Review 8: Trade Protection in the United States, by Charles K. Rowley, Willem Thorbecke & Richard E. Wagner (1995)

Francesco Parisi,
George Mason University School of Law,
European Journal of Law and Economics, 5:67-79 (1998)

"The Congress shall not lay any imposts or duties, nor shall it impose any quantitative restriction on imports and exports, except what may be absolutely necessary for executing its inspection laws or for protecting national security. Nor shall Congress delegate any such authority to the President."

Proposed Free Trade Amendment for the US Constitution

1. The efficiency of free trade and the robustness of trade protection

Trade Protection in the United States is written from a marked public choice perspective, thus distinguishing it from other classics in the trade protection literature. The book opens with two parables, the first drawn from Daniel Defoe's Robinson Crusoe. Crusoe, who lives on an island after his shipwreck, discovers the advantages of trade and cooperation with other individuals - an essential precondition for exploiting a comparative advantage in production. By trading with others, Crusoe reaches a level of living much superior to that obtainable by any individual left in complete isolation. This parable serves as the starting point for an insightful discussion of the role of specialization and trade in human progress. Professors Rowley, Thorbecke, and Wagner complement Crusoe's story with Leonard Reed's essay I Pencil which compellingly illustrates the inability of any ordinary human who operates in isolation to achieve self-sufficiency: how difficult (if at all possible) would it be for a single individual to produce a simple object such as a pencil without the network of trades and contracts that specialized producers possess?

Chapter 1 continues by laying the theoretical foundations that inform the subsequent sections of the book. The authors introduce the concept of comparative advantage, emphasizing the gains to individual and collective welfare from specialization. They note the importance of a market economy in providing a framework of private property and freedom of contract and association. Considering the role of the state in maintaining the framework of legal institutions within which trade takes place, the authors stress the government's crucial function in preserving and protecting individual rights. They suggest, however, that because of incomplete knowledge and unknown incentives, potential public goods or externality problems cannot effectively be met by government intervention.

The political economy of trade protection

Looking at international trade issues within the neoclassical framework of exchange economics, one soon realizes that national borders should stand as practically and economically irrelevant. Even in cases of absolute advantage (where one state is a more efficient producer in all areas of production) the existence of comparative advantage creates the potential for gains from trade.

While this proposition is clear and undisputed in the domestic setting, it quickly becomes a matter of controversy when given a transnational dimension. By reducing the individual dimension into an aggregate national dimension, two things tend to take place: (1) the diversity of individual preferences is condensed into a homogeneous perspective represented by the nation-state; and (2) the intellectual premises for unwarranted nationalism are laid. The authors of Trade Protection in the United States suggest that in order to solve this apparent contradiction, we must realize that individuals (not states) are the primary subjects of trade and exchange,

The authors very candidly manifest their philosophical and political beliefs, indicating the point at which they diverge from the mainstream neoclassical approach. In chapter 2, they outline the basic principles of economic and political philosophy that inform their analysis of free trade. Borrowing from Hayek and Buchanan, their framework of normative and methodological individualism places primary emphasis on individual rights and choices in the evaluation of collective decisionmaking. The authors also endorse a Lockean view of the individual: one who must be left completely free to order his actions. From this perspective, natural law (in the sense of a right to life, liberty and property) precedes any political constitution and cannot be alienated by any social compact.

In considering the costs and gains derived from free trade, the authors distinguish between nationalist and cosmopolitan formulations of free trade, outlining the various instruments of trade protection (tariffs, quotas, and the like), and discussing the differing impacts these instruments have on market and political processes. At the conclusion of chapter 2, the authors note that it is not at all obvious that capitalism has emerged totally victorious since 1989. They implore that economic liberty should be accorded the high moral ground in the debate over free trade versus protection. Their welcome analysis merges the qualitative assessment of the welfare losses induced by distortive protection with a discussion of the many quantitative models discussed in the economic literature.

The ideal rule: The efficiency of free trade

It is a widely accepted proposition of exchange economics that trade possibilities improve the welfare of the trading parties by expanding the feasible consumption set available to them. The welfare theorems of international trade extend these implications: free trade maximizes a country's welfare and allows the maximization of aggregate consumption possibilities. This proposition relies on notions of efficiency as aggregate welfare maximization, where the gainers from free trade (mostly consumers) would receive enough benefit to compensate the losers (mostly producers) for the loss occasioned by forgone market power. This indicates that, if gains and losses were readily measurable, a lump-sum transfer from consumers to producers would ensure a policy of free trade in the interest of both constituencies. On this point, Vousden (1990) observes that "in a system of majority voting with perfect information, costless lump-sum transfers and zero voting costs, the transfers could be adjusted so that those who are better off under free trade always constitute a majority - free trade would win every time. The reality is that redistributions are costly, and political markets are not perfect."

The substantial transaction costs involved in a transfer from consumers to producers leaves the free trade rule outside the politically feasible set. In their analysis of the political feasibility of free trade, the authors depart from the traditional approach to international trade theory, inasmuch as the focus on the aggregate gains and losses from international trade protection is shifted toward a more realistic analysis of the political and institutional determinants of policymaking.

The best feasible rule: Endogenous policymaking In neo-classical literature on international trade, protection policies are treated as an exogenous variable. Alternative policies are ranked according to a criterion of efficiency which bears little or no connection to the process with which the policy target is internally determined. Indeed, the efficiency criterion used in most treatments of the subject is, in itself, incapable of explaining why tariffs and protectionist measures come to exist in the first place. Despite the various efficiency propositions that support free trade arrangements, free trade equilibria are rarely observed in international relations. Public choice theory - and other theories of endogenous policymaking - explain this paradox by demonstrating that, although it is a first-best policy, free trade is not politically sustainable. Trade policy affects the distribution of income among the various constituencies of the nation-state. Consequently, the determinants of a country's endogenous trade policy extend beyond efficiency concerns to include the politically more pressing issues of income redistribution.

In the absence of compensatory transfers from the beneficiaries of free trade (consumers) to those who bear the cost of lifted protection (producers), there will necessarily be a divergence of opinions in the choice of a trade policy. The resulting conflict generates a noncooperative game in which the two interest groups try to affect policymaking through political pressure. Policymakers respond to the pressure of these competing groups by enacting policies that maximize (at the margin) their objective function. According to this perspective, tariffs, quotas and other redistributive policies exist because they are politically efficient, i.e. they improve the chances of election for the political party sponsoring such protectionist measures. Assuming convexity and internal solutions, this indicates that a positive amount of protection will be present in every political equilibrium, rendering the ideal rule of free trade unfeasible. The actual choice of trade policy will further depend upon the relative degree of effectiveness of the two groups' lobbying efforts. Because they are usually a more concentrated group, producers are generally predicted to be more effective in influencing the policy outcome.

Given the political infeasibleness of free trade, public choice theory generally moves to an analysis of alternative policies that fall within the politically feasible set. Best-feasible rules are those that possess the characteristics of political sustainability while minimizing the welfare losses occasioned by distortive protectionist policies. In this setting, the effects of tariffs are compared to those of quotas, voluntary export restraints and import controls. One should understand that the political allocation process suffers from an informational shortcoming: even if run by unbiased politicians, they system does not provide an opportunity for feedback over alternative outcomes. Once a policy is implemented, all outcomes precluded by the new rule are foreclosed. They are not tried out, save for a subsequent policy change. In this way, the political society does not generate the kind of information that is, instead, available in the commercial society. This insight, in turn, provides a basis to draw implications on the informational superiority of tariffs (i.e., the price system) over quotas (i.e. the quantity-based command system), and for the adoption of experimental sub-national policies, whenever the non-arbitrage conditions of the market allow for such decentralized experimentation.

The authors perform a complete and elegant analysis of the effective of alternative policies on production and consumption equilibria. The analysis is then enriched with a discussion of the political economy of protection, with special attention to the role of redistributive motives in explaining the outcomes of trade policymaking.

Welfare analysis and the rhetoric of trade protection

The authors examine several different theories of international trade, from the classical model to the Stolper-Samuelson theorem, in an effort to identify the gainers and the losers from trade protection. They consider the range of trade policy choices that an efficiency-orientated government make, as well as the informational asymmetries which make efficient centralized choices problematic. Typically, the authors assert, governments choose protection because of political forces directed at redistributing wealth, with little or no regard for economic efficiency.

In the course of this analysis, the authors consider all the relevant arguments in favor of protection, rebutting each in turn with their own compelling arguments. They begin with a discussion of Mill and Torrens, who developed theories of trade protection for infant industries and national defense. The discussion then moves to the theoretical arguments advanced by the new welfare economists in the mid-twentieth century on the basis of perceived factor-market and product-market imperfections. After refuting the various welfare justifications for trade protection, the analysis unveils the purely redistributive nature of many policy interventions. This, in turn, leads to a discussion of the political and constitutional forces in trade policymaking.

2. The constitutional economy of trade protection

The trade protection literature has generally neglected to consider the institutional and constitutional determinants of political feasibility in the context of trade policy. Even within the public choice school, Chicago theorists have focused on the determinants of endogenous policies but have failed to explore the role of institutions and constitutional constraints in the dynamic of policy formation. By filling this gap in the legal and economic literature, Professors Rowley, Thorbecke and Wagner forge new and ingenious theoretical constructs, bringing the institutional and constitutional dimensions to bear on the issue of trade protection.

The determinants of political feasibility: The political actors

After introducing the public interest theory of government, in which special interests take advantage of rational ignorance among the electorate and within the legislature to obtain political favors relative to their voting strength, the authors show why governments fail to choose free trade in the face of the comparative advantage theorem, choosing instead to extend trade protection policies. Their model of the U.S. system of government suggests if falls short of the degree of separation of powers contemplated by its founding fathers. Securing individual liberty by constitutional means, the authors suggest, also has failed.

A) The Congress In chapters 5 through 7, the authors discuss the role of the relevant political actors in the formation of trade policy. Central to their analysis is the role of Congress. The authors note that as an institution, Congress is characterized by the declining influence of party leadership and a concomitant advance of subcommittee power. The decline in party power has resulted in independent legislators augmenting their individual power through the growth of their staffs. Committees, the authors note, operate like quasi-fiefdoms separate from the main body of Congress. The authors then evaluate the relationship between the legislature and executive. In their opinion, these factors have combined to produce a tilt toward protectionism in the late twentieth century.

B) The President Chapter 6 examines the nature and contours of presidential authority to shape and influence U.S. trade policy. The authors consider the political constraints and pressures to which the President is subject, providing a framework for predicting the trade policy choices a President may make. They conclude that such choices will be less protection-orientated than those of Congress, but still highly protectionist according to the standard canons of global economic efficiency.

It is widely accepted today that the U.S. President has preeminence in the field of foreign affairs. Congress has delegated to the President a wide variety of powers in international affairs, and even the Supreme Court has even propounded in a theory of presidential foreign affairs power derived from non-textual sources. Later in the book the authors provide a public choice analysis of executive branch trade policymaking, with specific examples from various presidential administrations, and a detailed account of the history and relationship of the United States Trade Representative with Congress and the President. The authors note the incidence of special protection for industries confronted by severe import competition, including high tariffs, quotas, VERs, the GATT escape clause or other limitations, and the current trend away from a central norm of GATT, the most-favored-nation (MFN), toward aggressive unilateralism. The latter is epitomized by legislation such as ""Super 301"", which requires the President to retaliate against countries with consistent patterns of unfair trade practices. The authors also analyze the multilateral negotiations conducted under the aegis of GATT, including the Uruguay Round.

C) The Bureaucracy The authors discuss the role of the bureaucracy in the formation of trade policy, and extend some of the public choice models of bureaucracies initially created by Tullock (1965), Downs (1967), and Niskanen (1971 and 1975), who derived a number of hypotheses which have survived empirical testing. Trade policy is significantly dependent on and influenced by the federal bureaucracy, including the United States Trade Representative, the Department of Commerce, and the International Trade Commission. The authors address such issues as the self-interest of bureaucrats interested in increasingly larger budgets, why the worst get to the top, the theory of bureau dominance, the theory of congressional dominance, and institutional problems of monitoring. The President can influence and destabilize the influence of the so-called "iron triangle" (special interests - congressional committees-bureaucracy) yet, the authors conclude, opportunities for discretionary behavior by bureaucratic action remain.

Trade politics, fair trade, and individual rights

The major actors - interest groups, the President, Congress, bureaucrats, and voters - all behave in a highly predictable manner. The authors briefly examine the changing trade politics in the United States during the period 1900-80 and arrive at several generalizations. For example, Republican presidents have tended to favor greater protection than Democratic presidents, and the House is more protectionist than the Senate. The authors also note the rise of the executive in controlling tariff levels and the trend toward employing non-tariff barriers to trade. They apply their political market analysis to seven specific trade laws passed between 1930 (Smoot-Hawley) and 1988 (Omnibus Trade Act), and show that the public choice model consistently predicts the behavior of the major actors.

The authors conclude by noting that the more transparent a trade policy issue is, the more liberal the executive tends to be. Conversely, the executive tends to be more protectionists as a trade policy issue becomes more opaque. Multilateral negotiations show the greatest spatial distance between the executive branch and Congress.

The authors canvass the fair trade laws and their impact on foreign competition. They also explore the nature and roles of the International Trade Administration (ITA) of the Commerce Department and the International Trade Commission (ITC), as well as the relationships of these agencies with Congress. The authors note a rising tide of administrative remedies and assert that there is no sound utilitarian argument to justify fair trade laws, going so far as to maintain that such laws are illegal. Indeed, they argue that the current regime of fair trade laws, administered by the ITA and ITC, must be repealed to rescue consumers from the harmful consequences of rent-seeking behavior on the part of special interests, suggesting that ITA and ITC are predators of natural rights and enemies of individual liberty.

Regional trade politics and the evolution of cooperation The authors review preferential trading agreements that manifest a regional form, such as the European Economic Community, NAFTA, and the GATT generalized system of preferences for developing countries. Such preferential trading agreements are, in their view, back in fashion, constituting a continuing menace to the liberal trading order. Since 1980, the United States has acquiesced in this development, eschewing non-discrimination (MFN) in favor of a corporate industrial policy under the mask of managed trade.

In their critique of regional agreements, the authors fail to consider the fame theoretic implications of bilateral and multilateral cooperation in a world dominated by unilateral protectionism. Evolutionary game theory has shown that, in a world of defectors, cooperation is more likely to emerge when the number of players is small. Intra-group cooperation is reinforced by external inter-group conflict. Eventually, the improved performance of local clusters of cooperators will destabilize the defection strategies that dominate the external environment. There is therefore something to be said in favor of local bilateral or multilateral arrangements, not as final and optimal solutions, but as a means for destabilizing dominant unilateral protectionism.

Changing the feasibility constraint: The case for unilateral free trade

In chapter 13, the authors consider the case for constitutional reform. They begin by showing that a great deal of political activity on international trade matters has been directed toward the limitation of individual property rights for the benefit of a select group of rent-seekers. Trade opportunities have thus withered rather than grown. The authors note the ease with which special interest interventions have been presented as public interest policymaking, and consider the relative advantages of rules versus discretion in international trade policy. They appear to conclude that the discretionary approach is too vulnerable to the political failures of endogenous policymaking, and persuasively argue in favor of a rule-based approach. The authors suggest amending the U.S. Constitution to allow for unilateral free trade, rejecting Bhagwati's cosmopolitan version of the theory of free trade and faith in GATT. In the Constitution, the authors find clear emphasis on the supremacy of individual rights over governmental powers. Yet the government, the courts, and prevailing constitutional doctrine view individual freedom to import and export as a privilege rather than a right. The authors therefore recommend that Article I, Section 8 of the Constitution (the enumerated powers of Congress) be amended to provide for the protection of the right to free trade. They suggest that "with foreign nations" be deleted from the Commerce Clause, and that a new clause be added, to wit: "The Congress shall not lay any imposts or duties, nor shall it impose any quantitative restriction on imports or exports, except what may be absolutely necessary for executing its inspection laws or for protecting national security. Nor shall Congress delegate any such authority to the president."

In this section, the authors move beyond the skepticism of the traditional public choice analyses, and embrace a more idealistic perspective of constitutional reform. The authors note that Article V provides two methods for amending the Constitution. Although recognizing the difficulties of such procedures, they recommend taking the challenge for change to the electorate, so that the United States can convert to free trade by the year 2000.

A game theoretic reinterpretation

The dimension of normative individualism introduced by the authors provides a novel perspective for appraising trade protection. The gist of their argument can be reevaluated in game theoretic terms as follows.

In the traditional approach to trade, the choice of policy by sovereign states takes the form of a noncooperative game. Despite the existence of gains from trade, each state's endogenous policymaking is affected by the lust for the potential gains which the protected industries seek to obtain through the introduction of unilateral import restrictions. The attraction of unilateral protection is complemented by the fear of suffering a unilateral disadvantage against those states that have introduced protectionist measures as part of their own domestic policy. Holding the other states' policies constant, national industries obtain positive returns from protection. The concurrent choice of trade policies by states generates strategic conditions that resemble the well-known prisoner's dilemma problem.

Bypassing the usual nationalist approach to the issue, the authors avoid the cosmopolitan trap, bringing the discussion to the important - and yet novel - dimension of individual freedom and constitutional protection. In doing so, they turn the prisoner's dilemma on its head. Once the individual right to trade is introduced into the synallagma, what appeared to be a conflict problem matures into a self-enforcing cooperative equilibrium. There is no strategic dimension in the trade choices of an individual (other than natural bargaining to obtain a better share of the contractual surplus). Instead, the Edgeworth box exchange analysis and the Coase theorem become directly applicable. Individuals would be expected to trade with foreign parties whenever it is mutually advantageous to do so, with no temptation to introduce unilateral barriers to the exchange. Any such barrier would only limit the feasibility set of the protectionist party. Just as in a case of domestic exchange, trade - rather than protection - would become a dominant strategy, and free trade would obtain in a Nash equilibrium. In sum, what in the traditional framework appears to be an insoluble conflict game would become a self-sustainable exchange equilibrium.

There remains a residual objection to the point made above. Individuals undertaking exchange choices disregard the external costs imposed on the national industries. What therefore appears as a solution to the prisoner's dilemma between sovereign states reveals yet a different strategic problem among the different constituencies operating within the nation-state. This externality argument can be shown to be hollow in two different ways:

a) First, the externality claim begs the question of how rights are allocated between individuals and the state. If individuals are originally endowed with a natural right to trade, then it would be trade protection creating the relevant externalities, rather than the other way around. In sum, any argument based on the notion of externalities is tautollogically dependent upon the underlying legal construct and could not possibly serve as its supporting rationale.

b) Second, economic analysis points - almost without exception - to the superiority of the free trade equilibrium. The redistributive effect of alternative policies and the asymmetric political influence of interest groups renders the free trade equilibrium unfeasible. A politically stable free trade equilibrium cannot be secured through Coasian bargaining because of the high transaction costs involved in actualizing a lump sum transfer from consumers to producers. The normative Coase theorem would then suggest an allocation of rights which minimizes the effect of positive transaction costs. The unilateral free trade provision envisioned by Professors Rowley, Thorbecke, and Wagner would fulfill such a requirement, securing a cooperative equilibrium.

The game theoretic dimension of the analysis which I stress here is somewhat underplayed in Trade Protection in the United States, but should nevertheless be acknowledged as an important and implicit result of the authors' work.

An alternative approach: A generality constraint on trade policy In this final section, I consider a possible constitutional alternative to the unilateral free trade amendment in the form of a generality constraint. In doing so, I concede that a revenue motivation may justify a positive amount of tariff protection. Given the need for revenue, a policymaker may legitimately optimize at the margin between alternative sources of revenue. A flat tariff approach would allow such optimization, yet disactivate the interest group pressures: a constitutional flat tariff constraint would, indeed, exclude the possibility of discriminatory protection across industries and goods. Congress would thus retain the prerogative of regulating commerce with foreign nations, but a flat percentage tariff would apply to all products and services.

Such a generality constraint would yield a superior politically feasible frontier for two reasons:

a) First, a constitutionally-imposed generality constraint on trade policy would encourage the creation of inter-industry lobbying coalitions for the pursuance of a shared protectionist agenda. The various industries would share in the benefits of their concerted efforts, yet face the full private costs of their lobbying. This, in turn, would lead to the exacerbation of the "public good" character of the commonly pursued character of the commonly pursued target, reducing the expected effectiveness of the lobbying activity.

b) Second, industrial lobbying would face much more alert and responsive public opinion when attempting to increase the level of tariff protection through political lobbying. The information costs for the general public are sensibly reduced when Congress is forced to make across-the-board tariff increases for all goods and services. This alleviates the asymmetric information and rational ignorance problems that are embedded in our political systems.

Obviously, the ease of implementation of a generality constraint heavily depends on the nature of the protectionist device. A flat tariff rule leaves little or no discretion for its implementation. Conversely, a generality constraint applied to a quota would raise problematic comparability issues. Given the availability of alternative protectionist measures, the special interest lobbies could easily find satisfaction through different - and, socially more costly - forms of trade protection. The protection is nevertheless granted, but at a higher price for society. Furthermore, the choice of a "flat" tariff across all goods and services has its efficiency costs. The "optimal" tariff which economics contemplates as theoretically possible is limited to a set of conditions (price elasticities, etc.) which, almost by definition, restrict its optimality to a fairly narrow market for goods/services. Thus, one should consider the tradeoffs between the inefficiencies induced by a hypothetical flat tariff constraint and the inefficiencies induced by the real life unconstrained political process operating under biased protectionist pressures.

3. Conclusion

The tension between efficiency and redistributive considerations, which is pervasive in most areas of policymaking, is the most explanatory variable of trade protection. Prior to Trade Protection in the United States, the determinants of such tension and the definition of its institutional forces were in real need of theoretical systematization. Recent economic and legal literature had failed to develop a coherent theory that could define the dynamic of endogenous trade policy in the face of economic welfare analysis. Too often, the existing literature suffered from an excessive degree of abstraction from the complex institutional reality of US policymaking. Additionally, the unifying rationales articulated in the political economy literature were difficult to reconcile with the peculiar realities of the international trade process.

In this respect, the public choice literature on trade protection has been substantially enriched by Professors Rowley, Thorbecke, and Wagner. Their contribution is noteworthy for adding a much needed institutional dimension to the existing literature on endogenous trade policy. The application of structure-induced equilibrium analysis is critical to an understanding of policy outcomes in this area of the law.

No prior effort had been made to revisit the intellectual basis of free trade in light of the negative constitutional rights of the individual. Trade Protection in the United States has skillfully remedied that neglect, reappraising the difficult and ideologically loaded theme of free trade through the systematic framework of constitutional political economy. This book breaks new ground in examining the possible role of constitutional rules in changing the political feasibility constraint. Policy discussion of unilateral free trade amendment will no doubt benefit from a systematic exploration of the alternative constitutional constraints, and the analysis of Professors Rowley, Thorbecke, and Wagner will surely serve as a landmark and reference point for such debate.

Acknowledgement The author would like to thank Ian Corey and Jesse Lyon for their generous research assistance.