Trade Policy in Lobbying Equilibrium: With Non‐Traded and Traded Final Goods and Intermediate Inputs

The paper derives trade policies endogenously for final consumption and intermediate input industries in the presence of a non‐traded sector. Contrary to what the existing literature suggests, results show that there is no definite relation between lobbying status and the direction of trade policy of an industry. Trade protection of an industry depends on how its consumption (horizontal) and production (vertical) linkages with other industries reinforce or cancel out its lobbying efforts. To cite a few results, (i) an organized industry may face trade tax, whereas an unorganized one may obtain protection; (ii) an organized downstream industry may not be able to impose trade tax to an unorganized upstream industry, (iii) an organized upstream industry may not hurt unorganized downstream industry, (iv) lobby for non‐traded industry alone can influence trade policies, and (v) lobby for traded industry affects the size of the non‐traded sector in the economy.     

To Ban or Not to Ban: Foreign Lobbying and Cross‐National Externalities

This paper studies the costs and benefits of foreign lobbying. We show how and when foreign lobbying can help internalize cross‐national externalities. We argue that this is an often overlooked benefit of foreign lobbying. We also study under what conditions a constitutional rule banning foreign lobbying is in the national interest of a country. A key factor in this calculus is whether the interests of foreign lobby groups and domestic unorganized groups coincide or not. We illustrate the logic with examples from trade policy and environmental regulation.     

Free Trade Agreement and Vertical Trade with a Manufacturing Base

We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three‐country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non‐member country's tariff. The non‐member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto‐improving.     

Interest Groups, Trade Liberalization, and Environmental Standards

In considering a country that imposes a minimum standard on an imported polluting good, which generates negative consumption externalities, we construct a common-agency model, in which a domestic environmental group and a foreign industrial lobby can influence the formation of the minimum standard by providing political contributions to the government. This paper investigates the effects of trade liberalization on the political equilibrium environmental standard, the pattern of trade, environmental disutility, and social welfare. We find that trade liberalization tightens the minimum standard, decreases imports of the polluting good, and reduces environmental disutilities. The importing country’s social welfare, however, does not necessarily increase with trade liberalization. The weaker the environmental group’s lobbying efficiency, or the stronger the foreign firm’s lobbying efficiency, the more likely it is that trade liberalization will enhance the importing country’s welfare.     

Regional Trade Agreements and Cross‐border Lobbying: Empirical Evidence from the Canada–US Free Trade Agreement Negotiations

This paper documents participation of special interest groups in negotiations of the Canada–US Free Trade Agreement. Using data on the tariff reduction schedules mandated by the agreement, it shows that industries represented by strong lobby groups were faced with more favorable tariff reduction paths in both countries: phase‐out periods were longer at home and shorter in the partner country. This result provides evidence on the involvement of industry lobbying in negotiation of regional trade agreements and suggests that countries negotiating trade agreements are responsive to the interests of lobbying groups from across the border. Both results provide important implications for the political economy theory of trade agreements.     

Harmonizing External Quotas in an FTA: A Step Backward?

This paper explores how political–economy forces shape quantitative barriers against the rest of the world in an FTA. We show that whereas the dilution of lobbying power in an FTA typically leads to a relaxation of external quotas, this result is likely to be overturned as integration deepens. In particular, we show that cooperation among member countries on the level of their external quotas, cross–border lobbying by import–competing interests in the free–trade area, and the consolidation of national external quotas into a single one, all lead to stiffer restrictions against imports from the rest of the world. We also show that, unlike tariffs, endogenous quotas are not crucially affected by the presence of rules of origin.     

Foreign informational lobbying can enhance tourism: Evidence from the Caribbean

There exist legal channels for informational lobbying of US policymakers by foreign principals. Foreign governments and private sector principals frequently and intensively use this institutional channel to lobby on trade and tourism issues. This paper empirically studies whether such lobbying effectively achieves its goal of trade promotion in the context of Caribbean tourism, and suggests the potential for using foreign lobbying as a vehicle for development. Panel data are used to explore and quantify the association between foreign lobbying by Caribbean principals and US tourist arrivals to Caribbean destinations. A variety of sensitivity analyses support the finding of a strong association. The policy implications are obvious and potentially important for developing countries.     

Foreign informational lobbying can enhance tourism: Evidence from the Caribbean

There exist legal channels for informational lobbying of US policymakers by foreign principals. Foreign governments and private sector principals frequently and intensively use this institutional channel to lobby on trade and tourism issues. This paper empirically studies whether such lobbying effectively achieves its goal of trade promotion in the context of Caribbean tourism, and suggests the potential for using foreign lobbying as a vehicle for development. Panel data are used to explore and quantify the association between foreign lobbying by Caribbean principals and US tourist arrivals to Caribbean destinations. A variety of sensitivity analyses support the finding of a strong association. The policy implications are obvious and potentially important for developing countries.     

The silent success of customs unions

Globally, 81 countries are now part of a customs union (CU), following the rapid proliferation of this type of trade agreement in past decades. Much of this growth has been driven by countries “upgrading” their links from a free trade agreement (FTA) to CU. At the same time, the rapid formation of new FTAs among countries that had no prior agreement in place has largely overshadowed this growth, making CUs the silent success of regional integration. Using the canonical regionalism model, augmented to allow for political bias towards firm interests, we investigate the endogenous choice of trade agreement. We show it is generally politically viable to move from FTA to CU, because such a move is rent‐creating; but for countries without a trade agreement in place, it may be optimal to form an FTA as a stepping stone to reduce the risk of political derailment. Importantly, forming a CU is consistent with member social welfare maximization: as long as trade with the rest of the world does not cease entirely, a CU leads to higher social welfare than either FTA or no agreement. These gains come at the expense of third‐country welfare. If past trends continue, one can expect more FTAs to be upgraded to CU with associated adverse consequences for outsiders.     

POLITICAL ASYMMETRY AND COMMON EXTERNAL TARIFFS IN A CUSTOMS UNION

This paper examines the effect of political and economic asymmetries in the formation of common external tariffs (CETs) in a customs union (CU). We do so by introducing possible cross‐border lobbying and by endogenizing tariff formation in a political economic model for the determination of CETs. The latter allows us to consider asymmetries among the member nations in their susceptibilities to lobbying. We also consider asymmetries in the influence of the member nations in CU‐wide decision‐making. A central finding of this paper is that, in the absence of economic asymmetry, the CET rises monotonically with the degree of asymmetry in country influences if the two countries are equally susceptible to lobbying. If influences are the same, the CET also rises monotonically with the degree of asymmetry in susceptibilities. These results hold irrespective of whether the lobby groups in the two member countries cooperate or work non‐cooperatively.     

THE NUMBER OF FIRMS AND THE POLITICS OF STRATEGIC TRADE POLICY

Incorporating home firms' lobbying in a country into a third market model of oligopoly, this paper studies how such lobbying affects the government's strategic export policy scheme. We pay special attention to the home firms' lobby formation and its effect on domestic welfare. The home firms can organize a lobby more easily when the number of their rival foreign firms is larger than that of them, and/or when the government is overly concerned with political contribution relative to domestic welfare. The strategic export policy under lobbying cannot improve the domestic welfare, which depends on the number of firms, the government's concern about political donation and the level of socially wasted lobbying costs.     

Do South–South preferential trade agreements undermine the prospects for multilateral free trade?

Due to trade diversion, there have been concerns expressed over the proliferation of preferential trade agreements (PTAs) that include South countries. In this paper, we compare welfare across different geographic configurations of bilateral free trade agreements (FTAs) and customs unions (CUs) and examine their implications for the stability of multilateral free trade. While North–North PTAs do tend to yield higher global welfare than South–South PTAs, a single South–South FTA may make free trade more sustainable than any other single agreement. With pre‐existing North–North agreements and a large enough cost asymmetry between regions, an additional South member or a new South–South agreement always makes free trade harder to sustain.     

The welfare effect of a free trade agreement in the presence of foreign direct investment and rules of origin

This paper investigates the welfare effect of forming a free trade agreement (FTA). To receive tariff‐free treatment, firms must comply with the rules of origin (ROO). Outside firms could undertake either market‐oriented or export‐platform foreign direct investments (FDIs). ROO have the following effects: (i) An infeasible FTA may become feasible by deterring outside firms' FDIs, (ii) an FDI of a less efficient firm could replace that of an efficient firm, or (iii) FDIs made before the FTA is concluded might be eliminated. These potential effects complicate the welfare effect of the FTA and could decrease the consumer surplus.     

LOBBYING UNDER ASYMMETRIC INFORMATION

We analyze an informational theory of lobbying in the context of strategic trade policy. A home firm competes with a foreign firm to export to a third country. The home policy-maker aims to improve the home firm's profit using an export subsidy. The optimal export subsidy depends on the demand conditions in the third country, which are unknown to the policy-maker. The home firm can convey this information to the policy-maker via costly lobbying. Surprisingly, the presence of lobbying costs can be advantageous for both: it makes the home firm's lobby effort credible and eases the policy-maker's information problem. We identify the conditions under which lobbying is beneficial on balance and the conditions under which it is harmful.     

Unity versus Collaboration: Construction of China's Belt and Road Free Trade Agreement 2.0 Network

In the context of the United States prioritizing bilateral as well as trilateral trade agreements and China's regional economic integration strategy based on the Belt and Road (B&R) Initiative, the B&R free trade agreement (FTA) and the US–European–Japanese FTA (UEJFTA) have become the two regional economic integration processes with the greatest potential impact on the world economic landscape. The present paper examines the game situation as well as the economic effects of China's B&R‐FTA 2.0 network against the United States' UEJFTA to study the optimization of China's B&R FTA system. By constructing a four‐country extended game model under a two‐part expansion, we find that an increase in members will promote the welfare of each country when there is a single regional trade agreement; the potential member countries tend to choose larger organizations for higher economic benefits when there are several regional trade agreements. Our quantitative simulation shows that promoting the construction of the FTA 2.0 network based on the B&R can significantly alleviate the impact of FTA entered into by the United States with its major trading partners.     

Cross‐border Lobbying in Preferential Trading Agreements: Implications for External Tariffs and Welfare

This paper examines the effect of cross‐border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two‐stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent‐seeking activities type. We find that cross‐border lobbying un‐ambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.     

Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis

Why is a proliferation of bilateral free trade agreements (FTAs) between certain types of countries observed instead of progress in attaining global free trade through a multilateral FTA? This paper answers this question by exploring the enforceability of different types of FTAs through comparing minimum discount factors that are necessary to sustain them in an infinitely repeated game framework. The authors search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA. Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA, which is shown to be the first‐best solution to the maximization problem of global welfare.     

Trade,Transboundary Pollution,and Foreign Lobbying

In this paper, we explore the use of trade policy in addressing transboundary stock pollution problems such as acid rain and water pollution. We show that a tariff determined by the current level of accumulated pollution can induce the time path of emissions optimal for the downstream (polluted) country. But if the upstream (polluting) country can lobby the downstream government to impose lower tariffs, distortions brought by corruption and foreign lobbying lead to a rise in the upstream country’s social welfare, and to a decrease in social welfare in the downstream country. Thus, the usefulness of trade policy as a tool for encouraging cooperation and internalizing transboundary externalities depends critically on the degree of governments’ susceptibility to foreign political influence.     

SPECIAL INTERESTS AND THE GAINS FROM POLITICAL INTEGRATION

This paper presents a formal study of economic influence by special-interest groups under political integration and separation. We first show that countries where more groups are organized to lobby gain from political integration on economic grounds. The reason is that a more organized country, under a political union, can affect policies in the other country to its advantage, something that a less organized country can do to a lesser extent. We then study the interaction of political integration and endogenous lobbying structure. We show that political integration affects the formation of interest groups. Moreover, if a country is more organized before political integration, this will continue to be the case afterward.     

Endogenous Trade Policies in a Developing Economy

This paper examines the formation of trade policy for a small open developing economy where lobbying activities may be carried out to influence policy‐making decisions. The paper presents a three‐sector economy in which the manufacturing sector can lobby policymakers for favorable policies. Under some plausible conditions, it is demonstrated that lobbying activities carried out by the owners of the specific factor in the manufacturing sector would secure a protectionist trade policy through either an import tariff or an export subsidy. The government also imposes a consumption tax on agricultural products, which further strengthens the protectionist measure applied to the manufacturing sector. In general equilibrium, there will be a movement of labor to the manufacturing sector, an output expansion in the manufacturing sector, and an output contraction in the agricultural sector, exactly as suggested by factual evidence.