Tariff Wars and overcoming them through cooperation

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Transcript Tariff Wars and overcoming them through cooperation

Tariff Wars and overcoming them through cooperation

(accompanying Lecture 14)

Craig Parsons YNU January 16 th , 2008 1

Krugman and Obstfeld, table 9.3

US , Japan Free Trade Protection Free Trade 10 , 10 -10 , 20 Protection 20, -10 -5 , -5 2

Alternative, non-PD, payoff matrix

(here, free trade for both is Social


Nash eqm) US , Japan Free Trade Protection Free Trade Protection 10 , 10 -1, 5 5 , -1 -5 , -5 3

Notes for K&O Trade War

 This is a “normal” form (box) game  This is a non-cooperative game    This is a single-shot (single period, non repeating game) The “social optimum” would be “free trade, free trade”, as total welfare 10+10=20 is larger than any other outcome (cell) The “Nash equilibrium” is, however, “protect, protect” and both countries are worse off: therefore, this is an example of P.D. 4

Smoot-Hawley (1930)

    This P.D. game can be used to describe, roughly, what happened when the US and Europe got “trapped” in a costly trade/tariff war.

The US initiated high tariffs (averaging 59% in 1932); Europe (and Canada) retaliated with high tariffs of their own (note: Japanese tariffs also rose, but only to avg 20% or so.) Thus, in addition to the Great Depression, both countries were made even worse off because of the trade war.

After the lessons of the 1930s, leaders in US and Europe were determined NOT to repeat this mistake.


How did world leaders avoid repeating trade war?

 Domestic reform in the US. Reciprocal Trade Agreements Act (1934) taking trade policy power away from the Congress and giving it to the President.

 Internationally: (1948) GATT (since, 1995, expanded into WTO) rounds of trade liberalization.


How did Reciprocal Trade Act reduce protectionism?

   President is, in general, more concerned with country’s overall welfare. In contrast, certain congressmen/women may have strong regional/industrial interest (e.g. Autos in Michigan, Steel in Pennsylvania, Sugar in Florida, Rice in Niigata, etc.) Also, legislature (upper and lower house) are more susceptible to “log-rolling”.

By giving power to president, the US could better: (1) avoid logrolling and (2) be further from specific special interests because president must balance ALL interests (pro-trade and protectionist) 7

“Logrolling” (vote-trading) defined

 ログローリング(英: logrolling )とは、集合的決定 における戦略的行動の一つ。政治学や社会的選 択理論、及び経済学における公共選択論や公共 経済学における概念の一つである。決定の際に 票の取引を行うことをログローリングと呼び、主 に議会における法案の投票の際に見られる。こ のことから票取引と呼ぶこともある  Also see Lecture 8 notes 8

“Logrolling” in (much) more detail

 具体的なログローリングの例を以下に見てみたい。定数 99 の議会で議員 A と議員 B の二人の議員 に焦点を当てることとする。今議会においては議題 1 と議題 2 の二つの議題について審議が行われ ており、議題 1 について法案 X 、議題 2 について法案 Y がそれぞれ提出されているとする。議員 A は 議題 1 に関して特定の利益があるために強い関心を持っているが、議題 2 に関してはこの議題から 得られる効用は少なくさほど関心がない。逆に議員 B は議題 2 には強い関心を払っているが、議題 1 にはあまり関心がない。ここで議員 A は法案 X から利得を得るためこれを可決・成立させたい一方 で、議題 2 に関しては一応法案 Y に反対しているとする。他方で議員 B は法案 Y の可決・成立を期し たいと考えており、かつ一応は法案 X に反対しているとする。この時に法案 X を支持する議員が 49 対 50 で少数派であり、法案 Y に賛成する議員も 49 対 50 で少数派であると仮定しよう。効用を最大 化しようとする合理的な議員を仮定するならば、次のことが言えるであろう。すなわち議員 A はあま り関心のない、つまり自身の効用に関係ない議題 2 における自らの選好を放棄してでも議題 1 にお ける法案 X の成立を優先させる。同様に、議員 B も自分の効用にあまり関わらない議題 1 おける自 らの選好を放棄してでも議題 2 における法案 Y の成立を優先させる。従って、議員 A と議員 B の間に は一種の取り決めが成立することとなる。すなわち議員 A が議題 2 に関して偽の選好を表明して法 案 Y に賛成することを約束する一方で、議員 B も議題 1 に関して偽の選好を表明して法案 X に賛成 することを取り決める。こうしてこのような取り決めの結果、法案 X は 50 対 49 で可決・成立し、法案 Y も 50 議員 対 A 49 で可決されることになる。このため議員 と議員 B )を、取引連合と呼ぶ。 A ・ B は一定の制約の下でではあるが、自らの効 用を最大化することに成功することとなる。この時に、議員 A と議員 B は法案 Y への反対票と法案 X への賛成票を取引したことになる。またこのようにログローリングを行う投票者の集団(この場合は 9

“Reciprocity” balances rent-seekers

 With industries seeking protection, often the loss due to removing a tariff are very concentrated in one region/state, while the consumer gains are spread thinly across the entire nation.  With trade liberalization reciprocity, the US only removes a tariff (which in SR will hurt some industry and possibly region), if, in return, trading partners remove a tariff of their own. This will benefit some US




Reciprocity: an example

 Perhaps the US only promises to lower tariffs on Steel


, for example, the UK also reduces its tariffs on Wheat.

 The reduction of steel tariffs will impose a


on US steel producers, in Pennsylvania and Ohio. The representatives from that region may fight hard (rent seek) to resist such liberalization. BUT at the same time:  The farmers (and their representatives) will fight hard (rent-seek) for the trade agreement, because they will benefit from UK’s lower wheat tariff.


The 1934 Reciprocal Trade Act balances interests (rent-seekers)

 The 1934 Reciprocal Trade Act, made US liberalization conditional on foreign governments liberalization.

 Thus, US protectionist rent-seekers (-) were offset by pro-trade (+) rent-seekers.  Before 1934, there were many protectionist rent seekers (-), but little way for pro-trade rent-seekers (+) to be effective.

 This, in combination with treaty negotiation power to president, enabled the US to promote trade liberalization, and to do it much faster.


How do int’l agreements such as GATT reduce protectionism at home?

 In game theory terms, GATT trade liberalization rounds are


and they are


games,  Game theorists and experimental economists (and biologists!) find that players more often avoid P.D. outcomes, and converge the “social optimum” when they can or attain communicate (cooperate) and/or if they play the same game over and over, and learn.


More on International Cooperation

 Agreements such as GATT bind leaders of a country. That is, the president or prime minister promises other countries NOT to raise tariffs. This international promise helps the leader (president/ PM ) to resist protectionist demand from Congress at home.

 Important point: the President/PM promises NOT to do something, and this “self restriction” makes them, in a sense, more powerful (to resist).



by “limiting one’s own freedom of action” (Example 1: Secret ballots )

    Consider a country where voters fear that if they vote against the leader in power, they will be punished .

Also, imagine that in that country (US and many countries in the 19 th century), votes were not secret. Like in congress, every knows how everyone votes, including the cruel leader.

If voters

give up (sacrifice) their right

to announce who they vote for, they can vote for whom they


want. Because the leader cannot confirm or deny who each voter voted for, the leader becomes powerless to threaten. Thus, by the voter giving up their “right” to prove who they voted for allows them to vote as they truly want to.



by “limiting one’s own freedom of action” (Example 2: Odysseus)

 Odysseus knew that listening to the Sirens would be disaster for him as his men.  Thus, in advance, he had himself bound (tied), and had his men put wax in their ears, so that they could safely pass the the dangerous Sirens.

strait with  International cooperative agreements also bind (tie) leader hands so they can better resist domestic rent-seekers at home.


Odysseus and the Sirens



 In general, many world leaders (and many MPs, Congress) are, in general, committed free trade, as they know it benefits their economy overall (as well as strengthens political and cultural ties between nations, and possible reduces chance of war).

to  But, often, in the political balance, they must address domestic pressures, which inevitably involves some inefficient rent-seeking and “rent giving”; but they try to avoid this by giving power away through int’l agreements.


International Cooperation conclusion cont’d

    While this strategy has been very successful in producing “win win” strategies in trade, less success has been reached in issues such as international monetary coordination or the environment (e.g. failure of Kyoto Protocol).

This is, in part, due to the fact that the overall gains, in the short and medium run, to free trade are clearer to nations’ leaders.

The losses, especially in SR to both exporters and importing firms, with higher environmental regulations are quite clear, thus it is harder to win domestic support. (The

long term

benefits and costs of drastic increases in environmental regulations are also far from clear, where there is far more consensus on the long-term benefits of free-trade. At least among economists.) 19