International Trade Theory and Policy
by Steven M. Suranovic

Trade 105-5

The Producers' Lobbying Decision

On the producer side, let's assume that there are 35 separate, and equally sized, firms. If a $5 tariff is implemented, producers as a group would gain $35 million in producer surplus. That means each firm stands to gain $1 million. Domestic producers would also supply 2 million additional pairs of jeans and that would require expansion of the industry labor force. Clearly the tariff would be beneficial to the firm owners and to industry workers. The potential to expand production, add workers, and increase profits by $1 million per firm will provide a strong motivation to participate in a lobbying effort. In the case of the firms though, organization of a lobbying effort will be much easier than the opposing effort by consumers.

First of all, the $1 million surplus accruing to each firm is pure gravy. Payments to workers and other factors is not a part of the $1 million additional surplus thus it is money over and above the marginal costs of additional production. For this reason, profit received in this manner is often referred to as "economic rents." Since the rents are concentrated in a small number of firms, $1 million going to each, each firm will have a strong incentive to participate in a lobbying campaign. But who's going to spearhead the effort?

Organization of a lobbying campaign will probably be easier for firms than for consumers. First, the industry may have an industry association that maintains continual links with policymakers in state and federal governments. The workers in the industry might also belong to a trade union which would also have interests in supporting a lobbying effort. Or a few of the industry leaders could take it upon themselves to begin the effort. (although that is assumed away in the example) Second, as a smaller group, it is easy to identify the likely beneficiaries from the tariff and to solicit contributions. The lobbying group should easily be able to collect millions of dollars to support an extensive lobbying. A mere contribution of $50,000 per firm, would generate $1.75 million that could be used to hire a professional lobbying team. Even if the chances of a successful outcome are small it may still be practical for the firms to contribute to a lobbying effort. The return on that $50,000 "investment" would be $1 million if successful. That's a 2000% rate of return, much higher than any brick-and-mortar investment project that might be considered. Free-riding would also be less likely to occur since with only 35 firms to keep track of, contributors would probably learn who is not participating. Non-participation would establish a poor reputation and could have unpleasant consequences in future industry association dealings.

With a well-financed lobbying effort, it would not be difficult to make decision-makers aware that there is resounding support for the tariff within the industry community. Newspaper and television ads could be purchased to raise public awareness. Interested parties could be flown to the capitol to speak with key decision-makers. In this way, the chances of obtaining the tariff may be increased substantially.

International Trade Theory and Policy - Chapter 105-5: Last Updated on 3/3/01