Suspiciously timed trade disputes: How politics influences WTO enforcement

Paola Conconi, David DeRemer, Georg Kirchsteiger, Lorenzo Trimarchi, Maurizio Zanardi

Economic cycles patently influence politics. This column explores an unexplored avenue of political economy research by assessing whether US politicians file international trade disputes to win votes. It turns out they do. This means that disputes might be brought earlier or later than they otherwise would – potentially costing lots more than they should – and that violations in industries that are deemed unimportant by electioneering politicians go unpunished.

Politics can play a substantial role in the enforcement of international trade rules. Because dispute settlement is a costly process, governments face limitations on which trade rules they can enforce. For example, according to Bown (2009) some disputes within the World Trade Organization (WTO) involve litigation costs exceeding $20 million. The incentives for politicians to file trade disputes crucially affects which trade rules are enforced and when.

The timing of trade disputes filed by US presidents is suggestive of how politics influences trade enforcement. In 2012, The Economist observed a “suspiciously timed dispute” filed by Barack Obama against Chinese car part exports, which benefited the automobile industry in the “crucial swing state” of Ohio, less than two months before his re-election (The Economist 2012). Trade disputes also figured prominently in earlier presidential elections. In 2004, George W Bush initiated consultations with the EU over alleged subsidies of Airbus, leading challenger John Kerry to remark during their third presidential debate, “[t]his president didn’t stand up for Boeing when Airbus was violating international rules and subsidies. He discovered Boeing during the course of this campaign after I'd been talking about it for months”. Motivated by these anecdotes, in a recent study we examine the impact of re-election motives on the filing of trade disputes (Conconi et al. 2015).

Evidence of re-election and swing state effects on WTO disputes

An initial look at the data already suggests the importance of electoral incentives. Figure 1 reports the number of trade disputes filed by the US since the establishment of the WTO in 1995. While there is no clear pattern in disputes during the second term of each president (in which term limits prevent re-election) the dashed lines show an increasing trend during the first term (in which re-election is still possible).

Figure 1. WTO disputes filed by the US, by year of presidency

In addition to the timing of disputes, we can also consider how electoral incentives affect the composition of disputes, exploiting the fact that industrial employment and electoral incentives vary across the 50 US states. We categorise disputes based on whether they target industries that are among the largest employers in swing states in the presidential election. Descriptive statistics show that the incidence of disputes is nearly twice as large in these industries.

Our empirical analysis provides systematic evidence for the importance of both the re-election year and swing state effects. We conduct a panel study examining the incidence of WTO disputes filed by the US in a given year and industry. We employ different econometric methodologies, control for the national importance of industries, include time effects (for presidents or presidential terms), and account for the potential influence of macroeconomic conditions. We find that US presidents are more likely to file trade disputes during their re-election year and to target industries that are important to swing states in presidential elections. The probability that a dispute is filed in a re-election year and targets a swing industry is between 18 to 25% higher than the probability of a dispute being filed in other years and targeting other industries.

Our paper is related to previous studies that emphasise the importance of electoral incentives for trade policy choices. The fact that US presidents are more likely to file trade disputes when they are close to facing re-election is reminiscent of another paper which I co-authored (Conconi et al. 2014) that finds that election proximity makes US senators less supportive of trade liberalisation reforms. The finding that US trade disputes tend to target industries that are important in swing states is consistent with Muûls and Petropoulou (2013), who show that non-tariff trade policies respond to the interests of swing states.

How voters’ reciprocity can affect trade disputes

Why would politicians file more disputes in re-election years and in electorally close states? In our paper, we provide an answer based on the reciprocity of voters, who want to be (un)kind to an (un)kind politician. Recent empirical and experimental evidence supports the idea that voters behave reciprocally (e.g. Finan and Schechter 2012). They feel grateful and want to reward politicians who enact policies favourable to them, but they may feel angry and want to punish politicians who have chosen unfavourable policies.

We have developed a model based on the theoretical literature in which agents exhibit intrinsic reciprocal preferences (e.g. Rabin 1993, Dufwenberg and Kirchsteiger 2004, Falk and Fischbacher 2006). There are three key actors:

The incumbent politician;

A challenger; and

The median voter.

Politicians serve one-period terms and can only be re-elected once. In the first period, the incumbent decides whether to file a dispute. At the end of this period, the voter decides whether to elect the incumbent or the challenger. In the second period, the elected politician decides whether to file a dispute, if it was not filed prior to the election. Politicians are motivated by being elected into office and, all else equal, prefer not to file the trade dispute. The voter has an ideological preference for one of the candidates and prefers the filing of the trade dispute.

We first show that, if voters have standard preferences, they will choose between the incumbent and the challenger based on their ideological preferences. In this case, politicians will never file a trade dispute, even if they are office motivated and know that voters would like a dispute to be filed. This is because, if voters are fully rational, their decisions are unaffected by whether or not a politician has a filed a dispute. When instead voters are motivated by reciprocity, the incumbent will file a dispute to increase his chance of re-election, provided that the voter's ideological preference for either candidate is sufficiently small. This result is in line with our empirical finding that disputes tend to be targeted toward industries important to swing states.

Implications for WTO enforcement

Our analysis has broad implications for the effectiveness of WTO rules.

The fact that US presidents tend to file disputes when they are close to facing re-election suggests that politicians may delay a dispute to maximise their chances to retain office. For example, as pointed out in The Economist article above, the Obama administration waited until September 2012 to file a complaint to the WTO against China for unfairly subsidising car-part exports, even though it knew for years about these subsidies.1 The cost of this delay can be substantial, also due to the fact that the WTO offers no retrospective compensation for violations.

According to our theoretical model, WTO commitments will not always be enforced, since filing trade disputes is costly. Our empirical results on the composition of trade disputes suggest that certain violations of WTO rules, which involve industries that are not important for politicians’ re-election, are more likely to go unpunished.

References

Bown, C P (2009), Self-Enforcing Trade, Brooking Institution Press: Washington.

Conconi, P, D DeRemer, G Kirchsteiger, L Trimarchi, and M Zanardi (2015), “Suspiciously Timed Trade Disputes”, CEPR Discussion Paper 10582.

Conconi, P, G Facchini, and M Zanardi (2014), “Policymakers' Horizon and Trade Reforms: The Protectionist Effect of Elections”, Journal of International Economics 94: 102-118.

Dufwenberg, M, and G Kirchsteiger (2004), “A Theory of Sequential Reciprocity”, Games and Economic Behavior 47: 268-298.

The Economist (2012), “Chasing the anti-China vote: A suspiciously timed dispute,” 22 September.

Falk, A, and U Fischbacher (2006), “A Theory of Reciprocity”, Games and Economic Behavior 54: 293-315.

Finan, F, and L Schechter (2012), “Vote-buying and Reciprocity”, Econometrica 80: 863-882.

Muûls M and D Petropoulou (2013), “A Swing State Theory of Trade Protection in the Electoral College”, Canadian Journal of Economics 46: 705-724.

Rabin (1993). “Incorporating Fairness into Game Theory and Economics”, American Economic Review 83: 1281-1302.

Footnote

As stated in the US Trade Representative Press Release of 17 September 2012, “[China] made at least $1 billion in subsidies available to auto and auto-part exporters in China during the years 2009 through 2011”.