3 Trade: Preferences and Interest Groups

 

How do nations decide what and to what extent they should engage in trade with other nations? Centuries of economic theory have argued about the features and drawbacks of international trade. Key concepts like absolute advantage and comparative advantage tout the benefits of specialization and trade, as nations may stand to gain more from trading than they would producing all their goods independently, but the benefits of trade are not evenly distributed within nations, leading to complex economic, social, and political dynamics that influence nations’ trade decisions. In this chapter, we will introduce the basic concepts of international trade and unpack the impact of interest groups on trade policy.

Models

Absolute and Comparative Advantage

Adam Smith, known as the “Father of Modern Economics,” observed the rapid economic development of the United Kingdom and Western Europe and developed the theories of trade preference and interest groups, of which he elaborated upon in his Magnum Opus, The Wealth of Nations. Within this work, Smith examined the concept of labor division and specialization, emphasizing its significance in economic progress. Smith correctly highlighted that the division and specialization of labor are crucial for the growth of a modern economy (see Rassekh 2015). As workers become increasingly specialized and proficient in detailed roles, productivity and efficiency soar. Smith also applied the logic of specialization of labor to countries and the core of his logic is now identified as absolute advantage.

In basic terms, absolute advantage describes the ability of one nation to produce more of something than another nation can, given the same resources. For example, if you imagine that (given the same amount of coffee beans, workers, and hours) Ethiopia can produce four cups of coffee to every one cup of coffee produced in India, then Ethiopia has absolute advantage in coffee production. An alternative concept, comparative advantage, takes opportunity cost into account, which is what is being given up in order to produce something. Using the same example, by spending all that time and energy making four cups of coffee, Ethiopia might be unable to produce two cups of tea, while India can make coffee without giving up their ability to make tea. When a nation has a lower opportunity cost for making a product, it is said that that nation has comparative advantage.

Another vastly influential Enlightenment thinker, David Ricardo, deserves credit for developing the logic of comparative advantage. Ricardo’s theory is often lauded as the logical backbone for the free trade argument, from its inception over 200 years ago to today. From Ricardo, we can glean some key insights into how, when, and how much countries should trade with each other. Ricardo based his theory on the difference between nations’ opportunity costs, which he saw as the driving factor for free trade, as well as how specialization is determined within countries. Furthermore, Ricardo’s model was based upon the Labor Theory of Value, which counts labor as the most important means of production. Ricardo’s theory of comparative advantage would go on to influence the economists Hecksher and Ohlin, who bring the discussion of comparative advantage to the modern day and provide us with the key framework of understanding the existence of trade preferences and special interest groups and why they play a pivotal role in the makeup and trajectory of modern economies.

The Heckscher-Ohlin Model

The Heckscher-Ohlin Model (H-O model) was developed by the Swedish Economist Eli Hecksher near the turn of the 20^th century and was expanded upon by his student Bertil Ohlin at the Swedish School of Economics. Seeing the ever-changing socio-economic landscape of Europe at the time, Hecksher sought to re-evaluate the works of Smith and Ricardo towards the now heavily capital-intensive markets of Europe at the turn of the century. Following Ricardo’s thoughts on comparative advantage, the H-O model’s basic principle is that all countries have finite resources of factors like land, labor, and capital.

 

In international trade, each country has a comparative advantage that is developed from creating products that disproportionately use its most abundant resource. In this system, when nations specialize, trade should benefit all nations taking part, as it makes better use of their resource endowments. However, the theory’s predictions often contradict real-world trade patterns. For example, while the United States, an extremely capital-intensive market, more often exports labor-intensive products, only about half of capital-abundant nations overall export capital-intensive products. While some of this discrepancy can be accounted for by a lack of trade between “Global North” and ”Global South” nations until recently, much of it can be explained by trade preferences between that “Global North” grouping, which includes many European nations and the United States, among others.

The Specific Factors Model

The Specific Factors Model is best understood as a synthesis between the Ricardian Theory and the H-O model. The way the Specific Factors Model works is similar to the Ricardian Comparative Advantage Theory in that this model assumes that a country that produces two or more goods can adequately allocate labor between the production of these two different goods. However, unlike the Comparative Advantage Theory, the Specific Factors Model incorporates other factors outside of labor, in line with the H-O model, if they are specific to one or two goods. The key assumptions or predictions drawn from the Specific Factors Model is that trade will occur when relative prices differ—countries will trade whatever goods they can produce the most cheaply. Most importantly to the discussion of trade preferences, specific factors in export sectors can lead to a win for exporting countries while those in importing countries can lose because of those factors.

Why Does It Matter?

Even though these theories are not always correct when it comes to real-world trade patterns, they are useful to students of international political economy because they help us to understand how trade politics might take shape. Heckscher-Ohlin suggests that trade politics should be defined by factor-based coalitions, with abundant factors lobbying for openness and scarce factors lobbying for protection. Specific factors instead expects trade politics to divide according to sectoral lines, with globally competitive factors lobbying for openness and uncompetitive ones lobbying for protection.

Understanding the role of special interest groups is essential in comprehending the complexities of international trade dynamics. As these groups often have significant power and influence over trade policies, their interests and preferences shape trade patterns and economic relationships; it is such that trade preferences and special interest groups are inherently intertwined. These groups lobby for preferential treatment or protectionist policies to benefit their industries, and in reverse, trade preferences can shape the interests and strategies of special interest groups, as they seek to take advantage of preferential trade agreements or alliances.

Trade preferences and special interest groups play significant roles in shaping trade policies and influencing trade patterns and economic relationships between nations. By considering the interplay between these factors, we can gain a more comprehensive understanding of why international trade often deviates from the predictions of trade models and how trade preferences and special interest groups impact global trade dynamics.

Interest Group Formation

Trade Preferences

The benefits of international trade are not distributed evenly across different groups within nations; even within those groups, economic logic may not be the only consideration in forming opinions on optimal trade policy. As such, trade preferences, or which trade policies groups desire, can often seem incongruent with what economic models predict should be the case, like the United States’ departure from the H-O Model’s predictions. Do note, however, that trade preferences are not static, and can change over time due to political shifts, attitudinal changes, or external shocks. Russia’s 2022 ground invasion of Ukraine, for example, dramatically shifted NATO allies’ preferences against trading with Russia, for more security and geopolitical reasons than purely economic.

Many economists argue that free trade is the best way to promote economic growth and development. Many have begun to argue and support for temporary protections to help developing countries. These protections are seen as a guideline for these developing nations as they attempt to build their own industries, something that will explored more in-depth later in this text. Others argue that certain industries may require subsidies to maintain competitiveness. At the same time, economists also acknowledge that there are situations where trade preferences and interest groups need to be considered. Governments around the world have taken a variety of approaches to dealing with trade preferences and interest groups. Some have begun implementing protectionist policies to support domestic industries. Others have sought to reduce barriers to trade and increase market access. Over the years the support for the trend towards bilateral and regional trade agreements that attempts to balance interests has increased.

Preferences and interest groups in trade are central topics in international political economy (IPE) and have gained increasing attention in recent years. This surge in interest can be attributed to the fact that trade has become a key driver of economic growth, prosperity, and development in the global economy. The potential for some industries or groups to gain an advantage over others is a fundamental issue in IPE. Today, these issues are being studied and addressed by researchers.

Trade preferences are significant in building a useful model for understanding how countries interact economically and why there are hindrances to global free trade. Trade agreements are established based on trade preferences, and these agreements can shape the flow of goods and services between countries and impact trade patterns and economic relationships. The disparate benefits of trade may lead to certain segments of the population favoring reduced barriers while others fight to keep them: agricultural protectionism, for instance, often arises as a result of farming lobbies looking to protect domestic industry from lower-priced foreign competition. Political considerations may also influence economic ones. A diaspora group within a society that has maintained friendly ties to their first nation, for example, may lobby in favor of a Preferential Trade Agreement (PTA) or other form of economic alliance with that homeland. A political group that is in favor of conflict with another nation for various reasons may push against opening trade with it. Still other groups may have trade preferences that are completely divorced from their personal economic impact, due to a lack of information on the relationship between policy and their material circumstances.

Interest Groups

When trade preferences and interests are manifested in the international political economy, they take on different forms. Interest groups are prevalent actors in IPE, particularly in the context of international trade. These groups, which represent a wide range of economic sectors, industries, and businesses, frequently exercise substantial sway and may even have a greater effect on trade policy than individual states.

Interest groups take the policy preferences of individuals in society and organize to represent their views and advocate for policy shifts. These groups could include businesses, labor unions, environmental organizations, and many more. Interest groups aim to influence government policies that affect their members by lobbying policymakers, contributing to political campaigns, producing public information campaigns, sponsoring research, and a variety of other activities. Interest groups can be small or large; the most influential often have access to significant financial resources, extensive networks, and specialized knowledge, which can increase their impact on the policymaking process.

One example of this is the Corn Laws enacted in Britain in 1815, which were protectionist tariffs on grain from outside Britain. Landowners supported the laws because they allowed them to charge higher prices for their grain, benefiting from reduced international competition. In contrast, non- landowners had to pay higher prices for grain products like bread and opposed the laws. Eventually, due to organizational efforts by opponents of the laws known as the Anti-Corn Law League, they were repealed in 1846. This example illustrates how economic situations and comparative advantages lead to preferences, which lead to policy that impacts preferences, leading to new policy.

Interest groups play an incredibly important role in free markets: as a collective that either gains or losses from the distributional changes of trade policy, and therefore, have a strong interest in how legislation comes into being both domestically and internationally. Interest groups can provide a pathway for individual citizens to organize and attempt to make their needs, views, and ideas known as a collective with pooled resources and connections. They use their preferences to help manufacture outcomes within an interaction and analyze those in order to achieve best-case scenarios. There are both winners and losers of economic policy changes: an agricultural tariff might benefit producers, keeping their incomes high and sustaining demand for domestic farming, but it may also hurt consumers, who face rising food prices and decreasing access to fresh produce. Trading oil and gas may benefit drivers with lower prices and automobile manufacturers with increased demand, but it may also fund authoritarian regimes and cause environmental degradation.

While interest groups bring individuals together to advocate for their desired policies, they are not without fault. Interest group influence may be seen as undemocratic, in the way that political lobbying is criticized, as some groups may have more access and influence than others. Oil executives may be better positioned to access the U.S. Congress than a university’s pro-environmental sustainability student club. Groups can also suffer from collective action problems – like free-riding, where coordinating and mobilizing members to act on an issue when they believe others would act for them may be difficult. Collective action in IPE is an expansive field of study in its own right; interested readers may review Peinhardt and Sandler 2015 in the Works Cited below for a more thorough study. It is essential to analyze the different types of interest groups and understand how they represent and advocate for their members’ preferences, as well as evaluate the advantages and disadvantages of their influence in the international political economy.

It should now be apparent to the reader that trade preferences and interest groups are enormously important when understanding both the way in which states engage in trade globally as well as internally, not to mention the longstanding effect both trade preferences and special interest groups have on political and social systems within nations. These concepts will first be discussed at the macro level, before being broken down to their most fundamental theories: first, let us look at the types of interest groups and how trade preferences appear in practice.

Interest Group Mechanics

Variation in Interest Groups

Interest groups vary from corporations to loosely organized community groups and have long been involved in international affairs. While the terms interest groups and special interest groups can be used interchangeably, interest groups, in contrast to special interest groups, carry a connotation of a broader range of constituencies that advocate for specific interests or causes. Special interest groups tend to have a more specific connotation in the sense that they advocate for a more narrowed and specialized set of interests. A type of special interest groups would be single-issue groups, which, as per their name implies, are interested in advocating exclusively for a specific issue.

Despite the wide variety of interest groups, such as economic, government, ideological, business, religious, and civil interest groups, they all aim to take on an active role in policy influence. Labor unions, for example, actively represent their members’ interests, predominantly seeking to address concerns relating to labor rights, working conditions, and economic equity. The influence of labor unions on policy is substantial. Their capacity to mobilize workers, combined with their collective bargaining power, gives them a significant influence over labor-related policies. In addition, they frequently engage in lobbying efforts with policymakers, actively participate in elections, and provide support to candidates who prioritize the rights and interests of workers, which further gives labor unions the ability to directly impact decision-making processes at multiple tiers of government.

Interest groups can pursue variation in their approaches to achieving their advocacy goals and influence policy based on their given access to resources, information, organizational capacity, and strategies, which therefore impacts their effectiveness. The differentiation in resources of interest groups highlights disparities on their level of policy, public, and legal influence. Special interest groups, particularly in capital-intensive markets, play a crucial role in shaping international trade policies. These business groups, typically composed of powerful corporations, lobby for preferential legislation and trade policies to protect or expand the markets they are involved in.

It’s crucial to understand that interest groups are distinct from political parties and are not necessarily democratic or republican institutions. While they have the potential to represent certain segments of society, they do not always reflect the will of the majority. In many cases, influential interest groups tend to consolidate power among well-established minority entities or corporations, rather than representing the broader population. When interest groups strive to exert political sway, and both bureaucrats and politicians alike are motivated to establish connections with groups that possess valuable resources, it is reasonable to anticipate that interest groups endowed with corporative resources prioritize a strategy of targeting bureaucracy. This approach can be utilized by interest groups both in the public and private sector. It reflects an interaction of mutual benefit between interest groups and state actors based on the exchange of resources, which creates a privileged and institutionalized integration of interest group influence in public decision-making (Binderkrantz, 2008).

The diversity of interests includes public interest groups, which tend to advocate for a range of societal issues and include environmental, humanitarian, government accountability and transparency groups, and so on. The commitment of public interest groups to advance the greater benefit of the public, as opposed to serving the interests of constituencies, is the defining characteristic that distinguishes them from other types of interest groups. As their focus is public interest, these groups tend to employ strategies which cater to public opinion and influence public discourse on policy issues by using publicly visible indirect strategies to shape political agendas and achieve policy influence (Binderkrantz, 2008).

Trade Preferences and Interest Groups

The importance of interest groups is evident in almost every piece of legislation passed domestically. Tariffs, foreign policy, elections, and many more aspects of a governmental organization are defined by interest groups and their preferences. In global trade, Interest groups and their preferences play a central role in deciding how tariffs and regulations are decided by governments. Often, the argument between liberalization and protection becomes a priority and leads to both “winners” and “losers” of certain policy changes. For example, a nation and relevant interest groups may prefer democratic partners instead of authoritarian regimes and state-owned entities, which may lead to tariffs on non-democratic nations and trade agreements between more politically aligned countries. For certain sectors, this is considered a loss as that trade partner could have been integral to their production needs. For some groups, this helps strengthen their position in a once tighter market or helps them push their political agenda further. This can also lead to large-scale issues as trade preferences, pushed by interest groups, may isolate or anger another nation, leading to retaliatory tariffs and further polarization. Smaller nations with less negotiating capital to offer may find it hard to compete globally as interest groups will have their preferences focused on more robust economies that offer higher volume and more potential as a preference-receiving nation. It’s important to note that there are also issues related to the domestic production of items when preferences are given to foreign countries. If, for example, preferences are given to Haitian manufactured apparel, it results in a production adjustment domestically. In addition, in the long term, the sector may become vulnerable to supply disruptions, natural disasters, and geopolitical turmoil involving Haiti.

As free markets have progressed, interest groups have less room for leverage as regulations and tariffs have lessened overall. While free trade has historically been regarded as the optimal solution, developments in preferences and interest groups make it difficult to achieve a level playing field. Specifically, preferences and interest groups can create inefficiencies that can undermine the benefits of trade liberalization.

Such distributional conflicts can happen in a variety of ways, including through subsidies, tariffs, and other forms of protectionist policies implemented by governments. By leveraging their political influence, resources, organizational capacity, and strategies, interest groups can sway policymakers and mold the development of trade policy in a manner that prioritizes their respective interests. For instance, when manufacturers advocate for tariffs on imported goods and farmers advocate for agricultural subsidies, the resulting regulations could lead to increased consumer costs, lower quality goods, and decreased competition within the domestic industry.

However, even if interest groups possess significant resources, why should policymakers listen if free trade benefits the national interest? Although free trade may ultimately be advantageous for the nation as a whole, policymakers may still be receptive to the opinions of interest groups that have the capacity to mobilize local communities, provide information and expertise, and offer electoral support. An example of this occurrence can be seen in the instance of soy and corn farmers in Iowa, who retain a significant influence over energy consumption and food availability in North America through their lobbying efforts.

In industries that are concentrated in certain regions, interest groups are able to exercise an outsize influence mainly due to their ability to locally mobilize. Consequently, although these industries constitute a relatively minor portion of the overall national economy, they have a disproportionately significant economic and political influence at the local level. In democratic systems, control of the national government is often determined, at least in part, by control of local elections. This can be seen in the US, which has Congress and the electoral college, and the UK, who elects the Prime Minister through control of seats in Parliament.

Furthermore, while the benefits of free trade generally tend to be experienced diffusely by the whole nation through lower cost of goods and greater variety in goods, the costs tend to be concentrated and experienced more intensely through lost jobs, capital flight, etc. This makes individual voters unlikely to predicate their vote on promoting trade liberalization, as the relatively small personal economic benefits are likely outweighed by other concerns. Conversely, while certain policies can benefit the overall economy, the effect may not always yield best results on a microeconomic level when considering individual actors, such as workers or households. Thus, those who stand to lose from free trade are much more incentivized to vote to protect their interests, even if that group is much smaller compared to the national population of consumers.

Special interest groups wield considerable influence over policy due to their representation of easily mobilized voting blocs. While these groups may seem politically insignificant on a national scale, they can swing local elections, thereby impacting national politics. Consequently, policymakers are incentivized to heed the demands of special interest groups, even when they conflict with the broader national interest, such as in the case of free trade, because the economic benefits of free trade often fail to garner significant local support.

When considering trade preferences and interests through the lens of developing nations versus developed nations, each has distinct trade preferences in the scope of the international network, and these preferences are shaped by their unique challenges and position in the global economy. Developing countries often rely on international trade as a crucial source of jobs, economic growth, and poverty reduction; their trade preferences typically revolve around gaining access to new and profitable markets and promoting export-oriented industries so that they may take advantage of any natural resources they have access to.

At the same time, developing countries and their interest groups may also have interests in protecting their domestic markets and industries from competition, safeguarding their agricultural sectors, and promoting domestic value-added activities. Developing countries may use trade policy measures, such as tariffs, quotas, and export restrictions, to protect their domestic markets or industries from import competition and promote their domestic production. This is often driven by the need to safeguard domestic employment in order to protect small and medium-sized enterprises and preserve food security. For example, many developing countries impose tariffs or non-tariff barriers on agricultural products to protect their domestic farmers from competition with heavily subsidized agricultural products from developed countries.

Developed countries have their own distinct trade policy preferences, usually looking to drive economic competitiveness and prioritize political interests. This can entail aiming to secure access to new markets, reducing trade barriers, and optimizing regulations to secure the flow of investments. These countries will seek to gain preferential treatment in their trade agreements and are often able to do so due to their prominent position in the IPE.

Strategic considerations also play a large part in shaping the trade preferences of the interest groups of developed countries. They seek to strengthen their geopolitical influence and promote their values and norms, while countering the influence of other countries. They can use regional trade agreements as a tool for diplomatic engagement and alliance building. The EU has often done just this, as a part of its broader foreign policy objectives to promote stability, security, and prosperity in its neighborhood.

The possibility of trade disputes between nations is another problem connected to trade preferences and interest groups. Tensions can arise between trading partners when one nation’s interest group is given preference over another. This may result in punitive actions like tariffs, which may then intensify into trade wars. The global economy, as well as businesses and communities that depend on international commerce, can be significantly harmed by such disputes.

Despite their far-reaching goals and interests in global affairs, developed countries must maintain respect for domestic political considerations. Governments and interest groups face pressure from internal stakeholders such as domestic industries, labor unions, and civil rights groups, which leads them to consider these preferences and seek to include provisions in trade agreements that address these political concerns. For example, labor and environmental standards, intellectual property rights, and investor-state dispute settlement mechanisms are often contentious issues in regional trade agreements involving developed countries

Conclusion

Nations’ decisions to engage – or not to engage – in trading goods with other nations are based on a variety of factors, with economic interests and interest groups alike playing significant roles. The classic economic arguments in favor of specialization and free trade, absolute advantage and comparative advantage, demonstrate how international trade can be mutually beneficial and make production more efficient worldwide. The H-O Model goes further in explaining national trade preferences, though there are significant exceptions.

While nations stand to gain as a whole from international trade, the benefits of that trade are not distributed evenly within nations, with “winners and losers” alike being impacted by policy changes. Winners may benefit from more open trade in certain sectors, like the consumer facing lower grocery prices when foreign agricultural imports are allowed to compete on the open market; losers, like the domestic farmer unable to compete with imports, may advocate more protectionist policies instead of reducing barriers to trade. Those individuals with distinct preferences for trade policy can come together as a collective to advocate for certain policies, leading to the formation of interest groups.

It is certainly important to determine what interest groups are more likely to be effective in advocating for their preferred policies. Larger groups have more collective action issues, as organizing more competing interests requires overcoming more obstacles, but firms generally have fewer issues than consumers. Protectionist interests tend to be advocated for by specific domestic business interests because those businesses benefit from reduced international competition. Consumers tend to benefit from free trade, which results in lower prices from more competition. However, protectionist measures and policies tend to be advantaged or overrepresented in policy, as firms frequently excel at advocating compared to consumer groups because they possess better financial resources, organizational capacity, and the power to influence governmental decisions. The continuing progression of globalization and the increase or decrease in connectivity will also lead to changes in preferences from every interest group. In studying trade preferences, it is important to note that outcomes are not indicative of individual actor preferences but rather the confluence of preferences from all involved actors.

While this discussion has outlined some of the optimal decision making for interest groups and countries in specific situations, it is important to note that not all act in their own best interests when faced with the global arena of trade; whether it be through inefficiencies, a lack of expertise in political decision making, or the distorting pressures of interest groups, many actors end up losing through trade. The following section will elaborate on these concepts and provide a framework for explaining the tiered outcomes of trade.

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