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Trade theoretical literature uses three main models to shape the argument about the impact of trade liberalisation on incomes of producers – Heckscher-Ohlin-Samuelson (HOS), Ricardo-Viner and increasing returns to scale models. The first two models place the factors of production (like capital and labour) at the core of producers’ decision-making about the need to intervene in the trade policy formation process.

Factor specificity

In the HOS model trade benefits the owners of abundant factors (as products making use of these factors will be most competitive in a particular country) and harms the owners of scarce factors, hence the former will support trade liberalisation and the latter will be protectionist.

But factors of production are presumed to be mobile, and therefore if needed harmed producers can redeploy them to sectors that are better off from freer trade. Pressure politics will be employed if the adjustment costs (costs of switching the factors of production) are higher than the costs of lobbying.

Ricardo-Viner model, on the contrary, assumes that factors cannot easily move across sectors, therefore the resulting fall in prices following trade liberalisation will benefit export-oriented industries and will harm import-competing industries, which will compete with each other to influence the decision-makers. Thus it logically follows that the higher the factor specificity, the higher are the costs of adjustment to trade liberalisation for worse off sectors, and hence the more likely are they to mobilise to lobby for their preferences. A good example would the automobile lobby in the Ukrainian parliament, which consistently acts as an anti-liberalisation force.

These assumptions shaped the early research on the politics of international trade, in particular the endogenous tariff theory (Mayer, 1984; Grossman and Helpman, 1994) – this mainstream approach assumed all trade decisions to be the result of lobbying. In simple terms, the logic ran as follows – politicians enact policies because they need votes; consumers are the main winners from free trade, but they are numerous and face prohibitive costs of collective action; producers are less dispersed than the consumers and can overcome the costs of collective action easier and therefore are more successful in promoting their interests, which often happen to be protectionist (Stigler, 1971). Most of endogenous tariff literature uses the Ricardo-Viner assumption of highly specific (immobile) factors of production, where industries serving the domestic market will be worse off from free trade and thus more likely to mobilise to lobby.

Thus, early literature (in 1970-80s) focused more on the demand for protection in trade policy coalition formation. Although more recent economic literature has demonstrated that business-government relations in trade matters can be much more complex than that, some authors acknowledge that such dynamics is still relevant in not fully liberalised and/or transition economies. Referring to Russia, Woll and Artigas (2007) note that in the emerging economies the stakes with tariff reductions are higher, their lobby opportunity structure is

more obscure, and therefore anti-trade lobby can still dominate in the resulting policy equilibrium.

New trade theory and increasing returns to scale

As global industrial organisation was undergoing a major change and multinational corporations were gaining an unprecedented strength, the trade lobby agenda changed as well, making business actors’ demands more complex. The resulting balance of preferences was more and more often pro-free trade (as shown in Milner’s 1988 influential study). Milner and Yoffie (1989) extended the argument to say that trade preferences will not always be exogenously determined, i.e. always pro-trade for exporters and anti-trade for import-competing sectors. They can be significantly dependent upon external (foreign governments’

policy interventions) and dynamic (changing industry structure) factors, rather than solely on static factor endowments. And in this framework the main model of new trade theory is used – the increasing returns to scale (IRS) model – which leaves behind the factor specificity debate. It embraces Krugman’s arguments that competitiveness of the firm is defined by the nature of an individual market and the size of the firm, while presence of economies of scale makes larger firms more competitive internationally and smaller – more protectionist. Large business actors can then advocate their own “strategic policy” of trade barriers if foreign markets are protected (Milner and Yoffie, 1989). Moreover, sectors with IRS will be expected to lobby more and support more open trade (Alt et al., 1996).

Economic models help to identify the stakes. But in reality incomplete information may make identification of these stakes difficult.

Identifying the stakes: Uncertainty and incomplete information

Incomplete information is an important barrier for business actors in their quest to identify the potential stakes of liberalisation. The importance of information in international economic relations has been acknowledged in numerous studies (e.g. Keohane, 1984; Krueger, 1992).

Woll (2005) also underlines that identification of preferences is a lengthy process linked to the interactions between business and government representatives, and that uncertainty affects both the way firms conceive of the interests and the way in which they mobilise.

Better information about the distributional implications of an FTA can have a significant effect on the incentives of domestic business groups to mobilise and pressure their governments to adopt policies that favour them. Thus, Goldstein and Martin (2000) argue that in multilateral trade talks the ability of a government to sign an agreement may depend on the

groups mobilised for or against. Moreover, depending on the status quo and on the degree of information precision, information can have different empowering effect on exporters or protectionists – sometimes complete information can increase the incentives for protectionists to mobilise, and therefore governments should aim to maintain the right balance between too much and too little information in order not to lead the talks to a stalemate.

In reference specifically to the EU integration policies, Leblond (2007: 9) notes that:

Economic interests initially face great uncertainty as to the precise costs and benefits of integrating a particular policy area; only once the ‘fog of integration’ lifts—as a result of concrete legislative proposals being tabled by the Commission—are economic interests able to calculate these costs and benefits and, consequently, decide whether to lobby for or against the proposal.

This is of particular relevance to the Ukraine-EU trade liberalisation case, where little in terms of concrete legislative proposals has been done at the time of this research (2007-2008).

What is crucial in our case, and as has also been acknowledged in the literature (Dur, 2007), businesses tend to perceive the stakes to be higher when a trade policy measure or an agreement entail potential losses rather than gains – in the undertaken cost-and-benefit analysis the perspective of suffering losses will make business actors more eager to overcome the costs of mobilising. In particular, when discriminatory trade agreements are concluded, exporters of the third countries that are likely to suffer from trade diversion will mobilise either to receive compensation or to join these preferential agreements.

Kingstone (2001) goes further and criticises classifying business preferences based purely on economic criteria. He believes that politicians can use incomplete information as a tool to shape coalitions, especially when economic positions are undetermined. He quotes Verdier (1994), who argues that politicians can even create factor specificity through policy.

After making their judgements on the potential economic stakes of trade liberalisation, in conditions of higher or lower information availability, influenced or not by politicians, businesses will anyway face costs in turning these trade policy preferences into policy outcomes, which will be related to costs of organising the lobby and the institutions that shape the policy-making process.