The Political Economy of International Trade

The following sections are included:

• Dedication
• About the Author
• Contents

Economists agree that free trade is beneficial. Open trade promotes growth, improves economic welfare, and fosters the efficient allocation of resources. Nonetheless, free trade has been the exception rather than the rule. Countries routinely impose barriers to trade, engage in disputes over trade, and try to manage the flow of trade. Politics is central to these deviations from openness, a longstanding realization that has generated a vibrant literature on the political economy of international trade. This volume contains a collection of the articles that various co-authors and I have written on this topic over the past twenty-five years…

Over the course of the previous two decades, political scientists have become increasingly interested in the relationship between international politics and global trade. Much of the literature on this topic centers on the effects of a hegemonic distribution of power on commerce. Hegemonic stability theorists argue that hegemony is a necessary condition for the existence of a liberal economic order and that in the absence of a hegemon, a liberal international economy is particularly difficult to establish and maintain. However, a growing number of theoretical and empirical critiques have been leveled against hegemonic stability theory, and the issue of whether hegemony helps shape patterns of global trade continues to be the topic of heated debate…

Recent literature attributes the relative scarcity of open international markets to the prisoner's dilemma structure of state preferences with respect to trade. We argue that the prisoner's dilemma representation does not reflect the most critical aspect of free trade agreements in an anarchic international system, namely, their security externalities. We consider these external effects explicitly. Doing so leads us to two conclusions: (1) free trade is more likely within, rather than across, political-military alliances; and (2) alliances are more likely to evolve into free-trade coalitions if they are embedded in bipolar systems than in multipolar systems. Using data drawn from an SO-year period beginning in 1905, we test these hypotheses. The results of the analysis make it clear that alliances do have a direct, statistically significant, and large impact on bilateral trade flows and that this relationship is stronger in bipolar, rather than in multipolar, systems…

We analyze the effects of alliances and preferential trading arrangements on bilateral trade flows. Both factors are likely to promote trade among members, but we argue that the interaction between them is central to explaining patterns of commerce. The combination of an alliance, which creates political incentives for participants to engage in trade, and a commercial institution, which liberalizes trade among members, is expected to provide a considerable impetus to commerce among parties to both. The results of our quantitative analyses support these arguments. Both alliances and preferential trading arrangements strongly affected trade from 1960 to 1990, and allies that included a major power conducted considerably more trade than their nonmajor-power counterparts. Moreover, the interaction between alliances and preferential trading arrangements is fundamental to explaining patterns of bilateral commerce: Parties to a common preferential trading arrangement and a common alliance engage in markedly greater trade than do members of either type of institution but not both…

During the past half-century, states have established a large number of international trade institutions, both multilateral and regional in scope. The existing literature on this topic emphasizes that these agreements are chiefly designed to liberalize and increase the flow of overseas commerce. Yet such institutions have another function that has been largely ignored by researchers, namely, reducing volatility in trade policy and trade flows. Exposure to global markets increases the vulnerability of a country's output to terms of trade shocks. Governments seek to insulate their economies from such instability through membership in international trade institutions, particularly the World Trade Organization (WTO) and preferential trading arrangements (PTAs). We hypothesize that these institutions reduce the volatility of overseas commerce. We further hypothesize that, because market actors prefer price stability, trade institutions increase the volume of foreign commerce by reducing trade variability. This article conducts the first large-scale, multivariate statistical tests of these two hypotheses, using annual data on exports for all pairs of countries from 1951 through 2001. The tests provide strong support for our arguments. PTAs and the WTO regime significantly reduce export volatility. In so doing, these institutions also increase export levels.

Much research on the determinants of trade policy has focused on the efficacy of societal and statist approaches. Societal theories typically attribute patterns of protection to variations in demands made by pressure groups, whereas statist theories emphasize the effects of the “national interest” and domestic institutions in determining the level of protection. While both approaches have gained considerable currency, debates concerning their relative merits have been heated and long-standing. Yet very little quantitative evidence has been brought to bear on this topic…

Relatively little research has focused on whether countries' political institutions affect their international trade relations. We address this issue by analyzing the relationship between regime type and trade policy. In a formal model of commercial policy, we establish that the ratification responsibility of the legislature in democratic states leads pairs of democracies to set trade barriers at a lower level than mixed country-pairs (composed of an autocracy and a democracy). We test this hypothesis by analyzing the effects of regime type on trade during the period from 1960 to 1990. The results of this analysis accord with our argument: Democratic pairs have had much more open trade relations than mixed pairs…

Some theories of foreign economic policy stress the importance of domestic interest groups, whereas others focus on the effects of domestic institutions. Debates between advocates of these approaches are longstanding, but little systematic empirical research has been brought to bear on the relative merits of these theories. We argue that while interest group demands and institutions are often regarded as having independent and competing effects, it is more fruitful to view the influence of each type of factor as conditional on the other. As explanations emphasizing societal interests contend, deteriorating macroeconomic conditions are a potent source of protectionist sentiment. The extent to which such conditions reduce commercial openness, however, depends centrally on a country's political institutions, especially the number of veto points in a country's policy-making structure and its regime type. We expect the effects of macroeconomic conditions on trade policy to become weaker as the number of veto points increases. We also expect both veto points and the societal pressures stemming from the economy to have a more potent impact on trade policy in democracies than in other regimes. The results of our statistical tests covering almost 60 countries during the period from 1980 to 2000 strongly support these arguments.

Although it is widely acknowledged that an understanding of mass attitudes about trade is crucial to the political economy of foreign commerce, only a handful of studies have addressed this topic. These studies have focused largely on testing two models, both of which emphasize that trade preferences are shaped by how trade affects an individual's income. The factor endowments or Heckscher-Ohlin model posits that these preferences are affected primarily by a person's skills. The specific factors or Ricardo-Viner model posits that trade preferences depend on the industry in which a person works. We find little support for either of these models using two representative national surveys of Americans. The only potential exception involves the effects of education. Initial tests indicate that educational attainment and support for open trade are directly related, which is often interpreted as support for the Heckscher-Ohlin model. However, further analysis reveals that education's effects are less representative of skill than of individuals' anxieties about involvement with out-groups in their own country and beyond. Furthermore, we find strong evidence that trade attitudes are guided less by material self-interest than by perceptions of how the U.S. economy as a whole is affected by trade.

This article examines some international factors contributing to the recent spread of preferential trading arrangements (PTAs). PTAs help states to ensure against future disruptions of commerce with key trade partners. When stress is placed on the international trading system, the threat of such disruptions rises. Both hegemonic decline and global recessions raise the specter of commercial closure, and therefore each factor may stimulate the proliferation of PTAs. Furthermore, strategic interaction among both PTAs and countries is likely to guide the growth of preferential arrangements. As PTAs become increasingly pervasive, states that are not covered by one have strong incentives to enter such an arrangement. Doing so reduces the prospect that their access to important markets will be curtailed and that their competitiveness abroad will be undermined. The findings of this article conform with these arguments. In general, eroding hegemony, global recessions, and strategic interdependence have accelerated the pace of commercial regionalism since World War II.

Over the past fifty years, barriers to international trade have decreased substantially. While the decline in protectionism since World War II has stemmed partly from unilateral changes in trade policy by countries, it has also been a result of agreements among countries to liberalize commerce. In this article, we analyze the conditions under which states have concluded such agreements and, more generally, explore the domestic factors affecting interstate economic cooperation. We argue that the likelihood of states cooperating on trade policy depends crucially on their regime type: as states become more democratic, they are increasingly likely to conclude trade agreements.

Our analysis has implications for two broad areas in the field of international relations. First, a large and influential body of research has emerged on the effects of regime type on the outbreak and resolution of interstate conflict, the durability of political-military alliances, the propensity of states to join intergovernmental organizations (IGOs ), and various other aspects of foreign policy. Very little of this literature, however, focuses directly on the links between regime type and foreign economic policy. We conduct one of the initial analyses bearing on this important topic.

Since the Second World War, preferential trading arrangements (PTAs) have become increasingly pervasive features of the international economic system. A great deal of research has addressed the economic consequences of these arrangements, but far less effort has been made to identify the political factors leading states to enter them. In this article, the domestic political factors affecting whether countries enter PTAs are investigated, placing particular emphasis on the number of veto players within a state. It is argued that the probability of forming a PTA declines as the number of such players rises. The results, covering 194 countries from 1950 to 1999, strongly support this argument. Holding various political and economic factors constant, increasing the number of veto players within a country significantly reduces the probability of signing a PTA.

Preferential trading arrangements (PTAs) have spread widely over the past fifty years. During the same era, multilateral openness has grown to unprecedented heights, spurred by the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). If the cornerstone of the manifestly successful multilateral regime is nondiscrimination, why have its members increasingly resorted to preferential liberalization? We argue that developments at the heart of GATT/WTO encourage its members to form PTAs as devices to obtain bargaining leverage within the multilateral regime. Specifically, the growth in GATT/WTO membership, the periodic multilateral trade negotiation rounds, as well as participation and, especially, losses in formal GATT /WTO disputes, have led its members to seek entrance into PTAs. Conducting the first statistical tests on the subject, we find strong evidence in support of this argument.

The growing number of preferential trading arrangements (PTAs) since World War II has generated substantial interest in their economic and political effects. It has also prompted interest in the factors that give rise to PTAs, but very little research has been conducted on the growth of extant PTAs. To address this shortcoming, we analyze why some arrangements expand, whereas others do not. We find strong evidence that expansion is most likely when the existing members of a PTA display a high degree of trade openness and when the size distribution of these members is fairly uniform. We also find that PTAs that add new members are likely to do so again in the near future and that, throughout the global system, PTAs tend to expand in clusters. Equally, there is some indication that the market size of a PTA affects its odds of expansion. Finally, we investigate which states join enlarging PTAs. We find that PTAs expand by taking on new members that are economically and politically similar to existing members.

The following section is included:

• Index