Published by EH.NET (December 2004)

Michael Lusztig, The Limits of Protectionism: Building Coalitions for Free Trade. Pittsburgh: University of Pittsburgh Press, 2004. xvi + 272 pp. $27.95 (paper), ISBN: 0-8229-5843-0.

Reviewed for EH.NET by Anthony Patrick O’Brien, Department of Economics, Lehigh University.

George Akerlof once remarked that the problem with macroeconomics is that in half the models unemployment is impossible, and in the other half full employment is impossible. A problem with models of rent seeking applied to international trade is that it’s unclear how free trade ever survives. The firms that benefit from protection benefit a lot. Everybody else is hurt a little. This isn’t quite true, of course. The steel tariffs the Bush Administration imposed a couple of years ago hurt steel users, particularly smaller ones, quite a bit. Still, the rent-seekers have more to gain, and so should be more successful at bribing legislators. The result ought to be much more protectionist legislation than we actually see in the United States and other industrial countries.

Michael Lusztig, a professor of political science at Southern Methodist University, believes he has discovered the resolution of this paradox. In Lustzig’s view legislators are corrupt, their votes for sale to the highest bidder, and so tend to favor protection. On the other hand, heads of government — presidents and prime ministers — favor liberalizing trade because they are either beneficent social planners or because they reap the political benefits of the more efficient economies that result from free trade. The relative lack of protectionism, then, reflects the ability of presidents to outmaneuver Congressmen. Presidents manage this by converting to free trade a sufficient number of firms that might otherwise have lobbied for protection. The notion that presidents and prime ministers are altruistic social planners will draw a horse laugh from most economists. (Note, again, Bush’s steel tariffs.) The thing is, though, most of the time it may well be true. At any rate it seems more plausible than Lustzig’s alternative argument that either the harm from protection or the benefits from free trade are likely to be visible to voters soon enough to have much impact during the average election cycle. One of the book’s weaknesses is that Lusztig spends little time establishing why there is typically a divergence between the interests of presidents and the interests of Congressmen on the question of liberalizing trade.

Lusztig divides rent-seeking firms into those that have no hope of surviving without protection — his “mythical and extreme example” is olive farmers in Finland — and those firms that prefer protection, but that might succeed at competing internationally, if forced to. Lusztig compares the second group to the “idle adolescent who prefers a parental allowance to getting the metaphorical haircut and job.” The existence of this second group means that reducing protection may actually increase political support for free trade by convincing some firms to shift resources away from rent seeking and toward competing internationally.

Most of Lusztig’s book is devoted to seven case studies that he believes demonstrate the shortcomings of the conventional rent-seeking model. In these studies, governments reduced protection for one of three reasons: there was an economic crisis, the IMF or World Bank ordered the reduction, or the government’s objectives changed, as when, for instance, protection was reduced as part of a general program of reform. Lusztig’s case studies are based on secondary sources, including a smattering of articles by economic historians. They contain few statistics and no formal statistical analysis. The seven case studies include: the repeal of the Corn Laws in Great Britain in 1846, the growth of support for free trade in the United States during the 1930s and 1940s, the movements to free trade in Mexico, Canada, New Zealand, and Chile in the 1980s, and the failures of movements to free trade in Brazil and Australia. Lusztig does a good job demonstrating that in each country and time period there existed a sizeable group of “flexible rent seekers” who could be converted to free trade, once the process of dismantling protection seemed irreversible. The successful liberalization programs were those that pulled off this conversion without generating too strong a political backlash.

Lustzig divides the outcomes of his case studies into “successes,” where trade was liberalized and the liberalizing president or prime minister survived politically, “failures,” where liberalization either failed or succeeded but the liberalizing president or prime minister was driven from office; and “mixed,” where only minor liberalization occurred. Lustzig argues that the success of liberalization depends on presidents and prime ministers knowing whether to eliminate protectionism all at once (the “Big Bang” strategy) or piecemeal (the “Iteration” strategy). His case studies discuss at length why one or the other strategy was preferable in particular circumstances. Lustzig hopes his analysis will provide guidance to presidents and prime ministers contemplating launching programs of liberalization. I have to say, though, that his advice on when to blow protection up and when to ease it out the door seems pretty vague and ad hoc to me. In any case, in practice trade liberalization is generally only one component of the political strategy of the typical president or prime minister. So, the pace of liberalization is often dictated by broader political considerations.

The book is a quick read, is well written and is jargon free. But the lack of economic analysis limits the book’s appeal to economists. The only sporadic attempts to engage the economic history literature also limit the book’s appeal to economic historians. The book does seem well suited to undergraduate students of international relations or international political economy.

Anthony Patrick O’Brien is professor of economics at Lehigh University. His principles of economics text, co-written with Glenn Hubbard, will be published in 2005 by Prentice-Hall.