The politics of fair exchange

How is a country's trade policy determined? This is an important question for anyone concerned with trade policy issues. Economists, who take a sceptical view of political systems and their ability to serve the common good, often emphasise the power of sectional interests. Political scientists attach more importance to the decision-making institutions themselves but consider these as enjoying a high degree of independence from voters. A third view is that trade policy is ideologically determined, chiefly by whichever economic doctrine has the political ascendancy at any time. This too diminishes the role of voters, who are assumed to have few ideas of their own and are thus reduced to choosing between the various options on offer at any time.

Daniel Verdier, a political scientist at the University of Chicago, in a thought-provoking investigation into the nature of the process, Democracy and International Trade, challenges all three dominant paradigms. His argument is that in democracies voters are important, and that to leave them out of the picture is like "leaving soldiers out of the study of war". Much of the literature pertaining to the subject of voter control attaches either too much or too little importance to voters, says Verdier. The mandate theory, for example, overplays the role of the voter: most voters choose personalities and ideologies rather than programmes.

By way of contrast, the free-agent theory reduces voters merely to choosing agents, who may fail to represent their true interests. Verdier sees the voter as indirectly controlling the making of trade policy by setting the rules whereby elected representatives make policy. First, through elections, voters force political parties to rank issues in order of importance, thus emphasising those issues which are salient. Second, by forcing parties to expend greater efforts on particular issues, voters establish a high quorum for issues of concern, thus reducing the scope for rent-seeking by sectional interests. The process of electoral control is seen as following a pattern of election-as-delegation.

In the first part of the book, Verdier sets out a novel framework for explaining how trade policy is determined. At different times the process belongs to four different types of process, namely, party politics, executive politics and two variants of pressure politics, the competitive and the log-rolling. Next, the process indirectly determines trade policy orientation (for example free trade versus protectionist). Finally, the process directly determines the policy tools employed (for example tariffs, quotas, export subsidies, etc).

The second part of the book seeks to apply the theoretical framework to the history of trade policy in three countries, the United States, France and Britain, since 1860. This is fascinating. Verdier contrasts the triumph of free trade in Britain until the First World War with the drift into protectionism in the US and later France. His argument is that these differences were not so much a reflection of a different economic reality (British industrialists were clamouring for protection from foreign competition as early as 1880), as of differences in the policy process. Specifically, free trade triumphed in Britain because it found an institutional vehicle in Gladstone's Liberal Party, which helped to engineer a shift from pressure politics to party politics.

In a similar way, Verdier explores the reasons for the different responses of the three countries to the economic crisis of the interwar years.

Why did the US (and to a lesser extent France) adopt a free trade policy when Britain preferred protectionism? Verdier looks to the changes in voter alignments which took place following the failure of economic policies in all three countries. In the US and France, the right was discredited, whereas in Britain it was the left. Where the left took power, trade policy moved in the direction of free trade; where the right took power, policy drifted towards protectionism.

Verdier sees the first 20 years of the postwar period as reflecting the triumph of executive politics in the face of a security threat from the Soviet Union. The establishment of the GATT is seen effectively to have removed tariffs and quotas as policy tools from the public policy toolbox. Their place was taken by other measures, such as retaliation against so-called unfair trading, non-tariff barriers and public subsidies to industry. The US preferred to work within the GATT framework but Britain and France were less able to do so and instead sought to create a new policy arena while working within the GATT. But this took different forms in the two countries. In France, due to the political dominance of capital over labour, pressure politics prevailed, while in Britain the strength of the labour movement ensured that trade policy remained within the realms of party politics. In France, trade policy took the form of government intervention: the product of a close relationship between business and government. In Britain, business-government relations were more distant, and so intervention did not follow the French model.

The economic crisis of the 1970s and early 1980s led to a discrediting of the Keynesian methods of intervention involving industrial policy, sectoral targeting and the promotion of national champions. The right enjoyed periods of dominance in all three countries, with ramifications for trade policy. In Britain and France, there was a swing from governmental involvement to disengagement but in the US there was no trend towards more laissez-faire; if anything, US trade policy became more protectionist. This was not because the economic crisis was felt any more intensively in the US, according to Verdier, but because the trade policy process in the US remained linked to the security issue and was therefore less affected by the partisan realignment taking place. In Britain and France, by contrast, party politics dominated the period. There was an end to corporatist bargaining in Britain and the state assumed a changed role in France.

This begs the question as to whether the collapse of the Soviet Union and the disappearance of the security threat could see the end of executive politics in the trade arena. In an interesting epilogue, Verdier disagrees. He believes this could happen only if party politics were to assert itself sufficiently in the US.

Verdier has produced an impressive study of the making of trade policy in three leading countries over the past 100 years. While not rejecting existing theories, he successfully challenges attempts to explain trade policy in terms of single factors. Political scientists will love this book and historians will find much in it to hold their attention. Economists are strongly advised to take note of it, lest they are too easily persuaded to dismiss the contribution of political processes to trade policy-making.

Nigel Grimwade is head of the department of economics, South Bank University.