Trade War PPT English

Tariff Wars and overcoming
them through cooperation
(accompanying Lecture 14)
Craig Parsons
YNU January 16th, 2008
1
Krugman and Obstfeld, table 9.3
US, Japan
Free Trade
Protection
Free Trade
10, 10
-10, 20
Protection
20, -10
-5, -5
2
Alternative, non-PD, payoff matrix
(here, free trade for both is Social and Nash eqm)
US, Japan
Free Trade
Protection
Free Trade
10, 10
5, -1
Protection
-1, 5
-5, -5
3
Notes for K&O Trade War
 This is a “normal” form (box) game
 This is a non-cooperative game
 This is a single-shot (single period, non-
repeating game)
 The “social optimum” would be “free trade,
free trade”, as total welfare 10+10=20 is
larger than any other outcome (cell)
 The “Nash equilibrium” is, however, “protect,
protect” and both countries are worse off:
therefore, this is an example of P.D.
4
Smoot-Hawley (1930)
 This P.D. game can be used to describe, roughly,
what happened when the US and Europe got
“trapped” in a costly trade/tariff war.
 The US initiated high tariffs (averaging 59% in 1932);
Europe (and Canada) retaliated with high tariffs of
their own (note: Japanese tariffs also rose, but only to
avg 20% or so.)
 Thus, in addition to the Great Depression, both
countries were made even worse off because of the
trade war.
 After the lessons of the 1930s, leaders in US and
Europe were determined NOT to repeat this mistake.
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How did world leaders avoid repeating
trade war?
 Domestic reform in the US. Reciprocal Trade
Agreements Act (1934) taking trade policy
power away from the Congress and giving it
to the President.
 Internationally: (1948) GATT (since, 1995,
expanded into WTO) rounds of trade
liberalization.
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How did Reciprocal Trade Act reduce
protectionism?
 President is, in general, more concerned with
country’s overall welfare. In contrast, certain
congressmen/women may have strong
regional/industrial interest (e.g. Autos in Michigan,
Steel in Pennsylvania, Sugar in Florida, Rice in
Niigata, etc.)
 Also, legislature (upper and lower house) are more
susceptible to “log-rolling”.
 By giving power to president, the US could better: (1)
avoid logrolling and (2) be further from specific
special interests because president must balance
ALL interests (pro-trade and protectionist)
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“Logrolling” (vote-trading) defined
 ログローリング（英：logrolling）とは、集合的決定
における戦略的行動の一つ。政治学や社会的選
択理論、及び経済学における公共選択論や公共
経済学における概念の一つである。決定の際に
票の取引を行うことをログローリングと呼び、主
に議会における法案の投票の際に見られる。こ
のことから票取引と呼ぶこともある
 Also see Lecture 8 notes
8
“Logrolling” in (much) more detail

具体的なログローリングの例を以下に見てみたい。定数99の議会で議員Aと議員Bの二人の議員
に焦点を当てることとする。今議会においては議題1と議題2の二つの議題について審議が行われ
ており、議題1について法案X、議題2について法案Yがそれぞれ提出されているとする。議員Aは
議題1に関して特定の利益があるために強い関心を持っているが、議題2に関してはこの議題から
得られる効用は少なくさほど関心がない。逆に議員Bは議題2には強い関心を払っているが、議題
1にはあまり関心がない。ここで議員Aは法案Xから利得を得るためこれを可決・成立させたい一方
で、議題2に関しては一応法案Yに反対しているとする。他方で議員Bは法案Yの可決・成立を期し
たいと考えており、かつ一応は法案Xに反対しているとする。この時に法案Xを支持する議員が49
対50で少数派であり、法案Yに賛成する議員も49対50で少数派であると仮定しよう。効用を最大
化しようとする合理的な議員を仮定するならば、次のことが言えるであろう。すなわち議員Aはあま
り関心のない、つまり自身の効用に関係ない議題2における自らの選好を放棄してでも議題1にお
ける法案Xの成立を優先させる。同様に、議員Bも自分の効用にあまり関わらない議題1おける自
らの選好を放棄してでも議題2における法案Yの成立を優先させる。従って、議員Aと議員Bの間に
は一種の取り決めが成立することとなる。すなわち議員Aが議題2に関して偽の選好を表明して法
案Yに賛成することを約束する一方で、議員Bも議題1に関して偽の選好を表明して法案Xに賛成
することを取り決める。こうしてこのような取り決めの結果、法案Xは50対49で可決・成立し、法案Y
も50対49で可決されることになる。このため議員A・Bは一定の制約の下でではあるが、自らの効
用を最大化することに成功することとなる。この時に、議員Aと議員Bは法案Yへの反対票と法案X
への賛成票を取引したことになる。またこのようにログローリングを行う投票者の集団（この場合は
議員Aと議員B）を、取引連合と呼ぶ。
9
“Reciprocity” balances rent-seekers
 With industries seeking protection, often the
loss due to removing a tariff are very
concentrated in one region/state, while the
consumer gains are spread thinly across the
entire nation.
 With trade liberalization reciprocity, the US
only removes a tariff (which in SR will hurt
some industry and possibly region), if, in
return, trading partners remove a tariff of their
own. This will benefit some US exporting
firms.
10
Reciprocity: an example
 Perhaps the US only promises to lower tariffs on
Steel if, for example, the UK also reduces its tariffs on
Wheat.
 The reduction of steel tariffs will impose a cost on US
steel producers, in Pennsylvania and Ohio. The
representatives from that region may fight hard (rentseek) to resist such liberalization. BUT at the same
time:
 The farmers (and their representatives) will fight hard
(rent-seek) for the trade agreement, because they will
benefit from UK’s lower wheat tariff.
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The 1934 Reciprocal Trade Act
balances interests (rent-seekers)
 The 1934 Reciprocal Trade Act, made US
liberalization conditional on foreign governments
liberalization.
 Thus, US protectionist rent-seekers (-) were offset by
pro-trade (+) rent-seekers.
 Before 1934, there were many protectionist rentseekers (-), but little way for pro-trade rent-seekers
(+) to be effective.
 This, in combination with treaty negotiation power to
president, enabled the US to promote trade
liberalization, and to do it much faster.
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How do int’l agreements such as
GATT reduce protectionism at home?
 In game theory terms, GATT trade
liberalization rounds are cooperative games,
and they are repeated.
 Game theorists and experimental economists
(and biologists!) find that players more often
avoid P.D. outcomes, and converge or attain
the “social optimum” when they can
communicate (cooperate) and/or if they play
the same game over and over, and learn.
13
More on International Cooperation
 Agreements such as GATT bind leaders of a
country. That is, the president or prime
minister promises other countries NOT to
raise tariffs. This international promise helps
the leader (president/PM) to resist
protectionist demand from Congress at home.
 Important point: the President/PM promises
NOT to do something, and this “selfrestriction” makes them, in a sense, more
powerful (to resist).
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Gain by “limiting one’s own freedom
of action” (Example 1: Secret ballots)
 Consider a country where voters fear that if they vote
against the leader in power, they will be punished.
 Also, imagine that in that country (US and many
countries in the 19th century), votes were not secret.
Like in congress, every knows how everyone votes,
including the cruel leader.
 If voters give up (sacrifice) their right to announce
who they vote for, they can vote for whom they truly
want.
 Because the leader cannot confirm or deny who each
voter voted for, the leader becomes powerless to
threaten. Thus, by the voter giving up their “right” to
prove who they voted for allows them to vote as they
truly want to.
15
Gain by “limiting one’s own freedom
of action” (Example 2: Odysseus)
 Odysseus knew that listening to the Sirens
would be disaster for him as his men.
 Thus, in advance, he had himself bound
(tied), and had his men put wax in their ears,
so that they could safely pass the strait with
the dangerous Sirens.
 International cooperative agreements also
bind (tie) leader hands so they can better
resist domestic rent-seekers at home.
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Odysseus and the Sirens
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Conclusion
 In general, many world leaders (and many
MPs, Congress) are, in general, committed to
free trade, as they know it benefits their
economy overall (as well as strengthens
political and cultural ties between nations,
and possible reduces chance of war).
 But, often, in the political balance, they must
address domestic pressures, which inevitably
involves some inefficient rent-seeking and
“rent giving”; but they try to avoid this by
giving power away through int’l agreements.
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International Cooperation conclusion
cont’d
 While this strategy has been very successful in producing “win-
win” strategies in trade, less success has been reached in
issues such as international monetary coordination or the
environment (e.g. failure of Kyoto Protocol).
 This is, in part, due to the fact that the overall gains, in the short
and medium run, to free trade are clearer to nations’ leaders.
 The losses, especially in SR to both exporters and importing
firms, with higher environmental regulations are quite clear, thus
it is harder to win domestic support.
 (The long term benefits and costs of drastic increases in
environmental regulations are also far from clear, where there is
far more consensus on the long-term benefits of free-trade. At
least among economists.)
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