class: center, middle, inverse, title-slide # Trade Policy in the Shadow of Power ## Theory and Evidence on Economic Openness and Coercive Diplomacy ### Brendan Cooley ### Princeton University ### 5 October 2020 --- <style type="text/css"> .remark-slide-content ul ul, .remark-slide-content ul ol, .remark-slide-content ol ol, .remark-slide-content ol ul { color: #808080 ; /*grey out sub text*/ font-size: .9em; padding-left: 1em; display: block; margin-left: 40px; } a, a > code { color: #EB811B; text-decoration: none; } .reduced-size h1 { font-size: 20px; } </style> # Why War? **War's Consequences** - Direct: lives lost, property destroyed, productive resources reallocated - Indirect: wars confer political powers on victors + Today's global governance institutions established and propagated by World War II victors (Ikenberry 2011) -- **The Bargaining Model** > Most conflict situations are essentially *bargaining* situations > > -- Thomas Schelling, *The Strategy of Conflict* - War results from bargaining frictions (Fearon 1995): + Variation in war's propensity explained by variation in magnitude of bargaining frictions (power shifts and information asymmetries) - Some *conflict of interest* assumed by the model + Little attention paid to where conflicts of interest come from, variation in intensity across dyads --- class: inverse, center, middle, reduced-size # What is the bargaining and fighting *about*? --- # The "Pie": Territory? **A Representative Formulation** > Consider a situation where two states are involved in a dispute... -- > We conceptualize the conflict as occuring over a divisible item of unit size, **such as an area of territory or an allocation of resources**. -- > -- Fey and Ramsay 2011 -- **Governments as Territory-Maximizers?** - 1945-Present: Territorial disputes are rare and circumscribed in their extent (Schultz and Goemans 2019) - 1914-1945: Allied victors of world wars decline to seize territory of their wartime enemies - 1815-1914: Imperial conquest and spheres of influence common, colonial powers often refrain from directly exploiting colonies' land + British in India, treaty ports in Qing China, Perry expeditions, Japan and Russia in Manchuria -- **Then why war and conquest?** --- class: inverse **An Alternative Account** > Historically, great power competition has been driven primarily by exclusion or fears of exclusion from each power's **international economic zone,** including its domestic markets. -- > Great powers in the past have often used their international influence to build zones in which **subordinate polities** -- whether these be colonies or simply states within a sphere of influence -- **are integrated into their economies.** -- > These economic zones, in turn, are typically biased in favor of the great power's firms and investors, with the effect of **excluding (in whole or part) the economic agents of other great powers.** -- > -- Lake 2018, "Economic Openness and Great Power Competition" --- class: inverse, center, middle, reduced-size # **Theory** and **Evidence** on Economic Openness and Coercive Diplomacy --- # Theory **Conflicts of Interest: Commercial Policy and its Economic Effects** - Firm lobbying produces **mercantilist** governments, seeking + protectionism at home + trade openness abroad - Market access externality: protectionism **shifts profit opportunities** from foreign to home firms (Ossa 2012) + Trade policy generates conflicts of interest between mercantilist governments -- **Bargaining in Anarchy** - Efforts to pursue market openness abroad can take the form of **threats, displays, and uses of military force** - Peacetime institutions facilitating economic subordination: **empires, hegemonies, hierarchies** + Supported by implicit threat of force --- # Paper I .center[**Gunboat Diplomacy: Political Bias, Trade Policy, and War**] - Actors: Two governments + *Liberal* governments value welfare of consumers + *Illiberal* governments value firm profits - Interactions + Government 1: makes take-it-or-leave-it offer (pair of tariffs) to government 2 + Government 2: accept or declare war -- **Incentives** - War and Regime Change + War fought to impose liberal "puppet" abroad that implements free trade - Market access increases profits for home firms -- **Result I:** Liberal governments less likely to fight wars -- **Result II:** Powerful governments adopt higher tariffs than weaker counterparts -- .center[**Endogenous commercial peace: liberal government trade more and fight less**] --- class: inverse, middle, reduced-size # Microfoundations of international conflict: influence of politically-connected, export-oriented firms on "security" policy > Since trade ignores national boundaries and the manufacturer insists on having the world as a market, the flag of his nation must follow him, and the doors of the nations which are closed must be battered down > > -- Woodrow Wilson, 1907 (Williams, *The Tragedy of American Diplomacy*) <hr> .center[**Foreign policy as commercial policy**] --- class: middle, inverse # Evidence? .center[**Coercion's effects on the international economy**] **Measurement:** Quantifying trade policy - Aggregate magnitude of policy-induced trade distortions, margins of preferential access **Inference:** Power vs. Preferences - What trade policies would governments' adopt in the absence of coercion? --- # Paper II .center[**Estimating Policy Barriers to Trade**] **Varieties of Trade Barriers** - Direct: tariffs, quotas, price controls, health and safety regulations, technical barriers to trade - Indirect: government procurement rules, firm subsidies, excise taxes, domestic regulations -- **Model** - Trade flows, cross-national price levels, and freight costs are sufficient statistics for aggregate magnitude of policy barriers to trade -- **Results** - Policy induced barriers to trade an **order of magnitude larger than tariffs** - Developed countries enjoy superior market access conditions abroad --- # Paper III .center[**Trade Policy in the Shadow of Power: Quantifying Military Coercion in the International System**] - `\(N\)`-government extension of "gunboats" - Costs of war depend on observable dyadic features + Military expenditure ratio + Geographic distance - Equilibrium trade policies depend on governments' preferences and costs of coercion -- **Estimation:** Estimate model on observed government trade policies, measured in Paper II -- **Results:** - Returns to military advantage - No geographic loss of strength gradient -- **Counterfactual: A Coercion-Free World** - Coercion increases value of global trade by 60 percent --- class: middle, inverse # Conclusions **International Security Studies** - Taking conflicts of interest seriously + Variation in trade policy orientation drives foreign policy behavior + War propensity and incentives for military expenditure depend on foreign and domestic trade policy preferences **International Political Economy** - Constraints of anarchy and trade policy + Trade openness a function of domestic preferences and foreign coercion + Observed trade policies are not a sufficient statistics for underlying trade preferences --- class: middle, inverse > The relationship between economics and politics...is a reciprocal one. On the one hand, politics largely determines the framework of economic activity and channels it in directions intended to serve the interests of dominant groups; <br /> the exercise of power in all its forms is a major determinant of the nature of an economic system. On the other hand, the economic process itself tends to redistribute power and wealth; it transforms the power relationships among groups. > > --Robert Gilpin, *U.S. Power and the Multinational Corporation* --- class: middle, inverse > The relationship between economics and politics...is a reciprocal one. On the one hand, **politics largely determines the framework of economic activity and channels it in directions intended to serve the interests of dominant groups;** <br /> the exercise of power in all its forms is a major determinant of the nature of an economic system. On the other hand, the economic process itself tends to redistribute power and wealth; it transforms the power relationships among groups. > > --Robert Gilpin, *U.S. Power and the Multinational Corporation* --- class: middle, inverse > The relationship between economics and politics...is a reciprocal one. On the one hand, politics largely determines the framework of economic activity and channels it in directions intended to serve the interests of dominant groups; <br /> the exercise of power in all its forms is a major determinant of the nature of an economic system. On the other hand, **the economic process itself tends to redistribute power and wealth; it transforms the power relationships among groups.** > > --Robert Gilpin, *U.S. Power and the Multinational Corporation* --- class: inverse, center, middle, reduced-size # Thank You