Trade Gains & Pains; Concentrated & Diffuse

Brad DeLong:

In the United States, at least, the problem is that most beneficiaries from globalization don’t really know that they are beneficiaries, or how much they benefit.

Brad Setser, via MR:

Walmart’s customers are diffuse and unorganized.  Walmart itself is not.   The customers of US electronics firms that source production in China are diffuse.  But the US firms that make money off the China trade, and benefit from China’s willingness to sell its “assembly services” on the cheap, are a rather concentrated interest. And when it comes to the politics of trade, it seems to me like the customer – represented by the firms that organize global supply chains – usually win, at least on the big issues of real importance to global firms (liberalizing agricultural trade isn’t one of them). 

Richard Baldwin (pdf):

To understand juggernaut liberalisation of intra-industry trade, it is necessary to reach for the very latest trade theories, the so-called new-new trade theory (Melitz 2003, Eaton and Kortum 2002). These models allow for differences in firm size and efficiency and explain why the largest, most efficient firms export while smaller firms sell only domestically. In addition to matching many important aspects of reality, this implies that there is what might be called ‘intra-sectoral special interest politics’. In the new-new trade models, reciprocal trade liberalisation raises the profits of big export firms while lowering the profit of small firms in the same industry that sell only in the local market (Falvey, Greenaway and Yu 2004, Baldwin and Forslid 2004). The intuition is simple. Reciprocal liberalisation harms small firms that sell only locally since it raises the degree of competition they face; they have no exports to benefit from the expanded foreign market access. This leads to a downsizing of such firms with some of them exiting the industry. For the big firms, by contrast, the extra competition at home is offset by better market access abroad. On net they gain since their sales benefit from the downsizing and exit of small firms in both markets. Turning from the economic impact of reciprocal liberalisation to the political economy aspect, the key fact is that there are many more small firms than big firms. Thus, Olsen’s Asymmetry suggests that industries engaged in intra-industry trade will tend to be pro-liberalisation. Notice the juggernaut’s liberalisation-begets-liberalisation features of this mechanism. Big exporting firms drive the liberalisation of sectors marked by intra-industry trade since they are better organised politically than the small firms in the same sector, and the liberalisation itself downsizes the anti-trade small firms while upsizing the pro-trade big firms.

This approach to political economy suggests structural reasons to be optimistic about freer trade, despite the Doha round’s struggles.