Chapter 28 Political economy of trade policy

Abstract

This chapter discusses the political economy of trade policy. In principle, a political-economy model of trade policy must have four elements. Much of the trade theory is devoted to analyzing the consequences of trade policy for individuals who derive their incomes from different factors of production or sectors. First, it must contain a description of individual preferences over the domain of policy choices available to policymakers. Given an underlying economic model of the Heckscher–Ohlin or Ricardo–Viner type and the presumption that preferences for policy depend only on self-interest, individuals' policy rankings can be deuced on the basis of their factor endowments or sector-specific skills. Second, the model must contain a description of the way these individual preferences are aggregated and channeled, through pressure groups, political parties, or grass-roots movements, into political demands for a particular policy or another. This step involves a characterization of the modes of political organization, as well as of the forms that political influence takes. The chapter also reviews the choice among alternative trade policy instruments and elaborates the consequences of viewing trade policy from political-economy lenses.