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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
26
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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