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Winner of the 2005 William H. Riker Book Award, Political Economy Section of the American Political Science Association
Why do some industries win substantial protection from the whims of international trade while others do not? Privileging Industry challenges standard approaches to this question in its examination of when governments use trade and industrial policy for political goals. Fiona McGillivray shows why aiding an industry can be a politically efficient way for a government to redistribute resources from one industrial sector to another. Taking a comparative perspective that stands in contrast with the usual focus on U.S. trade politics, she explores, for example, how electoral rules, party strength, and industrial geography affect redistribution politics across countries. How do political institutions and the geographical dispersion of industries interact to determine which industries governments privilege? What tests can assess how governments distribute assistance across industries?
Research has focused on the industries that legislators want to protect, but just as important is identifying those legislators able to deliver trade assistance. Assisting an industry requires both a will and a means. Whether an industry is a good vehicle through which to redistribute income depends on its geographic make-up and the country's electoral system. In turn, the electoral system and party strength affect how legislators' preferences contribute to policy. McGillivray tests these arguments using a tariff-based empirical test and nonstandard dependent variables such as the dispersion of stock prices within fourteen different capital markets, and government influence in the targeting of plant closures within declining industries.
DEMOCRATIC PROCESSES are intended to ensure equal representation. Yet the "one man, one vote" ideal does not mean that everyone benefits equally from political processes. Redistribution is the essence of politics, and electorally motivated politicians have incentives to redistribute resources among voters, privileging some at the expense of others. Who wins and who loses from such redistribution is at the heart of democratic politics and is the subject of this book.
Desiring to keep their jobs, politicians are ever willing to give to those who can keep them in power: winners are not chosen randomly. I focus on the winners and losers from trade and industrial policy. Some might argue that trade policy is a fundamentally international issue. Yet despite its consequences for the international flows of goods and services, trade policy is, like industrial policy, highly redistributive. Those people associated with the production of a protected good are privileged, while the population as a whole suffers from higher prices or higher taxes. There is remarkable variance in which industries win and how they are privileged; for instance, imported leather handbags face high tariff barriers in the United States, the Germans heavily subsidize the marine propeller industry, carpet firms are favored with government loans in Belgium, while the Spanish strongly support EU (European Union) quotas for the toy industry.1
Democratic institutions are ostensibly designed to serve the majority. Why then should democratic politicians want to enrich some chosen few and forsake others? The answer is political survival. Leaders assist those who can help them keep their jobs; yet who can most effectively help them keep their jobs depends upon the institutional context in which the politicians serve. As such, who the winners and losers are is shaped by domestic political arrangements. Institutional rules affect which industries legislators wish to protect as well as whether they can achieve protection for these groups.
The field of comparative politics seeks to identify the dimensions in which political systems differ and the impact of these differences. Although the myriad of combinations across all of these different dimensions produces a virtually limitless number of possible institutional arrangements, I focus on the impact of two prominent features of democratic institutions: the electoral rule and the strength of political parties. These two features have deservedly received much critical attention as they shape many aspects of political behavior; for instance, the number of parties, parties' policy positions, the level of political violence, the duration of government, and public policy outcomes.2 My goal, however, is to explain which industrial groups receive preferential treatment through the redistributive effect of trade and industrial policy.
The institutional features of the electoral rule and the strength of political parties play a key role in sorting the winners from the losers through two processes. First, the combination of the electoral rule and industry geography affects which industries legislators want to protect. That is to say, they induce preferences over which groups to protect. Second, the electoral rule and the strength of parties affect which industries legislators are able to protect. The legislative incentives created by these features determine how legislators' induced preferences are aggregated into actual policy. Rogowski (1987, 1998; Rogowski and Kayser 2002) is one of many scholars who consider the mapping from electoral rule to trade policy as a single step.3 As I shall argue, considering only one of these two processes is misguided. While Rogowski's and Kayser's work is extremely insightful, particularly in terms of explaining aggregate levels of protection, I believe it fails to account for the pattern of winners and losers under different electoral systems. Desperately wanting to help an industrial group is not the same as being able to help an industrial group. Similarly, simply because politicians are in a position to privilege an industrial group does not mean they will. It has to be in their political interest to do so. The provision of assistance requires both a will and a means.
The theory in this book is about redistribution. The logic of the theory tells us which groups of voters politicians will favor with redistributive policies. Trade and industrial policy are one means for targeting benefits to voters (Godeck 1985). Other policies, like public spending programs or welfare transfers, also have a redistributive component. So why would politicians use trade and industrial policy rather than other more "efficient" means to redistribute? Rodrik (1995) has been vocal in his criticisms of the trade literature for precisely this reason. While alternative tax-and-spend redistributive policies might have greater economic efficiencies, the question is, are they politically as effective? Throughout the book I argue that trade and industrial policy can be a politically efficient way to target key voters. Whether or not an industry is a good vehicle through which to redistribute income depends on the industry's geography and how it maps into electoral jurisdictions. Politicians do not want to protect any industry per se. They want to assist groups with precisely the right size, spread and location, to target benefits to politically important groups of voters.
While those wedded to the efficiency of alternative redistribution might remain unconvinced of the superior political efficacy of protection, trade policy has another great advantage over direct redistribution: it is opaque (Magee, Brock, and Young 1989). It is hard to know how much has been redistributed and to whom. If the government raises taxes to hand out additional benefits, such as increased welfare transfers, these acts are readily transparent. Tracing the beneficiaries of the U.S. sugar quota is not. Of couse the beneficiaries know who they are, but it is difficult for most voters to figure this out, far less to determine how much extra they themselves are paying for a pound of sugar. It is extremely difficult for voters to judge whether or not the sugar quota is based on sound economic reasoning (to help the beleaguered industry compete with subsidized EU sugar) or political vote-buying (pork for Florida's voters). Trade and industrial policies are also an indirect method of redistributing between geographic regions. For example, the U.S. sugar quota redistributes resources to Florida, Louisiana, and Hawai from the other forty-seven states. Many countries institute rules preventing direct transfers to regional groups; for example, in the United Kingdom, government spending to different regions is strictly controlled by a set of rules that assess need, based on criteria such as demographics and unemployment. However, the allocation of research-and-development funds cannot so easily be monitored or legislated against.
More broadly, there are many different ways that governments can give and take between industries: subsidies, tax exemptions, low-interest loans, debt reduction, tariffs, and quotas. Unfortunately, what makes trade and industrial policy attractive to politicians-its opaqueness-makes it difficult to study analytically. Conceptually straightforward, as a practical matter it is extremely hard to directly assess the level of assistance any particular industry receives. I believe this is why so many of the empirical results in the literature disagree.4 Looking at different measures of protection can lead to very different conclusions about its causes. As a result, comparative trade research has stalled. Rather than contribute another voice arguing for one measure over another, this research focuses on deriving additional consequences of trade and industrial policy. By deriving alternative dependent variables and testing hypotheses that relate to aspects of trade that are not dependent on direct measures of trade assistance, I hope to forward the study of comparative trade and industrial policy.
The arguments in this book also contribute to the literature on U.S. government redistribution. Scholars of U.S. politics disagree about which groups of voters are "purchased" with government transfers. For instance, Dixit and Londregan (1986, 1998; see also Lindbeck and Weibull 1987) argue that parties target policy transfers to swing voters. In contrast, Cox and McCubbins (1986) argue that parties are more likely to use transfers to reward loyal voters. Both of these arguments focus on only one step of the two-step mapping I propose. Using a comparative framework to consider both steps, I argue that the Dixit and Londregan (1986, 1998) hypothesis applies to one subset of countries-for example, the United Kingdom, Austalia, and Canada-while the Cox and McCubbins predictions apply to a different subset of countries-for example, Sweden, Germany, and Belgium. The predictions in this book are not unique; however, they are sensitive to comparative political institutions and are testable against other theories of redistribution.
Next, and throughout this chapter, I focus on how governments redistribute policy between industries. I use the case of the cutlery industry in the United Kingdom, Germany, and the United States to illustrate how the geographic and structural features of industry and the institutional characteristics of political systems affect how governments distribute trade and industrial assistance.
KNIVES AND FORKS AND TARIFFS
The focus of this book is to explain cross-country differences in which industries governments choose to assist. Take, for example, the cutlery industry: highly protected in some countries, it had been left to the vagaries of market forces in others. In Germany, Britain, and the United States, the cutlery industry had long been in decline,5 but the recessions of the 1970s threw the industry into crisis.6 Although the cutlery industry lobbied loudly for protection in all three countries, there was considerable variation in each government's willingness to assist. Successive governments in Britain heavily protected the cutlery industry; its effective tariff rate was as high as 30 percent, far greater than the average level of protection in Britain. By comparison, the German government did much less to support its cutlery industry, giving less than a half of the assistance that the British did, and in the United States, the cutlery industry received only token tariff protection from its government.7 Based on national security legislation, the U.S. Department of Defense was restricted from purchasing foreign stainless-steel flatware. Apparently using German forks undermined national preparedness.8
Why did the British lack the political will to kick out cutlery's crutch of protection? Industry pressure alone was not responsible; if that had been the case in the United States, Britain, and Germany, we would have seen the highest level of protection in the United States, where the industry was largest, or in Germany, where the industry was well organized. In fact, what we observe is protection directly inverse to the size of the industry and uncorrelated with the level of organization. What is missing is a grasp of the political incentives to supply protection. Later in this chapter, I will argue that British cutlery's political leverage was, in large part, due to its regional concentration in the type of electoral districts that make or break governments. In Britain, the cutlery industry was small in size, but its firms were regionally clustered in politically important districts. Cutlery's geography made it an ideal vehicle for the government to redistribute income toward key groups of voters; hence cutlery's high levels of protection. Under the German and the U.S. electoral systems, however, cutlery's geography made protecting the industry much less politically profitable. In the latter case, regional concentration became the cutlery industry's Achilles' heel, the reason it failed to win protection. Throughout the book, I argue that it is the joint effects of an industry's geography and the electoral system that determine the political opportunities for industries, such as cutlery, to gain industrial assistance. This approach differs from extant explanations in which the industry's structure and ability to lobby matters most. Rather than focus on the incentives facing industry to organize and demand protection, I focus on the incentives facing governments to reward particular groups of voters. There are many different ways that government can redistribute resources among voters. Trade and industrial policy can be a politically efficient way to target key voters. Whether or not an industry is a good vehicle through which to redistribute income depends on the industry's geography. The purpose of this book is to show when governments use trade and industrial policy for political goals and to show why aiding an industry can be a politically efficient way for government to redistribute from one group to another.
Who the winners are and who the losers are from trade and industrial policy depends on the interaction of industry geography and the electoral system, a two-stage process. In the first stage of the argument, legislators have preferences induced over which industries they want to assist as a function of each industry's geographic distribution and the electoral rule. An industry's geography relative to political jurisdictions induces these preferences, determining whether or not legislators want to privilege an industry. In the second stage, the electoral rule and the strength of parties determine how legislators' induced preferences are aggregated into actual policy. It is one thing for a legislator to want to protect an industry and another for her to be able to do so.
In the case of cutlery, the initial link between industry geography and induced preferences is similar in the United States and Britain (the electoral rule is the same); however, in the second stage, differences in how legislative preferences are aggregated into policy strongly disadvantage a small, regionally concentrated industry such as cutlery in one case but strongly advantage it in the other. Thus the second stage is as important as the first. As I hope to demonstrate, most extant explanations of how governments' choose to redistribute fail because they examine only one of these two stages.
Obviously, the type of electoral system and the strength of parties are not the only political factors that come to bear on the setting of tariffs or on legislative policy making; for example, the role of international negotiations is a common topic of trade research (Grossman and Helpman 1995; Levy 1997; Marvel and Ray 1983; Pahre 2001, 2002).
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