Searching for the (Dark) Forces Behind Protection

Abstract

This paper re-examines the determinants of trade policy. It extends the Grossman-Helpman model of trade policy to take account of factors besides lobby contributions that may lead politicians to value rents differently across industries. The extension is motivated by the recent empirical finding that the weight placed by politicians on lobby contributions appears to be too small to explain much of the variation in protection rates. The paper argues that differences in the severity of capital and insurance constraints may cause marginal earnings to have different values in different industries, acting as a force separate from lobbying. The Grossman-Helpman model is extended to incorporate this effect and create a framework for testing it against the "protection for sale" hypothesis. The approach also paves the way for examining a variety of other effects influencing trade policy in a common framework. Estimation of the extended model with cross-industry data from the United States lends support to the role of capital and insurance constraints. Although lobby contributions may play an important role in economic policy in general, they seem to have little manifestation in trade policy because better organized groups tend to have easier access to more efficient fiscal and financial transfers. The perspective that emerges from the empirical results based on the extended model has far-reaching implications for the pattern and evolution of trade policies.

Keywords: Trade Policy, Political Economy, Imperfect Markets

JEL Classification: F13, P16