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Power in international trade negotiations

Periodic Reporting for period 2 - TRADEPOWER (Power in international trade negotiations)

Reporting period: 2019-01-01 to 2020-06-30

The TRADEPOWER project investigates various aspects of international trade negotiations and trade agreements. Its main expectation is that the rise of global value chains (GVCs) has led to significant changes in trade policy and politics, which ultimately causes a shift in countries’ bargaining power.

The first step in the argument is that GVCs alter the trade preferences of economic actors. To assesses this expectation, we conducted a survey of interest groups active on trade policy. This survey, which we fielded in spring 2019, received responses from 691 organizations from across the globe. Following much of the trade policy literature, the preferences of these economic actors should be reflected in the preferences of decision-makers. We tested this expectation by examining how domestic pressures affect the attitudes of members of national parliaments towards trade liberalisation across nearly all Latin American countries.

Via the change in trade preferences, GVCs then should alter the bargaining power of countries in trade negotiations. To study this aspect, the project uses such diverse measures as stock market reactions to the signing of trade agreements, tariff concessions, and the contents of preferential trade agreements (PTAs).

The project is relevant for society for several reasons:
- First, trade policy has consequences for most people, whether directly (e.g. when imports displace jobs) or indirectly (e.g. when protectionist measures increase consumer prices in a country). Thus, citizens, aware or not, are affected by trade policy in their daily lives and well-being. Understanding why we observe certain policies over others has broad implications for democracy.
- Second, the question of bargaining power in international negotiations is highly pertinent at a moment when we see a general shift in the international balance of power. How does the growing importance of countries such as China matter for trade negotiations? How good are the success chances of the strategy of the current US administration to put pressure on third countries to open their markets? How will the United Kingdom fare in its trade negotiations with the EU? These are just some of the questions to which the current project speaks.
- Third, many important trade negotiations are currently ongoing. Concretely, the EU engages in negotiations with the US and the UK. Broad public interest exists in these negotiations. The present project can contribute to a better understanding of them.
The project studies the various steps linking global value chains (GVCs) and power in international trade agreements: from the trade preferences of economic actors, via the preferences of decision-makers, to the consequences of trade agreements and what this means for bargaining power.

Starting with the question of trade preferences, the project has used data on the extent and speed of tariff cuts at the product level to see whether and how GVCs affect the preferences of economic actors. Moreover, in spring 2019 we carried out a survey of organizations on their trade policy views. The survey allows us to get experts’ perceptions of trade negotiations and trade agreements. Having contacted 2,841 business associations, professional associations, labour unions, and NGOs across the globe, we received responses from 691 organizations. A report that summarizes the key findings from the survey is available at http://tradepower.sbg.ac.at/survey_report.html.

We combine this survey data with data from the groups’ twitter profiles in order to map and measure their positions on trade issues. Using sentiment analysis, a form of quantitative text analysis, we try to measure the sentiments behind tweets, with the aim of assessing interest groups’ positions on trade policy. This mixed-methods approach allows us to get a more comprehensive picture of how interest groups form trade preferences.

Furthermore, we analyzed decision-makers’ preferences to better understand how the preferences of economic actors are translated into trade policies. For this task, we made use of interview data with 3,150 legislators from 15 Latin American countries over the period 2005-2017. We also estimated a measure of the economic competitiveness of electoral districts in Latin America. The resulting paper finds that legislators from districts that are competitive in manufacturing are more supportive of trade agreements than legislators from non-competitive districts. This suggests that competitive economic actors lobby their legislators for trade liberalization, whereas non-competitive actors lobby for protectionism.

We also assess the impact of PTAs on both trade and foreign direct investment flows. For both cases, our innovative approach is to look at the heterogeneous effects of PTAs: different provisions in PTAs have different effects for different actors. Some provisions in trade agreements increase, others reduce trade; and the same is true for foreign direct investments. A further, by now well-known effect of trade agreements is that they redistribute income, making some better and others worse off. We tackle these distributive effects by analysing stock market data. Firms that benefit from a PTA should see their market value increase as the PTA becomes more probable, whereas firms that lose from a PTA should see their market value decrease in the same situation. One key finding that has emerged from this research is that (among stock market listed companies) relatively smaller firms tend to reap bigger gains from the negotiation of PTAs than relatively larger ones.

Our research also directly tackles the question of power in trade negotiations. For this, we draw on data on tariff concessions, intellectual property rights provisions in PTAs, and the design of joint bodies that oversee the implementation of agreements. Power turns out to matter for most of these outcome measures.

During the second half of the project duration, we want to expand our research in several ways. Concretely, we aim at combining our data on economic actors with public opinion data, allowing us to better understand the demand side of trade policy. Moreover, we plan a survey of Latin American decision-makers that will shed new light on questions addressed in this project. Currently, we are working on the survey instrument for this part of the project.
The project has already made considerable progress beyond the state of the art. Specifically, we now have a better understanding of the relationship between GVCs and economic preferences. Our research clearly shows that GVCs matter for the economic preferences of economic actors, but they do so in a complex matter. In general, we can expect economic actors involved in GVCs to prefer freer trade, but there are some exceptions to this.

Moreover, our research has shed new light on the trade attitudes of legislators. Having been able to link these attitudes to the economic competitiveness of electoral districts is a major piece in the causal chain linking lobbying to political outcomes.

Our research on the effects of PTAs confirms existing findings concerning the heterogeneous effects of trade. It goes beyond the state of the art, however, in providing a very detailed analysis of which provisions increase trade. It also sheds novel light on how bargaining power matters for trade policy outcomes.
Views on the role of market size in international trade negotiations. Source: TRADEPOWER survey.
Views on the role of reciprocity in international trade negotiations. Source: TRADEPOWER survey.