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6I. Papers on the Political Economy of Trade Policy

Problems in the Political Economy of Trade Policy Reform: This paper reviews the recent literature on the political economy of trade policy reform as a basis for empirical study and/or policy advice.

Footloose Policy Preferences and Trade Policy: The Role of Non-Strategic Social Learning and Information Cascades. This paper reviews recent work on learning and argues that uncertainty/ignorance and learning can play a substantial role in determining trade policy outcomes. While this may lead to, possibly large prediction errors in standard political economy models, it also leads naturally to a major role for policy advice.

The Peculiar Political Economy of NAFTA. This paper develops the argument that public opinion on NAFTA is difficult to rationalize with standard political economy models. As an alternative, we develop a model of footloose policy preferences on the NAFTA issue. with H. Keith Hall (US ITC)

The Role of the WTO in the Transfer of Policy Knowledge on Trade and Competition. This paper uses theories of policy learning and of policy-making to examine how global institutions such as the WTO can influence policy choices. In pure learning by doing, policy choices are based on information relating to the history of an active policy; there is no information on alternative policies. New information on priors provides an incentive to choose a different policy. In the case of social learning, policy-makers can observe the policies chosen by other actors, but the signals those other actors receive is unobserved. External agents (global institutions of knowledge transfer) can influence policy choice by altering priors, providing technical advice or providing information on the (unobserved) effects of the policy choices of others. If the aim is to promote competition, institutions should also show awareness of the global competition environment. Many policies are advocated on the implicit assumption of competitive markets. This gives a false impression of the state of nature, and increases the probability that the effect of reforms will be less beneficial than predicted. If so, the reputation of the WTO as a ‘purveyor of global policy knowledge’ may be undermined. with Oliver Morrissey (University of Nottingham).

International Political Economy: A Tale of Two Heterodoxies: International political economy (IPE) originated in the early 1970s. For almost 20 years it has been dominated by separate, largely non-communicating schools, one centred on scholarly institutions in Britain, the other associated with the US journal, International Organization (IO). In terms of the evolving norms of both economics and political science, both schools are surprisingly heterodox. Rather than developing strong systematic data collections and systematic theory, the IO school has been characterised by a shifting set of conceptual and metatheoretical debates. The British school, which has tended to take a deliberately critical position, has been characterised by an ever-widening set of concerns topical concerns fuelled by a desire to include more and more voices in the study of IPE. These outcomes are explicable only by tracing the specific historical developments of the two schools. with Craig Murphy (Wellesley College)

The Distinct Political Economies of Trade and Migration Policy: Through the Window of Endogenous Policy Models: The domestic politics of international trade seem to differ in fundamental ways from the domestic politics of immigration, but it is difficult to say exactly how and, more importantly, why. This paper uses a common frame of reference, simple endogenous policy models, as a way into this problem. These models capture the essential insight underlying much political economy analysis that material interests drive policy preferences. Part of the claim made in this paper is that trade politics appear to be essentially about material interest, while immigration politics are not. Related to this claim, however, is the complementary claim that the politics of these two seemingly similar issues are also organized in fundamentally different ways. with David Greenaway (University of Nottingham)

Structural Change and the Labour Market Effects of Globalization: In this paper we are interested in effects of globalisation that operate on the labour market indirectly by transforming the structures that support one set of equilibria and induce change in those equilibria. We will develop our analysis in terms of the interdependence between economic and political structures in a given national economy. Because the economic and political structures are related, changes in the relationship of a national economy to the global economy can produce profound changes in the political-economic arrangements of a country. Specifically, we develop a simple model of political economic equilibrium with firm-union bargaining and a welfare state. Using this model, we consider the impact of increased openness. Following the theoretical development, we present empirical work based on a panel of OECD countries with results that are consistent with the predictions of the model. with Noel Gaston (Bond University).

Can Compensation Save Free Trade: Trade reform creates winners and losers. When the median voter loses from refor, free trade is blocked. Allowing the electorate to vote for compensatory wage or employment subsidies may lead to free trade under these circumstances. However, placing compensation on the agenda may also lead to an outcome where trade is blocked when it would have been supported otherwise. The reason for the latter result is that the transfer entailed under compensation is larger than the gains that the winners obtain from liberalization. Seeing the inevitable outcome of a series of votes, this group turns against liberalization. with Carl Davidson and Steven Matusz (Michigan State University).

The Political Economy of Antidumping: A Survey: Antidumping has become the primary form of increase in protection among members of the WTO. A sizable literature has grown up attempting to account for observable patters in antidumping enforcement. This paper provides a survey of the theoretical and empirical contributions in this area.

Fairness and the Political Economy of Trade: This paper argues that, as a matter of positive political economy, fairness plays a non-trivial role in the politics of trade policy. Specifically, we first argue that, as a matter of fact, widely held notions of fairness, that are empirically identifiable on the micro level, have macro effects not only in the social and political spheres of life, but even in the economy. Furthermore, as we argue in the second section, these notions systematically constrain public officials in the construction and pursuit of trade policy. with Carl Davidson and Steven Matusz (Michigan State University).

The Politics of Anti-Globalization: What Do We Learn from Simple Models: Our focus is a preliminary investigation of the link between democratic politics and the stability of globalization in three steps. First, we briefly develop two key distinctions that provide an analytical framework for our discussion. Specifically, we argue that most of the literature on political economy of trade and immigration fails to distinguish between the average level of a policy (say, a tariff) and the variance of that policy (e.g. the dispersion of the tariff across sectors), and we will distinguish between two very broad classes of political economy model (Weberian models and interest group models). Second, we will consider how well these models account for policy outcomes (both mean and variance) in trade and immigration policies. We conclude that the pattern of successes and failures is difficult to account for within any of the standard political economy frameworks. This will lead us to the third part of the paper in which we propose what, for want of a better label, we call the social values extension of both the Weberian and interest group models. With David Greenaway (University of Nottingham).

Proliferation of Contingent Protection Among Developing Countries: Causes and Consequences: This paper provides an overview of the spread of contingent protection among developing countries, then develops some political economic causes and consequences of the spread.

Groups with Intersecting Interests: We model a situation involving N groups of players. Each player belongs to a single group, and enjoys a public good that is enjoyed by members of that group. However, members of each group are also, to a greater or lesser extent, advantaged or disadvantaged by the public goods produced by the other groups. We provide a simple but rigorous analysis of existence, uniqueness and comparative static properties of the Nash equilibrium in such a model. With Richard Cornes (University of Nottingham) and Roger Hartley (Keele University)

The Political Economy of Protection: A Short Survey: The paper, written as an encyclopedia entry, provides a brief overview of current research on the political economy of protection.

II. Papers on Trade and Trade Policy under Imperfect Competition

A Geometry of Specialization: This paper offers a theoretical examination of the generic properties of models of increasing returns due to specialization (aka location of industry or geography models). Such models are currently in wide use in trade, development, public finance, macroeconomics, and endogenous growth. with Joseph Francois (Tinbergen Institute and CEPR).

Victims of Progress: Economic Integration, Specialization, and Wages for Unskilled Labor: This paper demonstrates that intra-industry trade (or FDI) between identical countries could produce the observed deterioration across OECD countries in the relative wages of unskilled workers. This involves a model of North-North integration through either increased trade flows or increased MNE-based production. Our motivation is arguments to the effect that trade cannot be responsible for the observed labour market trends because trade with developing countries is quantitatively too small to have significant labour market effects. We also introduce a relatively unexploited class of model that possesses attractive properties with respect to the explicit incorporation of firm-theoretic consideration in trade models. with Joseph Francois (Tinbergen Institute and CEPR).

On The Economic Relationship Between Marginal Intra-Industry Trade and Labour Market Adjustment in A Division of Labor Model. In the context of Ethier’s (1982) division of labour model, this paper accomplishes three tasks. First, we complement existing literature on the algebraic properties of marginal intra-industry trade (MIIT) measures by embedding one of these measures in a general equilibrium model. Consistent with the existing literature, we find that change in the Grubel-Lloyd index provides systematically different economic information from change in the MIIT index. Second, we examine the connection between intra-industry trade and intra-industry adjustment. Here we find that the informal assumption that intra-industry trade generates only intra-industry cannot be sustained. That is, intra-industry trade will generally induce inter-industry adjustment. Finally, we find that, because intra-industry trade generates inter-industry adjustment, increased intra-industry trade will generally induce long-run changes in relative factor-prices. This suggests, given the prominence of intra-industry trade in the trade of OECD countries, that there may be some problems with inference on the link between trade and wages undertaken in a strict Heckscher-Ohlin framework. With Mary Lovely (Syracuse University).

Trade and Industrial Policy for an International Duopoly with U-Shaped Costs. We develop an extension of the Brander-Spencer (1985) model in which inter-firm competition in a third market takes place in two stages: in stage one firms choose capacity; and in stage two they choose quantities. We will refer to policies that attempt to affect the capacity choice as “industrial policy” and policies that attempt to affect the choice of output/exports as “trade policy”. The basic Brander-Spencer model, and virtually all of the extensions that have appeared in the literature consider a very simple cost structure–usually constant marginal cost with a fixed cost. To the extent that this line of research does consider capacity decisions, it takes the Kreps-Schienkman (1983) form of fixed capacity choice followed by price competition (e.g. Ben-Zvi and Helpman, 1992). In this paper we are interested in the implications of ex post flexibility for trade and industrial policy, so we choose a simple specification with U-shaped short-run average costs. with Shunichi Tsutsui (KPMG Economic Consulting Services)

How Bad Is Antidumping?: Evidence from Panel Data. Current research on antidumping suggests a number channels through which antidumping affects the volume of world trade. This paper uses a structural approach to the gravity model framework to evaluate these hypotheses using data on trade volume over the period 1960-2001. We conclude that the volume and welfare effects have been negative, but quite modest.

III. Papers on Trade and Labour Markets

Globalisation and Wages in OECD Economies: Linking Theory with Evidence. This paper reviews the rapidly growing empirical literature on the relationship between trade and wages with a particular focus on comparing trade theoretic with labor theoretic approaches. with Noel Gaston (Bond University).

Trade, Technology, and Wages: General Equilibrium Mechanics: This paper examines theoretical reasons why we believe trade and technology are linked to wage movements in general, and how we should therefore organize our examination of the recent episode of wage and employment erosion in the OECD countries. We start with a graphic tour through the mechanics of general equilibrium theory on trade and wages. This provides a set of implied relationships between wages and factor intensity trends that, together, provide a casual test of the consistency of posited relationships with actual trends. Numeric analysis and a review of the general equilibrium empirical literature follow the theoretical overview. With Joseph Francois (Tinbergen Institute and CEPR)

Treating the Stolper-Samuelson Theorem Seriously: Is There a Long-run Relationship between Relative Commodity Prices and Relative Factor Prices?. This paper argues that an appropriate test of the Stolper-Samuelson theorem must take account of the fact that the theorem refers to a long-run relationship between relative commodity-prices and relative factor-prices. Thus, this paper applies the unit root/cointegration methodology developed by Johansen to evaluate the Stolper-Samuelson relationship. The results are consistent the presence of a long-run Stolper-Samuelson relationship between the relative prices of human capital intensive and unskilled labour intensive goods and the wage of human capital relative to the unskilled wage. with Rodrigo Navia (Universidad Catolica de Valparaiso) and Timothy Wedding (US Government Accounting Office).

Intra Industry Trade as an Indicator of Labor Market Adjustment: A growing body of recent empirical research has sought to use some measure of intra-industry trade as an indicator of labor market adjustment. As with our previous paper, in this paper, we argue that there are fundamental problems in the foundations of this work. Rather than developing our analysis in the context of a division of labor model, which generates IIT naturally, we develop a simpler model that is as closely linked to the trade-labor market concerns of the existing literature as possible. We then define measures of IIT and of labor reallocation and, in the context of the model, compare and contrast them. We find that changes in domestic absorption, which influence trade flows but which are distinct from production changes, make changes in IIT an unreliable guide to labor market pressure. With Mary Lovely (Syracuse University).

Globalization, Roundaboutness, and Relative Wages: We depart from the trade and wages literature and its emphasis on North-South trade, examining North-North by developing the basic linkages between trade-based integration and relative wages in an Ethier-type division of labor model. Using this model we identify a formal relationship between international trade, productivity, and wages. We then examine the trivariate relationship between trade, growth in total factor productivity (TFP), and the skill premium in a vector autoregression framework. We find evidence of a long-run relationship between growth in intermediate goods and changes in TFP. Controlling for this relationship we also find a positive relationship between trade and the skill-premium. With Kevin Grier (University of Oklahoma) and Joseph Francois (Tinbergen Institute and CEPR).

Fair Wages, Technological Change and Unemployment in a Global Economy: In this paper we analyze the effects of global and national technological change on employment levels and relative wages in an integrated two-country world (“ Europe ” and “ America ”), where both countries are characterized by equilibrium unemployment due to fair wage constraints. The asymmetry between the two countries arises from country-specific preferences towards wage inequality, with Europe ‘s preferences being more egalitarian. Furthermore, we look at trade integration between this two-country world and a third country (“low wage south”). We derive an analytical tool, the Virtual Integrated Equilibrium , that allows us to adapt Dixit and Norman’s well known Integrated Equilibrium approach to a situation where both trading countries have endogenous unemployment levels. With Udo Kreickemeier (University of Nottingham)
IV. Papers on Immigration and Labour Markets

Trade Policy and North-South Migration: This paper examines, through a mix of theory and numeric examples, linkages between trade policy and the incentives for migration. With Jospeh Francois (Tinbergen Institute and CEPR).

Political Economy of Illegal Migration: This paper develops three simple models of the endogenous determination of immigration policy. The first section develops a model, based on Ethier (AER, 1986), of international migration and unemployment in a one good model with a minimum wage and random job assignment. As in the existing literature on illegal migration, anti-immigration enforcement effort and unemployment are shown to be inversely related. In the first of the endogenous policy models, politically active capital lobbies for reduced enforcement effort in the context of a government with a negative preference for unemployment. In the second model, capital and labor lobby a passive register government to determine the level of enforcement effort. In the first two models government enforcement effort is taken to be costless. The third political economy model reverts to the case of politically inactive labor to consider the effect of resource-using enforcement effort. with Yongsheng Xu (Georgia State University).

Normative Migration Theory: A Social Choice Theoretic Approach. The purpose of this paper is to provide a normative analysis of some migration issues. Our main objective is to develop a social-choice theoretical framework to evaluate alternative immigration policies of a country. For illustrative purposes, we present some simple results that are characterizations of some policy evaluation functions that have some specific features.With Yongsheng Xu (Georgia State University).

The Wage and Employment Effects of Immigration: Trade and Labour Economics Perspectives. This paper presents a detailed survey of results from current research on the labour market effects of immigration. It argues: 1) that econometric research uniformly finds very small labour market effects of immigration; 2) that labour and trade economists have differed in their interpretation of this finding; and 3) that this difference is driven exclusively by different dimensionality assumptions (with labour economists preferring a 1-sector x m-factor model and trade economists an n-sector x m-factor model). It is then argued that the trade economists’ model, along with it’s presumption of factor-price insensitivity is the more useful as a presumption generator. The paper concludes with a discussion of the political economy implications of these results. With Noel Gaston (Bond University). The current draft is incomplete.

The Politics of Immigration: A Political Economy Puzzle. This paper provides a short summary of the survey part of the previous paper and emphasizes the political economy argument. With Noel Gaston (Bond University).

International Migration. This paper provides a survey of the literature on international migration, with a particular focus on the links between trade theory and methods as a framework for the analysis of migration; and the implications of that work for understanding the empirical work by labor economists. A much shorter version is to be published in a new Handbook of International Trade.
V. Papers on Globalization of Production and Labour Markets

Multinational Location Decisions and the Impact on Labour Markets. In this paper we present a simple, partial equilibrium, model that focusses on the location decisons of multinational firms. We use the model to analyse the effects of higher labour standards, a “race to the bottom”, and capital market integration. With Noel Gaston (Bond University)

Integration, FDI and Labour Markets: Microeconomic Perspectives. In this paper we reveiw economic theories and econometric evidence which purport to explain various aspects of the impacto of FDI on labour markets. The emphasis is on two partial equilibrium models which focus on the location decisons of multinationals and the impact of global firms on collective bargaining outcomes. With Noel Gaston (Bond University)