Shape up or ship out
Why Does Import Competition Favor Republicans? Localized Trade Shocks, Voting Behavior, and Scapegoating in the U.S.
Andrea Cerrato, Federico Maria Ferrara & Francesco Ruggieri
University of Chicago Working Paper, March 2018
Abstract:
Growing evidence documents that localized trade shocks from Chinese import competition favor conservative candidates and parties. This relationship has been explained as arising due to the success of protectionist platforms. We advance an alternative account. Rather than directly opposing free trade policies, individuals in import-exposed communities tend to target scapegoats such as immigrants and minorities. This drives support for right-wing candidates, as they compete electorally by targeting out-groups. We investigate the relevance of our argument in the 2008-2016 U.S. presidential elections. First, we perform a quantitative text analysis of campaign speeches and show that Republican candidates put forward a consistently harsher agenda towards immigration and the inclusion of minorities. Instead, trade policy stances are candidate-specific and exhibit more variation across elections. Second, using individual-level survey data, we provide evidence that shocks from Chinese import competition drive negative attitudes towards immigrants and minorities. This effect takes place across the board and is not limited to manufacturing workers. Conversely, attitudes towards free trade policies are weakly affected. Finally, we show that individuals in import-exposed districts are more likely to lean towards conservative values and vote for Republicans across all elections. Taken together, these results point to the role played by trade-induced scapegoating behavior in affecting political outcomes in the U.S.
The Trade Origins of Economic Nationalism: Import Competition and Voting Behavior in Western Europe
Italo Colantone & Piero Stanig
American Journal of Political Science, forthcoming
Abstract:
We investigate the impact of globalization on electoral outcomes in 15 Western European countries over 1988–2007. We employ both official election results at the district level and individual‐level voting data, combined with party ideology scores from the Comparative Manifesto Project. We compute a region‐specific measure of exposure to Chinese imports, based on the historical industry specialization of each region. To identify the causal impact of the import shock, we instrument imports to Europe using Chinese imports to the United States. At the district level, a stronger import shock leads to (1) an increase in support for nationalist and isolationist parties, (2) an increase in support for radical‐right parties, and (3) a general shift to the right in the electorate. These results are confirmed by the analysis of individual‐level vote choices. In addition, we find evidence that voters respond to the shock in a sociotropic way.
Global Competition and Brexit
Italo Colantone & Piero Stanig
American Political Science Review, May 2018, Pages 201-218
Abstract:
We show that support for the Leave option in the Brexit referendum was systematically higher in regions hit harder by economic globalization. We focus on the shock of surging imports from China over the past three decades as a structural driver of divergence in economic performance across U.K. regions. An IV approach supports a causal interpretation of our finding. We claim that the effect is driven by the displacement determined by globalization in the absence of effective compensation of its losers. Neither overall stocks nor inflows of immigrants in a region are associated with higher support for the Leave option. A positive association only emerges when focusing on immigrants from EU accession countries. The analysis of individual data suggests that voters respond to the import shock in a sociotropic way, as individuals tend to react to the general economic situation of their region, regardless of their specific condition.
Undeflected pressure? The protectionist effect of political partisanship on US antidumping policy
Tommaso Aquilante
European Journal of Political Economy, forthcoming
Abstract:
Antidumping (AD) is the most widely used non-tariff barrier. To deflect political pressure, in the United States, final decisions on AD are delegated to the International Trade Commission (ITC), an independent agency composed of six non-elected commissioners. Using a newly collected dataset, I study the determinants of all final ITC votes on AD during the 1989–2010 period. I find that ITC commissioners decisions on AD crucially depend on which party has appointed them and on the trade policy interests of key senators in that party: whether commissioners vote in favor of AD depends heavily on whether the petitioning industry is key (in terms of employment) in the states represented by leading senators of the Republican and Democratic parties, indicating that commissioners are reactive to party-specific political pressure. Interestingly, pressure seems to be more effective when the case for voting in favor or against AD is less clear-cut, suggesting that ITC commissioners are more likely to vote in line with political parties’ interests when it matters more.
What Will Happen to the US Textile and Apparel Industry if the NAFTA Goes?
Sheng Lu
Margin: The Journal of Applied Economic Research, May 2018, Pages 113-137
Abstract:
This study provides a quantitative evaluation of how the termination of the North American Free Trade Agreement (NAFTA) proposed by the Trump administration will affect the US textile and apparel (T&A) industry. By adopting the Global Trade Analysis Project (GTAP) computable general equilibrium model based on the GTAP9 database, the study finds that: first, the termination of NAFTA will significantly reduce US apparel imports from NAFTA members but lead to an increase of US apparel imports from Asian countries; second, ending NAFTA will substantially reduce US textile exports to the NAFTA region, which currently is the single largest export market for the US textile industry; and third, rather than encouraging more ‘Made in the USA’, the termination of NAFTA will reduce further the output of T&A manufacturing in the United States. The findings of this study augment our understanding of the potential economic impact of ending a major free trade agreement, which has been studied little, and shed new lights on the debate regarding the T&A-specific sectoral impact of NAFTA. The findings of the study also provide valuable inputs for policymakers regarding what should or should not be done with NAFTA from the perspective of the US T&A industry.
The Political Economy of the Foreign Corrupt Practices Act: An Exploratory Analysis
Rebecca Perlman & Alan Sykes
Journal of Legal Analysis, forthcoming
Abstract:
Critics of the Foreign Corrupt Practices Act (FCPA) have frequently claimed that it puts U.S. firms at a competitive disadvantage. This critique suggests that the beneficiaries of FCPA enforcement are foreign competitors of U.S. firms, and foreign economies that suffer fewer of the inefficiencies associated with corruption. Yet enforcement of the Act has increased dramatically since it first passed in the post-Watergate, anti-corruption era. If the FCPA really promotes foreign interests over the interests of U.S. firms doing business abroad, and if there are no obvious domestic beneficiaries of aggressive enforcement, why have domestic business interests been unable to push back successfully against growing enforcement? This article suggests several reasons why the adverse effects of FCPA enforcement on U.S. business may be considerably smaller than some FCPA critics suggest, and why significant numbers of U.S. firms may actually benefit from enforcement. Our hypotheses find support in Congressional testimony, business surveys, and interviews with prominent FCPA practitioners and compliance officers.
Multinational Firms, Labor Market Discrimination, and the Capture of Outsider’s Advantage by Exploiting the Social Divide
Jordan Siegel, Lynn Pyun & B.Y. Cheon
Administrative Science Quarterly, forthcoming
Abstract:
We theorize that foreign multinationals wield a particularly significant competitive weapon in host markets: as outsiders, they can pinpoint social schisms in host labor markets and exploit them for competitive advantage. Using two data sets from South Korea, we show that multinationals improve profitability and productivity by aggressively hiring an excluded group, women, in the local managerial labor market. We predict and find that foreign multinationals in South Korea are in a unique position to identify social schisms, implement practices designed to support and enhance the hiring and promotion of female managers, hire and promote members of the socially excluded group to positions of managerial leadership, and enjoy a net profitability benefit from doing so despite the real risk of backlash from some regulators, customers, suppliers, and employees from the socially dominant group in society. Many multinationals, even those whose home markets discriminate against women, appear to have recognized the strategic opportunity of what we call the outsider’s network advantage. The gradualness of the host market’s shift toward a new equilibrium freer of discrimination presented multinationals a multiyear competitive opportunity for outsider’s advantage. Our study extends understanding of the multinational enterprise by showing how its competitive opportunities include identifying and exploiting social schisms in a host country’s labor market.
Innovation and Trade Policy in a Globalized World
Ufuk Akcigit, Sina Ates & Giammario Impullitti
NBER Working Paper, April 2018
Abstract:
How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, and, therefore, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.
Globalizing the Supply Chain: Firm and Industrial Support for US Trade Agreements
Iain Osgood
International Organization, forthcoming
Abstract:
From 1960 to 2000, manufacturing supply chains became global. To what extent has this growth in offshore outsourcing and foreign direct investment affected industrial attitudes toward trade liberalization? Using data on public positions of US firms and trade associations on all free trade agreements since 1990, I show that foreign direct investment (FDI) and input sourcing are the primary drivers of support for trade liberalization. Direct import competition and export opportunities play a secondary role in shaping support for free trade agreements. This work therefore adds to the literature on the politics of globalization by providing systematic evidence of a link between global supply chains and industrial preferences, and by developing a new model of the determinants of industrial attitudes toward trade.
The Conditional Nature of Political Risk: How Home Institutions Influence the Location of Foreign Direct Investment
Quintin Beazer & Daniel Blake
American Journal of Political Science, April 2018, Pages 470-485
Abstract:
What determines whether countries' institutions attract or deter investment? Although existing theories predict that multinational enterprises (MNEs) avoid locations where institutions cannot constrain public and private actors' opportunistic behavior, we argue host institutions' attractiveness depends on firms' home environment. Home country institutions shape firms' practices and capabilities, thus helping to determine the environments that firms are best prepared to face abroad. We test our predictions using multiple data sets at different levels of analysis: firm‐level data on MNEs' foreign subsidiaries, data on bilateral foreign direct investment (FDI) positions, and longitudinal data on bilateral FDI flows. We find that states with independent judiciaries are particularly attractive to investment from countries also possessing independent courts. Similarly, countries with low judicial independence disproportionately send FDI to countries lacking independent judiciaries. These findings' implications challenge conventional wisdom: “Good” institutions may not attract all investors, and “bad” institutions may not always deter, as current research suggests.
Does Trade Liberalization Narrow the Gender Wage Gap? The Role of Sectoral Mobility
Masha Brussevich
European Economic Review, forthcoming
Abstract:
This paper analyzes the impact of import competition and dynamic labor adjustment on gender outcomes in wages and welfare in the U.S. I consider a dynamic model of sectoral choice and structurally estimate mobility costs using data from the Current Population Survey and O*NET. A measure of intersectoral distance in task characteristics facilitates the structural estimation of switching costs that vary by gender and across sectors. In a set of trade shock simulations, an import competition shock in the manufacturing sector disproportionately affects male employment and wages. Since manufacturing is male labor intensive and men face higher exit costs from manufacturing, wage and welfare gains from trade are higher for women than men.
The Macroeconomics of Border Taxes
Omar Barbiero et al.
NBER Working Paper, April 2018
Abstract:
We analyze the dynamic macroeconomic effects of border adjustment taxes, both when they are a feature of corporate tax reform (C-BAT) and for the case of value added taxes (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the U.S. the dollar appreciates strongly, by almost the size of the tax adjustment, U.S. exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT by contrast generates only a weak appreciation of the dollar, a small decline in imports and exports, but has a large negative effect on output. Lastly, border taxes increase government revenues in periods of trade deficit, however, given the net foreign asset position of the U.S., they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.
Modern Pirates: How Arbitration Lawyers Help Corporations Seize National Assets and Limit State Autonomy
Pia Eberhardt & Cecilia Olivet
American Journal of Economics and Sociology, March 2018, Pages 279-329
Abstract:
Large‐scale companies have worked for centuries with the governments of powerful nations to extract wealth from the rest of the world. Since the 1990s, one important method of continuing that legacy has been the use of secretive legal proceedings known as investor‐state dispute settlements (ISDS). Through this innocuous‐sounding practice, transnational corporations (TNCs) are able to blame foreign governments for their failure to extract as large a profit as they anticipated from their operations abroad. Asserting that changes in fiscal, environmental, or social policies have harmed them, TNCs have claimed that foreign governments should compensate them for the loss of potential revenues. ISDS tribunals have awarded billions of dollars as a result of such claims, mostly made under the auspices of bilateral investment treaties. Not only must governments spend millions of dollars defending themselves against assaults and tens or hundreds of millions if they lose their cases, but the ISDS system also has a chilling effect on the adoption of legislation designed to protect the health and safety of citizens. As a result of all the lawsuits in which corporations collect damages from governments under investment treaties, an array of groups in the legal industry have profited substantially: law firms representing corporate interests, arbitrators and other specialists in corporate arbitration, and litigation funders. The arbitration industry is, as a practical matter, the glue that holds the system together. The law firms involved in this industry do not wait passively for cases to arise. Instead, they actively pursue corporations to seek arbitration with governments, proselytize for the legitimacy of the current international investment regime, and block reforms that would limit arbitration opportunities. By creating methods of insulating TNCs from normal business risks and forcing host governments to bear the burden of liabilities, the arbitration system has effectively reinstituted a neo‐colonial regime through the judicial system.
Escaping Import Competition and Downstream Tariffs
Ana Cecília Fieler & Ann Harrison
NBER Working Paper, April 2018
Abstract:
We propose and provide evidence for a new source of gains from trade: Firms invest in product differentiation to escape import competition. In the data and in the model, these investments are associated with increases in measured productivity, introduction of new goods, and shifts to skill-intensive sectors. Investment in differentiation downstream leads upstream firms to also invest in differentiation. For China, these "downstream tariff" reductions lead to big increases in measured productivity for upstream suppliers. The effect on measured productivity is larger for upstream than for downstream firms, and we explain this difference theoretically through heterogeneous changes in markups.
An adverse social welfare effect of a doubly gainful trade
Oded Stark et al.
Journal of Development Economics, forthcoming
Abstract:
Acknowledging individuals' distaste for low relative income renders trade less appealing when trade is viewed as a technology that integrates economies by merging separate social spheres into one. We define a “trembling trade” as a situation in which gains from trade are overtaken by losses of relative income, with the result that global social welfare is reduced. A constructive example reveals that a “trembling trade” can arise even when trade is doubly gainful in that it increases the income of every individual and narrows the income gap between the trading populations.
The World Is Not Yet Flat: Transport Costs Matter!
Kristian Behrens, Mark Brown & Théophile Bougna
Review of Economics and Statistics, forthcoming
Abstract:
Using micro-level commodity flow data and micro-geographic plant-level data, we construct industry-specific ad valorem trucking rate series and measures of geographic concentration to provide evidence on the relationship between transport costs and agglomeration. We find that low transport cost industries display significantly more geographic concentration in the cross-sectional dimension, and that falling transport costs agglomerate industries in the panel dimension. The effects are large: the fall in trucking rates between 1992 and 2008 implied a 20% increase in geographic concentration on average, all else equal.