Draft! Comments welcome PROTECTION FOR RENT: NATIONAL SUBSIDIES AND EUROPE’S ECONOMY

Why is there still so much protectionism in light of political rhetoric extolling the virtues of free trade, favorable economic theory and evidence, and legal pressure to dismantle protectionist measures? The answer rests on four factors and their interactions: globalization, asset specificity, political power, and institutional access. I test the argument using data from 14 EU member states during the period 1992-2004. The findings clarify the variable impact of globalization on demands for protection, the impact of institutions on rent-seeking and rent-supplying behavior, and the conditions affecting domestic coalition formation. Politicians face an uncomfortable dilemma. Globalization and democracy appear to be on a collision course: the more globalization undermines democratic politics, the more democratic politics will strive to tame globalization. PROTECTION FOR RENT: NATIONAL SUBSIDIES AND EUROPE’S ECONOMY Globalization frequently imposes asymmetrical sacrifices—benefits and costs affect different element of society differently. The losers in that process will seek redress through their political system, which is national. (Henry A. Kissinger) [Attempts to] repel the surge of globalization...are futile and self-defeating. The paradox of protectionism is that it destroys what it seeks to protect. (Alan Johnson, UK Secretary of Trade and Industry) In light of the gains vigorously stressed by economists and many politicians, one would expect free trade to be the prevailing international rule and impediments to trade the exception. Yet, a casual perusal of world affairs today will probably convince even the most optimistic economist that this is not the case. True, trade barriers are being dismantled, but protection remains ubiquitous. As Irwin (2005, 27) puts it regarding market integration and trade, “if we focus not on how far global integration has progressed in the past few decades but on how far it has to go to achieve full integration, we’re impressed by how little integration there is” (emphasis in the original). If gains from trade are so large and self-evident, why is protectionism easy and free trade difficult to pursue? Put differently, why do governments offer the levels of subsidies that they do? I build an asset influence model of trade policy which highlights the motives and ability of social actors to demand and get protection from government. While there is no universally accepted definition, subsidies generally refer to government support to production, which aims to reduce the cost of input factors and consequently to increase the quantity of output produced. I do not deal with consumption (e.g., welfare) subsidies. I offer a political explanation which puts forth the argument that under threat of international competition disbursement of producer subsidies varies systematically with the degree of asset specificity in particular institutional contexts. The European Union (EU) provides the most fertile ground to test this argument because most subsidies are illegal under EU legislation, but they are still ubiquitous. The findings, therefore, acquire considerably more weight if it can be shown that domestic political considerations affect the disbursement of protection in the face of strong external political, economic, and legal pressure to the contrary. Far from being impotent, democratic states continue to shield social actors from the vagaries of the global market, albeit with less intensity than before. The Asset Influence Model of Subsidy Protection Why do governments subsidize their industries? The answer lies in the cost that owners of economic assets face in moving assets across industries, gains and losses from globalization, and the political and institutional incentives that governments have in disbursing subsidies.