Abstract
We construct a game theoretic model that offers to explain the increase in trade protectionism as a rational reaction of the voters to their increased concern that the policy choices of their governments are being influenced by international actors. More specifically, we construct a small open economy in which the citizens declare their most preferred tariff rate on an import good to their government. While the government has incentive not to deviate too much from the publicly demanded tariff rate, its final decision is determined after bargaining with a foreign lobby which offers benefits to the government in return of lowered tariffs. We show that the expectation of such foreign influence affects the citizens’ voting behavior. Namely, they tend to vote for more protectionist policies. Moreover, this behavior leads to an increase in benefits by the foreign lobby to the government.
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Notes
The European Union imposed a \(25\%\) duty on a range of US products worth USD 3.2 billion, which came into force in the same month. The US Administration in turn initiated a new investigation of automobile and auto parts imports to determine their effects on national security, hinting at the possibility of a \(20\%\)-\(25\%\) tariff increase.
A dramatic example is the extent of sovereign power the IMF exercized when it declared in 1992 that Yugoslavia had ceased to exist and allocated the assets and obligations of the new states created by its dissolution (Franck 1995).
For simplification, we assume that the benefits are not redistributed among voters. Yet, as discussed in the Conclusion, assuming otherwise does not qualitatively affect our results.
Additional to always choosing core allocations (and hence, satisfying Pareto optimality and individual rationality), the Walrasian rule satisfies a range of fairness axioms, including no-envy in trades, equal treatment of equals, and equal opportunities (Thomson 2011).
We interpret voting as any form of communicating a person’s response to a given policy proposal whether through the ballot, letters to political representatives, participation in political meetings, or public demonstrations.
A preference relation on the tariff rate is single-peaked if there is an optimal or peak tariff rate \(t^p \in [0,1]\) so that for \(t<t'<t^p\) or \(t>t'>t^p\), \(t'\) is strictly preferred to t.
We will later make a distinction on voters’ preferences on the real tariff rate (that is, the implemented tariff rate) versus their preferences on the tariff rate that will be declared to the government. For the latter, the decl subscript will be used.
A specific functional form such as \(G(t,B;t_{decl})=-(t_{decl}-t)^{\gamma }+B,\) where \(\gamma >1\) would be an example. Also note that the functional form can be altered to \(G(t,B;t_{decl})=g(t-t_{decl})+\alpha B\) for any \(\alpha >0\).
Even though the foreign lobby’s payoff is a function of \(t_{real}^f\), for ease of exposition we use F(t, B), even though a more appropriate notation would be \(F(t,B;t_{real}^f)\) as in the case of G.
A specific functional form such as \(-(t-t_{real}^{f})^{\varphi }-B\), where \(\varphi >1\), would be an example for the first part of F.
We discuss this point further in the Conclusion. A key observation is that, the bargained benefits increase in the public declaration \(t_{dec}\), as we state at the end of this section.
Since, z is not necessarily concave, neither is \(W^{i}\).
In fact, if a sophisticated government has the means to manipulate the declared tariff rate itself, it will choose an ever higher tariff rate than the one declared by the median voter. We will, however, not consider this possibility.
Note that the high-tariff median voter never has an incentive to imitate the low-tariff one. The case where no type has an incentive to imitate the other is simple and out of the scope of this paper.
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Kıbrıs, A., Kıbrıs, Ö. & Gürdal, M.Y. Protectionist demands in globalization. Rev Econ Design 26, 345–365 (2022). https://doi.org/10.1007/s10058-021-00275-2
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DOI: https://doi.org/10.1007/s10058-021-00275-2