International Trade and Political Institutions: Instituting Trade in the Long Nineteenth Century (review)

International trade theory demonstrates that, for a country with a small, distortion-free economy, free trade maximizes social welfare. If the country is large enough to influence the terms of trade, a tariff can improve on the free trade result. But the size of the optimal tariff is normally estimated to be small. Moreover, theory also teaches that under most circumstances a tariff can generate a given amount of protection for domestic industry at a lower overall cost than other trade policy measures such as voluntary export restraints. Given that these results are fixtures in most international economics classes, it may seem surprising that we find governments pursuing relatively protectionist trading agendas and that these countries often prefer voluntary export restraints over tariffs when choosing to protect. Our understanding of government actions with regard to these and many other trade policy choices has been greatly enhanced over the past thirty years by the development of the public choice literature as applied to international trade policy.

While the new theoretical developments have been widely applied to better understand trade policies of modern economies, the authors of the present volume argue that relatively little work has been undertaken in order to better understand past policies. One of the important contributions of this book is to fill in some of this gap. At its broadest level, this book asks, Why do governments with similar objectives systematically choose different policies? The answer looks to differing institutions and the prominent ideas circulating in particular governments when decisions are made.

The book is organized around four papers that attempt to apply various components of public choice theory to shed new light on specific historical events occurring between 1778 and 1914 (the twenty-two years before 1800 and the fifteen years after 1899 explain the modifier long in the subtitle of the book). These essays are preceded by a rather lengthy introduction and followed by an essay that attempts to build a unifying theory of the relationship between ideas, interest groups, and institutions. This last essay is speculative and does not fit in well with the focus of the four main contributions.

In the first main essay Robert Pahre develops a "domestic support model" of tariffs; the model predicts that "politicians change economic policy to compensate those harmed by external change" (72). Pahre uses this approach to advance several interesting hypotheses regarding the direction and volatility of tariff protection. One of the more provocative hypotheses states that in a two-country model, a decrease (increase) in the level of protection in one large country causes an increase (decrease) in the level of protection of the other country. Thus, a country will respond to liberalization of its trading partner by protecting its domestic industry. At first sight, this hypothesis seems illogical. However, if the government responds to political support, then at the margin, the result of foreign liberalization is a loss of support from the import competing industry. The government responds to this by increasing protection until the marginal contributions from each industry are again equalized. The author uses this result as an argument for why other countries responded to Britain's unilateral liberalization in the middle of the nineteenth century by increasing levels of protection. The policy implications of this result are straightforward: in order to achieve free trade, multilateral negotiations are required.

The next essay by Fiona McGillivray asks the more compact question of why the U.S. Constitution requires that external trade issues come under the authority of the Congress and that completely free trade among the states is mandated. The standard answer to these questions is that, under the Articles of Confederation, the colonies engaged in beggar-thy-neighbor trade policies that were wreaking havoc on the young nation's political unity. However, McGillivray...