POLITICAL ECONOMY

Political Economy of International Trade Policy

Political Economy of International Trade Policy

Introduction

International trade has become one of the most critical issues in domestic as well as international politics in recent decades. Although a growing number of historically oriented studies have shown that trade has been a salient issue among empires, states, and cities for centuries, it has become such a critical, contemporary issue because countries' economies are now, more than ever, open to trade flows. They thereby create complex interdependence, defined as mutual dependence, between national economies (Alt, Frieden, Gilligan, Rodrik and Rogowski 1996, pp. 689-717). Technological progress has resulted in dramatically falling transportation and communication costs, whereas various liberalization policies have freed the exchange of goods and services from different tariff and non tariff barriers.

The goal of this paper is to present the major theoretical discussions revolving around international trade, as well as to provide empirical evidence and highlight recent developments in the study of the political economy of international trade. Though, before discussing the dynamics of political economy of international trade policy, it is pertinent to understand the two terms, i.e. political economy and international trade.

Definition of International Trade

The term international trade refers the exchange of capital, services and goods across international territories or borders (Gruber 2001, pp. 703-741). For instance, if you walk into a supermarket and are able to buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade.

Definition of Political Economy of International Trade Policy

Political economy in the beginning was the term used for studying buying, selling and production and their connection with government, laws and custom as well as with the distribution of wealth and national income, including through the budget process (Held and McGrew 2007, pp. 22-29). At present, the term political economy refer different things, including Marxian analysis, applied public choice approaches emanating from the Virginia School and Chicago school, or simply the advice given by economists to the public or government on general economic policy or proposals.

As early as 1978, Magee developed the first genuinely formalized model of the political economy of international trade policy formation. Magee, who coined the term “endogenous policy formation”, proposed a framework of analysis that incorporated politico-economic agents who, in the context of the economic process and a probabilistic voting model, interact strategically to produce trade policy that advances their narrow self interests. The importance of this framework is that it explicitly identified plausible parameters within which trade policy, previously treated as exogenous, can be treated endogenously (Biersteker 1993, pp. 7-33).

Unlike Magee's model, MAYER's model of trade-policy formation reconciles the theory of endogenous protection with the standard orthodox models of international trade without entirely relinquishing the intricacies of contemporary political systems present in Magee. His model assumes a “direct majority voting” regime, which intends to approximate the decision making process in contemporary democracies, and formulated in the context of two prominent theorems of international trade designed to “explain” the flow of ...