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Toward a business-cycle model of tariffs

Published online by Cambridge University Press:  22 May 2009

Giulio M. Gallarotti
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A modified interest-group model links movements in tariffs to changes in the level of economic activity within nations. This model is introduced and tested for tariff behavior in the 19th and early 20th centuries in three nations: the United States, Great Britain, and Germany. Empirical analysis lends strong support to the model's central thesis, that tariffs are sensitive to movements within a business cycle. Tariff changes occurring in the three nations, with the exception of British tariff increases, generally conform to the expectations of the model. Furthermore, business-cycle sensitivity provides an explanation of the behavior of tariffs superior to two prominent alternatives, those based on ideology and on hegemonic stability.

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Articles
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International Organization , Volume 39 , Issue 1 , Winter 1985 , pp. 155 - 187
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Copyright © The IO Foundation 1985

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References

1. McKeown, Timothy's “Firms and Tariff Regime Change: Explaining the Demand for Protection,” World Politics 36 (01 1984)CrossRefGoogle Scholar, is the first systematic attempt to construct a business-cycle model of tariffs.

2. See, for example, Kindleberger, Charles, “The Rise of Free Trade in Western Europe, 1820–1875,” Journal of Economic History 35 (03 1975)CrossRefGoogle Scholar, and Fielden, Kenneth, “The Rise of Free Trade,” in Bartlett, C. J., ed., Britain Pre-eminent: Studies in British World Influence in the Nineteenth Century (London: Macmillan, 1969).Google Scholar

3. The best-known works of this literature include Krasner, Stephen, “State Power and the Structure of International Trade,” World Politics 28 (04 1976)CrossRefGoogle Scholar; Gilpin, Robert, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic, 1975)CrossRefGoogle Scholar; Kindleberger, Charles, The World in Depression (Berkeley: University of California Press, 1973)Google Scholar, and “Dominance and Leadership in the International Economy: Exploitation, Public Goods and Free Rides,” International Studies Quarterly 25 (06 1981)Google Scholar; and Keohane, Robert, “The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967–1977,” in Holsti, Ole, Siverson, Randolph, and George, Alexander, eds., Change in the International System (Boulder: Westview, 1980).Google Scholar

4. There are four possible outcomes in combining the two variables: hegemon-openness, no hegemon–openness, hegemon-closure, and no hegemon–closure. Since one-half of these outcomes exhibit combinations consistent with hegemonic stability theory, we should expect a success ratio of 50% if the variables are not related in any way.

5. Although one may be tempted to view a business-cycle theory as an outgrowth of recent scholarly arguments concerning the effects of industrial surplus capacity on economic policy making within nations, there are strong theoretical and analytical grounds for distinguishing between the two approaches. Notwithstanding a common dependent variable (both attempt to explain protection, although the surplus-capacity literature is often concerned with more than trade matters), surplus-capacity arguments have been developed within an analytical framework that exhibits a strong sectoral bias. The performance of specific industrial sectors is modeled as an independent variable. The business-cycle approach, on the other hand, fixes upon macroeconomic trends as a source of causation. Furthermore, the effects of surplus capacity are not formally explored within an interest-group theoretical framework. The mediating role of organized interests within the causal process is not articulated in any systematic way (i.e., direct rather than indirect effects dominate the process). Conversely, a business-cycle model posits a dominant indirect effect. Thus the model suggests that the political process leading to protection is a series of political actions (i.e., formulating and voting on tariff bills) undertaken by legislators in response to pressures from organized interests within their societies. A surplus capacity model, on the other hand, conceives of these same political actions as less dependent upon underlying societal pressures and more upon an acknowledged responsibility on the part of legislators to insure the economic viability of key sectors within their domestic economies. On the theory of surplus capacity, see Strange, Susan, “The Management of Surplus Capacity: or How Does Theory Stand up to Protectionism 1970s Style?” International Organization 33 (Summer 1979)CrossRefGoogle Scholar; Strange, and Tooze, Roger, eds., The International Politics of Surplus Capacity (London: Butterworth, 1980)Google Scholar; and Tsoukalis, Loukas and Ferreira, António da Silva, “Management of Industrial Surplus Capacity in the European Community,” international Organization 34 (Summer 1980)CrossRefGoogle Scholar. For a formal articulation and empirical investigation of the theory, see Cowhey, Peter and Long, Edward, “Testing Theories of Regime Change: Hegemonic Decline or Surplus Capacity?” International Organization 37 (Spring 1983).CrossRefGoogle Scholar

6. McKeown employs both rational-utility-maximization and satisficing theories of firm behavior.

7. For an extensive survey of the literature, see Mueller, Dennis, Public Choice (New York: Cambridge University Press, 1979).Google Scholar

8. The National Bureau of Economic Research's business annals were used in measuring the overall levels of economic activity within the three nations tested in Section 3. See Thorp, Willard, Business Annals (New York: NBER, 1926), pp. 94, 95Google Scholar. Unlike most business indexes, the business annals are not a statistical aggregation of specific time series of diverse economic processes. They provide a nonstatistical summary of business fluctuations within various nations over time. In this sense, the term “index” applies loosely. They are, however, ideal for my purposes since they attempt to be more comprehensive than the average business index in capturing movements within a national economy as a whole. On the comparison between the business annals and other indexes of business conditions, see Mitchell, Wesley, Business Cycles (New York: NBER, 1927).Google Scholar

9. The rational, unitary actor assumption is made strictly on the grounds of theoretical parsimony. It allows us to model the interaction between legislators and interest groups within a single exchange space, thus simplifying the analysis of policy outcomes. Needless to say, it abstracts substantially from the policy-making process in each nation tested in Section 3 (United States, Germany, and Great Britain).

10. Like other public-choice models dealing with the supply of government output, this model accepts the fundamental assumption that policy makers are sensitive to changes in political support. It differs from a mass-voting model (i.e., political business-cycle model) in that it assumes legislators to be sensitive only to the support of organized interests. Political support here comprises promises of future favors, votes, campaign contributions, and side payments.

11. In less abstract, political-process form, this proposed tendency of government to formulate commercial policy based upon a rational assessment of expected returns in the form of political support suggests nothing more than a propensity on the part of legislators to alienate as few organized interests as possible when formulating and voting on tariff bills. By favoring policies that minimize societal discontent, legislators assure themselves the broadest possible base of political support, which they value both for increasing their political influence while in office and for maximizing their probability of being reelected.

12. Insofar as organized interests are able to communicate their demands to legislators, the formal process of demand assessment postulated here is not far removed from the manner in which legislators are sensitized to policy preferences within their societies. A legislator will judge the extent to which groups desire a given policy by the intensity with which these groups convey their policy preferences. For example, where a substantial number of groups intensify their support for a proposed policy (i.e., sharp increase in lobbying; letters, telegrams, and petitions become more abundant), legislators will perceive society's demand for such legislation as having increased.

13. In that legislators both monitor and assess the political costs they incur in supporting specific policies, although perhaps neither as formally nor as rigorously as the abstract process articulated here, one does not deviate substantially from reality in positing the existence of policy-specific (i.e., each policy incurs specific costs) supply functions over government as a whole.

14. The shifting demand curves merely suggest that an expanding economy will cause the support for free-trade legislation to increase and become more intense over society as a whole (i.e., low-tariff groups will become more abundant and more vocal), while a stagnant economy will have a similar effect on society's support for protection. For purposes of theoretical parsimony and analytical simplicity, the model does not account for power differentials across coalition members. More specifically, it assumes that groups entering either tariff coalition possess roughly equal resources (which may be used to purchase policies) such that the voice of a coalition will be augmented by an equal amount with the entrance of each additional member.

15. Legislators, on a whole, will find the political costs of supporting free trade to be lower in an expanding economy. Since protectionist interests will be less abundant vis-à-vis freetraders, legislators will minimize their loss of political support by favoring low tariffs. As the economy experiences a downturn, however, and protectionist groups become more numerous, legislators will find it politically more costly to support low tariffs.

16. The power mechanism by which the sum of preferences is converted into policy manifests itself in a rational-exchange process. If we view the relation between competing coalitions as a balance of purchasing power (i.e., forms of payment acceptable to policy makers), the nature of this mechanism becomes clear. As the potential of any coalition to purchase a favorable policy increases with the entrance of each additional member, so does its ability to outbid the competition. Consequently, the balance of power within society will be determined by the relative sizes of the resource pools that coalitions use to bid for policy.

17. The resources that each group is willing to expend in order to pressure legislators for protection will rise in proportion to the expected gains from high tariffs. As this pressure grows (i.e., as lobbying and other forms of communication, both direct and indirect, intensify), legislators will perceive society's demand for protection as having increased.

18. The German cases before 1871 and during the Caprivi era (1890–94) are the only exceptions. Under the Zoilverein, Prussian tariff policy was generally initiated through treaties or within the institutional framework of the customs union. Consequently, major legislative initiatives from 1853 to the founding of the Empire in 1871 are lacking. Since the period is of considerable length, I coded major treaties and general Zollverein revisions rather than omit tariff data entirely. For the Caprivi era, the most important nonlegislated initiatives were coded. Because the 1890s were a turning point in the history of German tariff policy, the model must address the decade's events.

19. The sources for German tariffs were Ashley, Percy, Modern Tarff History (London: Dutton, 1911)Google Scholar; Ogg, Frederic, Economic Development of Europe (New York: Macmillan, 1920)Google Scholar; and Isaacs, Asher, International Trade: Tariff and Commercial Policies (Chicago: Irwin, 1948).Google Scholar

20. The sources for British tariffs were Ogg, , Economic DevelopmentGoogle Scholar; Isaacs, , International TradeGoogle Scholar, and Rees, J. F., A Short Fiscal and Financial History of England, 1815–1918 (London: Methuen, 1921)Google Scholar. The Acts of 1804 and 1815 did not formally alter existing tariffs. Rather, they revised the Corn Laws so as to afford greater protection to agriculture. Owing to a scarcity of observations and the fact that the Corn Laws were not functionally separable from tariff protection, these two cases were coded as increases. See Rees, pp. 32–38, and Isaacs, pp. 332, 333.

21. The sources for U.S. tariffs were Ashley, , Modern Tariff HistoryGoogle Scholar, Isaacs, , International TradeGoogle Scholar, and Taussig, Frank, The Tartff Historv of the United States, 8th ed. (New York: Putnam, 1931).Google Scholar

22. On the theory of bounded rationality, see Lindblom, Charles, “The Science of Muddling through,” Public Administration Review 19 (Spring 1959)CrossRefGoogle Scholar; Simon, Herbert, Administrative Behavior (New York: Free, 1965)Google Scholar; and March, James and Simon, Herbert, Organization (New York: Wiley, 1958).Google Scholar

23. See Taussig, , Tariff History, pp. 156, 157.Google Scholar

24. Such cross-sectional variation in economic activity may hold the key to explaining the emergence of differing commercial ideologies within the three nations. It would seem only natural for Great Britain, having experienced the longest stretch of high and moderate prosperity, to be guided by liberal policy prescriptions.

25. A similar interpretation is provided by Hoffman, Ross. See his Great Britain and the German Trade Rivalry, 1875–1914 (New York: Russell & Russell, 1964).Google Scholar

26. See Lake, David, “International Economic Structures and American Foreign Economic Policy, 1887–1934,” World Politics 35 (07 1983)CrossRefGoogle Scholar, and his “Structure and Strategy: The International Sources of American Trade Policy, 1887–1939” (Ph.D. diss., Cornell University, 1984).Google Scholar

27. The polarization of commercial policy preferences along party lines after the Civil War was especially evident during the last three decades before World War I. See Taussig, , Tariff History.Google Scholar

28. See, for example, Böhme, Helmut, Deutschlands Weg zur Grossmacht (Berlin: Kiepenheuer & Witsch, 1966).Google Scholar

29. See Böhme, Helmut, An Introduction to the Social and Economic History of Germany (New York: St. Martin, 1978).Google Scholar

30. Excellent historical accounts of this period may be found in Kitchen, Martin, The Political Economy of Germany, 1815–1914 (Montreal: McGill-Queen's University Press, 1978)CrossRefGoogle Scholar, and Böhme, Helmut, “Big Business Pressure Groups and Bismarck's Turn to Protectionism, 1873–79,” Historical Journal 10, 2 (1967).CrossRefGoogle Scholar

31. See Kitchen, , Political Economy.Google Scholar

32. See Gourevitch, Peter, “International Trade, Domestic Coalitions, and Liberty: Comparative Responses to the Crisis of 1873–1896,” Journal of Interdisciplinary History 8 (Autumn 1977).CrossRefGoogle Scholar

33. See Taussig, , Tarff History.Google Scholar

34. See Fielden, , “Rise of Free Trade.”Google Scholar

35. See Kindleberger, , “Rise of Free Trade.”Google Scholar

36. See Fielden, , “Rise of Free Trade.”Google Scholar

37. See, for example, Hibbs, Douglas, “The Mass Public and Macroeconomic Performance: The Dynamics of Public Opinion toward Unemployment and Inflation,” American Journal of Political Science 23 (11 1979).CrossRefGoogle Scholar

38. Although nontariff barriers did exist in the 19th century (e.g., health codes), their tradedistorting effects were minimal when compared to those of tariffs.