Betting on the Wrong Horse: Lobbying on TPP and the 2016 U.S. - PowerPoint PPT Presentation

Betting on the Wrong Horse: Lobbying on TPP and the 2016 U.S. Presidential Election Michael Blanga-Gubbay ( ECARES, ULB) Moritz Hennicke (ECARES, ULB & THEMA, UCP) 5 th OEET Workshop: Trade Wars and Global Crises University of Turin October 5, 2019

Motivation Recent decades have seen a proliferation of Free Trade Agreements 04/03/2019 WTO | Regional trade agreements RTAs currently in force, 1948 ­ 2019 RTAs in force and inactive, 1948 ­ 2019 Physical RTAs in force, participation by region Interactive Graph Number of RTAs notifications and RTAs in force RTAs currently in force (by year of entry into force), 1948 ­ 2019 45 600 Cumulative Number 30 400 Number per year 15 200 0 0 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Goods notifications Cumulative Number of Physical RTAs in force Services notifications Cumulative Notifications of RTAs in force Accessions to an RTA Note: Notifications of RTAs: goods, services & accessions to an RTA are counted separately. Physical RTAs: goods, services & accessions to an RTA 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 1 / 25 are counted together. The cumulative lines show the number of notifications/physical RTAs currently in force. Source: WTO Secretariat ­ March 4, 2019 © World Trade Organization 2019 https://rtais.wto.org/UI/charts.aspx 1/1

Motivation Firms are crucial players for the ratification of these agreements, and their gains from trade are highly heterogeneous Theory and evidence: New new trade theory: differences across firms, even within narrowly defined sectors (e.g. Bernard and Jensen, 1999; Melitz, 2003) Political economy: “Trade agreements are often influenced by a small set of rent-seeking interests and politically well-connected firms” (Rodrick, 2018) To understand the role and gains of these politically well-connected firms, we examine differences in firms’ stock prices according to their stance on the Trans-Pacific Partnership What is TPP 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 2 / 25

Contributions Using detailed information from lobbying reports we construct a dataset of firms expenditures on the Trans-Pacific Partnership 1 We conduct an event-study on the 2016 U.S. presidential election and uncover that, following the unexpected election of Donald Trump Firms who lobbied on the agreement underperformed in the stock market This negative effect was persistent, and correlated to the amount spent in lobbying 2 Evidence of heterogeneous gains from trade: lobbying corporations are able to extract rents from the ratification of FTAs Lobbying probability and expenditure are highly correlated to provisions included in the TPP agreement but suspended under CPTPP 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 3 / 25

Plan of Talk 1 Introduction 2 Related Literature 3 Event-study 4 Data 5 Results 6 Conclusions

Related Literature Stock prices under uncertainty: Campbell et al. (1997); Acemoglu et al. (2016); Bouoiyour and Selmi (2017a,b); Wolfers and Zitzewitz (2018); Ramelli et al. (2018) Political economy of trade policy: Grossman and Helpman (1994, 1995a,b); Bombardini and Trebbi (2012); Kim (2017), Rodrik (2018); Blanga-Gubbay et al. (2019) Trade with heterogeneous firms: Bernard and Jensen (1995; 1999); Melitz (2003); Helpman, Melitz and Yeaple (2004); Bernard et al. (2007); Antr` as et al. (2017) Trade agreements in the 21 st century: Baldwin (2011); Antr` as and Staiger (2012); Allee and Lugg (2018) 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 4 / 25

Plan of Talk 1 Introduction 2 Related Literature 3 Event-study 4 Data 5 Results 6 Conclusions

Betting on the Wrong Horse 1 Firms reveal their preferred trade policy outcome by lobbying on the TPP agreement Market participants form positive expectations about firms’ future gains from trade 2 Trump is vocal against the TPP, but all forecasts underestimate his chances to win Market perception of firms’ future profits from TPP does not change 3 Trump wins against all odds Investors adjust downwards their expectations about future profits of lobbying firms 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 5 / 25

Trade policy in the 2016 US elections Opposing TPP was one of Trump’s major topics during the US presidential campaign Trump vs. Clinton on TPP 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 6 / 25

Public Interest in TPP led by Donald Trump Google Trends, Trans-Pacific Partnership citations since 2016 100 80 60 40 20 0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Nov. 8, 2016 Jan. 23, 2017 Jul. 21, 2016 Feb. 4, 2016 Trump wins Trump signs an executive order Trump's acceptance Signature of TPP withdrawing the US from the TPP the election speech at the RNC Nov. 22, 2016 Trump announces withdrawing from TPP on “day one” of his presidency 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 7 / 25

US 2016 Presidential Elections Forecasts On the eve of the election Hillary Clinton was highly favored to win the presidency 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 8 / 25

Plan of Talk 1 Introduction 2 Related Literature 3 Event-study 4 Data 5 Results 6 Conclusions

Lobbying Dataset We use data on lobbying expenditures from lobbying reports available under the Lobbying Disclosure Act of 1995 PAC vs Lobby (Bombardini and Trebbi, 2012; Kim, 2017; Blanga-Gubbay et. al , 2018) We collect all lobbying reports filed in 2016 that mention the words TPP or Trans-Pacific Partnership Our lobbying dataset is based on all reports filed by firms The reports provide information on the identity of the lobbying firm, the amount of expenditures in favor/against the TPP To code the firm’s position on the FTA we use the lobbying reports and official statements (e.g. company websites, statements by CEO) 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 9 / 25

5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 10 / 25

5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 11 / 25

Lobbying Dataset A first result is that firms always lobby in favor of the TPP. Firms’s position on Trans-Pacific Partnership) Support Oppose Full Lobbying Dataset 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 12 / 25

Stock Prices We collect Daily Returns of all firms at the NYSE and the Nasdaq To adjust for large movements around the election we compute abnormal returns and cumulative abnormal returns (Campbell et al.,1997 ) We match our lobbying database with firm’s stock market returns using firms’ ticker symbols More than 80% of the lobbying firms are listed in the U.S. stock market In order to have more homogeneous treatment and control groups, we restrict our analysis only to S&P 500 firms 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 13 / 25

Lobbying firms in the S&P 500 Even within S&P 500, lobbying firms are larger K density Lobbying is a rare event, and firms self-select into lobbying activity .4 .3 .2 .1 0 0 5 10 15 Assets in log Non-lobbying firms Lobbying firms KORUS Lobbying firms TPP As a robustness check we restrict sample to firms that lobbied on KORUS t-test 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 14 / 25

Additional control variables To control for the political leaning of the firms, we collected their campaign contributions for the 2016 presidential election Firms lobbying on TPP contribute more But both groups contribute to both parties .25 8 .2 6 .15 4 .1 2 .05 0 0 0 5 10 15 -1 -.5 0 .5 1 1.5 Total Campaign Contributions in log Delta Money, Democrat - Republican Non-lobbying firms Lobbying firms Non-lobbying firms Lobbying firms On average firms pay contributions to both parties but support the republicans more 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 15 / 25

Plan of Talk 1 Introduction 2 Related Literature 3 Event-study 4 Data 5 Results 6 Conclusions

Results - Daily Returns U.S. Stock Prices around November 8, 2016 Daily returns 2 1 0 -1 -2 -20 -10 0 10 20 Days after election Market benchmark TPP Lobbyists Long series Day-by-day regression 5 th OEET AISSEC Workshop M. Blanga-Gubbay and M. Hennicke Betting on the Wrong Horse 16 / 25