It's the Exporters, Stupid! Reciprocity, Local Interests and the PE of Trade

• In Event: Political Economy of Firms

Abstract

We develop a political economy model of trade protection with decentralized decision makers in the shadow of potential retaliation by trading partners. The model accounts for terms of trade effect and the relative influence of exporters and characterize the legislative bargaining process under which trade policy is enacted. The model uncovers the tradeoffs faced by policymakers when choosing to grant protection to import competing and exporting interests in their districts. We are able to structurally estimate the relative weights of local interests that are reflected in the level of protection enacted at the national level. We use data from US Congressional districts a time when the structure of the U.S. economy was dramatically affected by international trade shocks. Our estimates suggest that specific factor owners in import competing sectors are more influential than predicted in earlier work. Yet we also find that specific factors in exporting industries play a sizable role, constraining the level of protection resulting from the legislative bargain at the national level in the shadow of potential retaliation from governments abroad. We use these structurally estimated weights to construct measures of unobserved demand for protection at the district level. These estimates reveal that while the influence of import competing interests is reflected in trade policymaking, the demand for protection at the local level is larger than the one received. This "unmet" demand for protection, we argue, is a force behind the political backlash against globalization.

Authors

• Kishore Gawande, University of Texas at Austin

• Pablo Martin Pinto, University Houston

• Santiago Miguel Pinto, Federal Reserve Bank of Richmond