Income Distribution and Trade Policy
The discussion so far has focused on national welfare arguments for and against tariff
policy. It is appropriate to start there, both because a distinction between national welfare
and the welfare of particular groups helps to clarify the issues and because the advocates
of trade policies usually claim that the policies will benefit the nation as a whole. When
looking at the actual politics of trade policy, however, it becomes necessary to deal with
the reality that there is no such thing as national welfare; there are only the desires of individuals,
which get more or less imperfectly reflected in the objectives of government.
How do the preferences of individuals get added up to produce the trade policy we
actually see? There is no single, generally accepted answer, but there has been a growing
body of economic analysis that explores models in which governments are assumed to be
trying to maximize political success rather than an abstract measure of national welfare.
Electoral Competition
Political scientists have long used a simple model of competition among political parties
to show how the preferences of voters might be reflected in actual policies.3 The model
runs as follows: Suppose that there are two competing parties, each of which is willing
to promise whatever will enable it to win the next election. Suppose that policy can be
described along a single dimension, say, the level of the tariff rate. And finally, suppose
that voters differ in the policies they prefer. For example, imagine that a country exports
skill-intensive goods and imports labor-intensive goods. Then voters with high skill levels
will favor low tariff rates, but voters with low skills will be better off if the country
imposes a high tariff (because of the Stolper-Samuelson effect discussed in Chapter 5).
We can therefore think of lining up all the voters in the order of the tariff rate they prefer,
with the voters who favor the lowest rate on the left and those who favor the highest
rate on the right.
What policies will the two parties then promise to follow? The answer is that they will
try to find the middle ground—specifically, both will tend to converge on the tariff rate preferred
by the median voter, the voter who is exactly halfway up the lineup. To see why,
consider Figure 10-4. In the figure, voters are lined up by their preferred tariff rate, which is
shown by the hypothetical upward-sloping curve; is the median voter’s preferred rate.
Now suppose that one of the parties has proposed the tariff rate , which is considerably
above that preferred by the median voter. Then the other party could propose the slightly
tA
tM
3See Anthony Downs, An Economic Theory of Democracy (Washington, D.C.: Brookings Institution, 1957).
230 PART TWO International Trade Policy
lower rate, , and its program would be preferred by almost all voters who want a lower
tariff, that is, by a majority. In other words, it would always be in the political interest of a
party to undercut any tariff proposal that is higher than what the median voter wants.
Similar reasoning shows that self-interested politicians will always want to promise a
higher tariff if their opponents propose one that is lower than the tariff the median voter
prefers. So both parties end up proposing a tariff close to the one the median voter wants.
Political scientists have modified this simple model in a number of ways. For example,
some analysts stress the importance of party activists in getting out the vote; since these
activists are often ideologically motivated, the need for their support may prevent parties
from being quite as cynical, or adopting platforms quite as indistinguishable, as this model
suggests. Nonetheless, the median voter model of electoral competition has been very
helpful as a way of thinking about how political decisions get made in the real world,
where the effects of policy on income distribution may be more important than their
effects on efficiency.
One area in which the median voter model does not seem to work very well, however,
is trade policy! In fact, it makes an almost precisely wrong prediction. According to this
model, a policy should be chosen on the basis of how many voters it pleases: A policy that
inflicts large losses on a few people but benefits a large number of people should be a
political winner; a policy that inflicts widespread losses but helps a small group should be
a loser. In fact, however, protectionist policies are more likely to fit the latter than the
former description. Recall the example of the U.S. sugar import quota, discussed in
Chapter 9: According to the estimates presented there, the quota imposed a loss of about
$2.5 billion on U.S. consumers—that is, on tens of millions of voters—while providing a
much smaller gain to a few thousand sugar industry workers and businesspersons. How
can such a thing happen politically?
Collective Action
In a now famous book, economist Mancur Olson pointed out that political activity on
behalf of a group is a public good; that is, the benefits of such activity accrue to all members
of the group, not just the individual who performs the activity.4 Suppose a consumer
tB
Preferred tariff rate
tA
Voters
Political
support
tB
tM
Median
voter
Figure 10-4
Political Competition
Voters are lined up in order of the
tariff rate they prefer. If one party
proposes a high tariff of , the
other party can win over most of
the voters by offering a somewhat
lower tariff, . This political competition
drives both parties to propose
tariffs close to , the tariff
preferred by the median voter.
tM
tB
tA
4Mancur Olson, The Logic of Collective Action (Cambridge: Harvard University Press, 1965).
CHAPTER 10 The Political Economy of Trade Policy 231
As we explain in the text, it’s hard to make sense of
actual trade policy if you assume that governments
are genuinely trying to maximize national welfare.
On the other hand, actual trade policy does make
sense if you assume that special-interest groups can
buy influence. But is there any direct evidence that
politicians really are for sale?
Votes by the U.S. Congress on some crucial trade
issues in the 1990s offer useful test cases. The reason
is that U.S. campaign finance laws require politicians
to reveal the amounts and sources of campaign
contributions; this disclosure allows economists and
political scientists to look for any relationship
between those contributions and actual votes.
A 1998 study by Robert Baldwin and Christopher
Magee* focuses on two crucial votes: the 1993 vote
on the North American Free Trade Agreement (generally
known as NAFTA, and described at greater
length below), and the 1994 vote ratifying the latest
agreement under the General Agreement on Tariffs
and Trade (generally known as the GATT, also
described below). Both votes were bitterly fought,
largely along business-versus-labor lines—that is,
business groups were strongly in favor; labor unions
were strongly against. In both cases the free trade
position backed by business won; in the NAFTA
vote, the outcome was in doubt until the last minute,
and the margin of victory—34 votes in the House of
Representatives—was not very large.
Baldwin and Magee estimate an econometric
model of congressional votes that controls for such
factors as the economic characteristics of members’
districts as well as business and labor contributions
to the congressional representative. They find a
strong impact of money on the voting pattern. One
way to assess this impact is to run a series of “counterfactuals”:
How different would the overall vote
had been if there had been no business contributions,
no labor contributions, or no contributions of
any type at all?
The following table summarizes the results. The
first row shows how many representatives voted in
favor of each bill; bear in mind that passage required
at least 214 votes. The second row shows the number
of votes predicted by Baldwin and Magee’s equations:
Their model gets it right in the case of NAFTA but
overpredicts by a few votes in the case of the GATT.
The third row shows how many votes each bill would
have received, according to the model, in the absence
of labor contributions; the next row shows how many
representatives would have voted in favor in the
absence of business contributions. The last row shows
how many would have voted in favor if both business
and labor contributions had been absent.
Politicians for Sale: Evidence from the 1990s
Vote for
NAFTA
Vote for
GATT
Actual 229 283
Predicted by model 229 290
Without labor contributions 291 346
Without business contributions 195 257
Without any contributions 256 323
*Robert E. Baldwin and Christopher S. Magee, “Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills,”
Working Paper 6376, National Bureau of Economic Research, January 1998.
If these estimates are correct, contributions had
big impacts on the vote totals. In the case of NAFTA,
labor contributions induced 62 representatives who
would otherwise have supported the bill to vote
against; business contributions moved 34 representatives
the other way. If there had been no business
contributions, according to this estimate, NAFTA
would have received only 195 votes—not enough for
passage.
On the other hand, given that both sides were
making contributions, their effects tended to cancel
out. Baldwin and Magee’s estimates suggest that in
the absence of contributions from either labor or
business, both NAFTA and the GATT would have
passed anyway.
It’s probably wrong to emphasize the fact that in
these particular cases, contributions from the two
sides did not change the final outcome. The really
important result is that politicians are, indeed, for
sale—which means that theories of trade policy that
emphasize special interests are on the right track.
232 PART TWO International Trade Policy
writes a letter to his congressperson demanding a lower tariff rate on his favorite imported
good, and this letter helps change the congressperson’s vote so that the lower tariff is
approved. Then all consumers who buy the good benefit from lower prices, even if they
did not bother to write letters.
This public good character of politics means that policies that impose large losses in
total, but small losses on any individual, may not face any effective opposition. Again
take the example of the sugar import quota. This policy imposes a cost on a typical
American family of approximately $30 per year. Should a consumer lobby his or her congressperson
to remove the quota? From the point of view of individual self-interest,
surely not. Since one letter has only a marginal effect on the policy, the individual payoff
from such a letter is probably literally not worth the paper it is written on, let alone the
postage stamp. (Indeed, it is surely not worth even learning of the quota’s existence
unless you are interested in such things for their own sake.) And yet, if a million voters
were to write demanding an end to the quota, it would surely be repealed, bringing benefits
to consumers far exceeding the costs of sending the letters. In Olson’s phrase, there is
a problem of collective action: While it is in the interests of the group as a whole to press
for favorable policies, it is not in any individual’s interest to do so.
The problem of collective action can best be overcome when a group is small (so that
each individual reaps a significant share of the benefits of favorable policies) and/or well
organized (so that members of the group can be mobilized to act in their collective interest).
The reason that a policy like the sugar quota can happen is that the sugar producers
form a relatively small, well-organized group that is well aware of the size of the implicit
subsidy members receive, while sugar consumers are a huge population that does not even
perceive itself as an interest group. The problem of collective action, then, can explain
why policies that not only seem to produce more costs than benefits but that also seem to
hurt far more voters than they help can nonetheless be adopted.
Modeling the Political Process
While the logic of collective action has long been invoked by economists to explain seemingly
irrational trade policies, it the theory is somewhat vague on the ways in which organized
interest groups actually go about influencing policy. A growing body of analysis tries
to fill this gap with simplified models of the political process.5
The starting point of this analysis is obvious: While politicians may win elections
partly because they advocate popular policies, a successful campaign also requires money
for advertising, polling, and so on. It may therefore be in the interest of a politician to
adopt positions that are against the interest of the typical voter if the politician is offered a
sufficiently large financial contribution to do so; the extra money may be worth more votes
than those lost by taking the unpopular position.
Recent models of the political economy of trade policy therefore envision a sort of auction
in which interest groups “buy” policies by offering contributions contingent on the
policies followed by the government. Politicians will not ignore overall welfare, but they
will be willing to trade off some reduction in the welfare of voters in return for a larger
campaign fund. As a result, well-organized groups—that is, groups that are able to overcome
the problem of collective action—will be able to get policies that favor their interests
at the expense of the public as a whole.
5See, in particular, Gene Grossman and Elhanan Helpman, “Protection for Sale,” American Economic Review 89
(September 1994), pp. 833–850.
Who Gets Protected?
As a practical matter, which industries actually get protected from import competition?
Many developing countries traditionally have protected a wide range of manufacturing, in
a policy known as import-substituting industrialization. We discuss this policy and the reasons
why it has become considerably less popular in recent years in Chapter 11. The range
of protectionism in advanced countries is much narrower; indeed, much protectionism is
concentrated in just two sectors, agriculture and clothing.
Agriculture There are not many farmers in modern economies—in the United States,
agriculture employs only about 2 million workers out of a labor force of more than
130 million. Farmers are, however, usually a well-organized and politically powerful
group that has been able in many cases to achieve very high rates of effective protection.
We discussed Europe’s Common Agricultural Policy in Chapter 9; the export subsidies in
that program mean that a number of agricultural products sell at two or three times world
prices. In Japan, the government has traditionally banned imports of rice, thus driving up
internal prices of the country’s staple food to more than five times as high as the world
price. This ban was slightly relaxed in the face of bad harvests in the mid-1990s, but in late
1998—over the protests of other nations, including the United States—Japan imposed a
1,000 percent tariff on rice imports.
The United States is, by and large, a food exporter, which means that tariffs or import
quotas cannot raise prices. (Sugar is an exception.) While farmers have received considerable
subsidies from the federal government, the government’s reluctance to pay money
out directly (as opposed to imposing more or less hidden costs on consumers) has limited
the size of these subsidies. As a result of the government’s reluctance, much of the protection
in the United States is concentrated on the other major protected sector: the clothing
industry.
Clothing The clothing industry consists of two parts: textiles (spinning and weaving of
cloth) and apparel (assembly of cloth into clothing). Both industries, but especially the
apparel industry, historically have been protected heavily through both tariffs and import
quotas. Until 2005, they were subject to the Multi-Fiber Arrangement (MFA), which set
both export and import quotas for a large number of countries.
Apparel production has two key features. It is labor-intensive: A worker needs relatively
little capital, in some cases no more than a sewing machine, and can do the job
without extensive formal education. And the technology is relatively simple: There is no
great difficulty in transferring the technology even to very poor countries. As a result,
the apparel industry is one in which low-wage nations have a strong comparative advantage
and high-wage countries have a strong comparative disadvantage. It is also traditionally
a well-organized sector in advanced countries; for example, many American
apparel workers have long been represented by the International Ladies’ Garment
Worker’s Union.
Later in this chapter we’ll describe how trade negotiations work; one of the most
important provisions of the Uruguay Round trade agreements, signed in 1994, was the
phaseout of the MFA, which took place at the end of 2004. Although import quotas were
reimposed on China in 2005, those quotas have since phased out. By 2013, trade in clothing
should no longer face many restrictions.
Table 10-2 shows just how important clothing used to be in U.S. protectionism, and
how much difference the end of the restrictions on clothing makes. In 2002, with the
MFA still in effect, clothing restrictions were responsible for more than 80 percent of the
overall welfare costs of U.S. protectionism. Because the MFA assigned import licenses to
CHAPTER 10 The Political Economy of Trade Policy 233
234 PART TWO International Trade Policy
exporting countries, most of the welfare cost to the United States came not from distortion
of production and consumption but from the transfer of quota rents to foreigners.
With the expiration of the MFA, the costs of clothing protection and hence the overall
costs of U.S. protection fell sharply.
The discussion so far has focused on national welfare arguments for and against tariff
policy. It is appropriate to start there, both because a distinction between national welfare
and the welfare of particular groups helps to clarify the issues and because the advocates
of trade policies usually claim that the policies will benefit the nation as a whole. When
looking at the actual politics of trade policy, however, it becomes necessary to deal with
the reality that there is no such thing as national welfare; there are only the desires of individuals,
which get more or less imperfectly reflected in the objectives of government.
How do the preferences of individuals get added up to produce the trade policy we
actually see? There is no single, generally accepted answer, but there has been a growing
body of economic analysis that explores models in which governments are assumed to be
trying to maximize political success rather than an abstract measure of national welfare.
Electoral Competition
Political scientists have long used a simple model of competition among political parties
to show how the preferences of voters might be reflected in actual policies.3 The model
runs as follows: Suppose that there are two competing parties, each of which is willing
to promise whatever will enable it to win the next election. Suppose that policy can be
described along a single dimension, say, the level of the tariff rate. And finally, suppose
that voters differ in the policies they prefer. For example, imagine that a country exports
skill-intensive goods and imports labor-intensive goods. Then voters with high skill levels
will favor low tariff rates, but voters with low skills will be better off if the country
imposes a high tariff (because of the Stolper-Samuelson effect discussed in Chapter 5).
We can therefore think of lining up all the voters in the order of the tariff rate they prefer,
with the voters who favor the lowest rate on the left and those who favor the highest
rate on the right.
What policies will the two parties then promise to follow? The answer is that they will
try to find the middle ground—specifically, both will tend to converge on the tariff rate preferred
by the median voter, the voter who is exactly halfway up the lineup. To see why,
consider Figure 10-4. In the figure, voters are lined up by their preferred tariff rate, which is
shown by the hypothetical upward-sloping curve; is the median voter’s preferred rate.
Now suppose that one of the parties has proposed the tariff rate , which is considerably
above that preferred by the median voter. Then the other party could propose the slightly
tA
tM
3See Anthony Downs, An Economic Theory of Democracy (Washington, D.C.: Brookings Institution, 1957).
230 PART TWO International Trade Policy
lower rate, , and its program would be preferred by almost all voters who want a lower
tariff, that is, by a majority. In other words, it would always be in the political interest of a
party to undercut any tariff proposal that is higher than what the median voter wants.
Similar reasoning shows that self-interested politicians will always want to promise a
higher tariff if their opponents propose one that is lower than the tariff the median voter
prefers. So both parties end up proposing a tariff close to the one the median voter wants.
Political scientists have modified this simple model in a number of ways. For example,
some analysts stress the importance of party activists in getting out the vote; since these
activists are often ideologically motivated, the need for their support may prevent parties
from being quite as cynical, or adopting platforms quite as indistinguishable, as this model
suggests. Nonetheless, the median voter model of electoral competition has been very
helpful as a way of thinking about how political decisions get made in the real world,
where the effects of policy on income distribution may be more important than their
effects on efficiency.
One area in which the median voter model does not seem to work very well, however,
is trade policy! In fact, it makes an almost precisely wrong prediction. According to this
model, a policy should be chosen on the basis of how many voters it pleases: A policy that
inflicts large losses on a few people but benefits a large number of people should be a
political winner; a policy that inflicts widespread losses but helps a small group should be
a loser. In fact, however, protectionist policies are more likely to fit the latter than the
former description. Recall the example of the U.S. sugar import quota, discussed in
Chapter 9: According to the estimates presented there, the quota imposed a loss of about
$2.5 billion on U.S. consumers—that is, on tens of millions of voters—while providing a
much smaller gain to a few thousand sugar industry workers and businesspersons. How
can such a thing happen politically?
Collective Action
In a now famous book, economist Mancur Olson pointed out that political activity on
behalf of a group is a public good; that is, the benefits of such activity accrue to all members
of the group, not just the individual who performs the activity.4 Suppose a consumer
tB
Preferred tariff rate
tA
Voters
Political
support
tB
tM
Median
voter
Figure 10-4
Political Competition
Voters are lined up in order of the
tariff rate they prefer. If one party
proposes a high tariff of , the
other party can win over most of
the voters by offering a somewhat
lower tariff, . This political competition
drives both parties to propose
tariffs close to , the tariff
preferred by the median voter.
tM
tB
tA
4Mancur Olson, The Logic of Collective Action (Cambridge: Harvard University Press, 1965).
CHAPTER 10 The Political Economy of Trade Policy 231
As we explain in the text, it’s hard to make sense of
actual trade policy if you assume that governments
are genuinely trying to maximize national welfare.
On the other hand, actual trade policy does make
sense if you assume that special-interest groups can
buy influence. But is there any direct evidence that
politicians really are for sale?
Votes by the U.S. Congress on some crucial trade
issues in the 1990s offer useful test cases. The reason
is that U.S. campaign finance laws require politicians
to reveal the amounts and sources of campaign
contributions; this disclosure allows economists and
political scientists to look for any relationship
between those contributions and actual votes.
A 1998 study by Robert Baldwin and Christopher
Magee* focuses on two crucial votes: the 1993 vote
on the North American Free Trade Agreement (generally
known as NAFTA, and described at greater
length below), and the 1994 vote ratifying the latest
agreement under the General Agreement on Tariffs
and Trade (generally known as the GATT, also
described below). Both votes were bitterly fought,
largely along business-versus-labor lines—that is,
business groups were strongly in favor; labor unions
were strongly against. In both cases the free trade
position backed by business won; in the NAFTA
vote, the outcome was in doubt until the last minute,
and the margin of victory—34 votes in the House of
Representatives—was not very large.
Baldwin and Magee estimate an econometric
model of congressional votes that controls for such
factors as the economic characteristics of members’
districts as well as business and labor contributions
to the congressional representative. They find a
strong impact of money on the voting pattern. One
way to assess this impact is to run a series of “counterfactuals”:
How different would the overall vote
had been if there had been no business contributions,
no labor contributions, or no contributions of
any type at all?
The following table summarizes the results. The
first row shows how many representatives voted in
favor of each bill; bear in mind that passage required
at least 214 votes. The second row shows the number
of votes predicted by Baldwin and Magee’s equations:
Their model gets it right in the case of NAFTA but
overpredicts by a few votes in the case of the GATT.
The third row shows how many votes each bill would
have received, according to the model, in the absence
of labor contributions; the next row shows how many
representatives would have voted in favor in the
absence of business contributions. The last row shows
how many would have voted in favor if both business
and labor contributions had been absent.
Politicians for Sale: Evidence from the 1990s
Vote for
NAFTA
Vote for
GATT
Actual 229 283
Predicted by model 229 290
Without labor contributions 291 346
Without business contributions 195 257
Without any contributions 256 323
*Robert E. Baldwin and Christopher S. Magee, “Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills,”
Working Paper 6376, National Bureau of Economic Research, January 1998.
If these estimates are correct, contributions had
big impacts on the vote totals. In the case of NAFTA,
labor contributions induced 62 representatives who
would otherwise have supported the bill to vote
against; business contributions moved 34 representatives
the other way. If there had been no business
contributions, according to this estimate, NAFTA
would have received only 195 votes—not enough for
passage.
On the other hand, given that both sides were
making contributions, their effects tended to cancel
out. Baldwin and Magee’s estimates suggest that in
the absence of contributions from either labor or
business, both NAFTA and the GATT would have
passed anyway.
It’s probably wrong to emphasize the fact that in
these particular cases, contributions from the two
sides did not change the final outcome. The really
important result is that politicians are, indeed, for
sale—which means that theories of trade policy that
emphasize special interests are on the right track.
232 PART TWO International Trade Policy
writes a letter to his congressperson demanding a lower tariff rate on his favorite imported
good, and this letter helps change the congressperson’s vote so that the lower tariff is
approved. Then all consumers who buy the good benefit from lower prices, even if they
did not bother to write letters.
This public good character of politics means that policies that impose large losses in
total, but small losses on any individual, may not face any effective opposition. Again
take the example of the sugar import quota. This policy imposes a cost on a typical
American family of approximately $30 per year. Should a consumer lobby his or her congressperson
to remove the quota? From the point of view of individual self-interest,
surely not. Since one letter has only a marginal effect on the policy, the individual payoff
from such a letter is probably literally not worth the paper it is written on, let alone the
postage stamp. (Indeed, it is surely not worth even learning of the quota’s existence
unless you are interested in such things for their own sake.) And yet, if a million voters
were to write demanding an end to the quota, it would surely be repealed, bringing benefits
to consumers far exceeding the costs of sending the letters. In Olson’s phrase, there is
a problem of collective action: While it is in the interests of the group as a whole to press
for favorable policies, it is not in any individual’s interest to do so.
The problem of collective action can best be overcome when a group is small (so that
each individual reaps a significant share of the benefits of favorable policies) and/or well
organized (so that members of the group can be mobilized to act in their collective interest).
The reason that a policy like the sugar quota can happen is that the sugar producers
form a relatively small, well-organized group that is well aware of the size of the implicit
subsidy members receive, while sugar consumers are a huge population that does not even
perceive itself as an interest group. The problem of collective action, then, can explain
why policies that not only seem to produce more costs than benefits but that also seem to
hurt far more voters than they help can nonetheless be adopted.
Modeling the Political Process
While the logic of collective action has long been invoked by economists to explain seemingly
irrational trade policies, it the theory is somewhat vague on the ways in which organized
interest groups actually go about influencing policy. A growing body of analysis tries
to fill this gap with simplified models of the political process.5
The starting point of this analysis is obvious: While politicians may win elections
partly because they advocate popular policies, a successful campaign also requires money
for advertising, polling, and so on. It may therefore be in the interest of a politician to
adopt positions that are against the interest of the typical voter if the politician is offered a
sufficiently large financial contribution to do so; the extra money may be worth more votes
than those lost by taking the unpopular position.
Recent models of the political economy of trade policy therefore envision a sort of auction
in which interest groups “buy” policies by offering contributions contingent on the
policies followed by the government. Politicians will not ignore overall welfare, but they
will be willing to trade off some reduction in the welfare of voters in return for a larger
campaign fund. As a result, well-organized groups—that is, groups that are able to overcome
the problem of collective action—will be able to get policies that favor their interests
at the expense of the public as a whole.
5See, in particular, Gene Grossman and Elhanan Helpman, “Protection for Sale,” American Economic Review 89
(September 1994), pp. 833–850.
Who Gets Protected?
As a practical matter, which industries actually get protected from import competition?
Many developing countries traditionally have protected a wide range of manufacturing, in
a policy known as import-substituting industrialization. We discuss this policy and the reasons
why it has become considerably less popular in recent years in Chapter 11. The range
of protectionism in advanced countries is much narrower; indeed, much protectionism is
concentrated in just two sectors, agriculture and clothing.
Agriculture There are not many farmers in modern economies—in the United States,
agriculture employs only about 2 million workers out of a labor force of more than
130 million. Farmers are, however, usually a well-organized and politically powerful
group that has been able in many cases to achieve very high rates of effective protection.
We discussed Europe’s Common Agricultural Policy in Chapter 9; the export subsidies in
that program mean that a number of agricultural products sell at two or three times world
prices. In Japan, the government has traditionally banned imports of rice, thus driving up
internal prices of the country’s staple food to more than five times as high as the world
price. This ban was slightly relaxed in the face of bad harvests in the mid-1990s, but in late
1998—over the protests of other nations, including the United States—Japan imposed a
1,000 percent tariff on rice imports.
The United States is, by and large, a food exporter, which means that tariffs or import
quotas cannot raise prices. (Sugar is an exception.) While farmers have received considerable
subsidies from the federal government, the government’s reluctance to pay money
out directly (as opposed to imposing more or less hidden costs on consumers) has limited
the size of these subsidies. As a result of the government’s reluctance, much of the protection
in the United States is concentrated on the other major protected sector: the clothing
industry.
Clothing The clothing industry consists of two parts: textiles (spinning and weaving of
cloth) and apparel (assembly of cloth into clothing). Both industries, but especially the
apparel industry, historically have been protected heavily through both tariffs and import
quotas. Until 2005, they were subject to the Multi-Fiber Arrangement (MFA), which set
both export and import quotas for a large number of countries.
Apparel production has two key features. It is labor-intensive: A worker needs relatively
little capital, in some cases no more than a sewing machine, and can do the job
without extensive formal education. And the technology is relatively simple: There is no
great difficulty in transferring the technology even to very poor countries. As a result,
the apparel industry is one in which low-wage nations have a strong comparative advantage
and high-wage countries have a strong comparative disadvantage. It is also traditionally
a well-organized sector in advanced countries; for example, many American
apparel workers have long been represented by the International Ladies’ Garment
Worker’s Union.
Later in this chapter we’ll describe how trade negotiations work; one of the most
important provisions of the Uruguay Round trade agreements, signed in 1994, was the
phaseout of the MFA, which took place at the end of 2004. Although import quotas were
reimposed on China in 2005, those quotas have since phased out. By 2013, trade in clothing
should no longer face many restrictions.
Table 10-2 shows just how important clothing used to be in U.S. protectionism, and
how much difference the end of the restrictions on clothing makes. In 2002, with the
MFA still in effect, clothing restrictions were responsible for more than 80 percent of the
overall welfare costs of U.S. protectionism. Because the MFA assigned import licenses to
CHAPTER 10 The Political Economy of Trade Policy 233
234 PART TWO International Trade Policy
exporting countries, most of the welfare cost to the United States came not from distortion
of production and consumption but from the transfer of quota rents to foreigners.
With the expiration of the MFA, the costs of clothing protection and hence the overall
costs of U.S. protection fell sharply.
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