Constituent Interests and U.S. Trade Policies

3. U.S. Trade Policies: The Role of the Executive Branch

CHAPTER 3 u.s. Trade Policies: The Role of the Executive Branch Robert E. Baldwin Prior to the Reciprocal Trade Agreements Act of 1934, tariff levels were set by Congress under its constitutional power "to regulate commerce with foreign nations." In granting the president authority under this Act to decrease (or increase ) import duties up to 50 percent from their 1930 levels as part of foreign trade agreements with other countries, Congress undertook an institutional change that marked a fundamental shift in the trade policymaking process of the United States. Since that date, there has been an uneasy sharing of the responsibility for trade policy between the executive and legislative branches of the federal government. This paper focuses on the manner in which the differing motivations of the President and the Congress work themselves out in the trade-policy formulation process. Special emphasis is given to the role of the president. The paper begins (Section I) with a brief survey of models of the trade policymaking process that have been formulated by economists and political scientists, with particular attention being given to the behavior of the President versus Congress. Section II then outlines a game-theoretic framework for analyzing the process by which the different actions of these two actors yield a particular trade-policy outcome. Section III describes particular historical incidents that illustrate two key features of the analytical framework, namely, the importance of the President taking a leadership role in proposing trade legislation to Congress and using his various powers to secure acceptance of his key objectives and, secondly, the importance of foreign policy considerations in motivating the trade-policy actions of the President. The last section summarizes some of the conclusions. I. Trade Policymaking Models of Economists and Political Scientists Economic Models In modeling the political economy of trade policy, economists generally do not distinguish between the executive and congressional branches of the federal government. Both branches perform the role of supplying various forms of 66 Constituent Interests and U.S. Trade Policies trade policies to the citizenry, who economists divide into producers and consumers . It is usually assumed that consumers are individually too small and are too numerous to be able to overcome the free-rider problem and thus do not actively lobby the government with regard to trade policy. In contrast, some or all of the producers are assumed to be able to organize into common interest groups and, through the lobbying process, to become demanders of various trade policies. It is also often assumed that production takes place within a specific-factors framework, with capital in each sector being the specific factor . The owners of specific-capital organize and seek to maximize their rents by lobbying the government for favorable trade measures. In the simplest economic models, elected public officials, the suppliers of particular trade policies, are motivated by a desire to be returned to office (or gain public office, if not already elected) and, consequently, are responsive to the lobbying demands of the various pressure groups. In one of the earliest formal models (termed the tariff-formation function approach by Rodrik (1995) in his recent survey article), Findlay and Wellisz (1982) utilize this framework to depict trade policy being determined endogenously in a twogood , specific-factors economy as the outcome of a lobbying game between an import-competing industry that favors protection and an exporting industry that opposes import protection. With a given level of lobbying activity (labor is the only resource used in lobbying) by one of the sectors, the more resources that are devoted to lobbying by the other sector, the higher the tariff obtained by the protectionist industry or lower the tariff obtained by the free trade industry . However, there are diminishing returns to lobbying in both sectors. For any given level of lobbying by the other industry, there is an optimum amount of lobbying for the other sector. The intersection between the two reaction functions depicting this relationship determines the Cournot-Nash equilibrium tariff level, where each group is devoting the optimum amount of resources to lobbying, given the labor resources used for lobbying by the other group. A more explicit modeling of the government's motivations is provided in models based on the notion of a political-support function that were developed by Stigler (1971) and Pelzman (1976) to analyze domestic regulatory processes and then adapted to international trade-policy situations by Hillman (1982). Under this approach the government is responsive to lobbying pressures from rent-seeking common...