By Sophie Welsh
Trade liberalization improves a country’s overall welfare in the long run, but creates winners and losers in the short run. In her policy innovations seminar, Megumi Naoi (University of California, San Diego) presented her co-authored work with In Song Kim (MIT) and Tomoya Sasaki (MIT). She began with a Coasian policy solution to “buy off” opposition to globalization, which is to redistribute income from winners to losers. This policy solution raises an empirical puzzle: protectionism has swept the U.S. and Europe, but not in Japan. What explains this variation in protectionist policy responses?
Naoi and her colleagues propose the idea of the "compensation contract,” which characterizes compensation politics as a contract between the executive (which promises compensation) and the legislature (which delivers compensation). When this contract is credible, it reduces legislators' opposition to liberalization and leads to successful ratification resulting in compensation. However, there are problems in the contract’s credibility, due to commitment problems arising from difficulties in enforcement and information asymmetry.
Naoi argues that credibility of the contract depends on the country’s constitutional structures. In parliamentary systems, there is fusion of powers between the executive and the legislature. Stronger party discipline and overlapping agents between the executive and legislature make the contract more credible. In presidential systems, the separation of powers between the executive and legislature and weaker party discipline make the contract less credible. As a result, the arena of contract enforcement takes place within a party in parliamentary systems, and on the legislative floor in presidential systems.
In turn, these political dynamics lead to different types of sectors and products which are liberalized. In parliamentary systems, contract enforcement within a party leads to liberalization and compensation in geographically concentrated sectors, which concern fewer concerned legislators. In presidential systems, liberalization and compensation take place in geographically diffused sectors, as contract enforcement on the legislative floor concerns many legislators from widespread electoral districts.
Naoi and her collaborators’ demonstrate their argument with a novel measure of crop-level, geographical concentration of agricultural commodities using remote-sensed and census-based cropland data. They also use newly collected tariff data for 237 preferential trade agreements (PTAs) signed between 1990 and 2016. As a result, their analysis compares preferential and non-preferential tariff rates at crop level for each PTA. Their research was supplemented by fifteen hours of elite interviews in Japan and the U.S. Their key findings are that countries with parliamentary systems tend to liberalize geographically concentrated crops, while those with presidential systems tend to liberalize geographically diffused crops.
Naoi highlighted sugar as a key case study. In Japan, sugarcane productin is highly concentrated in Okinawa and Kagoshima prefectures, and its parliamentary system contributed to the reduction of sugar tariffs over time. Sugarcane production is also geographically concentrated in the U.S., but its high tariffs have been maintained due to the failure of compensation contract in its presidential system.
Naoi and her collaborators’ research shows that constitutional structures powerfully shape the patterns of agricultural trade liberalization and compensation, mediated by geographical concentration of crops. It also presents an important finding for U.S.-Japan relations: the U.S. presidential system is more vulnerable to protectionist pressures, especially for geographically concentrated products. In general, parliamentary systems have an advantage of forming a compensation contract over presidential systems