Firms, Dynamics, and Stumbling Blocks in Trade

• In Event: Lobbying and Firm Influence

Abstract

A longstanding question in the international political economy literature is whether or
not preferential trade agreements (PTAs) are “building blocks” or “stumbling blocks” in
the larger project of building a more open world trading system. This paper presents a
dynamic political economy model with three important features - heterogeneous firms,
technology-based differences in comparative advantage across countries, and fixed costs
to lobbying - that demonstrates that the impact of PTAs on demands for future protection or liberalization can be conditional on the characteristics of the parties to a given
PTA. In particular, while international competition leads to a within-industry shift in
the distribution of firms towards larger, more productive firms, when this occurs within
a PTA for countries that are otherwise at a comparative disadvantage in that industry
with respect to world markets, it can actually strengthen protectionist demands by politically empowering firms who would be threatened by extra-PTA foreign competition.

Author

• Jason Sanwalka Davis, Florida State University