Trade Policy Transitions: Three Eras of U.S. Trade Policy
49 Pages Posted: 29 Apr 2022
Date Written: February 18, 2022
Abstract
We analyze major transitions in U.S. trade policy using a two-factor, two-good, two-country model, where domestic policy is the outcome of political bargaining between two parties representing each factor owner—globalists and protectionists. The dominant party sets the agenda, but parties must agree to any change from the status quo. When domestic and foreign status quo tariffs are low, and in the absence of transfers, the protectionist agenda-setter will offer high tariffs, agreed to by globalists in exchange for a share of tariff revenue—as was the case when the Republicans initiated the “Era of Restriction" after the Civil War. When the status quo trade policy is high unilateral (and foreign) tariffs, e.g., U.S. 1860-1931, a free trade bargain is available only if accompanied by sufficiently high domestic transfers to the protectionists. In the 1930s, the globalist Democratic party offered the protectionist Republican party transfers to replace the benefits of the tariff, ushering in the "Era of Reciprocity with Redistribution." When transfers are too low, a consensus emerges for a "Retreat" from free trade, especially in the face of rising imports. We conclude that the recent rise of China as an exporter of capital-intensive manufactures is not sufficient to explain the unilateral imposition of tariffs by the U.S. beginning in 2018; domestic social transfers that are too low are also to be blamed.
Keywords: Trade policy, political economy, United States
JEL Classification: F1, F5, F6, F10, F13, F53, F55
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