District heterogeneity shapes trade policy through legislative bargaining
A new working paper from the Federal Reserve Bank of Richmond models how diverse economic structures of Congressional Districts aggregate into national trade policy through legislative bargaining. The research addresses a gap in canonical political economy models by providing a supply-side explanation of trade policy formation.
Legislative bargaining shapes national tariffs
Canonical political economy models of trade, such as Grossman and Helpman (1994), largely overlook the crucial role of district-level interests in determining trade policy in Congress.
These models primarily focus on the demand side of protection, where organized interests influence policy through contributions.
However, empirical estimates for the United States suggest that organized interests have limited influence on tariff outcomes, motivating the need for a supply-side theory.
This working paper addresses this gap by formalizing the supply side of trade politics, modeling policymaking as a process of legislative bargaining among representatives of heterogeneous districts.
The framework replaces the unitary government concept with a legislature composed of districts, each with distinct production structures and welfare weights.
This approach aims to provide a unified and tractable analytical framework that integrates political and economic geography into trade policy determination.
Expanding the bargaining framework
The new framework expands on existing legislative bargaining models, particularly Celik et al. (2013), by incorporating several key advancements.
It allows districts to exhibit heterogeneous production patterns, potentially producing multiple goods, a departure from complete specialization.
The model also introduces flexible welfare weights across specific and mobile-factor owners, capturing differential political influence at the district level.
Each district's unilateral preferred tariff schedule is derived from a welfare-maximization problem, yielding closed-form solutions.
The legislative bargaining solution, representing the enacted tariff, is expressed as a convex combination of coalition members' preferred tariffs, with bargaining weights determined by participation constraints.
The paper differentiates between one-shot and dynamic bargaining environments, with implications for agenda setters' ability to implement ideal policies.
Geography and power in trade
This research offers a compelling supply-side lens to understand trade policy, moving beyond traditional demand-side explanations.
Its core insight—that geographic production concentration dictates political influence in legislative bargaining—is particularly relevant for explaining the limited impact of interest groups in the U.S. The model provides a robust framework for analyzing historical events like the 'China shock,' highlighting how institutional structures can shape national policy outcomes.