Opening the black box of Free Trade Agreements
|Date:||22 August 2023|
Associate Professor of International Economics Tristan Kohl recently received a grant from the Dutch Research Council (NWO). He got the grant for research on how lobbying by firms and non-governmental organizations shapes the rules on international trade. FEB Research talked to Kohl about his NWO project and the value of understanding how trade policies are formed and how they shape the economic environment.
As a trade economist, Tristan Kohl’s mission is to shed light on the causes and consequences of economic globalization. His expertise is analyzing how trade policies – enacted through Free Trade Agreements (FTAs), the World Trade Organization, and economic sanctions – shape international trade in goods and services. Kohl: “Throughout my studies in International Economics & Business (University of Groningen), I was intrigued by how government policy shapes and interacts with the economic environment. I took up studying Law part-time until I was able to do my PhD on international trade agreements (also at the University of Groningen). Throughout this process, I realized how economic models are powerful tools to analyze real-world phenomena, but that they come at the price of oversimplification. I therefore always try to find ways to infuse our economic intuition with insights and context from related disciplines such as political science and international law.”
In his research, he thus decided to delve deep into FTA’s and try to find out how they impact the world economy. His previous research in the field emphasizes how the content of trade policy affects international trade, with a concrete tool to quantify the contents and legal enforceability of 26 key legal provisions in the world’s FTAs as one of the results. With his new NWO Grant of € 400,000, Kohl aims to expands economists’ horizon to understand not only how (the rules in) FTAs shape globalization, but also how these rules come about in the first place.
Trade policies come in various shapes and sizes, but finding ways to measure these differences and to quantify their economic importance is very challenging. Kohl explains: “For example, FTAs were treated as a black box: we had knowledge of whether or not countries had FTAs, but lacked detailed measures on the actual contents of these agreements. This severely limited our understanding why some FTAs were more effective in creating economic gains from globalization compared to others. In trade models, we were unable to convincingly distinguish between ‘shallow’ agreements that mainly focused on cutting import tariffs and quotas, and ‘deep’ agreements that substantially remove discriminatory rules, or ‘red tape’, that would otherwise make international trade a very costly activity.”
To address this problem, Kohl was the first to categorize the contents of 296 Free Trade Agreements in a publicly available database. “This actually meant that I literally read through all of these agreements and developed a method to systematically code up the legal information in these agreements so that they can be used to answer questions that trade economists are working on. My data provides scholars and policy makers with a concrete tool to quantify the contents and legal enforceability of 26 key legal provisions in the world’s FTAs.”
The most important finding from his analysis, and subsequent theoretical and empirical work using his dataset, is that ‘deeper’ trade agreements foster international economic integration much more than ‘shallow’ agreements. Kohl’s research has also resulted in a better understanding of how specific provisions in these agreements, for example on environmental and labor standards enforcement, affect international exchange in goods and services.
FTAs are the result of a political decision-making process, in which interest groups exercise their power and undue influence to adapt FTAs in their favor. With very few exceptions, countries around the world do not yet have legal safeguards in place to guarantee the transparency of the political decision-making process. Lobbyists thus have many opportunities to serve their narrow interests through rent seeking, which is the exertion of political influence to extract favorable regulatory concessions at the expense of other members of society.
Kohl: “Existing research on special interest politics in trade policy has thus far focused on corporate lobbying. My research shows that especially large, publicly listed companies lobby in favor of FTAs to open foreign markets through lowering tariffs. Yet, our knowledge of how private firms and non-corporate interest groups lobby on globalization remains limited. I aim to get more insight into how corporations lobby on other trade-related policies in FTAs, such as labor standards and environmental laws. I also want to understand how non-corporate organizations lobby on these policies, if at all.”
Uncovering the economic merit of lobbying
This lack of systematic understanding of the various groups that lobby on trade policy, and their objectives in doing so, greatly hampers informed decisions about whether and how to regulate lobbying. Moreover, there is little insight into the results of these lobbying activities. It is still unknown under which conditions politicians vote in line with the lobby’s objective, or when lobbyists can successfully “buy” trade policies that favor their interests at the expense of other societal groups. Finally, it is fair to wonder what the economic merit of lobbying is, and thus of regulating the interest groups that do so. Kohl explains: “Lobbying directs resources away from directly productive uses in the economy and therefore imposes an economic burden on society. Given that corporate and non-profit special interest groups lobby either in favor of or against protectionism in FTAs, the question is whether lobbying can actually result in a net economic benefit, that is, when the welfare gains of (not) having an FTA supersede the total cost of lobbying.”
One the facts regarding lobbying on trade policy that Kohl has already discovered is that the United States has regulated lobbying disclosure remarkably well compared to other countries. “This makes it possible to obtain data on organizations’ lobbying activities over an extensive period of time. In contrast, lobbying disclosure regulations are difficult to find in most other countries that I am aware of. Even in the European Union, and in the Netherlands, rules on public disclosure of lobbying activities are on a weak and often voluntary basis.”
Tristan Kohl looks forward to continue working on this new project. “Together with my project partner and co-author James Lake, Associate Professor of Economics at the University of Tennessee, I have already worked on a pilot study to ensure that we can connect our lobbying reports to trade policy outcomes. I look forward to two important next steps. Firstly, to investigate if, and why, various corporate and societal groups lobby on trade policy, and secondly, to better understand if and how lobbyists influence political votes on FTAs.”
Besedes T, Kohl T, Lake J (2020) Phase out tariffs, phase in trade? Journal of International Economics 127, 103385. https://doi.org/10.1016/j.jinteco.2020.103385.
Kohl T, Brakman S, Garretsen JH (2016) Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements. The World Economy 39(1): 97-131. https://doi.org/10.1111/twec.12272. The open-source dataset is available at https://research.rug.nl/en/persons/tristan-kohl/datasets/.
Kohl T (2014) Do we really know that trade agreements increase trade? Review of World Economics 150(3) 443-469. http://dx.doi.org/10.1007/s10290-014-0188-3.