Searching for the (Dark) Forces behind Protection

Abstract

This paper re-examines the determinants of trade policy. It modifies 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 idea is motivated by the puzzling results of the recent empirical work on the Grossman-Helpman model. The empirical work in the paper based on US data confirms that lobby contributions do not play obvious roles in trade policy. Rather, trade policies seem to be placing higher weights on the earnings of industries where lower skill workers and smaller, less capital intensive firms are more prevalent. It is argued that this can be explained by the credit and insurance constraints that such agents tend to face. The weakness of lobby contributions in predicting protectionism across industries may be due to the variety of alternative goals that lobbies pursue and the diversity of interests within each industry. Also, the industries with well-organized and well-funded lobbies may have easier access to more efficient fiscal and financial transfers. The approach adopted in this paper paves the way for examining a variety of determinants of trade policy in a broader framework. The regularities observed here have far-reaching implications for the pattern and evolution of trade policies.

JEL Classification: F13, P16