Preferential Trade Agreements, Depth, and Regime-Type READING ASSIGNMENT: Mansfield, Edward D., Helen V. Milner, and B. Peter Rosendorff. 2002. Why Democracies.

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.

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The Plan

• Regional Trade Agreements

• Domestic politics

• Democracy v. dictatorship

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Regional Trade Agreements • Free Trade Area (e.g., NAFTA)

– Eliminate tariffs amongst members

– Members maintain independent trade policies with non-members

• Customs union (e.g., EU)

– Eliminate tariffs amongst members

– Common tariff policy with non-members

• Discriminatory?

– Allowed under GATT Article XXIV – as long as tariffs are no higher than the level applied by (ALL***) countries prior to the arrangement

– (MERCOSUR led Argentina to raise tariffs on non-members – but not above the level of the highest MERCOSUR member)

• Currently 190-250 RTAs in operation (up to 400 on the horizon for 2010)

• More than half are bilateral (e.g., KORUS)

• Most are free trade agreements3

Customs Unions• Central American Common Market (CACM)

• Andean Community (CAN)

• Caribbean Community (CARICOM)

• Economic and Monetary Community of Central Africa (CEMAC)

• East African Community (EAC)

• Eurasian Economic Community (EAEC)

• European Economic Area (EEA) (plus EC – Andorra, EC – Turkey)

• Gulf Cooperation Council (GCC)

• Southern Common Market (MERCOSUR)

• Southern African Customs Union (SACU)

• West African Economic and Monetary Union (WAEMU)

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Narrow and deep

• Most of the trade agreements in today’s class…

• BILATERAL

• As narrow as possible

• Still a form of international cooperation

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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)7

Will bilateral cooperation hurt global cooperation?

• Recall Richardson Hypothesis

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Why would you go to NAFTA?

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Why would you go to NAFTA?

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Without NAFTA

• Perhaps you don’t go to the WTO at all

• Status quo prevails

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With NAFTA?

This round: the “losers” from trade are weakened

Next round: government cares less about their preferences

The “ideal point” of the government shifts

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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

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Abundant factors win from globalization (intuition: supply & demand)

In a closed economy (autarky),

Papa Smurf is in high demand.

And he has a lot of cheap labor.

But imagine there’s another country out there with lots of “Papas” and only one regular smurf.

If these countries trade, the supply of Papa-goods (for the 1st country) goes way up (and the price way down)

Meantime, the demand for regular smurf-goods (worldwide) goes way up – and so does their price.

WINNERS FROM TRADE!LOSERS FROM TRADE!

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 government15

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

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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

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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

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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

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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!

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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

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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 PTAs24

Thank youWE ARE GLOBAL GEORGETOWN!

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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

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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

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