Labor Versus Capital in Trade-Policy Determination: The Role of General-Interest and Special-Interest Politics

Abstract

Trade policy depends on the extent to which the government wants to redistribute income as well as on a country's overall factor endowments and their distribution. While the government's desire to redistribute income itself is dependent on asset distribution, it is to a large extent also driven by the partisan nature of the government, i.e., whether it is pro-labor or pro-capital. Using cross-country data on factor endowments, inequality and government orientation, we find that, conditional on inequality, left-wing (pro-labor) governments will adopt more protectionist trade policies in capital-rich countries, but adopt more pro-trade policies in labor-rich economies than right-wing (pro-capital) ones. Also higher inequality is associated with higher protection in capital-abundant countries while it is associated with lower protection in labor-abundant countries. These results are consistent with the simultaneous presence of both general- as well as special-interest politics as determinants of protection within a two-factor, two-sector Heckscher-Ohlin framework. Overall, various statistical tests support an umbrella model (that combines both the general-interest as well as special-interest models) over each of the individual models.