Protection for Exporters: Power and Discrimination in Transatlantic Trade Relations, 1930-2010

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Published by EH.NET (August 2010)

Andreas Dur, Protection for Exporters: Power and Discrimination in Transatlantic Trade Relations, 1930-2010. Ithaca, NY: Cornell University Press, 2010. xv + 246 pp. $40 (cloth), ISBN: 978-0-8014-4823-2.

Reviewed for EH.NET by Andrea Maneschi, Department of Economics, Vanderbilt University.

Andreas Dur’s thought-provoking contribution to the political economy of trade literature examines how far governments in the North Atlantic region oriented their trade and investment policies toward the protection of their exporters, import substitute industries or both between 1930 and 2010. Dur, a Professor of International Politics at the University of Salzburg, assigns a key influence in the elaboration of trade policy to exporters when they are threatened by the loss of their markets due to preferential trade agreements proposed or concluded by their trading partners. With its focus on explaining the trade policies pursued in the transatlantic region in recent decades, his book will be of great interest to political scientists and economists among others. The documentation underlying the case studies contained in chapters 2 through 7 is meticulous and takes multiple forms, such as presidential speeches, ministerial declarations, Congressional hearings, reports by business associations and employers’ groups, and newspaper and other articles from the U.S. and other countries.

In the introduction Dur lists four main arguments for trade liberalization that have been advanced in the literature, analyzes them one by one and argues that they are less persuasive than his own thesis. The first is societal demands for trade liberalization exercised by economic actors such as firms (including multinational companies), industries and factors of production. The second is political institutions at the national or international level that favor exporting interests, such as the authority delegated to the U.S. president by Congress under the Reciprocal Trade Agreements Act (RTAA) of 1934, and the subsequent effect of the RTAA on the setting up of the General Agreement on Tariffs and Trade (GATT) and stimulating several GATT negotiating rounds that liberalized trade after World War Two. A third possible impetus for trade liberalization is a country’s geopolitical interests, where its hegemony in a security alliance or its military spending may be enhanced by expanded trade. For example the U.S. may have promoted trade with its allies as an instrument to support its conflict with the Soviet Union. A fourth explanation is decision-makers’ ideas and beliefs, such as the alleged change of heart and mind of American legislators after the protectionist Smoot-Hawley legislation of 1930 aggravated the effects of the Great Depression, leading to the RTAA and subsequent GATT rounds.

Dur’s principal rationale for trade liberalization is “the protection-for-exporters argument … based on the premise that exporters lobby more against losses than in favor of gains of foreign market access. In particular, exporters mobilize against losses inflicted on them by the discriminatory trade policies of foreign countries, such as preferential trading arrangements” (p. 3). He develops this thesis in chapter 1, finding an early antecedent in S.H. Bailey’s “The Political Aspect of Discrimination in International Economic Relations” (Economica, 1932). How protection for exporters relates to pre-nineteenth century mercantilist policies is a question that Dur does not address, and the term “mercantilism” hardly appears in his book. When international trade textbooks discuss trade policies favoring exporters in the form of production or export subsidies, they analyze the welfare effects on producers, consumers and trading partners. In common with other political scientists, Dur prefers to study the political economy of trade within a game-theoretic framework where countries react to the policies implemented by their trading partners. He pays special attention to how the implementation of a preferential trade agreement (PTA) — such as a customs union or a free trade area — can elicit a variety of responses from countries excluded from it, such as attempting to join it, pursuing multilateral trade liberalization, forming a competitive PTA with other countries, or simply adjusting to it. Economic actors tend to lobby for their own economic interests, and Dur examines the resulting collective action problem first mentioned by Vilfredo Pareto in the Manuale d’Economia Politica (1906) and analyzed in detail in Mancur Olson’s The Logic of Collective Action (1965). This arises from the fact that gains and losses are unevenly distributed, and the possibility of free riding ensures that only actors with concentrated gains or losses have the incentive to mobilize for political action. Dur notes the informational problems affecting exporters, who find it much more costly to discover opportunities to expand their markets in other countries than to react to a threatened loss of their own exports due to institutional or policy changes in their trading partners, or to a possible gain in exports due to a perceived opportunity to join an existing PTA.

The author enumerates the five key hypotheses he plans to test in the remaining chapters relating to the behavior of exporters or their governments, in terms of 1) exporters’ lobbying efforts to avert losses due to a PTA created abroad, 2) the response to their lobbying by their own governments, 3) how the strategy for retaining market access for exporters in response to a foreign PTA is tailored to a country’s vulnerability in foreign markets, 4) how a country’s international bargaining strength affects this strategy, and 5) how the final outcome depends on the willingness of the member countries of a PTA to conclude an agreement with excluded countries. Another possible response to a PTA is for firms to engage in foreign direct investment to set up subsidiaries to service the market area of the PTA directly. Whereas most economists tend to argue that import substitution and export promotion are mutually exclusive trade strategies, Dur maintains plausibly that governments that strive to maintain the market shares of their exporters are also pressed by the lobbies of import competitors to ensure that the policies that favor exporters do not come at their expense. Protection for exporters can be, and often is, accompanied by undiminished protection for import competitors.

Dur provides empirical evidence for his protection-for-exporters thesis in the case studies he presents in chapters 2 to 7 encompassing the period from the Ottawa conference of 1932 to the present day. Chapter 2 on “Imperial Preference and the U.S. Reaction, 1932-1947” is of particular interest since British imperial preference created the first global PTA before World War II and inspired the many PTAs that followed it. Its perceived consequences for American exporters in terms of lost markets in the U.K., Canada and other countries were a catalyst for the passage of the RTAA in 1934, designed to undo the nefarious consequences of the Smoot-Hawley tariff and other countries’ retaliatory tariffs. America’s trading partners were induced to reduce their tariffs in exchange for “reciprocal” reductions by the U.S. This philosophy, and the associated “most favored nation” (MFN) clause whereby a concession granted to one country is extended automatically to all other contracting parties, played an important part in the subsequent trade negotiations under the GATT. Dur analyzes the plethora of explanations that have been advanced for the passage of the RTAA. They include institutional changes such as the trading authority that Congress delegated to the president, the ideas and beliefs of policymakers newly oriented toward what they perceived as the need to reform the world trading system in the aftermath of the Great Depression, the opportunity the RTAA presented to further the U.S.’s geopolitical interests in a changed international environment, the “lesson thesis” that the Great Depression taught legislators in terms of the dire consequences of trade protection for national output and employment, and the party explanation that focuses on the shift in the balance of power from protectionist Republicans to freer-trading Democrats. While allowing some of these to play an ancillary role, Dur picks holes in all of them, and finds the protection-for-exporters the most plausible explanation. He calls attention to Roosevelt’s Secretary of State, Cordell Hull, a key actor in marshaling the support of exporters and their lobbies in favor of the RTAA. Dur’s thesis is persuasive: since it applies to more than one country and not simply to the U.S., it captures effectively the reciprocal nature of the Act.

As Dur recounts in chapter 3, the founding of the GATT in 1947 was followed by a decade of stagnation in transatlantic trade negotiations, which he attributes to a lack of perceived threat to exporters. Chapter 4 shows that this quiescence came to an end in 1958-1963 with the founding of the European Economic Community (EEC) by six countries in 1958. In order to protect its exporters from trade diversion, the U.S. proposed and gathered support for the Kennedy GATT round of 1964-67. The next two chapters argue that the multilateral negotiations that took place in successive GATT negotiating rounds, and other trade policy initiatives taken in Europe and North America, were mainly stimulated by the establishment of EEC, its subsequent enlargement into the European Community (EC) and gradual transformation into the European Union (EU). In each case Dur provides evidence for his protection-for-exporters thesis and evaluates the strengths and weaknesses of alternative explanations. The eight negotiating rounds held between 1947 and 1994 under the aegis of the GATT, until it was replaced by the World Trade Organization (WTO) in 1995, led to substantial tariff reductions, other forms of trade liberalization and a quantum leap in world trade. The RTAA thus acted as the catalyst that set in motion the entire sequence of policies and events that characterize international trade policy after World War Two.

Chapter 5 shows how the U.S. reacted to the first enlargement of the EEC to include the U.K., Denmark and Ireland, and then to a free trade agreement between the EEC and the other countries of EFTA, the European Free Trade Association. The latter had been created by seven European countries in response to the EEC, after they had initially decided not to join it. Chapter 6 studies transatlantic trade policies in the 1980s when the U.S. sought to protect its exporting interests from the consequences of the EU’s Single Market Program, adopted by its member countries in order to deepen the integration of their economies beyond the elimination of tariffs and quantitative trade restrictions. With a completion goal of 1992, this development stimulated the last and most ambitious Uruguay round of GATT trade negotiations (1986-94), where a primary aim of the U.S. was again to protect its exporters’ interests. The U.S. also responded to the EU’s evolution with its own PTA with Canada, extending it later to Mexico in the form of the North American Free Trade Agreement (NAFTA).

Chapter 7 completes the narrative by examining the competitive trade initiatives undertaken by the U.S. and the EU over the period 1995-2010, up to and including the Doha Development Agenda (and associated lagging round of negotiations) proposed after the GATT was replaced by the WTO. Dur documents the status in 2009 of the proliferation of PTAs that both the EU and U.S. created in the Americas, Africa, Middle East and Mediterranean region. Former U.S. Trade Representative Robert Zoellick gave this policy the rather misleading name “competitive liberalization,” when to my mind “competitive PTA creation” would be more appropriate. Dur’s protection-for-exporters thesis accounts well for the ensuing competitive formation of PTAs by the EU and the U.S., where an attempt by one bloc to create a PTA with an emerging market was countered by a similar attempt by the other bloc in order to avert the harm that might otherwise befall its exporters. For example the creation of NAFTA led to an EU-Mexico free trade agreement. Dur also throws light on an issue that trade economists have argued over in the past two decades, whether PTAs are “stepping stones” or “stumbling blocks” on the road to multilateral trade liberalization. He claims that “Although much has been written on this topic, this book is one of only a few that try to outline the specific circumstances under which preferential trade agreements set off a process of multilateral trade liberalization” (p. 221). While in general PTAs have served both as stumbling blocks and stepping stones, Dur believes that the latter scenario is more likely since a PTA frequently leads to negotiations with excluded countries aimed at deflecting its unfavorable consequences for their exporters, and thus to further trade liberalization.

In the conclusion Dur argues that his thesis is confirmed by the evidence presented in the case studies of chapters 2 to 7 spanning the period 1930-2010. He speculates that it may also be applicable to countries other than the North Atlantic ones and to other time periods. As possible additional case studies for his thesis, Dur mentions the Zollverein that united an increasing number of German states over the period 1818-1870 prior to Germany’s emergence as a nation-state, the competition for colonies by European countries in the late nineteenth century, and the “new regionalism” represented by the worldwide proliferation of PTAs (including now Asia as well as the transatlantic area) since the early 1990s. He should be encouraged to explore these and other historical episodes in order to shed additional light on his thesis and confirm its robustness. Although Dur’s thesis is persuasive and well supported by the evidence he presents, it focuses attention on the reasons for trade liberalization and downplays its normative aspects that are of interest to economists. Thus the competitive proliferation of PTAs by the U.S., the EU and most recently many Asian countries raises the question of how they affect the prospects of future multilateral trade liberalization. Such prospects have been harmed according to economists such as Jagdish Bhagwati, recent author of Termites in the Trading System: How Preferential Agreements Undermine Free Trade (2008). This is an area of topical importance and increasing interest to social scientists that Dur may wish to explore further in the future.

Andrea Maneschi is Professor of Economics at Vanderbilt University in Nashville, TN, and the author of Comparative Advantage in International Trade: A Historical Perspective (Edward Elgar, 1998). His research focuses on the international trade aspects of the history of economic thought, among them the interpretation of David Ricardo’s principle of comparative advantage.

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