Grossman- Helpman Model
• Afontsev (2003) noted that trade policy is determined endogenously where economic agents enter political markets to influence trade policy, which in turn affects their position on economic markets and incentives for influencing future trade policy.
• Grossman and Helpman (1994) have put forward a theoretical model of endogenous trade policy formation. • Model focuses on the interaction between special interest groups representing owners of factors specific to particular industries and the government interested in resource transfers from these groups and welfare of the general public, attaching different weights to each of them. 2
• Afontsev (2003) explains predictions of Grossman-Helpman model as • In industries represented by lobbies, protection decreases with higher import penetration. • In unorganized industries, on the contrary, relationship between import penetration and trade protection is positive. • Deviations from free trade are more likely in industries with low import demand and/or export supply elasticities, as low elasticities are associated with lower welfare losses for any given level of protection. 3
• Grossman and Helpman focus not on the magnitude of the effect of interest groups but instead on how they influence government policies. Influence can focus on government in office or on electing a government (Grossman and Helpman 1994).
• In China interest groups are closely aligned with a party and exercise influence through those connections. • Expenditures on lobbying in China is unreported therefore there is a lack of data on political action committee campaign contributions, which could serve as the proxy for a sectoral political organization. • There is some anecdotic evidence that lobbies managed to influence Chinese trade policy • Our expectation is that the importance of the lobbies in China is significantly lower...
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