How international trade shocks are accelerating political extremes
By Henrieta Isufllari
The western world political arena seems to have entered the age of extremes. In Greece, Syriza, a radical left party, won the latest elections while one of its opposition, the extreme-right neo-Nazi party Golden Dawn, was able to gain 7% of the vote, with 18 deputies serving as members of parliament. In Austria, Norbert Hofer of the populist right-wing Freedom Party won the highest number of votes on this year’s presidential elections; while a recent survey published by Le Monde reports that Marine Le Pen, leader of the far right National Front party, is in the first place on the race for the 2017 French presidential elections, with 28% of the voters supporting her candidacy. This political divergence has also spilled over within party lines - with the latest examples drawn from the current electoral process in the US, in which Presidential candidate Hillary Clinton, originally perceived as the uncontested Democratic candidate, was seriously challenged by Bernie Sanders, a democratic socialist who won quite a few primary votes before calling his campaign off . And on the right, the world painfully witnessed how Donald Trump, once dismissed by his party members as a character out of comic books, is now the official presidential nominee for the Republican Party, after winning a majority of the primaries.
Although Trump and Sanders couldn’t be farthest from each other on most policy recommendations, one point on which their platforms seem to converge is their strong criticism of Free Trade agreements and the negative impact that job outsourcing has had on increasing domestic unemployment rates. The elitist nature of global trade agreements is also, as The Economist explains, what is making leaders of far right European parties sound like “the far left when they dismiss deals such as the Transatlantic Trade and Investment Partnership (TTIP), a proposed agreement between the European Union and America, as stitch-ups that favour only big corporations.” While the shift towards the extremes in Europe is believed to be closely tied to nationalism and xenophobia towards the continuous influx of refugees, voters in the US are more concerned with the massive transfer of manufacturing and operations to countries with cheaper production costs that has been implemented by a vast number of American companies.
This polarization of the political sphere has been the topic of many studies from various disciplines, including a new paper by David Dorn (et al.), Professor of Economics at University of Zurich and CEPR, titled “Importing Political Polarization?” and presented during a recent MIPP seminar. The paper examines whether the partisan division in the US Congress is being fuelled by the fierce competition that the country’s labour market is facing from international markets. The authors are interested in whether this increased tendency of US voters to support politicians with legislation proposals on the extremes of the spectrum is being influenced by unfavorable international trade shocks. As the authors explain, the recent history of US politics is paved with examples of politicians who take a hostile position towards trade policy agreements, especially in the presence of increasing evidence on the adverse effects of international trade on US manufacturing jobs. The middle class status easily acquired by workers without a college degree, characteristic of the economic boom of 1950’s until 1980’s, was seriously dented in the 1990’s and on by competition from China and other emerging economies. This bleeding of jobs, and the consequential thinning of the US middle class are two of the main factors that have in part prepared the groundwork for the recent success of more extreme political platforms.
To study this link between international trade shocks and political polarization, the first two mechanisms the authors explore are the anti-incumbent effect, under which a negative shock on economic outcomes is associated with a decline in the support for the politicians in office and the party they represent, and the realignment effect, which implies shifts in an individual’s political support towards redistribution when their perception indicates an actual or expected downwards move in economic opportunity.
Their findings confirm that negative trade shocks have a downward effect on the support for the party in power at the time of such shocks, but do not establish an effect on greater partisanship. Surprisingly the authors find no empirical evidence for the realignment effect, which, at first pass suggests that voters that are mostly hurt by trade openness do not seem to shift their allegiances towards the left of the political spectrum.
In order to explain this, the authors test a less explored mechanism, the polarization effect, under which the voters exposed to increased competition from countries with cheaper labour do not jump ship; instead they tend to vote for more extreme candidates within the party. Dorn et al. find a very strong presence of the polarization effect in their data, and observe that in districts with higher trade competition the candidates being elected tend to be further away from the political center. Districts that were initially more likely to vote Republican tend to vote for a more conservative Republican after the shock, and districts that were initially more likely to vote Democrat vote for a more liberal candidate. In an interesting twist, the authors find that the polarization effect is also dependent on the proportion of non-white voters in the district. In districts where whites are a minority, liberal Democrats tend to win, while districts with a majority of non-Hispanic whites tend to vote for a more conservative Republican.
To capture the degree of polarization the authors gauge the actual voting behaviour of elected politicians by using an index that first measures how frequently an elected representative votes for or against legislation. The second step then measures how far these votes are from the ideological opposition of that representative. For example, a politician may vote for or against a particular piece of legislation. If a piece of legislation is deemed to be on the right of the spectrum, then most right wing politicians will vote for it and most left wing politicians against it. However, some right wing politicians will vote against and some left wing politicians will vote for it. By measuring the frequency of these types of votes the authors can measure the degree of a politician’s centrism (or lack thereof). Using this measure, the authors find a high degree of political polarization due to trade shocks, which suggests that voters in fact tend to dig in to their previously held political beliefs when facing difficult economic circumstances. The paper suggests that the type of rhetoric and vitriol that we are witnessing in the recent US election has been in part fueled by adverse trade shocks. Although the consensus among voters on both sides is that the country is going through an economic decline, with import competition from China negatively affecting domestic employment, both camps couldn’t diverge more in their beliefs regarding which representatives will provide the best solution. The authors conclude that, while this paradoxical behaviour is not new in models of belief formation, and such polarization of beliefs will not continue endlessly, in the immediate future the fate of the US political process remains unpredictable.