Capital Ownership and the Political Economy of Free Trade Agreements

What is it about?

This article models elections in two countries and trade policy. It assumes that, unlike labour, capital in both countries is owned and represented by the same lobby group. Using a standard Heckscher-Ohlin framework, factors affecting the likelihood of political parties and lobby groups supporting free trade agreements are investigated. The effects of free trade agreements on tariffs facing non-member countries are also examined.

Featured Image

Why is it important?

Basic trade theory implies that in a capital abundant country, capital benefits from free trade and labour losses. In a labour abundant country, the opposite is true. Yet the Canada-United State Free Trade Agreement was negotiated with political parties commonly considered to be closer associated with the interests of capital owners, in power in both countries. It is important to understand if such instances can be reconciled with standard trade theory.

Perspectives