American presidents strategically delay their reaction to violations of international trade rules so as to maximise their chances of remaining in office. That is the central finding of research by Paola Conconi, David DeRemer, Georg Kirchsteiger, Lorenzo Trimarchi and Maurizio Zanardi, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016.
Looking back through all US trade disputes since 1995 – when the World Trade Organization (WTO) was established – their study finds that disputes spike during re-election years. The chances of these disputes being tilted towards the interests of a swing state (seeking to protect a local industry) also increase by up to 25%.
For example, the Obama administration knew that China had been paying allegedly illegal subsidies to its car industry since 2009, but only filed a WTO dispute in 2012. And given that litigation costs of trade disputes can run into several million dollars, US presidents may choose to only complain about violations that hurt key industries in swing states, while violations that involve other industries may go unpunished.
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As the debate rages over pending mega-regional trade agreements, now is a good time to consider how well existing trade rules are enforced. Unfortunately for industries affected by violations of such rules, there is no benevolent attorney in the World Trade Organization (WTO) that prosecutes every case in timely fashion.
The scarcity of legal and administrative resources for trade litigation leaves these dispute decisions ripe for manipulation. The politicisation of trade enforcement is most easily studied in the WTO''s most frequent complainant, the United States, where the power to bring disputes rests solely with the US Trade Representative appointed by the president.
The presidential re-election campaign is the natural place to start looking for the strongest influence of politics on US engagement with the WTO dispute settlement. Looking at the trade disputes filed by the United States strongly suggests that President Barack Obama and President George W. Bush manipulated the timing of the disputes for political purposes.
President Obama''s administration filed a dispute against export subsidies for Chinese car parts just two months before his re-election. Several media reports noted that Obama touted this dispute while campaigning in Midwestern swing states like Ohio, whose automobile industry stood to benefit from the dispute. The Economist called it ''a suspiciously timed dispute''.
As for President Bush, his administration filed a famous dispute on behalf of Boeing against the European Union for subsidising Airbus in October before his re-election. The dispute led his 2004 electoral opponent, Senator John Kerry, to remark in the third Presidential debate that ''[Mr. Bush] discovered Boeing during the course of this campaign after I''d been talking about it for months.''
These anecdotes led these researchers to seek out more systematic evidence for how politics influences filings of WTO disputes. They begin their study by simply plotting trade disputes filed by the United States since the WTO''s inception in 1995. As shown in Figure 1, a striking pattern emerges: the number of disputes peaks in the re-election year of all three US presidents in the sample; in contrast, there is no clear pattern in disputes during each president''s lame-duck second term (and this is the case also for the years during President Obama''s second mandate).
Aside from dispute timing, the study also finds evidence that the incidence of trade disputes is tilted toward the interests of industries concentrated in swing states. The effects of electoral incentives that the study measures are statistically significant and quantitatively large. The probability that a dispute is filed in a re-election year while favouring a large industry in a swing state is 18-25% higher than the probability of a dispute being filed in other years while involving other industries.
Why could trade disputes be useful policy tools for presidents seeking votes? The researchers propose that the crucial element is the reciprocity of voters: voters feel grateful and want to reward politicians who have conducted policies favourable to industries important to them, but they may feel angry and want to punish politicians who have chosen unfavourable policies.
Such reciprocal behaviour from voters is consistent with recent empirical and experimental economic findings. For example, a study by economists Frederico Finan of the University of California, Berkeley and Laura A. Schechter of the University of Wisconsin, Madison find that politicians in Paraguay targeted favours to voters who were more likely to respond reciprocally.
The new study suggests that US presidents may strategically delay their reaction to violations of international trade rules, so as to maximise their chances of remaining in office. Trade violations may thus be left in place to serve electoral purposes, while damaging the domestic economy and weakening the WTO rule of law.
For example, the Obama administration knew that China had been paying allegedly illegal subsidies to its car industry since 2009, but only filed a WTO dispute in 2012. And given that litigation costs of trade disputes can run into several million dollars, US presidents may choose to only complain about violations that hurt key industries in swing states, while violations that involve other industries may go unpunished.
Paola Conconi, David DeRemer, Georg Kirchsteiger, Lorenzo Trimarchi and Maurizio Zanardi (2015): ''Suspiciously Timed Trade Disputes'', Centre for Economic Policy Research working paper 10582.
