Essays on the Political Economy of Protection and Industrial Location

Abstract: This thesis consists of three essays in the fields of the political economy of international trade.Location Equilibrium with Endogenous Rent Seeking:This paper analyzes the location of manufacturing activities when regional policy is determined by endogenous rent seeking. Once lobbying for government transfers to regions is included in an economic geography framework with size asymmetries, the standard prediction that the larger region becomes the core when trade barriers are reduced no longer holds. The establishment of manufacturing production in the economically smaller region is increasing in the level of regional integration once trade becomes freer than a certain threshold value. When free trade prevails, the relocation of industry takes place up to the point where there are as many firms operating in the South as in the North. Furthermore, lobbying slows down the agglomeration process, whereas the home market magnification effect (Baldwin, 2000) becomes weaker.Endogenous Tariff Formation and the Political Economy of Trade Retaliation:This paper extends the notion of endogenous tariff formation under representative democracy by allowing for strategic interaction between governments. The model developed suggests that the ideological distribution in the electorate within a country affects the tariff setting behavior among its trading partners. The equilibrium tariffs in a country depend on the trade policy preferences of the ideologically neutral voters among such partners as well as on the distribution of their sector-specific factor ownership. Ideological shifts in the population which systematically alter the political power of different voter groups, or types of factor owners, in one country thus influence the tariff setting behavior in competing trading nations.On the Indeterminacy of Trade Policy under Different Electoral Rules:Current research has found ambiguous results with respect to the effects of the type of electoral regime on trade policy. The present paper proposes a solution to this indeterminacy. It is shown that the equilibrium level of trade protection can be relatively higher, as well as lower, under a majoritarian electoral rule compared to proportional representation. The framework developed in this paper thus includes as special cases earlier models reported in the literature. The equilibrium outcome is shown to depend on the number of voters in swing districts who own a factor specific to the exporting industry in relation to those who possess claims to the specific input employed by the import-competing sector. Using a cross section of countries, empirical evidence is consistent with this hypothesis.