Does foreign lobbying influence trade policy in the United States?

Date
2011
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University of Delaware
Abstract
The increase in the number of organized interest groups and their lobbying activities in the United States (US) government in the past forty years have raised concerns regarding their implications for US public policy (CRS Report for Congress, 2006). This, coupled with the threat of foreign influence has led to the enactment of various laws, including the Foreign Agents Registration Acts, in order to maintain transparency in the US political system. In 1995, the Lobbying Disclosure Act was unanimously passed by the US congress to create a more effective and equitable system for administrating and enforcing disclosure requirements. Despite the efforts made by the Congress to avoid influence of interest groups in the policy making process, studies have shown that lobbying of organized interest groups does have a significant effect on policy outcomes, including trade policy. Influence of organized domestic groups have been reported by several analysts (Gawande and Bandyopadhyay 2000; Gawande and Hoekman 2006; Mitra et al., 2002) using the Grossman-Helpman (G-H) protection for sale modeling framework. The G-H approach assumes perfect competition and predicts cross-sectional differences in protection via three explanatory variables; namely the import elasticity, import penetration ratio and whether or not the industry is politically organized. In the last decade, this framework has been extended to incorporate foreign lobbying (Gawande et al, 2006), with significant evidence of foreign lobbying influence on US trade policy. However, a recent study which incorporates monopolistic competition into the G-H framework found that measuring the impact foreign lobbying without accounting for the presence of FTA is likely to overestimate the effect of foreign lobbying on Canadian trade policy (Stoyanov, 2009). Thus, a re-examination of the impact of foreign lobbying on US trade policy seems appropriate. Such an investigation using US data could provide additional policy insights since earlier studies did not account for the presence of preferential market access between trading partners. This study bridges a gap in the literature by re-examining the impact of foreign lobbying on US trade policy using the G-H model with monopolistic competition. The analysis focuses on congressional votes on foreign trade bills for the year 1997. Variables used in the model specification include level of protection (dependent variable), import elasticity, market shares and whether or not the industry is politically organized. Import penetration and the dummy variable for political organization were estimated using instrumental variables because of potential endogeneity of these variables. Based on the empirical results from our analyses there is some empirical support for the monopolistic competition model of endogenous trade policy; the preferred specification with NTB coverage ratio as dependent variable gives results consistent with the predictions of the model. However, the result presents domestic firms as sole determinants of US trade policy. The results of this study further shows that, contrary to the predictions of the benchmark G-H model unorganized firms do enjoy some level of protection from the government. Thus, an investigation of endogenous trade policy without accounting for the imperfect market structure which exists in reality might be underestimating the effect of protection on unorganized domestic firms.
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