Domestic Political Institutions - Coursework Example

Domestic Political s Trade policies and tariffs are important in enhancing protection or free trade ininternational economics. The state or domestic politics play a crucial role in shaping the outcomes of such trade policies and tariffs. Political factors determine economic relations among different countries of the world. Domestic politics are primary over economics. It involves pursuing state interests by influencing what is happening in the market. it is important to understand the linkage between domestic political institutions changes in trade policies because this helps in determining the dynamic movements of supply and demand of trade policies. Some of the trade policies that are used to promote or restrict free trade include import tariffs, export taxes, subsidies, licensing and quotas (Frieden et al 2010, p.45). Generally, politics play a crucial role in influencing trade policies and tariffs because political factors affect economic practices. Domestic politics influence these outcomes by restricting or increasing free trade. For example, certain types of tariffs imposed by the domestic political class limit imports of essential raw materials as suggested by the mercantilist theoretical approach. Exports of raw materials and technology may also be discouraged through domestic politics seeking which may include various trade policies and tariffs. Industrial nations pursue protectionist policies to safeguard their infant industries. However, when the industry is strong enough, domestic political institutions try to pursue free trade in order to encourage international business relations for economic interdependence and growth. Domestic political institutions also limit the range of goods that need protectionism and the size of tariff applied. However, protectionism needs to be temporary. According to mercantilists, trade policies can be developed to create competitive advantage (Cohen & Lipson 1999, p.67). Domestic political institutions influence such outcomes by encouraging tariffs that will increase revenues for their political and economic interests. Engaging in trade policies and tariffs therefore increases the survival of domestic political institutions. According to Jo (2006, p.97), trade policies enhance distributional benefits for domestic political institutions and groups. The decisions of a state to enter free trade will therefore depend on distributional consequences of trade policies. Trade policies affect the interests and preferences of various groups. For instance, free trade benefits those who own abundant factors and harm those who own scarce factors. On the other hand, protection benefits those who own limited factors and hurt those who own abundant resources. In this case, domestic political institutions decide on whether to pursue protectionism or free trade based on the abundance of factors. This factor model generally states that the trade policy preferences of domestic political institutions depend on relative factor endowments of countries. The sectoral model suggests that import industries tend to support protection while export industries support free trade. In this case, political institutions make their preferences on trade policies and tariffs based on the kind of industries operating in their countries. For example, import tariffs are imposed on imports into a country. Although this may raise revenue for the government, it may raise costs of imports; hence importers will oppose such a tariff. The government may also offer subsidies as a trade policy for exporters it can make significant benefits for export groups to partner countries (Jo 2006, p.98). However, such subsidies may be opposed by domestic political groups which consider them to be against their interests. There is also the aspect of competition from various domestic political interest groups which influence trade policies of the government. The domestic political institutions determine the interest group whose preferences should be translated into trade policies. Political leaders and their political supporters also depend on their ideological orientations to influence trade policies and tariffs (Hody 1996, p.345). For instance, political groups that support increased revenue from tariffs and import taxes encourage protection trade policies while the political groups which support free trade encourage subsidies and joining trade organisations. The type of regime in a given country also influences the preferences of domestic political institutions. In a democratic nation, the domestic political institutions are likely to support freer trade by reducing trade tariffs, quotas and taxes, while at the same time encouraging trade policies that support free trade including subsidies. This is due to the need by democracies to support trade cooperation. On the other hand, autocratic countries are likely to implement trade policies that support protectionism. Furthermore, hegemony causes powerful states to promote trade liberalization policies across the world; hence reduced hegemony encourages protectionism. Neo-liberalists also support trade policies that encourage cooperation among nations by minimizing collective action problems (Simons 2000, p.824). Therefore, in this case domestic political institutions affect decision making over trade policies. According to Milner (1999, p.106), political domestic institutions provide political leadership which plays a crucial role in trade-policy decision making and structuring of preferences on trade policies of specific countries. The decisions of political leaders regarding trade policy within a given country cause electoral and distributional consequences. Therefore, selecting a specific type of trade policy depends on the interests of political leaders in domestic political institutions. For example, the decision to join a trade agreement is a trade policy which depends on the benefits and costs of joining the trade agreement as perceived by the various political groups. Political leaders attempt to pursue trade policies that will favour the interests of their constituents so that they can retain their political positions. Domestic political institutions serve to please their electoral coalitions for political survival. This survival largely depends on successful performance of the domestic political institutions. Leaders of a winning coalition are able to maintain their political positions in office by winning the loyalty of enough people. Therefore, even if government policies fail essential supporters of the winning coalition are expected to maintain their loyalty to the leading political group as long as their private interests are achieved (Dai 2002, p.76). Political leaders may allocate political resources into private goods; hence policy performances may not influence their political survival. In this case, political leaders may offer subsidies as a trade policy to support private goods in order to win the loyalty of the winning coalition. In democracies, policy performances are likely to influence the survival of political leaders. In this case, domestic political institutions provide good policy for their citizens. More resources are allocated for the production of public goods. This requires good trade policies such as those that support free trade. For example, the trade policy of joining trade agreements such as WTO and PTA will be received well by the public because it leads to trade creation and enhances U.S. hegemony (Gaubatz 1996, p.109). Domestic politics are also said to be at play when industries support PTAs so that they can get a good access of foreign markets and expand their market shares. Domestic political institutions drive trade policies that encourage participation in Preferential Trade Area (PTA) because it leads to economies of scale. Domestic firms are also motivated by the privilege of accessing larger markets than those they currently have in order to become more competitive in such third markets as well as the domestic markets. Industries support PTAs over subsidies because they believe that retaliation will be minimized through PTAs than government subsidies. Democratic regimes support effective PTAs because it allows effective trade between the member countries without retaliation from domestic political institutions (Gaubatz 1996, p.112). PTAs can also be used to promote domestic reforms. Protectionism in form industrial tariffs and import taxes enhance strategic positioning of domestic industries and companies. It also enhances superiorly structured positions in the domestic political system. Pressure from interest groups and interests of domestic political institutions explain why protectionism is preferred by some nations. Jo (2006, p.106) suggests that policy decision makers face a lot of pressure from domestic political groups to provide import protection through import tariffs and quotas. One of the trade policies through which governments encourage protection of domestic industries is joining a PTA whose members have industries that do not rival each other. This may occur when economic conditions are bad, e.g. during recessions. These forms of PTAs also allow the government to deal domestic political pressures for protection by restricting imports (Jo 2006, p. 106). During recessions PTA among members of GATT and WTO also offer protection benefits to domestic groups as opposed to providing unilateral trade barriers such as quotas and tariffs. In conclusion, it is clearly important for protection and free trade to be enhanced through various tariffs and trade policies in order to meet the interests of domestic political groups. Domestic political institutions have their interests to protect, which they use to put pressure on the government to develop appropriate trade policies. PTAs, industrial/export tariffs and import taxes regulate the amount of trade among countries in order to meet the interests of domestic political institutions depending on the prevailing domestic economic conditions of countries. References list Cohen, B. J., & Lipson, C. (1999). Issues and agents in international political economy. Cambridge, Mass: MIT Press. Dai, X. (2002). Political Regimes and International Trade: The Democratic Difference Revisited. American Political Science Review, 96(1), 159-165 Frieden, J.A., Lake, D.A., & Broz, J.L. (2010). International political economy: Perspectives on global power and wealth. New York: W.W. Norton & Co. Gaubatz, K.T. (1996). Democratic States and Commitment in International Relations. International Organization, 50(1), 109-139. Hody, C. A. (1996). The politics of trade: American political development and foreign economic policy. Hanover: Dartmouth College. Jo, J.I. (2006). The Link between Domestic Political Institutions and Commitments to Tariff Reduction Agreements. The Korean Journal of International Relations, 46(5), 95-113. Milner, H. (1999). The political economy of international trade. Annual Review of Political Science, 2:91-114. Simmons, B. (2000). International law and state behavior: commitment and compliance in international monetary affairs. American Political Science Review, 94, 819-35. UCTAD (2013). Non-Tariff Measures to Trade: Economic and Policy Issues for Developing Countries. New York: United Nations. Read More