The Political Economy of Trade Agreements

Introduction

On Monday August 27, 2018, President Donald Trump announced that the United States and Mexico had reached an understanding on the renegotiation of the North American Free Trade Agreement (NAFTA). During the summer months, Mexico and the United States had been negotiating without the third NAFTA partner, Canada, at the table. Apart from the geopolitical and economic issues that can result from a new bilateral agreement that fails to include all three of the original signatories to NAFTA, the possible new pact has raised a number of additional political and economic problems. For instance, U.S. automakers and labor unions have raised concerns that omitting Canada from a new trade deal would disrupt the production chains in place today, which are organized across all three countries. Furthermore, in fact, a new deal with Mexico would not constitute a renegotiation of NAFTA and any fresh trade agreement would be subject to U.S. Congressional approval. Experts have been surprised by this move by the Trump administration and are still astonished by the vision of trade underpinning it. That shock arises from the fact that traditional views in economics and political science based on cleavage and factor endowments theory cannot explain these choices. This essay seeks to outline a research agenda that can help scholars better understand these unfolding dynamics. I will here explore the most recent contributions addressing the political economy of trade agreements and argue that institutionalism can help analysts understand these developments more comprehensively. Research concerning the political economy of trade agreements is in fact at a standstill. I contend that interested observers can more effectively examine how and why this has occurred by integrating the literatures on institutionalism and varieties of capitalism with that concerning the political economy of trade agreements.

The Conventional ‘Wisdom’ – Cleavages, Factor Endowment and Institutions

What do individuals think about trade? Public opinion on trade is widely researched and there are many models that seek to delimit the factors that underlie those preferences. Cleavage theory has traditionally emphasized the structural dynamics that separate groups into advocates and opponents concerning specific issues; for instance, class divisions are prominent in industrial societies with worker interests clashing with those of capital owners (Lipset and Rokkan 1967). Analysts have also highlighted the variation in trade policy approaches apparent in different countries. Some nations, for example, have evidenced a continued willingness to expand free trade, whereas others have been consistently protectionist in their policy stance.

Several scholars have examined these dissimilarities from a factor endowment perspective. Rogowski, for example, studied the differences among nations in their capital, land and labor resources and concluded that advanced economies with abundant labor and capital, but with limited land, tended to favor freer trade. Meanwhile, he argued, economies with abundant land, but relatively scarce labor and capital, were more prone to protectionism (Rogowski 1989). That is, in his view, public opinion on trade policy tracks the factor endowments of countries.

In this theory, varying availabilities of the factors of production among nations (land, labor, and capital) yield comparative advantage. These scholars have posited that, with free trade, countries export goods derived from their most abundant resources and import goods that require resources that are scarce within their territories. To summarize, mainstream economists have contended that material factors lead countries to specialize in the production of certain items (Baier and Bergstrand 2004; Baier et al. 2008).

For their part, political scientists instead have focused on domestic institutional factors as they have sought to understand attitudes toward trade (Mansfield, Milner and Pevehouse 2007). This research, however, has not substantially progressed during the last two decades. In fact, arguably, contemporary political research has shifted little since publication of Milner’s “The Political Economy of International Trade” (Milner 1999). Milner summarized the research in political science prior to her article and argued that the move towards freer trade that has occurred in the global economy since the 1990s has arisen as a result of two principal factors, concerning the relative significance of which researchers are divided: (1) the preferences of domestic actors (pressure groups), and (2) political institutions. The first factor, trade policy preferences, reflects the demands that certain groups seek in domestic policy-making, for instance protection from international competition or access to foreign markets. The second factor highlights the role of political institutions in shaping nations’ trade policies., i.e., “different institutions empower different actors” (Milner 1999, 101). In this view, the architecture of political institutions, such as a presidential or a parliamentary political system, determine trade policy choices. In other words, this division among political scientists—either an emphasis on organized group preferences or on institutions—reflects an ongoing debate concerning whether individual and collective agency or structure is more important in determining political outcomes. I turn next to outline how some scholars have argued the elements that Milner highlighted actually are interrelated.

The State of the Art – Ideas, Interests and Institutions

Researchers often analyze trade policy and agreements within the framework of International Political Economy (IPE). IPE emerged during the last four decades as an academic field that aims to bridge the gap between the understanding of international affairs in economics and political science (Cohen 2008). IPE scholars study the interactions between domestic and international factors at different levels that affect economic policies and their outcomes. (Frieden and Martin 2003, 119).

Ideas

Recent contributions exploring the political economy of trade and trade agreements have identified several variables that can explain the formation of Preferential Trade Agreements (PTAs). These scholars have found that as the structure of the global economy has shifted, material factors have become somewhat less significant while other concerns, including gender, race and meso-level dynamics, such as local communities’ cohesion and citizen perceptions of the economy as a whole, have emerged as more important determinants of public attitudes.

The reshaping of the global economy with offshoring and global value chains makes it harder for citizens to evaluate how trade policy is affecting their local and national economy. According to Guisinger (2017), public perceptions of what the U.S. is trading, for example, are being distorted by the fact that it is increasingly difficult to ascertain what percentage of a product is actually produced in the country. Even the labels ‘made in’ do not help consumers understand what role trade has played in the good or service they are purchasing. As the links between trade, employment and consumption have become increasingly blurry, it has become similarly difficult to associate material economic interests and public opinion on trade. In a recent study investigating U.S. citizens perceptions of trade, Gusinger (2017) included gender, race and meso-level variables as proxies for the relative cohesion of local communities to develop a socio-tropic model of trade opinion. She found that women and minorities were more likely to express protectionist sentiments than Caucasian citizens. She argued that this finding reflected the different perceived economic vulnerabilities of members of the different groups. She also found that at the meso-level, in highly diverse communities a racial component appears to influence public opinion on trade. In this case, the more diverse a community’s population is, the more white Americans preferred protectionist policies, because they believed that trade liberalization was related to redistributive welfare mechanisms that benefitted mostly minorities in their communities. In another recent study, White (2017) found that cultural norms and values are an important component influencing individuals’ views on trade. Another factor that is increasingly considered in the literature is offshoring. In fact, the shift of factories and employment to different international political jurisdictions affects voters’ decisions. The perception that their own employment may be under threat by such practices makes individuals feel more vulnerable to freer trade and leads to protectionist opinions (Owen 2017; Rommel and Walter 2018).

Interests

The international economy today operates through Global Value Chains (GVCs). This concept captures the fact that different stages of production frequently occur in different countries. As a consequence, a large part of trade today is in components rather than final goods. Recent research has found that, “GVCs, by stimulating more trade in intermediates, facilitate trade liberalization” (Baccini, Duer and Elsig 2018, 11). Since trade liberalization occurs largely through trade agreements, GVCs and trade policy are closely intertwined.

In this context, the structure of interest representation is changing, and the role of global firms is increasingly crucial. International firms and corporations are highly influential in shaping national trade policies and trade agreements, either indirectly by influencing public opinion (Osgood et al. 2016; Rommel and Walter 2018), or directly by engaging in trade politics via interest and advocacy groups (Osgood 2018).

Institutions

Current analyses have found that at the international scale, political-military alliances such as NATO also affect trade flows and decisions to pursue free trade policies. In fact, free trade is likelier among the member nations of such political-military alliances than among nations that do not participate in such agreements (Gowa and Mansfield 1993). The institutional framework of international cooperation is therefore crucial for freer trade. In addition, the regime type of states is also important, as democracies are more likely to trade with other democratic countries (Mansfield, Milner, and Rosendorff 2002; Mansfield and Milner 2012).

However, it is domestic politics that provides the incentives for governments to enter into international trade pacts. As Mansfield and Milner (2012) have argued, domestic political factors strongly influence international coordination and the formation of trade agreements. Entering into a preferential trade agreement, or any international agreement, constrains a nation-state’s ability to stipulate policy. Hence elected leaders will closely evaluate the political costs and benefits of such arrangements. In particular, public leaders must assure the general citizenry and domestic interest groups that a PTA is beneficial (Mansfield and Milner 2012). Scholars have found that two institutional factors are particularly important in this process. First, the regime type and the degree of electoral competition within a country influence the likelihood that its officials will pursue PTAs. Second, the number of veto players—that is, the institutional groups, actors or processes that can block policy change—influence trade cooperation; in fact, the likelihood of entering a PTA decreases with an increasing number of veto players in a nation (Mansfield and Milner 2012).

Analyses of the factors that mediate trade policy design and adoption are not alone sufficient to understand a nation’s political economy of trade and PTA. As Oatley has suggested, despite such studies, “we know no more about the politics of trade policy today than we knew three decades ago” (Oatley 2017, 699). Nonetheless, investigations of the political economy of trade will benefit from intensive scrutiny of the institutional differences among democratic countries and efforts to link specific differences to trade policy choices.

Integrating Comparative Political Economy in the Study of Trade Policy

The academic literature in the field of Comparative Political Economy (CPE) can help analysts understand better the formation of preferential trade agreements by bringing in a more nuanced view of institutions. Traditional IPE analyses of trade agreements, as described above, have focused on electoral, legislative and bureaucratic public institutions. This perspective, however, has failed to include other important factors that affect the formation of trade agreements, including the way that business interests and class struggles influence government actions. In particular, different institutions in different countries shape the way class struggles and corporate interests can influence trade policy and the formation of trade agreements. Analysts have identified two ideal types of interactions between businesses, the public and politics: pluralism and corporatism. In pluralist societies, interest groups are neither subsidized nor licensed and do not require any type of formal registration. Interest groups are not hierarchically ordered, they belong to self-determined categories and compete with each other. This type reflects how lobbying is organized in liberal market economies such as the United States. In contrast, corporatism is a system in which interest groups intensely influence public decision-making processes by being formally involved in them. In these systems, interest representation is organized with monopolistic interest groups, hierarchically ordered and compartmentalized in sectors. This type is prevalent in coordinated market economies, such as Germany and other central European countries. In short, different institutional structures influence trade policy and the formation of PTAs differently.

Hall and Soskice (2001) developed the Varieties of Capitalism (VoC) approach to capture these differences. The VoC places firms at the center of analysis and it posits two ideal-types of capitalist societies: liberal market economies (LME) and coordinated market economies (CME). The prototypes for these types are, once again, respectively, the USA and Germany. The two forms differ principally in the ways each organizes institutional coordination: CMEs favor non-market coordination mechanisms, while LMEs tend to prefer market mechanisms. The VoC framework highlights how institutional differences can shape trade negotiations. Surprisingly, the literature on the political economy of trade has not yet utilized this approach to examine trade policy formation. I argue that the integration of CPE and IPE into studies of trade policy might provide useful insights. This appears to be a useful possibility for future inquiry and theory development.

Conclusion

Some of the issues presented above are related to the fact that the global economy is in constant evolution. There are nevertheless features of that system that have remained stable for two centuries. CPE scholars are interested in studying those enduring characteristics as well as changes. While scholarship concerning IPE and the political economy of trade agreements has historically employed either a context-specific (country-based case studies) approach or a cross-national frame, CPE offers a new analytic lens that may offer more nuanced understandings of the evolution of the global economy.

Overall, this analysis suggests that scholars understand fairly well how public opinion on trade is influenced by different factors. Incorporating the role of firms and the different ways in which advanced economies manage their interactions with interest groups is important to understanding the dynamics of how trade agreements are designed and accepted in specific countries. In this respect, it will be useful to continue to develop analyses that employ the CPE framework while also incorporating insights from the IPE literature.

Returning to the contemporary issue with which this essay began—NAFTA renegotiations—we can identify three possible explanations for the difficult discussions now underway. First, we might explain the divergent tactics of the three participating nations by focusing on the different public attitudes in each towards trade. As argued here, recent research has found that the most prominent cleavages among citizens are gender, race and meso-level specific, rather than national in character. This perspective, however, does not explain the diverging interests of the U.S., Mexico and Canada. A second explanation, following IPE scholarship, might be that domestic and international institutions favor different policy choices. This explanation, however, does not explain U.S. actions in light of its multi-faceted relationship with Canada, particularly. The difficulty of the current NAFTA renegotiation can be also be partially understood by including a third explanation, namely the diverging politico-economic frameworks of the different countries. The U.S. is a presidential democracy, whereas Canada is organized as a parliamentary system. The ways in which corporations and interest groups interact and influence policies in these nations are quite distinct. Further research that seeks to bridge CPE and IPE should help researchers better understand trade politics in the 21st century.

References

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Simone Franzi is a doctoral student in the Planning, Governance and Globalization program at Virginia Tech. His current research interest is in the political economy of trade and, in particular, how trade and trade agreements play roles in shaping geographies and polities. More specifically, he is studying the consequences of trade agreements for different dimensions of democracy. Prior to coming to Virginia Tech, Simone earned a Bachelor and a Master’s degree in Political Science and Geography from the University of Bern, Switzerland. His baccalaureate thesis addressed conceptualizations of trust in the social sciences. For his Master’s degree, he studied the implications of commodity trading for sustainable development and wrote a thesis on the relationship between commodity abundance and international cooperation.