Milner, Helen V.

(2013) The Political Economy of International Trade One of the most salient changes in the world economy since 1980 has been the move toward freer trade among countries across the globe. Developing and developed countries participated in a rush to free trade. In her article, Milner seeks to assess whether and how existing theories about trade policy can explain this phenomena. She therefore explores four sets of issues that are central to understanding trade politics: Country preferences, political institutions, factors at the international level and international trade itself. What Do We Know About Trade and Trade Policy? Since the 1980s there has been a far-reaching liberalisation of trade barriers across the globe. For most of the post-war period the growth of trade has outpaced growth in world output. Intra-industry and firm trade has grown and is important, since it tends to have different effects than standard, inter-industry trade. Finally, there has been a significant regionalisation of trade. Intraregional trade flows within the EU, East Asia, North and Latin America especially have become more important as a share of total trade as a result of regional integration agreements. Trade Policy Preferences Early models regarding trade policy preferences argue that domestic groups either seek protection or liberalisation, because such policies increase their incomes. There have emerged two kinds of theories: Factoral and sectoral ones. 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 (Stopler-Samuelson theorem) show that when factors of production (labour 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. Sectoral theories (RicardoViner model) argue that all factors attached to import-competing sectors lose from trade liberalisation while those in export-orienting sectors gain (labour, capital and landowners). Milner superficially touches a lot of further theories but concludes that in any case, interest group explanations of the rush to free trade remain incomplete unless they can specify how an exogenous force shifted political influence away from protectionists and in favour of those preferring free trade. Large changes in relative factor endowments or increasing exposure to international markets could perhaps explain changes in preferences in liberalising countries. However relative factor endowments do not seem to have changed much and greater exposure to international markets has had more effects on developing countries. Moreover, various exogenous changes may have created new actors who favour free trade, shifting the domestic balance of power in favour of liberalization. Nonetheless, many scholars recognize that the support of societal groups favouring free trade is an essential element of the reform process, if not for its initiation at least for its implementation. Political Institutions The main claim with these theories is that institutions aggregate such preferences and different institutions do so differently, thus leading to distinct policies. Different institutions empower different actors. Other aspects of political regimes may make them more or less insulated from societal pressures. However, it is not clear whether greater insulation of policy makers always produces policies that promote trade liberalization, since the preferences of those policy makers also matter. The administrative capacity of the state is also seen as an important factor shaping trade policy. In less developed countries with low capacity, taxes on trade are very likely, since they are easy to collect and substantial for the states revenues. Large institutional differences in countries political regime types also may be associated with different trade policy profiles, however this debate is yet very young. The structure of the government and the nature of the party system have also been seen as important institutional factors shaping trade policy. Again, Milner lists further examples for institutional arguments, but in the end she concludes that they suggested that large institutional changes should have preceded changes in policy, however, there was little evidence for it. Moreover, it is unclear whether more or less insulation of policy makers induces trade liberalization. There is, however, one area where change has occurred that may be linked to this rush to free trade. Many of the countries that have embraced trade liberalization have also democratized (e.g. Mexico). 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 Trade policy is not only affected by domestic forces. A number of factors in the international system has been connected to countries trade policy choices. A favoured argument among Realists has been that the distribution of capabilities in the international system has a fundamental effect on trade. The Hegemonic Stability (HST) argues that when the international system or economy was dominated by one country, free trade is more likely to happen. 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. Once more, Milner describes a few examples and finally concludes that with the decrease of the US as a hegemon, not liberalisation but protectionism should have been observable. The constant presence of international institutions to guide trade, such as the GATT and IMF, is also a poor explanation for the global change in policy that has occurred since the 1980s. Effect of Trade on Countries and the International System A final area of interest in the political economy of trade policy is the reciprocal effect of international trade on domestic and international politics. Some have argued that liberalisation can change domestic preferences about trade. Others argue that increased trade may involve the character of national political institutions, namely that there is a relationship between countries with open economies and those with large governments, because liberalised governments need to compensate the losers from trade. In other words, 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. Besides its effects on preferences and institutions, trade may constrain the policy choices available to decision makers. In terms of international politics on the other hand, trade liberalization may also have important effects, as countries may improve their political relations with other countries. Conclusion Three theories have been assessed in terms of their explanatory power as of why trade barriers have been declining since 1980. The first involves changing preferences about trade policy among domestic actors. Clearly, in the 1980s many political leaders changed their views on what their best trade policy choice was. For less developed countries changes in leaders preferences and in political institutions seem more important. Democratisation also fostered liberalisation, wherefore large-scale changes in political institutions may be necessary for the kind of massive trade liberalisation that occurred in some less developed countries. Nevertheless, changes in preferences cannot be overlooked in explaining the rush to free trade. The second theory about international factors is harder to argue. Neither the end of the Cold War or the hegemony of the US can explain the development of trade liberalisation (Cold War ended afterwards and the US is no longer a hegemon). Perhaps most important was the role of international institutions (e.g. GATT, EU, IMF and World Bank). In the end, Milner concludes, none of these theories seems to do very well in explaining the rush to trade liberalisation. Finally, Milner answers the question whether trade liberalisation sustains or not by referring to possible changes in preferences, which might be affected by economic crises, and international institutions, whose roles seem to be heightened by the severity of domestic economic crises. All in all, existing theories are perhaps even less helpful in explaining sustainability than they are in explaining why countries liberalized in the first place.