Priorities for the Japanese Economy in 2017 (January 2017)

Spread of "Election-endorsed" Protectionism

ITO Banri
Research Associate, RIETI

"All countries benefit from free trade."

This was the theoretical conclusion that British economist David Ricardo drew in his Principles of Political Economy and Taxation (1817) based on the theory of comparative advantage. Two hundred years later, there are concerns about the spread of protectionism in 2017 following Britain's decision to leave the European Union (EU) and the election of Donald Trump, who favors extreme trade protectionism, as the next U.S. president. This article examines why protectionism is spreading through elections.

General public's skepticism over "trade benefits"

Populism is often referred to as a factor behind the recent emergence of protectionism. However, with regard to trade policy, many voters support the promotion of free trade in principle. For example, in the United States, opinion polls have shown time and time again that the majority of both Democratic Party and Republican Party supporters are in favor of international trade. According to a June 2016 survey conducted by the Chicago Council on Global Affairs covering approximately 2,000 people, 60% of respondents said international trade is good for the U.S. economy and businesses. On the other hand, when asked whether international trade is good in terms of job creation within the United States, the ratio of pro-trade respondents drops to just 40%. While globalization and trade are generally considered to be positive for the economy as a whole, many are skeptical about their benefits. A similar survey by the Pew Research Center reports an equivalent level of skepticism in Japan (Note 1).

Whether or not a person supports a trade policy depends on the level of education and income. Those who have completed higher education with higher income are more likely to support free trade. There are reports that, in the latest U.S. presidential election, Trump voters were mainly blue-collar workers with a low level of education and income. These voting behaviors are consistent with logic. According to the Stolper-Samuelson theorem, in a country that has comparative advantage with goods involving the use of a large number of skilled workers, the increase in exports resulting from free trade would increase the price of skilled-labor-intensive goods as well as the wage of skilled workers. In contrast, unskilled workers would suffer from competition with imports, triggering a decline in the price of unskilled-labor-intensive goods and wages. Skilled workers therefore support free trade, which is expected to increase their wages, whereas unskilled workers oppose it. In fact, empirical analysis conducted in the United States indicates that the lower a person's educational level is, the more likely the person prefers trade restrictions. (Scheve and Slaughter, 2001; Blonigen, 2011)

"Unwitting" opposition

Studies have also identified various factors, in addition to individuals' economic attributes, that affect a stance toward free trade. In empirical research that I conducted with Eiichi Tomiura (Hitotsubashi University), Hiroshi Mukunoki (Gakushuin University), and Ryuhei Wakasugi (University of Niigata Prefecture), we found that people's stance toward free trade is affected by the attributes of the communities in which they live, in addition to their personal attributes such as annual income, educational level, industry type, age, and gender (Ito et al., 2014). Those who live in a predominantly agricultural area tend to oppose free trade even though they might not be farmers themselves. Behind their opposition appears to lay their vague concern that free trade could indirectly harm their lives through its indirect impact on the local economy. When promoting free trade, it is necessary to consider ways to stimulate the regional economies by supporting their participation in exports.

Interestingly, a link between people's psychological bias toward the status quo and their support for protectionist policies are also shown (Tomiura et al., 2016). Those who favor the status quo have a behavioral bias toward subconsciously preferring a protectionist policy, and could oppose a free trade agreement "unwittingly." To overcome such a situation, it is necessary to provide and disseminate accurate information on the details and benefits of a free trade agreement, and to what extent a protectionist trade policy, such as existing tariffs, causes public burden. In the United States, misperception and a lack of accurate information could be luring people toward protectionism. For example, in a survey conducted by the political media POLITICO and Harvard University in September 2016, merely 29% of Americans said they know of or have heard of the Trans-Pacific Partnership (TPP). Astonishingly, 61% of them incorrectly believed that China was among the TPP members (Note 2) .

Protectionism to "win"

During elections, it is not rare to see politicians appealing to voters with protectionist policies. In the 2016 U.S. presidential election, Hillary Clinton, who had promoted the TPP during her days as the secretary of state, spoke of the need to re-negotiate the deal. Even President Barack Obama was talking about renegotiating the North American Free Trade Agreement (NAFTA) during his first presidential race in 2008, and made a 180-degree turnaround on the issue after his successful election. In Japan, the Liberal Democratic Party ran the 2012 Lower House election on the platform of opposing the TPP, and, as soon as the election was over, announced Japan's participation in TPP negotiations. Election-induced competitive pressure seems to guide politicians toward protectionism. Some empirical research suggests that election pressure affects politicians' policy preference. For example, at the U.S. Senate, where one-third of the seats go up for election every two years, senators who face an election become more protectionism-oriented in their election year than those who don't (Conconi et al., 2014).

The level of election win is also said to affect politicians' policy preference. A politician who has won an election with a significant margin over the runner-up tends to embrace more partisan policies that require reforms. In contrast, a politician who has scraped through with a narrow margin is likely to go for more moderate policies (Lee at al., 2004; Albouy, 2011). Based on the notion that protectionist trade policies, e.g., maintaining tariffs, are moderate as it seeks the status quo, and that the promotion of free trade represents an partisan policy requiring reforms, I examined candidates from the 2012 Japanese Lower House election, and confirmed statistically that candidates with a slim margin had a greater tendency to oppose or reserve their position on free trade compared to those who won with a comfortable margin (Ito, 2015). Candidates with a narrow margin tend to adopt protectionism to secure minority votes, which implies the likelihood of protectionist politicians emerging even in urban areas. This mechanism may have played a part in tight U.S. presidential elections, whereby candidates voiced their opposition to the TPP one after another.

The rise of protectionism was also observed following the global financial crisis, triggered by the U.S. subprime loan issue in 2007-2008. At that time, a sudden and dramatic economic crisis led to the manifestation of protectionist policies in order to protect domestic producers. The tide of protectionism was successfully contained with efforts by the World Trade Organization (WTO), etc. However, the latest protectionist trend is different in that it was endorsed by the public in the form of election votes. It would not be easy to control "election-endorsed" protectionism. In 2017, many European countries are facing elections, including general elections in the Netherlands in March, presidential and parliamentary elections in France in May, and federal parliamentary elections in Germany in September. The potential rise of anti-EU radical forces is being feared. In order to control the rise of protectionism, it is crucial to share and recognize, on regional, national and international levels, the presence of dynamic mechanisms that drive the public and politicians into protectionism.

January 6, 2017
Footnote(s)
  1. ^ For details, refer to the URL and report below. The Chicago Council on Global Affairs "Actually, Americans Like Free Trade"
    (https://www.thechicagocouncil.org/publication/actually-americans-free-trade),
    Pew Research Center "Faith and Skepticism about Trade, Foreign Investment"
    (http://www.pewglobal.org/2014/09/16/faith-and-skepticism-about-trade-foreign-investment/).
  2. ^ For details, refer to the report below. POLITICO-Harvard T.H. Chan School of Public Health Polls "Americans’ Views on Current Trade and Health Policies"
    (https://www.hsph.harvard.edu/horp/politico-harvard-t-h-chan-school-of-public-health-polls/)
Reference(s)
  • Albouy, D. (2011). "Do Voters Affect or Elect Policies? A New Perspective, with Evidence from the US Senate" Electoral Studies, 30, 162-173.
  • Blonigen, B. (2011). "Revisiting the Evidence on Trade Policy Preferences" Journal of International Economics, 85, 129-135.
  • Conconi, P., Facchini, G., & Zanardi, M. (2014). "Policymakers' Horizon and Trade Reforms: The Protectionist Effect of Elections" Journal of International Economics, 94, 102-188.
  • Ito, B., Mukunoki, H., Tomiura., E., Wakasugi R. (2014) "Trade Policy Preferences and Cross-Regional Differences: Evidence from individual-level data of Japan" RIETI Discussion Paper 14-J-052.
  • Lee, D. S., Moretti, E., & Butler, M. J. (2004). "Do Voters Affect or Elect Policies? Evidence from the US House" Quarterly Journal of Economics, 119, 807-859.
  • Scheve and Slaughter (2001). "What determines individual trade-policy preferences?" Journal of International Economics, 54, 2001, 267-292.
  • Tomiura, E., Ito, B., Mukunoki, H., and Wakasugi, R. (2016). "Individual Characteristics, Behavioral Biases, and Trade Policy Preferences: Evidence from a Survey in Japan" Review of International Economics, 24(5), pp.1081-1095.

January 16, 2017

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