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Divided government and U.S. trade policy: theory and evidence

Published online by Cambridge University Press:  22 May 2009

Susanne Lohmann
Affiliation:
Assistant Professor of Political Science at the University of California, Los Angeles.
Sharyn O'Halloran
Affiliation:
Assistant Professor of Political Science and Public Affairs at Columbia University, New York.
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Abstract

If different parties control the U.S. Congress and White House, the United States may maintain higher import protection than otherwise. This proposition follows from a distributive politics model in which Congress can choose to delegate trade policymaking to the President. When the congressional majority party faces a President of the other party, the former has an incentive to delegate to but to constrain the President by requiring congressional approval of trade proposals by up-or-down vote. This constraint forces the President to provide higher protection in order to assemble a congressional majority. Evidence confirms that (1) the institutional constraints placed on the President's trade policymaking authority are strengthened in times of divided government and loosened under unified government and (2) U.S. trade policy was significantly more protectionist under divided than under unified government during the period 1949–90.

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Copyright
Copyright © The IO Foundation 1994

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References

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7. The literature on the “new institutionalism” is often, and perhaps narrowly so, identified with the congressional dominance hypothesis. Recently, a number of scholars have modified the congressional dominance hypothesis to take into account the President's veto powers. See, for example, McCubbins, Mathew, Noll, Roger, and Weingast, Barry, “Structure and Process; Politics and Policy: Administrative Arrangements and the Political Control of Agencies,” Virginia Law Review 75 (03 1989), pp. 431–82CrossRefGoogle Scholar; and Kiewiet, D. Roderick and McCubbins, Mathew D., The Logic of Delegation: Congressional Parties and the Appropriations Process (Chicago: University of Chicago Press, 1991)Google Scholar.

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11. This concept of universalism does not exclude the possibility that the district-specific benefits enjoyed by any one district are outweighed by the total costs incurred by that district.

12. The Folk Theorem applies to a situation in which the members of Congress can vote indefinitely on a sequence of proposals. This theorem implies that the set of proposal and voting strategies described above is sustainable as a Nash equilibrium for some set of beliefs about punishment strategies. Clearly, the equilibrium characterized above is only one out of multiple belief-driven equilibria.

13. While we do not explicitly model the role of party in Congress, our main results are robust with regard to the possibility that members of the majority party partially or fully exclude members of the minority party from distributive logrolling.

14. An assumption that politicians can “solve” collective dilemmas by credibly committing to institutions is standard in institutional design models. This assumption is critically reviewed in Bendor, Jonathan and Lohmann, Susanne, “Institutions and Credible Commitment,” mimeograph, Graduate School of Business, Stanford University, 02 1993Google Scholar.

15. We find this assumption more plausible than the alternative assumption that the status quo is maintained if the President's proposal is voted down. Moreover, this assumption allows us to view the congressional dominance hypothesis as a special case of our model. If Congress constrained the President's powers by making presidential proposals subject to an open rule vote, the President's discretionary powers would fully unravel due to the subsequent amendment activity. The resulting outcome would correspond to the one that is implemented in the congressional dominance game.

16. This constraint eliminates undesirable voting equilibria of the following type. Suppose all legislators believe that a proposal will pass by more than one vote so that no legislator can affect the outcome by changing his vote. As a result, each legislator is indifferent between voting for or against any proposal, and one proposal may in fact pass although a majority would be better off if it failed, and vice versa.

17. In the presence of partisan conflict, it is plausible that the members of the majority party might exclude members of the minority party from the distributive logrolling process or constrain them to propose lower levels of protection. The main conclusions of our article hold for both the universalistic and majoritarian logrolling processes.

18. This theorem applies to our setting, since we assume that Congress can vote indefinitely on a sequence of proposals.

19. In equilibrium, a legislator who is indifferent between voting for or against the President's proposal is assumed to vote in favor of the proposal. An equilibrium in which an indifferent legislator votes against the President with strictly positive probability does not exist unless the equilibrium concept is extended to that of ε-equilibrium. See Friedman, James W., Game Theory with Applications to Economics (New York: Oxford University Press, 1986)Google Scholar.

20. Proposition 4 suggests that a President is either equally or more constrained under divided than under unified government, depending on the severity of the externalities. The severity of externalities across districts is not obviously empirically observable or easily measured. However, we can examine the joint hypothesis that the externalities are not too severe (γ is not too large) and that the President is more constrained under divided than under unified government. This joint hypothesis would be empirically supported by evidence showing that the President was in fact more constrained under divided than under unified government. If the evidence suggests that the President was equally constrained under divided and unified government, such evidence would be inconsistent with the joint hypothesis but not necessarily with proposition 4. The null hypothesis that unified versus divided government does not matter would not be rejected only if the President turned out to be less constrained under divided than under unified government.

21. See Baldwin, Robert, Trade Policy in a Charting World Economy (New York: Harvester Wheatsheaf, 1988), p. 28Google Scholar.

22. For a more detailed discussion of the evolution of U.S. trade institutions, see O'Halloran, Politics, Process and American Trade Policy.

23. See Baldwin, Trade Policy in a Changing World Economy.

24. The statement in proposition 5 is conditional on the parameters γ and m being “not too large.” Given the problems inherent in determining whether this condition is empirically fulfilled, we test the joint hypothesis that the externalities are not too severe, that the size of the majority party in Congress is not too large, and that U.S. trade policy tends to be more protectionist under divided than under unified government. This joint hypothesis would be empirically supported by evidence suggesting that U.S. trade policy was in fact more protectionist under divided than under unified government. If instead U.S. trade policy turned out to be equally or less protectionist under divided than under unified government, such evidence would be inconsistent with the joint hypothesis but not necessarily with our model.

25. See Takacs, Wendy, “Pressure for Protectionism: An Empirical Analysis,” Economic Inquiry 19 (10 1981), pp. 687–93CrossRefGoogle Scholar; Gardner, Grant W. and Kimbrough, Kent P., “The Behavior of U.S. Tariff Rates,” American Economic Review 79 (03 1989), pp. 212–18Google Scholar; and Magee, Stephen, Brock, William, and Young, Leslie, Black Hole Tariffs and Endogenous Policy Theory (New York: Cambridge University Press, 1989)Google Scholar.

26. For industry-level studies, see Pincus, Jonathan J., “Pressure Groups and the Pattern of Tariffs,” Journal ofPolitical Economy 83 (08 1975), pp. 757–78CrossRefGoogle Scholar; Caves, Richard E., “Economic Models of Political Choice: Canada's Tariff Structure,” Canadian Journal of Economics 9 (05 1976), pp. 278300CrossRefGoogle Scholar; Ray, Edward John, “The Determinants of Tariff and Nontariff Trade Restrictions in the United States,” Journal of Political Economy 89 (02 1981), pp. 105121CrossRefGoogle Scholar; Marvel, Howard and Ray, Edward, “The Kennedy Round: Evidence on the Regulation of International Trade in the United States,” American Economic Review 73 (03 1983), pp. 190–97Google Scholar; Baack, Bennett D. and Ray, Edward, “The Political Economy of Tariff Policy: A Case Study of the United States,” Explorations in Economic History 20 (01 1983), pp. 7393CrossRefGoogle Scholar; Lavergne, Real, The Political Economy of U.S. Tariffs: An Empirical Analysis (Toronto: Academic Press, 1983)Google Scholar; and Baldwin, Robert, The Political Economy of U.S. Import Policy (Cambridge, Mass.: MIT Press, 1985)Google Scholar. For a voting behavior perspective, see Coughlin, Cletus, “Domestic Content Legislation: House Voting and the Economic Theory of Regulation,” Economic Inquiry 23 (07 1985), pp. 437–48CrossRefGoogle Scholar; Baldwin, Trade Policy in a Changing World Economy; Marks, Stephen and McArthur, John, “Empirical Analyses of the Determinants of Protection: A Survey and Some New Results,” in Odell, John and Willett, Thomas, eds., International Trade Policies (Ann Arbor: University of Michigan Press, 1990)Google Scholar; and Lutz, James M., “Determinants of Protectionist Attitudes in the United States House of Representatives,” International Trade Journal 5 (1991), pp. 301–28CrossRefGoogle Scholar.

27. Two alternative tariff measures are commonly used: an unweighted average tariff rate or an average tariff rate weighted by the share of each dutiable import. These measures ignore duty-free imports and thus exaggerate the impact of rate changes and understate the impact of coverage (goods affected by tariffs) changes on the total value of imports. The import-share-weighted average used in our analysis is sensitive to changes in share weights and to changes in tariff rates. See Gardner and Kimbrough, “The Behavior of U.S. Tariff Rates.”

28. Most studies that incorporate estimates of nontariff measures into the analysis use the number of actions before the International Trade Commission (ITC) as a dependent variable; see Goldstein, Judith and Lenway, Stefanie Ann, “Interests or Institutions: An Inquiry into Congressional-ITC Relations,” International Studies Quarterly 33 (09 1989), pp. 303–27CrossRefGoogle Scholar; Hansen, Wendy, “The International Trade Commission and the Politics of Protection,” American Political Science Review 84 (03 1990), pp. 2146CrossRefGoogle Scholar; and Moore, Michael O., “Rules or Politics? An Empirical Analysis of ITC Anti-dumping Decisions,” Economic Inquiry 30 (07 1992), pp. 449–66CrossRefGoogle Scholar. One problem with such analyses is their pooling of data across periods characterized by significant changes in the institutional arrangements underlying ITC decisions. Other studies calculate NTBs in terms of coverage. The dependent variable is whether an industry is covered by a nontariff measure. Usually, studies employing this measure are cross-sectional or they compare the change in an industry's coverage from one period to the next. Using estimates of industries covered by nontariff measures, several authors find that tariff and nontariff barriers are largely complements and are shaped by similar forces. These preliminary findings suggest that our analysis should hold for NTBs; see Ray, “The Determinants of Tariff and Nontariff Trade Restrictions”; and Marvel and Ray, “The Kennedy Round.”

29. These measures are similar to those used by Magee, Brock, and Young in Black Hole Tariffs; and by Bohara, Alok and Kaempher, William H., “A Test of Tariff Endogeneity in the United States,” American Economic Review 80 (09 1991), pp. 952–60Google Scholar.

30. Bohara and Kaempher, “A Test of Tariff Endogeneity in the United States.”

31. Our model is based on the assumption that the legislature is unicameral, but it could be extended to incorporate the bicameral structure of Congress. In this extension, the House and Senate might strike a bargain under split partisan control of Congress. It is reasonable to assume that the outcome of this bargain would lie between the two houses' most preferred outcomes. As a practical matter, policy outcomes depend on the interaction between Congress and the President and thus on the presence of unified, split, or divided control of government. Making this distinction allows us to use the variability in our data set.

32. Fuller, W. A., Introduction to Statistical Time Series (New York: John Wiley Press, 1976)Google Scholar.

33. Two additional tests for a unit root, one that incorporates a time trend and the other that incorporates a time trend and the possibility of drift have estimated t statistics of –2.57 and –1.36, respectively. As reported by Fuller, the critical values for these tests are –2.93 and –3.50; see his Introduction to Statistical Time Series. Again, we cannot reject the null hypothesis of a unit root.

34. This result is consistent with the findings of Gardner and Kimbrough, who also find support for the hypothesis that the tariff has a unit root and is a stationary process after differencing. See Gardner and Kimbrough, “The Behavior of U.S. Tariff Rates.”

35. MacKinnon, James, “Critical Values for Cointegration Tests,” in Engle, Robert and Granger, Clive W. J., eds., Long-run Economic Relationships: Readings in Cointegration (London: Oxford University Press, 1991)Google Scholar.

36. In Black Hole Tariffs, Magee, Brock, and Young use only midterm administration data; we expand their data set by using annual data.

37. Bohara and Kaempher, “A Test of Tariff Endogeneity,” find similar results.

38. We conducted a number of sensitivity tests to examine whether our results are robust with regard to different specifications of the conflict measure; for example, we examined the consequences of distinguishing only between unified versus divided government. These variations led to qualitatively similar results.

39. For a discussion of linear restriction tests, see Johnston, John, Econometric Methods (New York: McGraw-Hill, 1984)Google Scholar.

40. These authors suggest that Republican presidents tend to employ disinflationary monetary and fiscal policies. As a result, Republican administrations are more prone to experience recessions that in turn give rise to protectionism; see Magee, Brock, and Young, Black Hole Tariffs. However, as shown in Table 7, the negative sign on PRESIDENT remains even when we control for economic conditions.

41. Mayhew, David, Divided We Govern: Party Control, Lawmaking, and Investigations, 1946–1990 (New Haven, Conn.: Yale University Press, 1991)Google Scholar.