Despite the economics profession’s attachment to the policy of free trade, trade protection is still common, with increasing controversy around trade policy outcomes steering towards trade wars. It is however important, to take a step back and recognize that trade policy decision-making is governed by complex sets of interactions between businesses/industry and the government as the agency of the state. Such interactions have the ability to ascertain whether trade policy is economically appropriate and feasible for the domestic economy, in addition to being politically acceptable. But do we know enough about these state-business interactions shaping trade policy outcomes-especially in less developed countries?
The political economy literature has started to generate empirical evidence on state-business interactions, studied as industry lobbying for trade policy. These interactions arise due to uncertainty about how such policies map into consequences, as elections or employment outcomes. The uncertainty creates space for industry groups as sources of policy-relevant information for the government, communicating information signals as industry lobby groups. Thereby, lobbying as the strategic transmission of information signals can help engender government responsiveness to business concerns. Yet, as stated by OECD Secretary-General Angel Gurría in a 2014 report, lobbying is quite often perceived as an ‘opaque activity of dubious integrity, which may result in undue influence, unfair competition and regulatory capture to the detriment of fair, impartial and effective policy making’.
The case of India
An interesting case is India that has acknowledged the importance of the international trading system, while equally always stressed domestic political imperatives in determining trade policy. There has been an equally vocal and significant demand for legalising lobbying, to bring in transparency to these processes, specifically in state-business dealings for Indian trade policy.
India has witnessed a dynamic typology of state-business interactions that evolved from direct and individual business access to the government towards collective influence of businesses as associations. The nature of tariff changes, even evident in applied MFN (Most Favoured Nation Tariffs) protection from 1990-2007, present a case to examine the extent to which political economy factors can be used to understand the inter-sectoral differences. India has had among the highest trade barriers in the world, with average applied MFN tariffs (at the 4-digit of National Industrial Classification) for the manufacturing sector at 85 per cent in 1990, that only later reduced to about 44 per cent by 1996. Yet, the variation (standard deviations) in tariffs remained quite high between 32-36 per cent.
Until economic liberalization in the 1990s, domestic interactions for trade policy between industry and the government, for trade policy, were only at the margin. After the reforms of 1991, subsequent multilateral and unilateral reforms arose from domestic political processes, allowing for significant differences across sectors. By 2000, the policy scenario was transformed such that domestic business interests could effectively determine negotiating positions by communicating with the apex organization of Ministry of Commerce and Industry (MOCI) overseeing Indian trade policy. Increasing industry involvement in multilateral WTO negotiations also served to heighten government responsiveness to domestic business concerns. State-business interactions evolved in this period from ‘direct individual business access to the government’ to ‘collective influence of business as associations’ and finally, towards a ‘duality in access’.
Quantifying the impact of lobbying, and facilitating accountability
With inter-sectoral differences in trade policy outcomes, it is likely that some sectors make a better case for trade protection than others. The sectors that make a better case are sending signals, say about pressing labour issues or other strategic reasons, which would make the government self-interested to supply protection. The idea of industry lobbying to transmit information signals is however under-researched, with negligible evidence for India. If some sectors signal the possession of relevant information that the government may wish to know before setting trade policies, then the effectiveness of state-business interactions can be captured based on the government placing different weights on different sectors. Quantifying such lobbying effectiveness for specific trade policy instruments can bring transparency to the trade policy-making mechanism. It can also provide compelling evidence to inform both policy-makers and industries, facilitating accountability for the trade policy making process.
Such transparency can be furthered by working towards a legal framework for state-business interactions, where businesses have a right to engage in lobbying to advance their concerns on trade policy and where economically appropriate, convince the decision-making authorities, getting rid of potential corporate espionage.
This blog derives from Amrita’s research on the political economy of Indian trade policy, funded by the Commonwealth UK, and awarded the International Economic Research Award (IERA) 2017 by the Export-Import Bank of India.