies • Democracies are more likely to enter into PTAs than dictatorships!

15. What do the statistical tests demonstrate? • MMR story is PLAUSIBLE: • Democracies more likely to sign PTAs than non-democracies. • Other findings: • Small countries (economies) enter PTAs • Former colonial ties encourage PTAs • Allies enter into PTAs • Neighbors enter PTAs • GATT members enter PTAs! • Waning hegemony  more PTAs • Surprising? Trade flows and military disputes do not seem to matter • However… • Is the mechanism right? • Plausible story, but not the only possible story

16. Take-aways • Free trade area, Customs union, Common External Tariff • Collective action: easier for small groups. • Voters benefit from free trade, but it's a large group and the benefits are small • Classic collective action problem: • Collectively rational for consumers to fight barriers to free trade, but it is individually irrational • Import-competing industries benefit from protectionism and the benefits are huge • Using international agreements to send credible signals (again) • This time: trade agreements • Why credible? Independent 3rd party enforcement (the other country in the agreement) • Democracies seeking efficient trade policies can use the international agreement as a credible signal • Democracies more likely than dictatorships to enter into PTAs

17. Thank youWE ARE GLOBAL GEORGETOWN!

18. Simplification of the argument(Mancur Olson, 1965, The Logic of Collective Action) • Expected value of taking action: • E(action) = Pr (my action makes the difference)*X – C • As the group gets larger, the probability that one individual will make a difference gets smaller. • How does Olson resolve this? • Selective incentives: • E(action) = Pr (my action makes the difference)*X – C + S • “S”: “Selective incentive” – applies only to the individual taking the action

19. What are barriers to trade & what are their effects? • Tariffs, Quotas, Subsidies, and other restrictions • They affect a national economy by lowering competitiveness, which may hurt in the long run • Shelter new industries? The infant industry view • They help domestic (import-competing) producers by allowing them to charge less • But they hurt foreign producers • And they hurt domestic consumers (voters) by raising prices