Business Lobbying and Trade Governance

The Case of EU-China Relations

Jappe Eckhardt

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781137325433
• eBook ISBN: 9781137325440
• Topic: Politics & International Relations
• Subtopic: Asian Politics
• Index: Politics & International Relations

This book provides an innovative account of how the globalization of production and the emergence of global value chains impacts on trade preferences, lobby strategies and the political influence of EU firms. It sheds new light on the complex EU-China trade relations.

1

Business Lobbying and EU Trade Governance in a World of Global Value Chains

In the last two decades, we have witnessed important changes in the world economy, in particular, in the fields of international trade and industrial organization. One of the most significant of these changes has been the radical restructuring of global production and the resulting development of global value chains (GVCs) and global production networks (GPNs). A key objective of this book is to construct a theoretical framework which takes into account some of these changes. This chapter will explain how, in an age where international production and trade increasingly occurs through value chains, import-dependent firms have become key new actors in the trade policy-making landscape. I will develop hypotheses which take into account the political involvement of import-dependent firms, as well as more established societal interests, in the context of EU’s system of trade defense instruments (TDIs).

Many existing analytical frameworks have difficulties or, at least, do not fully grasp the changes that have occurred in the trade policy landscape as described above. Traditional trade theories – developed by economists working in the tradition of David Ricardo and others – look primarily at the benefits of trade. Trade, so it is argued, expands consumption possibilities1 as it allows every country in the world to specialize in the production of those goods and services in which it has a comparative advantage2 (see for a good discussion Krugman and Obstfeld, 2003). Later, proponents of the “new trade theory” (see Dixit and Norman, 1980; Krugman, 1980, 1992; Lancaster, 1980) showed us that countries do not necessarily specialize and trade only to take advantage of their differences but also because trade permits industries to employ economies of scale. That is, due to international trade, the size of the market is extended, which, in turn, can lead to economies of scale and increasing returns so that the larger the scale at which it takes place, the more efficient the production. Where there are economies of scale, the argument goes, doubling the inputs to an industry will more than double the industry’s production.3 These scale economies lead to intra-industry trade and product differentiation. In this view, free trade is even more beneficial than what has been portrayed by traditional trade economists. More recently, we have seen the development of what has become known as the “new new trade theory” (see e.g. Baldwin and Robert-Nicoud, 2008; Ciuriak et al., 2011; Melitz, 2003; Ottaviano, 2011), which has shifted the focus from the industry level to individual firms. It is argued that firms, both within and across sectors, differ when it comes to their productivity and that “trade liberalization increases productivity primarily because of within industry reallocations rather than across industry reallocations” (Ciuriak et al., 2011: 3). That is, liberalizing trade will reallocate wealth (i.e. market shares and resources), within the same industry, from firms with a low productivity ratio to those with high productivity, which, in turn, will increase the average productivity (Ciuriak et al., 2011).

The aforementioned economic theories have mainly focused on analyzing what kind of trade policies bring most wealth to a firm, industry, nation, or the world as a whole. In this book, however, I am mainly interested in the circumstances under which decision-makers choose protectionism or freer trade. This means that we need theories that take into account the political process surrounding a decision by policy-makers to open or close a state’s market. Trade policy has distributional consequences and, as a result, in each society, there are firms who win and those who lose from international trade. To be sure, there has been no lack of attention in the literature on the role of firms in trade governance. Hitherto, as explained in detail in the introductory chapter, most of these accounts have focused on the political battle between import-competing and export-oriented producers (e.g. De Bièvre and Dür, 2005; Dür, 2007; Gilligan, 1997a; Hathaway, 1998; Hillman, 1982; Hiscox, 2001; Milner, 1988; Pahre, 2008). However, due to the globalization of production and the growing importance of GVCs, import-dependent firms have gained importance, both economically and politically, and should therefore be taken into account as well when analyzing trade politics.

I am clearly not the first to acknowledge the significance of importers in the trade policy landscape. Economists have developed models of trade policy in which importers are treated as interest groups separate from exporters and import-competitors (e.g. Bernard et al., 2005, 2007; Maggi and Rodriguez-Clare, 2000). Also, political scientists have looked into the political involvement of importers. Yet findings on their exact political role and influence are mixed. For instance, Destler and Odell (1987) observe political mobilization and influence on the part of importers, while Milner (1988) finds that importers face severe difficulties when trying to mobilize politically and, hence, have little political influence. What is more, most analysis to date are US focused and provide mainly empirical or, more specifically, anecdotal evidence for their role (or lack thereof) in trade politics. There is, in other words, a need to (a) deepen the analysis on the (contextual) factors that play a role in the political mobilization and involvement of import-dependent firms in trade governance; and (b) extend the analysis to countries or regions other than the US. This chapter aims to do exactly that.

The remainder of this chapter develops the argument that will be evaluated in the subsequent chapters of the book. To this end, this chapter will first discuss, in general terms, the collective action problems that firms face when considering political mobilization in the realm of trade politics. It will then zoom in on the particular political role of import-dependent firms in trade policy-making, by discussing the nature of this type of firms as well as their trade preferences. After that, I will discuss the political setting in which this book will be studying the political involvement of import-dependent firms as well as more traditional economic actors: EU’s system of TDIs. Subsequently, I will present my dependent variable (the choice of firms to act politically or not in the context of EU’s TDI policy) and my independent variables (the conditions under which firms decide to mobilize or not), and formulate my hypotheses. I will finish with some concluding remarks.

Trade politics and the logic of collective action

The starting point of my argument is the observation that for firms, and even more so for other societal interests, organizing joint political action is complicated for several reasons. Most obviously, for many individual businesses it is (somewhat) counterintuitive to work together with their competitors. After all, under competitive market conditions, firms face fierce competition and those in charge of a business will, if deemed necessary, do their utmost best to eliminate their competitors to ensure their own survival in the market (Schmitter and Streeck, 1999). Yet, as the growing body of literature on co-opetition shows us (Brandenburger and Nalebuff, 1996; Gnyawali et al., 2006; Lado et al., 1997; Luo, 2004), success in today’s business world requires that firms at times engage in both competitive and cooperative strategies simultaneously. That is, firms indeed compete with other companies by taking independent action in some domains in order to improve their own performances. At the same time, however, firms may, through cooperative relationships, benefit from working together on other domains to collectively enhance performance by sharing resources and committing to shared goals. This cooperation can entail shared product market or supply chain activities, but also joint political activities such as lobbying in favor or against a certain policy measure. Firms will engage in such cooperation if the shared activities are expected to enhance the competitive position of the individual firms. In other words, a competitive business environment does not necessarily mean that firms in a particular sector are unwilling to politically align with competing firms.

Having said that, even if the situation is such that firms consider joint political action to be a viable option, there are two additional (interrelated) problems in organizing or taking collective action: excludability and the (un)willingness to pay the cost associated with organizing a group (Alt and Gilligan, 1994). The problem of excludability can be traced back to the fact that the outcome of collective political action is a public good. As we know from economic theories, a good is public if its provision to some member of a group means that it cannot feasibly be withheld from others in that group. Economists have argued that consumers, as a result of free rider behavior, are not willing to pay for these public goods – a problem which has become known as the theory of market failure (cf., Oliver, 1980). In his pioneering book The Logic of Collective Action, Mancur Olson (1965: 15) translated this idea to the domain of political mobilization by asserting that

the achievement of any common goal or the satisfaction of any common interest means that a public . . . good has been provided for that group. The very fact that a goal or purpose is common to a group means that no one in the group is excluded from the benefit or satisfaction brought about by its achievement.

Consequently, individuals who share an interest and attempt to act collectively will have incentives to free ride on the efforts of others. However, Stigler (1974: 359) has rightly pointed out that “it should be apparent that rides, like lunches, cannot be wholly free.” That is, abstaining from contributing to the provision of a public good is not necessarily the optimal tactic. An individual is willing to contribute to the public good as long as the marginal costs do not exceed the marginal benefits. So, not each person benefitting from a public good will stop contributing immediately as soon as he or she has the chance, but the problem with public goods resembles, as Alt and Gilligan (1994: 169) show, the problem with externalities:

when one person contributes to the political efforts she does not internalize the entire benefit of doing so, and in fact every other member in the group can also consume any benefit thereby produced. Therefore, the marginal benefits of the contribution to a group as a whole are larger than the marginal benefits to the contributor personally – calling for a much larger contribution on each contributor’s part.

Yet, as people do not consider the benefits of their contribution to other people enjoying the public good, individuals will only contribute up until the point that their personal (instead of the group’s) marginal benefit is equal to their marginal cost. As a result, the group faces a “sub-optimal provision of the public good,” since individual contributors do not take into account the potential additional benefits of (even a little) extra political effort for the group as a whole. What is more, when people are confronted with a decline in the marginal benefits they receive from collective action, they will contribute less than in the case where they could solely reap the benefits of the action paid for by themselves. Given that every individual member is able to reap the benefits of the political efforts of all other people that are part of the group, each individual receives less benefit from the political efforts than they actually paid for and, in turn, will contribute less than they would have done in case it was not possible for them to use the efforts of others (i.e. if they were paying for a private good) (Alt and Gilligan, 1994: 169). In other words, an exogenous increase in contributions to the political efforts by one person will provoke other group members to contribute less (Gilligan, 1997b).

So, political mobilization is not easy. Yet, when certain conditions are met societal interests are very well capable of acting politically. As indicated before, import-competing firms and exporters are the prime examples of the type of firms that can overcome their collective action impediments. I argue that the same counts for import-dependent firms. However, before discussing the circumstances under which import-dependent firms are expected to mobilize and enter the political arena, I will first provide a more detailed characterization of this type of firms in the next section.

Import-dependent firms and their trade policy preferences

In the Introduction I have given a broad definition of import-dependent firms and said a few words about their trade policy preferences. In order to get a better idea of the role of import-dependent firms in world trade and, in particular, their political involvement in trade policy-making, we should take a closer at this type of firms and their policy preferences. It is important in this regard to make a distinction between two broad types of import-dependent firms: manufacturers and retailers.

Import-dependent manufacturers are goods-producing firms for which imports are an important part of the production process. I distinguish between two types of import-dependent manufacturers that can be active in an industry: outsourcing firms and import users. A typical outsourcing firm works as follows. It sets up networks of offshore suppliers – a system which is usually referred to as international subcontracting – to which they supply intermediate inputs. These offshore suppliers then use the inputs to assemble the goods, and subsequently, the goods are re-imported to the home country by the domestic manufacturers who, in turn, finish the products at their domestic factory or sell them directly to their customers (e.g. retailers, household consumers). When choosing a foreign supplier, the firms in question can either choose a supplier that is located in a country within the same region or choose a supplier in a region farther away from the home country. This “outsourcing logic” applies especially to small and medium sized firms. Large outsourcing firms, on the other hand, often use a somewhat different outsourcing system. Firms of this type – whose brands are usually very well known (e.g. Nike, Adidas, Liz Clairborne) – are often referred to as branded marketers, and they “produce” products, although they have in fact never carried out any production themselves. That is, these “manufacturers without factories,” as they are often referred to, were “born global” and have, since their first establishment in the mid-1970s, always done most of their sourcing abroad (Gereffi, 1999: 46). Besides outsourcing firms, there is a second kind of import-dependent manufacturers: the so-called import users. Import users are domestic manufacturers involved in importing products such as steel, copper, raw sugar, or semi-conductors, which they use as inputs for the production of their end products (Destler and Odell, 1987). The majority of these producers used to purchase most of their input products domestically, but over the years they have increasingly turned to overseas suppliers because foreign producers can often deliver quality, quantity, and service that is similar to domestic suppliers but at a lower price.

Now let us turn to the second type of import-dependent firms: import-dependent retailers. Although there is a debate in the specialized literature about the best way to define a retailer (Peterson and Balasubramanian, 2002), I stick to the definition given by Wingate (1931: 28), to whom a retailer is any

individual, firm or corporation that performs the last step in the marketing of goods from producer to consumer. He buys from a wholesaler, commission merchant, or manufacturer and sells directly to consumers. To be significant as a distinct economic unit, the retailer must act as a purchasing agent for the community rather than as a distributing agent for manufacturers.

In other words, retailers are all the way at the end of the supply chain and carry out no production of their own but purchase finished goods (e.g. clothes, furniture, food, electronics) or services from different types of suppliers, which they resell directly to end-users. Some well-known retailers are H&M (Sweden), Marks and Spencer (UK), Carrefour (France), Walmart (US), Ahold (the Netherlands), and IKEA (Sweden). The suppliers of retailers can be located either in the domestic market or in a third-country market (Gereffi, 1999), and only in the latter case does the retailer in question belong to the group of import-de...

Table of contents

• Cover Page
• Title Page
• Copyright
• Dedication
• Contents
• List of Illustrations
• Acknowledgments
• Introduction
• 1 Business Lobbying and EU Trade Governance in a World of Global Value Chains
• 2 The EU Safeguard Case against Chinese Clothing Products
• 3 The EU Anti-Dumping Case against Chinese and Vietnamese Shoes
• 4 The EU Anti-Dumping Cases against Chinese and Vietnamese Bicycles
• 5 Conclusions
• Notes
• Bibliography
• Index