Effect Of Domestic Politics On International Economy

Published Date: 02 Nov 2017

Introduction.

There have been several changes in the world economy since 1980. Some of these changes have been the move toward freer trade among countries across the globe. Countries as diverse as Mexico, India, Poland, Turkey, Ghana, Morocco, and Spain-not to mention Chile, which moved earlier in the 1970s.have all chosen to liberalize unilaterally their trade policies, and Many of these trade liberalizations occurred within the context of larger economic reform packages. In addition, the successful conclusion of the multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), the Uruguay Round, in 1994 further liberalized trade among many developed countries and between them and developing ones. This global rush to free trade, as Rodrik (1994) has called it, is an anomaly politically. As he describes it. Since the early 1980s, developing countries have flocked to free trade as if it were the Holy Grail of economic development. Together with the historic transformation and opening of the Eastern European economies, these developments represent a genuine revolution in policymaking. The puzzle is why is it occurring now and why in so many countries all at once? I hope that this essay will help us to understand this puzzle.

A lot has been written on this topic of political economy, both political and economic scientist have done so. This has been evidently put forward by economists such as Reizman &Wilson (1995) and Rodrik (1995) and political scientists such as Cohen (1990) and Lake (1993) demonstrate. But the contrast is that their approaches have tended to differ. Economists have focused on explaining trade flows. Why certain countries import and export particular goods or services to certain other countries has been a central question for them. Much theory in international trade addresses this question; for instance, one of the central theorems in trade theory, the Heckscher-Ohlin theorem, explains trade flows. Economists have also devoted attention to the issue of trade barriers. The central theoretical conclusion of the field, of course, has been that free trade is the best policy for most countries most of the time. Thus, economists have puzzled over why, given this finding, countries invariably employ at least some protectionist policies.

They have tended to ask why countries protect certain of their industries when free trade would be better economically. By and large, their answer has focused on the preferences of domestic actors for protection. Using the Stopler-Samuelson theorem and other economic theories, they have explored why certain domestic groups would prefer protection and why they would expend resources to lobby for it. This has resulted in a large empirical literature examining levels of protection across industries and, recently, in the development of models of such protection. Ultimately, then, economists have been pushed into studying the politics of trade. How well have they done in modeling such politics? Moreover, have they been able to explain the rush to free trade that has occurred?

In contrast, political scientists have rarely focused on explaining the pattern of trade flows (Milner 1999). Only some recent work has explored the political roots of import and export flows among countries. Moreover, political scientists have tended to see protection as the norm and have puzzled over why a country would ever liberalize its trade policy or adopt free trade. Politically, protectionism seems eminently reasonable. Explaining both protectionist and free trade policies and their changes over time has occupied political scientists. Indeed, the prevailing theories of the 1970s and early 1980s would have predicted the opposite of the rush to free trade. As I argue below, many systemic theories, such as hegemonic stability and dependency theory, seemed to forecast growing protectionism in the world economy. For many political scientists, then, the rush to free trade has been unexpected.

Theoretical framework

There two major theories that will be put into perspectives in this paper. This is realist theory and liberal theory. Liberalism’s core ideals stress individualism, human rights, universality, freedom from authority, right to be treated equally under the protection of law and duty to respect and treat others as "ethical subjects" as well as freedom for social action. (Doyle, 1983; Fukuyama, 1992) Closely connected to these individual freedoms is the concept of representative government as well as the importance of the ownership of private property, right to free economic activity without state interference. (Doyle, 1983; Fukuyama, 1992,) Liberal scholars such as Kant (1795) focused on harmony between people overseen by institutions such as judiciary and the representative form of the government where leaders exercise their authority with the consent of "free people existing in a political order". (Doyle, 1983,; Kant, 1795) As the liberal state is represented through sovereign government of the people, its sovereignty and integrity is not subject to any external control such as an authority. (Doyle 1983,). The realist deal with powers solely vested on the States. The States are the main actors and all their decisions are bound to be followed to the later.

Hypothesis of the study

There are several questions that this paper seeks to answer.

What do we know about trade and trade policy?

How do political institutions affect the ways in which the preferences of actors are translated into policy?

What factors at the international level shape trade policy choices?

How does international trade itself affect states and the international political system?

Objective of this paper

At the end of this discussion we should be able to understand the trade and trade policy preferences.

Be able to know how political institutions affect the ways in which the preferences of actors are translated into policy.

To be able to point out the factors that shape trade policy choices.

And finally to be able internalize how international trade itself affect States and the international political system.

Scope and limitation of study/conceptual framework.

This paper is divided into various parts each explaining specific issues that are central in explaining trade politics. First, what do we know about the preferences of domestic groups for protection or free trade? Why do some groups favor protection, and some favor free trade? Do these preferences change over time? And if so, why? Can changes in preferences explain the rush to free trade? Second, how do political institutions affect the ways in which the preferences of actors are translated into policy? How important are institutions in aggregating preferences and supplying policy? How much do changes in institutions affect trade policy, and can they explain the rush to free trade? Third, what factors at the international level shape trade policy choices? How do relations among countries and the structure of the international system affect domestic choices about trade? Have changes such as the end of the bipolar Cold War system been responsible for the recent trend toward trade liberalization? Fourth, how does international trade itself affect states and the international political system? Do rising trade flows produce important changes in domestic preferences, institutions, and policies? Finally to give a conclusion remarks on the same.

I examine each of these issues to see if they can provide us with some answers to the most significant aspect of trade policy today: the widespread liberalization of trade policies that has taken place since the early 1980s.

Trade and trade policy

Trade policy I mean all policies that have a direct impact on the domestic prices of tradables, that is, goods and services traded across national boundaries as imports and/or exports. Such policies include not only import tariffs, which are taxes on imports, but also export taxes, which under certain conditions have the same effects as import taxes. Likewise, import and export subsidies count. Exchange rate policy also affects trade flows, but I leave this subject for others to discuss.

Tariffs, which have been the main instrument of trade policy among advanced industrial countries, have been reduced to insignificant levels since World War II (Milner 1999). After the latest round of international trade negotiations, the Uruguay Round, completed in 1994, the average tariff for the developed countries was reduced from 6.3% to 3.8% [World Trade Organization (WTO) 1996]. Non-tariff barriers on the other hand,which include quantitative restrictions, price controls, subsidies, voluntary export restraints, etc.have proliferated, in part making up for the decline in tariffs. But again the Uruguay Round slowed or reversed this, helping to reduce quotas, subsidies, and voluntary export restraints across a wide range of industries and to convert these barriers into more transparent tariffs (WTO 1996).

According to Milner (1999), for quite sometimes and mostly after the postwar period, less developed countries (LDCs) have used trade barriers extensively, many for the explicit purpose of import-substituting industrialization (ISI). But more interestingly, beginning in the 1980s especially, many developing countries began to liberalize trade and to adopt export-oriented policies [International Monetary Fund (IMF) 1992]. Uruguay Round completion promoted this greatly by reducing trade barriers in many areas of key concern to the LDCs, such as textiles and agriculture; bearing in mind that LDCs are agricultural oriented; it also brought many new developing countries into the international trade organization, the WTO, inducing them to follow its rules. In addition, the constant acceleration towards global trade liberalization was brought by the transition from communist economies to market-based ones by many countries in the early 1990s. All of these changes have resulted in one striking fact about the period since 1980: There has been a far-reaching liberalization of trade barriers across the globe (WTO 1996, Rodrik 1994). Why has this occurred? And will it last?

Concomitantly and in part consequentially, the growth of world trade has surged. For most of the postwar period, the growth of trade has been advancing more than growth in world output (Milner 1999). Changes in the nature of global trade have been so important to this growth. There has been tremendous growth in intra-industry trade and in intra-firm trade. Intra industry trade, which involves the exchange of goods from within the same industry, say Toyotas for BMWs, now accounts for between 55% and 75% of trade in advanced industrial countries (Greenaway & Milner 1986:Table 5-3); for the United States, this figure was 83% in 1990 (Bergsten & Noland 1993:66). Intra-firm trade, which involves transfers of goods within one company across national boundaries, has also grown; it now accounts for over 40% of total US imports and 30% of US exports (Encarnation 1992:28). These two types of trade are important because they tend to have different effects than standard, inter-industry trade. Generally, they are associated with fewer displacement effects and less conflict. As Lipson (1982:453) argues, intra-industry trade provides a powerful new source of multilateral interest in the liberal trade regime: diminished adjustment costs in some sectors, and higher net gains from trade as a result. Finally, there has been a significant regionalization of trade. Intraregional trade flows within the European Union, East Asia, North America, and Latin America especially have become more important as a share of total trade. This is partially a result of the regional integration agreements signed by these countries in the past two decades.e.g. the single market in Europe, the North American Free Trade Agreement (NAFTA), the Association of South East Asian Nations (ASEAN), the Asia Pacific Economic Cooperation (APEC), the East Africa Treaty, and Mercosur (WTO 1996:17.22).

In explaining trade policy, some of the earliest models have focused on "pressure group politics". That is, they explain the recourse to protection by governments as a function of the demands made by domestic groups (Milner 1999). These domestic groups seek protection or liberalization because such policies increase their incomes. The distributional consequences of trade policy thus become the explanation for its causes. Adam Smith (1937) may have been one of the first to recognize this when he noted that the subversion of the national interest in free trade is the frequent outcome of collusion among businessmen. Schattschneider (1935) was another early proponent of the view that special economic interests were mainly responsible for the choice of protectionism; he showed how these pressure groups hijacked the US Congress in 1929.1930 and produced one of the highest tariffs in US history, the Smoot- Hawley tariff.

Since then, development of the pressure group model has attempted to delineate more specifically the groups who should favor and oppose protection and the conditions under which they may be most influential (Milner 1999). One motive for this has been the observation that the extent of protection and the demands for it vary both across industries and across countries. Such variance should not have existed if all domestic groups favored protection. Explaining this variance has been a key feature of the literature. Factoral versus sectoral or firm-based theories of preferences has been the main division. In both cases, preferences are deduced as a result of the changes in income that accrue to different actors when policy changes from free trade to protection or vice versa. Factoral theories rely on the Stopler-Samuelson theorem (1941), this theorem shows that when factors of production, such as labor and capital, can move freely among sectors, a change from free trade to protection will raise the income of factors that are relatively scarce in a country and lower the income of relatively abundant factors. Thus, scarce factors will support protection, whereas abundant ones will oppose it. According to Rogowski (1989) who has developed one of the most interesting political extensions of this, claiming that increasing (decreasing) exposure to trade sets off either increasing class conflict or urban-rural conflict according to the factor endowments of different countries. In contrast, sectoral and firm-based theories of trade preferences follow from the Ricardo-Viner model of trade, also called the specific-factors model in which, because at least one factor is immobile, all factors attached to import-competing sectors lose from trade liberalization while those in export-oriented sectors gain. Conflict over trade policy thus pits labor, capital, and landowners in sectors besieged by imports against those who export their production. How closely factors are tied to their sectors.i.e. the degree of factor specificity-is the key difference between these two models (Alt et al 1996). These models however have been tested by a number of models, sometimes singly and sometimes simultaneously. Irwin (1994, 1996), Magee et al (1989), and Frieden (1990) have found evidence in support of the specific-factors model; in contrast, E Beaulieu (unpublished manuscript), Balestreri (1997), Rogowski (1989), Midford (1993), and Scheve & Slaughter (1998) find support for the Stolper-Samuelson.type factoral models.

Additionally, to these models of trade preferences, others have looked at how particular characteristics of industries affect patterns of protection. Caves (1976), Pincus (1975), Baldwin (1986), Anderson (1980), Marvel & Ray (1983), Ray (1981), and Trefler (1993) have shown how specific characteristics make an industry more likely not only to desire protection but also to be able to induce policy makers to provide it. These regression analyses tend to straddle the debate between sectoral and factoral models of trade politics. Their comparison across industries suggests a sectoral type of model, but many of their findings do not disagree with those of a more factoral view of the world. For example, they tend to demonstrate that low-skill, labor-intensive industries with high and rising import penetration are frequently associated with high protection. In addition, many show that export-oriented industries and multinationals tend to favor freer trade and to be associated with less protection (Milner 1988). The attention to anti-protectionist groups is particularly interesting given the global move toward trade liberalization; one question is whether this movement has been due to the growth in importance of these types of groups domestically.

Can these models of societal preferences explain the rush to free trade? As Rodrik (1994) points out, focusing on the distributional consequences of trade policy provides one potential key to the puzzle. Perhaps the powerful interests that benefited from protection and had successfully blocked reform were weakened by the debt crises of the 1980s, which would explain the general move toward liberal policies. He concludes that such evidence would be difficult to find. But others have argued that the distributional politics of trade can explain this change in policy (Milner 1999).

Frieden&Rogowski (1996), for example, argue that exogenous changes have brought about a reduction in the costs of trade and have thus made trade more important relative to any domestic economy, increasing the costs of protection. They then point out that this Reduction in the costs of trade have thus heightened the opportunity costs of protection, creating new pressures for freer trade. Exactly why and how the proponents of trade liberalization have gained political advantage over those demanding protection is less clear. Indeed, as Rodrik (1994) notes, the prospect of too much redistribution may be the central political difficulty in trade reform. Taking income away from one group is rarely easy for a politician to accomplish. Why did policy makers around the globe choose to do this, and how were they able to overcome opposition to the sizable income redistribution wrought by embracing freer trade?

One argument made to explain this is that various exogenous conditions created new actors who preferred freer trade, thus shifting the balance of power in their favor. Many LDCs began their experiment with trade liberalization as part of a package of reforms designed to pull their economies out of severe economic crises. The crises themselves helped decimate sectors of the economy and created government budget crises, which in turn meant an end to subsidies for some domestic industries. Both of these changes eliminated many import-competing firms and put a premium on creating exporting firms that could generate foreign exchange (Haggard 1995). Thus, in many LDCs, the crises may have not only created new groups with preferences for freer trade but also eliminated supporters of protection. For the advanced industrial countries, such changes in the nature of the actors and in their influence may have come from a different source. Frieden & Rogowski (1996) claim that exogenous change, often in the form of technological change, may have altered the interest group politics of trade. Here one could cite the growing component of intra-industry trade among the developed countries and the new support for trade liberalization it might generate. In any case, interest group explanations of the rush to free trade remain incomplete unless they can somehow specify how an exogenous force shifted political influence away from protectionists and in favor of those preferring free trade.

Given that belief in the superiority of free trade has existed for centuries among economists, it is also important to question why this change occurred when it did. Krueger appears to retreat to more material factors to explain its timing; the failures of ISI and the success of the relatively open NIC economies convinced policy makers that new trade policies were necessary. Others focus on the economic crises of the early 1980s and the growing influence of international institutions and the United States.

Although Krueger and others, such as Rodrik (1995), Haggard & Kaufman (1995), and Bates&Krueger (1993), attribute trade policy reform to crises and economic downturns, another strand of literature on the macroeconomics of trade policy concludes in the opposite direction. Many scholars consider bad economic times a prelude to rising demands for protection and increasing levels of protection. Takacs (1981), Gallarotti (1985), Cassing et al (1986), Magee & Young (1987), and Wallerstein (1987) all found that declines in economic growth or capacity utilization and/or increases in unemployment and imports tend to increase the demand and supply of protection. This earlier literature saw policy makers responding increasingly to the rising demands for protection from domestic groups in bad economic times.

Political institutions.

I start by asking a simple question, can theories that focus on the supply side of trade policy do any better? Do these political institutions play any role in trade policy making? And can we attribute them to the changes in the rush for free trade?

Milner (1999) says that there has been several arguments from different scholars who argue that political institutions, rather than preferences, are crucial in explaining trade policy. Although preferences is the central item in these arguments, the main claim is that institutions aggregate such preferences and different institutions do so differently, thus leading to distinct policies. Understanding institutions is necessary to explain the actual supply of protection, rather than simply its demand (Nelson 1988). On the domestic side, different institutions have come out to empower different actors. Some institutions have tended to give special interest groups greater access to policy makers, rendering their demands harder to resist. For example, many scholars believe that the fact that the US Congress controlled trade policy exclusively before 1934 made it very susceptible to protectionist pressures from interest groups (Destler 1986, Haggard 1988, Baldwin 1986, Goldstein 1993), (but another contrast to this argument is that, will the US sustain this power to control trade policy? Or there will emerge another powerful State to do so?). Other institutions insulate policy makers from these demands, allowing them more leeway in setting policy (Milner 1999). Thus, some authors argue that giving the executive branch greater control over trade after the Reciprocal Trade Act of 1934 made trade policy less susceptible to these influences and more free-trade oriented. In general, concentrating trade-policy–making capabilities in the executive branch seems to be associated with the adoption of trade liberalization in a wide variety of countries (Haggard & Kaufman 1995). As Haggard & Webb (1994) have noted about trade liberalization in numerous LDCs, "In every successful reform effort, politicians delegated decision making authority to units within the government that were insulated from routine bureaucratic processes, from legislative and interest group pressures, and even from executive pressure."

The argument for trade preference is lengthy, but despite all the arguments about the policy preferences, there is one area where change has occurred that may be linked to this rush to free trade (Milner 1999). Many of the countries that have embraced trade liberalization have also democratized. Mexico is a prime case. The growth of political competition and the decline of the hegemonic status of the governing party seem to have gone hand in hand with the liberalization of trade policy beginning in the 1980s. However, trade reform in many LDCs occurred before the transition to democracy and was often more successful when it did occur this way (Haggard & Webb 1994). Chile, Turkey, Taiwan, and South Korea all began their trade liberalization processes before their democratic transitions. Rodrik argues more generally that any change in political regime is likely to induce trade reforms. "Historically sharp changes in trade policy have almost always been preceded (or accompanied) by changes in the political regime. Not all political transformations result in trade reform, but sharp changes in trade policy are typically the result of such transformations" (Rodrik 1994). Although strong evidence has not yet been presented, at this point changes in political regimes, and specifically the spread of democracy, may be the institutional change that best helps explain the rush to free trade.

INTERNATIONAL POLITICS/INTERNATIONAL ORGANIZATIONS

We can say that domestic politics are the only source of trade policy, but not, trade policy is not only affected by domestic forces. There are number of factors in the international system that is connected to countries’ trade policy choices. A favored argument among Realists has been that the distribution of capabilities in the international system has a fundamental effect on trade. The so-called theory of hegemonic stability (HST) posited that when the international system or economy was dominated by one country, a hegemon, then free trade would be most likely (Krasner 1976, Gilpin 1987, Lake 1988, Gowa 1994). Many critics have challenged this claim both theoretically and empirically (Lake 1993, Keohane 1997). Conybeare (1984) has shown that large countries should favor optimal tariffs, not free trade, even if others retaliate; Snidal (1985) and others have claimed that small numbers of powerful countries could maintain an open system just as well as a single hegemon could. According to Gowa (1993), the theory has also faced empirical challenges implying that a hegemon is neither necessary nor sufficient for an open trading system (e.g. Krasner 1976, Mansfield 1994). In light of these results, HST has been modified as scholars examine more closely the dynamics of interaction among countries in the trading system.

Perhaps the most interesting point about this theory is that it tries to explain change over time in the overall level of openness in the trading system; that is, it looks at the sum of countries’ trade policy choices. In terms of our puzzle of explaining the rush to free trade. Changes in the distribution of capabilities over time should provide clues to this puzzle. In the 1980s, however, many political scientists argued that the decline of American hegemony from its zenith after World War II would lead to a rise in protectionism and perhaps the fragmentation of the international economy into rival blocs (Gilpin 1987). This prediction does not seem to explain the rush to free trade witnessed since the mid-1980s.

One possible retort, however, is that US hegemony has risen, not declined, since 1980, as Russett (1985) and Strange (1987) have argued. Thus, the renewal of American preeminence in the international system explains the turn away from protectionism. This argument fits well with a broader claim concerning the dominance of American ideas about free markets and trade, and the impact of those ideas on other countries’ trade policy choices. After all, the package of market-oriented reforms, including trade liberalization, that has been proposed for the LDCs and ex-communist countries is called the Washington consensus. Finally, Haggard (1995) argues that changes in US trade policy in the 1980s help explain the move toward free trade. The United States began exerting strong bilateral pressure on LDCs to liberalize their economies or face closure of the American market to their exports. American hegemony and the renewed will to exert influence may help account for the rush to free trade.

Other scholars have felt that aspects of the international security environment best explain the pattern of trade. Gowa (1994) has argued that countries that are military allies trade more with each other, and that this is especially true of countries within the same alliance in bipolar system. That is, when countries are allies in a system featuring one other major opposing alliance group, as was the case during the Cold War, they tend to trade the most freely among themselves. The security externalities of trade drive their behavior, inducing them to help their allies while punishing their enemies. Gowa & Mansfield (1994) and Mansfield & Bronson (1997) provide strong evidence for this effect. How would this argument deal with the rush to free trade? Unlike other arguments, it directly links trade policy to the end of the Cold War and the dissolution of the Eastern bloc. Unfortunately, however, the argument suggests that protectionism should rise, not decline, with the demise of bipolarity. Predictions from this model seem to be inaccurate or at least incomplete. A description of the current structure of the international system might be one of either multipolarity, in which case the model is inaccurate, or unipolarity, in which case Gowa has no prediction.

Another aspect of the international system that scholars have noted for its effect on trade policy is the presence and influence of international institutions. Although a long debate has occurred over whether international institutions matter, many scholars conclude that the willingness of states to set up and participate in such institutions implies that they do matter (e.g. Ruggie 1983, Keohane 1984). In the trade area, a number of institutions provide support for an open, multilateral trading system; these include the GATT and its successor, the WTO, as well as the IMF and World Bank. Although regional trade institutions may have a more ambiguous effect on the multilateral system (E Mansfield, H Milner, unpublished manuscript), some of them, including the European Union (EU), NAFTA, and ASEAN, seem to have positive effects on lowering trade barriers and reinforcing unilateral moves toward freer trade (Milner 1999).

These institutions are postulated to have a number of different effects on countries’ trade policy choices. Some authors suggest that their main role is to provide information about other countries’ behavior and compliance with the rules of the game (e.g. Keohane 1984). Others see these institutions as providing a forum for dispute resolution so that partners in trade can feel more secure and thus more likely to trade (e.g. Yarbrough & Yarbrough 1992). Still others view such international institutions as encapsulating the norms by which countries agree to play the trading game, which again provides a common framework for sustaining trade flows (e.g. Ruggie 1983). All of these arguments hypothesize that the presence of these institutions should be associated with a freer trade environment; moreover, they imply that the depth and breadth of these institutions should be positively related to trade liberalization and the expansion of trade. Can these arguments help explain the rush to free trade since the 1980s? (Milner 1999).

Certainly the presence of institutions like the GATT and IMF have added leverage to arguments for trade liberalization; the IMF and World Bank, for instance, have often made loans conditional on trade policy reform. But these institutions have existed since the 1940s, and thus their mere presence cannot explain the current move toward liberalization. The fact that many countries have been in severe economic crisis and needed external financing may help explain the added influence that these institutions have exerted since the 1980s. As Rodrik (1992:89) points out, "The 1980s were a decade of great leverage for these institutions [i.e. the IMF and World Bank] vis-à-vis debtor governments, especially where poorer African governments are concerned. The trade policy recommendations of the World Bank were adopted by cash-starved governments frequently with little conviction of their ultimate benefits." But he also notes that, once the crisis is over, governments may return to their old protectionist ways. Others tend to argue that international institutions help lock in such domestic reforms. For example, Mexican unilateral trade liberalization seems much more secure now that Mexico is part of NAFTA and the WTO.

EFFECT OF TRADE ON COUNTRIES AND THE INTERNATIONAL SYSTEM

To conclude on this long discussion, let me now turn my attention to see the effects of trade on countries (especially the LDCs) and the International System. Once countries have liberalized or protected their economies, what might be the effects of such choices? Scholars have examined this question with attention to at least three aspects of the domestic political economy. First, some have argued that trade liberalization can change domestic preferences about trade. As countries liberalize, the tradables sector of the economy should grow along with exposure to international economic pressures. Rogowski (1989) has argued that this should lead to greater or new political cleavages and conflicts between scarce and abundant factors domestically. These new cleavages in turn will alter domestic politics, as for example new parties arise to represent these groups or new coalitions form. Milner (1988) also argues that increasing openness to trade changes preferences domestically. Openness raises the potential number of supporters of free trade as exporters and multinational firms multiply; it may also reduce import-competing firms as they succumb to foreign competition (Milner 1999). Hathaway (1998) presents a dynamic model showing that trade liberalization "has a positive feedback effect on policy preferences and political strategies of domestic producer groups. As industries adjust to more competitive market conditions, their characteristics change in ways that reduce the likelihood that they will demand protection in the future." James & Lake (1989) suggest an ingenious argument that repeal of the protectionist Corn Laws in the United Kingdom created the necessary conditions for the creation of a successful coalition for free trade in the United States. Each of these arguments in distinct ways suggests that increasing exposure to trade leads to increasing pressure against protection, thus creating a virtuous cycle of rising demand for freer trade. As an explanation for trade policy in the advanced industrial countries over the past few decades, this type of argument seems very plausible. The abrupt rejection of ISI and protectionism by developing countries seems less explicable in these terms.

A second aspect of domestic politics that increased trade may affect involves the character of national political institutions. Among the advanced industrial countries, Cameron (1978) long ago noted the relationship between those that were very open to international trade and those with large governments. He and Katzenstein (1985) attributed this correlation to the need for governments with open economies to provide extensive domestic compensation to the losers from trade and to employ flexible adjustment strategies for their industries. Rodrik (1997) has found strong evidence of this relationship around the globe. He claims that greater exposure to external risk, which trade promotes, increases the volatility of the domestic economy and thus that "societies that expose themselves to greater amounts of external risk demand (and receive) a larger government role as shelter from the vicissitudes of global markets" (1997). Increasing exposure to international trade may thus create demands for more government intervention and a larger welfare state, which in turn are necessary to sustain public support for an open economy.

Rogowski (1987) has says that as countries become more open to trade, they will find it increasingly advantageous to devise institutions that maximize "the state’s insulation, autonomy and stability." For him, this implies parliamentary systems with strong parties, proportional representation (PR), and large districts. He finds a strong relationship especially between openness and PR systems. Haldenius (1992) also finds that trade may have effects on domestic institutions. He argues that exposure to international trade brings higher rates of economic growth, which, through the development process, may translate into better conditions for the emergence of democracy. Thus, trade liberalization may over time foster conditions conducive to political liberalization. This again suggests a virtuous cycle—trade liberalization fosters democratization and democracy in turn may promote more trade liberalization, and so on.

CONCLUSION

I started this paper by asking several questions, some of which was why nations around the globe have liberalized their trade policies since 1980. I tried to examine the preeminent theories of trade policy to see if they could help explain this monumental shift in policy. In this section I assess how well they have done and where future research might be useful.

There has been a decline in trade barriers across the globe for quite some time especially since. Existing theories suggest at least three plausible answers to this phenomenon. The first involves changing preferences about trade policy among domestic actors. Clearly, in the 1980s, many political leaders and some societal groups in countries around the globe changed their views on what their best trade policy choice was. Political leaders in the LDCs became aggressive and launched ambitious, unilateral economic reforms that included massive trade liberalization, while leaders in the advanced industrial countries undertook large-scale, multilateral efforts to reduce trade barriers. For the latter group, it is hard to pinpoint changes in political institutions or democratization as playing a major role. Instead, the virtuous cycle—growing trade creating more groups in favor of trade liberalization, and this helped create more impetus for greater liberalization and more trade—which seemed to be a key factor. For the LDCs, on the other hand, changes in leaders’ preferences and in political institutions appear more important. Democratization in some countries also fostered this process. Large-scale changes in political institutions, especially in the direction of democracy, may be necessary for the kind of massive trade liberalization that occurred in some LDCs. But changes in preferences cannot be overlooked in explaining the rush to free trade.

Thus, changing preferences among political leaders and societal groups, institutional changes (especially democratization), and the increased influence of international institutions that supported trade liberalization may best explain the global rush to free trade witnessed since 1980. Research on this puzzle is certainly not complete, however. None of our existing theories by itself seems to do very well in explaining this movement, the most important change in trade policy globally since the end of World War II, and none appears to have predicted it. A better understanding of how political leaders form their trade preferences and how these preferences are connected to societal ones is essential. Moreover, theories about the relationship between democracy and trade are in their infancy. Knowledge of the conditions under which international institutions are able to exert greater (or less) influence over countries is necessary.

Finally, we need to know whether the rush to free trade will be sustained or reversed. Will trade barriers remain as low as they are and keep declining, or will protectionism return? Again, I suspect that the factors that are responsible for the initial change may have some bearing on this. If leaders’ or social groups’ preferences for free trade are maintained or grow, then we might expect liberalization to remain in place. Factors, such as economic crises, that cause actors to question these preferences will limit their sustainability. We might also expect that the return of authoritarian governments would be associated with the return to protection, but democracy itself is not a sufficient condition for liberalization. Finally, the role of international institutions seems to be heightened by the severity of domestic economic crises. This suggests that, as good times return, political leaders who do not favor free trade may reject the policies forced on them by their lenders and turn protectionist. These and other factors will be important for understanding the sustainability of trade liberalization. Our existing theories are perhaps even less helpful in explaining sustainability than they are in explaining why countries liberalized in the first place.